(a) Income-tax---

----Reference---Business expenditure---Transport business---Amounts given as bribes to R.T.O. staff and policemen---Finding that expenditure was not verifiable---Disallowance on the ground that it was in any case illegal-- Tribunal's order was valid---No question of law arose from it---Indian Income Tax Act, 1961, Ss. 37 & 256.

(b) Income-tax---

----Reference---Business expenditure---Question whether certain expenditure was incurred for purposes of business and whether it is deductible---Mixed question of law and fact---Indian Income Tax Act, 1961, Ss.37 & 256.

The question whether certain expenditure was made or incurred wholly or exclusively for the purpose of the assessee's business is a question which involves, in the first place, the ascertainment of facts by the Appellate Tribunal and, in the second place, the application of the correct principle of law to the facts so found. The question, therefore, is a mixed question of fact and law:

Held, dismissing the application for directing reference, that in the instant case payments allegedly made by a transport operator to R.T.O. gangmen and traffic police authorities had been claimed as business expenditure. The question whether the payments had been trade was a question of fact. They could not be verified and the same has not been accepted by the income-tax authority including the Tribunal. Secondly, such payments amounted to illegal gratification and were opposed to public policy and could not be allowable as deduction. The Tribunal was justified in holding that the amounts were not deductible. No- question of law arose from its order.

CIT v. Coimbatore Salem Transport (P.) Ltd. (1966) 61 ITR 480 '(Mad.); CIT v. Greaves Cotton & Co. Ltd. (1968) 68 ITR 200 (SC) and CIT v. Kodandarama & Co. (1983) 144 ITR 395 (AP) ref.

JUDGMENT

R. D. SHUKLA, J.---This order shall also dispose of I.T.R. No. 46 of 1997 (Gwalioir Road Lilies v. CIT), as common questions of fact and law arise in both the cases.

These are applications under section 256(2) of the Income-tax Act (hereinafter referred to as "the Act"), seeking a direction against the Income tax Appellate Tribunal (hereinafter referred to as "the Tribunal"), for referring to the High Court the following questions of law for answer.

"Question No. 1.---Whether, the Tribunal is right in law and had any material before it to hold in para. 7 that in the instant case there is absolutely no evidence about the factum of payments of the alleged tips to the policeman, etc., and deduction claimed at Rs.76,365 and Rs.68,087 for the assessment years 1986-87 and 1987-88, respectively, on payments of tips to policemen, etc., on way side by drivers while driving their vehicles is not an admissible expenditure under section 37(1) of the Income Tax Act, 1961?

Question No.2.---Whether, on the facts and in the circumstances of this case, expenditure incurred by the assessee on payments of tips to policemen, etc., on way side by drivers while driving their vehicles claimed and disallowed at Rs.76,365 and Rs.68,087 for the assessment years 1986-87 and 1987-88, respectively, is not anadmissible expenditure under section 37(1) of the Income Tax Act, 1961?"

The brief history of the case is that the applicant-assessee is a partnership firm operating transport business with a fleet of motor-trucks either owned by themselves or hired on commission. It is asserted that they are required to pay mamools, tips and further required to grease the hands of employees of the transport department for smooth running of the business. They claimed that they had incurred expenses of Rs.76,365 and Rs.68,087 in the assessment years 1986-87 and 1987-88. They claimed deduction of this amount as expenditure for running the business. The same was disallowed by the assessing authority/officer and was subsequently confirmed by the Tribunal. It is asserted that these are expenditures for running the business, and allowable under section 37(1) of the Act. The judgment of the learned Tribunal is wrong to that extent and the Tribunal has wrongly refused to refer the question to the High Court for answer.

The learned tribunal while dismissing the appeal has affirmed the finding of the Assessing Officer that such expenditures are not verifiable and further held that greasing the hands of Government employees amounts to an offence punishable under the Indian Penal Code and, therefore, such expenditure cannot be allowed to be deducted as the same is not lawful. While rejecting the application for reference to the Court, the learned Tribunal further held that the act of greasing the hands of Government employees is in contravention of the Indian Penal Code and amounts to infraction of law besides being opposed to public

policy. The findings are pure findings of fact based on appreciation of evidence available on record and, therefore, the prayer of the applicant for reference was rejected. Hence, this application under section 256(2) of the Act seeking reference as above.

The facts giving rise to I.T.R. No. 46 of 1997 are similar and the same points of fact and law involved, as such, both the references are referred together and are being decided together.

The contention of learned counsel for the applicant is that any expenditure incurred for the smooth running of the business would be allowable deduction under section 37(1) of the Income-tax Act.

Whether expenditure incurred for greasing the palms of R.T.O. staff or such other employees would be allowable deduction or not is a question of law, and, therefore, the Tribunal was bound to refer the same. It is after reference made by the Tribunal on application made before it or on a direction by the Court, that this Court would be in a position to decide as to whether the same be allowed or ought to be taken as an expenditure opposed to public policy. Learned counsel placed reliance on a judgment of CIT v. Coimbatore Salem Transport (P.) Ltd. (1966) 61 ITR 480 (Mad).

As against it, learned counsel for the Department has submitted that firstly the expenditure is not verifiable as found by the assessing authority (page 4 of the petition). The same being pure finding of fact based on appreciation of evidence available on record could not have been referred (page 43 of the petition). It has further been submitted that these are illegal payments amounting to illegal gratification and punishable under the penal law and, therefore, the same being against public policy and amounting to infraction of law has rightly been not accepted and referred as question of law. Learned counsel has relied on a decision of the Andhra Pradesh High Court in CIT. v. Kodandarama & Co. (1983) 144 ITR 395 and a Supreme Court decision in CIT v. Greaves Cotton & Co. Ltd. (1968) 68 ITR 200.

On perusal of the orders it is evident that the Assessing Officer has found that such expenditures are not verifiable. Even otherwise common experience goes to show that no person accepting illegal gratification would pass a receipt, which may be used as evidence against him and, therefore; such expenditure can never be verified. The businessman can show any amount of expenditure on this count.

The contention of learned counsel for the applicants that for a smooth running of the business the applicants-assessees are required to-pay tips and grease the hands of R.T.Q, staff and, therefore, that shoed be treated to be an expenditure under section 37(1) of the Act a not acceptable. 1n our opinion, it is the legal expenditure that can be claimed as allowable deduction. No law point would arise regarding expenditure for unlawful acts.

Greasing the palm of the R.T.O. staff or R.T.O. gang, as has been, referred to by the applicants, would not only be an illegal act, but amounts to illegal gratification. Such illegal gratification cannot be allowed to be deducted. So far as tips are concerned, that may be allowable expenditure in given circumstances. The tips are paid to increase the proficiency of a person who renders some service in the running of the business and, therefore, if any extra expenditure is made to persons engaged in the assistance of the business like loaders and unloaders of goods, the same may be taken to be allowable expenditure and may not be taken to be illegal, but such expenditure which clearly amounts to illegal gratification or a bribe cannot be allowed to be deducted. The Income-tax Appellate Tribunal has rightly held in para. 2 that the assessee was not doing any illegal business so as to treat such expenditure as normal expenditure on business. It has then been held in para. 4 that details of payments to policemen, traffic police, check post authorities and R.T.O. gangmen were not furnished and the details of the recipients had also not been given. Thus, the payment itself becomes a question of fact.

The Madras High Court in CIT v. Coimbatore Salem Transport (P.) Ltd. (1966) 61 ITR 480 has held, thus:

"(i) that, though generally the onus of proving that. the expenditure had been actually incurred for and in the course of the business for earning income therefrom is undoubtedly on the assessee, in the instant case, the Tribunal was not wrong in its view that, in the very nature of the expenditure, there could not be any documentary evidence to prove it."

But, these expenditures were incurred by way of tips to their drivers and employees. The Division Bench of the Madras High Court affirmed and accepted illegal and improper expenditure as allowable deduction. We are unable to subscribe to this view. This should be wholly against the public policy.

In such cases the High Court is not working as a Court of appeal. It is not open to the High Court in such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal. The High Court should confine itself to the fats as found by the Appellate Tribunal.

The question, whether certain expenditure was made or incurred wholly or exclusively of the purpose of the assessee's business is a question which, involves, in the first place, the ascertainment of facts by the Appellate Tribunal and in the second place, the application of the correct principle of law to the facts so found. The question, therefore, is a mixed question of fact and law.

The greasing of hands of police officers and R.T.O. staff was not a bona fide payment and was done for an oblique or improper purpose as found by the Tribunal and, therefore, this will be a question pf fact. Reference may be had to CIT v. Greaves Cotton & Co. Ltd. (1968) 68 ITR 200. We subscribe to the view taken by a Devision Bench of the Andhra Pradesh High Court, as reported in CIT v. Kodandarama & Co. (1983) 144 ITR 395 which reads, thus (headnote):

"In order to claim deduction of a particular amount under section 37(1) of the Income Tax Act, 1961, the payment need not necessarily be mandatory or statutory; even a voluntary payment made, so long as it is made in the interest of the assessee's business, 'is entitled to be deducted as business expenditure. However, the assessee would not be entitled to deduction of contributions or payments made in contravention of law or which are opposed to public policy. -Infraction of law is not a normal incident of the business. Similarly, payments which are opposed to public policy being in the nature of unlawful consideration for discharging an official duty other wise than according to law, i.e., otherwise than on merits, cannot equally be recognised. It would be shortsighted to hold that businessmen are entitled to conduct their business even contrary to law and claim deduction of payments as business expenditure, notwithstanding that such payments are illegal or opposed to public policy, or have pernicious consequences to the nation's life as a whole. Section 23 of the Contact Act equates an agreement or contract opposed to public policy, with an agreement or contract forbidden by law."

In our considered opinion, therefore, firstly the payments are questions of fact. They could not be verified and the same has not been accepted by the Income-tax authority including the Tribunal. Secondly, such payments amount to illegal gratification and are opposed to public policy cannot be treated to be allowable deduction.

Thus, we find absolutely no ground for issuance of a direction for reference of the case to this High Court.

In the result, the applications for reference are, therefore, rejected.

In the facts and circumstances of the case, the parties shall bear their own costs.

M.B.A./3399/FCApplications rejected.