By TIOL News Service

MUMBAI, MAY 09, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether if disallowance relating to speed money has been restricted to only 25% of expenditure, the same is to be complied with even for future cases. YES IS THE VERDICT.

Facts of the case:

During the course of assessment proceedings, the AO noticed that the assessee had collected certain fees or service charges from its clients, and a portion of this amount was spent for making payments to Port employees. However, these amounts were neither credited nor debited in the P&L A/c. Accordingly, in the return filed by assessee in response to notice u/s 153A, the amount of Rs.82,27,656/- was disallowed on account of sundry expenses u/s 37(1) and additions were made which was not offered in the original return. By doing so, the assessee submitted before the AO that it had followed the order of the ITAT, Mumbai in the case of M/s N. Jamnadas & Co., which was a group concern, for AY 1997-98 and AY 1998-99. The AO however found that such sundry expenses did not have any supporting documents, and they were claimed only on the basis of self-made cash vouchers The AO on perusal of those self-made vouchers, noticed that even name of persons were not mentioned on many vouchers and wherever some names were appearing, the assessee failed to furnish any further details about such persons. He therefore held that the assessee had made payments of speed money at various ports, without proving their nexus with assessee's business. Referring to section 37(1), the AO held that expenditure incurred by assessee should be wholly and exclusively for purpose of business and should not be for the purpose which was an offence prohibited by law. He therefore made a disallowance of the balance amount of Rs.2,46,82,967/-.

On appeal, the FAA observed that for the AYs 2004-05, 2005-06 and 2006-07, similar disallowances were restricted to the extent of 25% of such expenses. He therefore directed the AO to accept Rs.82,27,656/- and delete the balance amount of Rs.2,46,82,967/-.

Tribunal held that,

++ in the decision of Madras High Court in the case of CIT v. K. Thangamani - 2009-TIOL-48-HC-MAD-IT, there was a clear factual finding recorded by the AO as well as the CIT(A) to the effect that the assessee had indulged in filing bogus TDS certificate and got refund of the amount from the Income Tax Department. It was also the admitted case of the assessee before the I-T Department as well as before the CBI during the course of investigation into the offence that the assessee had indulged in the act of fabricating TDS certificates and collecting refund from the Income Tax Department. It was only on account of the said factual matrix, that the AO assessed the income received by assessee, by getting refund from Tax Department. The High Court held that "however, the ITAT without any basis set aside the order of AO as well as CIT(A), and that the Tribunal committed a serious error by holding that the booty received by assessee can under no circumstances be the income of assessee;

++ in contrast, in the present case, the expenditure incurred by assessee is in the nature of 'speed money'. The same issue arose before the Tribunal in assessee's own case for AY 1998-99 and from AY 2002-03 to AY 2009-10. In all these years the Tribunal has directed the AO to restrict the disallowance to 25% of such expenses. Facts being identical, the order of CIT(A) is upheld.

(See 2018-TIOL-676-ITAT-MUM)