In Patel Brothers vs. Deputy Commissioner of Income Tax, the High Court held that if assessee does not keep a record of the secret commission paid then it was justified in allowing assessee’s claim to extent of one per cent of total sales.

Facts:

The assessee was a partnership firm engaged in the business of electrical contractor. The assessee paid secret commission to the employees of different companies, who had given the business to the assessee. In this regard, no record was maintained by him.

 

When AO asked for the justification, the assessee failed to:

• establish that there was a practice for payment of such commission in the particular line of business
• adduce satisfactory evidence to show that the payments were actually made
• establish that such payments were wholly and exclusively for the purpose of business.

 

AO, thus, disallowed the entire claim of the assessee.

 

On appeal, the Commissioner (Appeals) formed an opinion that the expenditure claimed by the assessee was excessive as compared to the preceding years and also compared to the turnover. He also noted that the GP rate had also come down in the current year. He, therefore, while allowing the expenditure, limited the same to 1 per cent of the total sales.

 

The Tribunal upheld the order of Commissioner (Appeals). On higher appeal, it was held that:

 

Secret Commission would ordinarily be in a nature of payment in which the assessee would be reluctant to reveal the identity of the recipients. Such expenditure when allowed as a deduction would reduce the income of the assessee without the revenue being able to verify whether the recipients had offered such income to tax. Even otherwise such commission by very nature of things would be a small portion of an assessee’s turnover.

 

Section 37 (1) provides that any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid down or expanded wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’. Thus any expenditure barring those excluded under section 37 (1) laid out or expanded exclusively for the purpose of business or profession would be allowable expenditure.

 

In this context, no limitation is imposed in the said provision on any secret commission paid by the assessee, if it is otherwise demonstrated that the same was expended wholly or exclusively for the purpose of business or profession. Even though the courts have recognized the allowability of a deduction in the nature of secret commission, yet considerable onus has been placed on the assessee to establish such fact.

 

Though there was no nexus established by the assessee between the expenditure and the purpose of business, the Commissioner (Appeals) and the Tribunal allowed the commission restricting to 1% on the basis that the secret commission was claimed by the assessee in earlier years and was allowed by the revenue too.

 

Thus, the assessee appeal to the Court was dismissed and the secret commission limited to 1% of the total sales was allowed. Secret commission allowed as business expenditure.

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