JUDGMENT Sudhir Agarwal, J.
1. In this Income Tax Reference, we are required to answer the following question:
Whether on the facts and in the circumstances of the case, the 1d.I.T.A.T. was justified and correct in law in holding the expenditure on account of commission paid to Government Doctors incurred by the assessee in contravention of the Public Policy, as allowable expenditure.
2. The assessee is dealing in Ayurvedic medicines. For the assessment year 1989-1990, he claims that he spent Rs. 2,46,254/- as business expenditure by paying commission to various Doctors at the rate of 25/- who were prescribing his medicines to the patients. The said Doctors/Vaids were both private as well as Government Doctors. The Assessing Officer disallowed the aforesaid amount as business expenditure, but Commissioner, Income Tax (Appeal) allowed payment made to private Doctors/Vaids but disallowed a sum of Rs. 1,08,678/- as business expenditure claimed to have been paid to Government Doctors. The assessee claimed that payment of said commission was a business necessity and was followed by him over the years. The Tribunal upheld the contention of assessee with respect to claim of Rs. 1,08,678/- to be treated as business expenditure observing that the payment was not disputed by the Revenue, and since it was evident that such amount was paid over the years, it was a business necessity and was allowable as business expenditure.
3. The contention on behalf of the Revenue is that the amount paid as commission to Government Doctors is nothing, but an illegal gratification/bribe. No such payment in a legal manner was permissible to any Government Servant and, therefore, a payment made illegally, which amounts to an offence under the Statute, cannot be treated to be a business expenditure under Section 37 of the Income-tax Act, 1961(hereinafter referred to as the 'Act').
4. On the contrary, Sri Shakil Ahmad, learned Counsel appearing for the assessee, placing reliance on the Apex Court's decision in CIT v. Piara Singh and Dr. T.A. Quereshi v. CIT contended that even if payment to Government Servant as commission is illegal or an offence, the same cannot be disallowed as business expenditure since the matter is to be decided not on morality, but on the basis of law. He also placed reliance on a decision of Bombay High Court in CIT v. Samarth Sahakari Sakhar Karkhana Ltd. 2007 (294) ITR 540 and contended that the practice of payment of commissioner to Government doctors was prevalent for years together and hence it cannot be said to be an illegal payment particularly when genuineness of payment is not doubted.
5. Having heard learned Counsel for the parties and considering the record as well as the various authorities cited at the bar, we are of the view that the sum of Rs. 1,08,678/- paid as commission to Government Doctors/Vaids cannot be allowed as business expenditure under the Act and, therefore, the question has to be answered in favour of the Revenue and against the assessee. Our reasons for such conclusion are as under.
6. The alleged expenditure in question is sought to be deducted under Section 37 of the Act. The relevant provision for the purpose of the present case, is reproduced as under:
37. (1) Any Expenditure (not being expenditure of the nature described in Section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession.
Explanation. - For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deductions or allowance shall be made in respect of such expenditure.
7. The aforesaid provision allows an expenditure wholly and exclusively incurred for the purpose of the business or the profession in computing the income chargeable under the head Profits or gains of business or profession. The explanation thereof disallowed an expenditure which is incurred by an assessee for a purpose which is an offence or which is prohibited by law. The explanation thus makes it clear that such an expenditure shall not be treated to be a business or professional expenditure. It is not in dispute between the parties and the learned Counsel for the assessee also did not dispute that a Government Servant is not entitled to receive any amount in consideration of discharge of his official duty unless provided/permitted by the rules and regulations applicable to his conditions of service. The Government Doctors were not entitled to realise such amount for the purpose of prescribing medicines of the petitioner and thereby promoting his business interest. The amount paid to the Government Doctors by the assessee clearly comes within the category of "illegal gratification" or "bribe". It is also not in dispute that an illegal gratification or bribe is an offence under Prevention of Corruption Act, 1988. Earlier it was an offence under Section 161 I.P.C. The conduct rules applicable to Government Servants also prohibits such realization of money by the Government Servant and any amount, if so received by such Government Servant, is a serious misconduct. Without going to the question as to whether the payment paid as 'commission' to Government Doctors is moral or immoral, there is no manner of doubt that the aforesaid commission paid to Government Doctors is an offence in law. Both the persons, namely, one who is tendering or giving illegal gratification/bribe as well as one, who is receiving it, are offenders and commit offence in law. That being so, by virtue of explanation to Section 37 of the Act, the aforesaid expenditure incurred by the assessee can not be treated to be an expenditure incurred for the purpose of business or profession.
8. The judgments cited by the learned Counsel for the assessee have no application in the present case. In Piara Singh (supra), the issue was not with respect to "business expenditure" but it was a claim with respect to "business loss". Under the Indian Income Tax Act, 1922 a "business loss" was deductible under Section 10(1). Piara Singh (supra), admittedly, was engaged in the business of smuggling. He was caught while taking currency notes to Pakistan and while crossing the Indo-Pak border. When apprehended, the said currency notes to the extent of Rs. 65,500/- were confiscated. The income-tax authority considered smuggling activities of Piara Singh as a business activity and, therefore, assessed him under 1922 Act for determining his tax liability. He treated that out of Rs. 65,500/-, a sum of Rs. 60,500/- constituted his income from undisclosed sources and, accordingly, taxed him. His appeal was dismissed and in second appeal, Piara Singh claimed that if his business of smuggling was regarded a business for the purpose of tax liability under 1922 Act, then confiscation of Rs. 65,5000/- should be treated to be a "business loss" and he should have been allowed deduction of the said amount. The said contention was accepted by the Tribunal and it held that the assessee was carrying out a regular smuggling activity, which consisted of taking currency notes out of India and exchanging them with gold in Pakistan which was later smuggled into India. When for the purpose of Income Tax Act, the legality or illegality of the business was of no importance, then in such a case, a loss incurred in carrying out such illegal business was also liable to be treated to be a "business loss". On the reference made as to whether such deduction was permissible under Section 10(1), the High Court answered the same in affirmative. In appeal the Apex Court, confirming the view taken by the High Court, said that when the Income Tax Authority found that the assessee was carrying on business of smuggling and the income derived from such business was liable to income tax and on that basis his income was taxable, then in such case, if any loss is incurred in undertaking an activity which is an essential part of the smuggling operation, the same was liable to be given due benefit. It further held that if the activity of smuggling can be regarded as a business, then those who are carrying on that business must be deemed to be aware that a necessary incident involved in the business is detention by the customs authorities and, consequently, confiscation of currency notes. It is an incident as predictable in the course of carrying on the activity as any other feature of it. Therefore, confiscation of currency notes is a loss occasioned in perusing the business; it is a loss in much the same way as if the currency notes had been stolen or dropped on the way while carrying on the business. It is a loss which springs directly from the carrying on the business and is incidental to it. The Apex Court also considered an important aspect and held that a "business loss" incurred while undergoing an illegal activity is liable to be deducted under Section 10(1), but a loss incurred while committing a lawful business but on account of some illegal activity would not be deductable. The Apex Court drew a distinction between an "infraction of the law committed in carrying on of a lawful business and an infraction of law committed in a business inherently unlawful and constituting a normal incident of it". While drawing the aforesaid distinction, the Apex Court overruled the otherwise view taken by the Hon'ble Bombay High Court in J.S. Parkar v. V.B. Palekar but another decision of Hon'ble Andhra Pradesh High Court in Soni Hinduji Kushalji & Co. v. CIT was explained by observing that the Andhra High Court did not allow confiscation of gold to be a "business loss" on the ground that the assessee was carrying on a lawful business in gold, silver and jewellery and if committed an infraction of law in smuggling gold into the Country, in that case, such deduction incurred on account of confiscation of gold shall not be allowable. The aforesaid decision, therefore, does not help the assessee in the case in hand inasmuch, the assessee while dealing in Ayurvedic medicines is not engaged in an illegal business, but by paying illegal gratification or bribe to Government Doctors, he was guilty of infraction of law and, therefore, could not have claimed deduction on account of such infraction of law on the basis of the judgment in Piara Singh (supra).
9. Similarly, in Dr. T.A. Quereshi (supra) we find that it is also a case of claiming deduction of "business loss" under Section 36 of the Act and not of "business expenditure" under Section 37. The High Court disallowed deduction by referring to Explanation, Section 37 of the Act, but the Apex Court clearly held that Explanation to Section 37 has no application since it was not a case of "business expenditure" but of "business loss" as is evident from the following:
The Explanation to Section 37 has really nothing to do with the present case as it is not a case of a business expenditure, but of business loss.
10. Further, while following it earlier decision in Piara Singh (supra), the Court referred to the finding of fact recorded by the Tribunal that the heroin seized formed part of the stock-in-trade of the assessee and he was engaged in manufacture and selling of heroin. Once the said finding of fact has arrived at, then seizure and confiscation of heroin being a natural consequence of such business, the confiscation of heroin resulting in loss was liable to be deducted as held in Piara Singh (supra) and, therefore, in Dr. T.A. Quereshi (supra), the Court also held that the value of heroin was liable to be deducted as "business loss" in view of the finding of fact recorded by the Tribunal. It is in this context, the Apex Court held that when an assessee is being taxed under the Income-tax Act, the question has not be decided on the basis of emotions or moral approach but on legal approach. It is true that the assessee was committing a wholly immoral act in illegally manufacturing and selling heroin, but if the said activity of the assessee was taxable under the Act, then all necessary and integral activities would also be liable to be given due credit on ordinary commercial principles.
11. Coming to the next judgment i.e. of Hon'ble Bombay High Court in Samarth Sahakari Sakhar Karkhana Ltd. (supra), we find that it was not a case of illegal gratification or bribe but payment of extra amount termed as 'bakshish' (reward) to the workers employed by harvesting and transport contractors so that the said workers may complete the job during summer months failing which the assessee would have suffered heavy losses. A finding of fact was recorded therein also by the Revenue Authorities that the system of payment of 'bakshish' was a known practice prevailing in the State of Maharashtra for decades and such expenditure was consistently allowed in past also not only in the case of assessee but also in the case of several other sugar factories. The activity of assessee in paying 'bakshish' was not found to be illegal or constituting an offence. Therefore, explanation of Section 37 was not applicable and the said expenditure was found allowable under Section 37 of the Act.
12. In the present case, payment of commission to Government Doctors cannot be placed on the same pedestal. A distinction has already been made by the authorities while allowing deduction to the assessee in respect to commission which the assessee has paid to private Doctors since in their case, payment of commission cannot be said to be an offence under any statute but in respect to Government Doctors such payment could not have been allowed as it is an offence under the Statutes as stated above. In fact, the case in hand is covered by the decision of the Apex Court in C.I.T. v. S.C. Kothari where considering Section 10(1) & (2) of 1922 Act, the Apex Court held that "It is undoubtedly true that profits and gains which are liable to be taxed under Section 10(1) are what are understood to be such under ordinary commercial principles. The loss for which the deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it."
13. Disallowing deduction on account of payment of penalty for infraction of law, the Court further held-
...so far as the admissible deductions under Section 10(2) are concerned they cannot be claimed by the assessee if such expenses have been incurred in either payment of a penalty for infraction of law or the execution of some illegal activity. This, however, is based on the principle that an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of the trade cannot be described as such. Penalties which are incurred for infraction of the law are not a normal incident of business....
14. The Apex Court also drew a distinction with respect to the deduction of "expenditure" and "loss" observing that,"...disbursement or expenses of a trader is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which comes upon him ab extra."
15. A Division Bench of this Court in Cawnpore Sugar Works Ltd. v. CIT referring to Section 37 of the Act held-
Infraction of law is not a normal incident of business, for a business can and should be carried on without infringement or breach of the law. An expenditure which the assessee incurs in carrying on its business otherwise than in accordance with law is the result of his own conduct and such an expenditure cannot be regarded as incidental to the business or as an expenditure which is necessitated for carrying on of the business. In order that an amount may qualify as a revenue outgoing in computing taxable income as stated earlier, it must be a commercial loss or its nature must be contemplated as such.
16. We are, therefore, clearly of the opinion that payment as commission to Government Doctors for obtaining a favour therefrom by prescribing medicines in which the assessee was dealing cannot be said to be a "business expenditure" and no deduction can be allowed thereof under the Act.
17. The question referred is, accordingly, answered in favour of the Revenue and against the assess.