Karnataka High Court Rules Secret Commission Claims Need Evidence, Upholds ₹53.48 Lakh Disallowance

The Karnataka High Court on 9 July held that a taxpayer cannot claim deduction for alleged secret commission payments as business promotion expenditure without proving the claim through adequate evidence, and upheld the disallowance of Rs. 53.48 lakh claimed as a business deduction.

A Division Bench of Justices S.G. Pandit and K.M. Manmadha Rao dismissed Rampur Arvind's (taxpayer) appeal and upheld the orders of the Income Tax Appellate Tribunal, the Commissioner of Income Tax (Appeals) and the Assessing Officer. The judges held:

“A claim for deduction cannot be accepted merely on the assertion of the assessee. The assessee claiming such deduction is required to establish the nature of expenditure and the circumstances in which such expenditure was incurred.”

The taxpayer, engaged in the hospitality services and civil contracting business, claimed deduction of Rs. 53,48,852 as business promotion expenditure for the Assessment Year 2009 to 2010. He contended that the amount represented commission or incentive payments made to executives of private companies to secure business for its service apartment operations.

The Assessing Officer disallowed the claim after finding that the taxpayer had not furnished the names and addresses of the recipients, the dates and mode of payment, or any documentary evidence to prove that it had incurred the expenditure. The Commissioner of Income Tax (Appeals) and the Tribunal affirmed the disallowance.

Before the High Court, the taxpayer argued that the payments were secret commissions paid to private individuals and not bribes paid to public servants. He also contended that the payments therefore qualified as allowable business expenditure.

The Court rejected the contention and held that the case did not turn on whether the recipients were private persons or public servants. Instead, it found that the taxpayer had failed to establish the genuineness and allowability of the expenditure by producing the necessary particulars and supporting evidence. It reiterated that the burden of proving a claim for deduction rests on the taxpayer.

Further, the Bench noted that the Tribunal had relied on CIT v. Dhanpat Rai and Sons while examining the claim relating to secret commission payments. It found no perversity in the Tribunal's conclusion that the taxpayer had failed to discharge the primary burden required to claim the deduction.

Accordingly, the High Court held that the Tribunal's findings were purely factual, did not give rise to any substantial question of law and dismissed the appeal.

For Appellant: Madhusudhan U A, Advocate and M. Lava, Advocate 

For Respondent: M. Dilip, Advocate and Y.V. Raviraj, Advocate