K.G. Bansal, A.M. -
(1.) THIS appeal of the revenue emanates from the order of the Commissioner (Appeals)-XII, New Delhi, passed on 15-2-2005. The corresponding order of assessment was framed by the ACIT, Circle 33(1), New Delhi, under the provisions of Section 143(3) of the Income Tax Act, on 28-3-2002. The revenue had taken five grounds in appeal, the sum and substance of which is that the learned Commissioner (Appeals) erred in deleting the addition of Rs. 46,45,317 out of the commission expenses incurred for ensuring the continuation of lottery trade in the State of Madhya Pradesh. It is further mentioned that the learned Commissioner (Appeals) erred in deleting the aforesaid addition without appreciating that the ground of the assessee before the Tribunal was that the income was enhanced by the Commissioner (Appeals) without allowing opportunity to the assessee, which led to restoration of the matter to the file of the Commissioner (Appeals). It is also mentioned that no evidence was there to show that any effort was made by the agents to persuade the State Government authorities to exercise its discretion in not banning the lottery. It is also mentioned that the addition was deleted by considering additional submissions which were not made in the original appellate proceedings. It is also mentioned that the learned Commissioner (Appeals) erred in deleting the addition without making a reference to the earlier Commissioner (Appeals), who had enhanced the assessment.
(2.) In this connection, it is mentioned in the assessment order that the assessee was engaged in the business of selling lottery tickets procured from its sister concern, M/s. Sanjay Jayantilal & Co., who were the sole selling agent for the lottery of the Royal Government of Bhutan. In the year under consideration, sales promotion expenditure of Rs. 1,16,13,294 was claimed in respect of M/s. Bharat Trading Corporation amounting to Rs. 53,61,211 and M/s. Surya Enterprises amounting to Rs. 62,52,083. The assessee was required to furnish the details of the expenditure. It was submitted that commission was paid to the aforesaid parties for sale of lottery tickets for which written agreements were filed. However, no evidence was filed regarding numbers and value of tickets sold through these persons. No evidence was also filed regarding efforts made by them to procure business for the assessee and expenditure incurred by them for such efforts. Thus, no justification for the expenditure was made available to the assessing officer. As against the aforesaid, bad debts amounting to Rs. 1,80,47,097 were written off in the books in respect of M/s. Amit Lottery and M/s. Premier Lottery. It was the case of the assessing officer that the practice in the lottery trade was that the agents were responsible for realization of the sale proceeds. Thus, it was held that the payment had no nexus with the promotion of sales in the business of the assessee. It was also explained that the Government of Madhya Pradesh intended to ban lottery business within its territory. The aforesaid agents were entrusted with the work of liaison with the administration and the Government for continuation of the business and to manage the business in the State of Madhya Pradesh. The commission was paid to these parties for managing the business and maintaining liaison with the Government and the administration. In this connection, the assessing officer observed that the main consideration of the agreement was to ensure that the lottery business was not banned by the State Government. Such an agreement goes against the public policy and, therefore, it was void. Consequently, the payment made under the agreement was not allowable. However, the assessing officer disallowed 40 per cent of the expenditure aggregating to Rs. 46,45,307, being Rs. 21,44,848 in case of M/s. Bharat Trading Co. and Rs. 25,00,833 in case of M/s. Surya Enterprises. Aggrieved by this order appeal was filed, which was disposed of by the learned Commissioner (Appeals) on or about 20-10-2003. He came to the conclusion that ostensibly the agents were appointed for promoting the business of the assessee in the State of Madhya Pradesh. However, there was no evidence to suggest that any activity was carried out by the agents to promote the trade. The real intent and purpose was to ensure that the lottery trade was not banned in the State. It was explained to him that the agents being the proprietary concerns of the husband and the wife respectively, were in a position to mobilize public opinion, carry out liaison activity with the Legislature and of the executives to ensure that the trade was not banned within the State. In respect of this argument, it was held by the learned Commissioner (Appeals) that the intent and purpose of the agreements was against the public policy, being to obtain legislative and bureaucratic patronage for the business of the assessee. Therefore, he came to the conclusion that the whole of the expenditure was liable to be disallowed and the appeal was decided accordingly. The assessee agitated the matter further before the Tribunal and the appeal was disposed of on 29-11-2004 in ITA No. 5608(Del)/2003. The ground of the assessee was that the learned Commissioner (Appeals) erred in enhancing the disallowance of commission not only by misinterpreting the provisions contained in Section 37(1) but also by not allowing an opportunity to the assessee before making the enhancement in the income. In paragraph 6 of the order, it was held that the matter is required to be restored to the file of the learned Commissioner (Appeals) to decided afresh in accordance with law after giving adequate opportunity of being heard to the assessee. It was further mentioned that the Commissioner (Appeals) incorrectly enhanced the income of the assessee without giving notice of enhancement as required under Section 251(2) of the Act. Therefore, the ground No. 1 of the assessee was treated as allowed for statistical purposes.
In pursuance of this order of the Tribunal, the ground was decided by the learned Commissioner (Appeals) again on 15-2-2005 in appeal No. 104/04-05. The gist of the finding of the learned Commissioner (Appeals) is that the expenditure was incurred for preservation of the trade of the assessee and, therefore, the same falls within the ambit of Section 37(1). The question would be whether, the expenditure was caught within the mischief of the Explanation to Section 37(1), which provided for the removal of doubts 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 purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The Parliament had passed the law captioned as Lotteries (Regulation) Act, 1998. Section 4 of the Act allowed the State Governments to organize and conduct lotteries within their territories. However, Section 5 empowered the State Governments to prohibit the sale of tickets of the lotteries organized by other states. The assessee was agent of the Bhutan State lotteries and, therefore, it was vitally interested in the question whether the Government of Madhya Pradesh would take recourse to Section 5 or not. In order to secure that such a recourse was not taken up by the State Government, the agents were appointed and the question of the expenditure being against public policy had to be examined in this context. It was his view that mobilizing public opinion or influencing legislative decisions in the context of aforesaid scenario, was not against the public policy. An example was cited that before finalizing of the Union Budget, individual and institutions make representations to the Central Government, which are also considered and there is nothing illegal or unethical about it. The question whether, the sale of lottery tickets is good or bad was not really relevant. The question was whether the State of Madhya Pradesh would ban sale of the lottery tickets of other State Governments in its territory or not. It was held that it was not a case of illegal gratification paid to the public servants and there was nothing in such payment, which went against the public policy. Therefore, it was held that the expenditure was allowable under Section 37(1) as the whole of the amount was paid before the sale of tickets of Bhutan State lottery was banned by the State Government. No further payment was made after the imposition of the ban. Thus, it was held that there was no justification for disallowing any part of the expenditure.
(3.) BEFORE us, the learned Departmental Representative pointed out that the real grievance of the revenue is projected in ground No. 1, which is to the effect that the learned Commissioner (Appeals) erred in deleting the addition of Rs. 46,45,317 out of commission expenses incurred for ensuring continuation of lottery trade in the State of Madhya Pradesh through two parties using their contacts in the State Government and liaisoning with the local authorities, without appreciating the overall facts of the case, as discussed in the assessment order. In the first round of appeal before the learned Commissioner (Appeals), the matter was not only decided in favour of the assessee but the disallowance was also enhanced. However, in the second round of appeal, the learned Commissioner (Appeals) allowed the whole of the expenditure. The case of the assessing officer was that there was no proof of any service rendered by any of the agents and the payment was under an agreement for carrying out activities, which were against the public policy. The learned Commissioner (Appeals) not only deleted the income which was enhanced in the first round but also deleted the disallowance made by the assessing officer by holding that there was nothing illegal in the activities of the agents, which were in the nature of making representations before the Legislature and influencing public opinion. Since lobbying and influencing public opinion was against the public policy, the learned Commissioner (Appeals) ought to have upheld the disallowance of Rs. 46,45,317, made by the assessing officer.
4.1 In reply, the learned Counsel pointed out that there were contradictions in the order of the assessing officer when it was held that the purpose was against the public policy but 40 per cent of the expenditure was allowed. The facts are that the assessee was carrying on the business of sale of Bhutan State lottery. The Act of the Parliament empowered the State Governments to carry on the lottery business within their respective territories and also permitted them to ban the sale of tickets of the lotteries of other states. Since the State Governments were allowed to continue with their own lotteries within their own territories, there was nothing against the public policy in mobilizing public opinion to influence the Legislature that sale of tickets of other State lotteries may not be banned. The assessee made payments to the agents only for the period during which sale of Bhutan State lottery tickets was permitted within the State of Madhya Pradesh. The payment was stopped thereafter. Therefore, it was argued that the learned Commissioner (Appeals) was right in holding that the expenditure was incurred for preserving the trade already carried on by the assessee, deductible under Section 37(1) of the Act.;