Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1989-90 - Whether payment of commission to Government doctors for obtaining a favour therefrom by prescribing medicines in which assessee is dealing will come within category of 'illegal gratification' or 'bribe' and, therefore, cannot be allowed as business expenditure under section 37 - Held, yes FACTS The assessee was dealing in Ayurvedic medicines. During the relevant assessment year, he paid commission to various private as well as the Government doctors, who were prescribing his medicines to the patients and claimed deduction of the same as business expenditure. The Assessing Officer disallowed the assessee's claim. On appeal, the Commissioner (Appeals) allowed payment made to private doctors but disallowed the payment made to the Government doctors. On second appeal, the Tribunal allowed the payment made to the Government doctors also observing that the payment was not disputed by the revenue, and since such payment was made over the years, it was a business necessity and was allowable as business expenditure. On reference : HELD Section 37(1) 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 thereto disallows an expenditure which is incurred by an assessee for a purpose which is an offence or which is prohibited by law. The Explanation to section 37(1), thus, makes it clear that such an expenditure shall not be treated to be a business or professional expenditure. It is not in 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. Therefore, the Government doctors were not entitled to realize such amount for the purpose of prescribing medicines of the assessee and thereby promoting his business interest. The amount paid to the Government doctors by the assessee clearly came within the category of 'illegal gratification' or…

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