“illegal payment”
The decision most relied on for illegal payment is Maddi Venkataraman & Co. (P.) Ltd. v. CIT (229 ITR 534), cited in 72 judgments on BharatTax.
Leading authorities on illegal payment
Expenditure incurred for a purpose prohibited by law or in violation of another statute is not deductible as business expenditure under Section 37(1) as it is against public policy. The Explanation to Section 37 reinforces that such expenditure is deemed not for business.
Payments made by a business to labour unions or workers to ensure timely and emergency cargo handling are not prohibited by law and are thus deductible business expenses, even if receipts are not obtained from individual workers or payments are not made by cheque.
The rule of consistency dictates that a position adopted by the revenue in a prior year should not be allowed to be changed in a subsequent year, especially when it relates to the allowability of expenses or other tax treatment.
Payments made as commission to government doctors for prescribing medicines are considered illegal gratification or bribes and are therefore not allowable as business expenditure under Section 37(1).
Commission payments are not to be disallowed if the assessee provides evidence of services rendered, payment through banking channels, and relevant approvals, especially when the Revenue does not contest that services were not rendered at all.
Disallowance under Section 40A(3) may not be practicable for businesses that are inherently illegal, as compliance with payment methods might be impossible.
A payment made in connection with services rendered by an agent is not illegal if there is no evidence that the assessee intended to make an illegal payment.
