IT dept challenges hafta8217; order

MUMBAI, March 13: The Income Tax department has filed a reference application before the Income Tax Appellate Tribunal ITAT arising out of...

MUMBAI, March 13: The Income Tax department has filed a reference application before the Income Tax Appellate Tribunal ITAT arising out of an order of the Tribunal allowing expenses by a builder incurred in payment of protection money. The order of the ITAT, in M/S Pranav Construction Company Vs The assistant commissioner of Income Tax, had generated a lot of interest because the ITAT seems to have accepted the argument of the assessee that expenses incurred for protecting businessmen or other expenses paid to alleged toughies should be allowed.

A reference is made by the Tribunal to the High Court of the state when an order involves a point of law. If the tribunal were to reject the application for a reference, the department can move the High Court on its own.

During an IT raid on the assessee company, which is in the construction business, details of undisclosed income were unearthed by the IT officers. The partners of the company did not initially take the plea that protection money had been paid tovarious parties out of this undisclosed income. They later sought a deduction under various heads of expenses incurred in payments to local goons who had extended protection or help while removing encroachments on plots they were developing.

They had even produced evidence to the effect that the amounts were paid for either protection or as 8220;commission8221; paid for 8220;settlement with hawkers/ taporis8221; for eviction.

The assessing officer had disallowed these on the ground that the payments were not recorded in the regular books of account, nor were they admitted in the statement made to the IT search party that unearthed the 8220;on money8221; received by the builder on sale of flats. The deduction claimed was an obvious afterthought, the assessing officer had stated.

No evidence of the transactions with the alleged goons was found or seized by the search party, the assessing officer had observed and concluded that the unrecorded expenses could not be claimed as an allowable deduction.

TheCommissioner, Appeals, upheld the stand taken by the assessing officer. The assessee company then came in appeal to the ITAT. The ITAT bench, comprising R V Easwar and Dr M V R Prasad, held the evidence produced by the assessee was to be believed, and even in the case of two recipients of the protection money who had died in a subsequent gangwar, the circumstantial evidence was good enough to be taken into account. The ITAT bench had thus allowed the deduction of Rs 30 lakh from the total undisclosed amount.

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The reference filed by the IT department is based on the argument that such expenses are not legal expenses and therefore a deduction cannot be allowed.

The department is also likely to argue that the purported recipients of the protection money do not maintain their own accounts, nor are they assessed to tax.