New Company Law- Offences under - >

http://corporatelawreporter.com/2018/07/16/mca-has-constituted-a-10-member-committee-to-review-the-offences-under-the-companies-act-2013/

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"Rolling back" - 'DILUTION' seemingly of a significant nature, in the offing ! No sooner or rather even before the 'fear of.' if any,, comes to be felt ...given a chance to throttle - for good or bad of , or ....?!

Also, see Related Posts - 'ten ?) of them

Incidentally, so far as known, there , it appears, has been no statistics or periodical update or close monitoring on, - how many tax cases have cropped up and been decided /adjudicated upon, by invoking , successfully so, since sec 37 of the IT Act came to be amended by insertion of the Explanation under sub-sec (1) thereof.

A critical study of the implications of the referred amendment may be found discussed in the published Article - (2004) 270 ITR 33 (Journal)* .



*Copied File Text (For reference / read ONLY) >

EXPLANATION UNDER SECTION 37(1) OF INCOME-TAX ACT-

A STUDY

V. Swaminathan¹

Introduction

Under the Constitution of India is guaranteed, among others, the fundamental right of all citizens to practice any profession or carry on any business. Nonetheless, in the Income-tax Act (the Act), though it is basically a taxing statute, are embodied certain provisions imposing, in the interest of the general public, reasonable restraints or restrictions, either directly or indirectly, on the said fundamental right. As held by the apex court (In re, Attar Singh [1991] 191 ITR 667), in interpreting any such provision the court cannot be oblivious of the proliferation of black money which is in circulation in the country. Further, that any such restraint or restriction in the Act intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the citizen's fundamental right. One such instance of a restrictive or restraining provision may be found in the Explanation under section 37(1) of the Act.

The Explanation, inserted under section 37(1) by the Finance (No. 2) Act, 1998, with retrospective effect from, 1st April 1962, reads :

"For the removal of doubts, it is hereby declared 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 the business or profession and no deduction or allowance shall be made in respect of such expenditure."

Prima facie, the provision is, in effect, intended to curb, rather act as a deterrent against, anyone carrying on a profession or business in any illegal or illegitimate manner.

Having regard to the terms and tenor of the Explanation, one may reasonably infer that the provision was brought on the statute with a view to bypassing case law on certain related issues. In fact, there are, broadly speaking, two lines of court cases-one dealing with expenditure tainted with illegality (such as, penalty or fine for an infringement or infraction of law, or any illegal payment, e.g., to any Government servant). Another, with expenditure incurred for a business, or income therefrom, tainted with illegality, or an unlawful business (such as, sale of goods at more than control price, smuggling activity, illicit trafficking in liquor contrary to prohibition laws, trade involving fraud upon the customs). May be, the line of distinction between the two criteria is rather thin and not easy to readily comprehend. However, the Explanation, in terms, seems to be wide enough for the Assessing Officer to try and hold that the provision ropes in within its disallowing ambit, both-that is, any expenditure tainted with illegality, as well as expenditure incurred for any income or business so tainted, or an unlawful business.

In order to decide whether, in view of the Explanation, a particular expenditure disqualifies for deduction or allowance, the import of the words-"for any purpose", and the immediately succeeding words-"which is an offence or which is prohibited by law", needs to be carefully interpreted and understood.

The words "for any purpose" have to be necessarily understood in the light of and having regard to the expression "for the purposes of the business . . ." occurring in the main provision of sub-section (1) of section 37. Accordingly, "for any purpose" has to be taken to mean "for any purpose of the business".

Also the expression "which is an offence or which is prohibited by law", on a plain reading, and in the setting in which it finds place, should pose no problem in understanding what it seeks to convey. Prima facie, what is envisaged is that, the Assessing Officer himself has to examine and arrive at a finding. If he finds that the purpose for which a particular expenditure is incurred, is considered an offence or is prohibited by law ("law" may mean any statute/enactment, or any set of rules or regulations having the force of law, that govern and/or have a bearing, direct or indirect, on a particular business), then no deduction or allowance for such expenditure is permitted. The Assessing Officer will have no difficulty in this regard, especially if the applicable law clearly declares as to what is considered an offence or is prohibited thereunder. If so, there seems to be no warrant or support, either explicit or implied, for taking a view that the Assessing Officer can invoke the Explanation, only on the basis of an external finding under any applicable law, of a competent authority or court. Nonetheless, on this point, there appears to be a contrary view expressed.

Going by case law, what can come within the sweep of the Explanation, just as that of the main provision (sub-section (1) of section 37), is an item of expenditure, not an item of "loss". The reason is that, as held by courts, if it is an item of "loss", not "expenditure", its deductibility or otherwise is governed by, and has to be decided having regard to the general principles of, the concept of "income" and "profits and gains" as enshrined in section 28/29 ; not the residuary provisions of section 37(1).

One finds a plethora of court decisions, also on the interpretation of the expression-"for the purposes of the business". This has been widely construed, and uniformly held, to mean almost every conceivable activity connected with or incidental to the business. In the light of those decisions, but having regard to the terms/ tenor of the Explanation, one may have to proceed on the premise that a deduction or allowance is not permissible, should there be the taint of illegality or wrong-doing associated either with expenditure or with business.

If clinically analysed, it will be seen that the expression-"any expenditure incurred . . . for any purpose which is an offence or which is prohibited by law" necessarily contemplates that,-

(a) there is expenditure incurred ;

(b) such expenditure is incurred (wholly and exclusively) for any purpose (of the assessee's business) ; and

(c) such purpose for which expenditure is incurred, is either an offence or prohibited by law.

As such, generally speaking, for invoking the Explanation, all the above three criteria may have to be satisfied. However, that may not be necessary in every case ; for example, where the whole, or, perhaps, even substantially the whole, of the business is illegal. As, in that case, the Explanation may be found applicable to the whole lot of expenditure incurred for such business.

With the foregoing in the background, it has to be examined whether or not the Explanation comes into play in a particular case, and if the answer is "yes", to what extent.

To highlight and illustrate the scope for applying the Explanation, one may consider a typical case. It is noted that, in the guidelines on audit under section 44AB of the Act issued by the Institute of Chartered Accountants of India, dealing with the requirement of clause 17(e)(iii) of Form No. 3CD (this is a requirement in view of the subject Explanation under section 37(1) of the Act), the case of a builder engaged in construction business has been referred to. For illustration herein, the same business may be chosen, or more appropriately, that of a promoter ("promoter" as specially defined, refers to owner of the land and/or builder) carrying on the business of construction and sale of "flats" or "apartments", being independent units of a multistoried building that one comes across mostly in a metropolitan city.

Having regard to the very peculiar characteristics of such property, the respective State Governments (among them are, Maharashtra and Karnataka) have considered it essential and accordingly have brought about a special legislation : the Flats Act, the Apartments Act, and the Rules thereunder. The primary objective, as stated in the said Acts themself, is to declare that each such unit of a building is, for all purposes, to be regarded a heritable and transferable immovable property. This is to enable the buyer to enjoy exclusive ownership of his unit, but with an undivided interest in the common areas and facilities to be used and enjoyed by all the owners of the building jointly.

The several regulations in those Acts and Rules, besides the other related regulations and bye-laws as framed by the local authorities, are so devised as to safeguard and protect the lawful rights and interests of the buyers, individually as also in common. That being so, those Acts and Rules govern/embrace almost all the related activities of the promoter. That is, right from the initial stage of his deciding to develop and construct, for sale, a building comprising independent units, to the final stage of completing the construction as per the approved plan, obtaining a completion certificate, and conveying the property to the buyers. The said Acts provide that the conveyance has to be made by the promoter, either to the organization formed and registered by the buyers jointly, or to each of them individually, depending on whether the units are sold as "flats" or as "apartments".

Those regulations and rules are mandatory and are required to be strictly complied with by the promoter. To mention a few : The promoter constructing a building for sale of its units as "apartments" has to-(i) initially execute and register a declaration in the prescribed form (this is a must, for the apartments to be governed by the Apartment Act and Rules), (ii) get the plan for the building duly approved by the competent authority, (iii) execute an agreement to sell and have it registered, and (iv) construct the building in accordance with the approved plan.

If the promoter fails to so comply with or contravenes any of the provisions of the said Acts, any such failure or contravention is, as explicitly provided therein, considered an offence. Of course, under the said Acts, the promoter is punishable with imprisonment or fine or both, but he can get away without punishment if he establishes reasonable cause for such failure. The possibility of either consequence, however, as pointed out elsewhere herein, might not be of relevance or a deciding factor for the Assessing Officer to invoke the Explanation to section 37(1) of the Act in a particular case.

To sum up : On the aforementioned facts and circumstances, the Assessing Officer could try and invoke the Explanation on the ground that all those purposes (that is, inclusive of all activities in the course of/incidental) of the business, that are either (a) not in compliance with or in contravention of, and declared an offence by, or (b) prohibited by, the statutory rules and regulations governing the business, are caught within the mischief of the provision. If so, he will deny deduction or allowance for all such expenditure as are found to have been incurred for one or more of the aforementioned purposes/activities.

According to expert commentary in the recent edition of a book on income-tax, for the purposes of the Explanation, the question whether there is any infraction of law, or whether the expenditure is incurred for any purpose which is an offence or which is prohibited by law shall have to be decided by the authority or the court empowered to do so under the respective law, and not by the income-tax authorities or the tribunal functioning under this Act. With regard to the stated proposition, certain case law has been referred to in the commentary.

The judgments so referred to are : [1993] 202 ITR 774 (Ker) ; [1979] 119 ITR 996 (SC) and [1995] 215 ITR 364 (SC).

K. N. Narayana Iyer v. CIT [1993] 202 ITR 774 (Ker), a private limited company, before it went into voluntary liquidation, made a gift to its managing director's daughter and also paid the gift-tax. The Income-tax Officer sought to treat the amounts of the gift and gift-tax as part of the accumulated profits available with the company at the time of its winding up, for the purpose of computing "dividend" under section 2(22)(c) of the Income-tax Act. The issue was decided against the Revenue holding that the gift, if at all, was avoidable only by the liquidator ; but as he has not chosen to do so, the Income-tax Officer cannot ignore the gift and treat the amount as accumulated profits available with the liquidator for distribution on a notional basis.

Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC), an internal audit party of the Income-tax Department, besides drawing the attention of the Income-tax Officer to a provision of law that had escaped his notice, also expressed its opinion on a point of law. The apex court held to the effect that the audit party was not competent to interpret the law and express its opinion, as it was the Income-tax Officer who must determine for himself what was the effect and consequence of the law, and whether in consequence of the law, which had come to his notice through the internal audit party note, he could reasonably believe that income had escaped assessment. Held that, therefore, the opinion of the audit party on a point of law cannot be "information" as envisaged in section 147(b), so as to justify the reopening by the Income-tax Officer of a completed assessment under that provision.

Asst. CIT v. A. K. Menon [1995] 215 ITR 364 (SC), the limited point at issue was whether the Special Court appointed under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, had power to examine and decide whether or not the tax liability of a "notified person", as assessed by the appropriate authority under the Income-tax Act, was reasonable or justified or enforceable. The apex court held to the effect that the Special Court had no power to do so, as, under the above referred to Act, it had only a limited power to determine as to whether and to what extent, having regard to the funds of the notified person available with the custodian, the tax liability of the notified person as already determined by a competent authority could be paid.

On a study of those judgments, however, one is not clear as to why they could be regarded to have any bearing or relevance, so as to support, even indirectly, the stated proposition.

Besides, the validity or otherwise of the proposition calls for a closer examination, also for the following reasons :

The proposition, by implication, means that the Assessing Officer can invoke the Explanation only if there be, and on the basis of, a finding under the relevant law from a competent authority or court. If so, it may happen that the Explanation can never be given effect to by the Assessing Officer in a particular case ; for instance, if there has been no prosecution against the assessee and hence no such finding is, or can ever be expected to be, available.

Further, there is a statutory time limit for the Assessing Officer to complete an assessment. In the general scheme of things, even if there be a finding given by the first authority/court under the relevant law, it could be challenged by the aggrieved party before higher forums. Obviously, it is not feasible for the Assessing Officer to defer his proceedings, until such time as there is a final finding.

It is thus seen that the proposition, if it were accepted, is bound to result in unintended consequences.

In this context, one may have to keep in view, certain observations of courts in decided cases.

The apex court has, in Prakash Cotton Mills Pvt. Ltd. v. CIT [1993] 201 ITR 684, as also in CIT v. Ahmedabad Cotton Mfg. Co. Ltd. [1994] 205 ITR 163, ruled to the effect that it is the Assessing Officer who is required to examine the relevant provisions of the applicable law or statute for ascertaining the real nature of a particular expenditure in terms of those (external) provisions, so as to decide upon the allowability or otherwise of that expenditure under the Income-tax Act.

In CIT v. H. Hirjee [1953] 23 ITR 427 (SC) and CIT v. Chaman Lal and Bros. [1970] 77 ITR 383 (Delhi), it has been held that if the purpose for which a particular expenditure has been incurred is illegal, it could not be regarded as wholly and exclusively a business purpose and the expenditure is, therefore, not deductible. What calls for a special noting is the courts' ruling to the effect that in such a case, for disallowing the expenditure, the possible final outcome of the proceedings under the applicable law/statute, be it for or against, in respect of the alleged illegality, is not relevant so as to be taken into consideration.

Those rulings in cases decided under the main provision (section 37(1) of the 1961 Act/section 10(2)(xv) of the 1922 Act) are necessarily of equal force to cases coming within the purview of the Explanation under that provision (section 37(1)).

Another vital aspect that ought not to be lost sight of is, should it not be possible for the Assessing Officer to successfully invoke the Explanation in the normal course of his proceedings, the Explanation might be rendered meaningless or futile, and consequently, inoperative. More so, should the Revenue be left with no other course open to redo the assessment, for invoking and giving effect to the Explanation at a later date ; in particular, if no action is possible under section 154 or 148 or 263 of the Income-tax Act.

On this aspect, certain settled rules of construction of the provisions of a statute call for attention. These, among others, are that the court should endeavour to (a) so interpret as will achieve the object of the provision, (b) make the law workable and enforceable, instead of reducing it to a redundant or dead letter, and (c) best harmonize with and effectuate the object of the legislation.

To conclude: For the reasons indicated hereinabove, certainly the better view is that the Assessing Officer will be within his powers to proceed and invoke the Explanation on the basis of his own examination of and finding(s) under any law governing/relevant for a particular business, without having to, for this purpose, seek and/or rely on a finding of an authority or court under that law.

In the explanatory memorandum on the Finance (No. 2) Bill, 1998, referring to the then proposed Explanation, it is mentioned that-"This proposed amendment will result in disallowance of the claim made by certain taxpayers of payments on account of protection money, extortion, hafta, bribes, etc., as business expenditure". The payments thus specified are all items appropriately falling under the category of expenditure that are prohibited by law as envisaged by one of the two limbs of the Explanation. On a close study, however, the Explanation seems to have, as discussed hereinbefore, a much wider implication and application, than what appears to be conveyed in the memorandum. For, as per the other limb of the Explanation, deduction or allowance is prohibited, also of any expenditure if it has been incurred for a purpose that is regarded an offence under any law. In the explanatory memorandum no item of expenditure that may be covered under this other category has been referred to.

No doubt, understanding the true intent and purpose of the Explanation may prove rather a difficult task, and therefore, the possibility of divergent opinions on any one or more of the relevant aspects cannot be ruled out. On that premise, for taking a suitable but defensible stand for the purposes such as, filing the tax return, and furnishing the required particulars, for example- under clause 17(e)(iii) of Form No. 3CD, as also in the assessment and further proceedings, it will be prudent for the assessee to take, and be guided by, legal advice of a competent tax counsel. More so, if the applicability or otherwise of the Explanation is considered to be doubtful or arguable, either in general or in respect of any particular expenditure.

 Government servant). Another, with expenditure incurred for a business, or income therefrom, tainted with illegality, or an unlawful business (such as, sale of goods at more than control price, smuggling activity, illicit trafficking in liquor contrary to prohibition laws, trade involving fraud upon the customs). May be, the line of distinction between the two criteria is rather thin and not easy to readily comprehend. However, the Explanation, in terms, seems to be wide enough for the Assessing Officer to try and hold that the provision ropes in within its disallowing ambit, both-that is, any expenditure tainted with illegality, as well as expenditure incurred for any income or business so tainted, or an unlawful business.

In order to decide whether, in view of the Explanation, a particular expenditure disqualifies for deduction or allowance, the import of the words-"for any purpose", and the immediately succeeding words-"which is an offence or which is prohibited by law", needs to be carefully interpreted and understood.

The words "for any purpose" have to be necessarily understood in the light of and having regard to the expression "for the purposes of the business . . ." occurring in the main provision of sub-section (1) of section 37. Accordingly, "for any purpose" has to be taken to mean "for any purpose of the business".

Also the expression "which is an offence or which is prohibited by law", on a plain reading, and in the setting in which it finds place, should pose no problem in understanding what it seeks to convey. Prima facie, what is envisaged is that, the Assessing Officer himself has to examine and arrive at a finding. If he finds that the purpose for which a particular expenditure is incurred, is considered an offence or is prohibited by law ("law" may mean any statute/enactment, or any set of rules or regulations having the force of law, that govern and/or have a bearing, direct or indirect, on a particular business), then no deduction or allowance for such expenditure is permitted. The Assessing Officer will have no difficulty in this regard, especially if the applicable law clearly declares as to what is considered an offence or is prohibited thereunder. If so, there seems to be no warrant or support, either explicit or implied, for taking a view that the Assessing Officer can invoke the Explanation, only on the basis of an external finding under any applicable law, of a competent authority or court. Nonetheless, on this point, there appears to be a contrary view expressed.

Going by case law, what can come within the sweep of the Explanation, just as that of the main provision (sub-section (1) of section 37), is an item of expenditure, not an item of "loss". The reason is that, as held by courts, if it is an item of "loss", not "expenditure", its deductibility or otherwise is governed by, and has to be decided having regard to the general principles of, the concept of "income" and "profits and gains" as enshrined in section 28/29 ; not the residuary provisions of section 37(1).

One finds a plethora of court decisions, also on the interpretation of the expression-"for the purposes of the business". This has been widely construed, and uniformly held, to mean almost every conceivable activity connected with or incidental to the business. In the light of those decisions, but having regard to the terms/ tenor of the Explanation, one may have to proceed on the premise that a deduction or allowance is not permissible, should there be the taint of illegality or wrong-doing associated either with expenditure or with business.

If clinically analysed, it will be seen that the expression-"any expenditure incurred . . . for any purpose which is an offence or which is prohibited by law" necessarily contemplates that,-

(a) there is expenditure incurred ;

(b) such expenditure is incurred (wholly and exclusively) for any purpose (of the assessee's business) ; and

(c) such purpose for which expenditure is incurred, is either an offence or prohibited by law.

As such, generally speaking, for invoking the Explanation, all the above three criteria may have to be satisfied. However, that may not be necessary in every case ; for example, where the whole, or, perhaps, even substantially the whole, of the business is illegal. As, in that case, the Explanation may be found applicable to the whole lot of expenditure incurred for such business.

With the foregoing in the background, it has to be examined whether or not the Explanation comes into play in a particular case, and if the answer is "yes", to what extent.

To highlight and illustrate the scope for applying the Explanation, one may consider a typical case. It is noted that, in the guidelines on audit under section 44AB of the Act issued by the Institute of Chartered Accountants of India, dealing with the requirement of clause 17(e)(iii) of Form No. 3CD (this is a requirement in view of the subject Explanation under section 37(1) of the Act), the case of a builder engaged in construction business has been referred to. For illustration herein, the same business may be chosen, or more appropriately, that of a promoter ("promoter" as specially defined, refers to owner of the land and/or builder) carrying on the business of construction and sale of "flats" or "apartments", being independent units of a multistoried building that one comes across mostly in a metropolitan city.

Having regard to the very peculiar characteristics of such property, the respective State Governments (among them are, Maharashtra and Karnataka) have considered it essential and accordingly have brought about a special legislation : the Flats Act, the Apartments Act, and the Rules thereunder. The primary objective, as stated in the said Acts themself, is to declare that each such unit of a building is, for all purposes, to be regarded a heritable and transferable immovable property. This is to enable the buyer to enjoy exclusive ownership of his unit, but with an undivided interest in the common areas and facilities to be used and enjoyed by all the owners of the building jointly.

The several regulations in those Acts and Rules, besides the other related regulations and bye-laws as framed by the local authorities, are so devised as to safeguard and protect the lawful rights and interests of the buyers, individually as also in common. That being so, those Acts and Rules govern/embrace almost all the related activities of the promoter. That is, right from the initial stage of his deciding to develop and construct, for sale, a building comprising independent units, to the final stage of completing the construction as per the approved plan, obtaining a completion certificate, and conveying the property to the buyers. The said Acts provide that the conveyance has to be made by the promoter, either to the organization formed and registered by the buyers jointly, or to each of them individually, depending on whether the units are sold as "flats" or as "apartments".

Those regulations and rules are mandatory and are required to be strictly complied with by the promoter. To mention a few : The promoter constructing a building for sale of its units as "apartments" has to-(i) initially execute and register a declaration in the prescribed form (this is a must, for the apartments to be governed by the Apartment Act and Rules), (ii) get the plan for the building duly approved by the competent authority, (iii) execute an agreement to sell and have it registered, and (iv) construct the building in accordance with the approved plan.

If the promoter fails to so comply with or contravenes any of the provisions of the said Acts, any such failure or contravention is, as explicitly provided therein, considered an offence. Of course, under the said Acts, the promoter is punishable with imprisonment or fine or both, but he can get away without punishment if he establishes reasonable cause for such failure. The possibility of either consequence, however, as pointed out elsewhere herein, might not be of relevance or a deciding factor for the Assessing Officer to invoke the Explanation to section 37(1) of the Act in a particular case.

To sum up : On the aforementioned facts and circumstances, the Assessing Officer could try and invoke the Explanation on the ground that all those purposes (that is, inclusive of all activities in the course of/incidental) of the business, that are either (a) not in compliance with or in contravention of, and declared an offence by, or (b) prohibited by, the statutory rules and regulations governing the business, are caught within the mischief of the provision. If so, he will deny deduction or allowance for all such expenditure as are found to have been incurred for one or more of the aforementioned purposes/activities.

According to expert commentary in the recent edition of a book on income-tax, for the purposes of the Explanation, the question whether there is any infraction of law, or whether the expenditure is incurred for any purpose which is an offence or which is prohibited by law shall have to be decided by the authority or the court empowered to do so under the respective law, and not by the income-tax authorities or the tribunal functioning under this Act. With regard to the stated proposition, certain case law has been referred to in the commentary.

The judgments so referred to are : [1993] 202 ITR 774 (Ker) ; [1979] 119 ITR 996 (SC) and [1995] 215 ITR 364 (SC).

K. N. Narayana Iyer v. CIT [1993] 202 ITR 774 (Ker), a private limited company, before it went into voluntary liquidation, made a gift to its managing director's daughter and also paid the gift-tax. The Income-tax Officer sought to treat the amounts of the gift and gift-tax as part of the accumulated profits available with the company at the time of its winding up, for the purpose of computing "dividend" under section 2(22)(c) of the Income-tax Act. The issue was decided against the Revenue holding that the gift, if at all, was avoidable only by the liquidator ; but as he has not chosen to do so, the Income-tax Officer cannot ignore the gift and treat the amount as accumulated profits available with the liquidator for distribution on a notional basis.

Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC), an internal audit party of the Income-tax Department, besides drawing the attention of the Income-tax Officer to a provision of law that had escaped his notice, also expressed its opinion on a point of law. The apex court held to the effect that the audit party was not competent to interpret the law and express its opinion, as it was the Income-tax Officer who must determine for himself what was the effect and consequence of the law, and whether in consequence of the law, which had come to his notice through the internal audit party note, he could reasonably believe that income had escaped assessment. Held that, therefore, the opinion of the audit party on a point of law cannot be "information" as envisaged in section 147(b), so as to justify the reopening by the Income-tax Officer of a completed assessment under that provision.

Asst. CIT v. A. K. Menon [1995] 215 ITR 364 (SC), the limited point at issue was whether the Special Court appointed under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, had power to examine and decide whether or not the tax liability of a "notified person", as assessed by the appropriate authority under the Income-tax Act, was reasonable or justified or enforceable. The apex court held to the effect that the Special Court had no power to do so, as, under the above referred to Act, it had only a limited power to determine as to whether and to what extent, having regard to the funds of the notified person available with the custodian, the tax liability of the notified person as already determined by a competent authority could be paid.

On a study of those judgments, however, one is not clear as to why they could be regarded to have any bearing or relevance, so as to support, even indirectly, the stated proposition.

Besides, the validity or otherwise of the proposition calls for a closer examination, also for the following reasons :

The proposition, by implication, means that the Assessing Officer can invoke the Explanation only if there be, and on the basis of, a finding under the relevant law from a competent authority or court. If so, it may happen that the Explanation can never be given effect to by the Assessing Officer in a particular case ; for instance, if there has been no prosecution against the assessee and hence no such finding is, or can ever be expected to be, available.

Further, there is a statutory time limit for the Assessing Officer to complete an assessment. In the general scheme of things, even if there be a finding given by the first authority/court under the relevant law, it could be challenged by the aggrieved party before higher forums. Obviously, it is not feasible for the Assessing Officer to defer his proceedings, until such time as there is a final finding.

It is thus seen that the proposition, if it were accepted, is bound to result in unintended consequences.

In this context, one may have to keep in view, certain observations of courts in decided cases.

The apex court has, in Prakash Cotton Mills Pvt. Ltd. v. CIT [1993] 201 ITR 684, as also in CIT v. Ahmedabad Cotton Mfg. Co. Ltd. [1994] 205 ITR 163, ruled to the effect that it is the Assessing Officer who is required to examine the relevant provisions of the applicable law or statute for ascertaining the real nature of a particular expenditure in terms of those (external) provisions, so as to decide upon the allowability or otherwise of that expenditure under the Income-tax Act.

In CIT v. H. Hirjee [1953] 23 ITR 427 (SC) and CIT v. Chaman Lal and Bros. [1970] 77 ITR 383 (Delhi), it has been held that if the purpose for which a particular expenditure has been incurred is illegal, it could not be regarded as wholly and exclusively a business purpose and the expenditure is, therefore, not deductible. What calls for a special noting is the courts' ruling to the effect that in such a case, for disallowing the expenditure, the possible final outcome of the proceedings under the applicable law/statute, be it for or against, in respect of the alleged illegality, is not relevant so as to be taken into consideration.

Those rulings in cases decided under the main provision (section 37(1) of the 1961 Act/section 10(2)(xv) of the 1922 Act) are necessarily of equal force to cases coming within the purview of the Explanation under that provision (section 37(1)).

Another vital aspect that ought not to be lost sight of is, should it not be possible for the Assessing Officer to successfully invoke the Explanation in the normal course of his proceedings, the Explanation might be rendered meaningless or futile, and consequently, inoperative. More so, should the Revenue be left with no other course open to redo the assessment, for invoking and giving effect to the Explanation at a later date ; in particular, if no action is possible under section 154 or 148 or 263 of the Income-tax Act.

On this aspect, certain settled rules of construction of the provisions of a statute call for attention. These, among others, are that the court should endeavour to (a) so interpret as will achieve the object of the provision, (b) make the law workable and enforceable, instead of reducing it to a redundant or dead letter, and (c) best harmonize with and effectuate the object of the legislation.

To conclude: For the reasons indicated hereinabove, certainly the better view is that the Assessing Officer will be within his powers to proceed and invoke the Explanation on the basis of his own examination of and finding(s) under any law governing/relevant for a particular business, without having to, for this purpose, seek and/or rely on a finding of an authority or court under that law.

In the explanatory memorandum on the Finance (No. 2) Bill, 1998, referring to the then proposed Explanation, it is mentioned that-"This proposed amendment will result in disallowance of the claim made by certain taxpayers of payments on account of protection money, extortion, hafta, bribes, etc., as business expenditure". The payments thus specified are all items appropriately falling under the category of expenditure that are prohibited by law as envisaged by one of the two limbs of the Explanation. On a close study, however, the Explanation seems to have, as discussed hereinbefore, a much wider implication and application, than what appears to be conveyed in the memorandum. For, as per the other limb of the Explanation, deduction or allowance is prohibited, also of any expenditure if it has been incurred for a purpose that is regarded an offence under any law. In the explanatory memorandum no item of expenditure that may be covered under this other category has been referred to.

No doubt, understanding the true intent and purpose of the Explanation may prove rather a difficult task, and therefore, the possibility of divergent opinions on any one or more of the relevant aspects cannot be ruled out. On that premise, for taking a suitable but defensible stand for the purposes such as, filing the tax return, and furnishing the required particulars, for example- under clause 17(e)(iii) of Form No. 3CD, as also in the assessment and further proceedings, it will be prudent for the assessee to take, and be guided by, legal advice of a competent tax counsel. More so, if the applicability or otherwise of the Explanation is considered to be doubtful or arguable, either in general or in respect of any particular expenditure.