S. 37(1) Explanation Expenditure on secret commission and free distribution of books

Any secret transaction/payment that is made to secure an unfair advantage, would necessarily be repugnant to law. Transaction which is not transparent, offends normal business practice, must suffer scrutiny. Such unexplained and unvouched expenditure, if allowed, is likely to encourage illegal payments, evasion of tax and unscrupulous practices ushering in at both ends. The expenditure incurred on secret commissions would necessarily fall within the mischief of the Explanation added to Section 37 of the Act.

High Court remitted the case back to the Tribunal for deciding the question of allowability of deduction on secret commissions as also expenditure allegedly made on distribution of free books in the light of Explanation introduced and appended to Section 37(1) of the Act while evaluating and probing evidence of incurring of expenses on both the counts so as to give a finding with regard to reasonableness of such expenditure. – CIT vs. Dhanpat Rai & Sons ITA No. 51 of 1999, Order dated 10-01-2014 (Punjab & Haryana).