In a significant ruling reinforcing the principle that tax deductions must be supported by credible evidence, the Karnataka High Court has held that an assessee cannot claim deduction for alleged secret commission payments merely by describing them as business promotion expenses. The Court upheld the disallowance of ₹53.48 lakh claimed as a business deduction after finding that the taxpayer failed to establish the genuineness of the expenditure with supporting records.
The judgment reiterates an important principle of income tax law: the burden of proving the allowability of an expenditure always lies on the taxpayer. Mere assertions or explanations, without documentary evidence, are insufficient to claim deductions under the Income Tax Act.
Background of the Case
The case arose from the assessment proceedings for Assessment Year 2009-10 involving Shri Rampur Arvind, who was engaged in the business of hospitality services and civil contracting. During the assessment, the taxpayer claimed a deduction of ₹53,48,852 under the head of business promotion expenses.
According to the assessee, the expenditure represented secret commission or incentive payments allegedly made to executives of private companies for procuring business for the service apartment segment of his business. The taxpayer argued that such payments were common commercial practices intended to generate business opportunities.
Why the Assessing Officer Disallowed the Claim
The Assessing Officer rejected the deduction on the ground that the taxpayer had failed to produce any reliable evidence supporting the claim. Several critical details were missing, including:
- Names and identities of the recipients.
- Addresses of the alleged beneficiaries.
- Dates on which the payments were made.
- Mode of payment.
- Documentary records establishing that the expenditure was actually incurred.
Since no supporting evidence was furnished, the Assessing Officer concluded that the expenditure had not been proved and therefore could not be allowed as a deductible business expense.
The disallowance of ₹53.48 lakh was subsequently affirmed by the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal (ITAT).
Arguments Before the Karnataka High Court
Before the High Court, the taxpayer contended that the disputed payments were secret commissions paid to private individuals and not illegal payments or bribes made to public servants.
It was argued that since the payments were allegedly made to executives of private companies for securing business, they should qualify as legitimate business expenditure incurred wholly and exclusively for business purposes.
The assessee further attempted to distinguish secret commissions from unlawful gratification, asserting that the payments were commercial in nature and therefore deductible.
High Court’s Observations
The Division Bench comprising Justice S.G. Pandit and Justice K.M. Manmadha Rao rejected the taxpayer’s arguments.
The Court clarified that the controversy did not depend upon whether the payments were made to private persons or public officials. The real issue was whether the taxpayer had successfully proved that the expenditure was genuine, actually incurred, and otherwise allowable under the Income Tax Act.
The Court observed that a deduction cannot be granted merely because an assessee makes a claim. Every deduction must be substantiated with satisfactory evidence establishing both the nature of the expenditure and the circumstances under which it was incurred.
In its ruling, the Court observed:
“A claim for deduction cannot be accepted merely on the assertion of the assessee. The assessee claiming such deduction is required to establish the nature of expenditure and the circumstances in which such expenditure was incurred.”
Since the taxpayer failed to provide even the basic particulars relating to the alleged commission payments, the Court held that the primary burden of proof had not been discharged.
Reliance on Earlier Judicial Precedent
The High Court also noted that the Income Tax Appellate Tribunal had relied upon the decision in CIT v. Dhanpat Rai and Sons while examining the claim relating to secret commission payments.
The Bench found no error or perversity in the Tribunal’s factual findings. It held that the Tribunal had correctly appreciated the evidence—or rather, the absence of evidence—and rightly concluded that the deduction was not admissible.
Appeal Dismissed
After examining the record, the Karnataka High Court held that the findings recorded by the Tribunal were purely factual in nature and did not involve any substantial question of law requiring interference under Section 260A of the Income Tax Act.
Accordingly, the Court dismissed the taxpayer’s appeal and confirmed the disallowance of ₹53.48 lakh claimed as business promotion expenditure.
Key Takeaways
This judgment serves as an important reminder for taxpayers, businesses, and tax professionals that every deduction claimed under the Income Tax Act must be supported by adequate documentary evidence.
Businesses frequently incur marketing, promotional, commission, and incentive expenses. However, where the identity of recipients, mode of payment, supporting vouchers, agreements, confirmations, or other evidence is absent, tax authorities are justified in questioning the genuineness of the claim.
The ruling also reinforces that the allowability of an expenditure is determined not merely by the taxpayer’s explanation but by the evidence placed on record. Even if an expenditure is claimed to have been incurred for business purposes, the deduction cannot be allowed unless the taxpayer discharges the statutory burden of proof.
Case Details
Case Title: Shri Rampur Arvind v. The Assistant Commissioner of Income Tax
Case Number: Income Tax Appeal No. 676 of 2017
Court: Karnataka High Court
Date of Judgment: 9 July 2026