JUDGMENT B.V. Nagarathna, J.— In C. P. Nos. 365 and 366 of 1999 (IT) by the order dated April 8, 2001, this Court directed the Income Tax Appellate Tribunal, Bangalore Bench "A" to refer questions Nos. 3 to 7 sought to be referred by the Commissioner of Income Tax renumbering the same as questions Nos. 1 to 5. Accordingly, the Assistant Registrar of Income Tax Appellate Tribunal, Bangalore, has forwarded a reference under Section 256(1) of the Income Tax Act, 1961, in R.A. Nos. 307 and 308/Bang/96 arising out of I.T.A. Nos. 904 and 906/Bang/1988 for the assessment years 1983-84 and 1984-85 for its opinion on the question of law as stated in the reference which is extracted as follows: 1. Whether, on the facts and evidence brought on record, the conclusion of the Income Tax Appellate Tribunal that the fact of commission payment by the assessee to the Mehtas was proved beyond reasonable, is tainted by flawed logic? 2. Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in concluding that camouflaged payments made pursuant to a tainted contract would be allowable expenditure in the hands of the assessee? 3. Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in coming to the conclusion that the purported payment of the commission by the assessee to the Mehtas in cash would not be hit by the provisions of Section 40A(3) of the Income Tax Act thereby defeating the very purpose of its enactment? 4. Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in coming to the conclusion that the liability for the purported commission payment arose, when the assessee showed the debit for bogus steel purchases in its books and not when the purported agreement was entered into on August 2, 1982 (assessment year 1983-84) or when the purported commission amount was actually disbursed in later years? 5. Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in coming to the conclusion that the purported commission payment claimed by the assessee represented was an expenditure and not a sharing of income obtained by the firm, in pursuance of a conspiracy with the Mehtas to cheat the Kamataka Ball Bearings Company Ltd.? 2. 2. The facts leading to this reference are that the assessee which is a registered firm engaged in the business of engineering contracts had executed a contract for the Kamataka Ball Bearings Ltd., Mysore. It filed returns of income for the assessment years 1983-84 and 1984-85 along with a profit and loss account and balance-sheet and the assessments were completed. Thereafter the Revenue initiated action under Section 132 of the Income Tax Act in July, 1986, and during enquiry it was noticed that the assessee (respondent herein) had inflated the steel purchases debited in its books and claimed it as an allowable expenditure. The assessee admitted that he had obtained the computation bills from steel vendors and, therefore, the assessments were reopened under Sections 147 and 148. The assessee filed revised return and claimed that it had paid commission in cash to the Mehta group who were allegedly instrumental in having the contract awarded to the assessee by the Kamataka Ball Bearings Ltd. by inflating the contract cost and it was also admitted by the assessee that the inflated contract cost were handed over to the Mehta group as commission, the figures being Rs. 2,15,456 for the assessment during 1983-84 and Rs. 45,64,851 for the assessment year 1984-85. But no entry was made in« the assessee's books of account for the alleged commission paid. The Assessing Officer, however, held the payment of commission was only a device to escape and avoid tax and he, therefore, completed the assessment by making additions of the aforesaid amounts for the two years respectively. Being aggrieved by the said assessment order, appeal I. T. A. No. 30/ C-IV (CIT)(A)-III/1987-88 was filed in respect of the assessment year 1983-84 and I.T.A. No. 28/C-IV (CIT)(A)-III/1987-88 was filed in respect of the assessment year 1984-85. With regard to the disallowance of commission receipts, the order of the Assessment Officer was confirmed by the appellate authorities by order dated January 8, 1988, and further the Income Tax Appellate Tribunal in I.T.A. Nos. 905 and 906/Bang/1998 confirmed the orders of the Commissioner of Income Tax (Appeals) by its order dated January 31, 1990, and Miscellaneous Petition No. 10/Bang/90 filed against the said order was also dismissed on June 29, 1990. 905 and 906/Bang/1998 confirmed the orders of the Commissioner of Income Tax (Appeals) by its order dated January 31, 1990, and Miscellaneous Petition No. 10/Bang/90 filed against the said order was also dismissed on June 29, 1990. Aggrieved by the rejection of the miscellaneous petition the assessee had moved this Court in W. P. No. 23825 of 1990 and this Court, vide order dated April 6, 1992, quashed the order of the Tribunal dated June 29, 1990, and directed the Tribunal to consider the miscellaneous petition afresh and the Tribunal by its order dated August 30, 1993, recalled its order in appeal dated January 31, 1990. Against this order dated January 31, 1990, the Revenue moved this Court in W.P. No. 39210 of 1993 and this Court by its order dated July 15, 1994, rejected the contention of the Revenue and the matter was again heard by the Tribunal afresh. Thereafter, the matter was again heard by the Tribunal and by order dated July 8, 1996, the appeal of the assessee was allowed. The Commissioner of Income Tax, Karnataka-I, Bangalore, then filed a reference application before the Appellate Tribunal, Bangalore Bench, seeking a reference of certain questions for the opinion of this Court under Section 256(1) of the Act. The Tribunal rejected the reference application filed by the Revenue by its order dated November 5, 1998. Against the said order C. P. No. 365 and 366 of 1999 were filed before this Court and by order dated April 8, 2004, directed the Tribunal to refer questions Nos. 3 to 7 sought to be referred by the Commissioner of Income Tax renumbering the same as questions Nos. 1 to 5. Accordingly, the statement of case was forwarded by the Income Tax Appellate Tribunal to this Court, which is now under consideration. 3. The background facts of the case are that the assessee/firm (hereinafter also referred to as "the contractor") engaged in building contracts had responded to a tender for the construction of the factory building at Mysore for Karnataka Ball Bearings Ltd. (hereinafter also referred to as "the principal") of which Sri A. P. Mehta was the chairman and Sri Jairaj Mehta P, was the managing director and their company was under the management of the Mehta group which was in a position to award contracts. In the instant case, the contract for the construction of the factory building at Mysore was awarded to the assessee/firm subject to the payment of a commission by the assessee to the chairman and managing director of Karnataka Ball Bearings Ltd. and the same was to be achieved by agreeing on a suitable additional payment on the bills prepared for the work done by the assessee which additional payment was to be paid by way of commission to the Mehtas. In the books of account of the assessee/firm certain debit entries were made as expenditure towards steel purchase for the construction although in fact the steel was to be supplied by the principal. When the search was made by the Department, the assessee stated that the amounts were not spent for steel purchases but for paying commission to obtain the contract. According to the assessee, the commission was paid only for the purpose of business and that the amount was deductible from the income. 4. Sri A.P. Mehta, who was examined on oath had testified to the effect that there was such understanding of receipt of commission for awarding the contract to the assessee and the total amount payable was as claimed by the assessee for the two assessment years 1983-84 and 1984-85 and an identical amount was declared by various members of the Mehta group in their returns which were filed after the search. 5. According to the Department, the payments purportedly made cannot be termed as commission as the amount involved is not paid for any services rendered inasmuch as the contract with the principal was entered into on July 16, 1982, and thus, there was no liability which accrued in the course of running a business. It is the further contention of the Revenue that the payment of commission for a tainted purpose cannot be allowed. 6. On the other hand, the assessee's contention is that as per the "memorandum of minutes of the meeting of Mr. J.K. Panthaki with Mr. A.P. Mehta, Mr. Jairaj A. Mehta and others held on August 12, 1982" commission was payable to Mehtas and, therefore, it is an allowable expenditure. 7. 6. On the other hand, the assessee's contention is that as per the "memorandum of minutes of the meeting of Mr. J.K. Panthaki with Mr. A.P. Mehta, Mr. Jairaj A. Mehta and others held on August 12, 1982" commission was payable to Mehtas and, therefore, it is an allowable expenditure. 7. The Tribunal, while considering the above pleas, held that the agreement referred to above, though entered into on August 12, 1982, was reduced into writing on January 2, 1987, after the search took place and there was nothing wrong in this. It is also held that it is a fact that the assessee paid to Mehtas who were the directors of the company. It was further observed that Mehtas received the commission by cash and offered the same for taxation. After examining, the various payments made by the assessee as seen in the paper book, the Tribunal was of the view that the factum of payment of Rs. 48,00,000 as commission to Mehtas by the assessee was proved beyond reasonable doubt. Mehtas also offered the income in their returns. Therefore, the Tribunal felt that it was an expenditure to be allowed. 8. Since the Tribunal was of the view that the questions referred to above were based on facts. The reference application by the Department filed by the Revenue were rejected by the order dated November 5, 1988. But this Court by the order dated April 8, 2001, directed that a reference to be made and accordingly, the statement of case is before us. 9. It is seen from the assessment order dated March 27, 1987, that the assessee had not purchased any goods from M/s. Chimanlal R. Mehta and Manish and Co. but had only obtained purchase bills by paying the commission of 3Vi per cent. As the debits of steel purchase recorded in the books of account of the assessee were held to be bogus purchases and had escaped assessment, notice under Section 148 was issued and the assessee was heard in the matter and an amount of Rs. 2,15,456 was added to the income returned for the assessment year 1984-85 and the assessee's alternative claim to allow this as commission was rejected. Penalty proceedings under Section 271(1)(c) in respect of the bogus purchases were also initiated separately. 2,15,456 was added to the income returned for the assessment year 1984-85 and the assessee's alternative claim to allow this as commission was rejected. Penalty proceedings under Section 271(1)(c) in respect of the bogus purchases were also initiated separately. Similarly, for the assessment year 1984-85, there was a difference between particulars in respect of the return filed on January 30, 1985, and September 30, 1986, inasmuch as Rs. 56,72,010.33 which was shown as materials in the return filed on January 30, 1985, was split up and Rs. 10,87,159.71 was shown as materials and Rs. 45,84,850.62 was shown as commission. 10. The Assessing Officer held that the change in the return filed on September 3, 1986, could not be held to be a bona fide omission as contemplated under Section 139(5) and the assessment was proceeded with on the basis of the return filed on January 30, 1985, which was based on the books of account. The Assessing Officer has recorded that on September 4, 1986 J. S. Dave and M/s. Chimanlal R. Mehta and M/s. Maneesh and Co., had accepted the bogus nature of steel bills and at that stage the assessee revealed about the commission paid to the principal and, therefore, no purchases had actually been made but only purchase bills had been obtained and that a sum of Rs. 45,84,815.62 was shown under the materials accounts and that penalty proceedings should be initiated separately. The Assessing Officer also recorded that the contract work was for Rs. 1,28,18,413, out of which a sum of Rs. 48,00,000 was claimed as commission paid by the assessee to the principal instead of steel purchases but the same was disallowed by the Assessing Officer. 11. Under the above circumstances, the question that arises for our consideration is whether the disallowance of commission alleged to have been paid by the assessee to A.P. Mehta and others for obtaining the contract from Karnataka Ball Bearings Ltd. for construction of the factory building and other unit is justified. 12. We have heard Sri M. N. Seshachala learned Counsel for the applicant/ Revenue and Sri Vivek Holla for M/s. Holla and Holla learned Counsel for the respondent. 13. 12. We have heard Sri M. N. Seshachala learned Counsel for the applicant/ Revenue and Sri Vivek Holla for M/s. Holla and Holla learned Counsel for the respondent. 13. It is submitted by counsel for the Revenue that Chapter IV-D of the Income Tax Act, 1961, deals with profits and gains of business or profession and Section 37 states as to what could be considered for the purpose of deduction or allowance while computing the income chargeable under the head "Profit and gains of business or profession". Relying upon the Explanation to Sub-section (1) of Section 37, he submits that in the instant case the payment of amount involved for the payment of commission by the assessee would not have been deducted as an expenditure incurred by the assessee as the said payment was prohibited by law and was, therefore, an offence and hence this Court ought to answer the questions referred to by the Tribunal in favour of the Revenue. 14. The case of the assessee on the other hand is that it is a firm of contractors and it had tendered for the construction of the factory building at Mysore for Karnataka Ball Bearings Ltd. A.P. Mehta was the chairman of the company. Jairaj P. Mehta was the managing director. Thus, the company was under the control of the members of the Mehta group who were in a position to influence awarding of contracts. They were willing to award the contract on payment of what is called "kick back" (commission) to be paid to them by the assessee. 15. The assessee has also placed reliance on the memorandum of minutes of the meeting of Mr. J.K. Panthaki with Mr. A.P. Mehta, Mr. Jayaraj A. Mehta and others held on August 12, 1982, which reads as under: It is agreed that M/s. Karnataka Ball Bearing Corporation Ltd. shall make payments to M/s. J. K. Panthaki and Co. as per the original estimate recommended by the architects, even though the construction of the factory building as per the revised structural design resulting in cost reduction of Rs. 48 lakhs. It is further agreed that, (i) such cost reduction of Rs. 48 lakhs shall be paid by M/s. J. K. Panthaki and Co. as commission in cash to Mr. A. P. Mehta, Mr. Jayaraj A. Mehta Mrs. Prabhavathi A. Mehta, Mrs. 48 lakhs. It is further agreed that, (i) such cost reduction of Rs. 48 lakhs shall be paid by M/s. J. K. Panthaki and Co. as commission in cash to Mr. A. P. Mehta, Mr. Jayaraj A. Mehta Mrs. Prabhavathi A. Mehta, Mrs. S. J. Mehta, and Miss Raksha A. Mehta for awarding the construction of KBBC Ltd., (ii) the said commission of Rs. 48 lakhs is to be withdrawn from the books of account of J. K. Panthaki and Co. during the financial years ended March 31, 1983, and March 31, 1984; (iii) the amount of commission to be shared by each person shall be decided mutually amongst the aforesaid person ; and (iv) The time, mode, quantum and place of remittance, etc., shall be mutually decided by Mr. J. K. Panthaki and on behalf of other persons by Mr. A. P. Mehta. As mutually agreed upon by the aforesaid persons, Mr. J. K. Panthaki was asked to remit the below mentioned amounts to the said persons: 1. Mr. A.P. Mehta Rs. 13.80 lakhs 2. Mr. Jayaraj A. Mehta Rs. 12.85 lakhs 3. Mrs. Prabhavathi A. Mehta Rs. 7.15 lakhs 4. Mrs. Susheela A. Mehta Rs. 9.75 lakhs 5. Miss. Raksha A. Mehta Rs. 4.45 lakhs for J.K. Panthaki and Company Sd/- (J.K. Panthaki) Partner 16. It is submitted on behalf of the assessee that the assessee which is a partnership firm was dealing with a private limited company, namely, Karna-taka Ball Bearings Ltd. and that the commission paid by the assessee for obtaining the contract for construction of factory building cannot be said to be tainted or prohibited by law or an offence and, therefore, the Tribunal was right in its order dated July 8, 1996, by permitting the assessee in allowing the said commission amount to be deducted by way of expenditure. 17. Both sides have relied upon case law and authorities to explain the meaning of "commission". 18. At the outset it is relevant extract Section 37 of the Act. (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession. Explanation.--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 business or profession and no deduction or allowance shall be made in respect of such expenditure... (2B) Notwithstanding anything contained in Sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. 19. It is seen that the Explanation to Sub-section (1) of Section 37 was inserted with effect from April 1, 1962. Sub-section (1) of Section 37 basically states that what expenditure, laid out wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". For the removal of doubts an Explanation was added with effect from April 1, 1962, declaring 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 business or profession and no deduction or allowance shall be made in respect of such expenditure. It is significant that the Explanation has been added by way of a declaration specifically mentioning the words "offence" and prohibited by law and the said Explanation is in the nature of a deeming provision which bars a deduction or allowance in respect of an expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. What is an offence or what is prohibited by law has not been explained and, therefore, the scope for interpretation or bringing under the Explanation any expenditure in respect of which no deduction or allowance can be made is vast. 20. In the instant case, learned Counsel for the Revenue submits that the payment of commission to an extent of Rs. 48,00,000 for obtaining a building contract of Rs. 20. In the instant case, learned Counsel for the Revenue submits that the payment of commission to an extent of Rs. 48,00,000 for obtaining a building contract of Rs. 1,28,18,413 by the assessee not to the principal that is Karnataka Ball Bearings Ltd. but to the personal accounts of the Mehta group which was controlling the said company in respect of which a meeting was held on August 12, 1982, is prohibited by law and is an offence in terms of Section 630 of the Companies Act, 1956. He further submits that if the original contract was for Rs. 1,28,18,413 and if Rs. 48,00,000 out of the said amount was paid by the assessee as commission in cash to various individuals of the Mehta group who were controlling the company is also in violation of Section 299 of the Companies Act. Hence, the Assessing Officer was right in disallowing the said payment made by the assessee as expenditure. 21. The basic question that needs to be answered is as to whether the disallowance of commission paid by the assessee to A.P. Mehta and others for obtaining the contract from Karnataka Ball Bearings Ltd., the principal for construction of the factory building is justified in view of the Explanation to Section 37(1) of the Act. We find that detailed orders have been passed by the Tribunal on factual aspects of the matter, but the Tribunal has failed to consider the case in the light of the Explanation to Sub-section (1) of Section 37. Further, the Tribunal in its order dated July 8, 1996, has held that there was no loss caused to the Revenue inasmuch as the recipients of the commission had offered the said commission amount for payment of tax in their individual accounts and, therefore, the commission paid by the assessee ought to be deducted for the purpose of computing business income of the assessee. For the aforesaid reasons, we deem it proper to remand the matter to the Appellate Tribunal to reconsider the case in the light of the observations made above. 22. We are supported in our view by the judgment of the Bombay High Court in the case of Commissioner of Income Tax Vs. Gill and Co. For the aforesaid reasons, we deem it proper to remand the matter to the Appellate Tribunal to reconsider the case in the light of the observations made above. 22. We are supported in our view by the judgment of the Bombay High Court in the case of Commissioner of Income Tax Vs. Gill and Co. Pvt. Ltd., (2001) 248 ITR 362 Bom which was a case regarding secret commission paid by the assessee and in respect of which a deduction was sought and which was allowed in the past but the Legislature clearly intending to disallow such claims with effect from April 1, 1962, and which aspect not being taken into account by the Tribunal, the Bombay High Court remanded the, matter to the Tribunal for decision afresh keeping in mind the object of the above amendment. 23. Further, in the case of Tarini Tarpuline Productions Vs. Commissioner of Income Tax, (2002) 254 ITR 495 Orissa it has been held that a secret, commission paid by the assessee to procure business was not deductible under Section 37 of the Act, in view of the amendment effected from April 1, 1962, by the insertion of the Explanation. 24. Further, in the case of Commissioner of Income Tax Vs. Taraporvala Sons Co. Pvt. Ltd., (1999) 239 ITR 319 Bom, it has been held that where no finding regarding the purpose for which secret commission had been paid was given by the Tribunal without satisfying itself that it was not incurred by the assessee for an oblique purpose which is an offence or which is prohibited by law, in view of the amendment to Sub-section (1) of Section 37 of the Act by the insertion of the Explanation, the matter required reconsideration and was remanded to the Tribunal. 25. In view of what is stated above, these referred cases are remitted back to the Income Tax Appellate Tribunal to be considered afresh in the light of the observations made above particularly having regard to the Explanation to Sub-section (1) of Section 37 and the facts and circumstances of the case. Ordered accordingly.