Written in : May 1998

Recently, I discussed a case where a taxpayer tried - in vain - to fraudulently avoid paying tax on a huge amount of money. It was, if you remember, a case where a 'gift' was claimed to have been received in Srinagar from a resident of Ladakh.

This time, we shall discuss another interesting case, entirely on a different footing. This, too, tells us much about how things work in tax law and how things should be handled.

Pranav Construction, a builder in Mumbai, was searched by the income tax department. During the search, a chit was found which showed that it had received about Rs.80 lakhs as 'on money' on sale of apartments etc. The firm agreed to declare Rs.80 lakhs as its income.

While filing the return, the firm claimed an expenditure as being incurred outside the books of account, from the on money. This amount was not, of course, recorded in the books of account. This expenditure, it claimed, was incurred for : providing security to partners; getting hawkers and tapories vacated from the premises; payment of extortion money and haftas; etc.

While putting up the claim, the firm gave detailed information and notes on the expenses incurred. It showed that it had paid 'protection money' to one S B Shellar of Rs.7.5 lakhs and to one Padmakar Choudhary of Rs.12.5 lakhs. It said it had paid 'security charges' to guard the lives of partners and engineers who visit the plot.

A further Rs.13 lakhs was claimed as incurred for removing hawkers and tapories from the front portion of the plot. And, finally, it said commission was paid to one Suresh Patil for arranging the settlement with the hawkers and tapories for eviction.

The officer, of course, did not believe the firm. He asked it produce the parties to whom payments were claimed to have been made. Now, when such a request comes from the officer it is very difficult to produce parties who were paid off the record.

But this firm ensured that eight persons who had received money from it were produced before the officer. Each person confirmed that they did not maintain any books of account and were not assessed to income tax. Yet, each of them confirmed that it had received the amounts from the builder firm. The officer deputed his Inspector to visit the parties and re-check. The Inspector got confirmation from some of the parties. Others were not available.

Two of the parties who had been paid the money were murdered in a gang war. They could not, therefore, be contacted. The firm produced newspaper reports that they were involved in receiving extortion and protection money in the area in which the builder operated.

The officer did not, of course, accept the firm's contention and disallowed the claim. He said that the expenses were not recorded in the books; that he did not explain the expenses during the search statement; that no evidence was found of the expenses etc.

Incidentally, did the department go after the gangsters and make them pay tax on the money collected by them from the builder? High hopes. The law in this country is not for the likes of them. It is for us - who read, write and discuss such issues.

The Tribunal said it was common knowledge that extra moneys are received by builders in cash to incur certain expenses which could not be recorded. And, if such expenses were incurred they should be allowed while computing taxable income.

The Tribunal noted that various persons had admitted having received money from the builder and the Inspector had independently verified that fact.

Regarding the claim of protection money paid, the Tribunal noted that the firm had put up the claim before the gangsters were murdered. Hence, it was not an after-thought. Perhaps, it surmised, if they had not been murdered they might have also come forward and accepted having received the protection money. The newspaper reports also corroborated the claims of the firm that they were involved in receiving protection money and haftas from builders in Thane and Dombivli areas. The reports confirmed that builders found it impossible to conduct business unless they paid such protection money.

All in all, the Tribunal allowed the claims of the builder firm and deleted the additions made by the officer.

In the Srinagar article I had said that truth can always be established, given enough efforts and a will. This Mumbai case again proves it - and this time for the taxpayer.

Look at the situation. The expenses were incurred in cash. Obviously, without bills and receipts - not from gangsters! Yet, the builder firm put in enough efforts to prove its case. It produced receivers of on money before the officer. This was rather unusual - how often can you get gangsters to come and give evidence for you?

Good tax planning is important. But equally important is good tax management. Tax management is ensuring that the tax planning done is properly executed to ensure success. It involves good work both by the taxpayer and the consultant.

It is excellent tax management - by garnering all favourable, even unusual evidence - that helped the builder firm in this case.

With such evidence, it was not very difficult for the Tribunal to accept the fact of payments and allow them as expenditure.

This case also shows that unorthodox approaches, issues and facts do have a place in law and practice.

Incidentally, did the department go after the gangsters and make them pay tax on the money collected by them from the builder? High hopes. The law in this country is not for the likes of them. It is for us - who read, write and discuss such issues.