Bakshish is necessary business expenditure: Bombay HC

MUMBAI: Can 'bakshish', the money given as an inducement or reward for good work be held as necessary business expenditure for tax purposes?
    
The Bombay High Court in an order said 'bakshish' can be considered as business expenditure.
    
Observing that paying over and above the contractual amount to sugarcane harvesting workers was 'necessary incidence of business,' the division bench of Justices F I Rebello and J P Deodhar upheld a decision of Income Tax Appellate Tribunal in this regard .
    
Samarth Sahkari Sakhar Karkhana in Jalna district had claimed deduction of Rs 2,73,000 from its profit as 'bakshish' money paid to harvesting and transportation (H&T) workers.
    
It had also claimed deduction for advance paid to H and T contractor. This advance had been paid out of money borrowed by the factory itself, but at a lower interest rate. So it claimed differential interest as business's expenditure in income tax assessment.
    
Rates of H and T workers -- who cut and transport surgarcane from field to the sugar factory -- are fixed through a contract between factory, H and T contractor and the government.
    
Income tax Commissioner refused to allow the 'bakshish' money given to H and T workers as business expenses, saying that it was paid at factory's 'sweet will', and factory was not obliged to pay these amounts.
    
Similarly, the Commissioner also disallowed differential interest for amount advanced to H and T contractor, again on the ground that it was not an obligatory payment.

However, IATA (Income Tax Apellate Tribunal Authority) overturned this decision, against which Income Tax Commissioner filed appeal in the High Court.
    
The High Court, in a recent judgement, upheld tribunal's reasoning that paying Bakshish to H and T wokers was necessary, since harvesting sugarcane was a skilled job and skilled workers were hard to come by.
    
Court also noted that when harvesting season stretched upto summer, conditions became very adverse, and if workers left midway, factory could suffer immense loss. So, to induce H and T workers to continue, paying bakshish was a 'necessary incidence', court said, accepting tribunal's ruling.
    
The court took note of the argument that it was crucial to move surgacane from fields to factory speedily, because the time is inversely proportional to the sugar yield.
    
Court also stated that advancing loan to H and T contractor too could be termed as an expenditure on account of business expediency, as contractors needed money to engage workers before the harvesting season began.
    
Lastly, countering the argument that if `bakshish' was accepted as an expenditure for tax purposes, factories would show entire profit as `bakshish', court said, "...the argument has no basis because if such `bakshish' is unreasonable or exhorbitant, assessing officer can disallow it."