2012 (6) TMI 62 - AT - Income Tax

Kick back money - reassessment - Deduction u/s 37 disallowed on the ground that as per Volcker Committee report, the payments made to this company were illegal payments in the nature of kick-backs, which were ultimately received by the Iraqi authorities and as the amounts paid by the assessee are illegal and prohibited by the law of the land, the same cannot be allowed as expenses under the Income Tax Act, 1961 - held that - The assessee has made payment for commission and has been rendered services in consideration of the same. As a matter of fact, it is not even revenue s case that no services have been rendered at all. The fact that services have been rendered by a party other than the agent to whom commission is paid is wholly immaterial so far as deductibility in the hands of the assessee is concerned. As for the position that the payment was highly excessive vis- -vis the local costs, even if that be so, that aspect of the matter does not affect the deductibility in the hands of the assessee either. The assessee is concerned with commercial expediency of the said payment and not with what are the actual costs incurred in rendering the services for which the payment is made. As we have seen earlier in this order, from the extracts of the Volker Committee report itself, it was absolutely necessary for the assessee to make the impugned payments and, in any event, the commercial expediency of these payments has not even been called into question by the Assessing Officer. The case of the revenue is confined to invoking the Explanation to Section 37(1). - Decided in favor of assessee.

Summary

Issues Involved:
1. Deletion of disallowance of Rs 1,28,45,058 made by the Assessing Officer.
2. Legitimacy of commission payment to Alia Transportation and General Trading Co.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Rs 1,28,45,058:
The Assessing Officer disallowed Rs 1,28,45,058 paid by the assessee to Alia Transportation and General Trading Co., citing the Volcker Committee report, which described these payments as "illegal payments in the nature of kick-backs." The CIT(A) deleted this disallowance, stating that the payment was a legitimate business expense for commission paid through banking channels with RBI approval and pursuant to an agreement approved by the Government of India and the UN. The Tribunal upheld this view, noting that the services were indeed rendered to the assessee, and the payments were necessary for the business operations under the Oil for Food Program.

2. Legitimacy of Commission Payment to Alia Transportation and General Trading Co.:
The assessee exported tea to Iraq under the UN's Oil for Food Program. The Volcker Committee report indicated that Alia acted as a front company for the Iraqi regime, collecting payments that were ultimately kickbacks. However, the Tribunal observed that the payments made by the assessee were for legitimate business purposes, such as negotiating tender prices, following up with the Ministry of Trade, arranging transportation, and ensuring inspection and approval of consignments. The Tribunal emphasized that the illegality, if any, occurred at the stage of Alia's transactions with the Iraqi regime, over which the assessee had no control. The Tribunal noted that the Explanation to Section 37(1) of the Income Tax Act disallows expenses incurred for purposes prohibited by law, but in this case, the assessee's payments were not for illegal purposes, and the services were actually rendered.

The Tribunal also highlighted that the Volcker Committee report did not conclusively prove that all exporters were aware of the kickbacks. The onus was on the Assessing Officer to demonstrate that the assessee was a willing party to the illegal kickbacks, which was not established. The Tribunal concluded that the payments were made for bonafide business purposes and were not hit by Explanation to Section 37(1).

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs 1,28,45,058, concluding that the payments were legitimate business expenses and not prohibited by law. The appeal was dismissed.