2014 (6) TMI 1040 - AT - Income Tax

Payment made as kickbacks to Iraqi authorities - illegal payment within the provisions of Section 37(1) and paid under the Oil for Food Programme of UNO and a CBDT Memorandum No.414/117/2005-IT (Inv, -1) dated 18.11.2005 read with Volcker Committee s Report which confirmed the illegality of the payments - nature of commission payment - HELD THAT - As decided in case of TIL Limited vs. ACIT 2007 (3) TMI 404 - ITAT KOLKATA Volker Commission Report so far as the same is offending to the interests of India is mainly concerned about doling out permits to various parties including some Indian parties as well to procure oil from Iraqi oil fields at controlled/subsidized rates and have no direct connection with supply of tractors and allied materials to Iraq. Hence in our view there is no sound basis for connecting the appellant s case to the Volker Commission Report. It is also apparent that neither the Assessing Officer nor the CIT(A) had access to the said Volker Commission Report. Hence this particular allegation about the appellant s name being mentioned in the Volker Commission Report cannot stand. Records show that even these contingencies also did not arise in this case as neither the name of appellant company has been proved to have figured in the Volker Commission Report nor has the payment been proved to be of the nature of a kick-back nor even it has been shown that the necessary permission from UN was not taken. So far as the nature of the payment is concerned it has clearly been established that the payment was made purely for the purpose of procuring export order of Forklift Trucks to Iraq and also certain after-sales services performed by the Agent in Iraq and was of the nature of commission payment. As stand taken by the learned CIT(A) that in absence of deduction of tax at source from the payment it is hit by the provisions of section 40( a )( i ) of the Act also is not tenable. There is nothing on record to show that any part of the activities of the Iraq; Agent was performed in India. The payment was also received by them in Jordan. Absence of any Permanent Establishment or Business connection of the Agent in India also takes the case out of the purview of the deeming provisions regarding accrual of income in India as envisaged in section 5(2) - in this case neither was the Commission payment received by the non-resident Agent in India nor did any income accrue or arise nor is deemed to accrue or arise to it in India. Hence there was no liability on the part of the appellant company to deduct any tax from the amount of Commission payment made by it to the Iraqi Agent in terms of the provisions of section 195 of the Act .- there is nothing on record to show that the full amount as claimed by the appellant company was not actually paid or that some part of it was routed back to the appellant company or its Directors in an indirect or underhand way. Therefore there is no case for disallowing the Commission payment in this case from any angle whatsoever. Taking into consideration all these aspects we hold the Commission payment under consideration is fully allowable. We therefore reverse the orders of the lower authorities and delete the entire disallowance in this regard. - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of deletion of addition made by the A.O. under Section 37(1) of the I.T. Act.
2. Admission of additional evidences by CIT(A) in violation of Rule 46A.
3. Validity of reassessment proceedings initiated under Section 147 read with Section 148 of the I.T. Act.

Issue-wise Detailed Analysis:

1. Justification of Deletion of Addition Made by the A.O. under Section 37(1) of the I.T. Act:

The revenue challenged the CIT(A)'s decision to delete the addition of Rs. 49,25,296/- made by the A.O. on the grounds that the payment was made as kickbacks to Iraqi authorities under the UNO's Oil for Food Programme. The CIT(A) allowed the relief on merits, which was contested by the revenue. The ITAT referred to prior decisions, including the ITAT Calcutta Bench in the case of TIL Limited vs. ACIT and DCIT vs. Rajrani Exports Ltd., where similar additions were deleted. The Tribunal noted that there was no evidence showing the payment was a kickback or illegal. The payments were made for business purposes, specifically for procuring export orders and after-sales services. The Tribunal emphasized that the Volcker Committee's Report did not implicate private Indian parties or prove that the payments were illegal. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the addition, concluding that the payments were legitimate business expenses and not prohibited by law.

2. Admission of Additional Evidences by CIT(A) in Violation of Rule 46A:

The revenue contended that the CIT(A) admitted additional evidences in violation of Rule 46A, which governs the conditions under which additional evidence can be admitted. However, the Tribunal did not find merit in this argument, as the CIT(A) had provided sufficient opportunities for the A.O. to examine these details. The Tribunal's decision did not explicitly address this issue in detail, implying that the procedural aspect of Rule 46A was not violated in a manner that would affect the outcome.

3. Validity of Reassessment Proceedings Initiated under Section 147 Read with Section 148 of the I.T. Act:

The assessee filed cross objections challenging the validity of the reassessment proceedings initiated under Sections 147 and 148. The assessee argued that the initiation of these proceedings was not in compliance with statutory conditions and procedures, and that the reasons recorded for reopening were contrary to the facts. The Tribunal, however, did not delve deeply into these objections, as the primary focus was on the merits of the addition. The cross objections were ultimately dismissed for non-prosecution, indicating that the assessee did not actively pursue these arguments during the hearing.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to delete the addition made by the A.O., finding no evidence of illegal payments or kickbacks. The procedural objections regarding Rule 46A and the validity of reassessment proceedings were not addressed in detail, with the cross objections being dismissed for non-prosecution. The Tribunal's decision was consistent with prior rulings on similar issues, reinforcing the principle that legitimate business expenses should not be disallowed without concrete evidence of illegality.