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2016 (10) TMI 1298 - AT - Income TaxUnexplained expenditure u/s 69C - unexplained expenditure of payment of kickbacks - assessee s name appears in the list mentioned in the Volcker Committee Report as a result of Independent Enquiry Committee (IEC) appointed by the United Nations Security Council to investigate the administration and management of Oil-for-Food Programme in Iraq - onus of proving such expenditure is actually incurred - HELD THAT - Observations of VCR cannot be the basis for invoking the provisions of section 69C especially in the facts of the present case where majority of the contracts were prior to the period mentioned in VCR. Secondly the assessee already had subsisting contract with KME under which in respect of all exports to various others countries including Iraq commission was paid @ upto 12.5% wherein the said agent had to provide after sales service also. No extra commission was paid in respect of exports to Iraq. The assessee has time and again stressed that the payments were made through normal banking channel through authorized foreign exchange dealers and not through the banks which are listed in the VCR. Accordingly we hold that there is no merit in application of provisions of section 69C of the Act in the present facts of the case and accordingly we direct the Assessing Officer to delete the addition made on account of unexplained expenditure Disallowance u/s 37(1) - payments as ASSF and ITF were in the nature of kickbacks - HELD THAT - Assessee claims to have made payments to Al Azhar and KME in assessment year 2002-03 and where the assessee has failed to establish whether any services have been rendered by the said concerns and in view of the documents evidences referred to by us with regard to these transactions where admittedly the amount was paid for service charges the same are hit by Explanation to section 37(1) of the Act. With regard to Alia the payments are made against transportation services. The assessee has filed the copies of invoices which are CIF Baghdad and where it was its duty of assessee to deliver the goods at Baghdad the remuneration paid to Alia @ 10% of the value of contract which finds clear mention in VCR is payment by way of kickbacks to the IG and is covered by Explanation to section 37(1) of the Act and the same is not allowable as deduction to the assessee. This is a case where the persons were aware that the payments as ASSF and ITF were in the nature of kickbacks and were thus willing parties to the illegal gratification and hence are thus hit by Explanation to section 37(1) of the Act. Since the assessee has failed to establish its case of KME has given its services in the absence of any distribution agreement the payment made to KME is disallowed under section 37(1) of the Act. In this regard we refer to the findings of CIT(A) in assessment years 2002-03 and 2003-04 and do not reproduce the same for the sake of brevity. Another aspect to be kept in mind is that the name of present assessee finds place in Table 7 and 8 of VCR and Table 7 refers actual expenditure and not projected expenditure. The plea of the assessee that the payment has made through normal banking channels does not help the case of assessee in view of discussion made in the paras above regarding the discrepancy in different communications. Commission paid to Indian concern for liaison work was not allowed since the assessee failed to discharge its onus to establish that the said person had rendered any services to the assessee - Onus was upon the assessee to establish that the said persons had rendered services which necessitated the payment of commission to the said concern. Further VCR in this regard reported that the persons making supplies to Iraq were indulging in payment of kickbacks stands established against the assessee and applying the said ratio we uphold the disallowance made in the case of assessee relating to assessment years 2002-03 and 2003-04. Eligibility to claim deduction under section 80IA allowed.
Issues Involved:
1. Validity of reopening of assessment under section 147 of the Income Tax Act. 2. Adequacy of opportunity provided to the assessee during assessment. 3. Reliance on Volcker Committee Report (VCR) for making additions under section 69C of the Act. 4. Concept and applicability of 'unexplained expenditure' under section 69C of the Act. 5. Burden of proof on the Revenue for proving the expenditure. 6. Allowability of commission payments as business expenditure. 7. Disallowance under section 37(1) and Explanation to section 37(1) of the Act. 8. Disallowance for non-deduction of tax at source under section 40(a)(i) of the Act. 9. Claim of deduction under section 80IA of the Act. Issue-wise Detailed Analysis: 1. Validity of Reopening of Assessment: The ground of appeal against reopening of assessment under section 147 was not pressed by the assessee and hence dismissed as not pressed. 2. Adequacy of Opportunity Provided to the Assessee: The assessee contended that the assessment order was passed without affording adequate opportunity to rebut the evidence relied upon by the Assessing Officer, particularly the VCR. The CIT(A) held that the VCR was available in public domain and the assessee had made detailed submissions on various aspects of the matter, indicating that the assessee had access to and understood the report. Therefore, the contention of lack of opportunity was dismissed. 3. Reliance on Volcker Committee Report (VCR): The CIT(A) and Assessing Officer relied on the VCR, which alleged that the assessee paid kickbacks under the Oil-for-Food Programme. The VCR was considered to have significant evidentiary value. However, the Tribunal noted that the VCR's findings were based on estimations and not all payments were confirmed. The Tribunal found that the VCR alone could not be the basis for additions without concrete evidence of actual payments made by the assessee. 4. Concept and Applicability of 'Unexplained Expenditure' under Section 69C: The Tribunal emphasized that for invoking section 69C, the primary burden is on the Revenue to establish that the assessee actually incurred the expenditure. The Tribunal found that the Assessing Officer made additions based on presumptions without concrete evidence of actual payments. Therefore, the additions under section 69C were deleted. 5. Burden of Proof on the Revenue: The Tribunal reiterated that the burden of proof lies on the Revenue to prove that the expenditure was actually incurred by the assessee. In the absence of concrete evidence, mere appearance of the assessee's name in the VCR was not sufficient to discharge this burden. 6. Allowability of Commission Payments as Business Expenditure: The assessee had agreements with its agent KME for after-sales services, and commission payments were made as per these agreements. The Tribunal found that the payments were made for bona fide business purposes and were allowable as business expenditure. The Tribunal noted that no extra commission was paid specifically for Iraq, and the payments were within the agreed terms. 7. Disallowance under Section 37(1) and Explanation to Section 37(1): The Tribunal distinguished between payments made for bona fide business purposes and those made as illegal kickbacks. It held that payments made for bona fide business purposes, even if they ended up as kickbacks, were not hit by Explanation to section 37(1). However, in the case of Kirloskar Brothers Ltd., the payments were found to be for kickbacks and were disallowed under Explanation to section 37(1). 8. Disallowance for Non-Deduction of Tax at Source: The CIT(A) had alternatively disallowed the payments for non-deduction of tax at source under section 40(a)(i). However, this issue became academic as the Tribunal upheld the disallowance under Explanation to section 37(1). 9. Claim of Deduction under Section 80IA: The Tribunal allowed the assessee's claim for deduction under section 80IA for the infrastructure project, following its earlier decision in the assessee's own case for another assessment year. Conclusion: The Tribunal allowed the appeals of Kirloskar Oil Engines Ltd. and Mather & Platt Pumps Ltd. by deleting the additions made under section 69C. However, the appeals of Kirloskar Brothers Ltd. were dismissed, upholding the disallowance of payments as kickbacks under Explanation to section 37(1). The claim for deduction under section 80IA was allowed for Kirloskar Brothers Ltd.
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