Commission income – Bofors Case – taxability may be decided on the basis of probable normal human conduct, the surrounding circumstances, the preponderance of probabilities and the legal propositions

[C.A. Surender Gupta]

In the matter of Shri Hersh W. Chadha, DDIT, Circle-1(1), & others Versus. International Taxation [2010 -TMI - 201360 - ITAT, Delhi], ITAT has delivered an important decision involving an issue which has a wide impact not only on Income Tax but also in Indian Politics. Important observations and decision of the Hon'ble tribunal in this case may be summarized as under:

Burden

In criminal proceedings, the charge is to be proved by the State against the accused, establishing it beyond doubt, whereas as per the settled proposition of law, the income tax liability is ascertained on the basis of the material available on record, the surrounding circumstances, human conduct and preponderance of probabilities.

Private enquiry

Assessing Officer is entitled to make private enquiries to find out as to whether there is reason to suspect that the return is incorrect or incomplete. No objection can be taken to such enquiries made behind the back of the assessee at that stage, as they are all administrative inquiries. They assume a quasi-judicial character only after the issuance of notices for assessment. This is so, because the Assessing Officer is not a court.

Effect of criminal proceedings

Whether the illegal gratification was received by the assessee or not, might have to be decided in criminal proceedings, but for the purpose of income-tax proceedings, the material in hand was sufficient to fasten the tax liabilities upon the assesse. [R.P. Vashisht Vs. DCIT (2006 -TMI - 4274 - PUNJAB AND HARYANA HIGH COURT]

Evidence versus Material available on record

The difference between the evidence and material available on record in the Evidence Act and in income tax proceedings. The Income tax Act uses the words 'material available on record' and the SNAB Report accepted by the Govt. of India and the JPC and not objected to by assessee can not now be called in question.

The JPC Report, being an authentic report in public domain, is an admissible evidence.

The Chargesheet filed by the CBI is admissible evidence. It refers to various enquiries and new facts.

Secondary Evidences

The tax liability in the cases of suspicious transactions, is to be assessed on the basis of the material available on record, surrounding circumstances, human conduct, preponderance of probabilities and nature of incriminating information/ evidence available with AO. Sumati Dayal V. CIT [1995 -TMI - 5469 - SUPREME Court]

Circumstantial Evidences

It is evidence of various facts, other than the fact in issue which are so associated with the fact in issue, that taken together, they form a chain of circumstances leading to an inference or presumption of the existence of the principal fact

Whether JPC reports acts as Res judicata

The JPC was enquiring into the state of affairs at the relevant time in 1987 and 88, whereas the Income tax proceedings commenced much later. The JPC has given various findings to the effect that a lot of crucial information was not provided by the Bofors representatives. On the other hand, at the assessment stage, a lot of other material collected by the Investigative Agencies was available. Besides, it remains the settled position that income tax can be levied on actual or deemed receipt. Consequently the JPC findings do not apply as res judicata.

The JPC report nowhere says that Mr. Chadha or any other entities were held to be immune or exonerated from such charges. In our view the JPC has neither intended to oust the jurisdiction of the Investigative Agencies, nor has given findings constituting res judicata on the issues. Therefore, we do not find ourselves persuaded to hold that the JPC gave any clean chit to the assessee.

We have made it clear that finding the middleman is not the only issue for assessment of tax liability in Income tax proceedings. The liability to tax rests on many considerations, including the various deeming provisions of the Income Tax Act.

Whether Mr. Win Chadha was a commission agent

The Assessee's long-standing connections as a representative of Bofors and its looking after the sales promotion and their interests in India are not denied. It is contended that since Bofors' business prospects were going down, the assessee's commission was reduced from 2% to .25%. The facts clearly state that rather the prospects were brightening and reaching pay dirt.

All these facts clearly indicate that the prospects of the Bofors business were brightening and lots of activities were going on, the replies of both the assessee and Bofors are contrary to the apparent situation and against normal human conduct. These are glaring inconsistencies in the explanations, due to which, the process and clock of adverse inferences gets triggered in the circumstances.

Therefore, assessee and Bofors cannot be believed in saying that Mr. Chadha was not a representative but only a booking agent. He had much more important functions to perform and it also indicates that part of the remuneration was diverted to bye pass Indian Defense policy and given through Svenska.

The only logical and inescapable conclusion, which can be drawn from all these facts, coincidences, record and the various parameters laid down by the Hon'ble courts in this behalf, as discussed hereinbefore, is that Mr. Win Chadha was the principal beneficiary of the payments made by Bofors into the account of M/s Svenska Inc.

The interesting question for consideration at this juncture is as to whether an official statement of a sovereign State can be relied on in tax proceedings. …………. If the statement of a sovereign govt. sent through diplomatic channels and that too on the request of Indian Govt., is not acceptable or reliable evidence in Indian tax proceedings, no case of cross-border tax evasion can ever be detected or proved…………………. We see no reason to hold that the Swedish Govt. and its own Audit Department SNAB gave any wrong report by mentioning Indian agent as recipient.

Since incorrect replies are given by the assessee in his statement on oath, the AO is not obliged to give further evidence to prove him wrong, a suitable inference is to be drawn by the Revenue Authorities

Inquiry in difficult situation

We are conscious of the fact that the I.T. Deptt. was carrying out investigations in difficult circumstances ascribable to the sensitive nature of enquiries, their ramification on national politics and public perception. It was very difficult to get information and documents and to examine concerned links due to the premeditated surreptitious cover up of transactions and smokescreen corporate jugglery. There is no presumption in law that the AO is supposed to discharge an impossible burden to assess the tax liability by direct evidence only and to establish the evasion beyond doubt as in criminal proceedings. This is why Hon'ble courts by way of a catena of binding judicial pronouncements, have held that tax liabilities can be assessed by Revenue Authorities on consideration of material available on record, surrounding circumstances, human conduct, preponderance of probabilities and nature of incriminating information/ evidence available on record.

Deemed income

When the witness i.e. the assessee is not forthcoming with proper facts and chooses to be elusive and evasive, the AO has no choice but to take recourse to estimate. The only caveat is that it should be reasonable and based on material available on record. It should not be perverse or based merely on conjectures. In our view, herein the AO has considered the relevant aspects in quite a reasonable and tenable manner. In our considered view all the above material available on record and the facts and circumstances make it clear that this income is taxable in the hands of the assessee.

In our considered view even if this Hindu Newspaper material is ignored, it would not change the fact that Svenska and its funds were payments made by Bofors for the assessee. The income is deemed to be received by the assessee.

Letter Rogatory

The assessee's pleads that some material was obtained by Letter Rogatory with immunity provided by Swedish law from being used against third parties in tax frauds in the nature of duties, custom, money laundering etc. The immunity if any was applicable to money laundering, custom duties etc and that too for tax frauds only. There is no mention of income tax proceedings therein. The impugned orders are for assessing regular income tax proceedings and not for tax frauds. Consequently this plea of the assessee bears no merit and deserves to be rejected.

Mr. Chadha, along with Ottavio Quotrocci and the Hindjuas, opposed the Letter Rogatory proceedings before the Swiss Courts. Now if the assessee had no link with Svenska and his Swiss Bank Accounts, there was no need for him to have challenged these proceedings costing a fortune in Switzerland. If the assessee was as clean as claimed, he would have rather welcomed the supply of information by the Swiss authorities to the Govt. of his own country and would have avoided the trouble and cost of such litigation. Challanging the action of proper disclosure by the Swiss Govt. to the Indian Judicial System leads to an important adverse inference against the assessee.

Duty of AO

We have already mentioned AO is not concerned as to whether the assessee is held as a middleman or commission agent, or whether the actions are legitimate or against the Indian Defense Policy. His endeavor is to bring to Govt. the taxes which are due, an exercise far different than criminal or civil court proceedings.

Availability of Original Documents

All through, the assessee has demanded 'where are originals?' There has never been any challenge to the contents thereof as false or incorrect. It has to be borne in mind that the evidence has been collected by the JPC and by premier Investigating Agencies of the Indian Govt. Their contents broadly match with each other and the facts mentioned therein are corroborated by cross or direct references. The facts have a clear inter se corroboration, which cannot be called a mere coincidence. An inference cannot now be raised against this material that the contents thereof are fabricated or incorrect. The evidence was obtained by lawful means - by diplomatic or other official and govt. channels. Questioning their contents or veracity in income tax proceedings will amount to disbelieving the whole system. The assessee has nowhere claimed these documents to be false or fabricated the insistence is only on production of originals, or their admissibility. The Hon'ble Courts have laid down parameters for the Revenue Authorities in tax proceedings to respond to such circumstances also. Therefore, the assessee's plea in this behalf cannot be accepted.

Correctness of Estimation by AO

We now proceed to dwell upon the issue of burden of proof. If the AO, during the course of proceedings comes across some material indicating any accrual or receipt of income in the hands of the assessee, he is empowered to investigate the matter and ask relevant questions. The AO's burden is initial in nature, the assessee, thereafter, has to give a proper explanation, which means, it must be true and disclosing proper facts, more particularly when they are in the exclusive knowledge of the assessee. The assessee has no option to remain selective, elusive, evasive or restrained in disclosure. After such explanation, statement or other disclosure of the assessee, the AO will ascertain the correctness of the assessee's submissions on the basis of material available on record, the surrounding circumstances, the conduct of the assessee, the preponderance of probabilities and the nature of incriminating information/ evidence available with him. In the light of all these, the AO in this case discharged onus cast on him and came to the conclusion that the assessee was liable to tax qua Svenska commission.

The fact about the assessee's dominant position at the time of ripening of the prestigious defense deal, maintaining/operating key bank accounts, and his capacity to transfer funds, the trail whereof has been demonstrated by the AO, all lead to the inescapable inference that the above income accrued or is deemed to have accrued to the assessee.

Whether other entities are amenable to income Tax jurisdiction in bofors payouts

The subject matter from which these payments flew and a substantial part of the services rendered by assessee. A.E. Services, Ano, Moresco etc. pertain to this Indian Defense Contract, executed in India. All these entities are amenable to jurisdiction of Indian Income Tax Department, to bring to tax the amount which accrues or arises to them for these services, or is received, or it is deemed to be so by them. Indian income tax is leviable on all types of income, including legal and illegal income, whether recipients are Indian or foreign resident. In these facts, all the connected entities are clearly amenable to Indian tax jurisdiction for their respective income.

In Vodafone case [2010 -TMI - 77365 - HIGH COURT OF BOMBAY], Hon'ble Bombay High Court upheld the jurisdiction invoked by the Indian Tax Authorities.

Taxability of the transaction

In the Bofors supply case the fundamental contract was executed in India between Bofors and Defense Department. Payments were made from India and the services were to be rendered in India. All the incidental payments would have an Indian connection. Therefore, the Indian tax jurisdiction is squarely invoked.

Flaws in Investigation

Before us, neither of the parties has adverted to any other investigations. We are surprised to observe that though the Department has proceeded against the assessee, no action seems to have been taken against either Services or Ottavio Quattrocci and other related entities, by the Income Tax Department. Bofors admittedly paid the amounts to the assessee, AE Services, Quotrocci and other entities. It's liability for withholding tax is built in. Mr Ottavio Quatrocci was living in India for a considerable time. The issue about his tax residence status should have been verified.

Extraordinary jurisdiction of the Courts to reopen the assessment

The Hon'ble Supreme Court in the case of Green World Corporation [2009 -TMI - 33418 - SUPREME COURT OF INDIA], has dealt with a some what similar issue. In that case proceedings u/s 148 of the Act for reopening of completed assessment were found to be not valid by the Hon'ble Supreme Court. By the time the matters reached before Hon'ble Supreme court, they had become time barred. However, looking at the irregularities, the Hon'ble Court exercising its extraordinary powers under Article 142 of the Constitution of India, directed the Department that assessment be reopened.

In view of the above observations, the Department may examine these issues and, if so advised, may take necessary appropriate action.

Conclusion

BOFORS COMMISSION

Keeping in consideration the rival contentions, all the facts, the material available on record, the probable normal human conduct, the surrounding circumstances, the preponderance of probabilities and the legal propositions, we have not hesitation to hold that assessee received the impugned commission as added by AO as his income for AYs 1987-88 and 1988-89. This ground of the assessee is dismissed.

Relief Granted to the assesse for the issues involved as interest on such commission, business expenditure and income from house property.

Interest u/s 234 is consequential in nature.

For full text of the case, please visit:

Shri Hersh W. Chadha, DDIT, Circle-1(1), & others Versus. International Taxation [2010 -TMI - 201360 - ITAT, Delhi]