2014 (6) TMI 496 - AT - Income Tax

Disallowance on transport and commission expenses illicit payment to the Saddam Hussain regime - Held that - The obligation of the transportation of the goods from ports to the destination is on the part of the assessee - the assessee had to arrange the transportation of the goods from to port to the destination - when the payment of transportation is as per the terms of the agreement then it cannot be treated as bogus or illegal payment - the payments were barred in terms of Explanation to Section 37(1) of the Income-tax Act - until and unless it is otherwise proved that the payment was an illicit payment to the Saddam Hussain regime and not to the parties it cannot be concluded that the payments are not made for the purpose of business of the assessee. The Explanation to Section 37 cannot be invoked merely on the basis of some doubt about expenditure whether made infraction of law. There should be a direct and cogent evidence to show that the payment made by the assessee is contrary to law. The Authorities below failed to bring anything on record to establish that the payments in question were illegally made by the assessee to the Iraqi Authorities. On the contrary, the assessee has produced the evidence of payment to the agent who is not connected to the Iraqi Authorities. Therefore, in the absence of specific finding that the payments were made to the Iraqi Authorities, it cannot be held as illegal payment infraction of law. Even if the assessee fail to prove beyond doubt that the payments in question are inconsonance to the service rendered by the agent the same cannot be held as illegal in the absence of any evidence to prove that the assessee intended to pay the amount illegally through agent. Relying upon TIL Ltd. Versus Assistant Commissioner of Income-tax, Circle-1, Kolkata 2007 (3) TMI 404 - ITAT KOLKATA - the payments were made purely for the purpose of procuring export orders to Iraq and also for after sale services perform by agent in Iraq and therefore was an allowable expenditure - the payment made to Dalala & Company as commission, included any part of illicit payment termed as kickback in the Volcker Committee Report, on which basis, the payment made to Dalala & Company has been disallowed. The revenue authorities have not been able to pin the assessee on illicit payment made to Dalala, which also is stamped with approval from the RBI, a very heavy burden is cast on the revenue authorities to prove that the payment was made with an illicit intent, which in the end, the revenue authorities were unable to shift - the payments made by the assessee as commission are fully deductible as the said expenditure was incurred by the assessee for the purpose of its business and does not fall under the category of an expenditure incurred for any purpose which is an offence or which is prohibited in law in terms of Explanation to section 37(1) Decided in favour of Assessee.

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income-tax Act.
2. Disallowance of inland transportation expenses.
3. Enhancement of commission expenses.
4. Charging of interest under Sections 234B and 234C.
5. Deduction under Section 80HHC on account of DEPB.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147:
The assessee challenged the reopening of assessment under Section 147, arguing that it was illegal. The CIT(A) rejected the objection of the assessee, confirming the validity of the reopening. However, since the issues on merit were decided in favor of the assessee, the Tribunal did not find it necessary to decide this ground, considering it academic in nature.

2. Disallowance of Inland Transportation Expenses:
The AO disallowed the inland transportation charges based on the Volker Committee report, which alleged that the assessee made illicit payments to the Saddam Hussain regime. The assessee argued that the payments were made for the purpose of procuring export orders and were allowable under the Income-tax Act. The Tribunal found that the transportation expenses were in accordance with the terms of the contract approved by the UN and Indian authorities. The payments were made through banking channels with RBI approval, and there was no evidence of illicit payments to the Iraqi authorities. The Tribunal concluded that the disallowance was not justified and allowed the expenses.

3. Enhancement of Commission Expenses:
The CIT(A) not only confirmed the disallowance of inland transportation expenses but also enhanced the assessment by disallowing commission expenses. The assessee contended that the commission payments were made for services rendered in procuring export orders and were allowable under Section 37(1) of the Income-tax Act. The Tribunal noted that the assessee provided evidence of payments made through banking channels and that the services were necessary for the export business. The Tribunal referenced several decisions, including those of the Kolkata Bench and the Hon'ble Kolkata High Court, which supported the deductibility of such expenses. The Tribunal concluded that the commission expenses were allowable and not prohibited by law.

4. Charging of Interest under Sections 234B and 234C:
The assessee argued that the charging of interest under Sections 234B and 234C was illegal. However, the Tribunal's decision on the main issues rendered this point moot, and it was not specifically addressed in detail.

5. Deduction under Section 80HHC on Account of DEPB:
The assessee raised an additional ground regarding the deduction under Section 80HHC on account of DEPB, arguing that the retrospective amendment was discriminatory. The Tribunal referred to the decision of the Hon'ble Supreme Court in the case of Topman Export vs. CIT, which supported the assessee's claim. The Tribunal directed the AO to allow the deduction under Section 80HHC in accordance with the Supreme Court's decision.

Conclusion:
The Tribunal allowed the appeals of the assessee in part, concluding that the inland transportation and commission expenses were allowable deductions. The Tribunal also directed the AO to allow the deduction under Section 80HHC on account of DEPB as per the Supreme Court's ruling. The decision on the validity of reopening of assessment was deemed academic and not specifically addressed. The order was pronounced in the open court on 21/02/2014.

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