Income Tax Appellate Tribunal - Mumbai
Reliance Industries Ltd, Mumbai vs Assessee on 16 September, 2015
आयकर अपीऱीय अधिकरण, मुंबई न्यायपीठ "डी" मुंबई
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI
BEFORE S/SHRI B.R.BASKARAN, AM AND AMARJIT SINGH, JM
आमकय अऩीर सं./I.T.A. No.5769/M/2013
(ननधधायण वषा / Assessment Year: 2002-03)
Reliance Industries Ltd., बनाम/ Asstt. Commissioner of Income
3rd floor, Maker Chamber-IV, tax, Large Taxpayer Unit,
Vs.
222, Nariman Point, 29th floor, Center No.1,
Mumbai-400021 World Trade Centre, Cuffe Parade,
Mumbai-400020
(अऩीरधथी /Appellant) .. (प्रत्मथी / Respondent)
आमकय अऩीर सं./I.T.A. No.5798/M/2013
(ननधधायण वषा / Assessment Year: 2002-03)
Asstt. Commissioner of Income बनाम/ Reliance Industries Ltd.,
tax, Large Taxpayer Unit, 3rd floor, Maker Chamber-IV,
Vs.
29th floor, Center No.1, 222, Nariman Point,
World Trade Centre, Cuffe Mumbai-400021
Parade,
Mumbai-400020
(अऩीरधथी /Appellant) .. (प्रत्मथी / Respondent)
स्थधमी रेखध सं ./जीआइआय सं ./PAN : AAACR5055K
अऩीरधथी ओय से / Appellant by Shri Arvind Sonde
प्रत्मथी की ओय से/Rspondent by Shri Jayant Kumar
सुनवधई की तधयीख / Date of Hearing : 2.9.2015
घोषणध की तधयीख /Date of Pronouncement: 16.9.2015
आदे श / O R D E R
Per B R Baskaran, AM:
These cross appeals are directed against the order dated 25-06- 2013 passed by Ld CIT(A)-24, Mumbai and they relate to the assessment year 2002-03.
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2. The assessee is in appeal in respect of following issues:-
(a) Validity of reopening of assessment.
(b) Addition of „Provision for Wealth tax‟ for computing Book Profit u/s 115JB.
3. The revenue is in appeal in respect of following issues:-
(a) Addition of gain arising on re-purchase and extinguishment of debenture bonds.
(b) Addition of Commission/surcharge paid to SUMO, Iraq Government agency on the basis of Volker Committee report.
(c) Addition of inland transportation fee on the basis of Volker Committee report.
4. The facts relating to the case are stated in brief. The assessee company is engaged in the business of manufacturing of and trading in petrochemicals, polyester fiber intermediaries, textiles, generation and distribution of power, operation of jetties, investment activities etc. The assessment of the year under consideration was completed originally u/s 143(3) of the Act on 28.03.2005. Thereafter, the AO reopened the assessment by issuing notice dated 20-03-2006 u/s 148 of the Act. The assessee asked for the reasons of re-opening and thereafter filed its objections also. It is pertinent to note that the assessment has been re- opened within four years from the end of the assessment year under consideration. The assessing officer rejected the objections by following case law:-
(a) Dr. Amin‟s Pathology Laboratory (252 ITR 673)
(b) Praful Chunilal Patel / Vasant Chunilal Patel (236 ITR 832)
(c) Rakesh Aggarwal (225 ITR 496) Thereafter the assessing officer completed the assessment by making various additions. In the appeal filed by the assessee, the Ld CIT(A) upheld the reopening of assessment and granted relief only in respect of some of the additions. Hence the assessee has filed this appeal on the 3 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d
5 7 9 8 / M/ 2 0 1 3 issues cited above, which were decided against it. The revenue is challenging the decision of Ld CIT(A) in granting relief in respect of the additions cited above.
5. The first issue in the appeal filed by the assessee relates to the validity of reopening of assessment. We heard the parties and perused the record. We notice that the Ld CIT(A) has given a clear finding that the assessing officer has reopened the assessment only on the basis of material facts available with him and not on account of change of opinion. Further, the observation of the AO that the assessee did not produce the relevant materials necessary for completion of assessment at the time of completion of original assessment has also been upheld by the Ld CIT(A). At the time of hearing before us, the assessee could not contradict these observations made by the Ld CIT(A). Hence, we do not find any infirmity in his decision in confirming the validity of re-opening of assessment.
6. The next issue contested by the assessee relates to the addition of "Provision for Wealth tax" for the purpose of computation of book profit u/s 115JB of the Act. The assessee did not add the amount relating to "Provision for Wealth tax" to the Net Profit for computing the amount of „Book Profit‟ u/s 115JB of the Act. Before Ld CIT(A), the assessee placed reliance on the decision rendered by Hon‟ble Bombay High Court in the case of CIT Vs. Echaj Forging Pvt ltd (251 ITR 15) in support of its contentions. However, the Ld CIT(A) did not accept the contentions of the assessee with the following observations:-
"...It is seen from the above judgment referred by the assessee, that in this case, the wealth tax was already paid, but in the assessee‟s case, the wealth tax was not paid, but provision has been made."
7. We heard the parties on this issue and perused the record. It is a well settled proposition that the provisions of sec. 115JB is a complete 4 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 code by itself and the additions prescribed therein only can be added to the net profit for computing the „book profit‟ under that section. As per clause (a) of Explanation 1 to sec. 115JB, what is required to be added to the Net profit is "the amount of income tax paid or payable, and the provision there for." This clause provide for addition of only "income tax"
and not "wealth tax". The question as to whether the wealth tax was actually paid or a mere provision was made, in our view, is irrelevant for interpreting the above said provision. The very same issue came for consideration before the Hon‟ble Bombay High Court in the case of Echaj Forging Pvt Ltd (supra) and the revenue conceded before the Hon‟ble High Court that the wealth tax could not be added to the Net profit u/s 115J of the Act. The relevant observations made by the Hon‟ble jurisdictional High Court are extracted below:-
"(I) ADDITION OF WEALTH TAX PAID BY THE ASSESSEE TO THE NET PROFIT :
6. Mr. Desai, learned Senior Counsel for the Department, fairly concedes that the net profit, an shown in the profit and loss account, will not be increased by the amount of wealth tax paid because under clause (a) of the Explanation to section 115J(1A), what is contemplated is the amount of income tax paid. Under the said clause, payment of wealth tax is not contemplated. Therefore, the net profit shall not be increased by the amount of wealth tax paid by the assessee."
The expression used in sec. 115JB is para materia with the expression used in sec. 115J of the Act and hence, we are of the view that the assessee can take support of the above said decision. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the addition of provision for wealth tax while computing book profit u/s 115JB of the Act.
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8. We shall now take up the appeal filed by the revenue. The first issue relates to the addition of gains arising on re-purchase and extinguishment of debentures /bonds. The brief facts relating to this issue are that the assessee issued Foreign Currency Bonds in the year 1996 & 1997 (popularly called as "Yankee Bonds") carrying a coupon rate of interest ranging between 10% to 11% p.a. They were having a maturity period of 30 to 100 years. The interest was payable half yearly intervals and there is no dispute that the assessee has paid interest thereon regularly and it has been allowed as deduction u/s 36(1)(iii) of the Act. After the attack on "World Trade Centre" located in USA on 11th Sep. 2001, the financial markets collapsed dramatically and the investors of the debentures/bonds started selling them. Hence, the market price of the debenture/bonds came down heavily and they were quoted at a value less than its face value. Hence, the assessee has decided to purchase the bonds/debentures from the market and extinguish them. Accordingly, the assessee purchased bonds/debentures having a face value of US $ 12,32,60,000 at a discounted rate of US $ 80,61,100 from the open market. The gain/discount gained on buy back of the debentures worked out Rs.38.80 crores. The assessee treated the said gain as "Capital receipt". However, the AO held that the said gain is assessable u/s 41(1) as a profit chargeable to tax. The Ld CIT(A), however, deleted the same and hence the revenue has filed this appeal.
9. We heard the parties on this issue. The AO has invoked the provisions of sec. 41(1) in order to bring the gains arising on repurchase and extinguishment of debentures/bonds. The provisions of sec. 41(1) reads as under:-
"41(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred as the first mentioned person) and subsequently during any previous year,--
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(a) the first mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profis and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or.........."
A careful perusal of the above said provisions would show that the first and foremost condition for invoking the provisions of sec. 41(1) is that an allowance or deduction of loss, expenditure or trading liability incurred by the assessee should have been made in the assessment for any year. Conversely, if deduction of loss, expenditure or trading liability incurred by the assessee was not made in the assessment for any year, the provisions of sec. 41(1) shall not apply. In respect of liability incurred by the assessee, these provisions shall apply only in respect of "trading liability".
10. In this case, the assessee had raised funds by issuing bonds/debentures, i.e., the assessee has received the money and hence the same would not fall in the category of "Loss or expenditure", since both the terms connote outflow of money. Hence the receipt of money by the assessee would fall in the category of "Liability". Under accounting principles, the liability is divided into two categories, viz., "Capital liability"
and "trading liability". While no deduction is allowed in respect of capital liability, the deduction of corresponding expenditure is allowed in respect of a trading liability. As noted earlier the provisions of sec. 41(1) talks about trading liability only, i.e., in respect of capital liability, the said provisions shall not apply. In respect of trading liability incurred, the assessee shall get deduction of corresponding amount. For example, if the 7 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 assessee purchases goods on credit, the assessee shall avail deduction of purchase value of goods while computing the income and the corresponding amount payable shall be shown as a trading liability in the Balance Sheet.
11. Hence, if the assessee gets some benefit in respect of the trading liability incurred by way of remission or cessation thereof and if the trading liability has been allowed as deduction, then the said benefit is liable to be taxed as income u/s 41(1) of the Act. If the corresponding expenditure relating to trading liability incurred by the assessee was not allowed as deduction, then also the provisions of sec. 41(1) shall not apply.
12. When the funds are raised by issuing bonds/debentures, there would be no corresponding expenditure that could be allowed as deduction. Hence the liability incurred by the assessee by raising funds through bonds/debentures cannot be termed as „trading liability‟. There should not be any dispute that the funds so borrowed is called as "Capital borrowed" and further it would be a Capital liability. As stated earlier, the provisions of sec. 41(1) talks about "trading liability" only and hence the "Capital liability" shall not come under the purview of sec. 41(1) of the Act.
13. The impugned gain arose to the assessee, since the assessee could purchase its own debentures at less than its face value. To make it simple, the assessee issued debentures having a face value of say Rs.100/- with interest rate of 10% to 11%. Due to adverse market conditions, the said debenture was available in the market at a discounted rate of say Rs.70/-. If the debentures are to be redeemed at the maturity period, the assessee would have to pay Rs.100/-. If they are purchased from the market, it was enough if Rs.70/- was paid. Hence the assessee, as a prudent 8 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 businessman, chose to purchase the debentures at Rs.70/- and extinguish them. In this process the assessee made a gain of Rs.30/- per debenture. The question is whether the provisions of sec. 41(1) shall apply to the gain of Rs.30/- made by the assessee on repurchase and extinguishment of its own debentures. We have noticed the principles/conditions governing the provisions of sec. 41(1) of the Act. The foremost condition is that the assessee should have been allowed deduction in respect of the "gain" realized by the assessee. In this case, this condition was not satisfied and hence there is no question of invoking the provisions of sec. 41(1) of the Act.
14. The assessing officer has placed reliance on the decisions rendered by Hon‟ble Supreme Court in the case of CIT Vs. Karamchand Thaper & Others (222 ITR 112) and T.V. Sundaram Iyengar & sons (222 ITR 344) in support of his view. We notice that these two decisions have not been rendered in the context of provisions of sec. 41(1) of the Act. In these cases, the assessees therein received some money, which was in the nature of capital receipt initially, but later converted into trading receipt. It is a well settled proposition of law that the trading receipts are exigible to tax and the capital receipts are not taxable under the Act, unless specifically provided for. The Supreme Court, in the above said two cases, laid down the ratio as to when the nature of capital receipt would change into trading receipt.
15. The facts available in the case of Karamchand Thaper & Others (supra) are that the assessee therein acted as del-credere agent of colliery companies and also as agent of the purchasers of coal. The collieries supplied coal directly to the purchasers through Railway wagons. The purchasers are required to pay freight charges for full wagon, even if the wagons are not filled with its full capacity. As per the agreement between 9 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 the parties, the collieries are required to reimburse the excess freight to the purchasers. In this case, the assessee claimed the excess freight from the Collieries on its own, even if the purchasers did not make the said claim. In turn, the assessee paid the same to the purchasers, whenever they lodged the claim with the assessee. After meeting the claims, there was always a sizeable balance left with the assessee, which was transferred by it to the Profit and Loss account under the head "Miscellaneous receipts". The assessee claimed that it had held the amount received from Collieries in trust for and behalf of purchasers and hence it was not part of its trading receipts. The Hon‟ble Supreme Court noticed that the assessee had lodged claim with the Collieries without there being any instruction from the purchasers and paid the same to the purchasers only when a claim is received from them. The Hon‟ble Apex Court held ".... the assessee has collected money on account of under charges (freight charges) not on the basis of any demand made by the purchasers, but as a matter of routine irrespective of any demand by the consignees (purchasers). If and when any purchaser made demand for payment, some payments were made. The surplus balance was taken to the profit and loss account. It must be presumed that money taken to the profit and loss account of the assessee would be its trading receipts. No fact had been brought on record to the contrary. The amount was not kept in a suspense account or shown as a liability...... the inference should be that the assessee acted in accordance with the law and not contrary to law. The assessee collected the amounts of under charges in advance even before any claim was lodged. He realized the amounts from the colliery company not because any demand was made against him, but possibly, in order to protect himself from the eventuality of any demand being made against him as the del credere agent of the seller........ In the instant case, money in question arose from trading operations. The surplus had arisen out of trading transactions and taken to profit and loss account. It had a definite quality of trading receipt...."
10 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 It can be noticed that the dispute in the case of Karamchand thapar & others (supra) was about the nature of receipt, i.e., whether it was capital receipt or trading receipt.
16. In the case of T.V. Sundaram Iyengar & sons (supra) also, the question before the Hon‟ble Supreme Court was about the nature of receipts only. The said assessee collected certain deposits from its customers in the course of carrying on his business, which were originally treated as capital receipts. Since they were not claimed by some of the customers, it transferred the same to its profit and loss account. The following principle was discussed by Hon‟ble Supreme Court in this case:-
"If an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee‟s own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands the amount should be treated as income of the assessee."
The Hon‟ble Supreme Court noticed that the assessee had taken deposits in the normal course of trade. The said amounts were not retained till the fulfillment of contract, but they were depleted by adjustments made from to time. Under these set of facts, the Hon‟ble Supreme Court held that the unclaimed surplus retained by the assessee would be its trade receipts. The Hon‟ble Apex Court further held that:-
".....the assessee itself treated the amount as its trade receipt. If a commonsense view of the matter was taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The money had arisen out of ordinary trading transactions. Although the amount received originally was not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became definite trade surplus."
11 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 In the above said case also, the dispute was about the nature of receipt. The question of applicability of provisions of sec. 41(1) was not before Hon‟ble Supreme Court in the above said two cases.
17. A careful perusal of both the decisions would show that the dispute was about the nature of receipt and the impugned amounts received by the assessees were treated as revenue receipts, since they have been received during the course of trading operations. In the instant case, there should not any dispute that the assessee received funds through issuing debentures/bonds and they cannot be considered to have been received during the course of trading operations. In any case, the dispute in the instant case was about the applicability of provisions of sec. 41(1) of the Act. Hence both the decisions relied upon by the AO are not applicable to the facts of present case and accordingly, in our view, the AO could not have placed reliance on these decisions.
18. On the contrary, the assessee has placed reliance on the decision rendered by Hon‟ble jurisdictional Bombay High Court in the case of Mahindra and Mahindra Ltd Vs. CIT (261 ITR 501). The fact available in this case was that the assessee purchased tools (dies) from a company named KJC. Subsequently, the KJC gave loan to the assessee to purchase the tools (dies) and the said loan agreement was approved by RBI. Later, the company KJC was taken over by another company named AMC and the principal amount of loan was waived by AMC as a part of takeover arrangement with KJC to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, it was held that such waiver would not constitute business income. The Hon‟ble Bombay High Court further held that the provisions of sec. 41(1) were not applicable with the following reasoning:-
12 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 "So far as applicability of section 41(1) is concerned, one of the requirements is that the assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. In the instant case, the assessee had not obtained such allowance or deduction in respect of expenditure or trading liability in the earlier years. It was not disputed that the assessee had paid interest at 6 per cent over a period of 10 years to KJC. In respect of that interest, the assessee never got deduction under section 36(1)(iii) or section 37. Further, toolings constituted capital asset and not stock in trade. Therefore, section 41(1) was not applicable. Secondly, assuming for the sake of argument that the assessee had got deduction on allowance, even then section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability."
The Ld CIT(A), after considering the decision of Mahindra & Mahindra (supra) held as under:-
"In this case, as mentioned above, the facts are that, the assessee Mahindra and Mahindra Ltd had got loan waiver from American Motor Corporation. The assessee had shown the waiver of amount of Rs.57,75,064/- as cessation of liability. The assessee prior to the waiver of loan was paying 6% interest annually to the lender. However, the assessee company did not claim this interest expenditure during the currency of loan u/s 36(1)(iii). The Hon‟ble High Court, further held that, even assuming this interest was claimed as deduction, the provisions of section 41(1) were not applicable to the assessee, as such, the deduction was not in respect of loss, expenditure or trading liability, thus, the Hon‟ble High Court held that the waiver of loan does not amount to cessation of trading liability within the meaning of section 41(1) of I.T Act, 1961.
As pointed out by the assessee‟s AR, the facts of the assessee i.e., Reliance Industries Ltd are identical to the facts of the case of Mahindra and Mahindra (supra). I have also carefully examained the facts of the assessee and Mahindra and Mahindra‟s case and found that the AR‟s submission is correct."
The Ld CIT(A) has observed that the facts of the present case and M/s Mahindra and Mahindra are identical. In our view, the facts are not identical, but the ratio of the said decision shall squarely apply to the 13 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 assessee herein, since in the instant case also the amounts raised through debentures cannot be treated as trading liability for the assessee.
19. The assessee has also placed reliance on the decision rendered by Hon‟ble Karnataka High Court in the case of CIT Vs. Industrial Credit and Development Syndicate Ltd (in short „ICDS‟). The Hon‟ble Karnataka High Court explained the nature of debentures as under:-
"A debenture is a certificate of loan or bond evidencing the fact that the company is liable to pay a specific amount with interest and although the money raised by the debentures becomes a part of the company‟s capital structure, it does not become a share capital. A debenture imports an obligation or a convenant to pay. Discharging the liability to the debenture holder who has sold his debentures in effect amounts to repayment of the loan."
The assessee, ICDS, issued debentures in the year 1973 at a face value of Rs.10/- each at par. The debentures were redeemable during the accounting years corresponding to the assessment years 1984-85, 1985-86 and 1986-87 at the rate of 30%, 30% and 40% respectively. During the period of redemption, the assessee company purchased some of these debentures through a nominee at a price less than the face value thereof and credited the difference between the face value and the cost thereof in its books as surplus arising on redemption of debentures. Although it credited these sums in all the three years to the profit and loss account, it claimed deduction of the sums on the ground that they did not form part of its income. The Hon‟ble Karnataka High Court held as under:-
"...In the instant case, admittedly the assessee had issued debentures which are redeemable after a period of ten years at the face value thereof. Though the debenture holders sold the debentures before the stipulated period at a discounted price to the nominee of the assessee, the consideration paid to those debenture holders was paid by the assessee as reflected in the books of account by a loan advanced to the nominee. Thereafter, on the due dates the assessee has redeemed those debentures for the purpose of accounting, the entire liability was shown as a liability at the price 14 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 paid by the nominee of the assessee. In the balance sheet, the entire amount due under the debentures was shown as liability. After redemption, the difference in the amount was transferred to the profit and loss account and it was shown as surplus. It is obviously on the ground that after redemption so much liability is saved by the assessee and actually the same has to be shown as surplus though there is no real income or profit derived. Notwithstanding the nomenclature adopted in the balance sheet to depict that amount and the place where it is shown in reality the assessee did not receive the said amount as income. The assessee was only able to discharge its liability at a lesser amount as against the face value of the debentures. It is well recognized that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. It is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact did not exist. Cut away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income tax law. Merely because the aforesaid amount was shown as a surplus amount in the profit and loss account, when the assessee did not actually receive any income, we are unable to accede to the submission of Sri Seshachala that it constitutes income under section 2(24) of the Act. Having regard to the reality of the situation, as the assessee has not derived any income, he is entitled not to treat it as an income. Therefore, the Tribunal was fully justified in its conclusion that the said surplus amount reflected in the balance sheet (sic. profit and loss account) cannot be treated as income of the assessee. We do not find any error in the said conclusion reached by the Tribunal."
In our view, the facts prevailing in the above said case are almost identical and the ratio of the decision rendered by Hon‟ble Karnataka High Court is fully applicable to the instant case.
20. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was right in law in holding that the provisions of section 41(1) cannot be applied as the amount of surplus is not on account of trading 15 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 liability and accordingly he was justified in deleting the addition made by the assessing officer. Further, as per the ratio laid down in the case of ICDS (supra) by Hon‟ble Karnataka High Court, the gain realized by the assessee on re-purchase and extinguishment of debentures cannot be considered as income u/s 2(24) of the Act.
21. The next issue relates to the disallowance of commission/surcharges paid to SUMO, Iraq Government Agency and the transportation charges paid. The assessing officer disallowed the above said claim made by the assessee, but the Ld CIT(A) allowed the claim by following his predecessor‟s decision rendered in the assessee‟s own case for AY 2001-
02. The revenue is contesting the said decision of Ld CIT(A).
22. It was brought to our notice that the disallowance of identical claim made in AY 2001-02 was considered by the co-ordinate bench of Tribunal in the assessee‟s own case in ITA No.1347/Mu/2011 and the Tribunal, vide its order dated 24.4.2015, has upheld the relief granted by Ld CIT(A). The relevant discussions made by the co-ordinate bench of Tribunal and the decision taken by it are extracted below, for the sake of convenience:-
"23. The facts relating to the above said issue are set out in brief. Consequent to the invasion of Iraq into Kuwait, UN Security Council imposed economic sanctions on Iraq Government. However, on humanitarian grounds, a scheme called "Oil for Food Programme"
(OFFP) was introduced, whereby the Iraq was permitted to export oil and use the proceeds thereof to buy basic goods from other countries. The Iraq Government ordered its Ministry to collect "Surcharge" on the sale price of the Oil. The Iraqi State Oil Marketing Organisation (SOMO) ran a highly organized system to collect oil surcharges and maintained an extensive data base to keep track of the payments. This collection appears to have been viewed by UN as irregular. Hence the UN Security General appointed an independent Enquiry Committee (called Volcker Committee) to investigate the administration and management of "Oil for Food"
programme. The Volckar Committee Report observed that the Iraqi 16 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 official awarded the contract to various companies to favour them by making illicit payment of surcharge. According to the AO, the name of the assessee herein, viz., M/s Reliance Petroleum Ltd figured as one of the beneficiaries in Volcker committee Report. It was stated that 19 million barrels of oil was allotted, of which 15.7 million barrels were lifted by Alcon Petroleum Ltd, a Liechtenstein based energy trading company. Accordingly, the AO took the view that the assessee would have paid commission/surcharge during the year under consideration and estimated the same at Rs.8,89,36,380/-. Accordingly he added the same to the total income of the assessee.
24. The Ld CIT(A), however, deleted the same with the following observations:-
"3.6. I have considered the facts of the case, order of the AO and the submissions made by the appellant and I do not find enough reasons or justification for the addition made by the AO. Whereas the mention as a non-contractual beneficiary in the Volcker Committee Report is the only reason for the addition, following important aspects related to the issue in question supports appellant's case:-
(i). The observation in Volcker Committee Report is the only material or evidence for making the addition in the assessment order to the effect that assessee is a non-
contractual beneficiary and paid part of the purchase consideration as surcharge to Iraqi Government in violation of UN Resolution. There is no other material/evidence/ reason mentioned by the AO for addition. Such general observation by an outside agency, how much respectable it may be, cannot in itself be sole reason for disallowance/addition to the income under Indian law.
(ii). The Volcker Committee Report also does not refer to any specific evidence against the appellant and states that the commission/ surcharge has been paid by Alcon to the credit of Iraqi government and referred the Appellant as non- contractual beneficiary as it had received the supply of goods from Alcon. There is no evidence on' record which is referred in Volcker Committee Report to suggest that the appellant has paid the purchase price inclusive of a part of it as onwards payment of illicit commission/surcharge to Iraqi government.
17 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d 5 7 9 8 / M/ 2 0 1 3 The AO has also not brought on record any evidence or material in support of the alleged payment of illicit commission forming part of the purchase price. Even the Volcker Committee has not referred the appellant as payer of illicit commission.
(iii). Assessee purchased .lraqi crude oil from Alcon Petroleum Ltd. (Alcon), Leichtenstein company based in Europe, a UN approved company for dealing in crude in "oil and food-programme". The contract was signed with Alcon (and not with Iraqi Government) for supply of crude at an agreed price per barrel at the prevailing international market rate. There was no purchase from Iraqi Government or any Iraq Government agency and the contract signed between Alcon and assessee categorically states that Alcon has not paid any surcharge to Government or their agency for procuring the crude.
(iv) The price paid by assessee to Alcon is the consolidated price for the goods purchased and cannot be split for part of it as representing surcharged alleged to have been paid by Alcon to Iraqi Government. For assessee, it is the „cost‟ of goods for computing taxable income.
(v) There is no privacy of contract between assessee and Iraqi Government or any evidence direct or indirect confirming payment of surcharge by assessee to Iraqi Government. Even if it is accepted that Alcon paid any surcharge Government, it cannot in any view of the matter be said that a part of payment made by assessee to Alcon constitutes surcharge paid by assessee to Government 3.7. In view of the above, I hold that the addition made by the AO is not in accordance with the provisions of law and it is cancelled. The ground of appeal is allowed."
25. The Ld A.R submitted that identical disallowances made in the following cases have been deleted by the Tribunal:-
(a) Air Pac Exports Vs. ACIT (ITA No.2981-2983/M/12 dated 11.6.14)
(b) TIL Ltd Vs. ACIT (16 SOT 33)(Kol)
(c) DCIT Vs. Rajrani Exports (P) Ltd (22 taxmann.com)(Kol).
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26. The facts prevailing in the instant case show that the assessee has not made any payment directly to Iraqi Government. It has paid purchase price to its supplier M/s Alcon Petroleum Ltd. The Ld CIT(A) has given a categorical finding that there is no evidence or material to support the alleged payment of illicit commission/surcharge over and above the purchase price by the assessee to the Iraq Government. Further, as per the contract signed between the assessee and M/s Alcon Petroleum Ltd, M/s Alcon has also not paid any surcharge to Iraqi Government or their agency for procuring the crude oil. Hence, we are of the view that the Ld CIT(A) was justified in deleting this addition by holding that there is no material to support this addition."
Consistent with the view taken by the co-ordinate bench of Tribunal in the assessee‟s own case for AY 2001-02, we uphold the order of Ld CIT(A) in deleting the disallowance of commission/surcharges paid to SUMO and also the transportation charges made by the AO on the basis of Volkar committee report.
23. In the result, the appeal filed by the assessee is partly allowed and the appeal of the revenue is dismissed.
[[ Order pronounced on this 16th day of Sept, 2015.
Sd sd
(AMARJIT SINGH) ( B.R. BASKARAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
भुंफई Mumbai: 16th Sep, 2015.
व.नन.स./ SRL , Sr. PS
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5 7 9 8 / M/ 2 0 1 3
आदे श की प्रतिलऱपप अग्रेपिि/Copy of the Order forwarded to :
1. अऩीरधथी / The Appellant
2. प्रत्मथी / The Respondent.
3. आमकय आमुक्त(अऩीर) / The CIT(A)- concerned
4. आमकय आमुक्त / CIT concerned
5. ववबधगीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai concerned
6. गधर्ा पधईर / Guard file.
आदे शधनुसधय/ BY ORDER, True copy सहधमक ऩंजीकधय (Asstt. Registrar) आमकय अऩीरीम अधधकयण, भुंफई /ITAT, Mumbai