Income Tax Appellate Tribunal - Delhi
Cosmos International , New Delhi vs Assessee on 30 June, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'B' : NEW DELHI)
BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
AND
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.4138/Del./2011
(ASSESSMENT YEAR : 2002-03)
ACIT, Circle 32 (1), vs. M/s. Cosmos International,
New Delhi. 1, Aradhana Colony, Sector 13,
New Delhi.
(PAN : AAAFC5587A)
CO No.340/Del/2011
(in ITA No.4138/Del./2011)
(ASSESSMENT YEAR : 2002-03)
M/s. Cosmos International, vs. ACIT, Circle 32 (1),
1, Aradhana Colony, Sector 13, New Delhi.
New Delhi.
(PAN : AAAFC5587A)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Smt. Rano Jain, CA
REVENUE BY : Ms. Parvinder Kaur, Senior DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
The appeal filed by the revenue and the cross objection filed by the assessee emanate from the order of the CIT (Appeals)-XXVI, New Delhi dated 28.06.2011.
2 ITA No.4138/Del./2011CO No.340/Del/2011
2. The assessee filed a return of income on 31.10.2002 declaring income at Rs.26,00,506/- which was subsequently reopened by issuing notice u/s 148 of the Income-tax Act, 1961. The reason for reopening was based on the information received from CIT, Delhi-VIII, New Delhi that the assessee has supplied goods to Iraq under the Oil Food Programme of the UNO and in view of the CBDT's Office Memorandum No.414/117/2005-IT (Inv.-1) dated 18.11.2005 read with Volcker Committee's Report, the case was reopened by issuing notice u/s 148 of the Act on 30.12.2008. The assessment was finalized by making an addition of Rs.49,25,296/- being the amount as kick- backs to the Iraqi authorities. The assessee filed the appeal before the CIT (A) challenging the reopening as well as making the addition on merits. The CIT (A) sustained the reopening, however, allowed the relief on merits. Now, the revenue is in appeal by taking the following grounds of appeal :-
"1. On the facts and circumstances of the case, whether the Ld. CIT(A) was justified in deleting addition of Rs.49,25,296/- made by the A.O. when the payment was made as kickbacks to Iraqi authorities as illegal payment within the provisions of Section 37(1) of I.T. Act 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.
2. On the facts and circumstances of the case, whether the ld. CIT(A) was justified in admitting additional evidences in violation of Rule 46A when sufficient opportunities were provided by the A.O. to the assessee to file details.3 ITA No.4138/Del./2011 CO No.340/Del/2011
3. The appellant craves leave to add, alter or amend any/all the grounds of appeal before or during the course of hearing of the appeal."
The assessee filed cross objections by taking the following grounds :-
"1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) [CIT(A)] has erred, both on facts and in law, in upholding reassessment order passed under Section 147 read with Section 148 of the Act.
2. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in rejecting the contention of the Appellant that the initiation of the proceedings under Section 147 read with Section 148 of the Act was bad in the eye of law as the conditions and procedure prescribed under the statute have not been complied with.
3. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in rejecting the contention of the appellant that the notice issued under section 148 is bad in law, reason recorded for the issue of notice under Section 148 of the Act being contrary to the facts.
4. On the facts and circumstances of the case, the Hon'ble Commissioner of Income Tax (Appeals) [CIT(A)] has erred, both on facts and in law, in ignoring the contention of the appellant that the reassessment proceedings cannot be opened merely on the basis of doubt and there is no live nexus between the reasons recorded and the facts of the case.
5. That the appellant craves leave to add, amend or alter any of the grounds of cross objection."
3. At the outset of the hearing, the ld. AR submitted that this issue is covered in favour of the assessee by various decisions of ITAT as well as Hon'ble Calcutta High Court.
4 ITA No.4138/Del./2011CO No.340/Del/2011
4. We have heard both the sides on the issue. On the similar facts and circumstances, ITAT, Calcutta Bench, in the case of TIL Limited vs. ACIT IN ITA No.281/K/2007 for Assessment Year 2003-04 in its order dated 30th March, 2007 reported in (2007) 16 SOT 33 (Cal.), has granted the relief to the assessee by holding as under :-
"There are also no evidences to show that the payment made by the appellant was of the nature of a kick-back. Nor would it have made any difference in the matter of allowability of the expenses concerned in the I.T. assessment of the payer had those facts also been correct. There may be legal bar in payment of kick- back in the matter of purchase of goods or articles by the Government of India or even any company under the control of the Government. No such restriction a lies in the case of payment made by a private party for furthering its business interests. There is nothing on record to show that the payment was made to any mafia group or to other for any illegal purpose or against public policy. The Volker Commission's Report mostly concerns politicians and others who are Public Servants in the eyes of law. It does not mention any illegality on the part of a private Indian party. Any bar imposed by UN on supply of goods to Iraq also cannot debar an Indian party to do so unless the restriction is imposed by the Government of India through a legal process. In the present case, there was no such restriction on supply of goods or materials to Iraq imposed by the Government of India. In any case, the 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."5 ITA No.4138/Del./2011 CO No.340/Del/2011
Similarly, in the case of DCIT vs. Rajrani Exports Ltd. reported in (2012) 52 SOT 168 (Cal) order dated 31.05.2012, the ITAT, Calcutta Bench has deleted the addition by holding as under :-
"15. The assessee has made payment for commission and has been rendered services in consideration of the same. As a matter of fact, it is not even revenue's case that no services have been rendered at all. The fact that services have been rendered by a party other than the agent to whom commission is paid is wholly immaterial so far as deductibility in the hands of the assessee is concerned.
16. As for the position that the payment was highly excessive vis-a-vis the local costs, even if that be so, that aspect of the matter does not affect the deductibility in the hands of the assessee either. The assessee is concerned with commercial expediency of the said payment and not with what are the actual costs incurred in rendering the services for which the payment is made. As we have seen earlier in this order, from the extracts of the Volker Committee report itself, it was absolutely necessary for the assessee to make the impugned payments and, in any event, the commercial expediency of these payments has not even been called into question by the Assessing Officer. The case of the revenue is confined to invoking the Explanation to Section 37(1).
17. The objections to the said commission payments donot, therefore, are not therefore sustainable in law, so far as deductibility under section 37(1) is concerned.
18. A lot of emphasis has been placed by the CIT(A) on this Tribunal's decision in the case of TIL Ltd (supra). However, as we have decided the matter on merits and on the first principles, we see no need to deal with the said judicial precedent. Our reasoning could be different than the reasoning adopted by the CIT(A) and that adopted by the coordinate bench in TIL's case (supra), but then our conclusion is the same as arrived by the CIT(A) and by the coordinate bench. It is this aspect of the matter which is material for the present purposes.6 ITA No.4138/Del./2011 CO No.340/Del/2011
19. In view of the above discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
20. As we part with the matter, we must make it clear that our references to the Volker Committee report were only with a view to analyse as to whether even if everything stated in the Volker Committee report is taken as correct and this report is taken as an admissible evidence, will the deductibility of expenses in the hands of the assessee will be hit by Explanation to Section 37(1). However, to what extent this report can be relied upon in income tax proceedings is still an open question.
We leave it at that.
21. In the result, the appeal is dismissed.
The decision of ITAT, Calcutta Bench in the case of DCIT vs. Rajrani Exports has been upheld by Hon'ble Calcutta High Court in ITA No.49 of 2013 dated 24th April, 2013 as under :-
"The question suggested by the Revenue is as follows:
"Whether on the facts and in the circumstances of the case the Tribunal was justified in law to dismiss the appeal of the revenue by confirming the order of the CIT(A) on account of disallowing the commission payments in view of Explanation to Section 37(1) of the said Act."
Against the order of the Assessing Officer, the assessee preferred an appeal before the CIT(A), who in his order allowing the appeal, held as follows:
"It is observed that the commission on export activity had been fully disclosed in all correspondences and activities in relation to export, the commission was paid through banking channel of RBI approval and it was paid pursuant to an agreement approved by Government of India and UN. The payment of commission was for business consideration and there was apparently no illegality in making payment of commission. Besides this, 7 ITA No.4138/Del./2011 CO No.340/Del/2011 nothing has brought on record to show that the transactions relating to payment of commission are non-genuine or are excessive and unreasonable. The Volker Commission report had discussed about the utilization of money by the recipient of the commission in parting some of the fund so received as commission with the Government of Iraq and such parting of commission with the Government of Iraq was objected to by the Volker Commission report which was a pact between the Iraq Government and the UN wherein, as it appears, neither the appellant company is involved nor Government of India is involved. "
Aggrieved by the order of the CIT(A), the Revenue preferred an appeal before the Tribunal. The Tribunal dismissed the appeal holding, inter alia, as follows:
"The assessee has made payment for commission and has been rendered services in consideration of the same. As a matter of fact, it is not even revenue's case that no services have been rendered at all. The fact that services have been rendered by a party other than the agent to whom commission is paid is wholly immaterial so far as deductibility in the hands of the assessee is concerned.
As for the position that the payment was highly excessive vis-a- vis the local costs, even if that be so, that aspect of the matter does not affect the deductibility in the hands of the assessee either. The assessee is concerned with commercial expediency of the said payment and not with what are the actual costs incurred in rendering the services for which the payment is made. As we have seen earlier in this order, from the extracts of the Volker Committee report itself, it was absolutely necessary for the assessee to make the impugned payments and, in any event, the commercial expediency of these payments has not even been called into question by the Assessing Officer The case of the revenue is confined to invoking the Explanation to Section 37(1).
The objections to the said commission payments are, therefore, not sustainable in law, so far as deductibility under section 39(1) is concerned."8 ITA No.4138/Del./2011 CO No.340/Del/2011
Recently, ITAT, Mumbai Bench in the case M/s. Air Pac Exports vs. ACIT in ITA No.2981 - 2983/Mum/2012 dated 11th June,2014 has also deleted the addition made on the similar facts as under :-
"Commission payments to third party, not to Iraq Govt, under export contract signed under United Nations "Food for Oil Programme", not hit by Explanation to Sec. 37(1); AO's reliance on Volcker Commission's report incorrect as it prohibited illicit commission payments to Iraq Govt., while in present case payments were made to third party and not to Iraq Govt.; No finding that third party had rendered services and commission paid to third party was diverted to Government of Iraq, thus directs AO to delete disallowance; Relies on co-ordinate bench ruling in NSIL Exports Ltd as squarely applicable to present case."
In the case of NSIL Exports Ltd. vs. DCIT in ITA No.3050-3/Mum/2013 dated 21.02.2014, the ITAT, Mumbai Bench has also deleted the addition on similar facts by holding as under :-
"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 9 ITA No.4138/Del./2011 CO No.340/Del/2011 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 KOLKATAJ - 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)."
Respectfully following the aforesaid decisions of ITAT and also Hon'ble Calcutta High Court, we sustain the order of the CIT (A) for deleting the addition on merits and dismiss the revenue's appeal 10 ITA No.4138/Del./2011 CO No.340/Del/2011
5. The cross objection filed by the assessee was not pressed during the year, therefore, the same is dismissed for non-prosecution.
6. In the result, the appeal filed by the revenue and the cross objection filed by the assessee are dismissed.
Order pronounced in open court on this 30th day of June, 2014.
Sd/- sd/-
(I.C. SUDHIR) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 30th day of June, 2014
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-XXVI, New Delhi.
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.