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6. Regarding the penalty proceedings finalized by the AO for both the years, the facts include that AO levied the penalty of Rs.32,00,000/-_for A.Y. 2002-03 and Rs.60,00,000/- for the A.Y. 2003-04. In both the assessment orders, the case of the AO is that the sum of Rs.89,40,596/- and Rs.1,57,09,142/- were paid to Azhar Trading Company, Dubai and M/s. Alia and also the assessee's name is found in the list of records of VCR. These payments constitute the kickbacks paid to the Iraq Authorities in connection with the supply of portable centrifugal pumps to Ministry of Irrigation, Government of Iraq, under the Oil for Food Programme. In Para No. 5 of the penalty order, the AO referred to the allegations of receipt of kickbacks by the Iraq Government from the suppliers. On these allegations, United Nations appointed a commission under the Chairmanship of Mr. Paul Volcker which submitted a report. The committee finds that the Iraq Government charged fee, i.e. inland transportation fees and also in the name of the aftersales fees at the rate of 10% of sales. Apart from many others assessee's name also appeared in the list of said suppliers. On these facts, AO holds that said payments of alleged kickbacks attract the provisions of the Explanation 1 to section 37(1) of the Act. In this regard, the assessee furnished written ITA Nos. 2611 & 2612/PUN/2012 Kirloskar Brothers Limited submissions which were extracted by the AO in Para 2 of the penalty order. On considering the explanation, AO rejected the explanation of the assessee and held the penalty is leviable for the allegation of furnishing of inaccurate particulars of income without having reasonable explanation. In the order, AO relies on the Supreme Court judgments in the case of Union of India Vs. Dharmendra Textile Processors (306 ITR

Assessee paid Rs.1,78,676/- to (1) Azhar Trading Company, Dubai for inland transportation fee, aftersales service fee etc., (2) Rs.87,61,920/- to Kirloskar Middle East FZE, (3) Rs.1,57,09,142/- to M/s. Alia and M/s. General Trading Company, Jordan for transportation fees and aftersales service fee.

A. Further, it is the case of Ld. Counsel for the assessee that these amounts were paid in connection with the export sales for facilitating transport of goods to the end point and for rendering other services such as aftersales as per the agreement. Making of such payments for said services/fee is essential and therefore, incurring of the same constitutes allowable "business expenses". All these payments are not only borne out of the accounted books of the assessee but also made involving banking channels. Hence, these claims are allowable in view of the set principles of commercial expediency. Assessee relies on various decisions in this regard. CIT Vs. Walchand and Company Pvt. Ltd. 65 ITR 0381, Dr. G. G. Joshi V. CIT 209 ITR 0324 (Gujarat) are relevant for the proposition that the allowance of payment by way of commission or kickbacks is allowable although the same is against the good morality and public policy. However, these decisions were delivered prior to the ITA Nos. 2611 & 2612/PUN/2012 Kirloskar Brothers Limited relevant amendment to section 37(1) of the Act w.e.f. 01-04-2015 introduced by the Finance No.2 Act, 1998 with retrospective effect. By the said legislation, the new Explanation is inserted to section 37(1) of the Act making certain expenditure "not deemed to be incurred" for purposes of the business and hence disallowable u/s.37 of the Act. AO is of the view that these payments by the assessee is meant for kickbacks to Iraqi Authorities for allowing the exports to Iraq under "Oil and Food Programme. VCR is relied heavily by the ITAT/CIT(A) & the AO. B. According to said Explanation 1 to section 37(1) of the Act, any expenditure incurred for any purpose which is (1) an offence or (2) prohibited by law, is deemed disallowable ones despite their business connection. This provision is for "not deeming" the business expenses as not allowable ones. In this regard, Ld. AR for the assessee laboured a lot to demonstrate that the payment for Transportation charges, Aftersales service etc. do not constitute the one incurred for the purpose of committing any offence or any purpose prohibited by any domestic law. Further, Ld. AR argued that the payments were made to M/s. Alia, M/s. Azhar Trading Company, Dubai, and General Trading Company, Jordan, etc. for defined services. It is not for the assessee to monitor the money outflow of those payees. The payees are free to appropriate their funds in the manner they find it appropriate. Assessee is not the financial Auditor/Mentor for these payees. Assessee's responsibility stops with the making of the payments to the payees for the services received by the assessee. If the payees incurred any expenditure for kickback to Iraqi authorities, it is for them to explain and face the penal provisions as ITA Nos. 2611 & 2612/PUN/2012 Kirloskar Brothers Limited applicable to them in their country. Thus, the Explanation 1 of the section 37(7) of the Act does not apply to the transactions held between the payees and the Iraqi Authorities and they apply to ones between the assessee and the payees only. So far as the assessee's payment is concerned, the same are incurred by the assessee for its business purposes and not for the purposes of committing an offence and any purposes prohibited under Indian Laws. As per Ld. AR, if the said expenditure is not incurred, the assessee could not have recorded the export turnover of Rs.8,35,21,002/- and Rs.16,78,78,707/- in the assessment years under consideration. Referring to the order of the Tribunal on the disallowances, Ld. Counsel submitted that the addition was confirmed due to discrepancy in a letter between the assessee and the foreign entity.

D. Per Contra, Ld. DR for the Revenue rely heavily on the orders of the AO/CIT(A). Particularly, Ld. DR rely on the finding of the Tribunal on the merits of the addition made u/s.37(1) of the Act. It is the case of the Revenue and Ld. DR that the assessee failed to evidence the rendering of transport/aftersales service. Ld. DR relied on the failure of the assessee in discharging the onus. Ld. DR rely heavily on the finding of the Tribunal on this failure of the assessee.

12. We heard the parties on this issue of allowability of the claim of business expenditure qua the commercial expediency. Further, we find this issue involves not deeming such business expenditure as not allowable u/s.37(1) of the Act. We find that there is no dispute on facts, i.e. (a) export of sales to Iraqi; (b) making the payments to aforesaid parties in Dubai and Jordan; (c) accounting these transactions in the books of account of the assessee etc. The issue of Revenue is that the said payments are made for the purpose of paying to Iraqi Authorities by way of kickbacks. Further, it is also a fact that the payments were paid to parties in Dubai and Jordan and not paid as kickbacks to Iraqi Authorities. The payments were made only to the aforesaid parties. It is also a fact that the name of the assessee appeared in the VCR along with many other names from India. We also find similar disallowance stand allowed in favour of the assessee except in this case of the assessee. In other words, similar expenses are not deemed as incurred for business ITA Nos. 2611 & 2612/PUN/2012 Kirloskar Brothers Limited purposes in those cases. The assessee's solitary case is a case where the additions are confirmed and therefore, case is that the assessee is an exception to the rule where the expenses are "not deemed' so. Not deeming so happened in this case on technicalities relating to failure of assessee to discharge the onus and failure to file evidences or filing some irrelevant and messy evidences, a letter between the assessee and KME, etc., It is not the case that the AO is in possession of some incriminating evidences to prove that the services are not rendered by the said Dubai/Jordan entities or assessee paid kickbacks to Iraqi Authorities. Therefore, similar payments are found to be allowable business expenses incurred for business purposes. While this being the finding of the Tribunal in many other cases and, only in this case, the Tribunal held otherwise on technicalities. The confirming of addition is mainly due to the failure of the assessee in discharge of onus and non demonstration of onus in matters of rendering of services by the said Dubai/Jordan entities. Thus, on similar facts, there are divergent views of the Tribunal of various benches. Thus, there exists a debate on if the said expenditure should be either "not deemed" as ones covered by the provisions of Explanation of section 37(1) of the Act or not. Further, it is a settled legal proposition that the penalty is not leviable u/s.271(1)(c) of the Act when the issue suffer from the dispute or debate. We hold accordingly.

B. BINDING NATURE OF THE INTERNATIONAL TREATIES / CONVENTIONS / AGREEMENTS - UNSUPPORTED ENACTMENTS OF INDIAN PARLIAMENT ITA Nos. 2611 & 2612/PUN/2012 Kirloskar Brothers Limited A. Whether the UN Resolution-986 restricting the rights of citizens has binding effect on the assessee? In this regard, AO and the CIT(A) mentioned and relied heavily on the UN Council's Resolution-986 and submitted the same are binding on the Revenue. UN established OIP Programme called "Oil-for-Food Programme" in 1995 allowing the Iraq to sell their oil for Food and other humanitarian needs of its citizens. Under this programme, assessee along with many Indian exporters exported Portable Centrifugal Pumps to Iraq. However, there are various allegations of abuse of the said OIP programme and payment of kickbacks (commission) by various entities to the Iraqi Authorities by way of transportation fees, aftersales service charges etc. United Nations instituted an enquiry commission under the Chairmanship of Shri Volcker. He submitted a report called "VCR". The VCR contains various Indian exporters names and assessee is one of them. All these exporters are said to be the parties to the said alleged kickbacks. In these cases of exporters, the allowability of the expenses was the common issue. In few cases, AOs invoked the amended provisions of Explanation to section 37(1) of the Act and held that the said payments made by assessee are routed to the Iraq authority by way of kickbacks. This is merely an allegation and there is no finding of fact by any judicial forum. In this context, referring to the UN Resolutions, terming these allegations as unsustainable ones, Ld. Counsel submitted that the assessee never made any payment for the kickbacks. Ld. Counsel for the assessee submitted that no international agreements/conventions/treaties/UN Resolution-986 etc. are not binding on the citizens of India unless the said resolutions of UNO/agreements/conventions/treaties obtain the ITA Nos. 2611 & 2612/PUN/2012 Kirloskar Brothers Limited status of domestic Acts duly passed by the Indian Parliament with due process of legislation in India. In this regard and to support his argument, Ld. Counsel for the assessee relies heavily on the Supreme Court judgment in the case of Maganbhai Ishwarbai Patel etc. Vs. UOI and others AIR 1969 SC 783 B. Relying heavily on the said judgment of Supreme Court in the case of Maganbhai Ishwarbai Patel etc. Vs. Union of India and others (supra), Ld. Counsel argued that the said resolutions /agreements /conventions /treaties are applicable to the Indian citizens so long as they do not have any adverse impact on the rights of the citizens of India. He mentioned that there is a requirement of converting such resolutions /agreements /conventions/treaties into a law, the moment the rights of the citizens are infringed by such international treaties/resolutions etc. Relying on the said judgment of Apex Court, Ld. Counsel for the assessee submitted that the said judgment was not available to ITAT/CIT(A)/AO at the time when the quantum appeals were heard and finalized by the Tribunal. Had this judgment been brought to the notice of the Tribunal, the outcome of the proceeding on merits might have been different. C. UN Resolution-986 has the adverse effect on the right of business of the assessee : Mentioning about the rights of doing export business of the assessee and notwithstanding the decision of the Tribunal against the assessee on the quantum proceedings, when it comes to the penalty proceedings, the said Apex Court judgment and its ratio decidendi becomes extremely relevant. Further, as per Ld. Counsel, ITA Nos. 2611 & 2612/PUN/2012 Kirloskar Brothers Limited the violation by the assessee to the UN Council's Resolution- 986 does not become an offence or violation of any law as no Indian Law classifies such payments to parties at Dubai/Jordan or Iraq as an offence or otherwise. Consequently, the provisions of Explanation 1 to section 37(1) of the Act is not validly invoked by the AO. The ratio of said Apex court judgment in the case of Maganbhai Ishwarbai Patel Vs. UOI and others (supra) does not allot the UN Resolution-986 as equivalent of Indian Laws. Further, relying on the jurisdictional High Court judgment in the case of Karan Dileep Nevatia Vs. The UOI in Writ Petition No.7852/2008 (page 392 of the paper book) and the judgment of Hon'ble Karnataka High Court in the case of Civil Rights Vigilance Committee, SLSRC College of Law, Bangalore Vs. UIO and others (Page 392 of paper book No.4), Ld. Counsel for the assessee submitted that the positive commitment to International accords of Government ignites legislative action at home but does not automatically make the covenant an enforceable part of corpus juris of India.