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6. To the extent relevant for our purposes, the FFOP worked like this. The Iraqi Government was allowed to export oil but the sale proceeds were to be deposited in an escrow account, and these sale proceeds were to be partly, though substantially, used for importing goods, on humanitarian grounds, for ITA no. 543,544/Del/2010 Sara Services & Engs. Pvt. Ltd. v. CIT Iraq people. The goods so allowed to be imported were foodstuff, medicines and other necessities for day to day life of ordinary people. The manner in which program worked came up for sharp criticism for its functioning, and there were allegations of massive irregularities, kickbacks and corruption in its functioning. It was in this backdrop that an enquiry commission, named as 'Independent Inquiry Committee' headed by Paul A. Volker, a former Chairman of United States Federal Reserve, researched possible corruption in this Iraqi Oil for Food Program. The terms of reference of this inquiry were as follows:

8. There is thus reasonable material, by way of Volker Committee report, to indicate that no services were actually rendered by Alia which actually worked as a conduit for Iraqi regime on a wafer thin margin of 0.25% to 1.00%. The balance amount, ranging from 99% to 99.75% of the amounts paid to Alia, was transferred to Iraqi regime as an illegal kickback. The assessee has all along laid a lot of emphasis on the claim that a copy of the Volker Committee report has never been supplied to the assessee which is, to quote the words of the assessee, 'in clear violation of the well settled principles of natural justice, equity and fair play' but this plea is too naïve to be accepted. The Volker ITA no. 543,544/Del/2010 Sara Services & Engs. Pvt. Ltd. v. CIT Committee is freely available on the internet, is fully in public domain and anyone can access it. Having said that, we must quickly add that merely because this report states that the amounts paid to Alia were actually kickbacks to Iraqi regime, that fact per se would not render the expenditure so incurred, if otherwise deductible, as non-deductible in computation of business income, unless these payments are hit by some other disabling provisions of the Income Tax Act. What is to be examined first is whether the amounts so paid are deductible business expenditure in the first place, and if so, whether these amounts are hit by any disabling provisions under the Act. Let us, therefore, take a quick look at the scheme of the Act from this perspective to deal with this aspect of the matter. Section 37(1) of the Act provides that "any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation to Section 37(1), which qualifies this general deduction, provides that, "For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure". It follows that any payment, which is prohibited by law, is not an admissible deduction under the scheme of the Act. That takes us to the question whether payment to Alia, on the facts of this case, could be said to be prohibited by law."

40. After considering the report of the Volcker Committee the coordinate bench of the Kolkata Tribunal in the case of Rajrani Exports (Supra) finally granted relief to the assessee dismissing appeal of the revenue with following conclusion :-

"11. As a matter of fact, this Volker Committee report goes on to acknowledge the fact that while many companies freely went along with Iraq's demand for kickbacks, many companies ignored the probable use of these payments, there were also the companies which were not aware about the end use of these payments and made these payments unwittingly. There were thus three categories of persons ITA no. 543,544/Del/2010 Sara Services & Engs. Pvt. Ltd. v. CIT who paid the kickbacks (a) first, the persons who were all along aware that the payments as after sales service fee and inland transportation fees are in the nature of kickbacks and they were thus willing parties to these illegal gratifications; (b) second, the persons who had suspicion that the amounts paid as after sales service fees and inland transportation fees to may be used as kickbacks but they ignored these doubts; and (c) third, the persons who paid the amounts as after sales service fees and inland transportation fees under the bonafide belief that these payments are being made for the stated purposes. In our humble understanding, so far as category (a) is concerned, Explanation to Section 37(1) may hit the deductibility of impugned payments, but so far as categories (b) and (c) are concerned, Explanation to Section 37(1) cannot come into play. The onus of demonstrating that the case of an assessee falls in category
(a), in our humble understanding, is on the Assessing Officer. That onus has not been discharged at all. The reasoning of our above approach is this. Explanation to Section 37(1) prohibits deductibility of any payment for any purpose which is an offence or which is prohibited by law. Even if we assume that a payment for kickback to Iraqi regime, which is prohibited by UN sanctions, could indeed be viewed as prohibited by law, would not render all payments towards after sales service and inland transportation fees as hit by Explanation to Section 37(1). The most significant aspect of the matter is the 'purpose' for which the assessee has made the payment. No doubt, when the payment is made for the purposes of illegal kickbacks, these payments invite disqualification under Explanation to Section 37(1), but when the assessee makes the payments for bonafide business purposes and such payments end up being used as illegal kickbacks, in our considered view, Explanation to Section 37(1) will not be attracted. As far as the cases in category (a) are concerned, i.e. in a situation in which the assessee is a willing party to the illegal kickbacks, the onus is on the Assessing Officer to demonstrate so because an assessee cannot be asked to prove a negative i.e. that he is not a willing party to the illegal kickbacks. There must be some material to indicate that the assessee was aware that the payments by the assessee were to be used as kickbacks; a mere suspicion to that effect cannot suffice.