TMI Blog2016 (2) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... ial period towards export of oil drilling equipments etc. does not fall in the first category payments as per Volker Committee report and thus the same is allowable business expenditure and therefore, we direct the AO to allow the same. - Decided in favour of assessee Profit element for the purpose of computing the adjusted profit u/s 80HHC - Held that:- Conclusion of the CIT(A) in directing the AO to consider the only profit for the purpose of computing the adjusted profit u/s 80HHC of the Act is upheld - Decided in favour of assessee - ITA No. 406,407/Del./2010, ITA No. 543, 544/Del/2010 - - - Dated:- 18-1-2016 - Sri C.M.Garg, JM And Sri L.P.Sahu, AM For The Assessee : Sri O.P. Sapra, Sri Sandeep Sapara, Adv. , Shri Hemant Arora, CA, Sri Jeetan Nagpal, C.A. For The Revenue : Sri Sujit kumar, Sr. DR Smt. Sunita Kejriwal, CIT,DR ORDER PER C.M.Garg, J.M. Above captioned cross appeals have been filed against the orders of Commissioner of Income Tax (Appeals). Both dated 17.11.2009 in appeal no. 136/2008-09 and 141/2008-09 for AY 2002-03 and 2003-04 respectively. Since these cross appeals by the assessee as well as by the revenue have been filed agita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act, 1961 (for short Act) dated 24.02.2003. Similarly return was filed on 28.11.2003 declaring total income of ₹ 76,24,073/- which was processed on the returned income under vide intimation/ order u/s 143(!) of the Act dated 10.03.2004 for AY 2003-04. 5. Subsequently, notices u/s 148 of the Act was issued on 02.08.2007 and 20.03.2007 respectively for both the assessment year under consideration. Admittedly, notice u/s 148 of the Act dated 02.08.2007 for AY 2002-03 was issued after four years from the end of assessment year which was ended on 31.03.2003. The assessing officer issued copies of the reasons recorded for the respective assessment years before initiation of proceeding u/s 147/148 of the Act for AY 2002-03. The assessing officer showed his intention to reopen completed assessment u/s 147/148 of the Act mainly on the two issues i.e. on the issue of claim of the assessee u/s 80HHC of the Act in the light of amended provisions of section 80HHC and secondly, on the issues of information which was received from CBDT wherein it was informed to the AO that the assessee company had engaged in the foreign exchange transaction and Income Tax return for AY 2002-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial facts necessary for the assessment for that assessment year. The ld. Counsel further placed in reliance on the decision of Hon ble Gujarat High Court in the case of Avni Exports and others vs. CIT reported as 34 ITR 391 (Gujarat) and submitted that retrospective nature of amendment fees 2nd, 3rd and 4th provisos to Section 80HHC(3) of the Act inserted by taxation law amendment Act, 2005 with retrospective effect of 01.04.1998 was declared unconstitutional. The amendment was valid only prospectively therefore , reasons recorded by the AO for both the years on the basis of retrospective amendment u/s 80HHC of the Act, subsequently have been held to be unconstitutional by Hon ble Gujarat High Court hence, the initiation of proceedings u/s 147/148 of the Act on the basis of such reasons is legally untenable . 8. The ld. Counsel further submitted that as per order of the ITAT, Kolkata bench in the case of DCIT vs. Raj Rani Export Pvt. Ltd. 22 taxman.com 13 (Kolkata) payments made to Iraqi Company for receiving services to facilitate export to Iraq under Oil for Food programme is allowable as business expenditure irrespective of the fact that such payment was passed on by Ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 147 of the Act is only applicable to the cases wherein the assessment was completed u/s 143(3) of the Act and not u/s 143(1) of the Act. The ld. DR supported the action of the AO and submitted that the assessing officer was quite correct in assuming valid jurisdiction in recording reasons for reopening of assessment and issue notice u/s 148 of the Act even beyond 4 years because the original returns were processed u/s 143(1) of the Act and therefore the assessee cannot take shelter of first proviso to section 147 of the Act. 11. On carefully consideration of rival condition of both sides at the very outset, we find it appropriate to reproduce section 147 alongwith first proviso reads as under :- 147. If the 89 [Assessing] Officer 90 [has reason to believe 91 ] that any income chargeable to tax has escaped assessment 91 for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess 91 such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings91 under this section, or recompute the loss or the depreciation allowance or any other allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(1) of the Act, thus, the assessing officer had no opportunity to form an opinion and therefore initiation of proceedings u/s 147 of the Act and issuance of the notice u/s 148 of the Act cannot be held as invalid assumption of jurisdiction or untenable and we decline to accept legal contention of the assessee placed in the legal grounds under consideration. At the same time we have no hesitation to hold that the assessing officer was quite justified in initiating of proceeding u/s 147 of the Act for both the assessment years and thus we are inclined to hold that amended ground no. 1 for AY 2002-03 and ground no. 1 for AY 2003-04 being devoid of the merits deserve to be dismiss and we dismissed the same and conclusion of the CIT(A) in this regard is upheld. Accordingly, ground no. 1 of the assessee in both the years are dismissed. ADJUDICATION ON MERITS 14. Since the revenue has also filed appeals for both the assessment years challenging the relief granted by the CIT(A) to the assessee. Therefore we find it necessary and appropriate to deal with the grounds of the assessee as well as the revenue on merits together. Revenue s ground in ITA no. 543/Del/2010 :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year, under consideration, the assessee made exports to Iraq under the United Nations sanctioned Oil for Food Program against a purchase order from the Economic and Finance Department, Ministry of Oil, Bagdad, republic of Iraq, copy of which has been placed by the assessee at pages 40 to 46 of the assessee s paper book. The ld. Counsel further pointed out the assessee paid ASSF to foreign agents on Exports to Iraq to through banking channels and copies of the ledger accounts of foreign agents and bank advice are placed at pages 63 to 75 of the assessee s paper book. The ld. Counsel pointed out that the CIT(A) granted part relief to the assessee by accepting explanation, submission and contention of the assessee but denied part relief and uphold the disallowance of ₹ 38,35,079/- by stating that the assessee has not been able to correlate the sales of earlier year which such fee. 18. The ld. Counsel vehemently pointed out these observations of the CIT(A) are actually incorrect inasmuch as complete details of the sales to Iraq and also regarding ASSF paid in respect thereof were filed not only before the AO during the course of assessment proceedings but were also fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reason or basis to delete part disallowance made by the AO specially when he is upholding the part disallowance regarding payment of ASSF on the similar facts and circumstances. The ld DR also pointed out that the disallowance of ₹ 38,35,079/- on account of ASSF relating to payments connected with supplies made to Iraq was upheld by the CIT(A) by observing that the appellant has not been able to co-relate the sales of early arrears with such fees as it is seen that the assessee has claimed that no sales have been made to Iraq during the year as per affidavit of Managing Director. 21. Replying to the above, the ld. Counsel of the assessee also placed rejoinder to the above noted submission of the Ld. DR and contended that the assessee submitted entire detail regarding payment of ASSF by submitting the copy of supply contact entered into between economic and finance department, Ministry of Oil, Baghdad Republic of Iraq; copy of the ledger account of Ministry of Oil in assessee s books of accounts filed before the AO; copy of the ledger account of commission paid to foreign agents in assessee s books of accounts filed before the AO; copies of the bank advice for remittance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has not been supported by any satisfactory documentary evidence. The assessee has paid commission to the foreign agents as has been reflected in the bank statement submitted by the assessee. But the very fact that the identity of the agents to whom this commission has been paid remains unverifiable, therefore, the entire commission payment to Iraq of the amount of ₹ 97,48,138/- Is being disallowed in the absence of satisfactory documentary evidences. It is further seen that the assessee has paid commission to other foreign agents as well the names of whom the assessee has provided. But again as discussed above, the identity of the agents' to whom the commission has been claimed to be paid by the assessee remains unverifiable. Further, the assessee has failed to establish with any reliable evidence that the parties to whom the alleged commission was paid had rendered any such services so as to receive the commission. In the absence of evidence to support its claim of commission, the entire amount of ₹ 97,48,138/- is being disallowed. Further, I am satisfied that the assessee has filed inaccurate particulars of its income, hence penalty proceedings u/s 271(1 ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the transactions were recorded in the books of account or not. Upon verification of the books of accounts and on the basis of the information/documents submitted by the Appellant before the Id. AO it was also not in dispute that the transactions reported by the CBDT were found recorded in the books of the Appellant. It has been claimed that the Affidavit of Shri V K Dhawan conclusively laid at rest the Id. AO's apprehensions whether the transactions reported by the CBDT were recorded in the books of the Appellant. It is further contended that the additions made by the Id. AO are purely based on surmises and conjectures and on whimsical grounds not permitted by law. It is stated that in Hanutram Ram Prasad v CIT 114 ITR 19 (Gau) it has been held that evidence may be tendered on an affidavit before the assessing officer. Such evidence is legal and can be acted upon by the assessing/ appellant authority . Should the assessing officer or the deputy commissioner (Appeals) or the appellate tribunal regard the same as not sufficient proof of the contents thereof, they should Cross examine the deponent and, if dissatisfied, call upon the assessee to produce documentary evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Shahzada Nand Sons v CIT 108 ITR 358 (SC) the Supreme Court has held that it is not essential that the commission should be paid under a contractual obligation. It may be paid voluntary. But it must be for services rendered. The Bombay High Court in 188 ITR 1 in the case of CIT v Good lass Nerolac Paints Ltd. has held that where on the basis of facts and materials on record the Tribunal concluded that the payment of commission was established, and that payments were made for the purpose of business, inspite of the fact that names and addresses of recipients were not given, the Tribunal was held justified in allowing deduction of commissions. In Mather Platt (India) Ltd. v. CIT 168 ITR 493 (Cal.) it was held that where the assessee had established identities of commission agents to whom it had made payments, the fact that summons sent to them four years later by department came back undelivered would not mean that they were non-existent at the time of payment. Thus the commission was held to be allowable. Thirdly, it has been submitted that the Id. AO has alleged that the said agents to whom the commissions have been paid may not have rendered services so as to justify recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted part relief to the assessee with following observations and conclusion :- The appellant has submitted that while framing the impugned assessment order and while disallowing the commissions (ASSF/the Id. AO has given a new twist to the facts and stated that the commissions in question though recorded in books of accounts were still not allowable for certain reasons as stated in the impugned assessment order, the most important of them being that there was no detail of services rendered. It is seen that the AO also doubted the identity of the recipients of such fee. In this regard, the appellant has submitted that the nature of expenditure in question is undoubtedly commission and after sales service fee paid to foreign agents. The appellant has explained that it is not possible for any person to attend all the functions which are required for smooth conduct of business single handedly. Therefore, he has to take the help of others to perform various specified v4 functions. It is stated that for this purpose he has two options, either to employ someone to do the work and pay salary or getthe work done through agents on payment of commission. It is stated that the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e part of the impugned order, we note that finally the CIT(A) granted part relief to the assessee and upheld part this disallowance on account of ASSF relating to payments connected with supplies with following findings and conclusions :- As per the appellant, there is another aspect to the facts of this case. The Appellant has been in the same line of business for over twenty years and has been statedly exporting goods in the past also. The Appellant has statedly utilized services of foreign agents for several years now. It is seen in the immediately preceding year also such commission has been paid amounting to ₹ 20,04,088/-.The services are explained to have been rendered for procuring Orders, recovering debts and for maintaining liaison with overseas customers. In the past too commissions have been paid by the Appellant to the foreign agents and the same have been statedly allowed as deductible business expenditure by the department while assessing the appellant u/s 143(3) of the Act. The facts in present year are statedly no different from those in preceding years. Hence the disallowance of foreign commission is totally uncalled for and unwarranted as per the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the assessment, so that the assessment could be made after such opportunity. The view that such lack of opportunity can be made good in first appeal, was obviously found to be erroneous. From this angle also the impugned order deserves to be annulled. However on the technical issue of whether such disallowance could have been made at all in light of the fact that the same had no connection with the reasons articulated which formed the basis of a notice u/s 148(1), reliance is once again placed on the decision of the jurisdictional Delhi High Court in Jay Bharat Maruti Limited discussed above. The Hon'ble High Court has held that the ■assessment order in so far as it dealt with items other than those which formed the basis of the reasons disclosed are bad in law or stood vitiated in law. In the present case also the commission to foreign agent had no connection with the recorded reason and therefore could not have been a subject matter of re-assessment proceedings. The decision of the jurisdictional High Court deserves to be followed and the addition made on this account be kindly deleted. The above submissions have been carefully considered. It is seen th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipients of ASSF were given to the AO. Payments were made through banking channels. The payments were made in accordance with the instructions from buyer i.e. the Government of Iraq. It has further been contended that the payments of commissions are being made for the past twenty years, the Appellant has been regularly assessed to tax and never have such commissions been disallowed by the department. The details of the addresses of the agents and also the contracts with them are stated to be on record. 21. Various cases laws have been relied upon by the Id. AO which have been duly considered. 22. On a perusal of the material on record and after considering the rival contentions I am of the view that the commissions were paid by the Appellant to it's agents firstly for effecting export sales to various countries and for ensuring smooth after sales service for the sold equipment. The payment of said commissions is in accordance with the normal business practices. As regards the payment of ASSF, it has not been shown to be correlated with particular sales of earlier years, by the appellant. 22. In light of the aforesaid I find no plausible reason for disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties to whom the alleged commission was paid had rendered any such services so as to receive the commission. 28. The CIT(A) noted that the assessee had filed the details of commission paid before the AO during the course of assessment proceedings stating the names, addresses and details of bills against which such commission was paid. The CIT(A) noted the certification of the assessee that these documents have been filed before the AO and thus, held that the assessee got ample opportunity before the AO and he rejected the arguments of lack of opportunity as alleged by the assessee. On bare analysis of the impugned order on this issue we are in agreement with the finance of the CIT(A) that the commission were paid by the assessee to its agents, firstly for an effecting export sales to various countries and for ensuring smooth after sale service for the sole equipments. The CIT(A) after considering the documentary evidence filed by the assessee, as a list hereinabove, available at assessee s paper book from pages 33 to 40 and 63 to 76 of the assessee s paper book we observe that the payment of said commission was made for effecting export sales of equipments to various countries f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B in the case of DCIT vs. Rajrani Pvt. Ltd. (Supra) wherein it was held that the payment having made by the assessee for bonafide business purpose which ended up being used illegal kick backs between recipient Alia and Iraqi regime over which the assessee had no control the same could not be disallowed by the revenue. 32. At the cost of repetition, we may point out that the AO made additions by alleging that claim of the assessee has not been supported by any satisfactory documentary evidence; the assessee paid commission to foreign agent but the identity of the agents to whom commission has paid remained unverifiable and the names of whom the assessee has paid commission were not provided and the identity of the agents to whom commission has been paid remained unverifiable and the assessee has failed to establish with any reliable evidence that the party to whom the alleged commission was paid has rendered any such services. As we have already noted during adjudication of ground no. 1 of the revenue for AY 2002-03 that the CIT(A) granted appellate relief to the assessee by observing that the assessee submitted all required detail during the assessment proceedings to establish t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her there is any allegation that the claim of the assessee is bogus. However, the claim of assessee was disallowed by the AO on the allegations as noted above, precisely, on the basis of allegation that the identity of the agents remained unverifiable and the assessee failed to establish with any reliable evidence about the services rendered by the recipients so as to receive the commission. The CIT(A) uphold the part disallowance by incorrectly observing that as per affidavit of the managing director of the assessee company, no sales have been made to Iraq during the year. But as we have noted above the contents of the affidavit of the Managing Director Shri V.K. Dhawan does not state that no sales have been made during AY 2002-03. Per contra as per affidavit of the Managing Director it is ample clear that the assessee made sales to Iraq and commission was paid thereon to Alwasil and Babel General Company as ASSF on the account of payee i.e. Ministry of Oil, Iraq Drilling Company. 36. In this regard, it is relevant to take into consideration observation of the CIT(A) as reproduced hereinabove, wherein he noted that as per dicta laid down by Hon ble Gujarat High Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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, 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. 5. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which was meant to mitigate the hardships to ordinary Iraqi citizens as a result of harsh trade sanctions against Iraq, as a result of its invasion of Kuwait. The assessee himself has stated, in the statement of facts, that the exports were made under the Oil for Food Program under the United Nations monitoring. It will, therefore, be useful to understand the manner in which this program worked. The working of this program can be appreciated from the following document on UN website: Oil-for-Food http://www.un.org/Depts/oip/background/index.html Origins: In August 1990 the Security Council adopted resolution 661, imposing comprehensive sanctions on Iraq following that country s invasion of Kuwait. In the immediate aftermath of the Gulf War in 1991, the Secretary-General dispatched an inter-agency mission to assess the humanitarian needs arising in Iraq and Kuwait. The mission visited Iraq from 10 to 17 March 1991 and reported that the Iraqi people may soon face a further imminent catastrophe, which could include epidemic and famine, if massive life-supporting needs are not rapidly met. (S/22366, para. 37). Throughout 1991, with growing concern over the humanitarian situa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Government of Iraq. The balance included 25% for a Compensation Fund for war reparation payments; 2.2% for United Nations administrative and operational costs; and 0.8% for the weapons inspection programme. Management: The Office of the Iraq Programme is headed by the Executive Director who is responsible for the overall management and coordination of all United Nations humanitarian activities in Iraq under resolutions 661 (1990) and 986 (1995) and the procedures established by the Security Council and its Committee set up by resolution 661 (1990), as well as the Memorandum of Understanding between the United Nations and the Government of Iraq (May 1996). Mandate: The Office of the Iraq Programme administers the programme as an operation separate and distinct from all other United Nations activities within the context of the sanctions regime, which fall within the purview of UNMOVIC, IAEA and the United Nations Compensation Commission. Coordination: The Office of the Humanitarian Coordinator in Iraq (UNOHCI) is an integral part of the Office of the Iraq Programme (OIP). The Humanitarian Coordinator in Iraq reports directly to the Executive Director of OIP, and is responsible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Iraq were evacuated on 18 March 2003 and the President of the Security Council asked the Secretary General to submit proposals to adjust the mandate of the Oil-for-Food Programme so that it would have flexibility to meet new humanitarian challenges presented by the prospect of war in Iraq. On 19 March 2003, the war in Iraq began with the bombing of Baghdad and on 20 March 2003, the Secretary General pledged to do his utmost to ensure that the UN rose to the challenge of shielding the civilian population from the grim consequences of war. A resolution (1472) was adopted unanimously by the Security Council on 28 March 2003 adjusting the Oil-for-Food Programme and giving the Secretary-General authority to facilitate the delivery and receipt of goods contracted by the Government of Iraq for the humanitarian needs of its people. On 24 April 2003 those provisions were extended to 3 June. The extension under resolution 1476,(2003) gave the Office of the Iraq Programme and UN agencies, valuable time to identify and ship additional goods and supplies. The Security Council lifted civilian sanctions on Iraq on 22 May with the adoption of resolution 1483 (2003). The resolution also gave the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation relating to the administration and management of the Oil-for-Food Programme, including allegations of fraud and corruption on the part of United Nations officials, personnel and agents, as well as contractors, including entities that have entered into contracts with the United Nations or with Iraq under the Programme: (a) to determine whether the procedures established by the Organization, including the Security Council and the Security Council Committee Established by Resolution 661 (1990) Concerning the Situation between Iraq and Kuwait (hereinafter referred to as the 661 Committee ) for the processing and approval of contracts under the Programme, and the monitoring of the sale and delivery of petroleum and petroleum products and the purchase and delivery of humanitarian goods, were violated, bearing in mind the respective roles of United Nations officials, personnel and agents, as well as entities that have entered into contracts with the United Nations or with Iraq under the Programme; (b) to determine whether any United Nations officials, personnel, agents or contractors engaged in any illicit or corrupt activities in the carrying out of their respective roles in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qi businessman, and the Iraqi Ministry of Transportation. This arrangement developed from a proposal by Mr. Al-Khawam to refurbish Iraqi vessels stranded off the coast of Jordan and to use them for commercial shipping. At the time of Alia s registration, Jordanian law required that at least one owner of a Jordan-registered company be a Jordanian national. As a result, Mr. Al-Khawam nominated a close associate, Mo tasset Fawzy Qatishat, to hold fifty-one percent of the company s shares on Mr. Al-Khawam s behalf. The Iraqi Ministry of Transportation assigned two of its employees to hold Alia s remaining shares. In 1999, the Ministry of Transportation arranged with Alia to have it act as ISCWT s (Iraq State Company for Water Transport) collection agent for suppliers payments for the inland transportation of goods arriving at the port of Umm Qasr. As collection agent, Alia received a small commission on the funds it channeled from suppliers to ISCWT. According to bank records, Alia began receiving fees from suppliers as early as March 2000. The agent arrangement with Alia was useful to the Government of Iraq. As noted in Section II.B above, Alia violated and assisted in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne Agencies Sub : MV Makram Greetings ! We would like to inform you that the amounts below have been received from Jawala Company for internal transportation and after sales service fees for 2329.1897 m3 of wood ; LC No. V734538, bill of lading no PK/Iraq/001, based on the following: $ 60,225.31 for internal transportation fees 236,477.40 for after sales service We thank you for your cooperation with us. With utmost respect and appreciation, Financial/ Haitham El- Zobi Copy to : State Water Transport Co, Baghdad Baghdad Ships, Shipping Department Shortly after sending such communications, Alia transferred the full payment amount (less a commission between one-quarter percent and one percent) to ISCWT s account at Rafidain Bank in Amman. For these transfers, Alia used accounts in various foreign exchange currencies. In total, between March 2000 and December 2003, the payments passing through Alia s bank accounts in Jordan National Bank amounted to a USD equivalent of more than $788 million. Apart from acting as a collection agent, Alia also engaged in five sales contracts under the Programme. During Phase VIII ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et 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. Aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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. 12. It is also important to bear in mind that the fact that the services were indeed rendered to the assessee. The fact that services were actually rendered to the exporters supplying goods under Oil for Food Program, in consideration for these payments is evident from the Volker Committee report itself. The services were rendered to the exporters but these services were rendered by the Iraqi regime and the money was passed by the front companies to the Iraqi regime. Even the Volker Committee report, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibility of commission payments in the hands of the assessee. 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- -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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts as after sale services fee and inland transportation fees under bona fide belief that these payments are made for stated purposes. After thread bare analysis of the Volcker Committee report and relevant provisions for the act including explanation to section 37 of the Act the Kolkata ITAT co-ordinate bench explicitly held that if every contents of the Volker Committee report is taken as correct and the some is taken as basis for adjudication of controversy regarding payments to Iraq, the main question to be answered is that whether the allowability of expenses in the hands of assessee will hit by explanation to section 37(i) of the Act ? . 42. In the present case, we note that the AO has made disallowance of entire commission and disputed the identity of the recipients by observing that the agents to whom commission has been claimed to be paid by the assessee remains unverifiable. The AO also alleged that the assessee has failed to establish with any reliable evidence that the parties to whom alleged commission was paid had rendered any such services so as to receive the commission and in absence of evidence in support of claim of commission entire amount of commission paid w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iniss and demolish the same. 44. When we analysis the conclusion of the AO, we note that the AO has not brought out any allegation to demonstrate that the payments of ASSF are in the nature of kick backs and the assessee was willing party to pay these kind of illegal gratifications as per first limb of Volcker Committee Report as noted by the ITAT Kolkata Tribunal in para 11 of the order DCIT v. Rajrani Exports (P.) Ltd. (supra). Per contra, as per conclusion and observations of the CIT(A) we clearly note that the assessee filed all relevant documents before the AO as well as before the First Appellate Authority to demonstrate the payment of ASSF was made to AL Wasel Babel General Trading in the account of Minister of Oil, Iraq Drilling Company to which the assessee company exported Oil Drilling Equipments during AY 2002-03. Copies of the supply contact entered between assessee economics and finance department, Ministry of Oil, Bagdad, Republic of Iraq, copy of the ledger account of Ministry of Oil in the assesse s books of accounts, copy of the ledger account of commission paid to foreign agents in assessee s books of accounts, copies of bank advice for remittance of commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale services to the assessee against the commission paid to them. 47. At this juncture, we may point out that in thecase of DCIT v. Rajrani Pvt. Ltd. (supra) it was held that payment made to Iraqi Company for receiving services to facilitate to export under Oil for Food Program is allowable as business expenditure irrespective of the fact that such payment was further passed by Iraqi Company as kick back to Iraqi authorities. This judgment of ITAT Kolkata(supra) has been upheld by Hon ble High Court of Kolkata wherein their lordship held that where the assessee had paid commission on exports through banking channel in pursuant to an agreement approved by the Government of India and United Nations the Same could not be disallowed in absence of evidence of its illegality. In the present case, lower authorities have not brought out any allegation of illegal gratification or kick back payment or allegation of bogus payment by the assessee and as per proposition laid down by ITAT, Kolkata in the case of Rajrani Exports (Supra) payment made to Iraqi Company for receiving services to facilitate export is allowable business expenditure and this fact is not relevant for making disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utandis to ground no. 1 of the revenue for AY 2003-04 and thus the same is disallowed as we are unable to any valid reason to interfere with the impugned order on this issue. Ground no. 2 of the revenue for AY 2002-03 and 2003-04 51. The ld. Departmental Representative supporting the action of the AO submitted that the CIT(A) has erred in law and all the facts and in the peculiar circumstances of the case, in directing the AO to consider only the profit element for the purpose of computing the adjusted profit u/s 80HHC of the Act. The Ld. DR submitted that the impugned order may be set aside by restoring that of the AO. 52. Replying to the above the ld. Counsel of the assessee vehemently supported the conclusion of the first appellate authority and submitted that the CIT(A) has discussed the issue at paras 24 to 27 at pages 52 to 54 of the impugned order and the assessee to support this conclusion rely on the written submission filed before the CIT(A) and reproduced in the impugned order at pages 14 17 and 22 of the first appellate order. The ld. Counsel strenuously contended that the issue as to what would constitute profit on transfer of DEPP license is fully cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness transaction less the costs of the transaction, i.e. net proceeds. Excess of revenues over expenses for a transaction; sometimes used synonymously with net income for the period. Gain realized from business or investment overandaboveexpenditures. This Court in E.D. Sassoon Company Ltd. and Others v. Commissioner of Income-Tax, Bombay City (1954) 26 ITR 27 (SC) has quoted the following observations of Lord Justice Fletcher Moulton in The Spanish Prospecting Company Limited [(1911) I Ch. 92] on the meaning of the word profits : . Profits implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. Profits , therefore, imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. As DEPB has direct nexus with the cost of imports for manufacturing an export product, any amount ..... X X X X Extracts X X X X X X X X Extracts X X X X
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