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2016 (2) TMI 496 - ITAT DELHI

2016 (2) TMI 496 - ITAT DELHI - TMI - Payment of ASSF during the relevant financial period towards export of oil drilling equipments etc. - whetehr allowable expenditure u/s 37 - kick back - Held that:- 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 (2012 (6) TMI 62 - ITAT, Kolkata payment made to .....

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. Finally, we are inclined to hold that the payment of ASSF made by the assessee during the relevant financial 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) .....

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d 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 agitating issues pertaining two orders of the CIT(A) (Supra) therefore, for the sake of brevity and convenience and in order to avoid multiplicity of orders they have been clubbed and we are disposing them together by t .....

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n facts in upholding the addition of ₹ 38,35,079/- on account of payment of commission on sales to Iraq by stating that the Appellant has not been able to co-relate the sales of earlier years with such fee. The observation of the ld. CIT(A) are incorrect in as much as complete details of the sales to Iraq and also the ASSF paid in respect thereof were filed not only before the ld. AO during the course of assessment proceedings but were also filed before the CIT(A) during the course of appe .....

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erred in law and on facts in holding that a sum of ₹ 34,62,807/- included in other income on account of insurance claim, service charges, dividend income and interest from others has to be reduced for the purpose of arriving at adjusted profits while computing the profits for the purpose of section 80HHC of the Income Tax Act, 1961. 4. Briefly stated the facts giving rise to these appeals are that the return was filed on 28.10.2002 declaring total income of ₹ 55,35,426/- which was pr .....

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h 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 .....

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iture of After Sales Service Fee ( ASSF ) has been recorded in the books is not known and clear in absence of entries in the final accounts or related documents filed along with return filed for AY 2002-03. For AY 2003-04, the assessing officer recorded similarly worded reasons on the aforesaid two issues and besides these issues the AO also raised third issue pertaining to loss on account of foreign exchange amounting to ₹ 16,20,398/-. It is relevant to mention here that in the order pass .....

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amended ground no. 1 for AY: 2002-03 and since ld. Departmental representative fairly submitted that she has no objection regarding amended ground no. 1 submitted by the assessee, thus, amended ground no. 1 for AY: 2002-03 as reproduced above is admitted for consideration and adjudication. 7. We have heard the arguments of both the sides and carefully perused the relevant material placed before us. Apropos amended ground no. 1 for AY 2002-03 and ground no.1 AY 2003-04 challenging the initiation .....

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t by reason of the failure on the part of the assessee to make a return u/s 139 of the Act or in response to a notice issued under sub-section 1 of section 142 or section 148 or to disclose fully and truly all material 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 amendmen .....

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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 Iraq company as kick back to Iraqi authorities. The ld. Counsel of the assessee vehemently point .....

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pointed out that the claim of the assessee was squarely covered by the order of Hon ble High Court of Kolkata in the case of CIT vs. Raj Rani Export (Supra) and in this situation reopening of assessment in the similar said facts and circumstances cannot be held as valid and tenable. 9. The ld. Counsel of the assessee finally submitted that the reasons recorded by the AO for initiation of the reopening of the assessment for both the years and issuance of notice u/s 148 of the Act and order passe .....

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facts necessary for its assessment for that assessment year which is under consideration. The Ld. Counsel also pointed out that for AY 2003-04 the reasons recorded by the AO do not clothe the AO with valid assumption of jurisdiction as on third and second issue no addition has been made and on the first issue reopening of assessment was made on the basis of retrospective amendment which was declared unconstitutional by Hon ble Gujarat High Court. 10. Replying to the above ld. Departmental repres .....

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e 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 unde .....

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may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year92, unless any income chargeable to tax has escaped assessment for such assessment year by reason of t .....

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disputedly returns for both the years under consideration were processed u/s 143(1) of the Act and hence, we can safely presume that there was no opportunity for the AO to form any opinion regarding details filed by the assessee in its return of income and other documents filed alongwith return of income and on the and thus we are considered view that the assessee is not eligible for the shelter of first proviso to section1 47 of the Act. At this juncture, it is necessary and relevant to conside .....

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ormed and therefore on this basis the notice issued by the AO u/s 148 of the Act was held as valid. 13. On the basis of foregoing discussion and respectfully following the decta laid down by Hon ble Supreme Court of India in the case of Juari State (Supra) we are inclined to hold that since the original returns for both the assessment years were processed u/s 143(1) of the Act, thus, the assessing officer had no opportunity to form an opinion and therefore initiation of proceedings u/s 147 of th .....

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4 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. Re .....

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5. Revenue s ground in ITA no. 544/Del/2010 :- 1. Ld. Commissioner of Income Tax (Appeal) erred, in law and on the facts and circumstances of the case, in deleting the addition to ₹ 40,52,998/- made by the AO on account of commission on sale. 2. Ld. Commissioner of Income Tax(Appeal) erred, in law and on the facts and 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. Ground no. 2 of the assessee an .....

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no. 2 has challenged the upholding of part disallowance made by the CIT(A), thus, we are adjudicating these grounds together for the sake convenience and brevity in our order. 17. Apropos ground no. 2 of the assessee and ground no. 1 of the revenue, we have heard argued of both the sides and carefully perused the relevant material placed before us. The Ld. Counsel of the assessee submitted that the allegation of the AO in the reasons recorded was that what is the nature of contract and how fore .....

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il 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 o .....

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filed not only before the AO during the course of assessment proceedings but were also filed before the CIT(A) during the course of first appellate proceedings and the said details have either been ignored or not appreciated by the CIT(A) in the impugned order. The ld. Counsel also pointed out that the issue is squarely covered in assessee s favour by the tribunal order of ITAT, Kolkata B bench in the case of DCIT vs. Rajrani Export Pvt. Ltd. (supra) since recorded in (2012) 22 taxman.com 13 (K .....

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1 ITR 152. 19. Replying to the above, the ld. DR supported the action of the AO and submitted that the assessee has paid commission to the foreign agents as has been reflected in the bank statement submitted by the assessee but the AO noted that the identity of the agents to whom this commission has been paid remained unverifiable, therefore, the entire commission payment to Iraq was rightly disallowed in absence of satisfactory documentary evidences. The ld. DR vehemently pointed out the assess .....

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allenging the relief part of the first appellate order submitted that the CIT(A) uphold part disallowance an addition and he granted part relief to the assessee without any basis, therefore, the impugned order may be set aside by restoring that of the AO. The ld. DR strongly supporting the upholding part of the impugned order submitted that the AO strongly doubted the identity of the recipient of ASSF on commission of sale, therefore the first appellate authority has no justified reason or basis .....

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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 .....

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2002-03, the company has exported the Oil Drilling Equipment for USD 796152/- entered into the Economic and Finance Department, Ministry of Oil, Republic Baghdad after approvals of Government of India and Reserve Bank of India. The ld. Counsel vehemently pointed out that the CIT(A) in the impugned order in para 23 wrongly noted that the appellant has claimed that no sales have been made to Iraq during the year as per affidavit of the Managing Director which is factually incorrect because as per .....

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was not justified in upholding the disallowance pertaining to the claim of assessee regarding payment on account of ASSF relating to the payments connected with the said supplies made to Iraq during the relevant period. 22. On careful consideration of above submissions of both the sides from the assessment order, we note that the AO made disallowance with following observations submissions :- The submission filed by the assesse company has been duly considered but not acceptable. From the perus .....

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es services and also the fact that whatever commission has been paid by the assessee 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 a .....

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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 )(c) are also being initiated separately."(assessment Order) 23. The First Appellate Authority noted that the assessee placed following documentary evidence and papers during the first appellate proceedings before the A .....

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ow : In support of their claim, the Appellant places reliance on following documents filed before the Id. AO as statedly also duly acknowledged by her in the impugned order: a) Assessee's letter dated 17.7.2008 filed before the Id. AO - copy placed at pages 33-35. b) Assessee's letter dated 6.11.2008 filed before the Id. AO - copy placed at pages 36-40 c) Copy of the purchase order from the Economic and Finance Department, Ministry of OH, Baghdad, Republic of Iraq which also reflects tha .....

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mation/receipt from the agents about receipt of commission on account of sale to Iraq, copies placed at pages 71-75. i) Affidavit of Shri V. K. Dhawan, Managing Director of the Appellant company affirming the payment of ASSF to the two agents through wire transfer from the Appellant's bank account with Punjab National Bank, copy placed at pages It has been further stated that there were two aspects to the information received by the Id. AO from the CBDT. Firstly, the contract for supply to I .....

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ively 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 .....

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he Supreme Court in Mehta Parikh & Co v CIT 30 ITR 181. This decision only lays down that if there is no material whatsoever on record for doubting the veracity of the statements made in the affidavit and if the deponent has also not been subjected to cross examination for bringing out the falsity of his statements then the tribunal will not be justified in doubting the correctness of the statement made by the deponent in the affidavit. The finding arrived at in such a case would, according .....

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he commissions are never paid to the end customer but are paid to the agents and facilitators. What is paid to the customer is in accounting parlance called discounts/rebates. So the Id. AO's argument that the contract with the customer i.e. Government of Iraq does not provide for payment of commission is misplaced and erroneous and has no bearing on allowability of the commission and ASSF expenditure under the IT Act. ii) Secondly, it has been submitted that in fact the names of the recipie .....

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y even the second argument of the Id. AO that the identity of the persons to whom the commission have been paid remains unverifiable is misplaced and erroneous as per the appellant. It is stated that 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 .....

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nts 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 receipt of commissions. As per the appellant, this is a plain and baseless allegation without fact .....

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ss practices. The payment of commission is claimed to be at arms length price at prevailing market rates. It is stated that the Id. AO has neither disputed nor controverted any of these facts. Hence her allegation that no services have been rendered is not only baseless and erroneous as per the appellant but also grossly against the facts on record. The appellant has stated that (i) It has been so held in Ritz Hotel (Mysore) Ltd. v CIT (1992) 196ITR 614 (Kar.)that the burden is quite heavy On th .....

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n CIT V. Chandulal Keshavalal & Co.(1960) 38 ITR 601 (SC) the Apex Court has held that in order to justify deduction, the sum should be given up for reasons of commercial expenditure; it might be voluntary, but so long as it was incurred for the assessee's benefit, the deduction would be claimable. Further, the Appellant's case is stated to be totally covered by the decision of the Kolkata Bench of ITAT in TIL Ltd. v Assistant CIT reported in 16 SOT 33 wherein it has been held that w .....

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ons (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 a .....

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iture on payment of commission to agents etc. is deductible u/s 37(1) of the Act. The only condition when such expenditure is not deductible is statedly provided in explanation to said section which states that expenditure "incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to be incurred for the purpose of business or profession and no deduction shall be made in respect of such expenditure." It has been contended that the paym .....

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t although as per the AO no convincing evidence has been filed in this regard by the appellant. Further it was also stated that it was incurred on account of commercial expediency. Thus it statedly complies effectively with both the preconditions laid down in section 37(1) of Income tax Act 1961making it eligible for full admissibility of the business expenditure as deduction. It is an accepted fact that commissions have been paid by the Appellant to the agents for sales to Iraq and also to vari .....

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e the following facts: a. That the contract with the Government of Iraq did not provide for payment of commission, b. That the identity of the agents to whom this commission has been paid remains unverifiable. c. That in respect of the commissions paid to other agents the Id. AO has also remarked that whether such agents rendered any such services so as to receive the commission. 26. From last operative part of the impugned order, we note that finally the CIT(A) granted part relief to the assess .....

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as 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. He .....

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9 being commissions to foreign agents has been disallowed by the Id. AO only on the ground that the identity of the agents is not know. The appellant's relevant submission is reproduced below: Furthermore, on the basis of the examination of assessment record, we are to make a categorical statement before Your Honour that the Id. AO never queried the Appellant during the course of the proceedings with regards to the commissions paid to agents for foreign sales other than the ASSF of US$ 79,81 .....

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opportunity to provide the same. This is in gross violation of the Principles of Natural Justice. It is now a settled principle that a fair opportunity of hearing is a pre-condition even for an administrative order. This is a basic principle of natural justice. The principle of natural justice embodied in the Latin dictum "audi alteram partem" only means that a person has right to be heard by way of an opportunity, which should be adequate and reasonable, so as to enable the person aff .....

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o 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 .....

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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 that the appellant is not correct in alleging that adequate opportunity was not given to them and the addition was made behind their back. It is seen that the appellant had filed the details of commission paid before the AO during the course of assessment proceedings stating the names, addresses and the details of bills al .....

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the payments were made for the purpose of business and also whether any service was provided by the recipients to the appellant, as discussed by the AO in the assessment order. At the time of re-opening the AO was to examine the fact that the transactions involving sales to the Government of Iraq and the payment of ASSF in respect to said transactions were legal payments or not. The said fact was apparently examined on the basis of the AO s consideration of the purchase order, UN approval, the e .....

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that the transactions were found recorded in the books of the Appellant. The veracity of the transactions was statedly duly verified by the AO. 19. It is seen that in spite of this the AO has disallowed not only the ASSF paid against sales to Iraq but also all other commissions paid to foreign agents. The AO while doing so has reasoned that the identity of the recipients could not be proved and it has not been established what services were provide by the agents to the Appellant. 20. The Id. AR .....

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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 wit .....

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account of ASSF relating to payments connected with supplies made to Iraq, is upheld as the appellant has not been able to correlate the sales of earlier years with such fees as it is seen that the appellant has claimed that no sales have been made to Iraq during the year as per the affidavit of the Managing Director. The disallowance of ₹ 38,35,079/- is upheld and the balance of ₹ 54,13,059/- is deleted. 27. In view of the above first issue for adjudication before us is that whethe .....

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the only condition when such expenditure is not allowable is that the expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to be incurred for the purpose of business or profession and no deduction shall be made in respective such expenditure. The assessing officer noted that the assessee paid commission to foreign agents as has been reflected in the bank statement submitted by the assessee but the identity of the agents to wh .....

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to be paid by the assessee remained unverifiable and 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. 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 .....

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uipments. 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 for ensuring smooth after sale services for the sales effected by the assessee. It is also pertinent to note that the Ld. DR has no controverted or disputed the fact that the .....

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e the revenue authorities to take a deviate or different view on the issue. 29. During the appellate proceedings, after analyzing the entire facts, it was held that the commission payment made by the assessee is allowable expenses as the same was incurred during the normal course of business over the year. As we have already observed earlier that the payment of commission was made by the assessee to its agent for affecting export sales to various countries and ensuring smooth after sale services .....

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earlier years. On the basis of foregoing discussion we are unable to see any perversity or any other valid reason to interfere with the impugned first appellate order and we uphold the same. Accordingly ground no. 1 of the revenue being devoid of the merits is being dismissed. 30. Next question for adjudication placed before us for adjudication by the assessee as ground no. 2 for AY 2002-03 is that whether the CIT(A) was right and correct in upholding the disallowance made by the AO on account .....

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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 unverif .....

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st appellate authority granted part relief to the assessee. However, the CIT(A) confirmed and upheld the disallowance on account of ASSF relating to the payments connected with supplies made to Iraq by observing that the assessee has not been able to corelate 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 the Managing Director. 33. In our considered view above noted conclusion of the C .....

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amount of 54935 was paid towards the after sale services charges to A1 Waseel and Babel General Trading in account of Ministry of Oil Iraqi Drilling Co. This was paid through wire transfer from our account with Punbaj National Bank, Dehradun. 34. In view of the above, besides other documentary evidence filed before the AO during the assessment proceedings and again filed before the CIT(A) during the first appellate proceedings and also filed before us in the form of assessee s paper book placed .....

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f Ministry of Oil Iraqi Drilling Company and this amount was paid through wire transfer from the account of the assessee with Punjab National Bank, Dehradun. 35. It is pertinent to note that the assessing officer as well as the CIT(A) has not disputed the quantum of commission paid as ASSF and neither 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 tha .....

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o 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 case of .....

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ting the veracity of the statements made in the affidavit and if the deponent has also not been subjected to cross examination for bringing out the falsity of his statements then the tribunal will not be justified in doubting the correctness of the statement made by the deponent in the affidavit filed before the revenue authorities. 37. In view of above, we have no hesitation to hold that the CIT(A) uphold the part disallowance on account of ASSF relating to payments connected with supplies made .....

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not be disallowed in absence of evidence of its illegality, the relevant observations of Hon ble High Court are being respectfully reproduced below :- 3. 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. 4.Against the orde .....

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ly 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 .....

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s 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-à-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 .....

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to the said commission payments are, therefore, not sustainable in law, so far as deductibility under section 39(1) is concerned. 6. The department has come up in appeal. Mrs. Smita Das De, learned advocate appearing in support of the appeal, could not satisfy us as to why were the findings indicated above as recorded by the CIT(A) and the Tribunal incorrect either on fact or in law. There is, as such, no reason why the appeal should be entertained. The appeal is, therefore, dismissed. 39. The .....

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back to Iraqi authorities. The relevant operative part of this order is being reproduced below for the sake of clarity and transparency in our findings :- 5. To properly appreciate the controversy requiring our adjudication in this appeal, it is necessary to take note of some background facts relating to the issue in appeal. There is no dispute that the assessee had made exports to Iraq under the Oil for Food Program , which was meant to mitigate the hardships to ordinary Iraqi citizens as a re .....

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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-suppo .....

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ed Nations Charter, the Security Council adopted resolution 986, establishing the "oil-for-food" programme, providing Iraq with another opportunity to sell oil to finance the purchase of humanitarian goods, and various mandated United Nations activities concerning Iraq. The programme, as established by the Security Council, is intended to be a "temporary measure to provide for the humanitarian needs of the Iraqi people, until the fulfillment by Iraq of the relevant Security Counci .....

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, when war intervened and oil exports under the programme ended, the Oilfor- Food Programme was funded exclusively from the proceeds of Iraqi oil exports, authorised by the Security Council. In the initial stages of the programme, Iraq was permitted to sell $2 billion worth of oil every six months, with two-thirds of that amount to be used to meet Iraq s humanitarian needs. In 1998, the limit on the level of Iraqi oil exports under the programme was raised to $5.26 billion every six months, agai .....

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ations implemented the programme on behalf of 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) a .....

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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 for the management and implementation of the programme in the field. Implementation: There are nine United Nations agencies and organizations involved in the programme. They are: FAO, UNESCO, WHO, ITU, UNICEF, UNDP, WFP, UNOPS, UN-Habitat. Delivery: As of .....

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itarian situation in Iraq; a revenue shortfall in the programme; and an assessment of the implementation of the new set of procedures for the processing and review of contracts for humanitarian supplies. The new procedures were introduced under Security Council resolution 1409 (2002), based on the Goods Review List (GRL). It is the first such assessment since the adoption of that resolution. Oil-for-Food Plus: The Programme, as outlined in the latest report of the Secretary-General, was expanded .....

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following 10 new sectors in June 2002: construction, industry, labour and social affairs, Board of Youth and Sports, information, culture, religious affairs, justice, finance, and Central Bank of Iraq. Pre-War and Post-War Developments (2003): On 17 March 2003, the United Nations Secretary-General announced that in view of warnings received from the Governments of the United Kingdom and the United States, regarding the prospect of war and the continued safety and security of UN personnel presen .....

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d 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 2 .....

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of oil exports, with revenues deposited in a Development Fund for Iraq held by the Central Bank; and provided for the termination of the Oil-for-Food Programme within six months, transferring responsibility for the administration of any remaining Programme activities to the Authority representing the occupying powers. The Council has called on the United Nations to assist the Iraqi people, in coordination with the Authority , in a wide range of areas, including humanitarian relief, reconstructi .....

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4 November 2003, consultations between the Coalition Provisional Authority, Iraqi experts and the United Nations, had resulted in the prioritization of 3,168 contracts valued at more than $8.5 billion. (Updated 4 November 2003) (Emphasis by underlining supplied by us) 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, thou .....

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. 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: The independent inquiry shall collect and examine information 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 c .....

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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 relation to the Programme, including, for example, bri .....

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regime, and these allocations or quotas granted by the Iraqi regime were perceived as de facto bribe payments by the Iraq regime. That aspect, however, does not touch the issue in appeal before us. There were also findings to the effect that Iraqi regime used several front companies, which entered into agreements with the exporters and collected amounts for after sales service , inland transportation fees , commission etc, and the amounts so collected by these front companies were passed on as .....

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popularly known as Volker Committee Report, Alia was a key player in the irregularities relating to Oil for Food Program administered by the United Nations. Volker Committee report ( www.iic-offp.org) describes Alia as one of the Iraqi Front Companies and states, at page 309, as follows: ………….. VII: IRAQI FRONT COMPANIES Three of the major Iraqi front companies were: (1) Alia for Transportation and General Trade ( Alia ) of Jordan; (2) Al-Hoda International Trading Co .....

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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 wi .....

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and assisted in violating the United Nations sanctions regime, which prohibited any third party from engaging in financial transactions with the Government of Iraq except as permitted under the Programme or Security Council resolutions. By arranging for suppliers to make illicit payments to a Jordanian company such as Alia-instead of directly to ISCWT or another governmental entity of Iraq-the Iraqi regime disguised the illicit nature of such payments. 498 In fact, all transportation services f .....

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unaware whether the actual costs for transport had any bearing on the transportation fee charged and collected by Alia. Following the conclusion of contract negotiations between an Iraqi purchasing body and a supplier, ISCWT contacted Alia by fax, letter, or telephone and informed Alia of the amount that was to be received from the supplier. On some occasions, ISCWT contacted the supplier directly to advise the supplier that it should send payment to Alia or sent the same invoice to the supplie .....

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ponding supplier, contract, ship, and letter of credit. Below is one such example of a letter from Alia to ISCWT, advising ISCWT of its receipt of payment on ISCWT s behalf: (Translated from Arabic- Page 1 of 1) Alia Company for Transportation and General Trade No. F8/5087/2002 Date : 20/11/2002 To : State Company of Water Transport, Basra Attn : Ms Elham, Marine Agencies Sub : MV Makram Greetings ! We would like to inform you that the amounts below have been received from Jawala Company for int .....

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mount (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 of t .....

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t by more than $4,000 per vehicle at the Government of Iraq s request and then used the extra revenue to purchase fifty more vehicles that it shipped without inspection to Iraq. 503 In summary, based on the available evidence, Alia knowingly acted as a front company, serving as a conduit for collecting hundreds of millions of dollars in illicit fees paid by suppliers to the Iraqi regime. Alia further made illicit payments totaling $1,336,972 in connection with its own contracts under the Program .....

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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 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 expenditur .....

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ter. 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 .....

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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 .....

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unts 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) .....

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ohibited 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 bona .....

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ndicate 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 bu .....

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Ministry of Transportation or the Iraqi Grain Board ( IGB ). (Page 304 of the report) Vessels berthing at Umm Qasr required the approval of the Iraqi State Company for Water Transport ( ISCWT ) before being permitted to discharge. ISCWT was one of over a dozen SOEs overseen by the Ministry of Transportation and Communication ( Ministry of Transportation ). Under Iraqi law, ISCWT had exclusive authority for all activity at Iraqi ports. Its official function was to arrange and authorize the unloa .....

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confirmation of a supplier having paid into an Iraqi-controlled bank account, it generally would not permit discharge of the supplier s cargoes. In such circumstances, the supplier or vessel chartering company incurred demurrage of thousands of dollars a day. One supplier interviewed by the Committee recalled that a supplier s failure to pay fees, even on just one contract, resulted in large demurrage and prevented the vessel s entire contents from being offloaded (Page 272 of the report) (Emph .....

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ct the deductibility 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 .....

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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 .....

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o 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 Explanat .....

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ck back payments unwittingly. The Volker Committee, thus, segregated the persons/ companies who paid the kick backs in three categories viz., firstly, the persons who were all along aware that the payments as after sale service fee and inland transportation fee are in the nature of kick backs and they were thus willing parties to these illegal gratification ; secondly , the person who had suspicion that the amounts paid as after sale service fee and inland transportation fee may be used as kick .....

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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 .....

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part disallowance and addition on account of ASSF by observing that the assessee has not been able to co-relate the sales of earlier years which such fees as it is seem that the assessee has claimed that no sales have been made to Iraq during the year as per affidavit of the Managing Director. As we have already observed and discussed above the CIT(A) dismiss the claim of the assessee on wrong promise and by making factually incorrect and perverse observations as in the affidavit of Shri V.K.Dha .....

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istry of Oil, Iraq Drilling Company which was paid through wire transfer from the assessee s account with Punjab National Bank, Dehradun. 43. Hence, we have no hesitation to hold that the CIT(A) dismissed claim of the assessee upholding the part disallowance on account of ASSF on incorrect assumption of facts and on the basis of perverse and contradicting finding and the same are not sustainable we may also pointed out that the facts narrated by the Managing Director of the assessee company in h .....

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duced before the lower authorities during the assessment and first appellate proceedings. Thus, conclusion of the CIT(A) cannot be held as sustainable and tenable and hence, we diminiss 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 Committe .....

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nts 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 commission, copies of confirmation of receipts from agents and copy of the affidavit of Shri V.K.Dhawan, Managing director of t .....

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inst the assessee that the payment of ASSF in question was made by the assessee voluntarily in the nature of kick backs and the assessee was willing party to make these payments in the garb of ASSF as illegal gratifications. On the basis of foregoing discussion, we reach the logical conclusion that the assessing officer ignore vital evidence filed by the assessee and wrongly rejected the documentary evidence and explanation of the assessee and the CIT(A) dismissed claim of the assessee on factua .....

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financial period. We may also point out that the assessee is also placed copy of the United Nations letter dated 05.04.2001 place that paper book page no. 54 wherein the assessee was allowed establishment of supplies of Oil Drilling Equipments etc. through the border crossing point/ port of UMM QASR to Iraq from the report available at pages 56-57 of the assessee s paper book concerning request to especially spare parts for the Oil Industry to Iraq in course of resolution no. 986 (1995), 1175 (1 .....

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ing 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 .....

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on the premise that such payment was passed on by Iraqi Company as kick back or illegal gratification to Iraqi authorities or any other entity or person. In the present case, there is no such allegation of the revenue, therefore, the present assessee before us has a better case and does nothit by explanation to section 37(i) if the Act. Finally, we are inclined to hold that the payment of ASSF made by the assessee during the relevant financial period towards export of oil drilling equipments et .....

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lar to the ground no. 2 of the assessee for AY 2004-05 (ITA no. 408.Del.2010). Ld Counsel further pointed out that ground no. 2 for AY 2003-04 may be decided in accordance with the ground no. 2 of the assessee for AY 2004-05. The ld. DR fairly submitted that ground no. 2 of the assessee in AY 2003-04 and 2004-05 are quite similar bearing similar facts and circumstances, therefore, the conclusion for ground no. 2 for AY 2004-05 is applicable to AY 2003-04 also. 49. Since in ITA no. 408/Del/2010 g .....

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Ground no. 1 of the revenue for AY 2003-04 50. Since ground no. 1 of the revenue for AY 2002-03 has been decided by the earlier part of this order against the revenue and in favour of the assessee and facts and circumstances are quite similar therefore, we order that our conclusion for ground no. 1 of revenue s appeal for AY 2002-03 would apply mutatis mutandis 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 th .....

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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 profi .....

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carefully consideration on above submission of both the sides at the very outset we note that the issue of adjustment of profit on account of sale of DEPB is not as Hon ble Apex Court in the case of M/s Topman Export v. CIT had explicitely held that the difference between the sole value and the Face Value of DEPB represent profit on transfer of DEPB and required adjustment in this regard for computing profit u/s 80HHC of the Act should be made on the basis of difference only. The relevant opera .....

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y the Government of India to an exporter to pay customs duty on its imports and it is receivable once exports are made and an application is made by the exporter for DEPB. We have, therefore, no doubt that DEPB is cash assistance receivable by a person against exports under the scheme of the Government of India and falls under clause (iiib) of Section 28 and is chargeable to income tax under the head Profits and Gains of Business or Profession even before it is transferred by theassessee. 13. Un .....

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enues 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 bet .....

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