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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI RAJESH KUMAR, AM
स्थधमी रेखध सं./ PAN : AAACM2675G (अऩीरधथी /Appellant) (प्रत्मथी / Respondent) : अऩीरधथी की ओय से /Assessee by : Shri Keshav B Bhujle प्रत्मथी की ओय से/Revenue by : Shri N P Singh सुनवधई की तधयीख /Date of Hearing : 7.2.2017 घोषणध की तधयीख /Date of : 17.2.2017 Pronouncement आदेश / O R D E R PER RAJESH KUMAR, A. M: By way of this appeal, the assessee is challenging the order dated 1.8.2014 passed by the ld.CIT (A)-24. Mumbai confirming the penalty imposed by the Assessing Officer under section 271(1)(c) of the Income Tax Act, 1961 of Rs.9,57,282/- which pertains to assessment year 2002-03. 2 2. Brief facts of the case are that the assessee filed return of income on 31.10.2002 declaring a total loss of Rs.2,47,39,169/- under the normal provisions of Act and book profit u/s 115JB at Rs.2,10,94,397/-. The assessment was completed under section 143(3) of the Act at a loss of Rs.2,45,74,503/- and book profit at Rs.3,66,54,151/- and taxed accordingly. Thereafter the assessment was reopened under section 148 of the Act and the loss was re-computed at Rs.2,17,58,137/- by making the disallowance of Rs.28,16,366/- on account of freight/transportation charges under explanation to Section 37(1) of the Act. The Economic and Finance Department, Ministry of Oil, Baghdad had awarded a contract to the assessee under Oil for food programme by Iraq Govt. and the assessee had executed the contract accordingly. On the basis of Volcker Committee report , the CBDT vide letter dated 18.11.2005 informed the AO that in Oil for Food Programme by Saddam Hussain Regime in Iraq , the kickback were being paid to Iraq Govt in the form of inland transportation fees. On the basis of said letter of CBDT and on referring to the Volcker Committee report, the AO disallowed a sum of Rs.28,16,366/- claiming it to be not allowable under section 37(1) of the Act being the kickbacks. The assessee did not prefer any appeal before any higher forum against the above said quantum disallowance by the AO. Thus, the assessment order of the AO attained finality. The AO, thereafter, initiated penalty proceedings u/s 271(1)( c) vide order dated 19.3.2013 and imposed penalty of Rs.9,57,282/-. According to 3 the Volcker Committee report 10% of the amount total paid to the assessee was paased on to the Govt of Iraq as kickbacks which was wrongly allowed under section 37(1) of the Act. The AO accordingly issued notice under section 271(1)( c) of the Act on 11.12.2012 calling the assessee to explain as to why the penalty should not be imposed in respect of disallowance of inland transportation as made in the assessment order passed u/s 143(3) r.w.s.147 of the Act, which was replied by the assessee vide letter dated 2.1.2013. The AO, after considering the detailed submissions and contentions of the assessee which has been incorporated in para 4 of the penalty order, rejected the same as devoid of any merit and substance and subsequently levied penalty of Rs.9,57,282/- being 100% of the tax sought to be evaded for furnishing inaccurate particulars of income and concealing the particulars of income within the meaning of section 271(1)(c) of the Act read with explanation (1) thereto. The assessee appealed before the First Appellate Authority, who dismissed the appeal of the assessee by considering the submissions of the assesses by observing and holding as under:- “4.2 Decision :- I have considered the facts of the case and the submissions made by the assessee. Basic Issue Is that assessee claimed deduction for commission payments of Rs.28,16,366/- made to an Iraqi party for a contract awarded by Ministry of Oil, Baghdad, Iraq under 011 for food programme of the Govt Of Iraq and the transactions for payment were made through banking channel after obtaining the permission of Govt. of India. Assessee had made payments for fulfilling the conditions prescribed in terms and conditions for the supply of materials and charging of additional transpiration fees of Rs. 28,16,366/- did not constitute an offence prohob1ted by law. It has also been submitted 4 that the addition made by the Assessing Officer under explanation to section 37(1) of IT. Act, 1961 was arbitrary and illegal. However, the fact remains that CIT(A), Mumbai has confirmed the additions and therefore the view held by the Assessing Officer stands vindicated In CIT(A),s order. Assessee has cited following two decisions of ITA, Kolkata· and High Court of Kolkata on the Issue of disallowance of "Inland transportation charges and after sales and service charges" In the case of Rajrani Exports Pvt.Ltd.2012/22/taxmann.com/13/ Kol/ITAT and 2013/35/taxmann.com/644/Calcutta which are similar to the facts of assessee's case, however, the matter is already considered by the CIT(A), Mumbai in the quantum appeal and upheld Assessing Officer's view. Therefore, this appeal will be 'considered on the issue of levy of penalty u/s. 271(1)(c) of l.T. Act, 1961 only in the facts of the case, on merits and as per law. It has also been submitted by the assessee's advocate that there is neither Furnishing of Inaccurate particulars of any income, nor there is concealment of Income as the assessee had complied with the conditions of the terms and conditions of the contract from the Iraq Government which was obtained and executed with the permission of the Govt. of India and the payments were made after obtaining the approval of Govt. of India and the claim for deduction was genuine and logical. It has also been submitted that there Is no revenue loss since the total Income arrived at after the disallowance of Rs.28,16,366/- was loss and tax was paid on total income arrived at on the basis of book profit calculated under section 115JB of the IT Act at Rs.3,68,54,151/-“
The ld. AR vehemently submitted before us that the assessee has executed the contract awarded by Economic and Finance Department, Ministry of Oil, Baghdad, Government of Iraq. The ld. Counsel submitted that the AO on the basis of letter from CBDT dated 18.11.2005 referring to the Oil for Food Programme by Saddam Hussain regime in Iraq stated that the inland transportation fees paid by the assessee at the rate of 10% of the total payment was nothing but kickbacks to the Iraqi Govt and therefore, the 5 same was not allowable under section 37(1) of the Act. The ld. AR vehemently submitted that the assessee has paid the additional transportation charges to the Government of Iraq under a contractual obligation and the same were admissible under section 37(1) of the Act as not being illegal or against any statute and incurred wholly and exclusively for the purpose of business. The ld. AR also referred a number of decisions in support of his arguments as under: a) DCIT V/s Rajrani Exports (P) Ltd (2012) 22 taxmann.com 13(Kolkata); which has been upheld by the Hon’ble Calcutta High Court as reported in (2014) 361ITR 152 (Cal) b) NSIL Exports Ltd V/s DCIT (2014) 44 taxman.com 246 (Mumbai Trib), The ld AR submitted that in both the decisions it has been held that the services were rendered by the Government of Iraq to the assessee for transportation of its material and therefore the payment was held to be admissible expenses and the said fact is evident from the Volcker Committee Report admitted that the services were rendered to the assessee by the Government of Iraq. The ld. AR finally submitted that since the disallowance made on the basis of letter of CBDT referring to the Volcker Committee report could not be the basis for imposition of penalty. Under various decisions of the Co-ordinate Benches of the Tribunal as referred hereinabove have held that the payment made to Iraq Government by way of expenditures were admissible in computing the income of the assessee and 6 therefore the penalty levied on the disallowance made on the basis of the said letter of CBDT on additional transportation charges was bad in law and should be deleted.
On the other hand, the ld. DR relied heavily on the orders of authorities below.
Heard both the parties, perused the material placed before us including the orders of authorities below and case laws relied upon by the assessee. We find from the record that the assessee was engaged at the relevant point of time in the business of export under Oil for Food Programme under a contract by Iraq regime. The case of the assessee was reopened under section 147/148 of the Act on the bass of letter dated 18.11.2005, wherein a reference of Volcker Committee report was contained and it was stated that the payment were being made in the form of transportation charges by the various exporter in India to Iraq regime under Oil for Food Programme which were nothing but kickbacks and consequently was disallowed by the AO to the tune of Rs.28,16,366/-. The quantum appeal was not filed by the assessee challenging the addition made by the AO and thus the assessment framed by the AO attained finality. Now the issue before us whether the payment of transportation charges and claiming the same as deduction constituted concealment of income or filing inaccurate particulars of income warranting imposition of penalty u/s 271(1)© of the Act.In the case of 7 Rajrani Exports (P) Ltd(supra), the Co-ordinate Bench has decided the issue in favour of the assessee by holding that the payment made as additional transportation charges under Oil for Food Programme to the Government of Iraq were allowable as business expenditure under section 37(1) of the Act. The relevant part of the Tribunal order is reproduced below :
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2003-04 - Assessee was a manufacturer and exporter of rice and tea - It exported tea to Iraq under a program called 'Oil for Food Program' framed by United Nations to meet humanitarian crisis of food in war ravaged Iraq - Assessee made certain payments to an Iraqi company, viz., Alia, as commission for receiving services in nature of 'inland transportation' and 'after sales' services - Assessing Officer disallowed claim of such payments as expenditure under section 37(1) on ground that payments so made were illegal in nature being kickbacks received by Iraqi Authorities - Assessing Officer based its finding upon a report of an Inquiry Commission constituted by United Nations, viz., 'Volker Committee', wherein it was found that companies like Alia, were front runner companies for Iraqi authorities and amounts collected by those companies were passed on as kickbacks to Iraqi regime - Whether since payments made by assessee were for bona fide business purposes which ended up being used as illegal kickbacks between Alia and Iraqi regime over which assessee had no control and further since there was no material to indicate that assessee was aware of fact that payments were to be used as kickbacks and further since services were indeed rendered to assessee by Alia, prohibition contained in Explanation to section 37(1) could not be attracted - Held, yes - Whether, therefore, payments in question were to be allowed as deduction under section 37(1) - Held, yes [In favour of assessee]
The decision of the Tribunal has upheld by the Hon’ble Calcutta High Court by dismissing the appeal of the revenue by holding that there was no infirmity in the order of appellate authority and therefore the payment of 8 commission should not be disallowed. By applying the same analogy to the present case, we hold that the penalty cannot be imposed merely on the basis that the assessee has not filed any appeal against the quantum addition and more so when the tribunal decision upholding the claim of the assessee to claim the payments of charges to Iraqi regime as admissible which stands upheld by the jurisdictional high court. The penalty proceedings are independent proceedings which are to be decided on the basis of merits of each case. In the present case, the Calcutta Bench of the Tribunal has already decided that the payment made on account of transportation charges as admissible which cannot be disallowed on the basis of Volcker Committee report and hence penalty on such disallowance which is wrong and against the spirit of the Act cannot be sustained . Accordingly, we set aside the order of ld.CIT(A) and direct the AO to delete the penalty.