2017 (9) TMI 251 - HC - Income Tax

Tribunal disallows charges, finds Assessee linked to illicit oil program. Inland transportation costs deemed legitimate.

The Tribunal disallowed inland transportation charges and commission expenses, linking the Assessee to illicit oil charges under the Oil for Food program ... Allowable business expenditure u/s 37(1) - inland transportation charges and commission to foreign parties - kickback payment or commission payment - business expediency - Reopening of assessment bad in law - Held that:- It is precisely the contentions of assessee that payment of ₹ 1,31,56,323/should be disallowed and added to total income because this is not a legal payment , Assessing Officer's order is legally and factually untenable.The fate of the present appeals would have to abide by order passed in 09.08.2017 (M/s. Ajanta Pharma's Case - 2017 (8) TMI 857 - BOMBAY HIGH COURT) wherein held the sum and substance of the lengthy discussion in the Tribunal's order is that even if what is alleged by the Assessing Officer and relying upon the report is taken as true and correct, still, the participation of the assessee was not established and proved. The assessee was not found to have made any kickbacks or payment of that nature which reached the Iraq Government and through the channels indicated in the Volcker Committee Report. There was no material of this nature in possession of the Assessing Officer against the assessee. It is in these circumstances that the Tribunal concluded, and essentially in the peculiar facts of the case of the assessee, that the assessee has not incurred any expenditure for any purpose which is an offence or which is prohibited by law. The essential ingredients of explanation below Sub-Section 1 of Section 37, therefore, were not attracted to the Assessee's payment - Decided in favour of assessee. Claim in relation to Section 80HHC - Held that:- This issue been answered by applying ratio of the Judgment of the Hon'ble Supreme Court in the Case of Topman Exports V/s. CIT, reported in (2012 (2) TMI 100 - SUPREME COURT OF INDIA). Issues:1. Disallowance of inland transportation charges and commission expenses.2. Application of Explanation 1 to Section 37 of the Income Tax Act.3. Reopening of assessment based on Volker Committee report.4. Legal and factual tenability of the Assessing Officer's order.5. Admissibility of payments under the United Nations Programme.6. Invocation of Section 37(1) of the Income Tax Act.7. Disallowance of deduction under Section 80HHC.8. Finality of Tribunal's decision based on Ajanta Pharma Ltd. case.Analysis:1. The Tribunal considered the Assessee's challenge to three orders of the Commissioner of Income Tax regarding inland transportation charges and commission expenses. The Tribunal noted the Volker Committee report linking the Assessee to illicit oil charges under the Oil for Food programme in Iraq. It held that the payments were not admissible for deduction under Explanation 1 to Section 37 of the Income Tax Act.2. The Assessee argued that the reopening of assessment was improper as the Volker Committee was not appointed by the Indian Government. However, the Tribunal found the payments to be unauthorized and added them to the total income. The First Appellate Authority confirmed this decision, stating the Assessing Officer's order was legally and factually sound.3. The Tribunal examined the terms of the agreement approved by the United Nations and Indian Authority, concluding that the inland transportation expenses were legitimate business expenditures. The Assessee provided evidence of payments made through approved channels, thus the payments were deemed legal and admissible, and Explanation to Section 37(1) was not applicable.4. The Assessee raised substantial questions of law, questioning the Tribunal's deletion of the disallowance of expenses. However, the Court referred to a previous order related to the Ajanta Pharma Ltd. case, where similar issues were decided in favor of the Assessee. The Court held that the Tribunal's decision was binding and dismissed the Appeals, stating no substantial question of law emerged from the Tribunal's order.