The Bofors ghost returned to haunt the Congress party with an income tax tribunal saying that kickbacks of Rs 41 crore were paid to late Win Chaddha and Italian businessman Ottavio Quattrocchi in the Howitzer gun deal and that they are liable to pay tax in India on such income.

"....inaction in this regard may lead to a non-existent undesirable and detrimental notion that India is a soft state and one can meddle with its tax laws with impunity," the income tax appellate tribunal (ITAT) said in its 98-page order.

The tribunal gave this order while dismissing an appeal by Win Chaddha's son against income tax department's claim of Rs 52 crores and Rs 85 lakh from his father for the assessment years 1987-88 and 1988-89.

In the order, the tribunal details the denials by gun maker Bofors about existence of middlemen in the 1986 deal valued at Rs 1,437 crore and the efforts by Quarterdeck to open a series of accounts to transfer funds in an attempt to obliterate the money trail.

Holding that Bofors should have reduced the commissions paid from the contract price, the tribunal observed that government had to pay excess amount of about Rs 41 crore, which was passed to Chaddha and Quattrocchi against the terms of contract.

Quattrocchi was known to be close to the Gandhi family and tribunal's observations in the Bofors episode may have come at an inopportune time for the Congress and the government. The Congress party and the UPA government are already battling various allegations of corruption. Quattrocchi left India in 1993 even as a CBI case was filed on kickbacks in the deal.

The order mentions that a commission of Rs 32.66 crore was transferred to M/s. Svenska Inc., Panama, which was traced to Chaddha, and was credited in an account of Swiss Bank Corporation, Geneva.

Similarly, Rs 8.57 crore was transferred to A E Services Limited, c/o Mayo Associates SA, Geneva, which was opened only a fortnight earlier on August 20, 1986.

It emerged that despite Indian government's insistence not to appoint or pay any agent, Bofors entered into a fresh consultancy agreement with AE Services of UK at the behest of Quattrocchi.

"This amount of SEK (Swedish Kroner) 50,463,966 works out to be exactly 3 per cent of the amount of advance paid by the government of India to Bofors and was, thus, perfectly in accordance with the terms set out in the AE Services Limited-Bofors agreement dated November 15, 1985," the order said.

The two-member bench comprising R C Sharma and R P Tolani held that both Win Chaddha and entities through which money was transferred as commission to Quattrocchi were liable to pay tax in India.

"In our view the department should have carefully examined the issues about their taxability and their having permanent establishment in India and appropriate proceedings should have been undertaken to assess and recover taxes.

"We may point out there exists a serious issue apropos Bofors for not having deducted withholding tax i.e. TDS, from such payments to the assesses/Svenska, AE Services, Quattrocchi.

"In our view, to enforce the rule of law, these steps were desirable to bring all the relevant income tax violations to the logical end by the income tax department. Inaction in this regard may lead to a non-existent undesirable and detrimental notion that India is a soft state and one can meddle with its tax laws with impunity," the tribunal said in its 98-page order.