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IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI
BEFORE S/SHRI B.R.BASKARAN, AM AND AMARJIT SINGH, JM
./I.T.A. No.5769/M/2013
( / Assessment Year: 2002-03)
Reliance Industries Ltd., / Asstt. Commissioner of Income
3rd floor, Maker Chamber-IV, tax, Large Taxpayer Unit,
Vs.
222, Nariman Point, 29th floor, Center No.1,
Mumbai-400021 World Trade Centre, Cuffe Parade,
Mumbai-400020
( /Appellant) .. ( / Respondent)
./I.T.A. No.5798/M/2013
( / Assessment Year: 2002-03)
Asstt. Commissioner of Income / Reliance Industries Ltd.,
tax, Large Taxpayer Unit, 3rd floor, Maker Chamber-IV,
Vs.
29th floor, Center No.1, 222, Nariman Point,
World Trade Centre, Cuffe Mumbai-400021
Parade,
Mumbai-400020
( /Appellant) .. ( / Respondent)
./ ./PAN : AAACR5055K
/ Appellant by Shri Arvind Sonde
/Rspondent by Shri Jayant Kumar
/ Date of Hearing : 2.9.2015
/Date of Pronouncement: 16.9.2015
/ O R D E R
Per B R Baskaran, AM:
These cross appeals are directed against the order dated 25-06-
2013 passed by Ld CIT(A)-24, Mumbai and they relate to the assessment
year 2002-03.
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2. The assessee is in appeal in respect of following issues:-
(a) Validity of reopening of assessment.
(b) Addition of ,,Provision for Wealth tax for computing Book Profit
u/s 115JB.
3. The revenue is in appeal in respect of following issues:-
(a) Addition of gain arising on re-purchase and extinguishment of
debenture bonds.
(b) Addition of Commission/surcharge paid to SUMO, Iraq
Government agency on the basis of Volker Committee report.
(c) Addition of inland transportation fee on the basis of Volker
Committee report.
4. The facts relating to the case are stated in brief. The assessee
company is engaged in the business of manufacturing of and trading in
petrochemicals, polyester fiber intermediaries, textiles, generation and
distribution of power, operation of jetties, investment activities etc. The
assessment of the year under consideration was completed originally u/s
143(3) of the Act on 28.03.2005. Thereafter, the AO reopened the
assessment by issuing notice dated 20-03-2006 u/s 148 of the Act. The
assessee asked for the reasons of re-opening and thereafter filed its
objections also. It is pertinent to note that the assessment has been re-
opened within four years from the end of the assessment year under
consideration. The assessing officer rejected the objections by following
case law:-
(a) Dr. Amins Pathology Laboratory (252 ITR 673)
(b) Praful Chunilal Patel / Vasant Chunilal Patel (236 ITR 832)
(c) Rakesh Aggarwal (225 ITR 496)
Thereafter the assessing officer completed the assessment by making
various additions. In the appeal filed by the assessee, the Ld CIT(A)
upheld the reopening of assessment and granted relief only in respect of
some of the additions. Hence the assessee has filed this appeal on the
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issues cited above, which were decided against it. The revenue is
challenging the decision of Ld CIT(A) in granting relief in respect of the
additions cited above.
5. The first issue in the appeal filed by the assessee relates to the
validity of reopening of assessment. We heard the parties and perused
the record. We notice that the Ld CIT(A) has given a clear finding that the
assessing officer has reopened the assessment only on the basis of
material facts available with him and not on account of change of opinion.
Further, the observation of the AO that the assessee did not produce the
relevant materials necessary for completion of assessment at the time of
completion of original assessment has also been upheld by the Ld CIT(A).
At the time of hearing before us, the assessee could not contradict these
observations made by the Ld CIT(A). Hence, we do not find any infirmity
in his decision in confirming the validity of re-opening of assessment.
6. The next issue contested by the assessee relates to the addition of
"Provision for Wealth tax" for the purpose of computation of book profit
u/s 115JB of the Act. The assessee did not add the amount relating to
"Provision for Wealth tax" to the Net Profit for computing the amount of
,,Book Profit u/s 115JB of the Act. Before Ld CIT(A), the assessee placed
reliance on the decision rendered by Honble Bombay High Court in the
case of CIT Vs. Echaj Forging Pvt ltd (251 ITR 15) in support of its
contentions. However, the Ld CIT(A) did not accept the contentions of the
assessee with the following observations:-
"...It is seen from the above judgment referred by the assessee, that
in this case, the wealth tax was already paid, but in the assessees
case, the wealth tax was not paid, but provision has been made."
7. We heard the parties on this issue and perused the record. It is a
well settled proposition that the provisions of sec. 115JB is a complete
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code by itself and the additions prescribed therein only can be added to
the net profit for computing the ,,book profit under that section. As per
clause (a) of Explanation 1 to sec. 115JB, what is required to be added to
the Net profit is "the amount of income tax paid or payable, and the
provision there for." This clause provide for addition of only "income tax"
and not "wealth tax". The question as to whether the wealth tax was
actually paid or a mere provision was made, in our view, is irrelevant for
interpreting the above said provision. The very same issue came for
consideration before the Honble Bombay High Court in the case of Echaj
Forging Pvt Ltd (supra) and the revenue conceded before the Honble High
Court that the wealth tax could not be added to the Net profit u/s 115J of
the Act. The relevant observations made by the Honble jurisdictional High
Court are extracted below:-
"(I) ADDITION OF WEALTH TAX PAID BY THE ASSESSEE TO THE
NET PROFIT :
6. Mr. Desai, learned Senior Counsel for the Department, fairly
concedes that the net profit, an shown in the profit and loss
account, will not be increased by the amount of wealth tax paid
because under clause (a) of the Explanation to section 115J(1A),
what is contemplated is the amount of income tax paid. Under the
said clause, payment of wealth tax is not contemplated. Therefore,
the net profit shall not be increased by the amount of wealth tax
paid by the assessee."
The expression used in sec. 115JB is para materia with the expression
used in sec. 115J of the Act and hence, we are of the view that the
assessee can take support of the above said decision. Accordingly, we set
aside the order of Ld CIT(A) on this issue and direct the AO to delete the
addition of provision for wealth tax while computing book profit u/s 115JB
of the Act.
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8. We shall now take up the appeal filed by the revenue. The first
issue relates to the addition of gains arising on re-purchase and
extinguishment of debentures /bonds. The brief facts relating to this issue
are that the assessee issued Foreign Currency Bonds in the year 1996 &
1997 (popularly called as "Yankee Bonds") carrying a coupon rate of
interest ranging between 10% to 11% p.a. They were having a maturity
period of 30 to 100 years. The interest was payable half yearly intervals
and there is no dispute that the assessee has paid interest thereon
regularly and it has been allowed as deduction u/s 36(1)(iii) of the Act.
After the attack on "World Trade Centre" located in USA on 11th Sep. 2001,
the financial markets collapsed dramatically and the investors of the
debentures/bonds started selling them. Hence, the market price of the
debenture/bonds came down heavily and they were quoted at a value less
than its face value. Hence, the assessee has decided to purchase the
bonds/debentures from the market and extinguish them. Accordingly, the
assessee purchased bonds/debentures having a face value of US $
12,32,60,000 at a discounted rate of US $ 80,61,100 from the open
market. The gain/discount gained on buy back of the debentures worked
out Rs.38.80 crores. The assessee treated the said gain as "Capital
receipt". However, the AO held that the said gain is assessable u/s 41(1)
as a profit chargeable to tax. The Ld CIT(A), however, deleted the same
and hence the revenue has filed this appeal.
9. We heard the parties on this issue. The AO has invoked the
provisions of sec. 41(1) in order to bring the gains arising on repurchase
and extinguishment of debentures/bonds. The provisions of sec. 41(1)
reads as under:-
"41(1) Where an allowance or deduction has been made in the
assessment for any year in respect of loss, expenditure or trading
liability incurred by the assessee (hereinafter referred as the first
mentioned person) and subsequently during any previous year,--
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(a) the first mentioned person has obtained, whether in cash or in
any other manner whatsoever, any amount in respect of such
loss or expenditure or some benefit in respect of such trading
liability by way of remission or cessation thereof, the amount
obtained by such person or the value of benefit accruing to
him shall be deemed to be profis and gains of business or
profession and accordingly chargeable to income tax as the
income of that previous year, whether the business or
profession in respect of which the allowance or deduction has
been made is in existence in that year or not; or.........."
A careful perusal of the above said provisions would show that the first
and foremost condition for invoking the provisions of sec. 41(1) is that an
allowance or deduction of loss, expenditure or trading liability incurred by
the assessee should have been made in the assessment for any year.
Conversely, if deduction of loss, expenditure or trading liability incurred by
the assessee was not made in the assessment for any year, the provisions
of sec. 41(1) shall not apply. In respect of liability incurred by the
assessee, these provisions shall apply only in respect of "trading liability".
10. In this case, the assessee had raised funds by issuing
bonds/debentures, i.e., the assessee has received the money and hence
the same would not fall in the category of "Loss or expenditure", since
both the terms connote outflow of money. Hence the receipt of money by
the assessee would fall in the category of "Liability". Under accounting
principles, the liability is divided into two categories, viz., "Capital liability"
and "trading liability". While no deduction is allowed in respect of capital
liability, the deduction of corresponding expenditure is allowed in respect
of a trading liability. As noted earlier the provisions of sec. 41(1) talks
about trading liability only, i.e., in respect of capital liability, the said
provisions shall not apply. In respect of trading liability incurred, the
assessee shall get deduction of corresponding amount. For example, if the
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assessee purchases goods on credit, the assessee shall avail deduction of
purchase value of goods while computing the income and the
corresponding amount payable shall be shown as a trading liability in the
Balance Sheet.
11. Hence, if the assessee gets some benefit in respect of the trading
liability incurred by way of remission or cessation thereof and if the trading
liability has been allowed as deduction, then the said benefit is liable to be
taxed as income u/s 41(1) of the Act. If the corresponding expenditure
relating to trading liability incurred by the assessee was not allowed as
deduction, then also the provisions of sec. 41(1) shall not apply.
12. When the funds are raised by issuing bonds/debentures, there
would be no corresponding expenditure that could be allowed as
deduction. Hence the liability incurred by the assessee by raising funds
through bonds/debentures cannot be termed as ,,trading liability. There
should not be any dispute that the funds so borrowed is called as "Capital
borrowed" and further it would be a Capital liability. As stated earlier,
the provisions of sec. 41(1) talks about "trading liability" only and hence
the "Capital liability" shall not come under the purview of sec. 41(1) of the
Act.
13. The impugned gain arose to the assessee, since the assessee could
purchase its own debentures at less than its face value. To make it simple,
the assessee issued debentures having a face value of say Rs.100/- with
interest rate of 10% to 11%. Due to adverse market conditions, the said
debenture was available in the market at a discounted rate of say Rs.70/-.
If the debentures are to be redeemed at the maturity period, the assessee
would have to pay Rs.100/-. If they are purchased from the market, it
was enough if Rs.70/- was paid. Hence the assessee, as a prudent
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businessman, chose to purchase the debentures at Rs.70/- and extinguish
them. In this process the assessee made a gain of Rs.30/- per debenture.
The question is whether the provisions of sec. 41(1) shall apply to the gain
of Rs.30/- made by the assessee on repurchase and extinguishment of its
own debentures. We have noticed the principles/conditions governing the
provisions of sec. 41(1) of the Act. The foremost condition is that the
assessee should have been allowed deduction in respect of the "gain"
realized by the assessee. In this case, this condition was not satisfied and
hence there is no question of invoking the provisions of sec. 41(1) of the
Act.
14. The assessing officer has placed reliance on the decisions rendered
by Honble Supreme Court in the case of CIT Vs. Karamchand Thaper &
Others (222 ITR 112) and T.V. Sundaram Iyengar & sons (222 ITR 344) in
support of his view. We notice that these two decisions have not been
rendered in the context of provisions of sec. 41(1) of the Act. In these
cases, the assessees therein received some money, which was in the
nature of capital receipt initially, but later converted into trading receipt.
It is a well settled proposition of law that the trading receipts are exigible
to tax and the capital receipts are not taxable under the Act, unless
specifically provided for. The Supreme Court, in the above said two cases,
laid down the ratio as to when the nature of capital receipt would change
into trading receipt.
15. The facts available in the case of Karamchand Thaper & Others
(supra) are that the assessee therein acted as del-credere agent of colliery
companies and also as agent of the purchasers of coal. The collieries
supplied coal directly to the purchasers through Railway wagons. The
purchasers are required to pay freight charges for full wagon, even if the
wagons are not filled with its full capacity. As per the agreement between
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the parties, the collieries are required to reimburse the excess freight to
the purchasers. In this case, the assessee claimed the excess freight from
the Collieries on its own, even if the purchasers did not make the said
claim. In turn, the assessee paid the same to the purchasers, whenever
they lodged the claim with the assessee. After meeting the claims, there
was always a sizeable balance left with the assessee, which was
transferred by it to the Profit and Loss account under the head
"Miscellaneous receipts". The assessee claimed that it had held the
amount received from Collieries in trust for and behalf of purchasers and
hence it was not part of its trading receipts. The Honble Supreme Court
noticed that the assessee had lodged claim with the Collieries without
there being any instruction from the purchasers and paid the same to the
purchasers only when a claim is received from them. The Honble Apex
Court held
".... the assessee has collected money on account of under charges
(freight charges) not on the basis of any demand made by the
purchasers, but as a matter of routine irrespective of any demand by
the consignees (purchasers). If and when any purchaser made
demand for payment, some payments were made. The surplus
balance was taken to the profit and loss account. It must be
presumed that money taken to the profit and loss account
of the assessee would be its trading receipts. No fact had
been brought on record to the contrary. The amount was not kept
in a suspense account or shown as a liability...... the inference
should be that the assessee acted in accordance with the law and
not contrary to law. The assessee collected the amounts of under
charges in advance even before any claim was lodged. He realized
the amounts from the colliery company not because any
demand was made against him, but possibly, in order to
protect himself from the eventuality of any demand being
made against him as the del credere agent of the seller........
In the instant case, money in question arose from trading
operations. The surplus had arisen out of trading
transactions and taken to profit and loss account. It had a
definite quality of trading receipt...."
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It can be noticed that the dispute in the case of Karamchand thapar &
others (supra) was about the nature of receipt, i.e., whether it was capital
receipt or trading receipt.
16. In the case of T.V. Sundaram Iyengar & sons (supra) also, the
question before the Honble Supreme Court was about the nature of
receipts only. The said assessee collected certain deposits from its
customers in the course of carrying on his business, which were originally
treated as capital receipts. Since they were not claimed by some of the
customers, it transferred the same to its profit and loss account. The
following principle was discussed by Honble Supreme Court in this case:-
"If an amount is received in the course of trading
transaction, even though it is not taxable in the year of receipt as
being of revenue character, the amount changes its character when
the amount becomes the assessees own money because of
limitation or by any other statutory or contractual right. When such
a thing happens, common sense demands the amount should be
treated as income of the assessee."
The Honble Supreme Court noticed that the assessee had taken deposits
in the normal course of trade. The said amounts were not retained till the
fulfillment of contract, but they were depleted by adjustments made from
to time. Under these set of facts, the Honble Supreme Court held that the
unclaimed surplus retained by the assessee would be its trade receipts.
The Honble Apex Court further held that:-
".....the assessee itself treated the amount as its trade
receipt. If a commonsense view of the matter was taken, the
assessee, because of the trading operation, had become richer by
the amount which it transferred to its profit and loss account. The
money had arisen out of ordinary trading transactions. Although the
amount received originally was not of income nature, the amounts
remained with the assessee for a long period unclaimed by the trade
parties. By lapse of time, the claim of the deposit became time
barred and the amount attained a totally different quality. It
became definite trade surplus."
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In the above said case also, the dispute was about the nature of receipt.
The question of applicability of provisions of sec. 41(1) was not before
Honble Supreme Court in the above said two cases.
17. A careful perusal of both the decisions would show that the dispute
was about the nature of receipt and the impugned amounts received by
the assessees were treated as revenue receipts, since they have been
received during the course of trading operations. In the instant case,
there should not any dispute that the assessee received funds through
issuing debentures/bonds and they cannot be considered to have been
received during the course of trading operations. In any case, the dispute
in the instant case was about the applicability of provisions of sec. 41(1) of
the Act. Hence both the decisions relied upon by the AO are not
applicable to the facts of present case and accordingly, in our view, the AO
could not have placed reliance on these decisions.
18. On the contrary, the assessee has placed reliance on the decision
rendered by Honble jurisdictional Bombay High Court in the case of
Mahindra and Mahindra Ltd Vs. CIT (261 ITR 501). The fact available in
this case was that the assessee purchased tools (dies) from a company
named KJC. Subsequently, the KJC gave loan to the assessee to purchase
the tools (dies) and the said loan agreement was approved by RBI. Later,
the company KJC was taken over by another company named AMC and
the principal amount of loan was waived by AMC as a part of takeover
arrangement with KJC to which the assessee was not a party. The waiver
of the principal amount was unexpected. In the circumstances, it was held
that such waiver would not constitute business income. The Honble
Bombay High Court further held that the provisions of sec. 41(1) were not
applicable with the following reasoning:-
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"So far as applicability of section 41(1) is concerned, one of the
requirements is that the assessee should have obtained a deduction
in the assessment for any year in respect of loss, expenditure or
trading liability incurred by the assessee. In the instant case, the
assessee had not obtained such allowance or deduction in respect of
expenditure or trading liability in the earlier years. It was not
disputed that the assessee had paid interest at 6 per cent over a
period of 10 years to KJC. In respect of that interest, the assessee
never got deduction under section 36(1)(iii) or section 37. Further,
toolings constituted capital asset and not stock in trade. Therefore,
section 41(1) was not applicable. Secondly, assuming for the sake
of argument that the assessee had got deduction on allowance,
even then section 41(1) was not applicable because such deduction
was not in respect of loss, expenditure or trading liability."
The Ld CIT(A), after considering the decision of Mahindra & Mahindra
(supra) held as under:-
"In this case, as mentioned above, the facts are that, the assessee
Mahindra and Mahindra Ltd had got loan waiver from American
Motor Corporation. The assessee had shown the waiver of amount
of Rs.57,75,064/- as cessation of liability. The assessee prior to the
waiver of loan was paying 6% interest annually to the lender.
However, the assessee company did not claim this interest
expenditure during the currency of loan u/s 36(1)(iii). The Honble
High Court, further held that, even assuming this interest was
claimed as deduction, the provisions of section 41(1) were not
applicable to the assessee, as such, the deduction was not in
respect of loss, expenditure or trading liability, thus, the Honble
High Court held that the waiver of loan does not amount to
cessation of trading liability within the meaning of section 41(1) of
I.T Act, 1961.
As pointed out by the assessees AR, the facts of the assessee i.e.,
Reliance Industries Ltd are identical to the facts of the case of
Mahindra and Mahindra (supra). I have also carefully examained
the facts of the assessee and Mahindra and Mahindras case and
found that the ARs submission is correct."
The Ld CIT(A) has observed that the facts of the present case and M/s
Mahindra and Mahindra are identical. In our view, the facts are not
identical, but the ratio of the said decision shall squarely apply to the
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assessee herein, since in the instant case also the amounts raised through
debentures cannot be treated as trading liability for the assessee.
19. The assessee has also placed reliance on the decision rendered by
Honble Karnataka High Court in the case of CIT Vs. Industrial Credit and
Development Syndicate Ltd (in short ,,ICDS). The Honble Karnataka High
Court explained the nature of debentures as under:-
"A debenture is a certificate of loan or bond evidencing the fact that
the company is liable to pay a specific amount with interest and
although the money raised by the debentures becomes a part of the
companys capital structure, it does not become a share capital. A
debenture imports an obligation or a convenant to pay. Discharging
the liability to the debenture holder who has sold his debentures in
effect amounts to repayment of the loan."
The assessee, ICDS, issued debentures in the year 1973 at a face value of
Rs.10/- each at par. The debentures were redeemable during the
accounting years corresponding to the assessment years 1984-85, 1985-86
and 1986-87 at the rate of 30%, 30% and 40% respectively. During the
period of redemption, the assessee company purchased some of these
debentures through a nominee at a price less than the face value thereof
and credited the difference between the face value and the cost thereof in
its books as surplus arising on redemption of debentures. Although it
credited these sums in all the three years to the profit and loss account, it
claimed deduction of the sums on the ground that they did not form part
of its income. The Honble Karnataka High Court held as under:-
"...In the instant case, admittedly the assessee had issued
debentures which are redeemable after a period of ten years at the
face value thereof. Though the debenture holders sold the
debentures before the stipulated period at a discounted price to the
nominee of the assessee, the consideration paid to those debenture
holders was paid by the assessee as reflected in the books of
account by a loan advanced to the nominee. Thereafter, on the due
dates the assessee has redeemed those debentures for the purpose
of accounting, the entire liability was shown as a liability at the price
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paid by the nominee of the assessee. In the balance sheet, the
entire amount due under the debentures was shown as liability.
After redemption, the difference in the amount was transferred to
the profit and loss account and it was shown as surplus. It is
obviously on the ground that after redemption so much liability is
saved by the assessee and actually the same has to be shown as
surplus though there is no real income or profit derived.
Notwithstanding the nomenclature adopted in the balance sheet to
depict that amount and the place where it is shown in reality the
assessee did not receive the said amount as income. The assessee
was only able to discharge its liability at a lesser amount as against
the face value of the debentures. It is well recognized that in
revenue cases regard must be had to the substance of the
transaction rather than to its mere form. It is wholly unreal and
artificial to separate the business from its owner and treat them as if
they were separate entities trading with each other and then by
means of a fictional sale introduce a fictional profit which in truth
and in fact did not exist. Cut away the fictions and you reach the
position that the man is supposed to be selling to himself and
thereby making a profit out of himself which on the face of it is not
only absurd but against all canons of mercantile and income tax law.
Merely because the aforesaid amount was shown as a surplus
amount in the profit and loss account, when the assessee did not
actually receive any income, we are unable to accede to the
submission of Sri Seshachala that it constitutes income under
section 2(24) of the Act. Having regard to the reality of the
situation, as the assessee has not derived any income, he is entitled
not to treat it as an income. Therefore, the Tribunal was fully
justified in its conclusion that the said surplus amount reflected in
the balance sheet (sic. profit and loss account) cannot be treated as
income of the assessee. We do not find any error in the said
conclusion reached by the Tribunal."
In our view, the facts prevailing in the above said case are almost identical
and the ratio of the decision rendered by Honble Karnataka High Court is
fully applicable to the instant case.
20. In view of the foregoing discussions, we are of the view that the Ld
CIT(A) was right in law in holding that the provisions of section 41(1)
cannot be applied as the amount of surplus is not on account of trading
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liability and accordingly he was justified in deleting the addition made by
the assessing officer. Further, as per the ratio laid down in the case of
ICDS (supra) by Honble Karnataka High Court, the gain realized by t he
assessee on re-purchase and extinguishment of debentures cannot be
considered as income u/s 2(24) of the Act.
21. The next issue relates to the disallowance of commission/surcharges
paid to SUMO, Iraq Government Agency and the transportation charges
paid. The assessing officer disallowed the above said claim made by the
assessee, but the Ld CIT(A) allowed the claim by following his
predecessors decision rendered in the assessees own case for AY 2001 -
02. The revenue is contesting the said decision of Ld CIT(A).
22. It was brought to our notice that the disallowance of identical claim
made in AY 2001-02 was considered by the co-ordinate bench of Tribunal
in the assessees own case in ITA No.1347/Mu/2011 and the Tribunal, vide
its order dated 24.4.2015, has upheld the relief granted by Ld CIT(A). The
relevant discussions made by the co-ordinate bench of Tribunal and the
decision taken by it are extracted below, for the sake of convenience:-
"23. The facts relating to the above said issue are set out in brief.
Consequent to the invasion of Iraq into Kuwait, UN Security Council
imposed economic sanctions on Iraq Government. However, on
humanitarian grounds, a scheme called "Oil for Food Programme"
(OFFP) was introduced, whereby the Iraq was permitted to export
oil and use the proceeds thereof to buy basic goods from other
countries. The Iraq Government ordered its Ministry to collect
"Surcharge" on the sale price of the Oil. The Iraqi State Oil
Marketing Organisation (SOMO) ran a highly organized system to
collect oil surcharges and maintained an extensive data base to keep
track of the payments. This collection appears to have been viewed
by UN as irregular. Hence the UN Security General appointed an
independent Enquiry Committee (called Volcker Committee) to
investigate the administration and management of "Oil for Food"
programme. The Volckar Committee Report observed that the Iraqi
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official awarded the contract to various companies to favour them
by making illicit payment of surcharge. According to the AO, the
name of the assessee herein, viz., M/s Reliance Petroleum Ltd
figured as one of the beneficiaries in Volcker committee Report. It
was stated that 19 million barrels of oil was allotted, of which 15.7
million barrels were lifted by Alcon Petroleum Ltd, a Liechtenstein
based energy trading company. Accordingly, the AO took the view
that the assessee would have paid commission/surcharge during the
year under consideration and estimated the same at
Rs.8,89,36,380/-. Accordingly he added the same to the total
income of the assessee.
24. The Ld CIT(A), however, deleted the same with the following
observations:-
"3.6. I have considered the facts of the case, order of the AO
and the submissions made by the appellant and I do not find
enough reasons or justification for the addition made by the
AO. Whereas the mention as a non-contractual beneficiary in
the Volcker Committee Report is the only reason for the
addition, following important aspects related to the issue in
question supports appellant's case:-
(i). The observation in Volcker Committee Report is the only
material or evidence for making the addition in the
assessment order to the effect that assessee is a non-
contractual beneficiary and paid part of the purchase
consideration as surcharge to Iraqi Government in violation of
UN Resolution. There is no other material/evidence/ reason
mentioned by the AO for addition. Such general observation
by an outside agency, how much respectable it may be,
cannot in itself be sole reason for disallowance/addition to the
income under Indian law.
(ii). The Volcker Committee Report also does not refer to
any specific evidence against the appellant and states that
the commission/ surcharge has been paid by Alcon to the
credit of Iraqi government and referred the Appellant as non-
contractual beneficiary as it had received the supply of goods
from Alcon. There is no evidence on' record which is referred
in Volcker Committee Report to suggest that the appellant has
paid the purchase price inclusive of a part of it as onwards
payment of illicit commission/surcharge to Iraqi government.
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5 7 9 8 / M/ 2 0 1 3
The AO has also not brought on record any evidence or
material in support of the alleged payment of illicit commission
forming part of the purchase price. Even the Volcker
Committee has not referred the appellant as payer of illicit
commission.
(iii). Assessee purchased .lraqi crude oil from Alcon
Petroleum Ltd. (Alcon), Leichtenstein company based in
Europe, a UN approved company for dealing in crude in "oil
and food-programme". The contract was signed with Alcon
(and not with Iraqi Government) for supply of crude at an
agreed price per barrel at the prevailing international market
rate. There was no purchase from Iraqi Government or any
Iraq Government agency and the contract signed between
Alcon and assessee categorically states that Alcon has not
paid any surcharge to Government or their agency for
procuring the crude.
(iv) The price paid by assessee to Alcon is the consolidated
price for the goods purchased and cannot be split for part of it
as representing surcharged alleged to have been paid by
Alcon to Iraqi Government. For assessee, it is the ,,cost of
goods for computing taxable income.
(v) There is no privacy of contract between assessee and
Iraqi Government or any evidence direct or indirect confirming
payment of surcharge by assessee to Iraqi Government. Even
if it is accepted that Alcon paid any surcharge Government, it
cannot in any view of the matter be said that a part of
payment made by assessee to Alcon constitutes surcharge
paid by assessee to Government
3.7. In view of the above, I hold that the addition made by
the AO is not in accordance with the provisions of law and
it is cancelled. The ground of appeal is allowed."
25. The Ld A.R submitted that identical disallowances made in the
following cases have been deleted by the Tribunal:-
(a) Air Pac Exports Vs. ACIT (ITA No.2981-2983/M/12
dated 11.6.14)
(b) TIL Ltd Vs. ACIT (16 SOT 33)(Kol)
(c) DCIT Vs. Rajrani Exports (P) Ltd (22 taxmann.com)(Kol).
18 I T A N o . 5 7 6 9 / M/ 2 0 1 3 a n d
5 7 9 8 / M/ 2 0 1 3
26. The facts prevailing in the instant case show that the
assessee has not made any payment directly to Iraqi Government.
It has paid purchase price to its supplier M/s Alcon Petroleum Ltd.
The Ld CIT(A) has given a categorical finding that there is no
evidence or material to support the alleged payment of illicit
commission/surcharge over and above the purchase price by the
assessee to the Iraq Government. Further, as per the contract
signed between the assessee and M/s Alcon Petroleum Ltd, M/s
Alcon has also not paid any surcharge to Iraqi Government or their
agency for procuring the crude oil. Hence, we are of the view that
the Ld CIT(A) was justified in deleting this addition by holding that
there is no material to support this addition."
Consistent with the view taken by the co-ordinate bench of Tribunal in the
assessees own case for AY 2001-02, we uphold the order of Ld CIT(A) in
deleting the disallowance of commission/surcharges paid to SUMO and
also the transportation charges made by the AO on the basis of Volkar
committee report.
23. In the result, the appeal filed by the assessee is partly allowed and
the appeal of the revenue is dismissed.
[[
Order pronounced on this 16th day of Sept, 2015.
Sd sd
(AMARJIT SINGH) ( B.R. BASKARAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai: 16th Sep, 2015.
.../ SRL , Sr. PS
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5 7 9 8 / M/ 2 0 1 3
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
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