Kirloskar Brothers Limited, Pune V. DCIT, Range 11(1), Pune

ITA 2612/PUN/2012

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0038 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 29-06-2018
• Assessment Year: 2003-2004
• Appeal Filed On: 31-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUKESH JHA
• Keywords: Business expenditure; Deemed to accrue or arise in india; Commercial expediency; Reassessment proceedings
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E . , , , BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AW ASTHY, JM . / ITA NOS. 2611 & 2612/PUN/2012 / ASSESSMENT YEARS : 2002-03 & 2003-04 KIRLOSKAR BROTHERS LIMITED, YAMUNA, SURVEY NO.98/3 TO 7, BANER, PUNE 411 045 PAN : AAACK7300E ....... / APPELLANT / V/S. DCIT, CIRCLE-11(1), PUNE / RESPONDENT ASSESSEE BY : SHRI SHARAD SHAH REVENUE BY : SHRI MUKESH JHA / DATE OF HEARING : 30.07.2018 / DATE OF PRONOUNCEMENT : 19.09.2018 / ORDER PER D. KARUNAKARA RAO, AM: THERE ARE 2 APPEALS UNDER CONSIDERATION AND BOTH ARE FILE D BY THE ASSESSEE INVOLVING A.YRS. 2002-03 AND 2003-04 AGAINST THE TWO DIFFERENT ORDERS OF THE CIT(A) COMMONLY DATED 19-10-2012. IN BOT H THESE APPEALS, THE FACTS RELATING TO CLAIM OF EXPENSES, DISALLOWANCES, ARGUME NTS, PENALTY PROVISIONS, EXPLANATIONS, THE ISSUES FOR ADJUDICATION RAISED IN THE GROUNDS ARE IDENTICAL. THE CORE ISSUE RELATES TO THE C ORRECTNESS OF LEVY OF PENALTY U/S.271(1)(C) OF THE ACT QUA THE ADDITION ON ACCOUNT OF EXPENDITURE FOR PAYMENT OF TRANSPORTATION CHARGES, AFTERS ALES FEE ETC. ASSESSEE PAID TO THE ENTITIES IN DUBAI AND JORDAN IN CONN ECTION WITH THE EXPORT SALES OF THE ASSESSEE. RELYING ON THE VOLCKER COM MITTEE REPORT 2 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED THE AO DISALLOWED THE CLAIM U/S.37(1) OF THE ACT. CIT(A)/ITAT CONFIRMED THE SAME ON MERITS ON THE GROUND OF DISCHARGE OF ONUS. THEREFORE, AO LEVIED THE PENALTY U/S.271(1)(C) OF THE ACT AND THE CIT(A) CON FIRMED THE SAME. THEREFORE, THE ASSESSEE IS IN APPEAL BEFORE THE TRIB UNAL FOR BOTH THE YEARS. FOR THE A.Y. 2003-04, THE VALIDITY OF THE REASSESSMENT PR OCEEDINGS IS THE ADDITIONAL LEGAL ISSUE RAISED IN PARTICULAR FOR ADJUDICAT ION VIDE THE APPEAL ITA NO.2612/PUN/2012. 2. ASSESSEE RAISED VARIOUS GROUNDS ORIGINALLY. HOWEVER, DU RING THE PROCEEDINGS BEFORE US, ASSESSEE FILED CONCISE GROUNDS AND THE SAID GROUNDS FOR A.Y. 2002-03 ARE AS UNDER : GROUND OF APPEAL NO.1: THE LD. AO ERRED IN CIT(A) ERRED IN CONFIRMING THE LEVY OF PENALTY AMOUNTING TO RS.32,00,000/-. GROUND OF APPEAL NO.2 : THE LD. AO & CIT(A) ERRED IN NOT CONSIDERING THE EX PLANATIONS AND SUBMISSION FILED BY THE ASSESSEE AND ALSO ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE HAD NO MALAFIDE INTENTIONS A ND HAS DISCLOSED ALL RELEVANT FACTS. 3. BRIEFLY STATED RELEVANT FACTS ON MERITS INCLUDE THAT THE ASSESSE E IS A MANUFACTURER OF PNEUMATIC TOOLS. IN THE RE-ASSESSMENT P ROCEEDINGS FOR BOTH THE YEARS, AO MADE ADDITIONS OF RS.89,40,596/- AND RS.1,57,09,142/- FOR THE A.Y. 2002-03 AND A.Y. 2003-04 RESPE CTIVELY. THESE AMOUNTS ARE PAID BY THE ASSESSEE TO M/S. AZHAR TRADING COMPANY, DUBAI AND M/S.ALIA FOR TRANSPORTATION AND GENER AL TRADING 3 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED COMPANY, JORDAN FOR RECEIPT OF SERVICES IN THE A.YRS. 2002- 03 AND 2003- 04 RESPECTIVELY. THESE PAYMENTS ARE MADE TO THEM TOW ARDS AVAILING THE LOGISTIC SERVICES LIKE TRANSPORTATION CHARGES, AFTERSALES FEE, SERVICE CHARGES ETC. FURTHER, ASSESSEES NAME APPEARED IN THE LIST OF THE PER SONS ENLISTED IN THE VOLCKER COMMITTEE REPORT (IN SHORT VCR). OTHER NAMES APPEARED IN THE LIST OF VCR INCLUDES THE NAMES OF M/S. AIR P AC EXPORTS, TIL LIMITED, MOHAN EXPORTS, AJANTA PHARMA LTD., MAN IND USTRIES, M/S. EXIM TRADE LINKS INDIA PVT. LTD., M/S.GODREJ & BOYCE CO. LT D., BAJAJ INTERNATIONAL PVT. LTD., RELIANCE INDUSTRIES LTD., COSMOS I NTERNATIONAL AND MATHER AND PLATT PUMPS LTD. ETC. 4. RE-ASSESSMENT PROCEEDINGS : DURING THE RE-ASSESSMENT PROCEEDINGS IN BOTH THE ASSESSMENT YEARS UNDER CONSIDE RATION, IN RESPONSE TO THE AOS QUERIES ON THE GENUINENESS OF THE SE PAYMENTS AND THE APPLICABILITY OF PROVISIONS OF SECTION 37(1) OF THE ACT, ASS ESSEE RESPONDED BY EXPLAINING THAT THE PAYMENTS TO AZHAR TR ADING COMPANY, DUBAI WAS PAID TOWARDS INLAND TRANSPORTATION FEE AND PAR TLY PAID TO KISLOSKAR MIDDLE EAST. WHEN IT COMES TO THE PAYMENT TO M /S. ALIA AND GENERAL TRADING COMPANY, JORDAN, THE SAID PAYMENTS WERE MADE FOR TRANSPORTATION FEES. THESE SERVICES ARE AVAILED BY THE A SSESSEE IN CONNECTION WITH THE EXPORT OF THE GOODS BY THE ASSESSE E AND THE SAID PAYMENTS WERE MADE TO THE ABOVE SAID PERSONS IN CONNE CTION WITH THE EXPORT SALES TO IRAQ. THE TOTAL EXPORT SALES FOR THE A.Y . 2002-03 AND 2003-04 TO IRAQ ARE RS.8,35,21,002/- AND RS.16,78,78,707/- RESPECTIVELY. IN SUPPORT, THE ASSESSEE FILED THE BILLS AND INVOICES. THE 4 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED BANK DETAILS IN SUPPORT OF THE GENUINENESS OF THE PAYMENT S TO THE SAID PARTIES ARE ALSO FURNISHED. IT IS THE CASE OF THE ASSESSE E BEFORE THE AO THAT THE SAID PAYMENTS WERE FOR COMMERCIAL EXPEDIENCY AN D THEREFORE, THE PAYMENTS ARE GENUINE. THE PAYMENTS WERE MADE THR OUGH BANKING CHANNELS. HOWEVER, THE AO REJECTED THE SAME STATING TH AT THE ASSESSEE FAILED TO DISCHARGE THE ONUS IN MATTERS OF GENUINENESS OF THE SERVICES RENDERED BY THEM TO THE ASSESSEE. AO INVOKED THE RE STRICTIVE PROVISIONS OF THE EXPLANATION TO SECTION 37(1) OF THE ACT AND PROPOSE D FOR DISALLOWANCE IN BOTH THE ASSESSMENT YEARS. FURTHER, REFE RENCE IS MADE BY THE AO TO THE CONTENTS OF THE VCR REGARDING THE K ICKBACKS PAID BY THE ASSESSEE TO IRAQ GOVERNMENT. HOWEVER, IT IS SUBMITT ED BY THE ASSESSEE THAT PAYMENTS MADE BY THE ASSESSEE ARE ONL Y TO THE SAID PERSONS AND NOT TO THE IRAQ GOVERNMENT AUTHORITIES/OFFIC IALS. EVENTUALLY, THE AO REJECTED THE EXPLANATION OF THE ASSES SEE AND PROCEEDED TO MAKE ADDITION OF THE SAME IN BOTH THE YEA RS. THE PENALTIES U/S.271(1)(C) OF THE I.T. ACT WERE LEVIED IN CONNECTION WITH TH E SAID ADDITIONS AND THE PENALTY IN BOTH THE YEARS ARE RS.32,00,0 00/- AND RS.60,00,000/- RESPECTIVELY. 5. BEFORE THE CIT(A) & ITAT : IN THE FIRST AND SECOND APPELLATE PROCEEDINGS IN QUANTUM APPEALS, THE ADDITIONS IN BOTH THE YEARS WERE CONFIRMED. WHILE THE CIT(A) RELIES ON THE APPLICABILITY OF THE PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE ACT, THE TRIBUNAL INVOK ED THE SAID PROVISIONS AND HELD THAT THE ASSESSEE FAILED TO DISCHARGE THE ONUS IN MATTERS OF ESTABLISHING THE PAYMENTS ARE MADE FOR THE B USINESS PURPOSES AND NOT AS KICKBACKS TO IRAQ GOVERNMENT. FURTHER, THE TRIBUNAL ALSO 5 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED REFERRED TO THE UN RESOLUTION-986 ON ONE SIDE AND TO TH E VOLCKER COMMITTEE ON THE OTHER. THE TRIBUNAL ALSO REFERRED TO A LETTER FROM KIRLOSKAR MIDDLE EAST (KMC) DATED 02-01-2002 WHICH CONTAINS CERTAIN AMBIGUITIES WHILE CONFIRMING THE ADDITION ON ITS MERITS. THUS, T HE QUANTUM ADDITIONS HAVE ATTAINED FINALITY AGAINST THE ASSESS EE AT THE LEVEL OF ITAT. 6. REGARDING THE PENALTY PROCEEDINGS FINALIZED BY THE AO FOR BOTH THE YEARS, THE FACTS INCLUDE THAT AO LEVIED THE PENALTY OF RS. 32,00,000/-_FOR A.Y. 2002-03 AND RS.60,00,000/- FOR THE A.Y. 2003-04. IN BO TH THE ASSESSMENT ORDERS, THE CASE OF THE AO IS THAT THE SUM OF RS.89,40,596/- AND RS.1,57,09,142/- WERE PAID TO AZHAR TRADING COMPANY, D UBAI AND M/S. ALIA AND ALSO THE ASSESSEES NAME IS FOUND IN THE LIST OF RECORDS OF VCR. THESE PAYMENTS CONSTITUTE THE KICKBACKS PAID TO T HE IRAQ AUTHORITIES IN CONNECTION WITH THE SUPPLY OF PORTABLE CENT RIFUGAL PUMPS TO MINISTRY OF IRRIGATION, GOVERNMENT OF IRAQ, UNDER THE O IL FOR FOOD PROGRAMME. IN PARA NO. 5 OF THE PENALTY ORDER, THE AO REFERRED TO THE ALLEGATIONS OF RECEIPT OF KICKBACKS BY THE IRAQ GOVERNMEN T FROM THE SUPPLIERS. ON THESE ALLEGATIONS, UNITED NATIONS APPOINTED A C OMMISSION UNDER THE CHAIRMANSHIP OF MR. PAUL VOLCKER WHICH SUBMITTED A REPORT. THE COMMITTEE FINDS THAT THE IRAQ GOVERNMENT CHARGED FE E, I.E. INLAND TRANSPORTATION FEES AND ALSO IN THE NAME OF THE AFTERSALES FEES AT THE RATE OF 10% OF SALES. APART FROM MANY OTHERS ASSESSEES NAME ALSO APPEARED IN THE LIST OF SAID SUPPLIERS. ON THESE FACTS, AO HOLDS THAT SAID PAYMENTS OF ALLEGED KICKBACKS ATTRACT THE PROVISIONS OF THE EXPLANAT ION 1 TO SECTION 37(1) OF THE ACT. IN THIS REGARD, THE ASSESSEE FURNISHED W RITTEN 6 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED SUBMISSIONS WHICH WERE EXTRACTED BY THE AO IN PARA 2 OF THE PENALTY ORDER. ON CONSIDERING THE EXPLANATION, AO REJECTED THE EXPLANATION OF THE ASSESSEE AND HELD THE PENALTY IS LEVIABLE FOR THE ALLEG ATION OF FURNISHING OF INACCURATE PARTICULARS OF INCOME WITHOUT HAVING REASONABLE EXPLANATION. IN THE ORDER, AO RELIES ON THE SUPREME COUR T JUDGMENTS IN THE CASE OF UNION OF INDIA VS. DHARMENDRA TEXTILE PROCESSO RS (306 ITR 277) AND IN THE CASE OF CIT VS. RELIANCE PETRO PRODUCTS L TD. (322 ITR 158) FOR LEVYING THE PENALTY OF RS.32 LAKHS FOR THE A.Y. 2002- 03 AND ANOTHER SUM OF RS.60 LAKHS FOR THE A.Y. 2003-04 WITH IDENTICAL REASONS . 7. THE ONLY DIFFERENCE FOR THE A.Y. 2003-04 IS ON THE FIGUR ES THAT THE ASSESSEE MADE SALES OF RS.16.79 CRORES (ROUNDED OFF) TO T HE IRAQ GOVERNMENT AND THE PAYMENT IS MADE TO M/S.ALIA FOR TRAN SPORTATION FEES AND TOWARDS AFTERSALES FEES TO THE TUNE OF RS.1,57,09,142/- . THUS, FIGURING THE ASSESSEES NAME IN THE VCR ON ONE SIDE, THE PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE ACT ARE THE DOMINANT REASONS FOR LEVY OF SAID PENALTIES IN BOTH THE ASSESSMENT YEARS. CIT(A ) CONFIRMED THE SAID PENALTY STATING THAT THE UN SECURITY COUNCILS RESOLU TION-986 IS LEGALLY BINDING ON UNITED NATIONS ORGANIZATION. 8. AGGRIEVED WITH THE ABOVE ORDERS/FINDINGS OF THE CIT(A), T HE ASSESSEE FILED THE PRESENT APPEALS BEFORE US WITH THE GRO UNDS SUMMARIZED ABOVE. 7 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED PROCEEDINGS BEFORE THE TRIBUNAL DECISION 9. DURING THE PROCEEDINGS BEFORE US, LD. COUNSEL FOR THE A SSESSEE EXPLAINED THE ABOVE FACTS OF THE CASE AND REFERRED TO VA RIOUS DOCUMENTS FROM THE PAPER BOOKS. ASSESSEE FILED THE PAPER BOOK BEFOR E US IN SUPPORT OF THE ARGUMENTS THAT THE PENALTY SHOULD BE DELETED ON THE GROUND OF (A) COMMERCIAL EXPEDIENCY; (B) NON-BINDING NATURE OF THE UNO RE SOLUTION IN THE ABSENCE OF ANY DOMESTIC LAW IN SUPPORT OF RESTRICTING THE RIGHTS OF CITIZENS OF INDIA IN DOING BUSINESS WITH IRAQ INSTITUTIONS; (C) D EBATABILITY OF THE ISSUES ON MERITS AS WELL AS LAW; (D) DEEMED PROVISIONS NO PENALTY ETC. 10. WE SHALL DEAL WITH EACH OF THEM SEPARATELY IN THE SUC CEEDING PARAGRAPHS OF THIS ORDER. THE ARGUMENTS OF THE COUNSELS ON EACH OF THESE ISSUES AND THE DECISION OF THE TRIBUNAL IN THIS REGAR D ARE DISCUSSED AND GIVEN ON EACH OF THE MAJOR ARGUMENTS OF THE COUNSE LS IN THE FOLLOWING PARAGRAPHS. A. COMMERCIAL EXPEDIENCY 11. LD. COUNSEL FOR THE ASSESSEE EXPLAINED THE FACTS ON THE M ERITS OF ADDITION OF DISALLOWANCE OF EXPENDITURE AND SUBMITTED BRIEFLY THAT THE ASSESSEE EXPORTED PORTABLE CENTRIFUGAL PUMPS (PCPS) TO IRAQ IN THE ASSESSMENT YEARS UNDER CONSIDERATION. PCPS ARE USEFUL FO R TRANSFER OF FLUIDS/WATER/LIQUIDS BY USE OF CENTRIFUGAL FORCE. ACCORDINGLY , THE TURNOVER IN THIS REGARD IN BOTH THE YEARS ARE RS.8,35,21,0 02/- AND RS.16,78,78,707/- RESPECTIVELY. EXPORTING THEM IS THE BUS INESS ACTIVITY OF THE ASSESSEE. IN THIS REGARD, ASSESSEE MADE THE PAY MENTS TO AZHAR 8 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED TRADING COMPANY, DUBAI AND KIRLOSKAR MIDDLE EAST FZE (IN SHO RT KME) TO THE TUNE OF RS.87,61,920/- AND ALSO RS.1,78,676/- TOWARD S INLAND TRANSPORTATION FEES, AFTERSALES SERVICE FEE ETC., FURTHER, A SSESSEE PAID RS.1,57,09,142/- TO ALIA AND GENERAL TRADING COMPANY, JORDAN TOWARDS TRANSPORTATION FEES/AFTERSALES SERVICE. SUCH PAYMENTS A RE NOT NEW IN THIS LINE OF BUSINESS. ASSESSEE PAID RS.1,78,676/- TO (1) AZHAR TRADING COMPANY, DUBAI FOR INLAND TRANSPORTATION FEE, AFTERSALES SERVICE FEE ETC., (2) RS.87,61,920/- TO KIRLOSKAR MIDDLE EAST FZE, (3) RS.1,57,09,142/ - TO M/S. ALIA AND M/S. GENERAL TRADING COMPANY, JORDAN FOR TRANS PORTATION FEES AND AFTERSALES SERVICE FEE. A. FURTHER, IT IS THE CASE OF LD. COUNSEL FOR THE ASSESSEE THAT THESE AMOUNTS WERE PAID IN CONNECTION WITH THE EXPORT SALES FOR FACILITATING TRANSPORT OF GOODS TO THE END POINT AND FOR RENDERING O THER SERVICES SUCH AS AFTERSALES AS PER THE AGREEMENT. MAKING OF SUCH PAYM ENTS FOR SAID SERVICES/FEE IS ESSENTIAL AND THEREFORE, INCURRING OF THE SAM E CONSTITUTES ALLOWABLE BUSINESS EXPENSES. ALL THESE PAYMENTS ARE NO T ONLY BORNE OUT OF THE ACCOUNTED BOOKS OF THE ASSESSEE BUT ALSO M ADE INVOLVING BANKING CHANNELS. HENCE, THESE CLAIMS ARE ALLOWABLE IN VIEW OF THE SET PRINCIPLES OF COMMERCIAL EXPEDIENCY. ASSESSEE RELIES ON VARIO US DECISIONS IN THIS REGARD. CIT VS. WALCHAND AND COMPANY PV T. LTD. 65 ITR 0381, DR. G. G. JOSHI V. CIT 209 ITR 0324 (GUJARAT) ARE RELEVANT FOR THE PROPOSITION THAT THE ALLOWANCE OF PAYMENT BY WAY OF C OMMISSION OR KICKBACKS IS ALLOWABLE ALTHOUGH THE SAME IS AGAINST THE GOO D MORALITY AND PUBLIC POLICY. HOWEVER, THESE DECISIONS WERE DELIVERED PRIOR TO THE 9 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED RELEVANT AMENDMENT TO SECTION 37(1) OF THE ACT W.E.F. 01-0 4-2015 INTRODUCED BY THE FINANCE NO.2 ACT, 1998 WITH RETROSPECT IVE EFFECT. BY THE SAID LEGISLATION, THE NEW EXPLANATION IS INSERTED TO SEC TION 37(1) OF THE ACT MAKING CERTAIN EXPENDITURE NOT DEEMED TO BE INCURRED FOR PURPOSES OF THE BUSINESS AND HENCE DISALLOWABLE U/S.37 O F THE ACT. AO IS OF THE VIEW THAT THESE PAYMENTS BY THE ASSESSEE IS MEANT FOR KICKB ACKS TO IRAQI AUTHORITIES FOR ALLOWING THE EXPORTS TO IRAQ UNDE R OIL AND FOOD PROGRAMME. VCR IS RELIED HEAVILY BY THE ITAT/CIT(A) & THE AO. B. ACCORDING TO SAID EXPLANATION 1 TO SECTION 37(1) OF THE ACT, ANY EXPENDITURE INCURRED FOR ANY PURPOSE WHICH IS (1) AN OFFENCE OR (2) PROHIBITED BY LAW, IS DEEMED DISALLOWABLE ONES DESPITE THEIR B USINESS CONNECTION. THIS PROVISION IS FOR NOT DEEMING THE BUSINES S EXPENSES AS NOT ALLOWABLE ONES. IN THIS REGARD, LD. AR FOR THE ASSESSE E LABOURED A LOT TO DEMONSTRATE THAT THE PAYMENT FOR TRANSPORTATION CH ARGES, AFTERSALES SERVICE ETC. DO NOT CONSTITUTE THE ONE INCURRED FOR THE PURPOSE OF COMMITTING ANY OFFENCE OR ANY PURPOSE PROHIBITED BY ANY D OMESTIC LAW. FURTHER, LD. AR ARGUED THAT THE PAYMENTS WERE MADE TO M/S. ALIA, M/S. AZHAR TRADING COMPANY, DUBAI, AND GENERAL TRADING COMPANY , JORDAN, ETC. FOR DEFINED SERVICES. IT IS NOT FOR THE ASSESSEE TO MONITOR THE MONEY OUTFLOW OF THOSE PAYEES. THE PAYEES ARE FREE TO APPROP RIATE THEIR FUNDS IN THE MANNER THEY FIND IT APPROPRIATE. ASSESSEE IS NOT THE FINANCIAL AUDITOR/MENTOR FOR THESE PAYEES. ASSESSEES RESPONSIBILIT Y STOPS WITH THE MAKING OF THE PAYMENTS TO THE PAYEES FOR THE SERV ICES RECEIVED BY THE ASSESSEE. IF THE PAYEES INCURRED ANY EXPENDITURE FOR KIC KBACK TO IRAQI AUTHORITIES, IT IS FOR THEM TO EXPLAIN AND FACE THE PENAL PRO VISIONS AS 10 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED APPLICABLE TO THEM IN THEIR COUNTRY. THUS, THE EXPLANATION 1 OF THE SECTION 37(7) OF THE ACT DOES NOT APPLY TO THE TRANSACT IONS HELD BETWEEN THE PAYEES AND THE IRAQI AUTHORITIES AND THEY APPLY TO ONES BETWEEN THE ASSESSEE AND THE PAYEES ONLY. SO FAR AS THE ASSESSEE S PAYMENT IS CONCERNED, THE SAME ARE INCURRED BY THE ASSESSEE FOR IT S BUSINESS PURPOSES AND NOT FOR THE PURPOSES OF COMMITTING AN OFFEN CE AND ANY PURPOSES PROHIBITED UNDER INDIAN LAWS. AS PER LD. AR, IF THE SAID EXPENDITURE IS NOT INCURRED, THE ASSESSEE COULD NOT HAV E RECORDED THE EXPORT TURNOVER OF RS.8,35,21,002/- AND RS.16,78,78,707/- IN THE ASSESSMENT YEARS UNDER CONSIDERATION. REFERRING TO THE ORDER OF THE TRIBUNAL ON THE DISALLOWANCES, LD. COUNSEL SUBMITTED THAT TH E ADDITION WAS CONFIRMED DUE TO DISCREPANCY IN A LETTER BETWEEN THE ASSESSEE AND THE FOREIGN ENTITY. C. FURTHER, LD. COUNSEL SUBMITTED THAT AMONGST NUMBER O F CASES APPEARED IN THE VCR, THE ASSESSEES CASE IS A SOLITARY EXCEPTION TO THE RULE THAT IN NO CASE THE ADDITIONS ARE SUSTAINED ON MERIT S. THEREFORE, IN MANY THOSE CASES, THERE IS NO ISSUE OF PENALTIES U/S.271(1)(C ) OF THE ACT. IN OTHER CASES, THE PENALTY STANDS DELETED BY THE TRIB UNAL. IN THIS REGARD, LD. COUNSEL FILED A NOTE ON THE LIST OF CASES WHERE SIMILAR ADDITIONS ARE DELETED AND PENALTY WAS ALSO DELETED ON THE GROUND OF OTHER DECISIONS/JUDGMENT. THUS, ACCORDING TO LD. COUNSEL, THE PA YMENTS ARE MADE IN VIEW OF THE COMMERCIAL EXPEDIENCY. ASSESSEE NEVER PAID THE KICKBACKS TO THE IRAQI AUTHORITIES; ALL THE FACTS ARE DISCLOS ED IN THE BOOKS OF THE ASSESSEE ETC. THEREFORE, IT IS NOT A FIT CASE FOR LE VY OF PENALTY U/S.271(1)(C) OF THE ACT. LD. COUNSEL ALSO SUBMITS THAT THE ASSESSMENT 11 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED AND PENALTY PROCEEDINGS ARE TWO DIFFERENT PROCEEDINGS AND THEREFORE, THE CONFIRMING OF THE ADDITIONS BY THE CIT/ITAT SHOULD NOT INFLUEN CE THE CONFIRMING OF THE PENALTY. D. PER CONTRA, LD. DR FOR THE REVENUE RELY HEAVILY ON T HE ORDERS OF THE AO/CIT(A). PARTICULARLY, LD. DR RELY ON THE FINDING OF THE TRIBUNAL O N THE MERITS OF THE ADDITION MADE U/S.37(1) OF THE ACT. IT IS THE CASE OF THE REVENUE AND LD. DR THAT THE ASSESSEE FAILED TO EVIDENCE THE RENDERING OF TRANSPORT/AFTERSALES SERVICE. LD. DR RELIED ON THE FAILURE OF THE ASSESSEE IN DISCHARGING THE ONUS. LD. DR RELY HEAVILY ON THE FINDING OF THE TRIBUNAL ON THIS FAILURE OF THE ASSESSEE. 12. WE HEARD THE PARTIES ON THIS ISSUE OF ALLOWABILITY OF TH E CLAIM OF BUSINESS EXPENDITURE QUA THE COMMERCIAL EXPEDIENCY. FURT HER, WE FIND THIS ISSUE INVOLVES NOT DEEMING SUCH BUSINESS EXPENDITURE AS NOT ALLOWABLE U/S.37(1) OF THE ACT. WE FIND THAT THERE IS NO DISPUT E ON FACTS, I.E. (A) EXPORT OF SALES TO IRAQI; (B) MAKING THE PAYMENTS TO A FORESAID PARTIES IN DUBAI AND JORDAN; (C) ACCOUNTING THESE TRANSACTIO NS IN THE BOOKS OF ACCOUNT OF THE ASSESSEE ETC. THE ISSUE OF REV ENUE IS THAT THE SAID PAYMENTS ARE MADE FOR THE PURPOSE OF PAYING TO IRA QI AUTHORITIES BY WAY OF KICKBACKS. FURTHER, IT IS ALSO A FACT THAT THE PAY MENTS WERE PAID TO PARTIES IN DUBAI AND JORDAN AND NOT PAID AS KICKBACKS TO IRAQI AUTHORITIES. THE PAYMENTS WERE MADE ONLY TO THE AFORES AID PARTIES. IT IS ALSO A FACT THAT THE NAME OF THE ASSESSEE APPEARED IN T HE VCR ALONG WITH MANY OTHER NAMES FROM INDIA. WE ALSO FIND SIMILAR DISALLOWANCE STAND ALLOWED IN FAVOUR OF THE ASSESSEE EXCEPT IN THIS CASE OF TH E ASSESSEE. IN OTHER WORDS, SIMILAR EXPENSES ARE NOT DEEMED AS INCURRED FOR BUSINESS 12 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED PURPOSES IN THOSE CASES. THE ASSESSEES SOLITARY CASE IS A CASE WHERE THE ADDITIONS ARE CONFIRMED AND THEREFORE, CASE IS THAT THE A SSESSEE IS AN EXCEPTION TO THE RULE WHERE THE EXPENSES ARE NOT DEE MED SO. NOT DEEMING SO HAPPENED IN THIS CASE ON TECHNICALITIES RELATING TO FAILURE OF ASSESSEE TO DISCHARGE THE ONUS AND FAILURE TO FILE EVIDENCE S OR FILING SOME IRRELEVANT AND MESSY EVIDENCES, A LETTER BETWEEN THE ASS ESSEE AND KME, ETC., IT IS NOT THE CASE THAT THE AO IS IN POSSESSION O F SOME INCRIMINATING EVIDENCES TO PROVE THAT THE SERVICES ARE NOT RENDERED BY THE SAID DUBAI/JORDAN ENTITIES OR ASSESSEE PAID KICKBACKS TO IRAQI AUTHORITIES. THEREFORE, SIMILAR PAYMENTS ARE FOUND TO BE ALLOWABLE BUSINE SS EXPENSES INCURRED FOR BUSINESS PURPOSES. WHILE THIS BEING THE FINDING O F THE TRIBUNAL IN MANY OTHER CASES AND, ONLY IN THIS CASE, THE TRIBUNAL HELD OTHERWISE ON TECHNICALITIES. THE CONFIRMING OF ADDITION IS MAINL Y DUE TO THE FAILURE OF THE ASSESSEE IN DISCHARGE OF ONUS AND NON D EMONSTRATION OF ONUS IN MATTERS OF RENDERING OF SERVICES BY THE SAID DUBA I/JORDAN ENTITIES. THUS, ON SIMILAR FACTS, THERE ARE DIVERGENT VIEWS O F THE TRIBUNAL OF VARIOUS BENCHES. THUS, THERE EXISTS A DEBATE ON IF THE SAID EXPENDITURE SHOULD BE EITHER NOT DEEMED AS ONES COVE RED BY THE PROVISIONS OF EXPLANATION OF SECTION 37(1) OF THE ACT OR NOT. FURTHER, IT IS A SETTLED LEGAL PROPOSITION THAT THE PENALTY IS NOT LEVIABLE U/S.271(1)(C) OF THE ACT WHEN THE ISSUE SUFFER FROM THE DISPUTE OR DEBAT E. WE HOLD ACCORDINGLY. B. BINDING NATURE OF THE INTERNATIONAL TREATIES / CONVENTIONS / AGREEMENTS UNSUPPORTED ENACTMENTS O F INDIAN PARLIAMENT 13 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED A. WHETHER THE UN RESOLUTION-986 RESTRICTING THE RIGHTS OF C ITIZENS HAS BINDING EFFECT ON THE ASSESSEE? IN THIS REGARD, AO AND THE CIT(A) MENTIONED AND RELIED HEAVILY ON THE UN COUNCILS RESOLUTION -986 AND SUBMITTED THE SAME ARE BINDING ON THE REVENUE. UN ESTA BLISHED OIP PROGRAMME CALLED OIL-FOR-FOOD PROGRAMME IN 1995 ALLOWING THE IRAQ TO SELL THEIR OIL FOR FOOD AND OTHER HUMANITARIAN NEEDS OF ITS C ITIZENS. UNDER THIS PROGRAMME, ASSESSEE ALONG WITH MANY INDIAN EX PORTERS EXPORTED PORTABLE CENTRIFUGAL PUMPS TO IRAQ. HOWEVER, T HERE ARE VARIOUS ALLEGATIONS OF ABUSE OF THE SAID OIP PROGRAMME AND PAYMEN T OF KICKBACKS (COMMISSION) BY VARIOUS ENTITIES TO THE IRAQI AU THORITIES BY WAY OF TRANSPORTATION FEES, AFTERSALES SERVICE CHARGES ETC . UNITED NATIONS INSTITUTED AN ENQUIRY COMMISSION UNDER THE CHAIRMANSHIP OF SHRI VOLCKER. HE SUBMITTED A REPORT CALLED VCR. THE VCR CO NTAINS VARIOUS INDIAN EXPORTERS NAMES AND ASSESSEE IS ONE OF THEM. ALL THESE EXPORTERS ARE SAID TO BE THE PARTIES TO THE SAID ALLEGED KICKBACKS. IN THESE CASES OF EXPORTERS, THE ALLOWABILITY OF THE EXPENSES WAS THE COMMON ISSUE. IN FEW CASES, AOS INVOKED THE AMENDED PROVISIONS OF EXPLANATION T O SECTION 37(1) OF THE ACT AND HELD THAT THE SAID PAYMENTS MADE BY ASSESSEE ARE ROUTED TO THE IRAQ AUTHORITY BY WAY OF KICKBACKS. THIS IS MERELY AN ALLEGATION AND THERE IS NO FINDING OF FACT BY ANY JUDICIAL FORU M. IN THIS CONTEXT, REFERRING TO THE UN RESOLUTIONS, TERMING THESE ALL EGATIONS AS UNSUSTAINABLE ONES, LD. COUNSEL SUBMITTED THAT THE ASSESS EE NEVER MADE ANY PAYMENT FOR THE KICKBACKS. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT NO INTERNATIONAL AGREEMENTS/CONVENTIONS/ TREATIES/UN RESOLUTION-986 ETC. ARE NOT BINDING ON THE CITIZENS OF IND IA UNLESS THE SAID RESOLUTIONS OF UNO/AGREEMENTS/CONVENTIONS/TREATIES OBTAIN THE 14 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED STATUS OF DOMESTIC ACTS DULY PASSED BY THE INDIAN PARLIA MENT WITH DUE PROCESS OF LEGISLATION IN INDIA. IN THIS REGARD AND TO SU PPORT HIS ARGUMENT, LD. COUNSEL FOR THE ASSESSEE RELIES HEAVILY ON T HE SUPREME COURT JUDGMENT IN THE CASE OF MAGANBHAI ISHWARBAI PATE L ETC. VS. UOI AND OTHERS AIR 1969 SC 783 B. RELYING HEAVILY ON THE SAID JUDGMENT OF SUPREME COUR T IN THE CASE OF MAGANBHAI ISHWARBAI PATEL ETC. VS. UNION OF INDIA AND OT HERS (SUPRA), LD. COUNSEL ARGUED THAT THE SAID RESOLUTIONS /AGREEMENTS /CONVENTIONS /TREATIES ARE APPLICABLE TO THE INDIAN CITIZENS SO LONG AS THEY DO NOT HAVE ANY ADVERSE IMPACT ON THE RIGHTS OF THE CITIZENS OF INDIA . HE MENTIONED THAT THERE IS A REQUIREMENT OF CONVERTING SUCH RESOLUTION S /AGREEMENTS /CONVENTIONS/TREATIES INTO A LAW, THE MOMENT THE RIGHTS O F THE CITIZENS ARE INFRINGED BY SUCH INTERNATIONAL TREATIES/RESOLUTIONS ETC . RELYING ON THE SAID JUDGMENT OF APEX COURT, LD. COUNSEL FOR THE ASSE SSEE SUBMITTED THAT THE SAID JUDGMENT WAS NOT AVAILABLE TO ITAT/CIT(A)/A O AT THE TIME WHEN THE QUANTUM APPEALS WERE HEARD AND FINALIZED BY THE TRIBUNAL. HAD THIS JUDGMENT BEEN BROUGHT TO THE NOTICE OF THE TRIB UNAL, THE OUTCOME OF THE PROCEEDING ON MERITS MIGHT HAVE BEEN DIFFERENT. C. UN RESOLUTION-986 HAS THE ADVERSE EFFECT ON THE RIG HT OF BUSINESS OF THE ASSESSEE : MENTIONING ABOUT THE RIGHTS OF DOING EXPORT BUSINESS OF THE ASSESSEE AND NOTWITHSTANDING THE DECISION OF THE TRIBUNAL AGAINST THE ASSESSEE ON THE QUANTUM PROCEEDING S, WHEN IT COMES TO THE PENALTY PROCEEDINGS, THE SAID APEX COURT J UDGMENT AND ITS RATIO DECIDENDI BECOMES EXTREMELY RELEVANT. FURTHER, AS PER LD. COUNS EL, 15 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED THE VIOLATION BY THE ASSESSEE TO THE UN COUNCILS RESOLUT ION- 986 DOES NOT BECOME AN OFFENCE OR VIOLATION OF ANY LAW AS NO INDIAN LAW CLASSIFIES SUCH PAYMENTS TO PARTIES AT DUBAI/JORDAN OR IRAQ AS A N OFFENCE OR OTHERWISE. CONSEQUENTLY, THE PROVISIONS OF EXPLANATION 1 TO SECTION 3 7(1) OF THE ACT IS NOT VALIDLY INVOKED BY THE AO. THE RATIO OF SAID APEX COURT JUDGMENT IN THE CASE OF MAGANBHAI ISHWARBAI PATEL VS. UOI AND OTHERS (SUPRA) DOES NOT ALLOT THE UN RESOLUTION-986 AS EQUIVALE NT OF INDIAN LAWS. FURTHER, RELYING ON THE JURISDICTIONAL HIGH COURT J UDGMENT IN THE CASE OF KARAN DILEEP NEVATIA VS. THE UOI IN WRIT PETITION NO .7852/2008 (PAGE 392 OF THE PAPER BOOK) AND THE JUDGMENT OF HONB LE KARNATAKA HIGH COURT IN THE CASE OF CIVIL RIGHTS VIGILANCE COMMITTEE, SLS RC COLLEGE OF LAW, BANGALORE VS. UIO AND OTHERS (PAGE 392 OF P APER BOOK NO.4), LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE P OSITIVE COMMITMENT TO INTERNATIONAL ACCORDS OF GOVERNMENT IGNITE S LEGISLATIVE ACTION AT HOME BUT DOES NOT AUTOMATICALLY MAKE THE COV ENANT AN ENFORCEABLE PART OF CORPUS JURIS OF INDIA. RELYING ON THESE JUDGMENTS, LD. COUNSEL SUMMED UP BY S TATING THAT ASSESSEE DID NOT COMMIT ANY OFFENCE OR EXECUTED A NY ACTIVITY PROHIBITED UNDER LAW OF INDIA IN MATTERS OF EXPORT SALES O R MAKING PAYMENTS TO M/S. AZHAR TRADING COMPANY, DUBAI, M/S. ALIA AND GENER AL TRADING COMPANY, JORDAN, ETC. D. FURTHER, LD. COUNSEL SUBMITTED THAT THE PAYMENTS MAD E BY THE ASSESSEE FOR TRANSPORTATION AND OTHER LOGISTICAL SERVICES ARE NOT FOR THE PURPOSE OF KICKBACKS TO THE IRAQI AUTHORITIES. THEREFORE, THE SAME IS NOT AGAINST ANY INDIAN PUBLIC POLICY AS THE ASSESSEE NEVER INC URRED 16 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED KICKBACKS DIRECTLY. REFERRING TO VCR, LD. COUNSEL SUBMITT ED THAT THE VCR IS MERELY AN OPINION OF A COMMITTEE AND IT NEVER PASS ED THE TEST OF LEGAL SCRUTINY. THEREFORE, THE SAME IS WRONGLY TREATED BY AO/CIT(A) AS SACROSANCT AND MADE AN UNSUSTAINABLE ADDITIONS. SO FAR A S THE ASSESSEE IS CONCERNED, IT IS THE CASE OF MAKING PAYMENT FOR BUSINESS CONTINGENCY AND HOW THE SAID PAYMENT IS APPROPRIATED IS NOT FOR THE ASSESSEE TO MONITOR. FURTHER, LD. COUNSEL SUBMITTED THAT IN MAKING T HE SAID PAYMENTS, THERE IS NO INTENTION IN FURNISHING ANY INACCURATE PARTICULARS OF INCOME AS ALLEGED BY THE AO AND THE CIT(A). THEREFORE, IT IS THE CASE OF THE ASSESSEE THAT THE CITED PURPOSE OF AN OFFENCE OR PU RPOSES OF COMMITTING ANY ACT PROHIBITED BY LAW MENTIONED IN THE EXPL ANATION 1 TO SECTION 37(1) OF THE ACT ARE NOT DONE IN THE HANDS OF TH E ASSESSEE. THEREFORE, AS PER LD. COUNSEL, THE SAID PROVISIONS ARE WRON GLY INVOKED BY THE AUTHORITIES FOR LEVYING THE PENALTY. NO DOMESTIC LAW WA S EVER VIOLATED BY THE ASSESSEE IN MAKING THE SAID PAYMENTS TO M/S. AZH AR TRADING COMPANY, DUBAI, M/S. ALIA AND GENERAL TRADING COMPANY, JORDA N, KME, ETC AS THE CASE MAY BE. THE UN COUNCILS RESOLUTIO N-986 IS NEITHER THE LAW OF THE LAND NOR IT DOES NOT INFRINGE THE RIGHTS OF THE INDIA N BUSINESSMAN. 13. PER CONTRA, LD. DR SUBMITTED THAT THE INDIA IS A SIG NATORY TO THE UN RESOLUTION-986 AND THEREFORE, IT HAS BINDING EFFECT ON TH E CITIZENS OF INDIA. FURTHER, LD. DR FAIRLY SUBMITTED THAT THE SAID JUDG MENT OF SUPREME COURT DID NOT EXIST IN THE PAST AND MENTIONED T HAT THE FACTS OF SAID JUDGMENT ARE DISTINGUISHABLE. 17 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED 14. WE HAVE HEARD BOTH PARTIES ON THIS ASPECT OF UN RES OLULTION-986, RATIO OF HONBLE SUPREME COURTS JUDGMENT IN THE CASE M AGANBHAI ISHWARLAL PATEL (SUPRA), KARAN DILEEP NEVATIA ETC. THE RATIO OF JUDGMENT OF SUPREME COURT IN THE CASE OF MAGANBHAI ISHWARLAL PATEL (SUPRA) IS EXTRACTED AS UNDER : 77. THE EFFECT OF AN INTERNATIONAL TREATY ON THE R IGHTS OF CITIZENS OF THE STATES CONCERNED IN THE AGREEMENT IS STATED IN OPPE NHEIM'S INTERNATIONAL LAW, 8TH EDN., AT P. 40 THUS 'SUCH TREATIES AS AFFECT PRIVATE RIGHTS AND, GENERA LLY, AS REQUIRE FOR THEIR ENFORCEMENT BY ENGLISH COURTS A MODIFICATION OF COM MON LAW OR OF A STATUTE MUST RECEIVE PARLIAMENTARY ASSENT THROUGH AN ENABLI NG ACT OF PARLIAMENT. TO THAT EXTENT BINDING TREATIES WHICH ARE PART OF I NTERNATIONAL LAW DO NOT FORM PART OF THE LAW OF THE LAND UNLESS EXPRESSLY M ADE SO BY THE LEGISLATURE.' AND AT P. 924 IT IS STATED : THE BINDING FORCE OF A TREATY CONCERNS IN PRINCIPLE THE CONTRACTING STATES ONLY, AND NOT THEIR SUBJECTS. AS INTERNATIONAL LAW IS PRIM- ARILY A LAW BETWEEN STATES ONLY AND EXCLUSIVELY, TREATIES CAN N ORMALLY HAVE EFFECT UPON STATES ONLY. THIS RULE CAN, AS HAS BEEN POINTE D OUT BY THE PERMANENT COURT OF INTERNATIONAL JUSTICE, BE ALTERED BY THE E XPRESS OR IMPLIED TERMS OF THE TREATY, IN WHICH CASE ITS PROVISIONS BECOME SEL F-EXECUTORY. OTHERWISE, IF TREATIES CONTAIN PROVISIONS WITH REGARD TO RIGHTS A ND DUTIES OF THE SUBJECTS OF THE CONTRACTING STATES, THEIR COURTS, OFFICIALS, AND THE LIKE, THESE STATES MUST TAKE STEPS AS ARE NECESSARY ACCORDING TO THEIR MUNICIPAL LAW, TO MAKE THESE PROVISIONS BINDING UPON THEIR SUBJECTS, COURTS, OFFICIALS, AND THE LIKE.' IN WADE AND PHILLIPS' CONSTITUTIONAL LAW, 7TH EDN., :IT IS STATED AT P. 274 : ' AT FIRST SIGHT THE TREATY-MAKING POWER APPEARS TO CONFLICT WITH THE CONSTITUTIONAL PRINCIPLE THAT THE QUEEN BY PREROGAT IVE CANNOT ALTER THE LAW OF THE LAND, BUT THE PROVISIONS OF A TREATY DULY RA TIFIED DO NOT BY VIRTUE OF THE TREATY ALONE HAVE THE FORCE OF MUNICIPAL LAW. T HE ASSENT OF PARLIAMENT MUST BE OBTAINED AND THE NECESSARY LEGISLATION PASS ED BEFORE A COURT OF LAW CAN ENFORCE THE TREATY, SHOULD IT CONFLICT WITH THE EXISTING LAW.' ON P. 275 IT IS STATED THAT 'TREATIES WHICH, FOR TH EIR EXECUTION AND APPLICATION IN THE UNITED KINGDOM, REQUIRE SOME ADD ITION TO, OR ALTERATION OF, THE EXISTING LAW' ARE TREATIES WHICH INVOLVE LE GISLATION. THE STATEMENT MADE BY SIR ROBERT PHILLIMORE, JUDGE OF THE ADMIRAL TY COURT IN THE PARLEMENT BELGE(1)-(THOUGH THE ULTIMATE DECISION WA S REVISED BY THE COURT OF APPEAL IN ANOTHER POINT [VIDE (1880) 5 P. D. 197 ] IN DEALING WITH THE EFFECT OF A 'CONVENTION REGULATING COMMUNICATIONS,B Y POST' SIGNED AND RATIFIED IN 1876 WHICH PURPORTED TO CONFER UPON BEL GIAN MAIL STREAMERS. IMMUNITY OF FOREIGN WARSHIPS IS APPROPRIATE : 18 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED 'IF THE CROWN HAD POWER WITHOUT THE AUTHORITY OF PA RLIAMENT BY THIS TREATY TO ORDER THAT THE PARLEMENT BELGE SHOULD BE ENTITLE D TO ALL THE PRIVILEGES OF A SHIP OF WAR, THEN THE WARRANT, WHICH IS PRAYED FO R AGAINST HER AS A WRONG- DOER ON ACCOUNT OF THE COLLISION, CANNOT ISS UE, AND THE RIGHT OF THE SUBJECT, BUT FOR THIS ORDER UNQUESTIONABLE, TO RECO VER DAMAGES FOR THE INJURIES DONE TO HIM BY HER IS EXTINGUISHED. THIS IS A USE OF THE TREATY-MAKING PREROGATIVE OF T HE CROWN WHICH I BELIEVE TO BE WITHOUT PRECEDENT, AND IN PRINCIPLE CONTRARY TO THE LAWS OF THE CONSTITUTION.' 78. IN WALKER V. BAIRD(2) THE JUDICIAL COMMITTEE, A FFIRMING THE DECISION OF THE SUPREME COURT OF NEWFOUNDLAND, OBSERVED THAT THE PLEA OF ACT OF STATE RAISED IN AN ACTION FOR TRESPASS AGAINST THE CAPTAIN OF A BRITISH FISHERY VESSEL WHO WAS AUTHORISED BY THE COMMISSIONE RS OF THE ADMIRALTY TO SUPERINTEND THE EXECUTION OF AN AGREEMENT BETWEE N THE BRITISH CROWN AND THE REPUBLIC OF FRANCE, WHICH PROVIDED THAT NO NEW LOBSTER FACTORY SHALL BE ESTABLISHED ON A CERTAIN PART OF THE COAST OF NEWFOUNDLAND COULD NOT BE UPHELD. 79. THE JUDICIAL COMMITTEE IN ATTORNEY-GENERAL FOR C ANADA V. ATTORNEY- GENERAL FOR ONTARIO AND OTHERS(3) MADE SOME OBSERVA TIONS IN THE CONTEXT OF A RULE APPLICABLE WITHIN THE BRITISH EMPIRE, WHI CH ARE PERTINENT : 'IT WILL BE ESSENTIAL TO KEEP IN MIND THE DISTINCTI ON BETWEEN (1) THE FORMATION, AND (2) THE PERFORMANCE, OF THE OBLIGATI ONS CONSTITUTED BY A TREATY, USING THAT WORD AS COMPRISING ANY AGREEMENT BETWEEN TWO OR MORE SOVEREIGN STATES. WITHIN THE BRITISH EMPIRE THERE I S A WELL-ESTABLISHED RULE THAT THE MAKING OF A TREATY IS AN EXECUTIVE ACT, WH ILE THE PERFORMANCE OF ITS OBLIGATIONS, IF THEY ENTAIL ALTERATION OF THE EXIST ING DOMESTIC LAW, REQUIRES LEGISLATIVE ACTION. UNLIKE SOME OTHER COUNTRIES, TH E, STIPULATIONS OF A TREATY DULY RATIFIED DO NOT WITHIN THE EMPIRE, BY VIRTUE O F THE TREATY ALONE, HAVE THE FORCE OF LAW. IF THE NATIONAL EXECUTIVE, THE GO VERNMENT OF THE DAY, DECIDE TO INCUR THE OBLIGATIONS OF A TREATY WHICH I NVOLVE ALTERATION OF LAW THEY HAVE TO RUN THE RISK OF OBTAINING THE ASSENT O F PARLIAMENT TO THE NECESSARY STATUTE OR STATUTES.....PARLIAMENT, NO, D OUBT, .... HAS A CONSTITUTIONAL CONTROL OVER THE EXECUTIVE : BUT IT CANNOT BE DISPUTED THAT THE CREATION OF THE OBLIGATION.-. UNDERTAKEN IN TREATIE S AND THE ASSENT TO THEIR FORM AND QUALITY ARE THE FUNCTION OF THE EXECUTIVE ALONE. ONCE THEY ARE CREATED, WHILE THEY BIND THE STATE AS AGAINST THE O THER CONTRACTING PARTIES, PARLIAMENT MAY REFUSE TO PERFORM THEM AND SO LEAVE THE STATE IN DEFAULT.' THESE OBSERVATIONS ARE VALID IN THE CONTEXT OF OUR CONSTITUTIONAL SET UP. BY ART. 73, SUBJECT TO THE PROVISIONS OF THE CONSTITUT ION, THE EXECUTIVE POWER OF THE UNION EXTENDS TO THE MATTERS WITH RESPECT TO WH ICH THE PARLIAMENT HAS POWER TO MAKE LAWS. OUR CONSTITUTION MAKES NO- PROV ISION MAKING LEGISLATION A CONDITION OF THE ENTRY INTO AN INTERN ATIONAL TREATY IN TIMES EITHER OF WAR OR PEACE. THE EXECUTIVE POWER OF THE UNION IS VESTED IN THE, PRESIDENT AND IS EXERCISABLE IN ACCORDANCE WIT H THE CONSTITUTION. THE EXECUTIVE IS QUA THE STATE COMPET ENT TO REPRESENT THE STATE IN ALL MATTERS INTERNATIONAL AND MAY BY A GREEMENT, CONVENTION OR TREATIES INCUR OBLIGATIONS WHICH IN I NTERNATIONAL LAW ARE BINDING UPON THE STATE. BUT THE- OBLIGATIONS AR ISING UNDER THE AGREEMENT OR TREATIES ARE NOT BY THEIR OWN FORCE BI NDING UPON INDIAN NATIONALS. THE POWER TO LEGISLATE IN RESPECT OF TREATIES LIES 19 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED WITH THE PARLIAMENT UNDER ENTRIES 10 AND 14 OF LIST I OF THE SEVENTH SCHEDULE. BUT MAKING OF LAW UNDER THAT AUTH ORITY IS NECESSARY WHEN THE TREATY OR AGREEMENT OPERATES TO RESTRICT THE RIGHTS OF CITIZENS OR OTHERS OR MODIFIES THE LAWS O F THE STATE. IF THE RIGHTS OF THE CITIZENS OR OTHERS WHICH ARE JUSTICIA BLE ARE NOT AFFECTED, NO LEGISLATIVE MEASURE IS NEEDED TO GIVE EFFECT TO THE AGREEMENT OR TREATY. 80. THE ARGUMENT RAISED AT THE BAR THAT POWER TO MA KE TREATY OR TO IMPLEMENT A TREATY, AGREEMENT OR CONVENTION WITH A FOREIGN STATE CAN ONLY BE EXERCISED UNDER AUTHORITY OF LAW, PROCEEDS UPON A MISREADING OF ART. 253. ARTICLE 253 OCCURS IN CH. 1 OF PART XI OF THE CONSTITUTION WHICH DEALS WITH LEGISLATIVE RELATIONS: DISTINCTION OF LEGISLAT IVE POWERS. BY ART. 245 THE TERRITORIAL OPERATION OF LEGISLATIVE POWER OF THE PARLIAMENT AND THE STATE LEGISLATURES IS DELIMITED, AND ART. 246 DISTR IBUTES LEGISLATIVE POWER SUBJECT-WISE BETWEEN THE PARLIAMENT AND THE STATE L EGISLATURES. ARTICLES 247, 249, 250, 252 AND 253 ENACT SOME OF THE EXCEPT IONS TO THE RULE CONTAINED IN ART. 246. 'ME EFFECT OF ART. 253 IS TH AT IF A TREATY, AGREEMENT OR CONVENTION WITH A FOREIGN STATE DEALS WITH A SUB JECT WITHIN THE COMPETENCE OF THE STATE LEGISLATURE, THE PARLIAMENT ALONE HAS NOTWITHSTANDING ART. 246(3), THE POWER TO MAKE LAWS TO IMPLEMENT THE TREATY, AGREEMENT OR CONVENTION OR ANY DECISION MADE AT ANY INTERNATIONAL CONFERENCE, ASSOCIATION OR OTHER BODY . IN TERMS, THE ARTICLE DEALS WITH LEGISLATIVE POWER THEREBY POWER IS CONFERRED UPON THE PARLIAMENT WHICH IT MAY NOT OTHERWISE POSSESS. BUT IT DOES NOT SEEK- TO CIRCUMSCRIBE THE EXTENT OF THE POWER CONFERRED BY A RT. 73. IF, IN CONSEQUENCE OF THE EXERCISE OF EXECUTIVE POWER, RIG HTS OF THE CITIZENS OR OTHERS ARE RESTRICTED OR INFRINGED, OR LAWS ARE MOD IFIED, THE EXERCISE OF POWER MUST BE SUPPORTED BY LEGISLATION: WHERE THERE IS NO SUCH RESTRICTION, INFRINGEMENT OF THE RIGHT OR MODIFICATION OF THE LA WS, THE EXECUTIVE IS COMPETENT TO EXERCISE THE POWER. .. 99. THE APPEAL AND THE WRITS ARE DISMISSED. CONSIDERING THE SAID JUDGMENT, ON ONE SIDE AND THE UN RESOLUTION-986 ON THE OTHER, WE FIND THAT THERE IS NEED FO R DOMESTIC LEGISLATION FOR RESTRICTING THE BUSINESS RIGHTS OF THE CITIZENS IN INDIA. 14.1 THE HONBLE SUPREME COURT PRONOUNCED THE JUDGMEN T IN THE CONTEXT OF CEDING OF PART OF LAND QUA THE ORDER OF INTER NATIONAL TRIBUNAL. THE ABOVE SAID JUDGMENT OF SUPREME COURT IN THE CASE O F MAGANBHAI ISHWARBHAI PATEL ETC (SUPRA) IS CATEGORICAL IN PRONOUNCING THAT NO ORDER OF AN INTERNATIONAL COURT EFFECT ADVERSELY THE RIGHTS OF T HE CITIZENS IN 20 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED INDIA. IN THIS REGARD, WE PROCEED TO EXAMINE IF THE UN RE SOLUTION-986 HAS THE CAPABILITY OF INFRINGING THE RIGHTS OF INDIANS. AS PE R THE SAID UN RESOLUTION-986, THE INDIAN, ALONG WITH OTHER MEMBER COUNTR IES ABROAD, ARE ALLOWED TO EXPORT TO IRAQ ONLY UNDER OIL-FOR-FOOD P ROGRAMME AND NOT OTHERWISE. AS SUCH, NO DOMESTIC ENACTMENT EXIST TO SUPP ORT THE SAME. FROM THIS POINT OF VIEW, THE EFFECT OF UN RESOLUTION-986 INFRIN GES ON THE RIGHTS OF CITIZENS. SUCH RESOLUTION, BEING IN THE NATURE OF EXECUTIVE ORDER DO NOT HAVE THE POWER OF TAKING AWAY THE RIGHTS OF THE INDIAN CITIZENS. AS SUCH UN RESOLUTION-986 CANNOT DECIDE IF AN IN DIAN CITIZEN CAN EXPORT HIS GOODS TO IRAQI OR NOT EITHER UNDER OIL- FOR-FOOD PROGRAMME OR OTHERWISE. FROM THIS VIEW POINT, WE ARE OF THE VIEW THAT THE FAILURE OF THE ASSESSEE IN NOT COMPLYING WITH THE UN RESOLUTION-986 DO NOT CONSTITUTE AN OFFENCE FOR THE PURPOSE OF EXPLANATION 1 TO SECTION 3 7(1) OF THE ACT. THUS, FOR THE PURPOSE OF LEVY OF PENALTY U/S.271(1)(C) OF THE A CT IN RESPECT OF THE PAYMENTS FOR TRANSPORT CHARGES, AFTERSALES FEES T O M/S. AZHAR TRADING COMPANY, DUBAI, M/S. ALIA AND GENERAL TRADING COMPA NY, JORDAN, KME ETC., THE PENALTY IS NOT SUSTAINABLE. THE PAYM ENTS DO NOT CONSTITUTE FOR THE PURPOSE OF COMMITTING AN OFFENCE OR THE SAME IS PROHIBITED BY ANY LAW. WE ORDER ACCORDINGLY. WHEN THE RE IS NO RESTRICTIVE PROVISIONS, ASSESSEE IS FREE TO EXPORT HIS GOOD S TO ANY COUNTRY INCLUDING IRAQ. THEREFORE, NO INTERNATIONAL TREATY OR UN RE SOLUTION-986 CAN TAKE AWAY THAT RIGHT OF THE INDIAN BUSINESSMAN. 21 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED C. WHEN THE ISSUES ARE DEBATABLE NO PENALTY IS LEVIABLE 15. THE ALLOWABILITY OF THE PAYMENTS MADE TO M/S. AZHAR TRA DING COMPANY, DUBAI, M/S. ALIA AND GENERAL TRADING COMPANY, JORDA N, KME ETC. TOWARDS TRANSPORTATION/AFTERSALES SERVICES ETC. U/ S.37(1) OF THE ACT ATTRACTED ATTENTION OF THE VARIOUS BENCHES OF THE TRIBUN AL ON ONE SIDE AND THE CALCUTTA HIGH COURT ON THE OTHER SIDE. THE SA ME IS RELEVANT IN THE CONTEXT OF UN COUNCIL RESOLUTION-986 QUA THE OIL-FOR- FOOD PROGRAMME. THE ALLEGATION OF KICKBACKS TO THE IRAQ GOVE RNMENT WAS EXAMINED BY THE SAID HIGH COURT/TRIBUNALS. IN LARGE NUMBE R OF CASES MENTIONED ABOVE, THE EXPENDITURE CLAIMED BY THE ASSESSEE ON ACCOUNTS OF TRANSPORTATION CHARGES AND AFTERSALES SERVICES FEE WERE FOUND ALLOWABLE U/S.37(1) OF THE ACT. THE ONLY DIFFERENCE IN THIS CASE IS WIT H REFERENCE TO MESSY LETTER DATED 01-02-2012 OF KME WHICH CREATED NEG ATIVE OPINION AGAINST THE ASSESSEE. THE SAID LETTER MAY BE SUFFICIENT E VIDENCE TO MAKE ADDITION BUT NOT FOR LEVY OF PENALTY. ACCORDING TO LD. COUN SEL FOR THE ASSESSEE, IF THE SAID LETTER IS IGNORED, THE FACTS OF THE PRE SENT CASE IS EXACTLY SIMILAR AND THEREFORE, THE ADDITIONS ARE UNSUSTAINA BLE. THE TRIBUNAL DELETED SIMILAR ADDITION IN THE OTHER GROUP CASES OF THE ASSESSEE, I.E. KIRLOSKAR OIL ENGINES LTD.. THEREFORE, THE PENALT Y IS NOT LEVIABLE IN VIEW OF THE ABOVE REFERRED SERIES OF DECISIONS TABULATED ABOVE . D. DEBATABILITY REGARDING THE DEBATABILITY, LD. COUNSEL FOR THE ASSESSEE S UBMITTED THAT THE ASSESSEES CASE IS THE ONLY ONE CASE, WHERE THE ADDITIONS ARE CONFIRMED ON MERITS. IN ALL OTHER CASES, ASSESSEE WAS FOU ND ELIGIBLE FOR 22 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED CLAIM OF EXPENSES AND WHICH WERE ALLOWED. THEREFORE, ON THIS ISSUE OF CLAIM OF EXPENDITURE, THERE IS VARIANCE, I.E. (1) SAME ASSESSEE NEVER CLAIMED SUCH EXPENDITURE AS ALLOWABLE EXPENDITURE AT ALL; (2) OTHERS LIKE CIT VS. RAJARANI EXPORTS PVT. LTD. (361 ITR 152 (CAL.) (DCIT VS.RAJRANI EXPORTS PVT. LTD.17 ITR (TRIB.) 239 (KOL.) CASE CLAIMED AND WERE ALLOWED TOO; (3) ASSESSEE CLAIMED AS ALLOWABLE BUT DISALLOWED BY THE AO AND CONFIRMED BY THE TRIBUNAL IN THE PRESENT CASE. THUS, THE RE IS HUGE AMOUNT OF DEBATE ON THE NATURE OF ALLOWABILITY OF THE CLAIM THAT THE PAYMENTS MADE TO M/S. AZHAR TRADING COMPANY, DUBAI, M/S. ALIA AND GENERAL TRADING COMPANY, JORDAN, KME. IN SUCH CASE, THE IS SUE IS DEBATABLE AND THEREFORE, PENALTY SHOULD NOT BE LEVIED. E. LIST OF THE LEGAL PRECEDENTS ON THE SIMILAR PAYM ENTS MADE TO SIMILAR PARTIES ABROAD AMDN MENTIONED THE DIVERGENT FINDINGS BY VARIOUS BENCHES OF THE TRIBUN AL 16.A. LD. COUNSEL FOR THE ASSESSEE MENTIONING THE DIVERGEN T FINDINGS BY VARIOUS BENCHES OF THE TRIBUNAL SUBMITTED THAT, IN THE FOLLO WING CASES, THE PAYMENTS WERE MADE TO M/S. AZHAR TRADING COMPANY, DUBAI, M/S. ALIA AND GENERAL TRADING COMPANY, JORDAN, KME ETC. AND TH E SAID PAYMENTS WERE FOUND ALLOWABLE U/S.37(1) OF THE ACT. CONSEQ UENTLY, PENALTIES DO NOT SURVIVE. B. TO START WITH, LD. COUNSEL MENTIONED THAT IN THE CAS E OF KIRLOSKAR OIL ENGINEERS LTD. IN ITA NO.1170/PN/2011, THE PUNE BENCH OF THE TRIBUNAL CONSIDERED THE PAYMENTS ARE GENUINE AND HELD ALLO WABLE U/S.37(1) OF THE ACT. REFERRING TO THE ORDER OF THE MUMBA I BENCH OF THE TRIBUNAL IN THE CASE OF M/S.EXIM TRADE LINKS INDIA PVT. LTD . IN ITA 23 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED NO.4266/MUM/2009, LD. COUNSEL SUBMITTED THAT THE PAYMENT S WAS FOUND ALLOWABLE. THEREFORE, THE QUESTION OF LEVY OF PENALTY D OES NOT ARISE. VARIOUS OTHER CASES, WHERE THE ALLEGATION OF KICKBAC KS MADE TO IRAQ GOVERNMENT IS THERE, WERE FOUND ALLOWABLE BY VARIOUS BENCHE S OF THE TRIBUNAL/HIGH COURT. C. FURTHER, THERE IS DEBATE ON IF THE PAYMENTS MADE BY THE ASSESSEE ARE FOR KICKBACKS AT ALL IN THE PRESENT CASE AND ALLOWABLE U/S.37(1) OF THE ACT OR NOT. HE SUBMITTED THAT THE TRIBUNAL CONFIRMED THE ADDITION IN THE PRESENT CASE FOR FAILURE TO DISCHARGE OF ONUS BY THE AS SESSEE AND NOT BECAUSE OF ANY ADVERSE AND DIRECT EVIDENCES AGAINST TH E ASSESSEE IN MATTERS OF RENDERING OF SERVICES. AS SUCH, THERE IS NO DIR ECT EVIDENCE IN SUPPORT OF PAYMENT OF THE KICKBACK TO IRAQI AUTHORITIES. F URTHER, THERE IS DEBATE ON THE SACREDNESS OF THE VCR AND THEIR FINDINGS A ND THEY WERE NEVER SCRUTINIZED LEGALLY IN FORMS OF LAW. THEREFORE, ASSESSE E OUGHT TO WIN ON THE ISSUE OF PENALTY ON THE GROUND OF DEBATABILITY. THERE ARE CATENA OF BINDING JUDGMENTS FOR THE LEGAL PROPOSITION THAT THE PENALTY U/S.271(1)(C) OF THE ACT ARE NOT SUSTAINABLE WHEN THE ISSUE IS NOT FREE FROM THE DEBATE. WE ORDER ACCORDINGLY. F. EXPLANATION 1 TO SECTION 37(1) DEEMED PROVISIONS NO PENALTY IS LEVIABLE 17. NOTWITHSTANDING THE ABOVE ARGUMENTS, LD. COUNSEL BROU GHT OUR ATTENTION TO THE EXPLANATION 1 TO SECTION 37(1) OF THE AC T ARGUED THAT THE EXPLANATION 1 MERELY CONSTITUTES DEEMED PROVISIONS AND T HE SAME MAY BE APPROPRIATE SO FAR AS THE DISALLOWANCE OF EXPENDITURE IS CONCERNED. 24 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED HOWEVER, WHEN IT COMES TO THE LEVY OF PENALTIES U/S.271(1)(C) OF THE ACT IS CONCERNED, THE PENALTIES LINKED TO THE DEEMED INCOME ARE NOT VALIDLY LEVIED. RELYING ON THE VARIOUS DECISIONS IN THIS REGARD, LD . COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PENALTIES ARE REQUIRED TO BE DELETED SINCE THE SAME ARE DEEMED TO HAVE BEEN INCURRED FOR THE PUR POSE OF BUSINESS OR PROFESSION. ASSESSEE ALSO RELIED ON VARIOUS DECISIONS IN THIS REGAR D. PENALTY CONCLUSION OF THE TRIBUNAL 18. THUS, WE HAVE SO FAR DEALT WITH EACH OF THE ISSUE-CENT RIC ARGUMENTS OF LD. DR AS WELL AS LD. COUNSEL FOR THE ASSESSE E ON EACH OF THE ISSUES, I.E. (1) COMMERCIAL EXPEDIENCY; (2) BINDING NATURE OF THE INTERNATIONAL TREATIES/CONVENTIONS/AGREEMENTS; (3) APPLICABILIT Y OF JUDGMENT OF SUPREME COURT IN THE CASE OF MAGANBHAI ISHWA RBHAI PATEL ETC VS. UNION OF INDIA AND OTHERS; (4) DEBATABILITY OF THE ISSUES; (5) LEGAL PRECEDENTS ON THE SIMILAR PAYMENTS MADE TO SIMILAR PARTIE S ABROAD; AND (6)DEEMED EXPLANATION 1 TO SECTION 37(1) OF THE ACT ETC., WE HAVE ALSO ANALYSED FACTS OF THE ISSUE ON ONE SIDE AND THE PROVISIONS OF SECTION 37(1) AND THE EXPLANATION (1) WHEREVER APPLICABLE AND FIND THE EXPLANATION (1) DOES NOT PERMIT DEDUCTION OR A LLOWANCE OUT OF THE BUSINESS EXPENSES IF CERTAIN EXPENSES ARE NOT TO BE DEEMED TO HAVE BEEN INCURRED FOR BUSINESS PURPOSES. WE HAVE HELD THAT THE SAID EXPLANATION IS A DEEMING PROVISION IN THE CONTEXT OF BUSINES S EXPENDITURE ONLY. THE LANGUAGE IN THE EXPLANATION IS NEGA TIVELY WORDED FOR NOT DEEMING CERTAIN BUSINESS EXPENSES AS NOT ALLOWABLE OR DEDUCTIBLE BUSINESS EXPENDITURE U/S.37(1) OF THE ACT. FURTHER, IN THE CONTEXT OF 25 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED COMMERCIAL EXPEDIENCY, WE HAVE ANALYSED THE EXPENDITURE INCURRED IS FOR TRANSPORTATION CHARGES, AFTERSALES SERVICE FEE ETC. WHICH ARE OBVIOUSLY BUSINESS AND ALLOWABLE EXPENDITURE BUT FOR THE DEEMING PRO VISIONS OF THE EXPLANATION. WHETHER SUCH EXPENDITURE FALLS UNDER THE CAT EGORY OF EXPENDITURE NOT TO BE DEEMED AS INCURRED FOR BUSINESS P URPOSED WITHIN THE MEANING OF SAID EXPLANATION (1), WE OBSERVED THAT THER E IS NO EVIDENCE ON RECORDS TO INDICATE THAT THE ASSESSEE PAID THE KICKBACKS DIRECTLY TO THE IRAQI AUTHORITIES. THEREFORE, IN THE PENA LTY PROCEEDINGS, THE PAYMENTS MADE BY THE ASSESSEE NEEDS TO BE CONSID ERED FOR THE TRANSPORTATION CHARGES, AFTERSALES SERVICE FEE IN THE CON TEXT OF EXPORT OF THE PORTABLE CENTRIFUGAL PUMPS FOR USE IN IRAQ UNDER OIL- FOR-FOOD PROGRAM OF UNITED NATIONS ORGANISATION. SUCH CLAIMS ARE ALLO WED IN FAVOUR OF THE ASSESSEE IN LARGE NUMBER OF CASES MENTIONE D ABOVE. FURTHER, WE HAVE ANALYSED THE SERIES OF DECISIONS AND VA RIOUS TYPES IN IT AND HELD, BARRING THE INSTANT CASE OF THE ASSESSEE, IN ALL O THER CASES, THE EXPENDITURE WAS FOUND ALLOWABLE U/S.37(1) OF THE ACT ON SIMILAR FACTS. FURTHER, WE HAVE DEALT THAT THE PRINCIPLE OF DEBATABILITY ON VARIOUS COUNTS CONNECTED TO THE CLAIM OF THE ASSESSEE. ON MER ITS OF THE CLAIMS, THERE ARE DIVERGENT DECISIONS IN FAVOUR AND AGAINST ALLOWING THE CLAIM OF DEDUCTION. FURTHER ALSO, THE DECISION OF HONBLE SUPREME C OURT IN THE CASE OF MAGANBHAI ISHWARBHAI PATEL ETC. VS. UNION OF IND IA AND OTHERS (SUPRA) WAS ANALYSED AND FOUND THE SAME IS RELEVANT FOR T HE PROPOSITION THAT, WHEREVER THE RIGHTS OF THE CITIZENS ARE RESTRICTED BY WAY OF TREATIES/CONVENTIONS/AGREEMENTS ETC. LIKE THE CASE OF UN RESOLUTION- 986, THERE IS A REQUIREMENT OF DOMESTIC LAW RATIFYING THE SAID RESTRICTIONS OF THE UN RESOLUTION. IN THE ABSENCE OF ANY DOMESTIC LAW PASSED BY THE 26 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED INDIAN PARLIAMENT, SUCH RESOLUTION CANNOT CREATE AN OFFENC E IN THE CONTEXT OF EXPLANATION (1) TO SECTION 37(1) OF THE ACT AND A GAINST THE ASSESSEE. THEREFORE, THE ALLEGATION OF COMMITTING THE OFFENCE BY THE AS SESSEE, IGNORING THE FACT OF MAKING PAYMENT BY THE ASSESSEE TO THE SAID ENTITIES AND NOT TO THE IRAQI AUTHORITIES, IS UNSUSTAINABLE LEGALLY. THE SAID JUDGMENT OF HONBLE SUPREME COURT IS VERY CATEGORIC IN THIS REGARD. FURTHER, THIS IS A CASE WHERE AO MERELY RELIED ON VCR WH ICH IS NOT A LEGAL DOCUMENT DULY SCRUTINISED BY ANY LEGAL FORUM. MERE E XISTENCE OF ASSESSEES NAME IN THE LIST OF INDIAN ENTITIES APPENDED TO THE VCR, CANNOT BE ACCEPTED AS SACROSANCT IN THESE PENALTY PRO CEEDINGS. THE MATTERS RELATING TO INCOME-TAX HAS TO BE DECIDED BASED ON THE INCO ME-TAX LAW AND NOT BASED ON THE VCR OF UN RESOLUTION. THE ABO VE FINDINGS ARE BORNE OUT OF THE JUDGMENT/ORDER IN THE CASE OF CIT RAJ ARANI EXPORTS PVT. LTD. (SUPRA). THIS JUDGMENT IS RELEVANT FOR THE PROPOSITION THAT, NO ILLEGALITY IN MAKING PAYMENT OF COMMISSION WHEN THERE IS NO EV IDENCE TO SHOW THE TRANSACTION RELATING TO THE PAYMENT OF COMMISSIO N IS NOT GENUINE OR THE PAYMENT IS EXCESSIVE OR UNREASONABLE. RE LEVANT EXTRACT OF THE FINDINGS OF THE TRIBUNAL IN THE CASE OF DCIT VS. RAJRANI E XPORTS PVT. LTD. (SUPRA) ARE REPRODUCED HERE BELOW : 15. THE ASSESSEE HAS MADE PAYMENT FOR COMMISSION A ND HAS BEEN RENDERED SERVICES IN CONSIDERATION OF THE SAME. AS A MATTER OF FACT, IT IS NOT EVEN REVENUES CASE THAT NO SERVICES HAVE BEEN REND ERED AT ALL. THE FACT THAT SERVICES HAVE BEEN RENDERED BY A PARTY OTHER T HAN THE AGENT TO WHOM COMMISSION IS PAID IS WHOLLY IMMATERIAL SO FAR AS D EDUCTIBILITY IN THE HANDS OF THE ASSESSEE IS CONCERNED. 16. AS FOR THE POSITION THAT THE PAYMENT WAS HIGHLY EXCESSIVE VIS --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 PA YMENT AND NOT WITH 27 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED WHAT ARE THE ACTUAL COSTS INCURRED IN RENDERING THE SERVICES FOR WHICH THE PAYMENT IS MADE. AS WE HAVE SEEN EARLIER IN THIS OR DER, FROM THE EXTRACTS OF THE VOLKER COMMITTEE REPORT ITSELF, IT WAS ABSOL UTELY NECESSARY FOR THE ASSESSEE TO MAKE THE IMPUGNED PAYMENTS AND, IN ANY EVENT, THE COMMERCIAL EXPEDIENCY OF THESE PAYMENTS HAS NOT EVE N 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 DO NOT, THEREFORE , ARE NOT THEREFORE SUSTAINABLE IN LAW, SO FAR AS DEDUCTI BILITY UNDER SECTION 37(1) IS CONCERNED. THE REVENUE CHALLENGED THE FINDINGS OF THE TRIBUNAL BEFORE T HE HONBLE CALCUTTA HIGH COURT. THE HONBLE HIGH COURT CON FIRMED THE FINDINGS OF THE TRIBUNAL AND HELD THAT WHERE THE ASSESSEE PAID COMMISSION ON EXPORTS THROUGH BANKING CHANNEL IN PURSUAN CE OF AN AGREEMENT APPROVED BY GOVT. OF INDIA AND THE UNITED NAT IONS, SAME COULD NOT BE DISALLOWED IN ABSENCE OF EVIDENCE OF ITS ILLEGALITY. RELYING ON THE SAID JUDGMENT, THE MUMBAI BENCH OF THE TR IBUNAL IN THE CASE OF M/S.MAN INDUSTRIES INDIA LTD. IN ACIT IN I TA NO.6695/MUM/2014 DECIDED ON 12-02-2017 DELETED THE PEN ALTY U/S.271(1)(C) OF THE ACT READ WITH EXPLANATION 1 THERETO CON SIDERING THE SIMILARITY OF FACTS AS WELL AS THE ABOVE LEGAL PROPOSITION. PAR A NO.6 OF THE ORDER OF TRIBUNAL IS RELEVANT. FOR THE SAKE OF COMPLETENES S, WE PROCEED TO EXTRACT THE SAME BELOW : 6. THE DECISION OF THE TRIBUNAL HAS UPHELD BY THE HONBLE CALCUTTA HIGH COURT BY DISMISSING THE APPEAL OF THE REVENUE BY HOLDING THAT THERE WAS NO INFIRMITY IN THE ORDER OF APPELLATE AUTHORIT Y AND THEREFORE THE PAYMENT OF COMMISSION SHOULD NOT BE DISALLOWED. BY APPLYING THE SAME ANALOGY TO THE PRESENT CASE, WE HOLD THAT THE PENAL TY 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 DECI SION UPHOLDING THE CLAIM OF THE ASSESSEE TO CLAIM THE PAYMENTS OF CHAR GES TO IRAQI REGIME AS ADMISSIBLE WHICH STANDS UPHELD BY THE JURISDICTIONA L HIGH COURT. THE PENALTY PROCEEDINGS ARE INDEPENDENT PROCEEDINGS WHI CH ARE TO BE DECIDED ON THE BASIS OF MERITS OF EACH CASE. IN THE PRESENT CASE, THE CALCUTTA 28 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED 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 REP ORT AND HENCE PENALTY ON SUCH DISALLOWANCE WHICH IS WRONG AND AGA INST 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. THEREFORE, IT IS A CASE WHERE DEBATABILITY EXISTS BOTH ON FA CTS AS WELL AS ON LAW. ON LAW, THE DEBATE IS WHETHER THE EXPENDIT URE IS ALLOWABLE OR NOT; AND, ON LEGAL FRONT, THE DEBATE IS WHETHE R THE PAYMENTS MADE BY THE INTERMEDIARIES TO THE IRAQ AUTHORITIES CONST ITUTES AN OFFENCE COMMITTED BY THE ASSESSEE OR NOT. AMIDST ALL THESE DEBA TABILITIES, WE ARE OF THE OPINION THAT THE LEVY OF PENALTY IN BOTH THE ASSES SMENT YEARS IS UNSUSTAINABLE. 19. FURTHER, WITH REGARD TO THE RELEVANT A.Y. 2003-04, THE ASSESSEE MADE A CONTENTION THAT THE ADDITIONS U/S.37(1) OF THE ACT BECOMES UNSUSTAINABLE DUE TO LIKELY FAVOURABLE FINDING ON THE INVALIDITY OF REASSESSMENT PROCEEDINGS. IN OUR VIEW, ADJUDICATION OF T HIS ISSUE BECOMES AN ACADEMIC EXERCISE IN VIEW OF THE DELETION OF PEN ALTY BY US ON THE GROUND OF DEBATABILITY. ACCORDINGLY, RELEVANT GROUNDS ARE DISMISSED AS ACADEMIC. 20. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR A.Y. 2003 -04 IS PARTLY ALLOWED. 21. TO SUM UP, APPEAL OF THE ASSESSEE FOR A.Y. 2002-03 IS ALLOWED AND APPEAL OF THE ASSESSEE FOR A.Y. 2003-04 IS PARTLY ALLOWED. ORDER PRONOUNCED ON 19 TH DAY OF SEPTEMBER, 2018. SD/- SD/- ( /VIKAS AWASTHY) ( . /D. KARUNAKARA RAO) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; / DATED : 19 TH SEPTEMBER, 2018. SATISH 29 ITA NOS. 2611 & 2612/PUN/2012 KIRLOSKAR BROTHERS LIMITED / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(APPEALS)-1, PUNE. 4. THE PR. CIT-1, PUNE. 5. , , , / DR, ITAT, B BENCH, PUNE. 6. / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE