SUMO INTER5NATIONAL P. LTD, MUMBAI V. DCIT 8(3), MUMBAI

ITA 5293/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49036 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 12-04-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 15-09-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SONGATE
• Assessee Lawyers: MANISH J SETH
• Keywords: Business income; Business expenditure
• Section: 37; 80HHC; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI, J. SUDHAKAR REDDY, ACCOUNTANT MEMBER A ND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 5293 & 1345/MUM./2009 (ASSESSMENT YEAR : 2002-03 ) DATE OF HEARING: 18.4.2011 M/S. SUMO INTERNATIONAL PVT. LTD. 425, GEMSTAR COMMERCIAL COMPLEX RAMCHANDRA LANE EXTENSION KACHPADA, MALAD (WEST) MUMBAI 400 068 AADCS9185Q .. APPELLANT V/S DY. COMMISSIONER OF INCOME TAX CIRCLE-8(3), MUMBAI .... RESPONDENT ASSESSEE BY : MR. MANISH J. SETH REVENUE BY : MR. D. SONGATE O R D E R PER J. SUDHAKAR REDDY, A.M. THESE APPEALS FILED BY THE ASSESSEE, ARE DIRECTED A GAINST DIFFERENT ORDERS DATED 15 TH JANUARY 2009 AND 23 RD JULY 2009, PASSED BY THE COMMISSIONER (APPEALS) XXIX, MUMBAI, IN APPEALS ONE AGAINST THE QUANTUM AND ANOTHER AGAINST THE PENALTY ORDER OF THE ASSESS ING OFFICER, FOR ASSESSMENT YEAR 2002-03. SINCE THE ISSUE IS THE SAM E IN BOTH THE APPEALS, THESE ARE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE TAKE UP ASSESSEES APPEAL IN ITA NO.5293/M UM./2009. THE SOLE GROUND RAISED BY THE ASSESSEE IS, WHETHER OR N OT THE LEARNED CIT(A) WAS SUMO INTERNATIONAL PVT. LTD. ITA NO.5293 & 1345/MUM./2006 2 JUSTIFIED IN CONFIRMING THE DISALLOWANCE OF DISCOUN T / REBATE OF ` 2,50,563, WHILE COMPUTING THE BUSINESS INCOME OF THE APPELLAN T. 3. BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE IS A COMPANY AND IS ENGAGED IN THE BUSINESS OF EXPORTER IN ENGINEERING GOODS. IT FILED RETURN OF INCOME FOR ASSESSMENT YEAR 2002-03 ON 5 TH SEPTEMBER 2002, DECLARING TOTAL INCOME OF ` 40,06,630. THE ASSESSEE CLAIMED DEDUCTION UNDER SE CTION 80HHC OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ), TO THE TUNE OF ` 53,55,635. AS THERE WAS A LOSS IN THE BUSINESS OF T RADING FOR EXPORT, THE ASSESSING OFFICER HELD THAT THE ASSESSEE WAS NOT EN TITLED TO DEDUCTION UNDER SECTION 80HHC. THE ASSESSING OFFICER, IN HIS ORDER DATED 17 TH DECEMBER 2007, OBSERVED THAT THE INFORMATION WAS RECEIVED FR OM CBDT REGARDING ILLICIT PAYMENTS MADE BY VARIOUS SUPPLIERS TO GOVERNMENT OF IRAQ, AS ELABORATELY REPORTED IN THE VOLCKER COMMITTEES REPORT. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE SUBMITTED THAT IT HAD SOL D GOODS TO THE COMMISSION OF ELECTRICITY, GENERAL COMPANY OF ELECT RICAL ENERGY PRODUCTION, BASRAH, IRAQ. IT HAD EXECUTED BANK GUARANTEE WORTH 10% OF THE CONTRACT VALUE IN FAVOUR OF THAT BASRAH COMPANY. ON RECEIPT OF THE PAYMENT, THE ASSESSEE HAD TO PAY BACK COMMISSION / REBATE OF US $ 5,237, AND THEN ONLY THE BANK GUARANTEE WAS DISCHARGED TO THE SAID COMPA NY. THE AFORESAID PAYMENT WAS MADE THROUGH BANKING CHANNELS AND THE P AYMENTS ARE RECORDED AND REFLECTED IN THE BOOKS OF ACCOUNT. HE SUBMITTED THAT THE MONEY WAS PAID TO COMMISSION OF ELECTRICITY, GENERAL COMP ANY OF ELECTRICAL ENERGY PRODUCTION, BASRAH, IRAQ, AS A CONTRACTUAL PAYMENT AND IT WAS A LEGITIMATE COMMISSION / REBATE GIVEN DURING THE COURSE OF BUSI NESS, TO THE PARTY TO WHOM THE GOODS WERE SOLD. IT WAS CONTENDED THAT THI S WAS A BONAFIDE PAYMENT MADE THROUGH PROPER BANKING CHANNELS AND IS NOT A KICK-BACK. AT PAGE-4 OF THE ASSESSMENT ORDER, THE CONTENTIONS OF THE ASSESSEE ARE BROUGHT OUT AS FOLLOWS:- IN VIEW OF WHAT IS STATED ABOVE, WE STRONGLY CONTEN DED I) PAYMENT OF US$ 5237 IN COMMISSION OF ELECTRICITY OF GENERAL COMPANY OF ELECTRICAL ENERGY, BASRAH WAS FOR GETTIN G BUSINESS. SUMO INTERNATIONAL PVT. LTD. ITA NO.5293 & 1345/MUM./2006 3 IT IS NORMAL BUSINESS EXPENDITURE LAID OUT OR EXPEN DED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF OUR BUSINESS. II) SAID PAYMENT HAS ULTIMATELY CULMINATED INTO BUSINES S AND PROFITS ON WHICH INCOME TAX HAS BEEN PAID. III) IT IS PERFECTLY LEGAL AND VALID PAYMENT MADE THROUG H PROPER BANKING CHANNEL. IV) THIS PAYMENT DOES NOT CONTRAVENE ANY LAW OR PUBLIC POLICY OF SOVEREIGN INDIA. THIS IS NOT AN EXPENDITURE INCURRE D BY US FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBI TED BY ANY LAW OF INDIA. HENCE QUESTION OF APPLYING EXPLANATIO N TO SECTION 37 FOR DISALLOWING SUCH EXPENSES DOES NOT ARISE. V) CONTEMPLATED PAYMENT IS, THEREFORE, AN ALLOWABLE DE DUCTION UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961. THE ASSESSING OFFICER REJECTED THE CONTENTIONS OF T HE ASSESSEE AND HELD THAT THE PAYMENT OF 10% WAS MADE SECRETLY AS K ICK-BACK AND THUS, THE SAME IS NOT ALLOWABLE UNDER SECTION 37 OF THE ACT. HE, THUS, DISALLOWED ` 2,50,563. 4. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER BEFORE T HE FIRST APPELLATE AUTHORITY WITHOUT SUCCESS. FURTHER AGGRIEVED, THE A SSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 5. LEARNED COUNSEL, MR. MANISH J. SETH, APPEARING ON B EHALF OF THE ASSESSEE, CONTENDS BEFORE US THAT THE PAYMENT IN QU ESTION WAS A DISCOUNT AND REBATE, AS IT WAS PAID TO THE VERY SAME PARTY T O WHOM THE ASSESSEE HAS SOLD THE GOODS. HE CONTENDS THAT THERE IS NOTHING I LLEGAL ABOUT THIS PAYMENT. HE SUBMITTED THAT IN THE VOLCKER COMMITTEES REPORT , NUMBER OF COMPANIES AND FIRMS WERE NAMED AND THAT IT IS NOT THE CASE OF REVENUE THAT THE ASSESSEE COMPANYS NAME FINDS A MENTION IN THE VOLC KER COMMITTEES REPORT. HE SUBMITTED THAT THE BANK GUARANTEE WAS EX ECUTED FOR 10% OF THE VALUE OF THE GOODS SUPPLIED AND THE ASSESSEE HAD TO REMIT 10% OF THE SALE PRICE OF THE GOODS SO AS TO WITHDRAW THE BANK GUARA NTEE OF 10%. HE RELIED ON THE DECISION OF KOLKATA BENCH OF THE TRIBUNAL IN TIL LIMITED V/S ACIT, VIDE ORDER DATED 30 TH MARCH 2007, WHEREIN THE TRIBUNAL HELD THAT NEITHER THE SUMO INTERNATIONAL PVT. LTD. ITA NO.5293 & 1345/MUM./2006 4 ASSESSING OFFICER NOR THE COMMISSIONER (APPEALS) HA D ACCESS THE SAID VOLCKER COMMITTEES REPORT, HENCE, THE PARTICULARS OF ALLEGATION ABOUT THE APPELLANTS NAME BEING MENTIONED IN THE VOLCKER COM MITTEES REPORT CANNOT STAND. HE ALSO REFERRED TO CERTAIN OTHER OBSERVATIO NS MADE BY THE TRIBUNAL. HE REPEATED THE CONTENTIONS MADE BEFORE THE FIRST A PPELLATE AUTHORITY AND PRAYED FOR RELIEF. 6. LEARNED DEPARTMENTAL REPRESENTATIVE, MR. D. SONGATE , ON THE OTHER HAND, SUBMITTED THAT THE VOLCKER COMMITTEES REPORT HELD THAT SECRETLY KICK- BACKS WERE MADE AND THIS WAS OPPOSED TO GOVERNMENT POLICY. HE POINTED OUT THAT IN THE VOLCKER COMMITTEES REPORT, THE FIN DING WAS THAT WHAT WAS ACTUALLY PAID WAS A BRIBE AND NOT COMMISSION. HE RE LIED ON PARA-5 OF COMMISSIONER (APPEALS)S ORDER AND SUBMITTED THAT N O EVIDENCE WAS FURNISHED TO PROVE THAT THE PAYMENT WAS MADE TO GOV ERNMENT OF IRAQ AND THAT IT WAS ACTUALLY A REBATE. HE RELIED ON THE DEC ISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF CIPLA LIMITED V/S ACIT, ITA NO.7284 TO 7286/MUM./2007, VIDE ORDER DATED 29 TH JULY 2009, AND SUBMITTED THAT UNDER SIMILAR CIRCUMSTANCES, DISALLOWANCE WAS CONFIRMED B Y THE TRIBUNAL. IT WAS POINTED OUT THAT MUMBAI BENCH OF THE TRIBUNAL IN TH E CASE OF CIPLA LIMITED, VIDE ORDER DATED 26 TH NOVEMBER 2010, CONFIRMED THE PENALTY. 7. IN REPLY, THE LEARNED COUNSEL POINTED OUT THAT IN C IPLA LIMITED (SUPRA), WHAT WAS CONSIDERED WAS OIL FOR FOOD PROGRAMME SPONSORED BY U.N. ON HUMANITARIAN CONSIDERATIONS AND THE GOVERNMENT OF I RAQ HAD INFLATED THE OIL BILLS AND THE ASSESSEE HAD ILLEGALLY AND UNAUTHORIZ EDLY PAID THROUGH A THIRD PARTY, THE GOVERNMENT OF IRAQ, AFTER SALES SERVICE FEE (A.S.S.F). HE EMPHASIZED THAT THE PAYMENTS WERE NOT MADE DIRECTLY TO THE GOVERNMENT OF IRAQ BUT WAS PAID TO A THIRD PARTY. HE SUBMITTED TH AT, IN THIS CASE, THE PAYMENT WAS MADE TO THE BUYER ITSELF AND IT WAS A C ONTRACTUAL PAYMENT. 8. RIVAL CONTENTIONS WERE HEARD. ON A CAREFUL CONSIDER ATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAPERS ON RECORD, ORDERS OF THE AUTHORITIES BELOW AND CASE LAWS CITED , WE HOLD AS FOLLOWS:- SUMO INTERNATIONAL PVT. LTD. ITA NO.5293 & 1345/MUM./2006 5 THIS IS A CASE WHERE THE ASSESSEE SUPPLIED GOODS TO A COMPANY NAMELY COMMISSION OF ELECTRICITY OF GENERAL COMPANY OF ELE CTRICAL ENERGY, BASRAH, IRAQ. THE TERMS OF THE CONTRACT STIPULATE THAT THE ASSESSEE HAS TO GIVE A BANK GUARANTEE WORTH 10% OF THE CONTRACT AMOUNT. ON COMP LETION OF THE CONTRACT AND ON RECEIPT OF PAYMENT, THE ASSESSEE IS REQUIRED TO PAY 10% OF THE SALE PRICE TO THE BUYER, TO THE COMMISSION OF ELECTRICIT Y, GENERAL COMPANY OF ELECTRICAL ENERGY PRODUCTION, BASRAH, IRAQ. THE ASS ESSEE HAD FURNISHED THE BANK GUARANTEE AND IT WAS ONLY THERAFTER THAT A LET TER OF CREDIT WAS SENT TO THE ASSESSEE BY THE PURCHASER ON 2 ND JUNE 2001. THEREAFTER, ON RECEIPT OF MONEY, THE ASSESSEE HAD, THROUGH A NATIONALISED BAN K, WHICH IS AUTHORISED DEALER IN FOREIGN EXCHANGE PAID 10% TO THE PURCHASER AFTER OBTAINING APPROVAL OF THE RESERVE BANK OF INDIA. THE QUESTION IS WHETHER THE PAYMENT MADE BY THE ASSESSEE CAN BE REGARDED AS AN ILLICIT PAYMENT OR ILLEGAL PAYMENT. IN OUR OPINION, ON THE FACTS OF THE CASE, THE PAYMENT IS A CONTRACTUAL PAYMENT AND CANNOT BE CALLED AN ILLICIT PAYMENT. COMING TO THE DECISION OF TRIBUNAL IN CIPLA LIMITED (SUPRA), THE FACTS ARE DIFFERENT AND THE TRIBUNAL WAS DEALING WITH THE ISSUE OF SUPPLY OF GO ODS UNDER FOOD FOR OIL PROGRAMME SPONSORED BY U.N. ON HUMANITARIAN CONSIDE RATIONS. IT IS NOBODYS CASE THAT THE ASSESSEE WAS SUPPLYING GOODS UNDER OIL FOR FOOD PROGRAMME SPONSORED BY U.N. IN THE CASE OF CIPLA LI MITED (SUPRA), IT WAS HELD THAT OIL BILLS WERE INFLATED THROUGH THE MEDIU M OF A.S.S.F. WHICH HAS BEEN RECOVERED BY THE COMPANY THROUGH ESCROW ACCOUN T MAINTAINED FOR OIL TRANSACTIONS UNDER THE PROGRAMME. NO SUCH CIRCUMSTA NCE EXISTS HERE. IN THE CASE OF CIPLA LIMITED (SUPRA), A.S.S.F. WAS PAID TO A THIRD PARTY WHEREAS IN THE PRESENT CASE, THE AMOUNT WAS RETURNED TO THE VE RY PARTY WHICH HAS PURCHASED THE GOODS FROM THE ASSESSEE. EXCEPT FOR M AKING OF GENERAL COMMENT ON THE VOLCKER COMMITTEES RECOMMENDATION, NOTHING IS PLACED BEFORE THE BENCH AS TO WHAT WAS SAID BY THE VOLCKER COMMITTEES REPORT AND AS TO WHETHER THE ASSESSEES NAME FIGURES IN THE SA ME. NO COPY WAS GIVEN TO THE ASSESSEE AND HENCE NO RELIANCE CAN BE PLACED ON THIS REPORT. BE THAT AS IT MAY, ON THE PECULIAR FACTS OF THIS CASE, AND KEEPING IN VIEW THAT THE AMOUNT WAS RETURNED TO THE VERY PARTY FROM WHOM PAY MENTS WAS RECEIVED SUMO INTERNATIONAL PVT. LTD. ITA NO.5293 & 1345/MUM./2006 6 FOR SUPPLY OF GOODS, WE ARE OF THE CONSIDERED OPINI ON THAT NO DISALLOWANCE IS CALLED FOR. CONSEQUENTLY, WE SET ASIDE THE ORDER OF THE LEARNED CIT(A) AND ALLOW THE GROUND OF APPEAL RAISED BY THE ASSESSEE. 9. COMING TO THE ISSUE OF RE-OPENING, ETC., THE LEARNE D COUNSEL DID NOT WISH TO PRESS THESE GROUNDS. LEARNED DEPARTMENTAL R EPRESENTATIVE DID NOT OBJECT TO THE SUBMISSIONS SO MADE BY THE LEARNED CO UNSEL. CONSEQUENTLY, THESE GROUNDS ARE DISMISSED AS NOT PRESSED . 10. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. 11. NOW, WE TAKE UP ASSESSEES APPEAL IN ITA NO.1345/MU M./2009, AND THE SOLE GROUND RAISED IS WHETHER OR NOT THE LEARNE D CIT(A) WAS JUSTIFIED IN CONFIRMING PENALTY OF ` 89,450, IMPOSED BY THE ASSESSING OFFICER CONSEQUEN T UPON CONFIRMATION OF DISALLOWANCE IN THE QUANTUM PR OCEEDINGS. SINCE THE ADDITION IN QUANTUM PROCEEDINGS IN ITA NO.5293/MUM. /2009, HAS BEEN DELETED BY US, THEREFORE, IMPOSITION OF PENALTY UND ER SECTION 271(1)(C) OF THE ACT DO NOT HAVE LEGS TO STAND. CONSEQUENTLY, WE HER EBY QUASH THE PENALTY SO IMPOSED BY THE ASSESSING OFFICER AND AS CONFIRMED B Y THE COMMISSIONER (APPEALS). 12. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. 13. TO SUM UP, ASSESSEES APPEAL IN ITA NO.5293/MUM./20 09 IS PARTLY ALLOWED AND ASSESSEES APPEAL IN ITA NO.1345/MUM./2 009, IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20.5.2011 SD/- VIJAY PAL RAO JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 20.5.2011 SUMO INTERNATIONAL PVT. LTD. ITA NO.5293 & 1345/MUM./2006 7 COPY TO : (1) THE ASSESSEE (2) THE RESPONDENT (3) THE CIT(A), MUMBAI, CONCERNED (4) THE CIT, MUMBAI CITY CONCERNED (5) THE DR, E BENCH, ITAT, MUMBAI TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI DATE INITIAL 1. DRAFT DICTATED ON 16.5.2011 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 17.5.2011 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 17.5.2011 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 17.5.2011 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 17.5.2011 SR.PS/PS 6. DATE OF PRONOUNCEMENT 20.5.2011 SR.PS 7. FILE SENT TO THE BENCH CLERK 20.5.2011 SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER