Debunking a norm that income-tax laws in India strictly prohibit any allowance to illegal payments, including kickbacks, a Kolkata bench of the Income-Tax Appellate Tribunal (ITAT) has allowed deduction for illegal kickbacks paid by an Indian company to authorities in Iraq, on the ground that the Indian company did not know its payment would ultimately end up as a bribe. 

Explanation to Section 37 (I) of the Income-tax Act does not allow tax benefits for illegal payments. Yet, the ITAT justified its decision by holding that there was no material to suggest the taxpayer company, Rajarani Exports, was aware that the payment it made would end up as kickbacks. 

The transaction in question was made under the "oil for food" programme administered by the United Nations for helping the people of Iraq. Under this scheme, Iraq was allowed to export oil and deposit the proceedings in an escrow account for importing essential items for its people. 

The scheme was not without controversy, and an Independent Inquiry Commission (IIC) was set up by the UN to probe into allegations of irregularities. Rajarani Exports had exported tea to Iraq under the scheme and in the process paid a commission to Jordanbased Alia Transportation and Tradings. This commission had ended up as a kickback to Iraqi authorities. 

IIC, in its report, had mentioned Alia Transportations as a key figure in the irregularities in the scheme. The ITAT held that even if the IIC report was taken for granted without scrutiny, there was no material suggesting the taxpayer company knew in advance its payment would end up as kickbacks to Iraq authorities. 

The Indian company had made a bonafide transaction, but the illegality took place at another phase of the transaction, where Alia and Iraq authorities interacted, the tribunal said. (Economic Times)