The ITAT Mumbai has delivered a significant ruling affirming that expenditures incurred to overcome extraordinary banking obstacles arising from international sanctions qualify as legitimate business expenses under Section 37(1) of the Income Tax Act, provided they are shown to be commercially expedient from the assessee’s perspective. The decision reinforces the principle that tax authorities cannot substitute their commercial judgment for that of the taxpayer.
Background & Facts
The Dispute
The appellant, M/s. Indisol Marketing Pvt. Ltd., a pharmaceutical trading company engaged in the import of bulk chemical and pharmaceutical products, incurred professional fees of Rs.6,75,38,035/- during the assessment year 2022-23 to M/s. MJB Overseas. The payment was made to facilitate timely remittance of funds to overseas suppliers located in Iran, whose goods were subject to U.S. OFAC sanctions. Due to these sanctions, Indian banks were delaying or rejecting payment clearances, resulting in extended payment cycles, disrupted supply chains, and loss of business opportunities.
Key Facts
- The assessee imported goods originating from Iran, which triggered OFAC sanctions and complex banking compliance requirements.
- Payment delays to foreign creditors averaged 167 days in A.Y. 2021-22, severely impacting inventory turnover and sales.
- To mitigate this, the assessee engaged M/s. MJB Overseas, a firm incorporated on 21.08.2020, to act as a liaison between the company and banks.
- The services included navigating RBI/FEMA norms, expediting IDPMS/EDPMS filings, coordinating with banks, and resolving payment bottlenecks.
- An agreement dated 01.10.2020 was executed between the parties, with fees charged on a case-to-case basis ranging from 0.15% to 0.75% of transaction value.
- The assessee opened two new bank accounts (RBL and Yes Bank) specifically to facilitate transactions through MJB Overseas’s banking contacts.
- M/s. MJB Overseas received Rs.6,75,38,035/- in A.Y. 2022-23, which constituted nearly 98% of its total revenue from operations.
- M/s. MJB Overseas filed its income tax return, disclosed the income, paid taxes, and was audited under GST without adverse findings.
- The GST Audit Report No.581/Audit-Thane/2025-26 dated 11.02.2026 confirmed the legitimacy of the transactions.
- Comparative financial data showed a 73% increase in turnover (from Rs.1,507 crores to Rs.2,620 crores) and a 286% increase in net profit after engaging MJB Overseas, while payment cycle reduced from 167 days to 103 days.
Procedural History
- 20.03.2024: Assessment order passed by Ld. AO under Section 143(3) r.w.s. 144B disallowing Rs.6,75,38,035/- as professional fees.
- 20.06.2025: Ld. CIT(A) upheld the disallowance.
- 07.05.2026: Hearing before ITAT Mumbai.
- 12.05.2026: Judgment pronounced by ITAT Mumbai.
The Parties' Positions
Assessee (Appellant): Argued that the fees were incurred to overcome extraordinary banking impediments caused by OFAC sanctions, which were beyond the control of normal import-export executives. The services were essential for business continuity and directly linked to increased turnover and profitability. Relied on Shiv Raj Gupta v. CIT and CIT v. Indo Saudi Services (P.) Ltd. to assert that commercial expediency must be judged from the assessee’s standpoint.
Revenue (Respondent): Contended that the services were routine import-export functions that could be performed internally. Alleged lack of detailed service descriptions, absence of multiple clients for MJB Overseas, and the fact that the firm was incorporated just two months before the agreement raised suspicion. Argued that the residential/chawl address of the recipient and lack of employee records indicated a sham arrangement.
Relief Sought
The appellant sought deletion of the disallowance of Rs.6,75,38,035/-, restoration of the claimed deduction under Section 37(1), and consequential relief in the assessment.
The Legal Issue
The central question was whether professional fees paid to facilitate remittances for imports from OFAC-sanctioned jurisdictions qualify as expenditures incurred wholly and exclusively for business purposes under Section 37(1) of the Income Tax Act, even when the service provider has limited clients and no conventional infrastructure, and when the revenue authorities have not disproved the genuineness of the transaction.
Arguments Presented
For the Appellant
The Ld. AR submitted that the expenditure was not merely commercial but necessary for survival in a sanctioned environment. The fees were paid through banking channels with TDS deducted, and the recipient had disclosed the income, paid taxes, and passed GST audit. The reduction in payment cycle from 167 to 103 days directly correlated with a 73% increase in turnover and 286% increase in profits. Relied on Shiv Raj Gupta v. CIT to argue that reasonableness must be judged from the businessman’s perspective, not the revenue’s. Cited CIT v. Indo Saudi Services (P.) Ltd. to show that where the recipient pays tax, disallowance on grounds of excessiveness is unsustainable.
For the Respondent
The Ld. DR argued that the services rendered were routine and could be handled by in-house staff. Highlighted that M/s. MJB Overseas had no other clients, was incorporated shortly before the agreement, and operated from residential addresses. Asserted that no detailed service reports, employee records, or work logs were furnished. Contended that the absence of independent verification by banks or industry peers rendered the claim speculative.
The Court's Analysis
The ITAT rejected the revenue’s reliance on assumptions and surmises. It emphasized that the burden to prove non-genuineness lies with the Department, and mere suspicion or absence of conventional documentation cannot override established banking realities.
"The observations of the Ld. AO and the Ld. CIT(A) are primarily based on the premise that the services rendered by the recipient were not supported by conventional documentary evidences and that such activities could ordinarily be performed by an import-export executive. In our considered opinion, such reasoning proceeds merely on assumptions and surmises without properly appreciating the peculiar nature of the transactions undertaken by the assessee."
The Bench noted that the Department failed to conduct any inquiry with banks or other importers dealing with OFAC jurisdictions to verify the claimed difficulties. It held that the fact that M/s. MJB Overseas had only one major client did not invalidate the transaction, especially when the recipient had disclosed income, paid taxes, and was audited under GST.
"Merely because M/s. MJB Overseas had predominantly rendered such services to the assessee alone, the same cannot by itself lead to an inference that the transactions are sham or ingenuine."
The ITAT relied on the Supreme Court’s ruling in Shiv Raj Gupta that "the Income Tax Department cannot enter into the thicket of reasonableness of amounts paid by the assessee" and on the Bombay High Court’s decision in Indo Saudi Services, which held that tax payment by the recipient negates allegations of tax arbitrage.
The Bench concluded that the expenditure had a direct nexus with business operations, was incurred to overcome extraordinary external constraints, and was not a mere device to shift income. The documentary trail - invoices, bank statements, ITRs, GST audit report, and financial correlation - collectively established genuineness.
The Verdict
The appeal of the assessee was allowed. The disallowance of Rs.6,75,38,035/- made by the Ld. AO and sustained by the Ld. CIT(A) is deleted. The professional fees paid to M/s. MJB Overseas are allowed as a deduction under Section 37(1) of the Income Tax Act. The assessment for A.Y. 2022-23 is to be reopened to give effect to this order. No costs are awarded.
What This Means For Similar Cases
Commercial Expediency Is Context-Specific
- Practitioners must document the unique external constraints (e.g., sanctions, regulatory delays, banking restrictions) that necessitate third-party facilitation.
- Financial correlation - such as reduced payment cycles linked to increased turnover - must be quantified and presented as evidence of business benefit.
- The mere fact that services could be performed internally does not negate commercial expediency if the internal capacity is functionally inadequate due to external factors.
Documentation Over Conventional Structure
- Service providers need not have large offices or multiple clients; specialized expertise and banking relationships are valid business models.
- Invoices, bank statements, ITRs, GST audit reports, and correspondence are sufficient if they establish payment, receipt, and tax compliance.
- Avoid relying on oral explanations; always attach agreements, emails, and working notes linking fees to specific transactions.
Revenue Cannot Rely on Suspicion Alone
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The Department must produce cogent evidence of sham transactions - not just point to unusual structures.
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Absence of inquiry into banks or industry peers weakens the revenue’s case significantly.
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GST audit clearance and tax payment by the recipient are powerful rebuttals to allegations of tax evasion or arbitrage.
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The judgment sets a precedent for importers dealing with sanctioned jurisdictions (Iran, Syria, North Korea, etc.) to claim legitimate facilitation fees.
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Tax advisors should now advise clients to proactively document banking challenges and retain records of third-party facilitation arrangements.
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This ruling empowers businesses operating in geopolitically sensitive trade corridors to claim necessary expenditures without fear of arbitrary disallowance.
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Practitioners should cite Shiv Raj Gupta and Indo Saudi Services in all cases involving third-party facilitation fees under Section 37(1).
