The Bofors ghost returned to haunt the Congress party with an income tax tribunal saying that kickbacks of Rs 41 crore were paid to late Win Chaddha, an agent of the Swedish arms manufacturer and Italian businessman Ottavio Quattrocchi in the Howitzer gun deal and that they are liable to pay tax in India on such income.

"Inaction in this regard may lead to a non-existent undesirable and detrimental notion that India is a soft state and one can meddle with its tax laws with impunity," the Income Tax Appellate Tribunal said in its 98-page order.

The tribunal gave this order while dismissing an appeal by Win Chaddha's son against income tax department's claim of Rs 52 crore and Rs 85 lakh from his father for the assessment years 1987-88 and 1988-89.

In the order, the tribunal details the denials by gun maker Bofors about existence of middlemen in the 1986 deal valued at Rs 1,437 crore and the efforts by Quarterdeck, an American finance company with expertise in defence and aerospace, to open a series of accounts to transfer funds in an attempt to obliterate the money trail.

Holding that Bofors should have reduced the commissions paid from the contract price, the tribunal observed that government had to pay excess amount of about Rs 41 crore, which was passed to Chaddha and Quattrocchi against the terms of contract.

The order mentions that a commission of Rs 32.66 crore was transferred to Svenska Inc, Panama, which was traced to Chaddha, and was credited in an account of Swiss Bank Corporation, Geneva.

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The tribunal noted that Chaddha was representing Bofors as their agent in India since long. The evidence collected during investigations by tax authorities and other agencies reflected that he had received income in the Bofors gun deal more than what was disclosed in his return of income. Following political controversy in India, the government made a formal request to Swedish government in April 1987 for investigations into allegations of kickbacks.

The Swedish National Audit Bureau confirmed that payments to the tune of SEK 170-250 million (Rs 28-42 crore) were made by Bofors to its previous agent in India but the names of recipients were not mentioned.

The investigations, tribunal said, revealed that Quattrocchi had contacted Myles Tweedale Scott, director of M/s A E Services Limited sometime in August 1985 for the purpose of the agreement and was instrumental in brining the agreement between AE Services and Bofors.

It noted than Quattrocchi remained in India between February 1965 and July 1993 except for a brief interval from March 1966 to June 1968. "He was a chartered accountant by profession, working with Snamprogetti, an Italian multinational company providing services of designing, engineering, management of construction and the training of personnel in the sector of oil refineries, gas processing, petrochemicals, fertilisers and pipelines. "Neither Snamprogetti, nor Quattrocchi had any experience of guns, gun systems or any related defence equipment," it said.

The tribunal order narrates the various accounts into which the money from AE Services travelled first to Colbar Investments Limited, Panama, with the Union Bank of Switzerland, Geneva.Another sum was transferred to Wetelsen Overseas, South Africa with Union Bank of Switzerland. Further an amount of transferred to account of Wetelsen Overseas to an account of International Investments Development Company in Ansbacher Limited, St Peter Port, Guernsey. "These accounts of Colbar Investments Inc as well as Wetelsen Overseas, were being controlled by Quattrocchi and his wife Maria," the tribunal order said.

Inquiries further revealed that while opening the account of Colbar Investments Limited Inc with the Union Bank of Switzerland, on March 30, 1984 Quattrocchi had mentioned his address in India as "Colony East, New Delhi, India", which was a fake and non-existent address, it said.

The order said that investigations revealed that Chaddha and Quattrocchi had been transferring the funds received from Bofors frequently from one account to another and from one jurisdiction to another to avoid detection and to obliterate trail of money.

The tribunal also went into the report of the Joint Parliamentary Committee that went into the Bofors issue in which it said Chaddha cannot be described as a middleman between Bofors and the government and it cannot be concluded that he received kickbacks, pending investigations. However, the Tribunal said that JPC report nowhere said that Chaddha or any other entities were held to be immune or exonerated from such charges.

"In our view, the JPC has neither intended to oust the jurisdiction of the investigative agencies, nor has given findings constituting res judicata on the issues. Therefore, we do not find ourselves persuaded to hold that the JPC gave any clean chit to the Chaddha," it said.

The Supreme Court had also rejected Chaddha's petition seeking discharge from the criminal case and held accordingly. "The only logical and inescapable conclusion, which can be drawn from all these facts, coincidences, records and various parameters laid down by the courts in this behalf, as discussed herein before, is that Win Chaddha was the principal beneficiary of the payments made by Bofors into the account of Svenska Incorporated," it said.

Chaddha's plea that some material was obtained by Letter Rogatory with immunity provided by Swedish law from being used against third parties in tax frauds in the nature of duties, custom, money laundering etc., the Tribunal said, "the immunity if any was applicable to money laundering, custom duties etc. and that too for tax frauds only." It said there was no mention of income tax proceedings therein and the challenged orders were for assessing regular income tax proceedings and not for tax frauds. Hence Chaddha's plea was rejected.

Holding that Chaddha was liable to pay income tax as assessed by the assessment officer, the tribunal said, AE Services, Ano, Moresco, etc. pertained to this Indian defence contract executed in India.

"All these entities are amenable to jurisdiction of Indian income tax department, to bring to tax the amount which accrues to or arises to them for these services, or is received, or it is deemed to be so by them. Indian income tax can be levied on all types of income, including legal and illegal income, whether the recipients are Indian or foreign residents. In these facts, all the connected entities are clearly amenable to Indian tax jurisdiction for their respective income," the tribunal held.

In the Bofors case the fundamental contract was executed in India between the company and the defence ministry and the payments were made from India and the services were to be rendered in India. "All the incidental payments would have an Indian connection. Therefore, the Indian tax jurisdiction is squarely invoked," it held.

The tribunal said that it was surprised that no action seemed to have been taken against Quattrocchi and other related entities by the Income Tax Department. Quattrocchi was living in India for a considerable time. The issue about his tax residence status should have been verified.

Quattrocchi was known to be close to the Gandhi family and tribunal's observations in the Bofors episode may have come at an inopportune time for the Congress and the government which is already battling various allegations of corruption. He left India in 1993 even as a Central Bureau of Investigation case was filed on kickbacks in the deal.