Ita/145/2012 Of Nortrans Marine Service Pvt. Ltd v. The Assistant Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT:- THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY, THE 6TH DAY OF AUGUST 2018 / 15TH SRAVANA, 1940 I.T.A.No.145 of 2012 ----------------------------- AGAINST THE ORDER IN I.T.A.NO.60/COCH/2010 DATED 17.02.2012 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN. ------------------- APPELLANT(S)/ APPELLANT:- -------------------------------------------- NORTRANS MARINE SERVICES PVT. LTD., (MERGED WITH TRANS ASIAN SHIPPING SERVICES PVT.LTD.), TRANS ASIA CORPORATE PARK, XIV/396-C, SEAPORT AIRPORT ROAD, CHITTETHUKARA, KAKKANAD. BY ADVS.SRI.SAJI VARGHESE SRI.R.VIHAYARAGHAVAN SMT.MARIAM MATHAI RESPONDENT(S)/ RESPONDENT:- -------------------------------------------------- THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -I(3), ERNAKULAM. BY SENIOR COUNSEL FOR GOVERNMENT OF INDIA (TAXES) SRI.P.K.R.MENON. BY STANDING COUNSEL FOR GOI (TAXES) SRI.JOSE JOSEPH. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06-08-2018,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:- I.T.A.No.145 of 2012 APPENDIX APPELLANT'S ANNEXURES:- ------------------------------------------- ANNEXURE A TRUE COPY OF THE ASSESSMENT ORDER DATED 15.12.2008 FOR THE YEAR 2006-2007.YEAR 2006-2007. ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER (APPEALS),DATED 30.11.2009.DATED 30.11.2009. ANNEXURE C CERTIFIED COPY OF INCOME TAX APPELLATE TRIBUNAL ORDER DATED 17.2.2012 FOR THE YEAR 2006-2007 (WITH TYPED COPY OF ORDER)DATED 17.2.2012 FOR THE YEAR 2006-2007 (WITH TYPED COPY OF ORDER) RESPONDENT'S ANNEXURES:- --------------------------------------------- NIL. vku/- K. Vinod Chandran & Ashok Menon, JJ. ------------------------------------------------------- I.T.A.No.145 of 2012 ------------------------------------------------------- Dated, this the 06[th] day of August, 2018 JUDGMENT Vinod Chandran, J: The substantial questions of law arising from the order of the Tribunal, as per the memorandum of appeal, are as herein below: (i)Whether on the facts and in the circumstances of the casethe Tribunal was right in law in holding that the amountwaived by the Principals would be taxable as revenue receiptin the hands of assessee? the Tribunal was right in law in holding that the amountwaived by the Principals would be taxable as revenue receiptin the hands of assessee? (ii)Whether on the facts and in the circumstances of the casethe Tribunal was right in law in holding that the amountwaived by the Principals representing the amount collectedfrom the customers on behalf of the principals in the capacityas agent would constitute trading receipts in the nature ofcommission income in the hands of assessee? (iii)Without prejudice to the claim of the Appellant as above,whether on the facts and circumstances of the case theTribunal was right in holding that the entire amount waivedwould accrue during the current Assessment year ignoringthe possible liability that will arise from the pending litigationarising from the agency business? (iv)Whether on the facts and in the circumstances of the casethe Tribunal was right in law in holding that the balancethe Tribunal was right in law in holding that the balance expenditure disallowed in the assessment year 2005-06u/s.40(a)(ia) is not an allowable deduction in the currentassessment year even though tax was deducted andremitted to the Government? (iii)Without prejudice to the claim of the Appellant as above,whether on the facts and circumstances of the case theTribunal was right in holding that the entire amount waivedwould accrue during the current Assessment year ignoringthe possible liability that will arise from the pending litigationarising from the agency business? (iv)Whether on the facts and in the circumstances of the casethe Tribunal was right in law in holding that the balancethe Tribunal was right in law in holding that the balance expenditure disallowed in the assessment year 2005-06u/s.40(a)(ia) is not an allowable deduction in the currentassessment year even though tax was deducted andremitted to the Government? 2. The appellant-assessee was the agent of two foreignshipping lines. The appellant was providing agency services to both theCompanies in accordance with the agreements executed by thePrincipal and Agent. The shipping lines intended to terminate theagency and a Memorandum of Understanding [MoU] was arrived at foreffecting termination. On such termination being effected, therelationship hit rough weather and the Shipping Companies togetherraised a claim of Rs.45,00,00,000/- against the appellant. Theoutstanding balance in the account of the Principals as on 31.03.2005,revealed from the appellant's own books of accounts wasRs.31,07,28,673/-. The Principals filed suit before the Courts in London;but, however, subsequently settled the issue for Rs.25,99,75,647/-. TheAssessing Officer found the balance outstanding credit for thefinancial year 2006-07 to be Rs.4,91,86,945/-, taxable as income. Theassessee offered Rs.1,90,12,018/- for taxation after deduction of legalcost of Principals paid on the basis of the Court order andexpenses/professional fees paid by the assessee as also the local expenses on behalf of the Principals from 16.04.2005 to 31.03.2007.The assessee offered the said amounts for taxation in the assessmentyear 2007-08. The AO, however, found the balance of the amountsremaining with the assessee after settlement of the liabilities to be theincome of the assessee for the year 2006-07. 3. The settlement was entered into in February, 2006 andbalance payments as per the settlement was made on 31.03.2006,reckoning the payment made by the agent in August 2005 also. The AO,added on the legal cost and local expenses of Principals as also thelegal expenses incurred by the assessee in computing the taxableincome. Thus, a total amount of Rs.4,91,86,945/- was brought to tax.On first appeal, by Annexure-B the Commissioner of Income Tax foundthat the entire amount received on cessation of liability is taxable for theassessment year 2006-07. However, the AO was directed to allow thelegitimate expenses incurred. But for the amount of Rs.7,05,226/- forwhich there is no substantiating evidence produced of an allowableexpense; which claim was also withdrawn by the appellant before thefirst appellate authority, the other legitimate expenses were directed tobe verified and allowed. The Tribunal concurred with the order of thefirst appellate authority. The Revenue does not challenge theallowances granted by the first appellate authority as affirmed by the Tribunal. The assessee, however, claims that the balance amounts afterwaiver are not liable to tax as income for the subject assessment year. 4. The learned Counsel for the appellant-assessee relies on the decision of the High Court of Calcutta in Bengal & AssamInvestors Ltd. v. Commissioner of Income Tax [(1983) 142 ITR 156]and that of the High Court of Andhra Pradesh in Commissioner ofIncome Tax v. Andhra General Finance Corporation [(1985) 156 ITR Tribunal. The assessee, however, claims that the balance amounts afterwaiver are not liable to tax as income for the subject assessment year. 4. The learned Counsel for the appellant-assessee relies on the decision of the High Court of Calcutta in Bengal & AssamInvestors Ltd. v. Commissioner of Income Tax [(1983) 142 ITR 156]and that of the High Court of Andhra Pradesh in Commissioner ofIncome Tax v. Andhra General Finance Corporation [(1985) 156 ITR 386]. It is argued that when there was a mere waiver of the liability,there is actually no income received by the assessee and in suchcircumstances, there could be no taxation of the amounts waived onaccount of the compromise agreement. The learned Counsel would alsorely on the decision of the Hon'ble Supreme Court in Commissioner v.Mahindra & Mahindra Ltd. [2018-TIOL-173-SC-IT]. 5. The learned Senior Counsel for Government of India(Taxes) would place reliance on Raghuvanshi Mills Ltd. v.Commissioner of Income Tax [(1952) XXII ITR 482], Commissionerof Income Tax v. Dharamdas Hargovandas [(1961) XLII ITR 427]and C.I.T. v. G.R.Karthikeyan [(1993) 201 ITR 866]. 6. Bengal & Assam Investors Ltd.; an insurance agent had excess amounts with them which was not commission and hence nottrading receipts. The High Court found that these moneys were received by the assessee not as remuneration but rebates for timely payment ofthe premium, which were in fact amounts entitled to the insured onwhose behalf the premium was paid. Though it was the assessee whopaid the premium in time, the assessee had the liability to pass on therebates or excess amounts over and above the premium to the policyholder. The mere fact that the assessee did not do so or that theinsurance company or the policy holder did not do anything to get backthe moneys would not for reason alone of such inaction be converted toremuneration. The taxability according to the Court had to bedetermined on the basis of the nature of the receipt; in what capacity itwas received and not on the subsequent conduct or the entries made bythe assessee. The assessee had received the amounts as an agent, butthen not as a commission or remuneration, and hence not a tradingreceipt or income at his hands was the finding. The assessee was foundto hold the said amounts in a fiduciary capacity. 7. Andhra General Finance Corporationcarried on thebusiness of finance under hire-purchase agreements. When financingvehicles, it also insisted for the insurance to be paid through them,which amounts were transferred to the insurance company. There weresome amounts remaining in excess with the insurance company whichin the relevant assessment year, was debited to the running account it maintained with the insurance company and credited to its profit andloss account. However the assessee claimed it was not income, sincethey were obliged to refund it to their customers, if ever they claimed it.The AO found that the hire-purchase agreements against which thepayments were received had long expired and the amounts weretrading receipts especially since it was transferred to the P & L account.The Tribunal held that the transfer to the P & L account was irrelevantand the crucial test is the year in which the assessee became entitled tothe amounts; which has to be determined with respect to the expiry ofthose individual hire-purchase agreements, on which there was anexcess payment, the sum total of which was the amount credited to theP & L Account in that year. The Tribunal held that the amount cannot betaxed in that subject year. The High Court referred to a number ofjudgments in which amounts were received by the assessees in afiduciary capacity and ruled the subject amount also to be not liable tobe treated as trading receipts. 8. What distinguishes the present case from the facts 8. What distinguishes the present case from the facts available in the High Court decisions, is that the amount remaining inthe account, after settlement of the dues to the Principals is not held bythe assessee in a fiduciary capacity. The transactions entered into bythe assessee on behalf of the Principals, saw amounts coming in to the running account of the Principal and the agent. The amounts expendedon behalf of the Principal and the commission of the agent had to bededucted and the balance is the amount due to the Principal. When thePrincipal's dues are settled by Court order or by settlement and theexpenses too are deducted, what remains in the account is notsomething which is retained in a fiduciary capacity and is income at thehands of the assessee. Only on settlement of accounts it will bedisclosed as to what are the amounts available to the assessee. Therecan hence be no claim raised by the erstwhile Principals or any othersto the amounts the agent, the assessee, received on behalf of thePrincipals. Admittedly the entire amounts from the customers of theprincipals were credited to the agent-assessee, who maintained arunning account for the Principals. There is no determination of thecommission and admittedly after the expenses incurred on behalf of theprincipal is met and the amounts due to the Principal is transferred whatthe assessee gets to enrich its coffers is the income obtained by theagent-assessee. The assessee has not attempted to apprise theauthorities of the commission entitled or any determination of the same.Hence there can be no contention raised on the basis of the decisionsof the two High Courts, cited, to contend that what remains in excesswith the assessee are amounts received on behalf of the Principals; which they hold only in a fiduciary capacity. The amounts left in theaccount after deduction of expenses would be income taxable;especially since on settlement of the suit claims, the right if at allavailable to the Principals to such amounts, stands extinguished. 9. In The Commissioner versus Mahindra and Mahindra Ltd. [2018-TIOL-173-SC-IT], the assessee,a company manufacturingmotor vehicles, entered into a contract with a like foreign company, forpurchase of die models and equipments and tools. A subsidiarycompany of the foreign company financed the purchase. The assesseehad been regularly paying interest at the rate agreed upon. Later thefinancier was taken over by another, who waived the entire principalamount of the loan. The Income Tax Officer treated the entire principalamount waived as income of the previous year. Section 28(iv) wasfound to be not applicable since there was no benefit or perquisitearising from the business or profession. Section 41 was found to be aprohibition of a double benefit being claimed by the assessee; by virtueof an allowance or deduction in any previous year in respect of anexpenditure or trading liability which later stood waived off by thecreditor. The assessee therein had never claimed the purchase value asan expenditure, nor had claimed the interest paid as as a deductionunder Section 36(1)(iii). The amortization benefit claimed in the previous years was held to be akin to depreciation on the machinery. In thepresent case there can be no doubt that on settlement of the accountsbetween the principal and the agent, after deductions made forexpenditure incurred by the agent on behalf of the assessee; whateveramount remains, accrued in the account of the assessee, is the profitsand gains arising from the business, and income of the assessee. years was held to be akin to depreciation on the machinery. In thepresent case there can be no doubt that on settlement of the accountsbetween the principal and the agent, after deductions made forexpenditure incurred by the agent on behalf of the assessee; whateveramount remains, accrued in the account of the assessee, is the profitsand gains arising from the business, and income of the assessee. 10. Testing the grounds raised as against the facts, it has tobe noticed that there is nothing to substantiate the contention raised bythe assessee that out of the alleged waiver of five crores, three croreswere towards legal expenses incurred by the assessee and two crorestowards possible future claims. The terms of settlement between theprincipals and the assessee, as was noticed by the Tribunal, was neverplaced on record by the assessee. Though we find that the legalexpenses could be validly claimed to the extent evidenced, there is noreason to find the assessee holding any amounts in a fiduciary capacity.The contention is also belied by the action of the assessee in havingoffered the allegedly waived amounts, after making deductions, forassessment in the next year. We agree with the hypothetical situationnarrated by the Tribunal as reflected in Paragraph 19 of the order. 11. We garner further support from the decision of theSupreme Court in G.R.Karthikeyan (supra). The assessee, a renowned Motor Rallyst, was allowed exemption from including in the income anamount of Rs.22,000/- having come out first in an All India HighwayMotor Rally. The rally was basically one designed for testing theendurance driving, observance of traffic regulations, reliability of theautomobiles and so on and so forth, with prizes awarded on the basis ofoverall classification. The classification itself was a system of penaltypoints with the competitor finishing with least rally violations coming outfirst. The Tribunal found that the amount received cannot be treated asincome coming within Section 2(24)(ix), since the rally was not a gameand tested the skill and endurance of the driver. The High Court tooconcurred with the view of the Tribunal and found the receipt not torepresent winnings. Noticing the definition of 'income' under Section2(24) as also the exclusion from total income specified undersub-section (3) of Section 10, it was held” “If the monies which are not earned - in the true sense of theword - constitute income why do monies earned by skill andtoil not constitute income?” Finding the word “income” to be one not easy to define, it was held so: “Since the definition of “income” in section 2(24) is aninclusive one, its ambit, in our opinion, should be the sameas that of the word income occurring in entry 82 of List I ofthe Seventh Schedule to the Constitution (corresponding to entry 54 of List I of the Seventh Schedule to theGovernment of India Act)”. The word “income”, according to the Supreme Court, had to be giventhe widest amplitude. It was held again that: “If the monies which are not earned - in the true sense of theword - constitute income why do monies earned by skill andtoil not constitute income?” Finding the word “income” to be one not easy to define, it was held so: “Since the definition of “income” in section 2(24) is aninclusive one, its ambit, in our opinion, should be the sameas that of the word income occurring in entry 82 of List I ofthe Seventh Schedule to the Constitution (corresponding to entry 54 of List I of the Seventh Schedule to theGovernment of India Act)”. The word “income”, according to the Supreme Court, had to be giventhe widest amplitude. It was held again that: “... even if a receipt does not fall within sub-clause (ix), or forthat matter, any of the sub-clauses in Section 2(24), it may yetconstitute income. To say otherwise, would mean reading theseveral clauses in Section 2(24) as exhaustive of the meaningof income' when the Statute expressly says that it is inclusive. Itwould be a wrong approach to try to place a given receiptunder one or the other Sub-clauses in Section 2(24) and if itdoes not fall under any of the Sub-clauses, to say that it doesnot constitute income. Even if a receipt does not fall within theambit of any of the Sub-clauses in Section 2(24), it may still beincome if it partakes of the nature of the income. The ideabehind providing an inclusive definition in Section 2(24) is notto limit its meaning but to widen its net. this Court hasrepeatedly said that the word income' is of widest amplitude,and that it must be given its natural and grammatical meaning.Judging from the above standpoint, the receipt concernedherein is also income. May be it is casual in nature but it isincome nevertheless. That even the casual income is income'is evident from Section 10(3). Section 10 seeks to exemptcertain "incomes' from being included in the "total income”. Acasual receipt - which should mean, in the context, casualincome - is liable to be included in the total income, if it is in excess of Rs. 1,000/-, by virtue of sub-section (3) of Section 10.Even though it is a clause exempting a particularreceipt/income to a limited extent, it is yet relevant on themeaning of the expression “income”. In our respectful opinion,the High Court, having found that the receipt in question doesnot fall within Sub-clause (ix) of Section 2(24), erred inconcluding that it does not constitute income”. 12. We also have to notice, in the context of the specificreceipt of amounts by an agent, Section 2(24)(v) and 28(ii)(c):Sec.2(24):“income” includes-- xxx xxx xxx (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59. Sec.28:Profits and gains of business or profession The following income shall be chargeable to income taxunder the head “Profits and gains of business or profession”,-- xxxxxxxxx (ii) any compensation or other payment due to or received by,-- xxx xxx xxx (c) any person, by whatever name called, holding anagency in India for any part of the activities relating to thebusiness of any other person, at or in connection with thetermination of the agency or the modification of the termsand conditions relating thereto;” 12. We also have to notice, in the context of the specificreceipt of amounts by an agent, Section 2(24)(v) and 28(ii)(c):Sec.2(24):“income” includes-- xxx xxx xxx (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59. Sec.28:Profits and gains of business or profession The following income shall be chargeable to income taxunder the head “Profits and gains of business or profession”,-- xxxxxxxxx (ii) any compensation or other payment due to or received by,-- xxx xxx xxx (c) any person, by whatever name called, holding anagency in India for any part of the activities relating to thebusiness of any other person, at or in connection with thetermination of the agency or the modification of the termsand conditions relating thereto;” 13. The amounts received by the assessee-agent, on behalfof the Principal, after setting of the expenditure incurred on behalf of thePrincipal and satisfying that due to the Principal, is not kept in its handsin a fiduciary capacity and is income in its hands. Tribunal was right inholding the amounts waived by the Principals; in accordance with asettlement arrived at with their agent as income in the hands of theassessee-agent. What is left with the assessee-agent after settlementof accounts with the Principals and after deducting the expensesincurred on behalf of the Principals, constitute the character ofcommission received and are trading receipts of the assessee. There isno question of any further liability arising from the litigation initiated bythe Principals of the assessee, since the same has been settled andamounts due to the Principals satisfied. We hence answer the questionsof law framed as 1 to 3 against the assessee and in favour of therevenue. 14. On the fourth question it is to be noticed that theexpenditure claimed in the previous year was disallowed for reason ofno deduction of TDS having been made. The assessing Officer wouldhave to look at whether the assessee is entitled to the benefit availableunder the first proviso to Section 40(a)(ia). The Tribunal by a laconicstatement dismissed the plea finding the dis-allowance of the earlier assessment year not arising in the subsequent one. The proviso speaksof payment in a subsequent year and the allowance being made in thatsubsequent year. The question hence is answered against the revenueand in favour of the assessee, but the actual allowance being left to bedecided by the Assessing Officer who has to verify the claim and decideaccordingly. The appeal is allowed in part. Parties are left to suffer theirrespective costs. Sd/-K.Vinod ChandranJudge vku/- Sd/- Ashok MenonJudge [ true copy ]