Income Tax Appellate Tribunal - Pune
I.D.O.R.I. (P) Ltd. vs Deputy Commissioner Of Income Tax on 31 August, 2005
Equivalent citations: [2008]112ITD149(PUNE), [2008]301ITR374(PUNE), (2007)108TTJ(PUNE)433
ORDER
Ahmad Fareed, A.M.
1. These two appeals by the assessee directed against the order of the CIT(A) Kolhapur, dt. 24th July, 1998 for asst. yr. 1992-93 and dt. 3rd Sept., 1998 for asst. yr. 1994-95 were heard together and therefore, these are being disposed of by a common order for the sake of convenience.
2. The only issue involved in these appeals is about the disallowances of Rs. 5,36,234 and Rs. 3,33,771 made by the AO in asst. yrs. 1993-94 and 1994-95 respectively and confirmed by the CIT(A).
3. The assessee company was deriving income from a diagnostic centre having facilities of CT scan, ultrasound and X-ray. The assessee made a claim for deduction of Rs. 5,36,254 on account of professional charges paid to three directors who were also directors of the assessee company as under:
Name Period Amount (Rs.)
Dr. S.M. Karnawat (MD) 1-4-1990 to 31-3-1991 78,846.20
Dr. C.P. Mehta -do- 78,846.20
Dr. K.B. Patankar -do- 78,846.20
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Sub-total 2,36,538.60
Dr. S.M. Karnawat 1-4-1991 to 31-3-1992 99,898.28
Dr. C.P. Mehta -do- 99,898.28
Dr. K.B. Patankar -do- 99,898.29
___________
Sub-total 2,99,694.45
Total 5,36,233.85
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4. Shri K.A. Sathe, the learned Authorised Representative submitted that Dr. C.P. Mehta, Dr. S.M. Karnawat and Dr. K.B. Patankar were carrying on medical profession specializing in Radiology (CT scan, ultrasound and X-ray) in partnership under the name and style of M/s Kolhapur Diagnostic Center and Dr. Mehta, in addition had a proprietary X-ray clinic under the name of M/s Mehta X-ray Clinic at Kolhapur. The assessee company entered into an agreement on 1st April, 1990 with the three doctors for taking over the professional activities carried on by them in the city of Kolhapur by purchasing machinery and equipments belonging to Dr. Mehta and also the said partnership firm M/s Kolhapur Diagnostic Center for an agreed price. In terms of this agreement, Dr. Mehta, Dr. Karnavat and Dr. Patankar agreed that they shall not carry on the aforesaid professional activities either individually or collectively and shall not do or omit to do any act which will be competing to or detrimental to the interest of the assessee company. The restrictive covenant was to be operative for a period of five years from the date of the agreement by which time the assessee company expected to build its own goodwill in the city of Kolhapur. In consideration of the restrictive covenants, the assessee company agreed to pay to the three doctors as under:
(a) To M/s Kolhapur Diagnostic Center--
(I) Rs. 1.50 lakhs for transfer of tenancy rights of the premises situated (at) 615 Shahupuri, 2nd lane, Kolhapur (II) Rs. 40,000 towards the cost of furniture fittings electrical connections, etc. (III) Rs. 10,000 for user of telephone bearing No. 28601 which is presently standing in the name of Dr. C.P. Mehta. The company was free to get the same transferred in its own name and at its own cost.
(b) The company was to pay the following amounts to the three doctors in consideration of the restrictive covenants undertaken by them.
(I) Dr. C.P. Mehta Rs. 5 lakhs (II) Dr. S.M. Karnawat Rs. 3 lakhs (III)Dr. K.B. Patankar Rs. 1 lakh.
5. The assessee company entered into another agreement with the three doctors on 31st July, 1991. In terms of this agreement, the assessee company agreed to pay to each one of the three doctors, at the rate of 1.66 per cent of the total collection on CT scan, ultrasound and X-ray, w.e.f. 1st April, 1990, for a duration of 25 years. Shri Sathe, the learned Authorised Representative reiterated that the three doctors had merged their professional activities, that the impugned payment was made in consideration thereof and that it was an allowable expenditure. He also raised an alternative plea saying that the agreement dt. 31st July, 1991 had created an overriding charge. He submitted that the liability arose at source and that it related to the receipts and consequently it did not become receipt in the hands of the assessee company. He placed reliance on the decisions in the following cases:
(i) Jit & Pal X-rays (P) Ltd. v. CIT ;
(ii) CIT v. C.N. Patuck ;
(iii) Raja Bejoy Singh Dudhuria v. CIT (1933) 1 ITR 135 (PC).
6. Shri M.M. Shrivastava the learned Departmental Representative placed reliance on the orders of lower authorities and vehemently argued saying that the order of the CIT(A) needed to be upheld.
7. We have considered the rival submissions in the light of material on record and the precedents cited. It is seen that for the services rendered by them the doctors were paid salaries as under:
Asst. yr. Dr. Mehta Dr. Karnawat Dr. Patankar 1991-92 1,17,600 1,17,600 1,17,600 1992-93 1,09,200 1,09,200 1,02,200 1993-94 1,39,000 1,39,000 1,39,000
8. Also in respect of the restrictive covenant vide agreement dt. 1st April, 1990, the doctors received payments as mentioned in para 4 above. And then after more than one year yet another agreement was entered into on 31st July, 1991. In terms of this agreement each one of them are to be paid by the assessee company at the rate of 1.66 per cent of the total collections in respect of CT scan, ultrasound and X-ray w.e.f. 1st April, 1990 and for a duration of 25 years and in the event of death or insolvency of any one of them the same payment shall be made to their legal heirs. The terms of the agreement dt. 31st July, 1991 leave no doubt in our mind that the impugned payment does not qualify the conditions mentioned in Section 37(1) of the Act. The CIT(A) has rightly observed that there is no connection between the impugned payments and the services rendered and that this expenditure could not be treated as business expenditure under Section 37(1).
9. Shri Sathe, the learned Authorised Representative, however, raised an alternative plea saying that the agreement dt. 31st July, 1991 had created an overriding charge. He submitted that the liability in respect of the impugned payment arose at source, that it related to the receipts and consequently it did not become receipt in the hands of the assessee company. Since this was a legal plea it was admitted for adjudication. Before proceeding to examine this plea we need to discuss the legal position with regard to the question whether an amount paid is application of income or diversion by an overriding title.
10. The question whether an amount paid is application of income or diversion by an overriding title is a vexed question in IT law. The principles on this point have been laid down by various decisions.
11. In Raja Bejoy Singh Dudhuria (supra), the Privy Council (per Macmillan L.J.) held that where an amount had to be paid to the step-mother in pursuance of a decree creating a charge on the assessee's resources it was not application of the assessee's income but rather the allocation of a sum out of his revenue before it becomes income. A diversion of income by an overriding title need not necessarily be by a decree of Court or by statutory or customary law, but may be under the provisions of a Will, or agreement, or deed e.g. a deed of sale or gift or partnership or sub-partnership or partition of joint family property member.
12. It was held by the Supreme Court in the case of Provat Kumar Mitter v. CIT (1961) 41 ITP 624 (SC) that the fundamental principle is that an application of income is an allocation of one's own income after it accrues or has arisen, although such application may be under a contract or obligation, whereas diversion of income is that which diverts away or deflects before it accrues to or reaches the assessee, and it is received by him only for the benefit of the person who is entitled to the income under an overriding charge or title.
13. In the case of Motilal Chhadami Lal Jain v. CIT , it was explained by the Supreme Court that what has to be seen is the nature of obligation by reason of which the income becomes payable to a person other than the one receiving it. Where the obligation flows out of an antecedent and independent title it effectively slices away a part of the corpus of the right to receive the entire income and thus it would be a case of diversion.
14. In the case of CIT v. Imperial Chemical Industries (India) (P) Ltd. , it was pointed by the Supreme Court that where there is an obligation to apply an income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee, it is a case of diversion of the income.
15. The principle which can be culled out from the above rulings is that where an assessee received an amount of money but it is for the benefit of some other person under some antecedent obligation then it is a case of diversion of income by superior title and not application of income. There is a distinction between obligation to spend money in a particular manner attached to an income, and a similar obligation attached to the source of the income. In other words, to be an overriding charge the obligation must be attached to the source of the income.
16. We now proceed to apply the above principles to the present case. The assessee company having three doctors as its directors had taken over the professional activities carried on by them. The company had entered a restrictive covenant with the doctors vide agreement dt. 1st April, 1990. The consideration paid by the assessee company to the doctors in respect of the restrictive covenants is mentioned in para 4 above. The doctors are directors of the assessee company and are paid salary as per the details mentioned in para 7 above. It was after more than a year on 31st July, 1991 that another agreement was entered into between the assessee company and the three doctors providing for the impugned payment to them at the rate of 1.66 per cent of the total collection of CT scan, ultrasound and X-ray to each one of the three doctors for a period of 25 years w.e.f. 1st April, 1990. In view of these facts and the legal position enunciated in the above paras, it cannot be said that the obligation to make the impugned payments to the doctors as per the agreement dt. 31st July, 1991 represented an obligation which was attached to the very source of the income of the assessee company. The decisions relied upon by Shri Sathe, the learned Authorised Representative, do not render any help to the case of the assessee. In the circumstances, therefore, we are of the opinion that the impugned payment made in terms of the agreement dt. 31st July, 1991 was not a case of diversion by an overriding charge. We do not find any infirmity in the orders of the CIT(A) and accordingly we uphold his orders.
17. In the result, the appeals filed by the assessee for both the years are dismissed.