Income Tax Appellate Tribunal - Mumbai
Dr. Francis P. Candies Allied Services, ... vs Assessee on 3 June, 2010
1
IN THE INCOME TAX APPELLATE TRIBUNAL
"J" Bench, Mumbai
Before Shri D. K. Agarwal (JM) and Shri Rajendra Singh(AM)
ITA No.5945/M/2010
Assessment Year 2007-08
Dr. Francis P. Candies The ITO 11(2)(3), Mumbai
Leo Villa, Poinsur IC Colony
Borivali (West), Mumbai 400 103.
PAN : AAAPC 4684 J
Appellant Respondent
Assessee by : Shri Bhupendra Shah
Revenue by : Shri Sumeet Kumar
ORDER
PER RAJENDRA SINGH (AM) This appeal by the assessee is directed against the order dated 3.6.2010 of CIT(A) for the assessment year 2007-08. The assessee in this appeal has raised disputes on three different grounds.
2. The first dispute is regarding disallowance of expenditure of Rs.42 lacs incurred by the assessee on account of royalty. The facts of the case as borne out from records are that the assessee who was a consultant pathologist, had, along with one Dr. Kalpana D. Velaskar constituted a firm named as Hi Tech Blood Transfusion and Allied Services for providing services of blood bank. Dr. Kalpana D. Velaskar was managing the affairs of the blood bank on day to day basis. Subsequently a dispute arose between the two partners and the 2 assessee filed a complain against her in the Economic Offence Wing of the Crime Branch, who after investigating the matter had filed charge sheet against Dr. Kalpana D. Velaskar which was pending. Thereafter Dr. Kalpana Velaskar filed a dissolution suit before the Hon'ble high Court of Mumbai. There being provision for arbitration in the partnership deed, she later filed arbitration petition No.259 of 2003 in the High Court. The Hon'ble High Court in the order dated 18.6.2003 in the arbitration proceedings appointed a Court Receiver to take over assets, books of account, bank account, premises, business etc of the firm considering the special nature of business being done by the assessee. The court also directed that the receiver would call bids from the partners for the purpose of fixing royalty and the higher bidder shall be entitled to carry on the business as agent of the receiver. The assessee being the highest bidder was allowed to carry on the business after executing an agency agreement in terms of the order of the High Court. The royalty payment @ Rs.3.5 lacs per month, totalling Rs.42 lacs had been debited by the assessee in the profit and loss account.
2.1 The AO noted that the assessee had not deducted tax at source while paying the royalty and therefore asked the assessee to explain as to why the claim should not be disallowed under section 40(a)(ia). The assessee submitted that though Dr. Kalpana Velaskar had filed arbitration petition, she did not pursue the matter as a result of which the assessee had to move another arbitration petition No.608 of 2009 which was still pending. The matter was therefore disputed which was one of the reasons for not deducting the tax. The assessee also submitted that the receiver did not have any PAN and therefore the assessee even if he had deducted the tax could not pay the TDS to the government. No tax was therefore deducted. The AO was however not satisfied 3 by the explanation given. It was observed by him that the receiver was acting only as a representative of the firm and therefore he could have easily given the PAN of the erstwhile firm. He referred to the provisions of section 40(a)(ia) which provide that in case tax has not been deducted at source in respect of royalty payment or fees for technical services the amount paid could not be allowed as deduction while computing the total income.
2.2 The assessee disputed the decision of the AO before CIT(A) and reiterated the submissions made before the AO that the matter being in dispute and the receiver not having any PAN, the assessee did not deduct the tax at source. It was also submitted that payment by way of royalty was diversion of income by overriding title and therefore there was no income accruing to the assessee on account of royalty and there was no obligation of any TDS. CIT(A) was however not convinced by the arguments advanced. It was observed by him that the receiver had been appointed on behalf of the firm which had the license to operate the blood bank and therefore the royalty payable to the receiver was not in his personal capacity. The royalty was payable on behalf of the firm and the assessee was required to deduct tax at source. It was also observed by him that there was no direction of the High Court not to deduct tax at source. CIT(A) accordingly confirmed the order of AO aggrieved by which the assessee is in appeal before the tribunal.
2.3 Before us the Learned AR for the assessee reiterated the submissions made before lower authorities that the arbitration proceedings were still on and it was not clear as to whom the said income would belong. There was also difficulty of the receiver not having PAN. It was also argued that the payment of Rs.42 lacs had been diverted at source by way of overriding title and 4 therefore no income on that account had accrued to the assessee and thus there was no obligation to deduct tax at source. Reliance was placed on the following decisions of the tribunal in support of the claim.
(i) 137 ITR 117 (Bom) in case CIT Vs Y.S.Desale
(ii) 97 TTJ 516 (Mum) in case of Amitabh Bachchan Vs CIT
(iii) 88 TTJ 53 (Delhi) in case of Salora International Vs DCIT
2.3.1 Alternatively, it was also submitted that, even if payments were covered under section 40(a)(ia), the same will apply to payments made on or after 13.7.2006 as the provisions of section 194J in relation to royalty were applicable only from 13.7.2006.
2.4 The Learned DR on the other hand strongly supported the orders of authorities below. It was argued that there was no diversion of income and the payment made by the assessee which had the nature of royalty attracted the provisions of section 40(a)(ia) and the tax having not been deducted, claim had been rightly disallowed.
2.5 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of deduction of Rs.42 lacs claimed by the assessee on account of payment made to the receiver as a royalty. The High Court had appointed a receiver for running the business of M/s. Hi Tech Blood Transfusion and Allied Services which was a partnership firm between the assessee and Dr. Kalpana D. Velaskar, due to disputes between the two parties. In terms of the directions of the High Court, the receiver was required to handover the business to the partner who paid the 5 highest monthly royalty. The assessee being the highest bidder, was to pay monthly royalty of Rs.3.5 lacs to the receiver. The total annual payment of Rs.42 lacs had been claimed by the assessee as deduction in the profit and loss account while computing the income of the business. The assessee had not deducted tax at source and therefore the AO disallowed the claim under the provisions of section 40(a)(ia) which provides that in case of any payment on account of royalty etc. if the tax is not deduct at source, the claim has to be disallowed. The case of the assessee is that the arbitration proceedings between the two partners were still going on and it was not clear as to the name in which the income has to be assessed and therefore the tax was not deducted at source. It has also been submitted that the receiver did not have PAN which was necessary for payment of tax deducted at source. Another argument advanced by the assessee is that the payment of Rs.42 lacs was diversion of income at source in terms of the order of the High Court and therefore the income had not accrued to the assessee at all and thus there was no question of deducting tax at source.
2.6. We have considered the various aspects carefully. Under the provisions of section 194J any person responsible for making any payment by way of royalty or fees for technical services is required to deduct tax at source at the specified rate. The term "royalty" has been defined in the Explanation 2 to section 9(1)(vi) which among other things includes any consideration for use of any patent, model, design, secret formulae or process or trade mark or similar property. In the present case, payment has been made for use of the license and name of the firm for doing the business of blood bank. Therefore, in our view, the nature of the payment is the same that of royalty as defined in the Explanation 2 to section 9(1)(vi). In fact in the order the Hon'ble High Court 6 also, the payment by the highest bidder has been referred to as royalty. Therefore we hold the nature of payment was that of royalty. We also agree with the view taken by the lower authorities that the receiver was receiving the royalty on behalf of the firm and not in its personal capacity and therefore the assessee could have easily mentioned the PAN of the firm who was the actual owner of the royalty. Even if the matter was disputed in arbitration proceedings, there was no dispute regarding the nature of income and the fact that the same was taxable under the provisions of Act. It is immaterial in whose hands the income is taxable. Any payment of royalty which is taxable will attract the provisions of section 194J and non deduction of TDS at source will disqualify the claim of expenditure on this account under section 40(a)(ia). The Learned AR has also argued that the payment was diversion of income by overriding title and therefore no income had accrued to the assessee as the receipts itself had been diverted at source before the same were received by the assessee. We do not find any substance in such argument. There was no direction of the High Court that the assessee had to set aside part of the business receipts and pay the same to the receiver. The only direction was that the assessee had to pay a fixed monthly sum as royalty which the assessee could pay out of income earned from the business. It was thus a case of application of income and not diversion of income.
2.7 The judgments relied upon by the Learned AR are distinguishable and not applicable to the facts of the case. In case of CIT Vs Y.S. Desale (supra) the promoters had been permitted by the Executive committee for limited purpose of registering a cooperative society and not for carrying on any business. The promoters had collected large amounts from persons who were to be become members. Due to delay in formation of society, the money collected had been 7 deposited in bank on which interest had been earned. The issue was whether the interest income could be assessed in the name of the promoter. It was held that the promoters were only acting as an agent of the principal who were the shareholders. The promoter did not have any title to the income which merely vested in the shareholder. Therefore there was no question of any overriding title of the shareholder because even initially the income vested in the shareholder and the promoters were merely acting as an agent. Income thus could not be taxed in the hands of the promoters either as AOP or Body of Individual. The case is obviously distinguishable and not applicable to the case of the assessee. The case would have been relevant if the issue was whether the royalty income should be taxed in the name of the firm on whose behalf it had been received or in the name of the receiver which is not the issue here. 2.7.1 In case of Amitabh Bachchan vs DCIT (supra) there was agreement between the assessee and ABCL as per which the assessee was to handover all its income to ABCL except income earned by acting in movies. The assessee during the year had earned income of Rs.23 crores from television programe namely Kaun Banega Crorepati (KBC) under an agreement with a third party and without information of ABCL. There were arbitration proceedings and under an arbitration award, the assessee had to pay a sum of Rs.21.67 crores to KBC. The issue was whether the payment was application of income or diversion of income. Since in this case certain percentage of receipts had been paid to KBC as per the court order, it was held to be a diversion of income at source. In the present case the court had not ordered that the assessee would pay a certain percentage of receipts which could be considered as diversion of income. The assessee had to pay a fixed monthly sum to the receiver which was not linked 8 to the business receipts. Therefore this was only a case of application of income.
2.7.2 The decision of the tribunal in case of Salora International Ltd. Vs JCIT (supra) is also distinguishable. In that case the assessee had sold its P division to another company namely MTAIC. As per the scheme of arrangement, the consideration of P division was fixed at 50.12 crores of which 17.64 crores were to be given to the shareholders by allowing each shareholder in possession of share of Rs.10, 2 shares of equal amount by MTAIC. Thus the amount paid to the shareholders had been diverted at source under the scheme of arrangement and therefore it was held as a case of diversion of income. The case is obviously distinguishable from the facts of the present case. We thus conclude that in the case of the assessee, there was no diversion of income. 2.8. In view of the foregoing discussion, we hold that the payments made by the assessee were of the nature of royalty, which were covered by the provisions of section 40(a)(ia). However, since the TDS provisions under section 194J in relation to royalty were applicable only from 13.7.2006 only the payments made for the period from 13.7.2006 onwards will be disallowed under section 40(a)(ia) for non deduction of tax at source. Subject to the above the order of CIT(A) is upheld.
3. The second dispute is regarding disallowance of Rs.3 lacs being the rent paid by the assessee under the provisions of section 40(a)(ia). The AO noted that the assessee had debited a sum of Rs.3 lacs on account of rent. The assessee submitted that it had deducted tax at source and paid to the government and in support thereof filed ledger account of TDS. However the 9 assessee could not file the TDS challan and TDS return. The AO therefore did not accept the claim that tax had been deducted and accordingly disallowed the claim of Rs.3 lac under section 40(a)(ia). In appeal CIT(A) confirmed the disallowance aggrieved by which the assessee has filed the present appeal. 3.1 Before us the Learned AR for the assessee submitted that the assessee had deducted tax and also paid to the government which was supported by the books of account and the bank statement. The AO had disallowed the claim on the ground that challan had not been produced. The assessee had not produced the challan as the same was not traceable. However, the assessee will produce the same before the AO if opportunity was given. The Learned DR placed reliance on the orders of authorities below.
3.2 We have perused the records and considered the matter carefully. The claim of expenditure on account of rent has been disallowed under section 40(a)(ia) on the ground that no tax had been deducted at source. The claim of the assessee is that tax had been deducted and paid to the central government which was supported by the books of account and bank statement. The assessee could not produce the challan which was not traceable and which was the reason for disallowance. In our view, one more opportunity is required to be given to the assessee to trace the challan as it would not be proper to make addition if the tax had actually been deducted and paid to the central government. We accordingly restore the issue to the file of AO for passing a fresh order after allowing opportunity of hearing to the assessee. 10
4. The third dispute is regarding charge of interest which is only consequential. The AO will recompute the interest at the time of giving effect to this order.
5. In the result the appeal of the assessee is partly allowed in terms of the order above.
6. The decision pronounced in the open court on 20.04.2011.
Sd/- Sd/-
( D. K. AGARWAL ) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date : 20.04.2011
At :Mumbai
Copy to :
1. The Appellant
2. The Respondent
3. The CIT(A), Mumbai concerned
4. The CIT, Mumbai City concerned
5. The DR "J" Bench, ITAT, Mumbai
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
Alk