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Income Tax Appellate Tribunal - Delhi

Lalit Kalra,, New Delhi vs Department Of Income Tax on 18 June, 2010

        IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'D' BENCH
          BEFORE SMT. DIVA SINGH, JM & SHRI A.N. PAHUJA, AM

                                  ITA No.4196/Del/2010
                               Assessment year:2007-08

Assistant CIT,Circle-32(1),  V/s.               Shri Lalit Kalra,
Room       no.      376A,CR                     D-33, Lajpat Nagar-II,
Building,IP estate,                             New Delhi
New Delhi
                         [PAN :AAJPK           8596 Q]

(Appellant)                                               (Respondent)

               Assessee by            S/Shri Ajay Vohra &
                                      Rohit Jain,ARs
               Revenue by             Ms. Nandita Kanchan, DR


                 Date of hearing                    25-04-2012
                 Date of pronouncement              25-05-2012


                                     ORDER

A.N.Pahuja:- This appeal filed on 10.09.2010 by the Revenue against an order dated 18.06.2010 of the learned CIT(A)-XXVI, New Delhi, raises the following ground:-

1. "The learned CIT(A) has erred in deleting the addition of ``1963858/- made by the Assessing Officer arising out of payment of commission without considering the fact that assessee had deducted tax @5% on rental payments instead of 15% as envisaged in section 194-I of the Income-tax Act, 1961."

2. Facts, in brief, as per relevant orders are that return declaring income of ``10,37,048/- filed on 31.10.2007 by the assessee, engaged in the business of trading in spectacles, sun glasses and related accessories, after being processed on 14.03.2008 u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), was taken up for scrutiny with the service of a 2 ITA No.4196/Del./2010 notice u/s 143(2) of the Act issued on 16.09.2008. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee paid a commission of ``3,60,000/- to his wife Smt. Manisha Kalra;

`7,78,506/- to M/s Star Enterprises and ``8,25,352/- for the shop at Saket. To a query by the AO, the assessee replied that the aforesaid payment is on account of rent commission on which tax was deducted at source and deposited to the credit of the Government. However, while referring to the profit and loss account, the AO pointed out that the assessee debited shop rent for only two shops at Pacific Mall & Rajouri Garden at `4,69,120/- & `13,20,000/- respectively while in respect of other shops at Greater Kailash-1, Saket, Noida and Shahadra, the assessee did not debit any rent. Instead the rental payment has been disguised as rent commission. While rejecting the contentions of the assessee that payment was actually commission , the AO treated the payment as rent and concluded that the assessee was required to deduct tax at source @15% as envisaged u/s 194I of the Act and not @5% in terms of provisions of section 194- H of the Act. Accordingly, having recourse to provisions of section 40(a)(ia) of the Act, the AO disallowed the amount of `19,63,858/-.

3. On appeal, the ld. CIT(A) allowed the claim of the assessee in the following terms: -

"5.3 The 3rd &4th Grounds of appeal related to the disallowance of the commission expenses paid to Mrs. Manisha Kalra,M/S Star Enterprises & for shop at Saket amounting to `19.63 lacs.The AO has on the basis of examination of various agreements between the appellant & the above three parties, had reached to the conclusion that even though the appellant had deducted TDS, the same was@5% only, while in the view of the AO, the same should have been @15% as per the provisions of section 194I.Accordingly,disallowance was made u/s 40a(ia) of the Income- tax Act.

On careful consideration of the above facts, I find that there is no dispute about the genuineness of the payments for business purposes. The AO has also not in any way made a claim that such expenditure was not allowable u/s 37.There is no dispute about the factum of payment in respect of such expenses. The provisions of 3 ITA No.4196/Del./2010 section 40a(ia) of the Income Tax Act, as relating to the commission expenses were brought in the statute in order to ensure that whether tax was deductible at source under chapter XVIIB, the same should have been deducted or, after deduction should have been paid as per law on due dates. The only question is whether the tax was rightly deducted by the appellant or not. The AO had held that the transactions were covered by the provisions of section 194I & not 194H as claimed by the appellant and hence the entire expenses were disallowed.

5.4 The provisions of Finance Bill No.2 of 2004, while amending the provisions of Section 40(a), inserted sub-clause (ia) in clause

(a) of section 40, with a view to augment compliance of TDS provision. The above provision is constitutionally valid, as was held in the case of M/s Tube Investments of India Ltd. Vs. ACIT (2000) 185 Taxman 438 (Madras). In the case of the appellant, the appellant had duly deducted TDS in respect of the payments made to the above referred three parties u/s 194-H. The tax so deducted was also paid to the Government, a fact not disputed by the learned Assessing Officer. The provisions of section 194-H are also covered under Chapter XVII-B of the Income-tax Act and hence since the appellant after having deducted TDS by bonafide belief under that section had paid the tax to the department, it cannot be said that the appellant had violated the provisions of section 40(a)(ia). As explained in the explanatory memo to Finance Bill No.2 of (2004), the purpose of the above provisions was to augment TDS compliance and not to decide the liability or otherwise of prudent business expenditure. The Hon'ble Delhi High Court in the case of CIT Vs. NIIT Ltd. (2009) 184 Taxman 472 (Delhi) had held that whether on facts, the agreement between the parties was a franchisee agreement and not a lease agreement and it could not be said that rent was being paid by the assessee to franchisees, the appellant was not liable to deduct tax u/s 194-I in respect of amount shared by it and remitted to franchisees.

5.5 I find that while ascertaining the facts, the learned AO has not given due credence to the agreement signed by the appellant with the three franchisees. The Assessing Officer has given an unsubstantiated finding that the appellant had disguised the rental payment as commission expenses. However, on careful perusal of three franchisees, I find that the above arrangement was not in the nature of lease of property for rental in view of the following:

i) The payment was linked to sales. A typical rental for property would not linked to sales, but would be fixed as provided in the agreement.

ii) The responsibility in respect of rent of shop, loss of goods etc. was also put on to the second party and not to the appellant. A typical lessor would not be bound by any such liability.

iii) In case of one Sh. Mahesh Garg, the shop was not even owned by him, but was itself hired from third party and the rental thereon was less than the rent paid by Sh. Mahesh Garg.

iv) Further, the various conditions of the agreement also clearly show that the business arrangement between appellant and the three parties was that of franchisee and not in respect of simply lease out of property.

The AO has observed that the appellant had 'disguised' rental payment as commission. However, I do not find any motive on the part of the appellant to resort to disguising, as the appellant was liable to get the benefit of section 37 even if the said payment was rental or commission, in any case. Therefore, no advantage/benefit could accrue to the appellant by deducting TDS under a different section. On careful consideration, I have already held that the TDS deducted u/s 194-H was correct in view of the terms between the appellant and three franchisees.

In view of this, this ground of appeal is also decided in favour of the appellant."

4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR while carrying us through the impugned order submitted that provisions of section 40(a)(ia) of the Act are applicable even in the case of short deduction of tax at source. While carrying us through the relevant agreements, the ld. DR vehemently argued that these agreements are for renting the premises and not for payment of commission, the assessee having carried on the business in the rented premises.. The ld. DR added that decisions in DCIT vs.S.K.Tekriwal,48SOT 515(Cal.) & DCIT vs. Chandabhoy and Jassobhoy,49 SOT 448(Mum.) are not applicable in this case.

5. The ld. AR on behalf of the assessee, on the other hand, while carrying us through the relevant clauses of the three agreements contended that payment was on account of commission and nowhere in the agreement it is stipulated that possession and control over the premises vested with the assessee. The payment was actually for use of the premises for the assessee's business. While referring to decision in Liberty Sales Service Vs. Jakki Mull and Sons 66 (1997) DLT 506, the ld.AR vehemently argued that agreements were franchise for selling the goods traded in by the assessee and nowhere the control and possession of the premises passed on to the assessee; the agreement was for pooling of joint resources. In this connection, the ld. AR also referred to decisions in CIT vs. Career Launcher India Ltd. in ITA no.939/2010(Del.); M/s Hughes Escort Communications Ltd. Vs. DCIT in I.T.A. No.752/D/05& CIT vs. NIIT Ltd.,318 ITR289(Del.). While referring to decision in CIT Vs. Kotak Securities Ltd. (2011) 245 CTR 3 (Bom.) , the ld. AR further pointed out that the assessee was under the bonafide belief that tax was required to be deducted at source in terms of provisions of section 194-H and not sec.194-I of the Act. The ld. AR further argued that since tax had been deducted at source, but under a different provision according to the Revenue, provisions of sec. 40a(ia) of the Act are not attracted in such a situation, as held in DCIT vs.S.K.Tekriwal,48SOT 515(Cal.) & DCIT vs. Chandabhoy and Jassobhoy,49 SOT 448(Mum.) . Without prejudice to these arguments, the ld. AR added that in view of decision of Special Bench in Merilyn Shipping & Transports v. Additional CIT,,20 taxman.com244, the provisions of section 40a (ia) of the Act were applicable only to the amount payable at the end of the year. Therefore, at the most disallowance be restricted to the amount payable to M/s Star Enterprises and Mahesh Garg.

6. We have heard both the parties and gone through the facts of the case as also the decisions relied upon. The first issue before us is as to whether the TDS was required to be deducted in terms of provisions of sec. 194H or 194 I of the Act. The AO invoked provisions of sec. 194I of the Act on the ground that agreements were for rent payments and not commission. The assessee 6 ITA No.4196/Del./2010 deducted tax @5% only, treating the payments as commission payments. Now whether payments are for commission or rent, we have to refer to the relevant agreements. The three agreements entered in to by the assessee with the Star Enterprises,Mahesh Garg & Manisha Kalra, wife of the assessee, are placed at page 1 to 7 of the paper book. First agreement is with M/s Star Enterprises. The preamble clause of the said agreement executed on 2.9.2006 contemplates that the assessee in order to expand his business of optical ,intends to give franchise to shri Sidharth Jatia,party no.2;clause (i) says that party no.2 has arranged his shop at Shahadra;clause(ii) says party no.2 shall exclusively deal with optical goods; clause (iii) says party no.1 i.e. the assessee shall supply the goods as its own stock and as such ownership shall remain with the assessee.It also stipulates that shri Jatia shall work as franchisee to sell the goods for which he will receive commission on mutually agreed terms on item to item and from time to time; clause (iv) says rent of the premises shall be borne by party no.2;clause

(v)& (vi) say that sale proceeds shall be deposited in the bank a/c of the assessee and clause (vii) says that the assessee shall not be responsible for pilferage while clause (viii) stipulates accounting of stock;clause ix) to xii) stipulate sharing of various expenses and liability towards income tax etc..As is evident from a bare reading these clauses in the agreement, the said agreement is for franchise of selling goods of the assessee on commission basis and the rent of the shop is to be borne by the second party i.e. the franchisee himself.

6.1 As regards agreement with Mr. Mahesh Garg exceuted on 17.3.2006, in order to run retail outlet in the name of '1961'in the commercially licensed property at GF-8,Anupam Shopping Arcade,PVR Saket,New Delhi ,occupied by shri Garg, the assessee approached the said person. Clause 1 of the agreement envisages permission of shri Mahesh Garg, to allow the assessee to set up the outlet; clause 2 stipulates that trademark'1961' shall remain the exclusive property of the assessee. Shri Garg shall not do any business of sun glass boutique for next six years after termination of the agreement as per clause 3 while clause 4 stipulates that the agreement shall be for 3+3+3 years, renewable 7 ITA No.4196/Del./2010 thereafter on mutually agreed terms; clause 5 envisages that cost of running, operation and maintenance of outlet shall be met by the assessee while shri Garg shall remain exclusive owner and in possession of the licensed premises, as per clause 7;clause 8 envisages payment of `66,850/- plus applicable taxes or 12% of the turnover, whichever is higher as franchisee commission to Shri Garg while clause 9 stipulates that the assessee shall give advance by cheque as minimum guarantee and security for a period of three months; clause 10 says escalation of 15% in the franchisee commission every three years;;clause 11 stipulates that the assessee shall give interest free refundable security deposit of 3 months on termination of agreement and advance adjustable during the last three months of the agreement; clause 12 says that franchisee commission shall start from 1st May,2006;clause 15 envisages appointment of cashier by shri Garg or he himself can act as cashier; clause 16 stipulates that possession of premises shall remain with shri Garg; clause 17 says that all the employees shall belong to the assessee and expenses on their salary etc. shall be borne by the assessee; clause 18 says that sales tax and other legal liabilities shall be borne by the assessee and the assessee shall quit the licensed property within 30 days of receipt of revocation notice, if assessee fails to pay commission for two months and clear statutory dues and other expenses for two months;;clause 20 clarifies that dealing between two parties shall be on principal to principal basis while clause 21 says that agreement shall not be tenancy agreement. As is evident from these terms and conditions of the agreement, the agreement is for franchise of selling goods of the assessee on commission basis and the possession of the shop shall remain with owner shri Garg.

6.2 Now adverting to third agreement with wife of the assessee, at the outset, we find that this agreement was executed on 9.7.2003 and as per clause 8 of the agreement , the agreement is valid for three years and thereafter, it is to be renewed at the market rates prevalent at that time. As per clause 6 & 12 of this agreement, commission is payable at the end of the year i.e.31st March every year. Apparently, validity of this agreement having expired on 8.7.2006,unless it 8 ITA No.4196/Del./2010 was renewed, this agreement is not relevant for the year under consideration. In the absence of the relevant agreement, the ld. CIT(A),in our opinion, was not justified in concluding that the agreement with Mrs. Manisha Kalra was franchise agreement or that the tax was deducted on payments to Mrs. Manisha Kalra u/s 194H of the Act under a bonafide belief. Despite specific directions during the course of hearing of the appeal, the assessee did not place before us a copy of the renewed agreement applicable in the year under consideration, until the writing of this order. In these circumstances, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issue in relation to disallowance attributable to payment to Mrs. Manisha Garg, afresh, in accordance with law, after ascertaining as to whether or not agreement with Mrs. Manisha Garg was renewed and of course after allowing sufficient opportunity to both the parties.. Needless to say that while redeciding the appeal, the ld. CIT(A) shall pass a speaking order, bringing out clearly as to whether the renewed agreement, if any, is franchise agreement or tenancy agreement.

6.3 In view of the foregoing, as is evident from the various clauses of the agreement with shri Mahesh Garg ,he is the exclusive owner and in possession of the property while shri Sidharth Jatia is required to arrange for the shop and pay rent.Nowhere from these two agreements emerges that the assessee is in possession of the premises utilized for carrying on the business. If the assessee was to be tenant, then Revenue must first prove that the assessee is in exclusive possession of the premises. But, Clause i) & iv)of the agreement with shri Sidharth jatia and clause 7 of the agreement with shri Mahesh Garg specifically says that the said persons will be in exclusive possession of the premises and not the assessee. It is well settled that the nomenclature employed by the parties may not be conclusive while deciding whether the relation between parties is one of tenancy or a licence. One of the important tests is who is having exclusive possession. As held in Liberty Sales 9 ITA No.4196/Del./2010 Services(supra),where in a document there is an express clause as to who is or is deemed to be in exclusive possession, the question of drawing an inference from a reading of all the clauses does not at all arise. On the same principle, when there is a dispute as to whether the deed is one of Agency or lease, the absence of a clause as to who is or is deemed to be in exclusive possession, an inference as to exclusive possession has to be drawn by reading all the clauses. But where there is a specific clause dealing with the question as to who is or is to be deemed or not to be deemed to be in possession, there is no need to have resort to all other clauses the document. Applying these principles laid down by the Hon'ble jurisdictional High Court, we find that there is a specific clause in agreements that the exclusive possession will be with the franchisee and not the assessee in two agreements with shri Sidharth jatia and Mahesh Garg. In such a situation, especially when the assessee is not only not in physical possession and there being no fixed rent payable while the francisee have to receive commission on the basis of turnover or on mutually agreed terms, it is evident that the aforesaid two agreements are truly of franchise and can, by no stretch of imagination, be treated as a tenancy in favour of the assessee. Thus, the assessee rightly deducted TDS in terms of provisions of sec. 194H of the Act in respect of payments to these two persons..

6.4 Now adverting to the provisions of sec. 40(a)(ia) of the Act, which provide for disallowance of any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid, the object of introducing Section 40(a)(ia) as explained in the CBDT circular No.5 dated 15/7/2005 was to augment compliance of TDS provisions in the case of residents and curb bogus payments. Indisputably, the assessee deducted and paid tax in accordance with the provisions of sec. 194H of the Act in relation to payments to shri Sidharth 10 ITA No.4196/Del./2010 Jatia and shri Mahesh Garg, and thus, there is no violation of provisions of sec. 40a(ia) of the Act.

7. Even otherwise, in the event of any shortfall in deduction of tax at source, provisions of sec. 40a(ia) are not attracted, as held in DCIT vs. SK Tekriwal,15taxmann.com 289(Kol.) & DCIT vs. Chandabhoy & jassabhoy,17 taxmann.com 158(Mum.)

8. In the light of our aforesaid view, we do not consider the necessity of considering alternative plea on behalf of the assessee.

9. In the result, appeal is partly allowed as indicated above for statistical purposes.

                  Order pronounced in open Court

           Sd/-                                            Sd/-
     (DIVA SINGH)                                   (A.N. PAHUJA)
  (Judicial Member)                              (Accountant Member)

NS

Copy of the Order forwarded to:-

1. Shri Lalit Kalra, D-33, Lajpat Nagar-II, New Delhi

2. Asstt. CIT, Circle-32(1), New Delhi

3. CIT concerned

4. CIT (A)-XXVI, New Delhi.

5. DR, ITAT,'D' Bench, New Delhi

6. Guard File.

BY ORDER, Deputy/Asstt.Registrar ITAT, Delhi