Income Tax Appellate Tribunal - Delhi
Career Launcher (India) Ltd., New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'B' DELHI
BEFORE SHRI C.L. SETHI,HON'BLE JUDICIAL MEMBER
AND
SHRI K.G. BANSAL ; HON'BLE ACCOUNTANT MEMBER
ITA Nos. 4924 & 4925(Del)/2009
Assessment years: 2005-06 & 2006-07
M/s Career Launcher (India ) Ltd., Assistant Commissioner of Income
B-90, Greater Kailash-II, Vs. Tax, Circle 3(1), New Delhi.
New Delhi.
PAN-AAACC3885C
ITA Nos. 523 & 524(Del)/2010
Assessment years: 2005-06 & 2006-07
Assistant Commissioner of M/s Career Launcher (India) Ltd.,
Income-tax, Circle 3(1 Vs. B-90, Greater Kailash-II,
New Delhi. New Delhi.
(Appellant) (Respondent)
Assessee by : Shri Ajay Vohra &
Shri Avdhesh Bansal, Advocates
Department by : Shri Stephen George, CIT &
Shri H.K. Lal, Sr. DR
ORDER
PER K.G. BANSAL : AM These cross appeals of the assessee and the revenue have been argued in a consolidated manner by the ld. counsel for the assessee and the ld. CIT, DR. Therefore, a common order is passed. 2 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010 1.1 It may be mentioned here that an interim order regarding stay of demand for both these years was passed on 24.09.2010. This order comes to an end with the passing of final order in the cross appeals. ITA No. 4924(Del)/2009-A.Y. 2005-06- Appeal of the assessee
2. Ground nos. 1 and 1.1 are against disallowance of a sum of Rs. 6,38,64,018/- u/s 40(a)(ia) of the Income-tax Act, 1961 ("the Act"), on account of non-deduction of tax at source on the payments made by the assessee to the franchisees on the ground that tax thereon has not been deducted at source u/s 194C of the Act. It is mentioned that the ld. CIT(Appeals) erred in holding the joint venture agreement between the assessee and the franchisees as a service agreement. 2.1 Before us, the ld. counsel for the assessee submitted that the assessee had about 150 franchisees with whom it was sharing tuition fees received from the students. For this purpose, a separate account was maintained in which the fees were credited. Thereafter, the receipts were divided between the assessee and the franchisees. There was no payment either by the assessee to the franchisees or by the franchisees to the assessee.
3 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010 2.2 Our attention was drawn towards page nos. 1 to 27 of the paper book, which contains a sample agreement made on 01.10.2007 between the assessee-company and M/s Sphere Academy of Ahmedabad. This agreement does not pertain to the relevant year, however, the ld. counsel made a statement at the bar that all agreements with the franchisees, including the agreements pertaining to this year, are identically worded. Paragraph no. 1 of the agreement, the assessee is to provide all technical know-how and the product details including entire study material to the licensee. Paragraph no. 3 grants a limited license to the aforesaid M/s Sphere Academy to use the trade mark and the trade name in relation to professional learning center provided the same is created and conducted in accordance with terms and conditions of the agreement. In particular, it is permitted to use the name of "Career Launcher (India) Limited" in any printed matter, distinctive features décor and any other matter pursuant to its directions and also to use the copyrighted material of the assessee including text, transparencies, video tapes, CDs, software etc. but only for the benefit of the assessee and the licensee. The license is also granted for the purpose of marketing only, the right to use technical know-how contained in various products, counseling and marketing 4 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 manuals. Any improvement thereto in the course of the agreement is agreed to be vested in the assessee. The assessee also granted to the licensee the right to use reputation and goodwill of Career Launcher (India) Ltd. and all its brands and registered trade marks and also its general goodwill relating to the professional learning during the period of the agreement. The agreement forbids the licensee to use the trade mark, the name of the assessee, "CL" or trade name or any other deceptively similar expression after the expiry of the agreement. 2.3 Under the scope of the license, the licensee is granted a right to operate the professional learning center in relation to marketing of Career Launcher courses, whose details have been annexed to the agreement. Any expansion in the prescribed capacity or opening another professional center is allowed to be done only with the prior consent of the assessee in writing. The license is a non-exclusive license in terms of the territory.
2.4 Under paragraph no. 4.1, the licensee is to provide at its cost the equipment, furniture and fixtures at the approved centre. Paragraph 4.5 5 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 obliges the licensee to implement various fees as laid down by the assessee which are subject to audit by it. The fees is to be collected on behalf of the assessee as per paragraph no. 4.6. Paragraph no. 4.16 inter- alia places obligation on the licensee to place monthly orders on the assessee for various items mentioned in paragraph no. 6.3, which include application forms, prospectus, rule books, identity cards, stationery, folders, course material and transparencies, guides and manuals, for which the assessee will issue the price list.
2.5 The franchisee, as a consideration, shall pay to the assessee the franchisee fees @ 25% of the net value earned from the operations, as per paragraph no. 5.6.
2.6 The case of the ld. counsel on the basis of the terms of the license agreement is that it is in the nature of a joint venture, in which certain rights are granted to the franchisee in lieu of which the franchisee is required to pay 25% of the earnings from the operations of the centre. Therefore, it is not a case of an agreement for carrying out any work (including supply of labour for carrying out any work) in pursuance of a 6 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 contract between the assessee and the franchisee. Therefore, the provision contained in section 194C of the Act is not applicable to it. 2.7 In order to support his contentions, reliance has been placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. NIIT Ltd. (2009) 318 ITR 289 and the "G" Bench of Delhi Tribunal in Assistant CIT Vs. NIIT Ltd. (2007) 112 TTJ 800.
3. In reply, the ld. DR referred to the finding of the AO recorded on page no. 1 of the assessment order, where it is mentioned that the assessee claimed expenditure of Rs. 6,38,64,018/- by debiting the amount to the profit and loss account, being payments to the franchisees. In this connection, it was submitted that the franchisees were given licenses to operate educational centers in different locations of the country. The agreement with the franchisees was enforceable under the law and, therefore, it is a contract as understood under the Indian Contract Act, 1872. The contract is in the nature of a service contract and, therefore, the provision contained in section 194C of the Act is clearly applicable. 3.1 Further, he referred to the finding of the ld. CIT(Appeals) recorded in the impugned order on page no. 8 where he discussed the facts 7 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 of the case of SRF Finance Ltd. , 211 ITR 861, decided by Hon'ble Delhi High Court. It is mentioned that the question before the High Court was whether circular nos. 666 and 681 issued by the Board were ultra-vires or intra-vires section 194C. The Hon'ble Court held that the Board does not have any power to enlarge the scope of statutory provision and, therefore, these circulars were ultra-vires section 194C. The ld. CIT(A) further mentioned that the question in that case was entirely different. There has also been an amendment to section 194C made by Finance Act, 1995 by which Explanation III has been inserted to enlarge the scope of inclusive definition of the word "work". It is also mentioned that the facts of the case of NIIT Ltd. (supra) are also different. That case involves the question regarding the applicability of provision contained in section 194-I. The Tribunal held that the dominant intention was not to let out building, furniture and fixtures and, therefore, the assessee was not liable to deduct tax under section 194-I. It is also mentioned that the agreement entered into by the assessee with the franchisees is in the nature of a contract for carrying out specific works for which payments are made. Therefore, the AO rightly held that the assessee had failed to comply with the provision contained in section 194C and accordingly disallowed the payment of Rs.6,38,64,018/- 8 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010 made to the franchisees by invoking the provision contained in section 40(a)(ia).
3.2 The case of the ld. DR is that the contract with the franchisees is in the nature of a contract for work and, therefore, the provisions contained in sections 194C and 40(a)(ia) are applicable.
4. We have considered the facts of the case and submissions made before us. The facts are that the assessee is carrying on the business of running coaching classes for admission of the students to professional courses. In the course of this business, it has also entered into agreements with various persons desirous of running similar coaching classes on the basis of standardized agreement. The agreement allows the franchisees to use the trade name, trade mark and course material belonging to the assessee. However, other arrangements such as finding suitable premises, enrolling students, collecting fees etc. are made by the franchisees. The fees collected by the franchisees from the students is credited to a bank account. In lieu of the user of trade mark, trade name and course material, the assessee receives an amount equal to 25% of net value earned from the operations. Apart from this, the assessee 9 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 supplies stationery etc. to the franchisees at the rates fixed in this behalf by it. In the year under consideration, the assessee has credited net fees of Rs.27,37,56,334/- to the profit and loss account. Further, the assessee has debited a sum of Rs. 6,38,64,018/- under the head " Franchisee payments" under the head "Administrative and other expenses". The question is whether the payments are in the nature of payments to contactors or sub-contractors for carrying out any work (Including supply of labour for carrying out any work) in pursuance of the contracts. 4.1 At the outset, we may mention that paragraph no. 5.6 of the agreement states that the licensee shall be paying recurring franchisees fees to the licensor @ 25% of the net value (net of taxes, applicable now or at any time in future) earned from the operations. This paragraph speaks of payment by the licensee to the assessee. However, the profit and loss account has been drawn in a manner that the assessee is shown to have made payment of the disputed amount under the head "franchisee payment". This anomaly between the agreement and the accounts has not been explained by either party. This matter has also not been dealt with by the lower authorities, who have gone by the accounts and these accounts are not reconciled with the terms and 10 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 conditions of the agreement. However, we may add at this juncture that the matter has to be decided as per law and not merely as per entries in the books of account, which may only be indicative in nature but not conclusive of the matter.
4.2 Section 194C regarding tax deduction at source from payments to contractors and sub-contractors obliges a person responsible for paying any amount to any resident person for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between them. The revenue has placed considerable emphasis on Explanation -III of this provision which includes within the ambit of the term "work" advertising, broadcasting and telecasting including production of programmes for such broadcasting and telecasting; carriage of goods and passengers by any mode of transport other than by railways; and catering. The work carried out by the franchisees, if any, is not covered by the entries in Explanation-III. However, the intent of the argument of the revenue is that the term "work", though not defined in the provision, is of wide import as Explanation III uses the word "include". Similar word "including" has been used in the main provision in sub-section (1). It is their case that the franchisees have 11 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 carried out the work of coaching students on behalf of the assessee, the principal, for which they have been paid a sum of Rs. 6,38,64,018/- in this year. Therefore, the assessee was liable to deduct tax at source from these payments. Since this has not been done, the amount paid to the franchisees does not constitute deductible expenditure by dint of the provision contained in section 40(a)(ia).
4.3 The AO has relied on the decision of Hon'ble Supreme Court in the case of Associated Cement Co. Ltd. Vs. CIT & Another (1993) 210 ITR
435. The facts of that case are that the assessee company issued a letter to Mr. S.P. Nag, the contractor, containing the terms and conditions of a contract for loading packed cement bags into wagons or trucks. The contractor was to be paid a sum for his work @ 41 paise for each tonne of cement handled in plant no. 1 and 30 paise for each tonne of cement handled in plant no. 2. The recital to the agreement mentioned that the rate of loading has been worked out on the basis of daily basic wages of Rs. 2.35, D.A. of Rs. 1.21 and house rent allowance of 0.50 paise per day per worker. The ITO issued notice to the assessee asking it to show cause why it should not be treated as assessee in default for short deduction of tax at source required to be made u/s 194C(1) of the Act. 12 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010 The assessee challenged the notice by way of writ petition under Articles 226 and 227 of the Constitution of India before the Patna High Court. The petition was dismissed. Therefore, the assessee filed a SLP before the Hon'ble Supreme Court. In the course of hearing, the ld. counsel for the assessee relied on the decision of Hon'ble Supreme Court in the case of Brij Bhushan (1978) 115 ITR 524. After considering the submissions on the term "work" and the aforesaid decision, the Hon'ble Court mentioned that the words in the sub-section "on income comprised therein" appearing immediately after the words "deduct an amount equal to two per cent of such sum as income-tax" cannot be understood as the percentage amount deductible from the income of the contractor out of the sum credited to his account. There is also nothing in the language of the sub-section which permits exclusion of an amount paid on behalf of the organisation to the contractor according to clause 13 of the terms and conditions of the contract any reimbursement of the amount paid by him to the workers, from the sum envisaged therein, as suggested by the ld. counsel for the assessee. Coming to the meaning of the term "work", it has been mentioned that there is nothing in the sub- section which could lead to the conclusion that the contract to carry out a work or the contract for supply labour to carry out a work should be 13 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 confined to "works contract". Therefore, there is no reason to curtail or cut down the plain meaning of the words "any work", which mean any work and not a works contract, as the latter has a special connotation in the tax laws. Therefore, the term has a wide import and covers any work which one or the other organization specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisation as supply of labour under a contract with a contractor for carrying out its work which would have fallen outside its scope. Thus, the conclusion is that the term has a wide meaning. We may only add that the import of the term stands further amplified by Explanation III although none of the entries in the Explanation covers the case of the assessee.
4.4 We may now examine the salient features of the agreement with a view to decide its nature and intent. The assessee has been termed as "Licensor" and the operator of the study center has been termed as "Licensee". Although the assessee has placed emphasis on these terms, we are of the view that this is not material for deciding the issue at hand. What is material is the content of the agreement. According to the agreement, the assessee is to provide entire study material, up-gradation 14 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 thereof, technical know-how and product details. The licensee is entitled to use trade mark and trade name of the assessee. The licensee is to set up the premises, equipments and infrastructure at its cost as per specifications provided by the assessee. The whole of the material, trade name etc. can be used by the licensee only for the purpose of running the study center. The licensee is to collect various fees from the students. The taxes or duties leviable in presenti or in future are to be borne by the licensee. He is also liable to pay fees @ 25% of the net value earned from the operations. This means that 75% of the profit from the operation of the center is to be retained by the licensee and 25% is to be handed over to the assessee. When we look to these terms, it emerges that it is not a case where the licensee is doing any work for the assessee even within the wider meaning of the term "work" as understood in common parlance. It is a case of running a study center and to apportion profits thereof between the assessee and the licensee. Therefore, the decision in the case of Associated Cement Co. Ltd. (supra) does not advance the case of the revenue.
4.5 The facts of the case of NIIT Ltd. (supra), decided by Hon'ble Delhi High Court, are that the assessee is engaged in the business of 15 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 providing computer education and training. It provides computer education and training through its own centers and through franchisees, who are providing NIIT courses under a license from the assessee. Under the agreement of the license, the parties to the agreement bring together their resources for providing the education. The assessee provides relevant course-ware and its expertise. The franchisees provide infrastructure, like class room facilities, equipments, furniture, fixtures, administrative set up etc. They also operate and manage the education center on a day-to-day basis. They admit students, conduct classes and perform other administrative functions in this behalf. The education center is run under the brand name of the assessee. The fees collected from the students are deposited in the account of the assessee and thereafter shared with the franchisees in accordance with the terms and conditions of the license agreement. The fees shared by the assessee with the franchisee has been placed under different nomenclatures, i.e., marketing claim, infrastructure claim etc. The Tribunal came to the conclusion that the agreement has to be read as a whole and a composite agreement like this cannot be broken into various components as contended by the revenue. Therefore, the provision contained in section 194-I regarding tax deduction from rent of a building is not applicable 16 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 in respect of the infrastructure claim. Although the model of sharing receipts in the case of NIIT is somewhat different from the instant case, it is clear that as in that case, in this case also the agreement has to be read as a whole. If we do that, it becomes clear that the present agreement is not an agreement regarding payment to be made to the licensee for any work done on behalf of the assessee. Rather it is a case of sharing of fees for carrying out respective obligations under the contract.
4.6 The assessee has also relied on the decision of Special Bench of the Tribunal in the case of Mahindra Holidays & Resorts (India) Ltd. (2001) 39 SOT 438 (Chennai). We however find that the issues in that case were different relating to treatment of membership fees given by the assessee i.e., 40% as income and 60% as deferred income for obligations to be carried out under the time sharing agreement. 4.7 As mentioned earlier, while the agreement speaks of payment by the franchisees to the assessee, the accounts have been maintained in a manner where payment it shown by the assessee to the franchisees. However, the mode and manner of keeping accounts is also not of great 17 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 significance for deciding the issue as the same is to be decided as per law. On the fact, it is clear that it is not a case of any payment made by the assessee to the licensee for the work done. Therefore, the provision contained in section 194-C is not applicable.
4.8 In the result, ground nos. 1 and 1.1 are allowed.
5. Ground no. 2 is against disallowance of expenditure of Rs. 5,14,976/- attributable to the income by way of dividend, not includible in the total income of the assessee, by invoking the provision contained in section 14-A of the Act. It is mentioned that the ld. CIT(A) erred in invoking the provision contained in Rule 8D which has been inserted with effect from 24.3.2008. It is further mentioned that only that expenditure, which has direct relation with the dividend income can be disallowed u/s 14A. It is also mentioned that the expenses incurred because of legal necessity for maintaining corporate existence could not be said to be the expenditure in relation to earning the dividend income. 5.1 It is the common case of both the parties that in so far as applicability of Rule 8D is concerned, the matter stands covered by the 18 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT (2010) 194 Taxman 203, in which it has been held that the provision is applicable to the proceedings of assessment year 2008-09 and subsequent years. Therefore, it is held that the computation of disallowance could not have been made in this case by invoking the aforesaid rule.
5.2 In this case, it has also been held that in case details of expenses are not maintained separately in respect of exempt income, the AO can estimate the same after considering all the facts. In this connection, the ld. counsel drew our attention towards the provision contained in section 14A(1), which authorizes the AO not to allow any expenditure incurred by the assessee in relation to income which does not form part of his total income. However, it was the common case of both the parties that the matter may be restored to the file of the AO for reconsideration of the matter in the light of statutory provision and the case law. As the disallowance has been made by invoking the provision, which was not in force for the relevant year, the whole matter has to be considered afresh. Therefore, we think it fit to restore the 19 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 matter to the file of the AO to decide it in the light of statutory provisions and the cases decided thereunder.
5.3 Thus, these grounds are treated as allowed for statistical purposes.
6. Ground no. 3 is to the effect that the ld. CIT(A) erred in disallowing the bonus payable to the directors amounting to Rs. 33,22,000/- by holding that the same is otherwise payable as profits or dividends, by invoking the provision contained in section 36(1)(ii) of the Act. 6.1 In this connection, it is mentioned in the assessment order that the assessee has shown profits of Rs. 6,56,19,376/-. No dividend has been proposed or distributed to the shareholders, who also include the directors of the assessee-company. The directors have been paid bonus as under:-
Name of Directors Shareholding in coy. Bonus paid (Rs.) Mr. Satyanarayanan R 40.93% 7,02,231/-
Mr. Gautam Puri 40.93% 7,02,231/-
Mr. Shiva Kumar 7.22% 4,75,038/-
Mr. Srinivasan R. 7.22% 5,16,346/-
Mr. Nikhil Mahajan 2.60% 4,13,077/-
Mr. Sujit Bhattacharya 1.09% 4,13,077/-
Total: 33,22,000/-
20 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010
6.2 It was submitted that the bonus paid would not have been payable as such to the directors. It has been paid for services rendered to the assessee. However, the AO came to the conclusion that the bonus has been paid to the directors to avoid the payment of Dividend Distribution Tax. Therefore, the provision contained in section 36(1)(ii) is applicable and, thus, the amount of Rs. 37,44,000/- was disallowed while computing the total income of the assessee.
6.3 Before the ld. CIT(A), it was submitted that the assessee has to prove that the bonus was paid on account of services rendered by the employees. In this connection, reliance was placed on circular no. 551 dated 23.1.1990 to the effect that if bonus has been paid in consideration of services rendered, the same is an item of deductible expenditure without any restriction. It was further submitted that if the terms of appointment provide for payment of bonus, which is approved by the Board of Directors and shareholders, the same has to be allowed. It was also submitted that the bonus paid had no co-relation with the shareholding of the directors. The ld. CIT(A) considered the facts of the case. It is mentioned that the assessee-company earned profits of Rs. 3,50,55,110/-
and Rs. 6,56,19,376/- in the previous years relevant to assessment years 21 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 2005-06 and 2006-07 respectively. No dividend has been declared in either of the years. At the same time substantial bonus has been paid to the directors. This payment has not been worked out on any scientific basis relating it to the performance of the directors. The amount paid as bonus when worked out as percentage of salary gives odd figures such as 27.46%, 27.59%, 19.51% and 27.27% for assessment year 2005-06. The percentages are higher in assessment year 2006-07 but they also constitute odd figures. It is further mentioned that the allowance of the bonus is governed by section 36(1)(ii). The absence of declaration of dividend and actual payment of bonus show that if bonus had not been paid, the amount would have been declared as dividend. The circular relied upon by the assessee explains amendments to section 36(1)(ii) under which the provisos to the section were omitted. Finally, it has been held that the provision is applicable on the facts of the case. Thus, the action of the AO has been confirmed.
7. Before us, the ld. counsel referred to the explanation submitted before the ld. CIT(A) on 13.10.2008, which inter-alia includes the details of salary and bonus paid to whole-time directors. The details are reproduced below in a tabular form:-
Name Designation Total Bonus Bonus % of
Salary as % share-
22 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010
of holding
salary
Mr. Satya Chairman 25,56,840/- 7,02,231/- 27.46% 40.93%
Narayanan R
Mr. Gautam Managing 25,56,840/- 7,02,231/- 27.46% 40.93%
Puri Director
Mr. Shiva Director 17,21,484/- 4,75,038/- 27.59% 7.22%
Kumar R.
Mr. Director 26,46,016/- 5,16,346/- 19.51% 7.22%
Sreenivasan
R
Mr. Nikhil Director 15,14,280/- 4,13,077/- 27.27% 2.60%
Mahajan b
Mr. Sujit Director 15,14,280/- 4,13,077/- 27.27% 1.09%
Bhattacharya
7.1 It is submitted that the percentage of bonus to salary paid to the
directors is not the same as percentage of their shareholdings to the total shareholding. For example, the ratio of bonus to salary in case of Mr. R. Satya Narayanan is 27.4%, while his shareholding constitute 40.93% of the total shareholding. The ratio of bonus to salary in case of Mr. Sujit Bhattacharya is 27.27% while percentage of his shareholding is only 1.09%. Similar position is obtained in respect of other directors. Therefore, if bonus had not been paid to the directors, they would not have received the same or proportionate amount by way of dividends because of vast variation in the percentage of shareholding. Thus, it is argued that the provision contained in section 36(1)(ii) is not applicable. 23 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010 7.2 In reply, the ld. DR relied on the discussion in the assessment order on page 17 where it is mentioned that the company is avoiding tax to the extent of about 20% (13.5% as dividend distribution tax plus 5% due to differential rate of taxation). Therefore, it is strongly argued that the findings of the lower authorities may be confirmed in the matter. 7.3 We have considered the facts of the case and submissions made before us. Section 36(1)(ii) provides that any sum paid to an employee as bonus or commission for services rendered is to be deducted in computing the total income, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. When we apply the statutory provision to the facts of this case, what is to be seen is that if various sums paid to the directors would have become payable as dividend, then, the deduction cannot be allowed. Otherwise, the deduction has to be allowed. We have already given details of payments and shareholdings in case of Mr. R. Satya Narayanan and Mr. Sujit Bhattacharya. It has also been mentioned that relevant facts are similar in case of other directors. Coming to the case of Mr. R. Satya Narayanan, it is clear that if the amount of Rs. 7,02,231/- had not been paid to him as bonus, the same amount would not have been 24 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 paid to him as dividend because he would have got 40.93% as dividend from the total dividend declared. In other words, he would have received higher dividend than the bonus. The position in case of Mr. Sujit Bhattacharya would be opposite. He was paid bonus of Rs. 4,13,077/- although his shareholding is only 1.09%. Thus, it can be said that none of the directors would have received the bonus as dividend in case bonus was not paid. Otherwise, the bonus has been paid as per resolution of the Board of Directors. Therefore, the provision contained in section 36(1)(ii) is not applicable.
7.4 The result of the discussion is that this ground is allowed. ITA No. 523(Del)/2010-A.Y. 2005-06-Appeal of the revenue
8. Ground no. 1 is that the ld. CIT(Appeals) erred in deleting the disallowance of Rs. 22,07,188/- made by the AO in respect of interest paid to NOIDA for purchase of land. It is the common ground of both the parties that this issue stands covered in favour of the assessee by the order of "B" Bench of Delhi Tribunal in the case of the assessee in ITA No. 1047(Del)/2008 for assessment year 2004-05 dated 29.06.2009, a copy of which is placed in the paper book on page nos. 36 to 48. The 25 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 relevant paragraph nos. 10 to 16 are reproduced below for ready reference:-
"10. Coming to ground No.2 the assessee contends that the ld. CIT(A) has erred in confirming the disallowance of interest payment to Noida Authority of Rs.22,07,188/-. The assessee had claimed an amount of Rs. 22,07,188/- as interest paid to the Noida Authority for purchase of land. This amount was capitalized in the books of the assessee. In the computation sheet filed, however, it was detected from the profits of the assessee company. On query, the assessee submitted that it had been allotted 20,000 sq.mtrs. of institutional plot by the Greater Noida authority; that the payment with regard to that was paid in two installments along with interest; that a copy of the lease deed evidencing the payment of interest was being enclosed; that interest paid on borrowed capital for the purpose of business or profession was allowable u/s 36(1)(iii) of the I.T. Act, as per the proviso to which, interest paid in respect of borrowed capital for acquisition of an asset for extension of the existing business or profession, whether capitalized in the books of account or not, shall be allowed as deduction till the date of which the said asset was put to use; that the company did not have any office or training school of its own and was operating from rented place; that the plot was to be used for a training centre and office by the company; that the proviso to section 36(1)(iii) applies only where extension of existing business is involved; that acquisition of the plot would not amount to extension of the existing business but the acquisition would be for the assessee's business; that therefore, the proviso to section 36(1)(iii) was not applicable; that deductions not claimable under sections 30 to 36 of the Act can be claimed u/s 37(1) of the Act; that though acquisition of land is a capital expenditure, interest paid on borrowed capital is not a capital expenditure and is an expenditure incurred wholly for the purpose of business; and that therefore, the interest paid by the assessee was allowable as a business expenditure.26 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010
11. The AO, however, disagreeing with the assessee's contention observed that section 36(1)(iii) was with regard to interest paid in respect of borrowed capital for acquisition of an asset for extension of the existing business; that the interest paid by the assessee was undoubtedly towards the acquisition of the land; and that when any capital asset is acquired, all related expenses including interest relating to the capital asset forms part of the cost of acquisition of the asset. Therefore, the amount of Rs. 22,07,188/- claimed as a revenue expenditure was disallowed.
12. The learned CIT(A) observed , inter alia, that interest was pertaining to acquisition of the land being part and parcel of total consideration of land at Rs. 1.70 crores (principal + interest); that thus the interest of Rs. 22,07,188/- was part of cost of the land which was purchased in the earlier years; and that hence, the AO was justified to treat the interest as capital expenditure.
13. The learned counsel for the assessee has submitted that the plot was allotted to the assessee in 2002; that the payment was made in deferred installments, as per the lease deed (page 6 of the assessee's paper book) ('APB' for short). Reliance has been placed on "Bombay Steam Navigation v. CIT", 56 ITR 52(SC) with regard to the issue of determination as to whether the expenditure in question is a capital expenditure or a revenue expenditure. Further, it has been pointed out that the CBDT has, in pursuance of "Bombay Steam Navigation" (supra), withdrawn its circular/instructions dated 30.9.1964, whereby it had been instructed that interest liability incurred in respect of plant and machinery from abroad as deferred payments was not an administrative deduction u/s 36(1)(iii) of the I.T.Act, since such payment did not constitute payment on borrowed capital.
14. Supporting the impugned order, on the other hand, the ld. DR has relied on Special Bench (Mumbai) decision of the Tribunal in the case of JCIT v. Mukund Ltd. [2007] 291 ITR (AT)249(Mumbai)[SB]. The ld. DR contends that the asset 27 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 was purchased and the amount in question is a part of that asset. Reliance has also placed on JCT v. DCIT And Another, 276 ITR 115(Cal).
15. In this regard, in "Bombay Steam Navigation" (supra), it has been held , inter alia, that whether a particular expenditure is a revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances and by the application of principal of commercial training; that the question must be viewed in that context of business necessity or exigency; and that if the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure. In the present case, undeniably, the assessee did not have an office of a training place of its own. The plot was acquired for the purpose. Therefore, in keeping with "Bombay Steam Navigation" (supra), applying the principles of commercial training and viewing the question in the larger context of business necessity and expediency, it is found that the expenditure was directly related to the carrying on or conduct of the assessee's business. The possession of the plot was a condition to the carrying on of the assessee's business.
Therefore, the expenditure is a revenue expenditure . In this regard mention may also be made on the decision "Gujarat Fertilizer and Commercial", 313 ITR 244(Guj), wherein it has been held that borrowed capital must be used for business.
16. In view of the above, ground No.2 filed by the assessee is accepted."
8.1 As the Coordinate Bench had already taken a decision in the matter, the ground is dismissed.
28 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010
9. Ground no. 2 is against deduction of depreciation on computer peripherals & accessories @ 60% of cost/WDV thereof. This issue stands covered by the decision of Hon'ble Delhi High Court in the case of CIT Vs. BSES Rajdhani Powers Ltd. in ITA No. 1266 of 2010 dated 31.8.2010, in which it has been held that computer peripherals and accessories are entitled for deduction of depreciation at the higher rate of 60%. For the sake of ready reference, paragraph nos. 3 and 4 of the decision are reproduced below:-
"3. However, upon a perusal of the file, we find that the higher rate of depreciation was allowed both by the Commissioner of Income-tax (Appeals) ["CIT(A)"] and the Tribunal. In fact, the Tribunal in its impugned order has observed as under:-
"The issue involved in this appeal is covered by the decision of coordinate bench of the Tribunal as discussed below:-
In the case of ITO Vs. Samiran Majumdar (2006) 98 ITD 119 (Kol.), ITAT Bench "B" has taken a view that the printer and scanner are integral part of the computer system and are to be treated as computer for the purpose of allowing higher rate of depreciation i.e. 60%.
3.2 The ITAT, Delhi "F" Bench in the case of Expeditors International (India) (P) Ltd. Vs. CIT reported in (2008) 118 TTJ 652 has held that peripherals such as printer, scanners, NT Server etc. 29 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 form integral part of the computer and the same, therefore, are eligible for depreciation at the rate of 60% as applicable to a computer.
4. Respectfully following the aforesaid decisions of the Coordinate Bench, we uphold the order of ld. CIT(A) in allowing the depreciation at 60% on computer peripherals and accessories and, thus, the ground raised by the revenue is rejected.
5. In the result, the appeal filed by the revenue is dismissed."
4. We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer.
Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60%."
9.1 Respectfully following this decision, ground no. 2 is also dismissed.
10. Ground no. 3 is against deletion of the disallowance of a sum of Rs. 6,52,352/- made by the AO on account of advances written off on the ground that the conditions prescribed in section 36(1)(vii) and section 36(2) are not satisfied. The case of the assessee is that this issue stands covered by the order of Tribunal in its case for assessment year 2004-05 30 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 (supra). Paragraph no. 21 of the order is reproduced below for ready reference:-
"21. We have considered the matter. There is no denying the fact that the advances were made as a business exigency of the assessee. It has also not denied that despite efforts on behalf of the assessee, the recovery with regard thereto could not be effected. However, invoking of the provisions of section 37(1) in this regard, is not called for. Page 48 of the APB shows details of the amounts written off . The amount of Rs. 85,242/- was an amount paid to education. This represented license fee booked as revenue and debited to the franchise. No business, however, generated by him. The amount was written off as the amount of Rs. 47,576.- represents employee balances. In this period was not served by the employees who left the salary, that the same was debited and could not be recovered is necessitating write off. In these facts, the write off is held to be justified and is allowed as such."
10.1 In the course of hearing, the assessee was requested to state whether the advances were made on revenue account or capital account. It has been submitted that this matter may be left to the AO for verification. On the other hand, the case of the revenue is that the advances made for the purpose of acquisition of capital assets and written off cannot be deducted even u/s 29 of the Act.
31 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010 10.2 We have considered the facts of the case. We are of the view that the advances made in the revenue field, which are written off, are deductible in computing the total income. However, advances made in the capital field are not so deductible as the loss would be capital in nature. It is held accordingly. The assessee is directed to furnish the details of the amounts written off with reference to the purpose thereof. The same may be verified by the AO. Thereafter, he is directed to allow advances in the revenue field and disallow advances in capital field, if any. Thus, this ground is treated as partly allowed for statistical purposes.
ITA No. 4925(Del)/2009 -A.Y. 2006-07-Appeal of the assessee
11. Ground nos. 1 to 3 are similar to ground nos. 1 to 3 in ITA No. 4924(Del)/2009 (supra). It is the common case that decision on these grounds in that appeal shall be equally applicable in this appeal. Following that order, ground no. 1 is allowed; ground no. 2 is restored to the file of the AO, and ground no. 3 is allowed.
32 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010
12. Ground no. 4 is that the ld. CIT(A) erred in treating non-refundable deposit of Rs. 12,01,00,000/- as income. It is mentioned that the income accrued in assessment year 2007-08, when the services were rendered. 12.1 In this connection, it is mentioned in the assessment order that the assessee received non-refundable advances from the students amounting to about Rs. 12.01 crore. The assessee was requested to state as to why this amount should not be treated as income. It was submitted that the assessee is imparting coaching for admission to various professional courses. Some of the courses are spread over to two accounting periods. In such cases a part of the fees is accounted for as advance in the year of enrolment as it pertains to the next accounting year. This treatment is justified in view of the fact that the assessee is following mercantile system of accounting. Similar treatment was given to the receipts in earlier years. The treatment is also justified in view of the matching principle of receipt and expenditure. However, the AO did not agree with the assessee and the amount was added to its total income. 12.2 These very submissions were repeated before the ld. CIT(Appeals). Reliance was inter-alia placed on the decision in the case of Radha 33 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 Soami Satsang Vs. CIT, 193 ITR 321 and Lagan Kala Upvan, 259 ITR
489. The ld. CIT(Appeals) mentioned that the amount of Rs. 12.01 crore was received by the assessee out of which nothing was refundable to the students. Therefore, the assessee has complete domain over the amount. It is further mentioned that as per provision contained in section 145(3), if the AO is not satisfied about correctness or completeness of the accounts or where the method of accounting or notified accounting standards have not been followed, the AO may make an assessment in the manner provided in section 144. The Hon'ble Supreme Court in the case of CIT Vs. British Paints Ltd., 188 ITR 44, has held that it is not only the right but the duty of the AO to consider whether or not the books disclosed true state of affairs and correct income can be deducted therefrom. It is incorrect to say that the AO is bound to accept the system of accounting regularly employed by the assessee, the correctness of which has not been questioned in the past. There is no estoppel in these matters. He also distinguished the decision in the case of Radha Soami Satsang by stating that even in that case the Hon'ble Court observed that strictly speaking, the principle of res-judicata does not apply to the tax proceedings. It has also been mentioned that the decision is confined to the facts of the case only and may not be treated as an authority for general application. The 34 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 case of Lagan Kala Upvan (supra) was also distinguished. A reference was made to the decision of Hon'ble Supreme Court in the case of Sanjeev Woollen Mills Vs. CIT, 279 ITR 434, in which it has been held that the material purpose of section 145 is to ensure that real profit can be determined on the basis of system of accounting followed by the assessee. As the amount has come into the coffers of the assessee irrevocably, the same constitute income taxable in this year.
13. Before us, the ld. counsel referred to page no. 44 of the paper book, being a part of submissions made before the ld. CIT(Appeals). It is inter- alia mentioned that the assessee received most of the money from the students in the month of March, 2006 and enrolled them for a course which was spread over for more than one year. A part of the services were rendered in financial year 2005-06 and a part was rendered in financial year 2006-07. The amount of Rs. 12.01 crore related to financial year 2006-07, relevant to assessment year 2007-08. Therefore, it was accounted for in assessment year 2007-08. Reference was also made to page no. 75 of the paper book, being notes to the financial statements. Under "revenue recognition", it is mentioned that revenue in respect of educational and training fees received from the students is 35 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 recognized over the period of the course. Fees are recorded at invoice value, net of discounts, if any. Where there is uncertainty in recovery of the fees, the same is charged to profit and loss account on completion of the course. Revenue in respect of one time license fee received from franchisees is recognized on execution of the contract. 13.1 Reliance has been placed on the decision of Hon'ble Supreme Court in the case of E.D. Sasoon & Co. Ltd. And others Vs. CIT (1954) 26 ITR
27. Our attention is drawn to page 50 of the report, where it is inter-alia mentioned that income is that which comes in as periodical produce of one's work, business, lands or investments; annual or periodical receipts accruing to a person or corporation. Further, reliance is placed on the decision of Delhi Bench of the Tribunal in the case of K.K. Khullar Vs. DCIT (2008) 304 ITR (AT) 295, in which it has been held that sections 4 and 5 deal with the scope of income and its charge to income-tax, while section 145 is a procedural section regarding the method to be followed for recording the income in the books of account. Referring to the decision in the case of M/s Shoorji Vallabhdas &Co. (1962) 46 ITR 144, it has been mentioned that the Income-tax Act takes into account two points of time on which liability to tax is attracted,- (i) accrual of income, or (ii) 36 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 receipt of income. The substance of the matter is "income". Reliance is also placed on the decision of Special Bench of Chennai Tribunal in the case of ACIT Vs. Mahindra Holidays & Resorts (India) Ltd. (2010) 131 TTJ 1. It has been held that a debt is created in favour of the assessee immediately on execution of the agreement for time-sharing. However, it cannot be said that corresponding services have been fully rendered by the assessee. The assessee is required to furnish accommodation to the members for one week every year till the currency of membership. Therefore, till this obligation is fulfilled, the domain of money is not complete as the failure to provide the accommodation in terms of the agreement entails liability to pay liquidated damages. 13.2 In reply, the ld. DR relied on the discussion in paragraph no. 8.3 of the impugned order, which has already been summarized by us. 13.3 We have considered the facts of the case and submissions made before us. The facts are that the assessee received non-refundable fees in this year. The coaching was to be given in this year as well as in the subsequent year. This means that the attendant obligation was to be discharged in two accounting years. The assessee booked a part of the 37 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 fees in this year and a part thereof in the subsequent year. As held in the case of K.K. Khullar (supra), a distinction has to be made between the terms "receipt" and "income". What is liable to be taxed is income and not the receipt. Therefore, only that amount which is received as income can be brought to tax. For the sake of ready reference, discussion at placitum nos. 8 and 9 are reproduced below, which cover the matter regarding accrual of income and application of principle of consistency:-
"5. We have considered the facts of the case and rival submissions. We may refer to the charging section 4 of the Act to the effect that income-tax shall be charged for any assessment year at the rate or rates provided in any central Act in respect of the total income of the previous year of every person. Section 5 deals with the "scope of total income", which is defined in respect of any previous year in terms of accrual, deemed accrual, receipt and deemed receipt etc. Section 145 deals with the method of accounting in respect of "profits and gains of business or profession" or "income from other sources". Thus, while sections 4 and 5 deal with the scope of income and its charge to income-tax, section 145 is a procedural section regarding the method to be followed for recording of income in the books of account. It is no doubt true that for assessment year 1997-98 and onwards, the assessee can follow either cash or mercantile system of accounting and the hybrid system of accounting is prohibited. However, what is to be taxed is income and receipt of an amount is not be the basis for the levy of the tax. In the case of Shoorji Vallabhdas & Co. (supra), the Hon'ble Supreme Court pointed out that the Income-tax Act takes into account two points of time on which the liability to tax is attracted, namely, -(i) accrual of income or (ii) receipt of 38 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 income. It is further mentioned that the substance of the matter is "income". It may be emphasized that it is accrual of income or receipt of income that can become the subject matter of tax and it is the income which has to be recorded as per system of accounting followed by the assessee in view of section 145 of the Act, because the substance of the matter is "income". Therefore, there is an infirmity in the order of the learned CIT(A) in paragraph 4.7 where it was stated that the entire amount received, whether arrear or advance, is to be shown as income under cash system of accounting. The correct position would be that the entire income received, whether arrear or advance of income, has to be shown as income under cash system of accounting. Coming to the facts of this case, the assessee received certain amounts for services to be performed over a period of time. The amount relatable to the services rendered in the year under consideration was shown as income, the reason being that the assessee became entitled to receive that amount from the client in respect of the services rendered. In other words, debt to the extent of the amount pertaining to services rendered only got vested in the assessee. The rest of the amount was taken as liability to be adjusted in subsequent year as and when the service was rendered. It is but clear that the excess amount would have to be returned in case the service was not performed in subsequent year and, therefore, in respect of such amount no debt came into existence in favour of the assessee. Therefore, this amount did not become the income. Accordingly, we are of the view that the learned CIT(A) erred in finding that the assessee was following hybrid system of accounting on the ground that the whole of the amount received from the clients as retainership fees was not declared as income in the year of receipt of the amount.
5.1 Coming to the issue of consistency of assessments, it may be mentioned that the Hon'ble Supreme Court itself mentioned in the case of Radhasoami Satsang (supra) that their findings should not be taken as a general proposition of law to be followed in every case as it was confined to the facts of that case. We may add that if a manifestly 39 ITA Nos. 4924, 4925(Del)/2009& ITA Nos. 523 & 524(Del)/2010 wrong decision has been taken by the Assessing Officer in one year or in a number of years, it will not bind the Assessing Officer in assessment of a subsequent year because there cannot be any estoppel against the law. However, in this case, we find the earlier and subsequent assessments were made on correct appreciation of the principle of cash system of accounting. Since the assessee succeeds on merits on this aspect, there is no need for us to give a finding that the Assessing Officer was bound in this year to follow the past or future assessment."
13.4 Following this order, it is held that only that part of the receipt is taxable in this year which accrued to the assessee as income. Therefore, the accounting policy followed by the assessee in this regard cannot be faulted with.
13.5 In the result, this ground is allowed.
ITA No. 524(Del)/2010-A.Y. 2006-07-Appeal of the revenue
14. The only ground taken in this appeal is regarding deduction of higher rate of depreciation on computer peripherals and accessories. This issue stands covered by our order in ITA No. 523(Del)/2010 (supra). Following that order, this ground is decided in favour of the assessee.
15. In the result:-
• ITA No. 4924(Del)/2009 is treated as partly allowed for statistical purposes;
• ITA No. 523(Del)/2010 is treated as partly allowed for statistical purposes;40 ITA Nos. 4924, 4925(Del)/2009&
ITA Nos. 523 & 524(Del)/2010 • ITA No. 4925(Del)/2009 is treated as partly allowed for statistical purposes;
• ITA No. 524(Del)/2010 is allowed.
The order was pronounced in the open court on 27th December, 2010.
Sd/- sd/- (C.L. Sethi) (K.G.Bansal) Judicial Member Accountant Member Date of order: 27th December, 2010. SP Satia Copy of the order forwarded to:- M/s Career Launcher (India) Ltd., New Delhi., Asstt. CIT, Circle 3(1), New Delhi. CIT(A) CIOT The DR,. ITAT, New Delhi. Assistant Registrar.