Income Tax Appellate Tribunal - Delhi
Annamaria Travels And Tours (P) Ltd. vs Deputy Commissioner Of Income Tax on 1 April, 2004
Equivalent citations: (2005)95TTJ(DELHI)71
ORDER
R.V. Easwar, J.M.
1. This appeal by the assessee relates to the asst. yr. 1998-99, for which the previous year was 1st April, 1997 to 31st March, 1998. The assessee is a company engaged in the business of conducting tours and acting as travel agent. It also carries on ticketing for airline companies, both national and international. It follows the mercantile system of accounting. In disposing of this appeal, we have taken into consideration the compilation, notes as well as tabulation of facts filed by the assessee.
2. The first ground is that the assessment made under Section 143(3) is invalid in law because the notice under Section 142(1) and Section 143(2) were not validly served. At the time of the hearing, the learned counsel for the assessee stated that this ground is not pressed. Accordingly, it is dismissed.
3. The second ground consists of various sub-grounds. We shall deal with them seriatim.
4. The first sub-ground is directed against the addition of Rs. 6,424 made towards interest income. The AO has dealt with this ground briefly in the assessment order. He refers to the assessee's letter stating that the interest deposits amounts to Rs. 30,424, against which the disclosed interest was Rs. 24,000. The difference of Rs. 6,424 was accordingly added by him as income. The CIT(A) noted the assessee's contention but held that, since the assessee was following the mercantile system of accounting, it was required to declare the interest on accrual basis. The assessee did not bring any evidence on record to show that the interest of Rs. 6,424 had been declared in the asst. yr. 1997-98. In this view of the matter and having regard to the assessee's letter filed before the AO, he confirmed the addition.
5. The assessee is in further appeal. The contention briefly is that the full reconciliation of the interest has been filed and even as per the mercantile system followed by the assessee, the interest has been correctly shown in the return. Reference was made to pp. 8 and 8.1 of the paper book which shows the interest on deposit account for the year ended 31st March, 1998 and the interest receivable account for the period 1st April, 1998 to 30th April, 1998. Reference was also made to the certificate issued by the South Indian Bank Ltd., M.G. Road, Ernakulam on 23rd Jan., 2002. Learned. Departmental Representative on the other hand relied on the orders of the Departmental authorities. On a careful consideration of the matter, we are of the view that the income of Rs. 24,000 declared by the assessee in the return is in accordance with the interest on deposit account which shows a provision for interest receivable at Rs. 24,000. The deposit, according to the bank certificate is of Rs. 2,00,000 and interest @ 12 per cent has been taken credit for in the provision account (interest on deposit account). This deposit matured on 22nd April, 1998 as per the bank's certificate and interest of Rs. 26,378 was received after TDS of Rs. 5,477. Adding Rs. 26,378 and the TDS of Rs. 5,477, the figure comes to Rs. 31,855. The interest of Rs. 24,000 has been accounted for in the year 1st April, 1997 to 31st March, 1998, i.e., the asst. yr. 1998-99. There does not appear to be any escapement of income. The return filed by the assessee for the year under appeal showing interest at 12 per cent on Rs. 2,00,000 is in accordance with its method of accounting and the difficulty has been created because the deposit matured on 22nd April, 1998 and it was renewed with interest for a further period. Any difference between the interest of Rs. 24,000 declared in the return and what the assessee actually received on 22nd April, 1998 would properly be chargeable in the next assessment year. Accordingly, we hold that no addition is called for in respect of the interest on the fixed deposit for the year under appeal. The AO would, however, ensure that the difference is brought to tax in the next assessment year. With these remarks, we delete the addition of Rs. 6,424 and allow the sub-ground.
6. The second sub-ground is that the CIT(A) erred in sustaining the disallowance of the prior period expenses of Rs. 7,11,406. It is stated in the ground that the expenditure was fully explained and is allowable as a deduction and that the IT authorities were not justified in relying on Section 37(1) of the Act.
7. The amount of Rs. 7,11,406 consists of the following amounts:
(a) Payment to airlines for purchase of tickets by Rs. 6,35,551
customers in the list fortnightly of March, 1997
(b) Doubtful debts Rs. 40,997
(c) Shortage of cash as on 31st March, 1998 Rs. 34,858
Total Rs. 7,11,406
So far as the payment to the airlines is concerned, the brief facts are these. The assessee has a branch in Cochin. In respect of air tickets sold during the last fortnight of March, 1997, the assessee has accounted for the sale proceeds of Rs. 11,09,155. However, because of the procedure involved in the national and international ticketing, the assessee would not be in a position to know the amounts payable to the airline company on account of tickets, contemporaneously. The correct amount payable is known to the assessee only in the first fortnight of April, 1997 when the assessee receives the statement from the airline companies showing the amount of commission payable to the assessee for ticketing services and the amount payable by the assessee-company to the airlines. On account of this procedure, the assessee came to know that in respect of the ticket sales made in the last fortnight of March, 1997, it had to pay Rs. 6,35,551 to the various airline companies only in the first fortnight of April, 1997. Accordingly the amount was paid and debited in the assessee's P&L a/c, but since the amount related to the sales of tickets which took place in the earlier accounting year, it was debited as prior period expenses. A note was made in the balance sheet that the commission of Rs. 31,16,118 earned by the assessee includes prior period income of Rs. 11,09,155 and prior period expenses of Rs. 7,11,406 of which the amount paid to the airlines amounted to Rs. 6,35,551.
8. The AO called upon the assessee to justify how the prior period expenses could be allowed in the year under appeal. The assessee would appear to have stated before the AO that since the prior period income of Rs. 11,09,155 was shown in the return, the prior period expenses would also be allowable. The AO, however, held that since the assessee was following mercantile . system of accounting, the prior period expenses were not allowable under Section 37(1) of the Act.
9. On appeal, the assessee filed the details of prior period purchase of tickets in the paper book and contended that the payments were made in the month of April, 1997, which fell in the accounting period relevant to the assessment year under appeal. It was also explained that the assessee was not actually selling tickets on its own account, that it was only an agent for the various airlines and, therefore, it cannot be said that the moment the tickets were sold the corresponding liability to pay for them accrued to it. It was submitted that the payment due to the airlines was payable to them on fortnightly basis which is a regular trade practice and, therefore, only when the fortnightly statements were received from the airlines company, can it be said that the liability accrued. Since this took place only in the first fortnight of April, 1997, the liability accrued in the year under appeal. It was explained that due to cutthroat competition, the rate of commission fluctuates on day-to-day basis and, therefore, the quantification of the amount payable to the airlines would also be uncertain until the rates are finalised and settled in the fortnightly statement. It was pointed out that the fortnightly statement is a sacrosanct practice and is strictly followed in the trade. Various other submissions were also made in support of the claim. The copies of the relevant fortnightly sales report sent by the various airlines were also filed before the CIT(A).
10. The CIT(A) rejected the assessee's submissions on the ground that the assessee was following mercantile system. He also observed that the assessee did not file any evidence of payment to airlines as in the account books, the payments were not shown in the account of the airlines but shown as prior period expenses. It was his view that as per the mercantile system followed by the assessee, the payments should be shown in the respective accounts of the airlines and mere furnishing of details of payment does not prove the assessee's claim. In this view, he sustained the disallowance.
11. The assessee is in further appeal. We have carefully considered the argument and perused the relevant pages of the paper book to which our attention was drawn. There is no dispute that the assessee follows mercantile system of accounting. The dispute is only with regard to the question as to when the liability to pay the price of the ticket to the airlines company accrued. We find it difficult to accept the contention of the learned counsel for the assessee that the liability did not accrue when the sales were effected. In our opinion, when the tickets are sold, albeit on behalf of the airline company, the assessee would certainly be aware of the fact that the tickets have to be paid/or and the moneys which is received by way of sale proceeds have to be parted with, after deducting its commission. It may even be correct to say that the assessee merely receives the sale proceeds in trust or as agent on behalf of the various airline companies and, therefore, the moment the sales are effected, there is an overriding liability to pass on the price of the ticket to the airline company. Therefore, we reject the assessee's contention that the liability did not accrue in the last fortnight of March, 1997, in respect of the sales made during that period.
12. The alternative contention of the learned counsel for the assessee was that the above system of accounting has been consistently followed by the assessee for more than a decade that it has also been accepted by the IT authorities without demur and, therefore, there should be no departure from the same. He also pointed out on the strength of the judgment of the Bombay High Court in the cases of CIT v. Nagri Mills Co. Ltd (1958) 33 ITR 681 (Bom), that in the case of a limited company where the tax is attracted at a uniform rate without any basic assumption (sic-exemption), the IT authorities should not raise disputes as to the year in which the deduction, which is otherwise permissible, should be allowed. Reliance was also placed on the following judgments :
(i) CIT v. Nadiad Electric Supply Co, Ltd. (1971) 80 ITR 650 (Bom);
(ii) Saurashtra Cement & Chemicals Ind. Ltd. v. CIT (1995) 213 ITR 523 (Guj).
13. We find force in the alternative contention noted above. It is not disputed on behalf of the Department that the practice of debiting the price of tickets in respect of sales made during the last fortnight of March, in the accounts during the first fortnight of April, has been adopted by the IT authorities. There is thus no loss of revenue. Further there is no other objection to the allowability of the expenditure and in the case of a company, it does not matter much whether the expenditure is allowed in a particular year or in the next year because the tax rates are the same and there is no basic exemption also. A consistent practice accepted by both the parties should not be ordinarily or needlessly departed from. It should also be remembered that if the claim for prior period expenses by way of price of tickets is not allowed, the assessee may well raise a claim that the price of ticket sold during the last fortnight of March, 1998 should be allowed in the assessment year under appeal. There is thus, no justification for any departure from the past practice. Therefore, though we reject the assessee's claim that the liability accrued only in the first fortnight of April, 1997, having regard to the consistent practice adopted by both the sides over a considerably long period of time, we see no need to depart from the same. Accordingly, we direct the Departmental authorities to allow deduction of Rs. 6,35,551.
14. So far as the doubtful debts of Rs. 40,997 and the shortage of cash Rs. 34,858 are concerned, the Departmental authorities have not dealt with these claims separately. The AO has not said anything in respect of these claims, The CIT(A) has, however, deleted the disallowance of the doubtful debts and, therefore, the appeal of the assessee to this extent is redundant. As regards the shortage of cash, the CIT(A) has held that no evidence has been filed. The learned counsel for the assessee has, however, drawn our attention to the affidavit of Devis Manjali, the managing director of the assessee-company, a copy of which is at p. 58 of the paper book which is to the effect that the shortage of cash was noticed in the Cochin Branch by the branch auditor during finalisation of branch account, that the shortage arose due to embezzlement by an employee of the branch and, therefore, it is contended that it should be allowed. It is not clear as to before whom this affidavit was filed. The affidavit does not bear any date. However, assuming that the affidavit contains an assertion of fact, we consider it proper to restore this issue to the file of the AO who shall take a decision afresh in respect of the allowability of the shortage of cash. The AO shall afford adequate opportunity of being heard to the assessee before taking a decision.
15. The third sub-ground is that the GIT(A) erred in sustaining the addition of Rs. 13,86,868 under Section 68 of the Act. This amount consists of the following:
(a) Sundry creditors for purchase of the tickets Rs. 11,24,407
(b) Visa advance Rs. 2,32,950
(c) Ticket advance Rs. 4,125
(d) Provision for audit fee Rs. 25,386
Total Rs. 13,86,868
16. The assessment order merely states that the assessee did not file any confirmation of the above balances in the sundry creditors or accounts and, therefore, they are added under Section 68 of the Act.
17. On appeal, the assessee pointed out that in the course of assessment proceedings, the details of sundry creditors outstanding as on 31st March, 1998 were filed along with the bank statements where the payments to the creditors made after 31st March, 1998 were highlighted. The details of the sundry creditors in respect of the Cochin branch were also filed. It was pointed out that the sundry creditors of Rs. 15,68,059 in the Delhi Office was accepted without any confirmation and that the sundry creditors at the Cochin office also comprise of the similar items only. It was pointed out that the AO had accorded a discriminatory treatment to the sundry creditors in the Cochin office. It was pointed out that the commission in respect of the sale of tickets has been assessed as income, but the outstanding purchase price of those tickets is not being accepted and was being added without any justification under Section 68 of the Act. The assessee also sought to establish before the CIT(A) that the amount of Rs. 11,24,407 was a trading liability and not a loan. In the paper book, the details of the payments made in the next financial year, copies of the bank statements and ledger account of the airline companies or travel agents were also filed in the paper book.
18. The CIT(A), however, rejected the assessee's explanation by observing that there was no confirmation from the airline companies. He perused the account copy filed by the assessee and noticed that the assessee had purchased ticket from other travel agencies also, such as National Travel, Hansa Aviation etc. and that the amounts payable to them were shown as payable to M/s Kuwait Airways. He, therefore, felt that the assessee should have filed the confirmation from the airlines. In the absence of confirmation, he sustained the addition.
19. The assessee is in further appeal. Strong reliance is placed on the statement of facts filed before the CIT(A) as well as the detailed written submissions filed before him where entire facts and evidence with regard to the above have been brought to the notice of the CIT(A). In fact, the CIT(A) has also noted these facts but has confirmed the addition only on the ground that no confirmation was filed from the airline companies. But, in our opinion, the CIT(A) ought not to have confirmed the addition only on this ground when the assessee had filed before him not only the details of sundry creditors outstanding as on 31st March, 1998 but also the bank statements showing payments to these creditors as well as the copy of their accounts in the assessee's books. When the payments to the creditors have not been doubted and when the commission income in respect of the sales of those very tickets for which payments are outstanding as on 31st March, 1998, has been assessed as the income of the assessee, it is not justified on the part of the IT authorities to add the outstanding balances under s, 68 of the Act. We are also inclined to hold that Section 68 has no application to such a situation. The assessee has not received any moneys from the airline companies. The credit represents amount due to them for purchase of tickets. Section 68 comes into play only where any sum is found credited in the account of a third person and the assessee is unable to give satisfactory explanation in respect of the nature and source of the sum. The section cannot apply where goods or services are acquired by the assessee on credit and an entry is made crediting the liability in the account of the person from whom the goods and services are acquired. In this view of the matter also, the addition of Rs. 11,24,407 cannot be sustained. It is accordingly deleted.
20. As regards the observation of the CIT(A) that the assessee has shown amount due to National Travel Services, Hansa Aviation etc. as amount due to Kuwait Airways, we find that this is an incorrect statement. At p. 151 of the paper book, the details of the sundry creditors for air tickets are given. It shows amount due to Hansa Aviation at Rs. 51,611, to National Travel Services at Rs. 10,556.70 separately. There is no amount shown as due to Kuwait Airways.
21. As regards the visa advances of Rs. 2,32,950, it consists of Rs. 1,57,950 towards Austrian family visa advance and Rs. 75,000 towards Dubai visa advance. The names of the persons from whom the amounts were received is also annexed at p. 152 of the paper book. The assessee also renders visa services and these amounts have been received as advance to be adjusted later after the payments have been made to the concerned consulates and the visas have been issued. This is an amount received by the assessee in the regular course of its business as an advance. Further the assessee has received service charges of Rs. 46,039 in connection with the visa services which amount has been shown in the statement of commission filed with the AO under cover of letter dt. 23rd March, 2001, a copy of which has been filed at p. 165 of the paper book. In view of these facts, the addition is deleted.
22. The ticket advance of Rs. 4,125 has been adjusted on 21st Dec, 1998 against bill raised and the amount has been squared up. We are of the view that the Departmental authorities have unreasonably rejected this explanation of the assessee. The CIT(A) would appear to have based his decision only on suspicion to the effect that the squaring up of the account may not have existed when the AO examined the accounts. We accordingly delete the amount.
23. As regards the addition of Rs. 25,386 this represents a provision made for payment of audit fee, accounting charges and service tax payable. All the details were filed before the AO who has not stated anything to doubt them but has added it under Section 68 of the Act only because there is no confirmation. The CIT(A) has rejected the assessee's plea on the ground that it is an afterthought. We are unable to subscribe to this view. These are bills submitted by the assessee's auditor which have been paid subsequently, even the service tax has been paid subsequently. We do not see how Section 68 can be invoked to these bills payments. Accordingly, we delete the addition.
24. Thus, the entire addition of Rs. 13,86,868 is deleted as unjustified.
25. The fourth sub-ground is that the CIT(A) erred in sustaining 50 per cent of the disallowance of the foreign travel expenses of Rs. 3,35,375 incurred by the assessee. The AO disallowed the claim on the ground that the assessee sells air tickets in India and, therefore, was not required to travel abroad. The CIT(A) noted that the directors of the company who travel abroad visited certain Christians religious places and met Christians and that they also spent time and money in Dubai Shopping Festival and Singapore and New Zealand. He also noted that the assessee failed to mention the benefits derived by the company from the visits. He, therefore, disallowed 50 per cent of the expenses as personal in nature.
26. The assessee is in further appeal to contend that once the CIT(A) agrees that the main purpose of the visit abroad is for the assessee's business, the entire amount should be allowed as deduction. He also submitted that the applicability of Rule 6D may, however, be directed to be verified. On the other hand, learned Departmental Representative relied on the orders of the Departmental authorities.
27. On a careful consideration of the matter, we are of the view that once it is agreed that the foreign trip was made for the purpose of the business, the entire expenditure is allowable as deduction. The CIT(A) is also not justified in saying that the assessee did not derive any benefit from the foreign trip. The assessee is in the business of conducting tours and acting as travel agents. A trip to the foreign countries gives an opportunity to meet the foreign airlines people and firm up the business relations as also to identify places of interest which can be included in the conducted foreign tours. The expenditure may not bring immediate results to the company but it may have long-term benefit. At any rate, it is not necessary for the assessee to show tangible benefit in the very year in which the expenditure is incurred. It is the duty of the assessee only to show that the expenditure was incurred for the purpose of the business irrespective of whether it resulted in benefit to the business or not. However, the objection of the IT authorities that the directors visited religious places and places of shopping has to be reckoned with. While, therefore, holding that the CIT(A) was not justified in sustaining a disallowance of 50 per cent of the foreign travel expenses, we direct the AO to examine the expenditure in terms of Rule 6D of the IT Rules, a proposal which was agreed to before us by the learned counsel for the assessee. The AO is, therefore, directed to regulate the expenditure under the above rule and disallow the amount if any, found not allowable as per the rule. The ground is disposed of accordingly.
28. Sub-ground 5 is directed against the levy of interest of Rs. 5,20,955 under Section 234B of the Act. The contention of the assessee is that there are no directions or reasons in the assessment order in support of the levy and thus the rule laid down by the Hon'ble Supreme Court in CIT and Ors. v. Ranchi Club Ltd. (2001) 247 ITR 209 (SC) has been violated. List of other authorities has been filed in support of the contention. On the other hand, learned Departmental Representative points out that Form No. ITNS 150 contains the working of the interest and this has been served on the assessee also. He relies on the findings of the CIT(A) in para 40 of his order, He has also drawn our attention to the judgment of the Hon'ble Supreme Court in CIT v. Anjum M.H. Ghaswalla and Ors. (2001) 252 ITR 1 (SC) wherein it has been held that the interest is mandatory. Reliance is placed on the judgment of the Hon'ble Supreme Court in the case of Kalyan Kumar Ray v. CIT (1991) 191 ITR 634 (SC) in which it has been held that if Form No. ITNS 150 containing the working of the tax is served on the assessee, there can be no objection to the validity of the assessment order on the ground of non-computation of tax.
29. On a careful consideration of the matter and having regard to the fact that the necessary computation of interest is contained in ITNS 150 which has been sent to the assessee, we hold that there is no infirmity in the levy of interest under Section 234B of the Act and the rule laid down in Ranchi Club (supra) has not y been violated. The judgment of the Hon'ble Supreme Court in Anjum MM. Ghaswalla (supra) is also in support of the levy. Accordingly, we uphold the levy in principle. The AO will, however, rework the same while giving effect to our order.
30. In the result, the appeal filed by the assessee is partly allowed.