TMI Blog2008 (3) TMI 713X X X X Extracts X X X X X X X X Extracts X X X X ..... tarily assigned to the appellant as gift, holding the same to be income taxable under section 2(24) of the Income Tax Act, 1961 (the Act ). 1.2 That the CIT (A) erred on facts and in law in observing that the amount received by the appellant being a benefit arising from the business was to be regarded as business income of the appellant. 1.3 That the CIT (A) erred on facts and in law in holding that the payment of said amount by HNS was not an unsolicited gift or unforeseen windfall but had been made as a necessary incident of carrying on of the business. 1.4 That the CIT (A) erred on facts and in law in holding that it could not be said that the appellant's status as wholly owned subsidiary of HNS was the only substantial reason as to why the receivables from HTIL had been assigned to the appellant by way of gift. 1.5 That the CIT (A) erred on facts and in law in holding that the gift of ₹ 1,21,03,75,000 by HNS to the appellant was inextricably linked to the services rendered by the appellant towards the Tata transaction and Mittal Settlement. 1.6 That the CIT (A) erred on facts and in law in holding that the so called gift was wholly incidental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of shares without which it would not have been possible to recover the receivables in terms of the supply termination agreement. 2.3 That the CIT (A) erred on facts and in law in not appreciating that the successful closure of sale and purchase transaction by transfer of respective equity stake by all shareholders (including shares held by Mittal family, not party to the supply termination agreement) was imperative for receipt of the receivable of the appellant. 2.4 That the CIT (A)erred on facts and in law in not appreciating that the recovery of receivables of the appellant was inextricably linked with and was conditional on completion of the transaction of transfer of shares in HTIL and payment of facilitation charges were made to ensure consent of Mittal family. 2.5 That the CIT (A) erred on facts and in law in not appreciating that the payment of facilitation charges were incurred for realizing the debt due to the appellant and were wholly and exclusively incurred for the purpose of business of the appellant. ITA No.1333(Del)07: On the facts and in the circumstances of the case and in law, the CIT (A) erred in deleting the disallowance of prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no presumption of love and affection between artificial juridical entities. AR's however still insists that consequent to gift deed dated November 23, 2002 M/s Tata Teleservices Ltd. have issued assessee 0.1% non cumulative redeemable preference shares of Rs,. 1 ,21,03,75,000 /-. Reference is made to the following case laws. It has been held by Madras High Court in CIT vs. Parmanand Uttamchand 146 ITR 430 that a payment, which a gift element or an element of bounty, may be treated as part of taxable income of the business man. If gift is received in course of or as necessary incident of, assessee's business. As the foresaid gift is received in course of or as necessary incident of assessee's business, the same is taxable in the hands of the assessee. It has been held by Bombay High Court in the decision of Maharaj Shri Govidlalji Ranchhodlalji v. CIT 34 ITR 90 , that if a person receives any payment because he is holding office and not as a personal gifts, even in the absence of legal and binding contract, the receipt would be taxable income. In David Mitchell v. CIT 30 ITR 701, it has been laid that the test to tax a voluntary receipt shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diary of HNS. HTIL, a company incorporated in India during the year under consideration was a joint venture of Hughes Electronic Corporation (USA) and Altel(USA) and Ispat Group and the joint venture was awarded a licence to provide basic telephone services in Maharashtra on 30.9.97. For carrying out the said work HTIL entered into an agreement with HNS (a wholly owned subsidiary of Hughes Electronic Corporation) on 5 December, 1997 for supply of certain equipments required by HTIL to set up the Telecom net work and the said agreement hereinafter called as HTIL - HNS agreement. 5. On the said date HTIL also entered into an agreement with the assessee and the said agreement hereinafter will be called as HTIL - HNSIL agreement, according to which, assessee was responsible for installation, commissioning and maintenance of Telecom Net Work. According to the assessee HTIL was incurring losses since inception and, therefore, all the share-holders of HTIL agreed to sell their shares to Tata Tele Services Ltd. (TTSL) vide share purchase agreement dated 27.6.2002. In this view of the situation an agreement dated 27.6.2002 was entered into amongst HNS, HTIL and TTSL and the said agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which a particular receipt has arisen and connection must exist between quality of receipt and source and reliance was placed on several decisions. Considering all these submissions the ld. CIT (A) has upheld the addition with the following observations:- 4. I have examined the issue in appeal and also taken into consideration the appellant's submissions as to why the gifts in its hands should not be held as taxable. The conclusion whether a transfer amounts to gift is one that must be reached on consideration of all factors. While crystallization of individual experiences reduced to a report might appear persuasive, one cannot lay down as a matter of law any single determining factor. Determination in each individual case as to whether the transaction in question was a gift or otherwise must be based ultimately on the application of assessing authority's experience with the main springs of human conduct with the totality of the facts of the case. 4.1 It is correct that a voluntary payment of money or transfer of product from one person to another is prima-facie not income in the recipient's hands. However, where it is established that the payment or transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it will be taxable if it was made because of the office or vocation of the donee . In determining whether a receipt is income or not, what the donor was doing was not relevant, and that what was relevant was as to why the donee was receiving. The Hon'ble Court affirmed the statement of law made by Collins M-R in Herberp vs. Mcquad (1902) to K.B. 631, 639 that it was a principle of law that a payment may be liable to income tax although it is voluntary on the part of the person who made it and that the test is whether, from the stand point of the person who receives it, it accrues to him by virtue of his office, if it does, it does not matter whether it was voluntary or whether it was compulsory on the part of the person who paid it . 4.4 It is established law that if the amount so received is not an amount which is excluded from the ambit of income under the Act, such receipt would constitute income. The fact that the amount was given to the recipient without any demand for the same by the recipient or without any legal obligation on the part of the donor to make the payment would not make any difference. The fact that the person who makes the payment regards it as a dona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not indemnify either TTML for sale of shares to the Tata Group or even indemnify the appellant in respect of the so called gift of the receivables due from HTIL, knowing fully well that the DRI 's action in 2002 related to supplies made to HTIL by HNS Inc. for alleged under payment of duty and misclassification of import codes and a part of the supplies remained unpaid by HIL and hence the receivables it can be said that HNS Inc.'s own personal and potential liability in the matter and on the issues emerging out of the DRI action has also been implicitly shifted both to TTML and the appellant. The fact that DRI action on HTIL took place in 2002, and the supply termination agreement of HNS Inc. / ALLTEL / the appellant with HTIL transfer of stake in HTIL by HNS Inc. and its affiliates also were completed in 2002, in very certain terms suggest that HNS Inc. was eager to dissociate itself from HTIL immediately upon the DRI action. Otherwise, there was no reason to explain the hurry in signing up the agreements to terminate supplies to HTIL / TTSL and for sale of stake in HTIL in 2002 itself . In Commissioner vs. Duberstein 363 US 278, 285, 286 (1960), the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other former sponsors of Hughes Tele. Com (India) Limited (:HTIL ) were sold to the Tata Group (the Tata Transaction ) and certain inter-sponsor matters were settled between Hughes and the Mittal Group (the Mittal Settlement ). As you know, Hughes Network Systems India limited HNC India ) was a key participant in the Tata Transaction and the Mittal Settlement and realized substantial value from these transactions, including (among other things) a payment of Sponsor Redeemable Preference Shares and Equity Warrants of Tata Teleservices Limited. As part of the Mittal Settlement, it was agreed and memonalized in the Mittal Letter that HNS India would pay to the designee to Mr. V. K. Mittal ten percent of an amount of direct signatory of the Mittal Letter, HNS India was aware of this agreement made by HNS Inc., at the time it was made and HNS India agreed at that time to support the obligation to pay ten percent of such Sponsor Credit amounts. Accordingly we are writing at this point to request that, pursuant to the Mittal Letter and in accordance with our price agreement, HNS India pay to the designee of Mr. V.K. Mittal the amount of ₹ 59,505,906/- representing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the employment of the recipient or the services rendered by the recipient to the payer, or to a business carried on by the recipient that it is in substance and reality a product or an incident of an income earning activity on the part of the recipient, the gift may constitute assessee's income in the hands of the recipient. In the case under appeal, the so called gift has to be seen in the context of the fact that both HNS Inc. and the appellant provided services and supplies to HTIL from 1997 and both terminated the agreements in 2002. HNS Inc. holds 99.9% shares in the appellant company. HNS Inc. Also has independent business transaction by way of sale of VSAT equipment to the appellant. For the year under appeal it has purchased equipment worth ₹ 22.90 crores from HNS Inc. and it was to pay ₹ 10.31 crores to HNS Inc. in respect of its business transaction on the balance sheet date relevant to A.Y. 2003-04. There was business related transaction between HNS Inc. and the appellant in the past and such transaction continue in the year under appeal. The volume purchase agreement between HNS and HTIL on 05-12-1997 the network design and systems integration agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... An agreement was also entered into between HTIL and the assessee on the same date whereby the assessee was responsible for installation, commissioning and maintenance of the tele-com work. It was submitted by the ld. AR that HTIL was incurring losses since inception. Therefore, all the shareholders of HTIL agreed to sell their shares to Tata Tele-services Ltd. (TTSL) vide their share purchase agreement dated 27.6.2002. HNS had certain receivables from HTIL under the HTIL-HNS agreement. As HTIL was incurring losses, HNS was unable to recover those receivables from HTIL. HTIL having constraints on its own resources was not able to make payments of those receivables to HNS. Therefore, HNS, HTIL and TTSL entered into an assignment agreement dated 27.6.2002 (for receivables) which is called as 'assignment agreement'. According to the assignment agreement, HNS agreed to assign TTSL rights and interest in the said receivables. In consideration thereof TTSL has agreed to issue HNS redeemable preference shares with an aggregate face value equivalent to such receivables i.e. a sum of ₹ 1,21,03,75,000/-. A gift deed was executed by HNS on 27.11.2002 (hereinafter is referred as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the source. Referring to section 5 it was pleaded that it lays emphasis on the position by defining total income to include all income 'from whatever source derived'. The classification of income into 5 heads u/s 14 which also points to the proposition that income should have some source and according to the scheme of the Act, income is linked with its source. The source, however, need not necessarily be one which is expected to be continuously productive but the same at any rate be one the object of which is the production of a return. It was pleaded that a voluntary gift or money or reward given to a finder of a lost article by its owner or a windfall has no source. Reference was made to the following decisions:- Leeming v Jones (1930) 15 TC 333, 355 (HL); CIT v. Shaw Wallace and Co. AIR 1932 PC 138: 6 ITC 178 (PC) 12. Reference was made to Full Bench decision of Allahabad High Court in the case of Rani Amrit Kunwar, 14 ITR 561 wherein it has been held that voluntary payment received, not attributed to any custom, usage or obligation and which had no origin for the payment (which could amount in its nature to a definite source) so as to render such payment as & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee cannot be characterized as income. Reference was made to the following decisions:- The Privy Council in Commissioner of Income-tax vs. Shaw Wallace and Co. [1932] 2 Comp Cas 276, 280 : AIR 1932 PC 138, 140. Ram Amrit Kunvvar vs. CIT : 14 ITR 561, (Alld.) H.H. Maharani Shri Vijaykuverba Saheb of Morvi vs. Commissioner of Income- tax : 49 ITR 594 (Bom.) Mehboob Production P. Ltd. vs. CIT : 106 ITR 758 (Bom.) CIT vs. Rama Lakshmi Reddy : 131 ITR 415 (Mad.) 16. Further reference was made to the decision of Delhi High Court in the case of Siddhartha Publications(P)Ltd. v. CIT , Delhi, 129 ITR 603(Del). In the said case assessee was publishing an English magazine approached the 'World Partnership Organization' for financial assistance. Such receipts were held by the AO on being revenue receipts. AAC held that the receipts were in the nature of casual and non-recurring receipts which could not be treated as income. It was held by the Tribunal that donation was business receipt liable to tax. Tribunal observed that the assessee has approached the magazine for financial assistance for business purposes and thus the amount received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee was not a revenue receipt. It was contended that while holding so the Hon'ble High Court has observed that there was no obligation, either contractual or statutory on the foreign company to make the said payment to the assessee. The payment was unsolicited and without any expectation and no consideration was passed by the assessee to the foreign company and no quid pro quo was involved. Referring to the said case it was pleaded by the ld. AR that in the present case also the receipts are without any quid pro quo and, therefore, cannot be characterized as income. 18. It was further pleaded that the amount also cannot be characterized as business income in terms of section 28. Referring to section 28 it was pleaded that it is a well settled law that every receipt by the assessee does not become income from business. Reference was made to the decision of Hon'ble Supreme Court in the case of Universal Radiator v. CIT , 201 ITR 800 in which it was held that an income directly or ancillary to the business may be an income from business but any income to an assessee carrying on business does not become an income from business unless the necessary relationship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld arise to an assessee from his business or exercising his profession, e.g., the receipt should be in consideration of the services rendered. It was submitted that benefit must have direct, proximate and immediate nexus with the business. It was pleaded that any amount received by the assessee which is not connected or which does not arise from the business of the assessee cannot be covered under clause (iv) of section 28 of the Act. It was pleaded that the test to be applied is - would the assessee have received such benefit, had the assessee not been carrying on business. If the answer is negative, the receipt would be one arising in the course of business and hence taxable u/s 28(iv) of the Act since the carrying on of business is sine-qua non for the receipt of such business and if the answer is in the affirmative the amount cannot be brought to tax as the receipt will have no connection and is not arising in the course of business. Reference was made to the decision of Hon'ble Gujarat High Court in the case of CIT v. Kaira District Co-operative Milk Producers' Union Ltd., 247 ITR 314 wherein the Hon'ble Gujarat High Court following the decision of Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 57 ITR 532(SC) it was pleaded that in that case considering taxability of receipt in the nature of gift it was held by the Hon'ble Supreme Court that the circumstances relied on by the Tribunal did not establish that what was given by S to the assessee was remuneration for the services rendered or to be rendered and that what the assessee received was not assessable to tax and it was held by the Hon'ble Supreme Court that in all the cases in which receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provisions. 26. Ld AR further referred to the order of CIT (A). He contended that addition has been sustained by him on following grounds:- (i) As the result of Department of Revenue Intelligence (DRI), action on HTIL in 2002, HNS and its affiliates were eager to disassociate itself from HTIL and as a consequence thereof, HNS entered into supply termination agreement for transfer of stake in HTIL. (ii) The payment of ₹ 1,21,03,75,000 by HNS to the appellant was inextricably linked to the services rendered by the appellant towards Tata transaction and Mittal settlement. (iii) The so called gif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot arise in the course of business of the appellant. The appellant under a separate contract with HTIL is installing equipment supplied by HNS USA to HTIL. The consideration for services rendered by the appellant in installing the equipment is payable by HTIL (not HNS USA to the appellant). 27. Ld. AR pleaded that case law relied upon by CIT (A) is distinguishable on facts and cannot be applied to the case of the assessee. 28. Concluding his arguments the ld. AR pleaded that the transaction of gift is evidenced by gift deed executed by HNS on 27.11.2002 whereby all the rights and interests of HNS in the receivable due from HTIL were assigned by HNS by way of gift voluntarily, unconditionally and irrevocably in favour of the assessee, which was a wholly owned subsidiary of HNS. The revenue on the basis of conjectures and surmises, without leading any evidence, is seeking to hold the same to be arising out of the business carried on by the assessee, notwithstanding that gift deed clearly and unambiguously asserts that the gift is being made without any consideration. It was argued that a heavy burden lies on the revenue to show that the amount of receivable assigned by HNS in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S to the assessee without quid pro quo and could not be categorized as income for the purpose of section 24 and other arguments raised by the ld. AR. The submissions of the ld. DR in short were as under:- a) Before the Assessing Officer, the assessee has failed to discharge the onus cast on it to prove that the alleged gift was not income chargeable to tax. b) The AO by relying on the ratio of the Madras High Court in CIT vs . Permanand Uttamchand 146 ITR 430 held that the aforesaid sum has been received by the assessee in course of or as necessary incident of the assessee's business and the same was taxable in the hands of the assessee. c) The AO also relied on the Bombay High Court decision of Maharaj Shri Govindlalji Ranchhodlalji vs . CIT 34 ITR 90 wherein it has been held that if a person received any payment because he is holding office and not as a personal gifts, even in the absence of legal and binding contract, the receipt would be taxable income. d) Further, by applying the test to tax a voluntary receipt as laid down in David Mitchell vs. CIT 30 ITR 701, the AO held that the aforesaid payments received by the assessee, though without conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions continued in the year under appeal also. Therefore, in the context of the past contractual relation between HTIL, LINS and the assessee and the continuing business relationship between HNS and the assessee it was rightly held by the ld. CIT (A) that the assessee's status as a wholly owned subsidiary of HNS was the only substantial reason as to why receivables from HTIL were assigned to it by way of gift. Therefore, the payments of the so called gift were wholly incidental to carrying on of the assessee's business as a co-supplier of equipment and services of HTIL. Thus, the claim of the assessee that the sum of ₹ 1,21,03,75,000/- was not received by it on account of its business relation or services rendered by the assessee to HNS and HTIL is not correct at all. j) The assessee's claim that the gift has been made without any quid pro quo is also incorrect as the amount of ₹ 1,21,03,75,000/- has been received by it as a necessary incident of the carrying on of the business of the assessee as wholly owned subsidiary of HNS and co-supplier of equipment and services to HTIL. k) The assessee's submission that the AR's categorically s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and its holding company are at arms length. It was pleaded by the ld. AR that the transaction of gift receivable is not connected and did not arise from the business of the assessee and thus was on capital account not having any semblance of income. The holding company has accounted the income from supply of equipments on accrual basis and taxes thereon have been paid in USA and it is a different matter that such incomes are not taxable in India in view of holding company not having a permanent establishment in India . Any amount received/to be received by holding company from HTIL towards the equipment supplied could not be once again subjected to tax in the hands of holding company. In such transaction no tax advantage has been derived either by holding company (USA company) or assessee company. CIT -DR has not been able to explain as to how the tax burden is reduced by gift of receivables from holding company to the assessee company. 33. Replying to the arguments of the ld. DR that on realization of debt, the same would be taxable as revenue receipt in the hands of holding company and by making gift, pure revenue receipts are sought to be converted into capital receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er that section. Reference was made to section 2(xviii) of the Gift Tax Act which defined 'person' and does not debar the corporate assessee to be termed as person. Reference was made to section 45 of the Gift Tax Act which provides exemption from levy of gift tax in respect of gifts made by, inter alia, (a) a company in which public are substantially interested and (b) any company to an Indian company in the scheme of amalgamation etc. Thus it was submitted by the ld. AR that gift is a voluntary or gratuitous payment where there is no quid pro quo, which is an essential element for making the gift. 36. It was pleaded by the ld. AR that case laws relied upon by the ld. DR are distinguishable as under:- (i) CIT vs. Rajaram Maize Products : 251 ITR 427 (SC), Sahney Steel and Press Works Limited and Others vs. CIT : 228 ITR 253 (SC) Reply : In the aforesaid cases, the subsidy received by the assessee was held to be in the nature of revenue receipt since it was meant to supplement profits of the recipient assessee(s). On the facts of those cases, it was held by the Supreme Court that subsidy/incentives were paid by the Government as per the incentive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of receivables by HNS USA was unsolicited and without any expectation. There was no obligation - legal or moral, on HNS USA to make the gift of receivables in favour of the appellant company. In such circumstances, the gift of receivables which is in the nature of mere windfall cannot be regarded as benefit / perquisite arising in the course of business in the hands of the appellant company. (iii) Susil C. Sen. vs CIT : 9 ITR 261 (Cal.) Reply: In the said case, the assessee, an attorney and advocate, in the course of acting for a shareholder of a company rendered certain services which resulted in substantial issue of new shares of the company to the public. A firm of stock brokers who were benefited by the issue of new shares paid ₹ 10,000 to the assessee though the latter had not acted for them and they were not legally bound to pay anything to the assessees. The assessee claimed that the amount was in the nature of casual and non-recurring receipt not liable to tax. The Calcutta High Court held that the amount paid to the assessee was because of the help that the assessee, as a lawyer and advocate, had rendered in respect of new issue of shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom his followers by way of contributions. The Hon'ble Allahabad High Court while considering whether such receipts were taxable as revenue receipt in the hands of the assessee held that the mere fact that the teaching of Vedanta was a matter of religion would not mean that the assessee was not carrying on a vocation. Though the assessee was giving the discourses without any motive or intention of making a profit out of such activity, yet the giving of discourses was a vocation and the raising of the contributions for purchasing a car for the assessee by his disciples was in consideration of the teaching imparted by him. The giving of the discourses by the assessee was a causa causans for the raising of the contributions by his disciples and the purchase of the car by them for him. In the aforesaid decision, giving religious discourses was vocation of the assessee and the discourses given by him were causa causans for such contribution. The contributions in that case which essentially arose from the exercise of the vocation were accordingly held to be taxable income. The aforesaid decision relied upon by the Ld. CIT DR does not apply to the fact of the appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, while the firm had borrowed funds on interest, it had advanced monies to its partners without charging any interest. The Tribunal found in the case of the firm that the non interest-bearing funds available to the firm exceeded the advances made to the partners. The very basis of the addition under section 28(iv) of the Act was held to be no longer sustainable. It was further held that if what was received either by way of benefit or perquisite was money, there was no question of considering the value of such monetary benefit or perquisite under clause (iv) of section 28. It held that it was only if the benefit or perquisite was not in cash or money that section 28(iv) would apply. For that reason, too, the addition was deleted. There is no quarrel to the proposition laid down in the aforesaid decision. Section 28(iv) of the Act can be invoked only when benefit is other than cash. This issue does not arise in the present case. The gift of receivables is per se not connected with the business operation carried on by the appellant and there is no basis to invoke provisions of section 28(iv) of the Act. Thus Ld. AR pleaded that the aforesaid decision does not, in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The addition of the amount of gift is, therefore, misconceived and calls for being deleted. 40. It may be mentioned here that Ld. AR was required to submit certain details with respect to following points: A. Details regarding supply of VSAT equipment by HNS(USA) to customers in India during the relevant year: B. Total revenue of HNS USA and Hughes Network Systems India Limited from supply of equipment/installation services to HTIL; C. Assignment of Receivable and Payment of Sponsor Credits Receivable Balance at Each Step D. Accounting treatment provided to the said amount of gift in the Books of HNS and HNSIL (HNSI) With respect to point A the information is as under:- Supply to Hughes Network Systems India Limited INR 229,007,165 Supply to Hughes Escorts Communication Limited INR 150,530,799 Supply to Third parties INR 173,266,045 With respect to point B the information is as under:- Total revenue of HNS USA and Hughes Network Systems India Limited from supply of equipment/installation services to HTIL. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs equity/networth) To record receipt of receivables contributed by parent company Dr. Redeemable Preference shares-TTSL $25m Cr.A/c receivables-HTIL $25m To record exchange of accounts receivable from HTIL for investment in preference shares in TTSL. Amount Amount Description Accounting entries recorded by HNS inc. USA Dr.Accounts receivable $25m Cr. Sales $25m To record sale of equipment to HTIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obably on account of that reason AO may not have further proceeded to have properly investigated the facts and has made the addition by making reference to the decisions CIT v. Parmanand Uttamchand (supra), Maharaj Shri Govindlalji Ranchhodlalji v. CIT , 34 ITR 90, relevant portion of assessment order has also been reproduced in para 2 of this order. 42. Though the assessee before CIT (A) has taken a particular ground i.e. ground No. 2.6 in which it has been agitated that AO erred on facts in recording the admission of AR which is contrary to the submissions made vide letter dated 20.3.2006, but the said ground has not been specifically adjudicated by the CIT (A). In absence of specific findings of CIT (A) on the said ground, it cannot be said with certainty that whether or not there is any admission on the part of AR of the assessee. Mere submissions made in letter dated 20.3.2006, in our opinion, do not suggest that ld. AR of the assessee did not admit before AO that the receipt is on account of professional activity as to controvert such finding reliance is only placed on part of the submission made in letter dated 20.3.2006 whereas the case may have been represented before A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submit information regarding the fact that what treatment is given to the amount shown as gift in the books of HNS. According to information submitted by ld. AR the said amount has not been written off in the books of HNS but has been treated as 'investment' of HNS in HNSJ. Thus the very nature of amount become contrary to the claim of the assessee and HNS as if the said amount was assigned as 'gift' than why the same was shown as investment in the books of HNS. In case the assignment of receivable was in the form of gift, it should have resulted into the reduction of capital of the parent company i.e., HNS. Whereas there was no reduction in capital but on the contrary such receivables were converted into investment. Thus the audited books of account which have been duly certified by the Auditors and accepted by the General Body meeting by its shareholders, goes against the gift declarations executed by the parent company and duly accepted by the assessee company. Such treatment given to the assigned amount in the books of HNS is contrary to the facts placed by the assessee before AO or CIT (A). In the circumstances, such claim of the assessee cannot be accepted o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts relate to the receivable from HTIL to HNS. The text of the said letter is reproduced below for the sake of convenience:- We refer to the letter dated June 26, 2002 , from Mr. V. K. Mittal to Hughes Electronics Corporation, Hughes Network Systems, Inc. ( HNS. ) and First HNS Mauritius Limited (the Mittal Letter ) which, as you know, formed part of a larger set of documentation pursuant to which the equity interests of Hughes and the other former sponsors of Hughes Telecom (India) Limited ( HTIL ) were sold to the Tata Group (the Tata Transaction ) and certain inter-sponsor matters were settled between Hughes and the Mittal Group (the Mittal Settlement ). As you know, Hughes Network Systems India Limited ( HNS India ) was a key participant in the Tata Transaction and the Mittal Settlement and realized substantial value from these transactions, including (among other things), a payment of Sponsor Credit from HTIL in the amount of ₹ 595 ,059,058.50 and the receipt of certain Redeemable Preference Shares and Equity Warrants of Tata Teleservices Limited. As part of the Mittal Settlement it was agreed and memorialized in the Mittal Letter that HNS India would pay to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relates to disallowance of a sum of ₹ 5.95 crores claimed by the assessee as amount given to one Shri V.K. Mittal as facilitation charges. The said amount was claimed by the assessee on the basis of note No.9 which reads as under: - Note 9. On June, 2002, Hughes Network System Inc, USA, Altel Information (India) Private Limited and the company executed a supply termination agreement with Tata Teleservices Limited and Hughes Tele.com (India) Limited and in terms of the agreement Hughes Tele. com (India) Limited agreed to pay to the company all debts aggregating to ₹ 59.50 crores within 120 days of the closing date as specified in the share purchase agreement executed for purchase of equity shares of Hughes Tele.com (India) Ltd. by Tata Teleservices Limited. Accordingly, one of the shareholders of Hughes Tele.com (India) Limited namely, Mr. V.K. Mittal has agreed to provide all assurances, documents or instruments necessary to consummate the various agreements that have been executed in pursuance to the share purchase agreement and in consideration for such undertaking, the company has agreed to pay ten percent of any amount that that the company receives as stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his part to consummate the transfer of shares under the share purchase agreement. Under these circumstances the assessee was constrained to agree for the payment of 10% of its debts sought to be received from HTIL to Shri Mittal so as to facilitate successful completion of share transfer as contemplated in share purchase agreement. Thus it was pleaded that the facilitation charges were paid to ensure recovery of the receivable from HTIL. Reference was made to section 37(1) of the Act to claim that such expenditure was allowable and reliance was placed on various decisions as listed in para 5.2 of the order of CIT (A). It was also submitted that reasonableness of expenditure has to be seen from the point of view of a business man. It was submitted that the recipient of facilitation charges is a company incorporated under Companies Act and assessed to Income Tax and thus identity of payee is established and necessity of payment for business cannot be disputed. After considering all these submissions ld. CIT (A) has upheld the disallowance vide paras 5.3 and 5.4 of the impugned order. Ld. CIT (A) has found that supply termination agreement dated 27.6.2002 was executed amongst HNS, HN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y assessee's own business consideration and commercial expediency. In this manner the claim of the assessee has been rejected. 51. Before us the ld. AR referred to the supply termination agreement, a copy of which is placed at pages 27 to 42 of the paper book to contend that in pursuance of the said agreement HTIL agreed to pay to the assessee and HNS debts of ₹ 595 million and 10 million US $ respectively within 120 days of the closing date as specified in the share purchase agreement. Such payment was to be received only on closure of share purchase. He submitted that, in other words, successful closure of share purchase agreement by transfer of equity stakes by all share-holders was imperative for receipt of HNS debt as well as assessee's debt. HTIL was incurring huge losses and realization of such debt was otherwise doubtful and unlikely. Assessee and its parent company could, however, persuade TTSL to ensure the payment of such debts subject to successful consummation of share purchase agreement. Considering that one of the shareholders of RAPL namely, Shri V.K. Mittal did not have any vested interest in the realization of HNS and HNSI debts and was not willin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such share holder of M/s HTIL, Shri V.K. Mittal agreed to provide all assurances, documents or instruments necessary to consummate the various agreements and in consideration of such undertaking, HNIL agreed to pay 10% of any amount that HNIL would receive in the supply termination agreement to Shri V.K. Mittal or his nominee. 2. During the course of assessment proceedings, the assessee was asked to justify such payment of commission especially when even Shri V.K. Mittal had in an agreement directed that the payment may be made not to him but to his designated authority, which was a company by name of M/s Ritambara Agent P. Ltd., Calcutta (RAPL). The assessee was unable to justify why the payment of 10% of total debt value of a third party had to be paid by the assessee company and how the same was wholly and necessarily for assessee's own business. The AO in absence of the relevant and sufficient evidence to prove the genuineness of transaction, disallowed the same u/s 37 of the I.T. Act and added back the amount to the assessee's income. 3. The ld. CIT (A) in his order has also observed that Ritambra Agent P. Ltd. (RAPL) was itself a party to the share purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share purchase agreement executed for purchase of equity shares of HTIL by Tata Tele services. M/s Ritamba Agents P. Ltd. was itself a party to the share purchase agreement. Therefore, the ld. CIT (A) has rightly observed that it could not be understood as to why Shri V.K. Mittal representing Ritambra Agent P. Ltd. insisted on payment of 10% of the debt receivable by the assessee from HTIL in order to execute the share transfer on behalf of Ritambra Agent P. 1 ld. 6. From the letter of Shri D. Dutt of HNS dated 22.10.2003 to the assessee, it is clear that it was only at the behest of HNS that 10% of the debt has been paid to Ritambra Agent P. Ltd. Since the actual payment has been dictated by HNS and was not in terms of any actual evaluation of such claim either from the point of view of reasonableness or expediency of such payment by the assessee, such expenditure has been rightly held as not being incurred wholly and exclusively for the purposes of the assessee's business. Therefore, it is submitted that the order of the AO which has been confirmed by the ld. CIT (A) deserves to be upheld by the Hon'ble ITAT. 53. We have carefully considered the arguments and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement. Unless evidence is produced to show that said Sh. V.K. Mittal really was reluctant to non completion of share purchase agreement, the claim of the assessee that the said payment was made wholly and exclusively for the business purpose cannot be accepted. Mere submission of letters dated 27.6.2002 and 25.6.2003 is not sufficient to show that such payment was claimed by the assessee represents an expenditure which is incurred wholly and exclusively for the purpose of business. Here again reference can also be made to the letter written by parent company to the assessee dated 22.10.2003 a copy of which is placed at page 161 of the paper book whereby it has been requested by parent company to the assessee to make payment of a sum of ₹ 5,95,05,906/- being 10% of the sponsor credit. In that letter also reference is not made only to the sponsor credit but the benefits received by the assessee in the shape of redeemable preference shares and equity warrants of Tata Tele Services Ltd. Thus the entire sum of ₹ 5 ,95,05,906 /- cannot be said to be incurred wholly and exclusively for the purpose of receiving sponsor credit. As pointed out earlier, the AO in the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngent liability keeping in view the decisions relied upon by the ld. AR of the assessee. The department is aggrieved, hence in appeal. 55. After narrating the facts it was argued by the ld. DR that finding of ld. CIT (A) are not acceptable because the disallowance of provision for warranty of ₹ 84,06,000/- has been deleted by the ld. CIT (A) ignoring the fact that the assessee company had been making this provision year after year on estimate basis without co-relating it to the actual expenditure incurred in any year on warranty and thus AO was right in disallowing the claim of the assessee on account of provision for warranty on the plea that the expenses have not been still incurred and the provision was based on estimation of probability of such expenditure being incurred in future. Thus it was pleaded that the order of CIT (A) should be set aside and that of AO be restored. 56. On the other hand, the ld. AR relied on the order of CIT (A) and submissions made before him . He also referred to the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. v. CIT, 245 ITR 428(SC). 57. We have carefully considered the rival submissions in the li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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