TMI Blog2008 (3) TMI 500X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of which he could say that there was such a failure on the part of the assessee to disclose fully and truly all material facts necessary for making the assessment. It is a clear case of change of opinion and therefore a wrong initiation of the proceedings us 148 of the Act. We agree with the reasons given by the CIT(A) and the conclusions arrived at in respect of the disputed issue. He correctly held that the proceedings u/s 147 was clearly time-barred and illegal. We decline to interfere with his order. Although reference has been made to several case law on both the sides during the course of proceedings, the decision of the Hon ble Supreme Court in the case of Indian Oil Corpn. v. ITO[ 1986 (5) TMI 1 - SUPREME COURT] , which is placed at the assessee s paper book, is more relevant to the facts of this case. Disallowance of commission paid to foreign agents - No services rendered by ABC DSL - HELD THAT:- AO failed to appreciate that the extent of services rendered by the foreign agents could be ascertained from the correspondences exchanged between the two parties and also the increase in the volume of business of the assessee. The role of the foreign agents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement. If the provisions of section 9(1)( i ) are analysed carefully, it will transpire that there is no business connection between the two within the meaning of that section. The term business connection has been explained clearly in the case of Blue Star Engg. Co. (Bombay) (P.) Ltd. v. CIT[ 1968 (12) TMI 3 - BOMBAY HIGH COURT] held that in order to constitute a business connection there must be an activity of the non-resident in the taxable territories having an intimate and real relation of a continuous character with the business of the non-resident and contributing to the earning of profits by the non-resident in his business. In the present case, the foreign agent rendered no service in India. Therefore, no income accrued or arose in India. The question of deduction of tax at source under section 195 of the Act thus did not arise. The Assessing Officer oversimplified the issue by saying that in the matter of deduction of tax it would be immaterial as to whether the payment was made outside India or within India. He overlooked the expression any other sum chargeable under the provisions of this Act embedded in the section. Unless the payment made to a non-res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 147 of the Act has been taken for disallowing expenditure of foreign commission payments made to M/s. ABC Dubash Shipping Ltd., as under : 1995-96 Rs. 1,41,31,935 1996-97 Rs. 1,16,77,605 1997-98 Rs. 1,03,32,636 1998-99 Rs. 97,61,147 Admittedly, in all these years the proceedings under section 147 were taken after expiry of four years from the end of the assessment year in which the income chargeable to tax had allegedly escaped assessment. The contention of the assessee all along was that there was no failure to file return under section 139 of the Act or to respond to the notice under section 142(1) of the Act or to disclose fully and truly all the material facts necessary for the assessment of income for the assessment years in question. The assessee, it may be stated that, filed complete details regarding payment of commission to the Assessing Officer including the specific details about the nature of services rendered by the agents, copies of invoices raised by them and copies of letters written by the RBI granting approval for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer recorded the reasons only after he gathered the fresh evidence. He relied on the decision of the Hon ble Supreme Court in Phool Chand Bqjrang Lal v. ITO [1993] 203 ITR 456 in support of the Departmental stand. 5. The learned counsel for the assessee on the other hand, strongly justified the order of the CIT(A). He pointed out that there was neither failure on the part of the assessee to file the return of income nor there was a failure to disclose all material required by the Assessing Officer to frame the proper assessment. All the details in respect of the payment of commission have been furnished to the Assessing Officer. All these payments were genuine payments duly approved by the RBI and the payments were made for the services rendered abroad. For almost 40 years the assessee has been making payments after obtaining necessary approval from the RBI. During the course of search proceedings in the assessee s premises there was no evidence available regarding non-rendering of any services by ABC Dubash Shipping Ltd. The learned counsel for the assessee further pointed out that reassessments are based on mere change of opinion and in the absence of any f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; ( c )where an assessment has been made, but ( i )income chargeable to tax has been under assessed; or ( ii )such income has been assessed at too low a rate; or ( iii )such income has been made the subject of excessive relief under this Act; or ( iv )excessive loss or depreciation allowance or any other allowance under this Act has been computed." 7. Proviso to section 147 indicates the clear terms that no action can be taken under section 147 of the Act after the expiry of four years from the end of the relevant assessment year for which an assessment has been made under section 143(3) of the Act, unless there is a failure on the part of the assessee to file a return under section 139 or in response to a notice under section 142(1) or section 148 of the Act or to disclose fully and truly all material facts necessary for making the assessment. The assessee in this case has been paying commission in the past after obtaining necessary approval from the RBI. The assessee has disclosed full evidences for the payments. All the details relating to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion and an inference drawn from about the work in co-relation to the amount debited. The facts, viz. what was done, what was done, what was being claimed by the London office and the difficulties in producing the accounts or the opinion of the auditors for which the ITO had called the assessee, were all known to the ITO at the time of making the original assessments. In spite of the same, the ITO chose to assess the assessee by allowing the amounts as deductions. The opinion of the auditors for the assessment year 1963-64, that ten per cent would be a reasonable charge might be good information for which the assessments of the assessee could be reopened under clause ( b ) of section 14, but on this basis, although it could not be said that the assessee had failed to disclose fully and truly all basic facts at the time of the original assessments, there was no evidence or allegation that such an opinion was available with the assessee at or before the time of the original assessments. All the basic facts in this case were disclosed : It was, however, not disclosed as to what was the opinion of the author regarding what was reasonable allocation, having regard to the amount of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, or discovered, by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as to certain other facts. But, on the primary facts, it is for the taxing authority to draw inferences; it is not necessary for the assessee to draw inferences for him. Reason to believe is not the same thing as reason to suspect." 8. The other important case law which justifies the order of the CIT(A) is the decision of the Hon ble Bombay High Court in the case of Cartini India Ltd. v. Asstt. CIT [2007] 291 ITR 355 (Bom). The facts and the decision in that case can be extracted from the headnote as under : "The petitioner was a company engaged in the business of manufacturing and marketing of refrigerators, air-conditioners and washing machines. It filed its return for the assessment year 1999-2000 and the Assessing Officer after considering all materials facts relating to the scrutiny assessment queries, completed the assessment under section 143(3) of the Income-tax Act, 1961. The order of the Assessing Officer stated that the Modvat balance of Rs. 3,37,51,671 represented an amount which pertained to the cost of purchase and henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been contended by the Department that the learned CIT(A) erred in stating that all the 15 correspondences referred by him in p. 7 of the appellate order originated in India and were written by the assessee, the only letter dated 12-2-1993 from Channel Islands was addressed by ABC Dubash as the director of ABC Dubash Shipping Ltd., (in short "ABC DSL") to the assessee company whose chairman was ABA Dubash himself. It was further contended that all these papers were not found during the search, which meant that these were written on later date to support the commission payments. Before the Assessing Officer, the assessee took the plea that commission was paid to foreign agents for more than 40 years and that such remittances had been approved by the RBI. The Assessing Officer further observed that both the assessee company and ABC DSL, were controlled by ABA Dubash and his wife Uma A. Dubash, which meant that the Dubash family paid the commission to themselves without any valid business consideration. It was noted that no documents were found during the course of search of the assessee s premises which could indicate that services were rendered by ABC DSL. The Assessing Officer was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ABC DSL, subject to the condition that there would be no reimbursement of expenditure under any other head. The approval was subsequently renewed in 1994, 1995, 1996, 1997 and 1998. During all these years, the rate of commission remained at 9 per cent. which was, without doubt, of considerable benefit to the assessee company. The services rendered were : ( a )Procuring new foreign contracts/jobs for stevedoring activities; ( b )To retain and maintain relationship and keep existing contracts/jobs for stevedoring; ( c )To administer all related work/activity and to do liaison work; ( d )To maintain and handle other public relationship work/activity for and on behalf of the assessee. As a result of such services, the assessee had been able to obtain much higher rates from its principals such as APL Lines and Hoegh Lines as compared to its competitors. This was during the period 1994-95 to 1999-2000. The assessee has submitted a chart, along with the written submissions, to substantiate this point. Most importantly, the assessee was able to command such rates in spite of severe competition from 14 other stevedores who operate in the Mumbai port." 11. The learned CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying commission at of the rate 11 per cent to ABC DSL, the RBI reduced it to only 9 per cent on the condition that no expenditure under any head would be reimbursed. According to the learned CIT(A) the RBI had diligently applied not only its rules and regulations pertaining to foreign remittances but also to the reasonableness of the payments considering the services rendered by the agents. The decision to appoint ABC DSL as an agent with a commission of 9 per cent was approved not only by the RBI but also by SCICI, which meant that the agreement appointing ABC DSL as an agent, the services rendered by it and the payments/remittances of commission to them, were genuine and in keeping with the exigencies of the assessee s business activity. 12. The learned CIT(A) was very categorical in stating that the Assessing Officer was mistaken while concluding that the payments made to ABC DSL merely represented the siphoning of funds by ABA Dubash and the members of his family and that both the assessee company and ABC DSL were controlled by ABA Dubash and his wife Uma A. Dubash. In the appellate order it was clearly stated that ABC DSL was not controlled either by ABA Dubash or his wife ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h were accepted as genuine in the original assessment. Subsequently, there was a confession by the managing director of the creditor company admitting that no cash loan was advanced to any person during the relevant period. It was held by the apex Court that the subsequent information was definite, specific and reliable justifying the validity of the reassessment. In the present case the facts are entirely different and there was no confession and no subsequent information on the basis of which one could validly reopen the completed assessment. The Assessing Officer also failed to appreciate that the extent of services rendered by the foreign agents could be ascertained from the correspondences exchanged between the two parties and also the increase in the volume of business of the assessee. The role of the foreign agents in the matter of fixation of rates of stevedoring work was also not appreciated by the Assessing Officer. The Assessing Officer also ignored the certificate given by Mr. Barry Miller, Vice President of APL Lines Ltd., acknowledging that Mr. A.B.C. Dubash and his other associates, viz. Capt. Surty of ABC DSL, who were marketing and liasoning agents for the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell". The learned CIT(A) in the light of these principles have correctly appreciated the facts of the case and rejected the stand of the Assessing Officer and has rightly deleted the addition made by the Assessing Officer. We agree with his findings and uphold his order. Asst. yr. 1999-2000 (Assessee s appeal) 16. While agreeing with the observations of his predecessor on the issues of genuineness and reasonableness of the commission payments to the foreign agent, the learned CIT(A) confirmed the disallowance made by the Assessing Officer by invoking the provisions of section 40( a )( i ) of the Income-tax Act. The assessee heavily relied on the CBDT Circular No. 786 dated 7-2-2000 [(2000) 158 CTR (St) 61], wherein it was clarified that no disallowance had to be made under section 40( a )( i ) of the Act in respect of the payment of the commission to foreign agents, since they operated outside India and no part of their income arose in India. The learned counsel for the assessee relied on the following authorities : (1) Indopel Garments (P.) Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the income chargeable to tax in the hands of the non-resident under section 195(2) would arise where there is no dispute about the chargeability as such and the dispute is with regard to the proportion of the sum which is chargeable. It is our considered view that the question of apportionment by the Assessing Officer under section 195(2) would not arise in a case where in view of the circular issued by the Board, there is no income chargeable to tax in the hands of the non-resident. The decision in the case of Cheminor Drugs Ltd. ( supra ) relied on by the learned Departmental Representative is thus not applicable to the facts of the present case, where the assessee s claim regarding non-chargeability to tax is supported by the circulars issued by the Board and the decision of the Supreme Court in Tashoku Ltd. s case ( supra ). In the above circumstances, we reverse the finding of the CIT(A) and direct the Assessing Officer not to disallow under section 40( a )( i ) the sales commission payable to the non-resident. Accordingly this ground of appeal is decided in favour of the assessee." In CIT v. Toshoku Ltd. ( supra ), the Hon ble Supreme Court was more specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the business of the non-resident and contributing to the earning of profits by the non-resident in his business. The business connection must undoubtedly be a commercial connection but all commercial connections will not necessarily constitute business connection within the meaning of the concept unless the commercial connection is really and intimately connected with the business activity of non-resident in the taxable territories and is contributory to the earning of profits in the said trading activity. The term business connection used in the section has not been defined in the Act. However the term has been the subject-matter of interpretation by various Courts. The scope of the expression business connection has been explained by the Hon ble Supreme Court in CIT v. R.D. Aggarwal Co. [1965] 56 ITR 20 (SC). The expression business connection means something more than a business. It presupposes an element of continuity between the business of the non-resident and the activity in the taxable territory. A stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms; it my include carrying on part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 of the Act thus did not arise. The Assessing Officer oversimplified the issue by saying that in the matter of deduction of tax it would be immaterial as to whether the payment was made outside India or within India. He overlooked the expression any other sum chargeable under the provisions of this Act embedded in the section. Unless the payment made to a non-resident (not being a company) or a foreign company is chargeable to tax under the provisions of the Act, deduction of tax under section 195 is totally ruled out. The matter was clarified by CBDT in some of the instructions issued by them from time to time. Our attention was drawn by the learned counsel to the following circulars/instructions of CBDT : Non-resident agent operating outside the country As clarified earlier in Circular No. 23, dated 23-7-1969, where the non-resident agent operates outside the country, no part of his income arises in India, and since the payment is usually remitted directly abroad, it cannot, be held to have received by or on behalf of the agent in India. Such payments were therefore, held to be not taxable in India. This clarification still prevails, in view of the fact that the relevant sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be followed and accepted by the authorities CIT v. Vasudeo V. Dempo [1992] 196 ITR 216 (SC). Even if the directions contained in a circular issued by the CBDT deviate from the provisions of the Act, they are biding on the ITO Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC). Circulars issued by the CBDT are legally binding on the revenue and this binding character attaches to the circulars even if they are found not in accordance with the correct interpretation of a statutory provision and they depart or deviate from such construction K.P. Varghese v. ITO [1981] 131 ITR 597 (SC). It is surprising to note that the learned CIT(A) also did not consider these decisions while analyzing the issues. We are strongly of the view that the learned CIT(A) wrongly interpreted the provisions of section 40( a )( i ) and section 195 of the Act. In view of the above discussion, we hold that the order of the CIT(A) confirming the addition made by the Assessing Officer is unjustified and uncalled for. Accordingly the addition is deleted. 22. The next dispute in the assessee s appeal for the assessment year 1999-2000 relates to the claim of bad debts written off to the exten ..... X X X X Extracts X X X X X X X X Extracts X X X X
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