TMI Blog2010 (12) TMI 746X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 matter to the file of the AO to decide it in the light of statutory provisions and the cases decided thereunder. Bonus payable to directors - salary or dividend - section 36(1)(ii) - held that:- one 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. - Decided in favor of assessee. Interest on borrowed capital - Section 36(1)(iii) - Interest paid to NOIDA authority for purchase of land - Held that:- Expenditure allowed - Decided in favor of assessee. Regarding non-refundable deposit - 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 - The treatment is also justified in view of the matching principle of receipt and expenditure - It has also been mentioned that the decision is confined to the facts of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding 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 d cor 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment 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 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) furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 conditions of the agreement. However, we may add at this juncture that the matter has to be decided as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assessee in default for short deduction of tax at source required to be made u/s 194C(1) of the Act. 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 envi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms, 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 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 administrativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 decision of Hon'ble Bombay High Court in the case of Godrej and 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal 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 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 perc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of shareholding. Thus, it is argued that the provision contained in section 36(1)(ii) is not applicable. 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 Bhatt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not 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 (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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 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 stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and 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 andCo. (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 attract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and 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 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 learn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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