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2016 (8) TMI 329 - DELHI HIGH COURT

2016 (8) TMI 329 - DELHI HIGH COURT - [2016] 387 ITR 33 - Accrual of income - Selection of year of assessment - tds liability - Cash system of accounting - ITAT appears to have proceeded on the basis that since the services were to be performed by each of the Assessees for over a period of five years, the amount received from UGHPL had to be spread over a period of five years - Held that:- There is merit in the contention of the learned counsel for the Revenue that since admittedly no books of a .....

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apply only to companies and not individuals. Once it is clear that it is the cash system of accounting that is followed, the further question whether the sum received in one year could be spread over several years, and that too in the absence of any agreement at the time of such payment would not arise. The ITAT could not have overlooked the fact that the agreements produced before the CIT (A) regarding engaging the Assessees as hospital consultant was more than four years after the amount had b .....

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f the view that the ITAT erred in concluding that the sum received in each of the AYs in question could be spread over five years on the basis of the subsequent agreements dated 15th June 2010 between the UGHPL and the Assessees. - Significantly, what the Trust was being paid was only a monthly payment whereas over a sum of ₹ 4 crores as lump sum payment was made to the Assessees. The questions raised by the CIT (A) do not appear to have been satisfactorily answered by the Assessees. .....

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pellant : Mr. Zoheb Hossain, Senior Standing Counsel with Mr. Deepak Anand, Advocate For the Respondent : Mr. M. P. Rastogi with Mr. K. N. Ahuja, Advocates ORDER Dr. S. Muralidhar, J. 1. These are five appeals by the Revenue under Section 260A of the Income Tax Act, 1961 ( Act ). Three of them i.e. ITA Nos. 653 of 2012, 19 of 2015 and 326 of 2015 pertain to quantum proceedings and two of them i.e. ITA Nos. 476 of 2014 and 21 of 2015 pertain to penalty proceedings. Background facts 2. The backgro .....

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g of a basement, ground floor and four floors known as Khera Hospital. The agreement noted that the Khera Hospital had not been functioning except for an Out-Patient Department and that too on a small scale. The hospital was stated to be ill-equipped and facing financial problems. 4. The agreement noted that the Trust had approached the management of Metro Hospital, Noida to run and manage the Khera Hospital and that the Metro Hospital had agreed to the proposal. The clauses of the agreement rel .....

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y working in Khera Hospital within seven days of signing of this agreement. 4. Metro Hospital shall pay a monthly lump sum amount as mutually decided to Khera Society and all receipts of monthly in cash or by cheque shall belong to Metro Hospital. 5. Metro Hospital shall have full freedom in fixing rates for various medical procedures, consultation and treatment procuring medicines, consumables equipments, recruiting staff, maintenance of buildings, equipments etc. 6. Metro Hospital has to manag .....

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m the day it was taken from Metro Hospital or its nominees is cleared and discharged by Khera Hospital at the time of serving of notice. No notice of termination will be valid if the financial involvement is not discharged. 5. The agreement could be terminated by either party by giving 12 months notice to the either party. Interestingly, the agreement provided that in the event of such termination, the consideration taken from Metro Hospital and interest accruing thereon should be discharged by .....

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GHPL ) which was running Metro Hospital and the Heart Institute issued a letter to Dr. Aman Khera in the following terms: We are glad to appoint you as a management consultant for the chain of hospitals run and managed by us for a period of 5 years. The tenure of your appointment shall start w.e.f. 1st January 2006. You have been paid a consolidated amount of ₹ 1,21,83,494/- in advance for the above mentioned appointment. An amount of ₹ 6,83,494/- has been deducted as TDS from the ab .....

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15) filed their respective returns of income for the AY 2006-07. While Dr. Aman Khera declared an income of ₹ 5,46,616 on 31st October 2006, Dr. Raman Khera filed a return on 31st October 2006 declaring an income of ₹ 3,82,155 and Ms. Jyoti Khera filed a return on 31st March, 2007 declaring an income of ₹ 33,950. None of them disclosed the entire amount received from UGHPL in their respective returns. Assessment orders 10. The returns of income were picked up for scrutiny and a .....

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alary income or the income from business. 11. As regards the receipt from UGHPL, the AO noticed that TDS had been deducted on the entire payment made in lump sum by UGHPL. The claim of the Assessees that the amount was received as advance on account of appointment as hospital/management consultant for five years and, therefore, the amount should be spread over for a period of five years, was not accepted by the AO. He observed that it was unbelievable that a hospital would all of a sudden need s .....

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that from the period mentioned on the TDS certificates it was clear that the Assessee s claim of advance receipt for five years was not correct. Importantly, the AO noticed that there was no reason why a business entity like UGHPL would advance such a huge sum to doctors of a particular family for such a long period without any formal written agreement or contract. The AO noted that the assessee and the Hospital both were requested to furnish copy of agreement if any signed at any point of time, .....

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h December 2008. The AO noticed that there was no further acceptable evidence to spread over the lump sum amount over five years as claimed by the Assessees. It was noticed that there is no regular books of accounts maintained by the Assessees in any system cash or mercantile. Accordingly, the entire receipt from UGHPL by each of the Assessees was treated as their respective income for the AY in question. 14. The AO then proceeded to deal with the claim of expenditure which might have been incur .....

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ed 24th November 2010, the CIT (A) partly allowed each of the appeals. Significantly, before the CIT (A) for the first time, the Assessees placed on record the letters issued by UGHPL to each of them at the time of their appointment as Hospital Consultants; copy of the accounts of UGHPL in the books of the Assessees; confirmation receipt from UGHPL about the treatment of the payment in their books; income tax returns for each of the Assessees for AY 2007-08 and 2008-09 which showed that the prop .....

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years, because in law the same income cannot be taxed twice. 17. The CIT (A) appears to have raised specific questions which were answered as under: 1. Whether there is any agreement between the appellant and UG Hospital. How UG Hospitals will recover the advance received in case of failure of appellant to provide services/consultancy to the Hospital. Answer: There is no agreement between me and UG Hospitals. There is only a letter of appointment dated 12.12.2005 which is already on record. Con .....

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ppointment for another 5 years once the term is completed. The details however have not yet been worked out. 2. Evidence for service rendered; name of patients attended, time period of consultancy, fees received from patient. Answer: We are not doctors there. We are management consultants who are involved in corporate management of the hospitals run by UG Group of hospitals. We do not have to go to the hospital everyday. We meet at the head office as and when required. The nature of our services .....

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tion has taken place? Answer: With Dr. Purshottam Lal. 4. How the sum had been working out at an odd figure - basis of receipt by the appellant. The sum demanded by me was ₹ 3 lacs per month. Then it was negotiated to ₹ 2 lacs a month if all was paid in advance. This was ₹ 1 crore and 20 lacs. This was finally settled at ₹ 1 crore and ₹ 15 lacs. Then came the issue of TDS. Since I wanted ₹ 1 crore and 15 lacs in hand, the whole amount was re-calculated so that .....

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tached. The balance documentation/information required is furnished below: 1. Trust deed of R.L. Khera Charitable Hospital: attached 2. Is there any Agreement between R.L.Khera Charitable Hospital and UG Hospital if so copy of that Agreement: already filed under cover of our letter dated 17.09.09 3. Service rendered by the assessee to R.L. Khera Charitable Hospital. Are they getting any salary/reimbursement or any in kind for these services: None. 4. What actual expenses incurred for giving cons .....

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ntract period shown to be five years commencing with the effective date from which the Consultant joins the Metro Institute whether the originally stipulated date, suspended date or extended date. Clause 2.2 stated the term of the agreement and read as under: 2.2 The term of this Agreement shall begin as on 1st January 2006 and shall continue in full course and effect for a period of five years from the effective date unless it is terminated earlier in accordance with the terms and conditions st .....

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l, however, deduct any or all applicable taxes as are statutorily required. 20. Article 4 which spelt out the representations and warranties did not require the Consultant to return any amount in case he failed to perform any part of the contract. Interestingly, Article 9.2 stated as under: 9.2 In the event, that Metro Institute for any reason disclosed or otherwise chooses to seek premature termination of the Services of the consultant prior to the expiry of the fixed period of 5(five) years, t .....

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(A) under Rule 46A of the Income Tax Rules, 1962 ( Rules ). The CIT (A) concluded that these evidences only enable the undersigned to pass an order on this issue one way or other. The CIT (A) held that the nature of evidence is such that these do not give rise to any new principle or lead to any new facts requiring fresh investigation and by filing the additional evidence the assessee is not seeking to make any fresh line of enquiry. 22. On the merits of the appeal, the CIT (A) came to the follo .....

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ssees. One of them Ms. Jyoti Khera was not a doctor and was also not having a degree in hospital management. (iii) The payments appear to have been made not for their expertise but otherwise. The payments to the Assessees were made irrevocable because they were not related to the specific services. There was no obligation on the Assessees to refund or repay the fees received. 23. Consequently, the CIT (A) upheld the conclusions of the AO that receipts from UGHPL was chargeable in this year. 24. .....

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the ITAT which by the impugned order allowed the appeals after coming to the following conclusion: (i) When examined in the light of the decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax (1954) 26 ITR 27(SC), it is seen that the Assessees had not served the entire period of five years and had, therefore, not awarded emoluments in the sums paid to each of them. In other words, the entire income could not be said to have accrued to the Assessee as the Assessee had not created a .....

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ncome Tax v. Dinesh Kumar Goel (2011) 331 ITR 10 (Del), it was held that the amount received by each of the Assessee has to be proportionately spread over five years. 26. The orders of the AO and the CIT (A) were accordingly set aside and the appeals were allowed. Question of law 27. While admitting these appeals on 23rd January 2014, this Court framed the following question of law in each of the appeals: Did the Tribunal fall into error in accepting the assessee's contention that the sum of .....

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of law: "Did the ITAT fall into error in deleting the penalty in the case of the assessee in the circumstances of the case?" 30. However, in the penalty appeal in the case of Mr Raman Mehra i.e. ITA Nos. 476 of 2014, no question as such was framed and the matter was simply kept for hearing along with the quantum appeals. 31. However, it should be noted that as far as the penalty proceedings were concerned, the CIT (A) allowed the appeals of the Appellants by separate orders dated 22nd .....

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gi, learned counsel for the Assessee. 33. The submissions on behalf of the Revenue could be summarised as under: (i) There was no agreement entered into between the Assessees and UGHPL at the time of making of the payment on 12th December 2005. Further although the letter dated 12th December 2005 to Dr. Aman Khera by UGHPL termed the amount as being in advance for the abovementioned appointment it was clear that what was paid was consolidated amount from which ₹ 6,83,494 was deducted as TD .....

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ation of a debt justifying the income received did not arise. The question of spreading over said income over five years also did not arise. (iv) The decision in Commissioner of Income Tax v. Dinesh Kumar Goel (supra) was distinguishable on facts. The decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax (supra) was relevant for companies and not individual Assessees. The matching principle or AS-9 could not be pressed into service when the assessment was of individuals. (v) The A .....

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ince none of the conditions under Rule 46A was satisfied. Reliance was placed on the decision in Commissioner of Income Tax v. Manish Buildwell (2012) 204 Taxman 106 (Delhi). Submissions of counsel for the Assessees 34. On behalf of the Assessees it was submitted by Mr. M.P. Rastogi, learned counsel, as under: (i) Under Section 4 of the Act, tax was chargeable on the total income which in terms of Section 5 included income derived from three sources (a) income received or deemed to be received i .....

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each of them rendered services. The emoluments were spread over and declared in the subsequent years in proportion to the period of services rendered in those very years. This has been acknowledged in the orders of the CIT (A) as well as the ITAT. (iii) With the Revenue having processed the returns filed by the Assessees for the AYs subsequent to the AY in question i.e. 2006-07 in which the proportionate amount received from the UGHPL was offered to tax, which has been accepted by the Revenue, .....

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tion in relation to bringing the entire amount received from UGHPL to tax it would have to be shown that the Assessee must have either rendered all the services or created a debt in his favour in the AY in question. In other words, unless it was shown that he has brought into existence a debt or a right to receive the payment, it cannot be said that the income was accrued to him. (v) AS-9 issued by the ICAI recognised that revenue from service transactions should be proportionate to the period d .....

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esh Kumar Goel (supra) where on facts it was held that since the services of a coaching institute had to be rendered in two years, the entire fee received had to be spread over in two years and assessed proportionately. Reliance is also placed on the decision of this Court in Commissioner of Income Tax, Delhi v. Om Prakash Khaitan 62 taxmann.com 324 (Del) where the monies received by lawyers from clients were treated as income in the hands of lawyers in the year in which the money is received si .....

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ervice. Reference was also made to the decision in Commissioner of Income-tax v. Winner Business Link (P). Ltd. [2015] 55 taxmann.com 468 (Guj) where the Gujarat High Court following the decision in Commissioner of Income Tax v. Dinesh Kumar Goel (supra) held that the entire receipt of the membership fees in the business of discount cards was required to be spread over the period of membership and income had to be recognised proportionately. (vii) Whether it is a mercantile or cash basis of acco .....

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alternative plea before the CIT (A) was that if the entire income is to be taxed in this year then the tax already paid on the proportionate amount in the subsequent years should be accounted for and in that event the expenditure claimed in the subsequent years should be allowed in full. Emphasis was placed on the matching principle and the decision in Calcutta Co. Ltd. v. Commissioner of Income Tax (1959) 37 ITR 1 (SC). 35. In response to the above plea, it was submitted by Mr. Raghvendra Singh .....

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e. Analysis and reasons 36. The ITAT appears to have proceeded on the basis that since the services were to be performed by each of the Assessees for over a period of five years, the amount received from UGHPL had to be spread over a period of five years in proportion and for this purpose the ITAT referred to the decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax (supra). 37. The Court finds that the decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax (supra) w .....

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ent and transfer were duly executed. It is in the above context that it was held that the remuneration or commission was given by the transferee company to the managing agents only on completion of a definite period of service. It was held that such remuneration constituted a debt only at the end of period of service and no remuneration or commission was payable to the managing agents for broken periods. 38. The above decision is of no assistance to the Assessees. In the first place the entities .....

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the Trust which is saddled with the responsibility of making good the losses. 39. The mere terming of the money received as advance will not per se render the payment as such when in fact it admittedly was paid upfront as a lump sum amount on which TDS was been deducted as such for the period 1st January to 31st March 2006. The decision in Commissioner of Income Tax v. Dinesh Kumar Goel (supra) is distinguishable on facts. There the issue was about collecting fees from students for coaching cla .....

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ble. 40. There is merit in the contention of the learned counsel for the Revenue that since admittedly no books of accounts were maintained by any of the three Assessees it had to be presumed that they followed the cash system of accounting. In that view of the matter, the question of income accruing or the right to earn income accruing only upon the performance of a service at the end of a period would not arise. 41. As rightly pointed out by learned counsel for the Revenue, the matching princi .....

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he CIT (A) regarding engaging the Assessees as hospital consultant was more than four years after the amount had been paid. Such agreements were not reliable pieces of evidence. 42. Mr. Rastogi repeatedly stressed that the proportionate income disclosed by each of the Assessees in the years subsequent to the AY in question was in fact offered to tax and therefore, there cannot be a double taxation of the same amount. 43. While it may be true that the Assessees had offered to tax in the later AYs .....

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ver five years on the basis of the subsequent agreements dated 15th June 2010 between the UGHPL and the Assessees. 44. Significantly, what the Trust was being paid was only a monthly payment whereas over a sum of ₹ 4 crores as lump sum payment was made to the Assessees. The questions raised by the CIT (A) do not appear to have been satisfactorily answered by the Assessees. In the facts and circumstances, the Court is of the view that the CIT (A) was right in affirming the order of the AO t .....

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r the subsequent AYs. 47. From the side of the Revenue, a reference is made to Section 240 of the Act which reads as under: 240. Refund on Appeal, etc. - Where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to the Assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the Assessee without his having to make any claim in that behalf: Provided that where, by the order aforesaid,- (a) an .....

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ot change the correct legal position that where accounts are maintained on cash basis and there is nothing to show that there was any agreement about spreading the income over several years, the entire amount received should be brought to tax in the year of the receipt. As regards the expenditure of the subsequent years, where it has actually been incurred, it should be allowed in that year. The question of allowing the expenditure of later years in the year under consideration does not arise. T .....

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