9911796707
TMI Blog2004 (10) TMI 261X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Trident Maritime (India) (P) Ltd. with shareholding to the extent of 51 per cent held by ITS Investments (P) Ltd. and to the extent of 49 per cent by Mr. V.S. Puri on behalf of Samrat group. Subsequently, the name of the assessee-company was changed to NOL (India) (P) Ltd. and on 22nd Dec, 1997, it was renamed as APL(I) (P) Ltd. after the takeover of APL group by NOL group on 13th April, 1997. It may be mentioned that NOL group, in terms of shareholding, is held by Temasek group, which is a Government of Singapore body. 3. A search was conducted under s. 132(1) in the case of the assessee on 6th Nov., 1999 which resulted into issue of notice under s. 158BC of the IT Act, in response to which return of income for the block period was filed on 4th July, 2000 declaring nil undisclosed income. During the course of search proceedings, a large number of vouchers for cash payments to dock workers were found. It was noted that these vouchers were internally prepared and the employee of the assessee-company who had prepared these vouchers himself signed as recipient of the amount. It was claimed by the assessee that these cash payments had to be made to the workers and labourers at Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidence to substantiate the claim of the assessee, such expenses have to be treated as bogus and disallowed. (b) Neither the recipients of these amounts nor their confirmations have been produced with respect to these payments. So, the question about quantum can never be answered in the absence of any concrete independent evidence. (c) The port authorities have not given any approval or sanctions for such type of payments to their employees. So, the question of their confirming of such expenses does not arise. (d) Payer is not aware of as to whether the recipients are showing such receipts in their return of income. (e) Even if we hypothetically assume that these payments have been made, then the question comes about legality of these payments. These payments have neither legal sanction nor approved by JNPT or respective ports. So can any payment, to a person employed with Government of India or its affiliates (bodies, trust, etc.) to carry its normal duties more effectively/efficiently be called legal payment? Aren't such payment against public policy? The only answer to these questions can be that such payments are covered by Explanation to s. 37(1) of IT Act and are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure at the cost of the assessee-company in the form of charges payable to JNPT for allowing detention of ships at the port. It is, therefore, submitted that the 'speed money' has to be paid for quick loading and unloading of ships. It is contended that payment of 'speed money' is a widely prevailing practice at various ports in the country including JNPT and such payment is a legitimate business expenditure. It is submitted that even newspaper reports from time-to-time confirm the practice of payment of 'speed money'. He has invited our attention to the news report in the Economic Times dt. 17th Dec, 1996, a copy of which has been filed. In this report, it is confirmed that the practice of payment of 'speed money' to dock workers is an accepted fact at JNPT. In the detailed report, even the rates at which such payments have to be made are indicated. The learned counsel for the assessee specially invited our attention to these rates as published in the Economic Times, which are as under: No. of containers Amount per box (Rs.) No. of import containers Amount per box (Rs.) export 1 to 120 20 1 to 100 20 121 to 140 25 101 to 120 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e asst. yr. 1987-88 was followed by other Benches of the Tribunal vide their orders as under: (i) Order dt. 19th Dec., 2001 in ITA No. 9205/Bom/1991 (asst. yr. 1988-89) and ITA No. 8826/Bom/1992 (1989-90) (ii) Order dt. 2nd March, 2000 in ITA No. 4807/Bom/1994 for the asst. yr. 1991-92. 7. The learned counsel for the assessee also placed reliance on the following decisions: (i) Sreevidya Family Trust vs. Asstt. CIT (1995) 78 Taxman 289 (Coch)(Mag) (ii) CIT vs. Arumugham Chettiar (1980) 125 ITR 753 (Mad) Shri Y.P. Trivedi has invited our attention to the ratio of the Madras High Court decision in the case of Arumugham Chettiar, which is reproduced below from the headnote: "The assessee, a registered firm carrying on business as stevedoring contractors to some companies at the Madras port, made payments of commission or mamool to the crew of the various ships calling at the port. It claimed that such payments were inevitable in this line of business as the captain of-the ship had to issue a no damage certificate before it could claim the bills from the companies. The ITO did not dispute their genuineness but treated these payments as entertainment expenditure and limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abour Board. Shri. Y.P. Trivedi concluded his arguments by forcefully submitting that the learned CIT(A) was wholly unjustified in confirming the uncalled for addition made by the AO. 9. Shri K.L. Maheshwari, the learned CIT-Departmental Representative supported the orders of the Revenue authorities. He invited our attention to the statements of the concerned persons recorded during the course of search and also subsequently during the course of assessment proceedings, relevant portion of which have been reproduced by the AO at pp. 2 to 5 of his order. It is contended that during the course of search, the concerned persons were confronted by the officers of the IT Department with the vouchers, it was categorically submitted by them that these payments cannot be verified with reference to any relevant evidence and they also surrendered and offered the amount as assessee's income, Shri Maheshwari submitted that it is the onus of the assessee to establish beyond any doubt that an expenditure which is debited in the books of account and which is claimed as deduction has actually been incurred by the assessee. It is argued that the relevant amount aggregating to Rs. 50,60,127 has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges are also incurred by the stevedoring agent. For performing the stevedoring work, a license is required from the port authorities. The stevedoring agents are required to hire gangs of labour from the Dock Labour Board to lift the cargo from the ship to the jetty, or vice-versa. Labour charges are paid at prescribed rates to the Dock Labour Board. Since the cargo is to be loaded/unloaded quickly to avoid demurrage charges, generally some additional payments are also made as 'efficiency money' to the labour gangs for extra and speedy work. Such payments are against the provisions of the Dock Labour Board Act, applicable to different ports, and are, therefore, not recorded. Instead, other bogus/inflated expenditure are debited to cover up the same." 11. Shri Maheshwari also relied on the Andhra Pradesh High Court decision in the case of CIT vs. Transport Corporation of India Ltd. (2002) 177 CTR (AP) 55 : (2002) 256 ITR 701 (AP). Drawing support from this case, he submitted that mere payment by itself would not entitle the assessee to deduction of expenditure unless the same is proved to be paid for commercial considerations and the burden of proof is always upon the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g much turns on the statements recorded during the course of the search. We have gone through the statements and we find that the persons categorically confirmed that payment of 'speed money' was required to be made for efficient conduct of the work of loading and unloading ships and such payment was actually made. During the course of interrogation, it was not admitted at any point of time that the payment was not genuine or it was bogus and was not incurred. However, it is true that the amount was offered as assessee's income on the ground that the cash payments were not in accordance with the rules and regulations. In our view, this issue has to be decided after taking an overall view of the entire facts and circumstances and not merely on the strength of statements recorded during the course of search. From the reports published in reputed and leading national dailies like Economic Times and The Hindu as also from the order of the Tribunal in the case of NDSTC, it is established that there is a widely prevalent practice of paying 'speed money' to the dock workers so that the work of stevedoring is conducted efficiently and without delay. Such payment of ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and not by the actual recipient, any number of such vouchers could be produced by the assessee to defraud the Revenue. In the present case, the details of such payment have been duly recorded which are compiled at pp. 127 to 153 of the paper book. In respect of each payment, there is a voucher wherein the details of import and export, number of containers, rate at which the payment is calculated, etc. have been mentioned. However, as mentioned above, 5 per cent has been added and Rs. 500 have been further added in respect of each shift. The assessee, apparently, is not in a position to establish that actually the payment has been made to the extent indicated in these vouchers. Considering the totality of facts and circumstances and the various cases cited before us and also the Tribunal's decision in the case of NDSTC, in our view, it would be fair and reasonable to disallow, on estimate basis, 25 per cent of the expenditure incurred by way of payment of 'speed money'. It is assumed that to that extent the payment was not made and this amount was appropriated by the assessee-company for its own purposes. The AO is directed to allow consequential relief to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in the pre-merger period, i.e., before February, 1998. In the post-merger period, i.e., after February, 1998, the account of the principals including the bank balance held by the assessee on behalf of the principals formed part of the books of account of the assessee. However, at the end of the relevant year, the balance lying in these bank accounts are brought into the books of the assessee by crediting corresponding amounts as liability payable to the principals. The detention charges are collected from consignees where the containers are kept beyond the free period granted to them. These collections are made on slab system depending on the duration over and above the free period time. The AO found that as per the regulations and directions of the RBI, only the outstanding liabilities on account of detention charges are partly permitted to be remitted to the principals. All other liabilities are not permitted to be remitted to the principals and, therefore, they remain with the assessee-company. The AO has mentioned in his order that it was admitted by the assessee that it was not possible to identify the brokers to whom the outstanding brokerage was payable. The brokers had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to have control over a big chunk of funds, which it is not required to pay to anyone i.e., neither the creditors (since they do not exist) nor the principals (since amount cannot be repatriated) and assessee can utilize the amount for its own benefit in the manner it likes. (b) The principals need not much bother about sending advance payments for meeting expenses in India, to the extent of such bogus expenses (lying unclaimed) shown as amounts payable to it. (c) None of them has to pay any tax on such receipts as principal (not liable to tax in India because of DTAA with Singapore) must have claimed it as expense in its own country and assessee has not routed it through its own books of account by claiming it as the liability of the principal towards its (principal's) creditors in India, which, in fact, do not exist (as already discussed). In fact, the amount is not payable to anybody. The true state of affairs is that both principals and agent are aware that they have shown bogus liabilities towards certain persons, who do not exist. But with tacit understanding, in order to increase the income of the assessee, without increase in its tax liability, a roundabout route ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts of the assessee-company are annually audited and the auditors have never made any adverse comments about the outstanding liabilities. It is argued that since the assessee is only acting as an agent, its capacity is entirely fiduciary and for this proposition, reliance has been placed on the following judgments: (i) CIT vs. Tanubai D. Desai (1972) 84 ITR 713 (Bom); (ii) CIT vs. Sandersons & Morgans (1970) 75 ITR 433 (Cal); (iii) CIT vs. A. Tosh & Sons (P) Ltd. (1987) 59 CTR (Cal) 272 : (1987) 166 ITR 867 (Cal); (iv) CIT vs. M.L. Bhapkar (1993) 112 CTR (Bom) 105 : (1994) 207 ITR 464 (Bom); (v) CIT vs. D. Shankaraiah & Ors. (2001) 166 CTR (SC) 370 : (2001) 247 ITR 798 (SC); (vi) CIT vs. Devatha Chandraiah & Sons (1987) 61 CTR (AP) 187 : (1985) 154 ITR 893 (AP); and (vii) CIT vs. Motor & General Finance Ltd. (1974) 94 ITR 582 (Del). The learned counsel contended that the liabilities are genuine and the assessee is unable to remit these liabilities on account of the regulations of RBI. It is submitted that the assessee always desired to remit these liabilities to the principals and for this purpose, it has been seeking clarifications from the RBI, but the RB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... originally cannot become trading receipt. For this proposition, he has relied on the Hon'ble Supreme Court decision in the case of Travancore Rubber & Tea Co. Ltd. vs. CIT (2000) 160 CTR (SC) 1 : (2000) 243 ITR 158 (SC). It is also contended that a genuine liability cannot be brought to the charge of tax under s. 41(1) as held by the Hon'ble Supreme Court in the case of CIT vs. Sugauli Sugar Works (P) Ltd. (1999) 152 CTR (SC) 46 : (1999) 236 ITR 518 (SC). For the same proposition, the learned counsel has relied on the Bombay High Court decision in the case of Mahindra & Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501 (Bom). The learned counsel also invited our attention to the contradiction in the AO's order where he says that the liabilities are bogus and at the same time he says that such surplus liabilities can be used for meeting future expenditure on behalf of the principals. This itself shows that the assessee is holding the money only as an agent and such money cannot be used by the assessee for its own purposes. Shri Y.P. Trivedi summed up his arguments by forcefully contending that the additions made by the AO and sustained by the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is compiled at pp. 202 to 205 of the paper book. Regarding detention charges, the learned CIT-Departmental Representative was fair enough to concede that to the extent such charges have actually been remitted to the principals, it cannot be said that the liability was bogus. Shri Maheshwari submitted that the learned CIT(A) has reduced the addition on account of detention-charges and has allowed relief to the assessee to the extent of Rs. 2,14,78,504 on the ground that the aforesaid amount was remitted to the principals. It is submitted that the relief allowed by the learned CIT(A) is the subject-matter of the Departmental appeal. It is contended that there is no discussion in the order of the learned CIT(A) to indicate that the aforesaid amount of Rs. 2,14,78,504 is included in the overall addition made by the AO. In other words, the submission of the learned CIT-Departmental Representative is that it is to be verified as to whether the relevant sum of Rs. 2,14,78,504 has been remitted by the assessee from out of detention charges of Rs. 3,12,34,627, which has been added by the AO. The learned CIT-Departmental Representative has placed reliance on the following judgments: (i) P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable to the facts of the assessee's case for the simple reason that in those cases, the liabilities were liquidated and credited to the P&L a/c by the assessee. In the present case, the assessee has been all along showing these amounts as liabilities payable to the principals and the assessee has not appropriated any part of such liabilities for its own purposes. Such liabilities are independently and separately reflected in the books of account. It is also argued that further under s. 218 of the Indian Contracts Act, the assessee is bound to pay these liabilities to the principals as there is a legal and contractual obligation on the assessee. It is also submitted that the cases relied by the learned CIT-Departmental Representative would also not apply as the assessee has not claimed any deduction from its income for any of the assessment years in respect of these liabilities and, therefore, s. 41(1) has no application. It is contended that even today, the assessee is acting as agent for the principals and the liabilities are shown as payable to the principals. 22. We have very carefully gone through the relevant facts pertaining to this issue and have given our due con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary to meet all the expenditure to be incurred in connection with their ships calling at Indian ports. The directions of the RBI with regard to JRC, FAC and inland haulage charges may be reproduced below from p. 2 of the RBI's letter: "These charges represent domestic land-based costs, including documentation and other handling charges payable to the local shipping agents as per Karmahom Conference guidelines, recovered from shippers/consignees. These need to be collected in such a way that no surplus remains in the hands of the shipping company or its agent. The question of surplus collection of such charges should not, therefore, arise. On the basis of statement of such charges collected and disbursements made thereagainst, if any surpluses are noticed, these are blocked. As these charges are on account of local costs recovered from shippers/consignees and need to be disbursed by the agent to various agencies handling the different items of work, including dues receivable by him, these are not permitted to be credited to principals account. These charges need to be credited to agent's account to enable disbursements as and when due." From the above, it may be seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed the correct procedure in submission of data in this regard and in case of doubt, have been seeking necessary clarifications by deputing their staff. It may, however, be mentioned that due to pressure of work as also oversight, on occasions, amount to be blocked are not correctly worked out resulting in releasing higher amounts for local use." From the above, it becomes clear that the liabilities fall into two distinct categories. Detention charges are not retained for disbursement of any expenses and these charges are allowed to be remitted by the RBI in part as per the guidelines of the RBI. On the other hand brokerage/THC/FAC are collected and retained with the assessee for the purpose of disbursement of expenses and these amounts cannot be used for any other purposes and cannot be remitted to the principals. Even accounting entries cannot be reversed and these amounts continue to be credited in the account of the assessee-company. Thus, for all practical purposes, if there is no disbursement by the assessee-company from out of these amounts, the surplus continue to remain with the assessee and the assessee has full control over such funds and these funds are reflected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the case of Sugauli Sugar Works (P) Ltd. We find that this controversy was addressed by the Kerala (sic-Madras) High Court in the case of CIT vs. Sundaram Industries Ltd. (2002) 253 ITR 396 (Mad). The Kerala (sic-Madras) High Court discussed both the Supreme Court decisions and held that the judgment in the case of T.V. Sundaram Iyengar & Sons Ltd. was rendered by three-Judges Bench whereas the judgment in the case of Sugauli Sugar Works (P) Ltd. was rendered by two-Judges Bench. It was held that larger Bench decision must be followed in case of conflict. The learned counsel has relied on the Bombay High Court decision in the case of Mahindra & Mahindra Ltd., wherein it was held that benefit arising from business on account of remission of liability cannot be assessed under s. 28(iv) or under s. 41(1). In that case, the assessee imported capital assets and loan was granted by the foreign company. Interest paid on loan by the assessee was not deducted under s. 36 of the IT Act. Subsequently, the principal amount of loan was waived and it was held that the amount waived was not assessable as assessee's income. In this case, the Bombay High Court held as under: "Hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s business activity. These collections were of revenue character right from the very beginning and they were not in the nature of capital receipts. At this stage, the ratio of the Supreme Court decision in the case of T.V. Sundaram lyengar & Sons may be reproduced below from the headnote. "If an amount is received in the course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. The ITO found that for the asst. yrs. 1982-83 and 1983-34, the assessee had transferred an amount of Rs. 17,381 to the P&L a/c of the company during the accounting period ended on 31st March, 1982 (asst. yr. 1982-83), and an amount of Rs. 38,975 during the accounting period ended on 31st March, 1983 (asst. yr. 1983-84). But these amounts were not included in the total income of the assessee. The sums were stated to be credit balances standing in favour of the customers of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed by the purchaser. As and when demanded by the purchaser, the assessee used to pay off their claims on account of unloading of wagons. Every year, there was an excess of receipts over payments which was taken to the P&L a/c. The Supreme Court observed that the important features in this case were that the assessee collected the amounts as 'under charges' in advance even before any claim was lodged It realized the amount from the colliery companies not because of any demand was made, but in order to protect itself from the eventuality of any demand being made against it as a del credere agent. The relevant part of the ratio of the Supreme Court in this case may be reproduced below from the headnote: "Held, that the assessee in the course of its business collected every year substantial amounts on account of 'under charges'. The sums so collected were the property of the assessee subject to certain contingencies. They did not cease to be trading receipts because they might or might not have to be debited again. The assessee's account all along showed a steady surplus in this account. The claims made by the consignee were always less than the amounts recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sst. yr. 1976-77, the assessee credited to its P&L a/c a sum of Rs. 63,379. This amount comprised a sum of Rs.7,429 deposited by the customers of the assessee in earlier years as advance for purchasing pumps. These parties never turned up to buy the pumps or claim refund. Another sum of Rs. 4,321 represented excess commission received from parties which those parties never claimed back. Another sum of Rs. 13,249 was collected by the assessee on behalf of its principals, who never claimed the same from the assessee. The balance represented savings from remittances received from the foreign company towards the expenses of the directors in India which was not claimed back by the foreign company. Before the ITO, the assessee contended that this amount, though credited to its P&L a/c, should not be included in its assessable income. The ITO, however, included it as business income and this was upheld by the Tribunal. On a reference: Held, that the benefit that had arisen to the assessee by appropriation of the excess commission or advance receipts against supplies, etc., received in earlier years and not credited to the P&L a/c in those years had a close and direct nexus with the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the balance sheet. Thus, the funds are under complete control of the assessee-company and can be used for its business purposes. The assessee-company cannot disburse these amounts for payment of expenses in future for the simple reason that no details are available regarding the persons to whom such payments are to be made. There are no vouchers or bills which have been raised by these persons which may be in assessee's possession on the basis of which the identity of such persons can be established. As mentioned above, the liability on account of brokerage has remained stagnant for almost 5-6 years and nothing has been paid to anybody. It does not stand to reason that any person who has rendered any service and is entitled to any payment to be made by the assessee-company on account of such service rendered, will wait indefinitely for a period of 5-6 years without staking any claim for such payment. In our view, if such liabilities are not paid by the assessee, eventually the assessee is able to appropriate these funds and the same has to be brought to the charge of tax in the hands of the assessee. The receipts/collections have been made by the assessee-company during the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortion of such liabilities, which has already been brought to the charge of tax in its hands, the assessee can claim deduction under the provisions of the IT Act, which may be duly considered by the IT authorities as per the provisions of law 33. The last ground raised by the assessee pertains to levy of surcharge on the tax determined as payable under s. 113 of the IT Act. The learned counsel for the assessee invited our attention to the provisions of s. 113, which is reproduced below: "The total undisclosed income of the block period, determined under s. 158BC shall be chargeable to tax at the rate of 60 per cent- Provided that the tax chargeable under this section shall be increased by a surcharge, if any, levied by any Central Act and applicable in the assessment year relevant to the previous year in which the search is initiated under s. 132 or the requisition is made under s. 132A." 34. It is submitted that the proviso has been inserted w.e.f. 1st June, 2002. It is argued that it has been held by various Benches of the Tribunal that the proviso is prospective in operation and therefore will not be applicable to a case where search has been carried prior to 1st June, 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned CIT(A) erred in disallowing Rs. 2,96,952 under s. 43B in respect of certain late payments to PF and ESIC and adding Rs. 2,72,921 in respect of income taxed under s. 2(24)(x) r/w s. 36(1)(va) of the IT Act in respect of employees' contribution to PF and ESIC as detailed hereunder: Sl. No. Particulars Amount added/disallowed (Rs.) 1. Disallowance under s. 43B of the Act (a) Delayed contribution of PF 2,19,180 (b) Delayed contribution of ESIC 77,772 2. Income taxed under s. 2(24)(x) of the Act (a) Delayed contribution of PF 2,42,656 (b) Delayed contribution of ESIC 30,265 1(c)(i) The learned CIT(A) erred in adding the liability payable to the principals under different heads aggregating to Rs. 7,55,27,732 as under: Sl. No. Particulars Amount (Rs.) Bogus liability- Rs. 7,55,27,732 (a) CPT deposit-to be transferred to port vendors account 55,55,187 (b) Sundry creditors-others 40,89,645 (c) Local utilization-transfer entry to be passed 3,50,58,707 (d) Detention-transfer entry to be passed to APL Co. (P) Ltd. 48,13,580 (e) Detention amount remitted-transfer entry to be passed to APL C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is clear that if the payments are made beyond the due date prescribed under the relevant Act, such payments are not deductible by virtue of the provisions of s. 36(1)(va). Admittedly, these payments have been made beyond the prescribed time-limit. Therefore, the disallowance with regard to payment of employees' contribution is confirmed. 39. The next issue pertains to addition of Rs. 7,55,27,732 as per break-up indicated in the relevant grounds of appeal as reproduced above. This issue regarding disallowances of liabilities has been discussed at length by us while deciding the cross-appeals for the block period. The facts and circumstances are the same and therefore, our findings are similar as already recorded No addition can be made in respect of liability on account of detention changes. Regarding other liabilities for brokerage, THC, FAC, etc., the AO is directed to verify the facts after allowing opportunity to the assessee. Whatever has been remitted to the principals subsequently or transferred to the account of the principals shall be excluded from the addition. The additions, if any, shall be reduced accordingly. 40. The last ground pertains to finding of the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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