TMI Blog2005 (2) TMI 448X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, Pune, Ahmedabad, Indore, and Kandla, and Northern India covering Delhi, Ludhiana, Kanpur, Varanasi, Jodhpur, Jaipur, Jalandhar and Amritsar. The agent's job was to procure cargo for the principal from the above places for loading and unloading the ships of NL and their transportation to and from the territories indicated above. The agent was responsible for handling all matters connected with shipping, i.e., apart from loading and unloading of goods, it was also required to obtain port clearance and transact with the customs authorities. 3. As per p. 5 of the terms of agreement, the appellant was entitled to commission only, at rates varying from 1 to 2.5 per cent on various items of work covered under the agreement. In addition, the appellant was also entitled to reimbursement for certain types of office expenditures specified in the agreement. The agreement also stipulated that the agent was not to engage in any other business activity which would come in conflict with the agency work. 4. The agent had to deal with a large number of customers covering a very wide territory, i.e., whole of North India and West India. Apart from the functions outlined in the preceding para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principal from the account standing in the name of the principal. Also, as per the MOD, the new agents took over contingent liabilities to the extent of Rs. 9.57 crores. After this settlement all uncertainties ceased and since it was no longer necessary to keep any cushion for any anticipated liability, the appellant-company brought into its P L ale the residual amount of Rs. 9.94 crores from the above account and offered it for taxation in the asst. yr. 1999-2000. 8. During the course of the assessment proceedings, the AO wanted confirmation of balance in the sundry creditors account between the applicant-company and the principal, M/s Nedlloyd. M/s NL in a letter reported that the balance outstanding against the appellant-company as on 1st April, 1997, was Rs. 3.98 crores as against Rs. 17.25 reported by the appellant-company. The AO, therefore, added the difference between the two, amounting to Rs. 13.26 crores in asst. yr. 1997-98. The AO also disallowed certain other claims such as Rs. 3.64 lakhs on account of entertainment expenses and Rs. 4.06 lakhs expenditure incurred for reimbursement of medical expenses of its CEO. The appellant thereafter went up in appeal before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion was payable by the principal. It was, therefore, natural that when reconciliation was made between the accounts maintained by the principal and by the appellant, there was discrepancy. It had to be remembered that amounts were also collected for carrying out various activities not required to be reported to the principal. Under the agency agreement, it was neither required nor the assessee was obliged to report the other part of the balance amount to the principal. These were essentially collected, as stated earlier, to cover the sums guaranteed in bonds with the customs authorities, penalties which were levied or excess duty or demurrage charged subsequent to settlement of accounts with the customer. 12. Mr, Tulsiyan countered the observations of the CIT(A) point by point and explained the position. In the first place, referring to the observation made by the CIT(A) at para 7, p. 7 of his order that it was incumbent on the appellant to reconcile the differences of the two balances, i.e., one reported by the appellant and the other by the principal. Shri Tulsiyan submitted that as explained earlier, the reconciliation can be made only when both segments of the accounts are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses which the appellant had to incur in carrying the agency work with which the principal was not involved, it had to collect additional money from all customers. But, since the business was being carried on exclusively on behalf of the principal all accounting entries had to be made in the account of the principal. It is the credit balances from these accounts which the appellant had been carrying forward from 1986 to 1998. As explained earlier, these amounts were actually meant to take care of post-settlement expenses of the customer, such as covering the amount for the bonds signed with customs authorities, additional demurrage charges levied later, penalties imposed later, etc., for which the agent was wholly and exclusively liable. The appellant always apprehended that if it did not withhold the amount it would create problems of recovery from the customers who had already settled their accounts. 15. Regarding the CIT(A)'s observations that the actual amount of difference between NL account and appellant account was Rs. 13.26 crores as against the claim of the appellant of Rs. 9.94 crores, it was submitted by Shri Tulsiyan that the learned CIT(A) failed to take note of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the scope of the activity which the applicant had to perform on behalf of the principal. The conclusion of the CIT(A) was, therefore, completely misplaced. In coming to this wrong conclusion. The CIT(A) had failed to take note of s. 148 of the Customs Act, 1962, which imposes liability on an agent and on whom penalties can be imposed and from whom confiscation of goods can be made for all acts done by him or on behalf of the principal. Thus, all duties and penalties leviable by the customs authorities were payable by the agent if originally there was short levy or incorrect claim. Shri Tulsiyan further stated that for the purpose of indemnifying timely return of container it had to execute bonds of several crores of rupees with the customs authorities. He cited the example of two indemnity bonds, which the appellant had executed aggregating to Rs. 75.26 crores which were dt. 3rd Feb., 1997, and 19th Dec., 1997. This was available at Sch. C of the MOU signed in April, 1998. 17. Objecting to the refusal on the part of the CIT(A) to accept the figure of Rs. 9.94 cores as the correct amount assessable in the asst. yr. 1999-2000, Shri Tulsiyan explained that the following facts cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim for inclusion of the balance amount of Rs. 9.94 crores was to be assessed in the asst. yr. 1999-2000. He explained that s. 4 of IT Act brought into tax only the income accruing or arising in any previous year. No receipt could be converted into income in a particular assessment year unless that receipt can be attributed to the corresponding previous year. Similarly, the receipt will acquire the attribute of profits or gain of a business under s. 28 of the Act only when all outgoings from such receipts have been accounted for and all uncertainties and claims against the receipts had ended. The appellant-company received the advance deposits from the customers in its fiduciary capacity as an agent of the principal and the amounts were held as a trust. At the time of the receipt, the advances were kept for services to be rendered in future and until such services had been rendered, accounts settled and uncertainties of future claims ceased, they could not constitute income. The learned counsel drew our attention to some of the decisions of Courts in support of his arguments. He referred to the case of Morley vs. Tattersall 22 Tax Cases 51 (CA) : (1939) 7 ITR 316 (CA). According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s octroi collected by an assessee from its customers. Finally, the learned counsel cited a case of CIT vs. T. V. Sundaram Ayengar Sons Ltd. where the Supreme Court had at p. 353 of its order had held: "If a commonsense view of the matter were taken, the assessee because of the trading operation had become richer by the amount which it transferred to its P L a/c. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus". 22. Shri Tulsiyan also emphasized upon the fact that the position of acceptance of advances from the clients of the principal and keeping the amounts in the credit account in the name of the principal (as the appellant does not maintain separate accounts in respect of the clients) has been accepted by the Department since the very beginning of the business of the appellant, i.e., 1986. The appellant has been filing its returns of income since asst. yr. 198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture. The expenditure was, therefore, allowable. Finally, Shri Tulsiyan objected to the charging of interest under s. 234B of the IT Act. He argued that this should not have been charged as the direction to charge such interest was not there in the assessment order passed by the AO. This was taken as an additional ground before the CIT(A) and the CIT(A) refused to entertain the ground on the plea that the appeal which was before him was on limited issues for deciding to quantify the amount appearing in the credit balance and determine the year in which it was to be assessed. Therefore, he was debarred from going into grounds beyond the direction of the Tribunal. Alternatively, he held the view that Supreme Court's decision in CIT vs. Anjum H. Ghaswala (2001) 171 CTR (SC) 1 : (2001) 252 ITR 1 (SC) made it mandatory for the AO to charge interest. Shri Tulsiyan, on the other hand, relied upon the decision of the Supreme Court in the case of CIT vs. Ranchi Club Ltd. (2000) 164 CTR (SC) 200 : (2001) 247 ITR 209 (SC), where it was held as under: "Interest-Return of income filed by assessee-Notice to produce accounts or documents-Interest not leviable for failure to comply with notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e new agents took over contingent liabilities to the extent of Rs. 9.57 crores. The balance amount of Rs. 9.94 crores was brought into the P L a/c in the asst. yr. 1999-2000 and was offered for taxation in that assessment year in accordance with ratio of decision given by the Supreme Court in the case of Mr. T. V. Sundaram Ayengar referred to earlier. The amount is, therefore, assessable in the asst. yr. 1999-2000 only. He added that in any case, there is no scope for disturbing the accepted position in asst. yr. 1997-98 without any genuine particular reason. 27. The claims pertaining to expenditure connected with the holding of seminar, business meetings, etc. and the reimbursement of medical expenses to the CEO of the company for the treatment of his wife were clearly allowable in full as they were incurred fully and exclusively for the business purpose. The charging of interest by the AO under s. 234B was clearly illegal since the direction to charge such interest had not been given by him in the assessment order. In accordance with the decision of the Supreme Court in the case of CIT VS. Ranchi Club referred to above the charge is illegal and should be quashed. 28. The Depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agent accounts of the principal 32. The next point for consideration is at what point of time such receipts partake the character of income in the hands of the appellant? According to the AO and the CIT(A), since a part of the deposit received by the appellant had not be reported to the principal and there was discrepancy in the balance as reported by the foreign principal, NL and the appellant the entire difference was, therefore, assessable either as business income of the appellant under s. 28 or under s. 41(1) being remission of liability from the principal alternatively, according to CIT(A), as income from undisclosed sources under s. 68 of the Act. According to the learned counsel for the appellant, s. 41(1) did not apply since at no point of time the assessee had made any claim for deduction nor was it allowed by the AO. Similarly, s. 68 also was not applicable since the advances were business receipts of the principal received and collected by the agent in the course of normal business activity. According to the counsel, the balances have been coming since 1986 and there has been no change in the facts or accounting procedure in the assessment year under consideration. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such genuineness in this year and to bring to tax the difference amount which all along existed in the books of account of the appellant. The Supreme Court decisions as cited by the learned counsel for the appellant surely support this proposition. From this angle also, there is no scope for making the impugned addition: 35. We have carefully considered the submissions of the learned counsel regarding the claim of the appellant for allowing in full the expenses incurred for conducting business seminars, meetings, etc. Having regard to the nature of expenditure incurred, it will be very difficult to clearly demarcate what constitutes entertainment and what constitutes wholly business expenditure when it is incurred in providing food and transportation to the delegates. An element of entertainment cannot be clearly ruled out in such expenditure. In view of this, we are satisfied that expenses as allowed by CIT(A) is reasonable. We, therefore, decline to interfere. 36. The appellant has claimed allowance of the expenditure incurred in reimbursing the CEO, medical expenses for the treatment of his wife. We have examined the facts brought out in the order of CIT(A) and we find that ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
