2005 (7) TMI 575 - AT - Income Tax

High Court Upholds Deletion of Fees Addition Under GIC Scheme, Emphasizes Real Income Principles

The High Court upheld the deletion of an addition of fees receivable under the GIC Big Value Scheme, emphasizing that only real income is taxable and ... Concept of real income Issues:- Deletion of addition of fees receivable under GIC Big Value Scheme- Applicability of real income concept for taxation- Commercial expediency in waiving fees- Interpretation of relevant legal precedentsAnalysis:1. Deletion of addition of fees receivable under GIC Big Value Scheme:The Department appealed against the deletion of an addition of Rs. 37,49,715, representing fees receivable by the assessee under the GIC Big Value Scheme. The Assessing Officer disallowed the claim, stating that the fees were chargeable as per the agreement, and the waiver of fees did not benefit the assessee. However, the CIT(A) relied on the principle that only real income is liable to tax, as established in the case of H.M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom.). The High Court held that the real income cannot be determined without considering the amount foregone by the assessee. The Tribunal upheld the CIT(A)'s decision, emphasizing that the waiver of fees was a commercial decision made in the interest of the company, and hence, the addition was deleted.2. Applicability of real income concept for taxation:The Tribunal further analyzed the concept of real income for taxation purposes, highlighting that the decision to waive fees was based on commercial expediency and was not aimed at tax avoidance. The Board of Directors' resolution to not charge fees was made in January 1997, well within the relevant assessment year, and was not a post-year-end adjustment. The Tribunal reiterated the principle that real income, as per the mercantile system of accounting, includes considering amounts foregone by the assessee. The Tribunal concluded that the fees waived by the assessee could not be treated as income for the year under consideration, aligning with the CIT(A)'s decision.3. Commercial expediency in waiving fees:The Tribunal examined the commercial rationale behind waiving the fees, emphasizing that the decision was taken to prevent a larger shortfall that would have burdened the GIC Asset Management Co. Ltd. The Tribunal noted that the waiver was not an afterthought to avoid tax implications but was a proactive measure in the best interest of the company. By considering the circumstances and the commercial necessity of the decision, the Tribunal upheld the CIT(A)'s deletion of the addition of fees receivable under the GIC Big Value Scheme.4. Interpretation of relevant legal precedents:The Tribunal referenced the decision in H.M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom.) to support the position that only real income is taxable, and the waiver of fees did not result in any undue benefit or tax evasion. Additionally, the Tribunal highlighted the consistency in decisions, noting that similar additions had been deleted for the assessment year 1997-98. By aligning with the legal principles established in prior cases and considering the commercial context of the fee waiver, the Tribunal dismissed the Department's appeal, affirming the CIT(A)'s decision to delete the addition.