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1977 (8) TMI 77
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....iture cannot be disallowed in terms of R. 6(d). 4. We find that the amount disallowed by the Income-tax Officer consists of the following :- (1) Disallowance out of travelling expenses of the directors in excess of the amount allowable in terms of Rs. 6(d) Rs. 4,383 ; (2) Entertainment expenses incurred in tours by the Managing Director Sri M. Venkataratnam Rs. 10,385 ; and (3) Gifts and entertainment expenses incurred in tours by Shri M. Venkateswara Rao and Shri C.L. Narayana, directors-Rs. 2,979. (Total Rs. 17,747) In so far as the first amount in concerned, the disallowance was quite in order in accordance with R. 6(d) of the Income-tax Rules. The learned counsel also has not disputed the disallowance of this amount. 5. As regards the second item, we find that the claim has to be allowed in view of the Andhra Pradesh High Court's order in assessee's own case for the assessment year 1967-68 reported at 1977 C.T.R. 18 (A.P.) where the High Court held that entertainment expenses of the nature claimed by the assessee have to be allowed as legitimate business expenditure in computing the business income. The facts and circumstances are similar to those in the ye....
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....le remuneration to Rs. 6,000 per month in terms of s. 40(c)(B). This ground is clearly ill-conceived. There cannot be any dispute that the provisions of s. 40(c)(B) are applicable to the facts of the case. The disallowance is, therefore, quite in order and we confirm it. 10. Next ground is regarding the addition of Rs. 1,328 being the cost of replacement of old boiler, on the ground that it was a capital expenditure. This ground was not pressed at the time of hearing before us and, therefore, the addition stands. 11. Next addition in dispute is the sum of Rs. 2,000 which was disallowed out of motor car expenses claimed by the assessee, on the ground that the vehicles were used by the directors partly for their personal work. It is contended by the learned counsel that there is no evidence to hold that the cars were used by the directors for their personal work, that even if they were so used, the expenditure thereon could be assessed in the directors' hands as perquisites and it cannot be disallowed in the assessment of the company. 12. There is good deal of force in the above contention. Even assuming that the cars were used by the directors occasionally for their persona....
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....tor of the country for priority as well as for non-priority industries, and such imports were restricted "in the case of stainless steel to the actual users manufacturing surgical goods and hospital wares only". The assessee had exported tobacco of the value of Rs. 34,02,382.42 in 1969 and became entitled to make nominations for the grant of licences to import stainless steel of like value. The same was confirmed by the State Trading Corporation in its letter dated 18th Aug, 1971. It appears that the assessee company gave undertakings in June and July 1970 to a British company called Citland Ltd., that the latter would have the right to nominate actual users or export houses in India in respect of an amount of Rs. 12,56,011.63 generated under the barter approval. One of the conditions of this undertaking was that the British company would pay minimum of 10% of the value of the aforesaid amount to the assessee after the import licences have been issued. The assessee company also entered into two agreements with one Continental Commercial Company, Bombay, for realisation of the benefits due to it under the barter agreement for a total sum of Rs. 22,00,000, one agreement covering Rs. ....
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....er share mentioned in the agreements was only a tentative one based on a trial balance-sheet. It is clear from these documents that they were intended to have only a transitory effect till the final balance-sheet was prepared. 16. On 30th Dec., 1970, transfer deeds duly stamped for an enhanced consideration of Rs. 171 per share were accepted by the company and transfers of the shares belonging to Lakshmaiah and Satyanarayana groups were registered in favour of Venkataratnam and his nominees. Six deeds of "security by way of indemnity" were also executed on the same day. Two of the deeds, executed by Lakshmaiah and Satyanarayana groups in favour of Venkataratnam group stated that notwithstanding the transfer of shares "the rights and liabilities of the parties prior to 30th Sep, 1970 shall continue to be borne proportionately over the said shares" and then contained undertakings and indemnities in terms similar to those in the documents executed on 30th Sep, 1970. The transferors were made liable for all liabilities cast on the company "regarding and arising out of the transactions of the company till 30th Sep, 1970". Two more documents executed by the same groups in favour of th....
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....so for the realisation of the benefits due to First Party under barter deal No. 25(52)/69-ST dated 18th June, 1969. (2) First party undertakes to make future sales or nominations or renominations with the consent of Maddi Lakshmaiah and Maddi Satyanarayana and agrees to arrange for the irrevocable letters of undertakings by the Continental Commercial Company, Bombay, or any other nominees for payment of 30% (thirty percent) of net amount due thereunder to the second party and payment of 27% (twentyseven percent) of the net amount due there under to the Third Party directly and without further recourse to the First Party. (3) Parties Second and Third undertake and agree to contribute and bear 30% (thirty per cent) and 27% (twenty seven per cent) respectively of the share of all expenses and payments that may be required for the effective realisation of the profits and benefits due under the above barter to the First Party". Simultaneously, another agreement containing similar provisions was executed between the same parties in respect of the benefits earned (but not yet realised) by Maddi Venkataratnam and Co. (P) Ltd. Under the Export Incentive Scheme for exports made by i....
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....company, it was signed by Shri Venkataratnam. It was stated therein that certain difficulties cropped up in getting foreign exchange released from Government of India under the barter deal and the assessee-company was not in a position to make a headway. Karnataka Exports Ltd. agreed to sort out the difficulties in consideration of which the premium mentioned in the earlier agreement at 70% of the entitlement value was reduced to 50% thereof. Accordingly, it was understood and agreed that out of the total amount of Rs. 34,02,383.42 generated under the barter entitlement, Citland Ltd., London, was entitled to make nominations to the extent of Rs. 12,56,011.63 and that premium at the reduced rate of 50% would be paid to Maddi Venkataratnam & Co. (P) Ltd. on the balance of Rs. 21,46,372. It was further agreed that M/s. Karnataka Exports Ltd. would pay 10% of the foreign exchange amount of Rs. 12,56,011 belonging to M/s. Citland Ltd., London, which would also be paid a premium at the rate of 50% of the said amount and to which they had agreed. Shri M.P. Singhania undertook the responsibility of having a letter confirming this agreement sent by Karnataka Exports Ltd., New Delhi. The con....
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..... to pay Rs. 3,31,955.80, being 30% share of the premium in the barter entitlement to Maddi Lakshmaiah and Co. Pvt. Ltd., and Rs. 2,89,760.20, being 27% share of the premium to M/s. M. Seshagiri Rao (out of the total premium of 50% on Rs. 21,46,372 payable by M/s. Karnataka Export Ltd. under the agreement dated 2nd August, 1972 with the assessee-company. (2) Out of 10% of the import entitlement value of Rs. 12,56,011 assigned to M/s. Citland Ltd. and payable By M/s. Karnataka Exports Ltd. the assessee-company instructs the latter, i.e., Karnataka Exports Ltd., to pay a sum Rs. 37,500 to Maddi Lakshmaiah and Co. (P) Ltd., towards its 30% share and Rs.33,750 to M/s. M. Seshagiri Rao towards its 27% share in terms of the agreement dated 5th Jan, 1971. Then there were other terms in the shape of indemnities and guarantees relating to tax liabilities and on either side arising out of the assessment of the above profits under the Income-tax Act. The Court directed that on the above terms being complied with, the plaintiffs shall apply to the Court for the withdrawal of the aforesaid suit. The suit, we understand, was accordingly withdrawn. The settlement was reached in July, 1973, ....
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....le to tax only in respect of its share of the premium got from Karnataka Exports Ltd., and that too in the subsequent year when it was actually received as a result of the settlement between the parties. The Income-tax Officer did not accept these contentions. He held that the entire profit of Rs. 11,98,717 accrued to the assessee-company in the accounting year relevant for the present assessment by virtue of the agreement dated 9th Aug, 1972 with M/s. Karnataka Exports Ltd. His view was that the import entitlements were generated out of the exports made by the assessee company and it was the assessee-company alone that was entitled to the profits flowing therefrom. The accrual of the profits to the assessee-company was, the Income-tax Officer observed, in no way affected by agreements between the shareholders to share such profits and such agreements cannot bind the company. According to him, the settlement arrived at between the assessee-company and Lakhsmaiah and Satyanarayana groups through the compromise decree passed by the Delhi High Court was in the nature of division of profits after they arose to the assessee company and, therefore, the question of assessing the share of ....
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....ayana group, who sold their shares to the remaining shareholders and went out of the company, had no right in law to receive any part of the premium on sale of import entitlements which was the exclusive property of the assessee-company and that in the circumstances, the agreement entered into between the assessee-company on the one and the said two groups on the other on 5th Jan, 1971 was only in the nature of application of profits earned by the assessee. The said agreement, it is argued, did not create any overriding title in favour of the two groups of shareholders of result in diversion of source of income. Thus, according to him, the entire profit on sale of import entitlements is assessable in the hands of the assessee only. Shri Rangayya, the Departmental Representative, has further contended that the profit accrued to the assessee on 9th Aug, 1972 when a final agreement was executed between the assessee and Karnataka Exports Ltd. for the sale of import entitlements. He has argued that the injunction order of the High Court restraining M/s. Karnataka Exports Ltd. from making any payment to the assessee-company had the effect of only postponing the receipt of profits by the ....
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....e test in the following words :- " In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be executed and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income; but for and on behalf of the person to whom it is payable." 29. In Commissioner of Income-tax vs. Imperial....
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.... either accrued or arose, that such income cannot be regarded as income of the assessee for tax purposes and that the revenue was not correct in its contention that the income had accrued to the assessee and was later applied by him by making a gift in favour of the married daughters. 31. The Bombay High Court had occasion to consider again the same issue a little later in another case, viz., Commissioner of Income-tax vs. Crawford Baley & Co.(6). There the assessee firm was governed from 1st April, 1957, by a partnership deed dated 14th March, 1957. One of the partners, N. died on 27th May, 1958. Thereafter, a new partnership deed was executed on 16th April, 1959 to take effect from 1st April, 1959. A partner, L, died on 16th July, 1959. A supplementary deed was executed on 29th April, 1960. Under the provisions of the partnership deeds of 1957 and 1958, the widows of N and L were made some payments monthly. The payments thus made were claimed as deductions by the assessee-firm in the assessments for the assessment years 1959-60 to 1963-64. The Income-tax Officer rejected the claim holding that the widows were not parties to the agreement, that they had no rights against the fi....
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....ts was between the assessee-company and Karnataka Exports Ltd. But, the agreement between the assessee-company on one hand and the two groups on the other entered into on 5th Jan, 1971 created on overriding title in their favour in respect of a portion of the premium, i.e., 30% to Lakshmaiah group and 27% to Satyanarayana group. The passages extracted from the agreement of 5th Jan, 1971 earlier in this order clearly show that Lakshmaiah and Satyanarayana groups had interest in the import entitlements and their right to share the premium on the sale of those entitlements flowed from that interest. It must also be noted that the sale consideration of Rs.171 per share paid to them by Venkataratnam group for their shares was without prejudice to their rights and interests in the import entitlements arising from the barter deal approved by Government. This is clear from the sets of documents executed on 30th Sep, 1970 and 30th Dec, 1970. Relevant extracts from these documents were already quoted supra in this order. Reference is invited to the extract in the agreement executed by Sri Venkataratnam on 30th Sep, 1970 in which he stated; "Some of the transactions of the Company including a....
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....That the assessee company was in the position of a trustee for the two groups of shareholders in respect of the premium receivable on the basis of the agreement entered into with Karnataka Exports Ltd. was recognised by the Delhi High Court while giving the injunction order restraining Karnataka Exports Ltd. from making any payment to the assessee-company. 33. We may observe incidentally that the position in the case before us bears close resemblance to the position obtaining in Surjarathan Damani's(1) case in the matter of sharing of the managing agency commission by the managing agency company and the Damani brothers. There also the managing agency commission was actually receivable by the managing agency company, but by an agreement between that company and Damani brothers, it was to be shared by the parties. If the contention raised by the revenue in the case before us it to be accepted, the share of managing agency commission received by Damani brothers should have been included in the managing agency company's income and taxed in its hands on the ground that the payments made to Damani brothers were in the nature of application of income. But, the revenue does not appear t....
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....o say, the said groups did not get their share of the premium after it came into hands of the assessee-company, but even before it reached the assessee-company. They had as much right to their respective shares as the assessee had to its share and there was no question of their receiving it from the assessee. The agreement dated 5th Jan, 1971 between them was as much a valid contract as a contract of sub-partnership and the agreement gave to them an overriding title in respect of the premium by which their share of the same was diverted to them before it reached assessee. 35. One of the cases relied on by the department in Commissioner of Income-tax vs. Sitaldas Tirathdas (3). There, in computing his total income for purposes of income-tax, the assessee sought to deduct amounts paid by him as maintenance to his wife and children under a decree of court passed by consent in a suit. No charge on any property of the assessee was created. After applying the rule of diversion of income by an overriding charge, the Supreme Court held on the facts of that case, that the wife and children of the assessee who continued to be members of his family received a portion of his income after he....
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.... it had accrued and not a case of diversion of any sum of money before it had become the income of the assessee. The above decision is also, therefore, clearly distinguishable in view of the fact that in the case before us the income did not accrue to the assessee before it was distributed to the two groups of shareholders. The two groups of shareholders were entitled to it in their own right on account of an overriding title which they had by virtue of the agreement between them and the assessee-company executed on 5th Jan, 1971. 37. Next case, relied on by the revenue, is M.K. Brothers Private Limited vs. Commissioner of Income-tax (9) decided by the Allahabad High Court. There, one S & Co. was appointed as sole-sellling agents of Kanpur Cotton Mills owned by British India Corporation. When a sum of Rs. 8 lakhs was found due to the Corporation by them S. & Co. entered into an agreement with K to resign their sole agency in favour of K or K's nominee on condition and K or his nominee agreed to pay one-seventh of the commission accruing to K or his nominee as sole selling agents, to S & Co. It was further agreed that the corporation should have the right to receive this one-seve....
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.... mode. The compensation payable to the former agents was spread over a period of three years and on the assumption that the turnover was constant, the compensation payable was on an average equal to eleven-fifteenths of the commission at the normal rates. In the first place, the assessee credited the commission account and debited the I.C.I. (Export) Ltd. account with the full amount of commission earned by it at normal rates on sales effected during the year. Then it transferred from the commission account to a special reserve account called the "Explosives Ex-Agents Compensation Reserve Account", eleven-fifteenth of the commission at normal rates, leaving four-fifteenths towards commission account. Since the year of account of the assessee was from 1st October to 30th September, as a result of this method, the assessee had transferred in its account for the accounting periods relevant to the assessment year 1949-50 to 1952-553 to the Compensation Reserve Account respectively Rs.2,08,503, Rs.5,41,526, Rs.5,29,284 and Rs.4,00,052. The assessee claimed deduction of these amounts in computing its profits, contending that there was an agreement between the I.C.I. (Export) Ltd. and the....
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....efore, only the assessee's share of the premium, viz. Rs.5,15,140, is includible in its total income for assessment purposes. 40. The question then is as to when the aforesaid share of premium accrued or arose to the assessee. In our opinion, it accrued to the assessee only when it became entitled to receive it. Though the assessee entered into an agreement with M/s. Karnataka Exports Ltd. on 9th Aug, 1972 for the sale of import entitlements, it was not entitled to receive the premium during the accounting year relevant for the assessment year 1973-74 on account of the disputes between the assessee and the outgoing groups of shareholders, viz., Lakshmaiah and Satyanarayana groups consequent suit filed by them before the Delhi High Court and the Delhi High Court's injunction order. By the injunction order, the court restrained M/s. Karnataka Exports Ltd. from paying any part of the premium earned on the sale of import entitlements by the assessee-company and the said two groups of shareholders, to either party during the currency of the suit. It was only on 8th Aug, 1973 when the settlement was reached and a compromise decree was passed by the court that the assessee and the said....
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....at this was not a case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lesser remuneration than what had been agreed upon, and that the assessee had in fact received only the lessor amount in spite of the entries in the account books, and this lesser amount alone was taxable. The Supreme Court made the following significant observations in this respect :- "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there can not be a tax, even though in book-keeping, an entry is made about a 'hypothetical' income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might....
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.... and as a result the assessee was able to earn more profits in later years. The Supreme Court held : (i) that the office allowance foregone by the assessee was allowable as revenue expenditure under s. 10(2)(xv) of the Indian Income-tax Act, 1922; and (ii) that as the managing agency commission was receivable could have been ascertained only after the managed company has made up its accounts and the assessee had given up the commission even before the managed company made up its accounts, and no date had been fixed in the agreement for payment of the commission, the mere fact that the assessee was maintaining its accounts on the mercantile system did not lead to the conclusion that the commissions had accrued to it by the end of the relevant accounting year; the commission given up by the assessee could not be considered to be its real income. 43. In the case before us, it cannot even be said that the assessee's share of the premium arising from the sale of import entitlements was definitely ascertainable in the accounting year relevant for this assessment. In the suit filed by the aforesaid two groups of shareholders in the Delhi High Court, there were claims and counter-claims....
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....of the company and a small percentage on sales and purchases. The agreement provided that the assessee was at liberty to retain, reimburse and pay themselves out of the funds of the company all moneys expended on behalf of the company all sums due to them for commission or otherwise. During the year of account ending 31st March, 1942, the assessee became entitled to a commission of Rs. 2,26,850. On 30th March, 1942, the assessee wrote to the company requesting that a certain debt, which the assessee owed to the company for a long time past, should be written off. The directors, by their resolution passed on the same date, refused to write off the amount without consulting the general body of shareholders and pending the settlement of the dispute, resolved to keep the sum of Rs.2,26,850 in suspense without paying it. The assessee kept no separate books of account other than the books of account of the company in which there was a ledger containing entries relating to the remuneration and commission paid in cash to the assessee. The sum of Rs.2,26,850 was debited as a revenue expenditure of the company and was allowed as deduction in computing the profits of the company for purposes ....
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....ion of certain per cent per annum on the annual net profits of U company which was due to it on the 31st March every year. On 1st Dec, 1943 S company assigned to A their office as managing agents and all its rights and benefits under the managing agency agreement and the consideration received by it was transferred to the capital reserve account. The accounts of the managing agency commission payable to the managing agents for the calendar year 1943 were made up in 1944 and paid to A in 1944. The question was whether in the assessment year 1944-45, A was liable to pay tax on accrual basis on the whole of the commission or whether the tax was payable by A and company on proper apportionment being made between them of the amount received by A. The Supreme Court held that in the circumstances of the case, the managing agency commission was not liable to apportionment between S company and A in the proportion of the services rendered as managing agent by each one of them, but A was liable to pay tax on the whole commission. That decision has no relevance to the issue before us in the present case, because, the Supreme Court's decision in that case was based on the view that managing ag....
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....ome stronger while that of the assessee became weaker and, therefore, the relinquishment was not for the benefit of the assessee. On a reference the High Court agreed with the view taken by the Tribunal. On appeal to the Supreme Court, it was held confirming the decision of the High Court, (i) that the commission had accrued to the assessee on 31st Dec, 1954, and 31st Dec, 1955, and the fact that payment was deferred till after the accounts had been passed in the meetings of the managed company did not affect the accrual of the income, and since the amounts of income for the two years were given up unilaterally by the assessee after they had accrued to it, could not escape liability to tax on those amounts, and (ii)that since there was nothing to show that the amounts were relinquished for the purpose of the assessee's business, the assessee was not entitled to claim deduction of the amounts as business expenditure under s.10(2)(xv) of the Indian Income-tax Act, 1922. The Supreme Court made the following observation on which strong reliance has been placed by Shri Rangayya : " The income can thus be said to accrue when it becomes due. The postponement of the date of payment has ....