TaxTMI 
TaxTMI 
2024 (10) TMI 860
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....n the business of slimming and beauty services. The assessee has not disclosed any other source of income during the year. During assessment proceedings, AO observed that the assessee is carrying substantial credit balances as current liabilities under the head 'Advance from customers'. The assessee was asked to explain along with supporting documents. Assessee vide its letter dated 22.11.2011 submitted as under :- "With respect to the above-said proceedings we have submitted all the information required by you from time to time during the course of assessment proceedings. Further we furnish the information relating to Unexecuted Packages (UEP) as follows: 1.1 It must be appreciated that the receipts from the clients for various services are assessable as a part of profit and gains from business and profession and not directly as income. Profits and gains from business and profession are computed as provided in section 29 of the Act. Mere receipts are not taxable as profits. A Note on UEP (Unexecuted Packages) is enclosed. 1.2 Receipt is different than income and the income is different than profits. In mercantile method of accounting, money receipt by it....
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....uch services expires. 1.5 In mercantile method of accounting while computing the business income all inbuilt liabilities against the receipts have to be deducted because incurrence of the said liability is an inevitable precondition to earn the profits. Such a liability of not precisely quantifiable at the particular time then a fair estimate of the same has to be made deducted while computing the said income. Presuming but not admitting, that the amount received in advance is income of the year of receipt then admittedly the assessee has to provide services against the same in the subsequent year and the cost for such series on the particular date has to be estimated and deducted who considering the receipt as taxable income and in absence of the same no correct profits can be determined as per accepted accounting principles. Thus the method of accounting has been accepted by the department and therefore the same should not be disturbed following the principle of Judicial discipline." 4. After considering the submissions of the assessee, AO rejected the submissions made by the assessee that method of accounting adopted by the assessee is accepted by the Revenu....
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....umber of sessions are to be. At the end of the year, the progress of each client for the various packages given to him is evaluated vis-a-vis the amount received from him and the sales corresponding to the services which remains to be rendered are claimed as unexecuted packages i.e. in the nature of liability in the B/S. it has been claimed by the assessee that no package is of a duration of more than one year meaning thereby that the unexecuted package claimed as a liability in one loss account in any particular year is calculated as under : Net sales reflected in P&L A/c= Opening Unexecuted package lie closing unexecuted package of the last year) + Total sales of the year closing UEP of the current year which is shown as liability in the B/S)." 5. Based on the facts and modus operandi, relevant UEP followed by the assessee are as under :- F.Yr. Opening UEP as at start of F.Yr. (A) (in lacs) Total Sales (B) (in lacs) Closing UEP as at end of F.Yr. (C) (in lacs) Closing UEP as a% of total sales Net sales shown in P&L=A+B+C Total income Shown by assessee 1997-98 Nil 519.74 141.52 27 378.22 4,80,440 1998-99 141.52 ....
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....osing Balance of UEP as on 31.03.2009 Rs. 16,27,66,801/- Opening Balance of UEP as on 31.03.2009 Rs. 15,91,64,697/- Difference added to total income Rs. 36,02,104/- Accordingly, he made the addition. 8. During assessment proceedings, the AO observed that assessee has claimed huge expenses of Rs. 2,39,80,342/- under the head 'Share of profit of collaborators'. AO observed that the nature and details of such expenses were not furnished by the assessee and it furnished vide letter dated 12.12.2011 a copy of one agreement and calculation of such share of profit amounting to Rs. 12,14,541/- against the sum of Rs. 2,39,80,342. He further observed that the assessee had not deducted any TDS from the abovesaid sum. On an enquiry of such claim to the assessee, assessee filed its response vide letter dated 22.12.2011. The same is reproduced below :- "The share of profits of Collaborators; please not that under the collaboration agreement, the collaborator carries out the interior work under the guidance, und supervision of the assessee. The collaborator also procures the necessary equipment and hardware under the advice of the assessee from its approved sources/s....
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....hile interpreting the law as has been held in the under noted judicial pronouncements: CGT VS N.S.Getti Chettiar (1971) 82ITR 599 (SC) In interpreting tax laws, the Courts merely look at the words of the Section. If a case clearly comes within the section, the subject is taxed and not otherwise. M.P.Poddar (HUF) Vs Appropriate Authority (1999) 107 Taxman 251 / 240 ITR 372 (Delhi) Meaning and intention of a statute must be gathered from the plain and unambiguous expression used therein rather than to find out what is just or expedient. CIT Vs National Agriculture Co-operative Marketing Federation of India Ltd. (1999) 105 Taxman 586/236 ITR 766 (Delhi) The law is well settled that where the language is plain, it can neither be stretched wider nor squeezed narrowly with an eye of assumed or implied intention of the Legislature. In a fiscal law much scope for interpretative process is not available if the language of an enactment permits of no ambiguity. CIT Vs IIT Limited HC Delhi The Delhi High Court in case of N Limited has clearly held that sharing of the profits is not liable to TDS A copy of the judgment is also attac....
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....ed the expenses as share of profit. The assessee admittedly not deducted any TDS on such payments. The assessee claimed such expenses as share of profits of collaborators. He further observed that the assessee did not form any partnership firm with such entities and, therefore, sharing of profit is out of question because sharing of profits can only be between the partners or shareholders and the said issue was clearly confronted to the assessee and assessee did not furnish any explanation on the same. Based on the above discussion, he rejected the submissions wherein assessee merely submitted calculation of Rs. 12,14,541/- against the claim of Rs. 2,39,80,342/-. Accordingly, he disallowed the claim of abovesaid expenditure. 10. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A). During appellate proceedings, assessee furnished detailed submissions. For the sake of clarity, the same is reproduced below :- "In this regard, it is submitted that the assessee is engaged in the business of running beauty and slimming centres through out the country. The assessee carried out its business under the following two business models during the year ....
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.... head Royalty from this model of business as can be seen from the enclosed photocopy of the financial statements of the assessee. Thus in the JVP models, the sales are recorded in the books of the assessee and then share of profit is paid to collaborators as per agreement but in case of the franchisee, the sales are recorded in the books of account of the franchisee and not of the assessee and franchisee fees and royalty are received from them by the assessee. In the JVP model, the management lies with the assessee but in case of franchisee, the management lies with the franchisee and not with the assessee. Such centres have their independent status. In JVP model, the fees generated from operating the healthcare center is collected by the assessee and is recorded in its books of account. The share of the collaborator is disbursed thereafter. The profits I loss arising from operating the centre under JVP model are to be shared between the assessee and the collaborator in an agreed ratio. In the case of loss arising from operation of healthcare centre, the collaborator has to bear the loss in the same agreed ratio. It is not a case, where the collaborator is renderi....
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....re of the JVP is computed on the basis of terms and conditions of the JVP agreement which is then paid to the collaborators and claimed as expense in the books of the assessee. The computation of share of profit of Collaborator for Bhopal centre was submitted before the assessing officer as a sample basis. The assessing officer while making addition alleged that the assessee submitted details of only one centre for Rs. 12,14,541/- out of Rs. 2,39,80,342/-. In this regard it is submitted that the share of profit of the collaborator is computed for each centre in the similar manner on the basis of terms and conditions of the agreement. If the assessing officer wished to verify the computation of share of profit for all JVPs, then he could have asked for the same to the assessee during the course of assessment proceedings. However, the assessing officer did not raise any further query in this regard and therefore no further documents were submitted on this issue. Photocopies of the computation of the share of profit of Collaborator of the centres along with copies of agreement with them for the five centres are produced for your verification on sample basis and copies of the ....
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....y disallowance, it has to clarify as to under which section or due to default in following which section, the disallowance is being made. Merely mentioning that the TDS is not deducted on such payment is not sufficient to make an addition. This approach shows that the assessing officer himself could not understand as to under which provisions tax was to be deducted on these payments. It is further submitted that the assessee took an opinion from M/s Vaish Associates regarding the deduction of tax at source on the payments made to Collaborators I Joint Venture Partners under the Infrastructure Facility Management Agreement wherein the Professionals opined on the facts of the case that no tax is to be deducted at source on such payments. While framing such opinion, the professionals relied upon the decision of ACIT Vs NIIT Ltd. 112 TTJ 800 which has been approved by the jurisdictional High Court as explained above. A copy of the said opinion is enclosed. The assessee has been making such payments since its inception and the said payments have been scrutinized by the department in a number of years whenever the assessee was assessed u/s 143(3). However the assessing ....
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....tted that rents amounting to Rs. 88,45,308/- were paid as Interior Uses Charges' to such Joint Venture Partners on which TDS amounting to Rs. 15,79,703/- was deducted and deposited with the Government. In effect, the rent was paid to collaborators & TDS was deducted thereon. 6.6 After considering the facts and circumstances in totality, I find that the amount of Rs. 2,39,80,342/- represents share of profit of Joint Venture Partners. I hold that these payments were in the nature of share of profit of the collaborators and therefore, Section 40(a)(ia) is not attracted. As regards A.O.s view that profits cannot be distributed without a partnership firm etc., the existence of Joint Venture Agreement is sufficient for distribution of profits as per mutual agreements." 12. Aggrieved with the above order, Revenue is in appeal before us by taking the following grounds of appeal:- "1. That the Ld.CIT(A) has erred on facts and circumstances of the case and in law in ignoring the fact that the assessee has paid to the collaborators for expenses on services/ premises which are clearly covered under the ambit of TDS provisions. 2. That the Ld. CIT(A) has erred ....
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....rant the franchisee to the partner to engage the business as per the terms of the agreement and as per the fee collection, sharing of payment arrangements given at clause 9 are as under :- (a) Franchisee shall pay a non-refundable franchise fee to the franchiser i.e. assessee; (b) The franchisee and franchiser shall also issue the sales collection from the franchised business. As per Schedule - A, the monthly collections are given below :- "Monthly Collection Sharing (based on sales) It is agreed by the parties that the monthly Sales Collections shall be shared between the Parties in the following ratio: Year 1: 10% to Franchisor and 90% to Franchisee Year 2: 12% to Franchisor and 88% to Franchisee Year 3: J 5% to Franchisor and 85% to Franchisee Year 4: 15% to Franchisor and 85% to Franchisee Year 5: 15% to Franchisor and 85% (0 Franchisee The Sales Collections means amount collected by the Franchisee from the clients either by way of cash, cheque, credit card or such other mode convertible in cash. The Sales Collections for this Agreement shall be inclusive of Service tax collected from the ....
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....s not fixed. There was no minimum 2009:DHC:4004-DB ITA Nos. 1107,1167, 1176, 1200 of 2008 Page 9 guarantee amount which the assessee was to make. The composite arrangement in the essence of the agreement for conducting the business. The essence of agreement is to conduct the business of running education centre jointly. Mere certain rights of the assessee to protect the business interest stipulated in the agreement would not change the essence of the agreement. The share of the Revenue with the Franchisee is on account of composite services provided by the Franchisee. In view of these facts, we hold that the broad objective of the agreement between the assessee and the Franchisee was to share the revenue and certainly it was not hire the premises provided by the assessee. Therefore, the assessee is not liable to deduct the taxes under section 194-I of the act in respect of the amount shared by the assessee and remitted to the Franchisee for infrastructure claims." 19. From the above decision, we observed that the Hon'ble High Court allowed the claim of the assessee where the assessee shared the revenue with the franchise partner on account of composite services provided by the f....