Nortrans Marine Services Pvt. Ltd. v. Assistant Commissioner of Income Tax

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT:-** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR. JUSTICE ASHOK MENON** **MONDAY, THE 6TH DAY OF AUGUST 2018 / 15TH SRAVANA, 1940** ## **I.T.A.No.145 of 2012** **-----------------------------** **AGAINST THE ORDER IN I.T.A.NO.60/COCH/2010 DATED 17.02.2012 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN. [ASSESSMENT YEAR 2006-07]** **-------------------** ## **APPELLANT(S)/ APPELLANT:--------------------------------------------** **NORTRANS MARINE SERVICES PVT. LTD., (MERGED WITH TRANS ASIAN SHIPPING SERVICES PVT.LTD.), TRANS ASIA CORPORATE PARK, XIV/396-C, SEAPORT AIRPORT ROAD, CHITTETHUKARA, KAKKANAD.** **BY ADVS.SRI.SAJI VARGHESE SRI.R.VIHAYARAGHAVAN SMT.MARIAM MATHAI** ## **RESPONDENT(S)/ RESPONDENT:-** **--------------------------------------------------** **THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -I(3), ERNAKULAM.** **BY SENIOR COUNSEL FOR GOVERNMENT OF INDIA (TAXES) SRI.P.K.R.MENON. BY STANDING COUNSEL FOR GOI (TAXES) SRI.JOSE JOSEPH.** **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06-08-2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:-** ## **I.T.A.No.145 of 2012** ## **APPENDIX** ## **APPELLANT'S ANNEXURES:-** **-------------------------------------------** **ANNEXURE A TRUE COPY OF THE ASSESSMENT ORDER DATED 15.12.2008 FOR THE YEAR 2006-2007.** **ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER (APPEALS), DATED 30.11.2009.** **ANNEXURE C CERTIFIED COPY OF INCOME TAX APPELLATE TRIBUNAL ORDER DATED 17.2.2012 FOR THE YEAR 2006-2007 (WITH TYPED COPY OF ORDER)** **RESPONDENT'S ANNEXURES:-** **--------------------------------------------NIL.** **vku/-** **[ true copy ]** ## K. Vinod Chandran & Ashok Menon, JJ. ------------------------------------------------------I.T.A.No.145 of 2012 ------------------------------------------------------- Dated, this the 06[th] day of August, 2018 ## **JUDGMENT** ## Vinod Chandran, J: The substantial questions of law arising from the order of the Tribunal, as per the memorandum of appeal, are as herein below: - (i) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the amount waived by the Principals would be taxable as revenue receipt in the hands of assessee? - (ii) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the amount waived by the Principals representing the amount collected from the customers on behalf of the principals in the capacity as agent would constitute trading receipts in the nature of commission income in the hands of assessee? - (iii) Without prejudice to the claim of the Appellant as above, whether on the facts and circumstances of the case the Tribunal was right in holding that the entire amount waived would accrue during the current Assessment year ignoring the possible liability that will arise from the pending litigation arising from the agency business? - (iv) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the balance - 2 - ITA.145/2012 expenditure disallowed in the assessment year 2005-06 u/s.40(a)(ia) is not an allowable deduction in the current assessment year even though tax was deducted and remitted to the Government? 2. The appellant-assessee was the agent of two foreign shipping lines. The appellant was providing agency services to both the Companies in accordance with the agreements executed by the Principal and Agent. The shipping lines intended to terminate the agency and a Memorandum of Understanding [MoU] was arrived at for effecting termination. On such termination being effected, the relationship hit rough weather and the Shipping Companies together raised a claim of Rs.45,00,00,000/- against the appellant. The outstanding balance in the account of the Principals as on 31.03.2005, revealed from the appellant's own books of accounts was Rs.31,07,28,673/-. The Principals filed suit before the Courts in London; but, however, subsequently settled the issue for Rs.25,99,75,647/-. The Assessing Officer [AO] found the balance outstanding credit for the financial year 2006-07 to be Rs.4,91,86,945/-, taxable as income. The assessee offered Rs.1,90,12,018/- for taxation after deduction of legal cost of Principals paid on the basis of the Court order and expenses/professional fees paid by the assessee as also the local - 3 - ITA.145/2012 expenses on behalf of the Principals from 16.04.2005 to 31.03.2007. The assessee offered the said amounts for taxation in the assessment year 2007-08. The AO, however, found the balance of the amounts remaining with the assessee after settlement of the liabilities to be the income of the assessee for the year 2006-07. 3. The settlement was entered into in February, 2006 and balance payments as per the settlement was made on 31.03.2006, reckoning the payment made by the agent in August 2005 also. The AO, added on the legal cost and local expenses of Principals as also the legal expenses incurred by the assessee in computing the taxable income. Thus, a total amount of Rs.4,91,86,945/- was brought to tax. On first appeal, by Annexure-B the Commissioner of Income Tax found that the entire amount received on cessation of liability is taxable for the assessment year 2006-07. However, the AO was directed to allow the legitimate expenses incurred. But for the amount of Rs.7,05,226/- for which there is no substantiating evidence produced of an allowable expense; which claim was also withdrawn by the appellant before the first appellate authority, the other legitimate expenses were directed to be verified and allowed. The Tribunal concurred with the order of the first appellate authority. The Revenue does not challenge the allowances granted by the first appellate authority as affirmed by the - 4 - ITA.145/2012 Tribunal. The assessee, however, claims that the balance amounts after waiver are not liable to tax as income for the subject assessment year. 4. The learned Counsel for the appellant-assessee relies on the decision of the High Court of Calcutta _**in Bengal & Assam Investors Ltd. v. Commissioner of Income Tax**_ **[(1983) 142 ITR 156]** and that of the High Court of Andhra Pradesh in _**Commissioner of Income Tax v. Andhra General Finance Corporation**_ **[(1985) 156 ITR** **386].** It is argued that when there was a mere waiver of the liability, there is actually no income received by the assessee and in such circumstances, there could be no taxation of the amounts waived on account of the compromise agreement. The learned Counsel would also rely on the decision of the Hon'ble Supreme Court in _**Commissioner v. Mahindra & Mahindra Ltd.**_ **[2018-TIOL-173-SC-IT].** 5. The learned Senior Counsel for Government of India (Taxes) would place reliance on _**Raghuvanshi Mills Ltd. v. Commissioner of Income Tax**_ **[(1952) XXII ITR 482],** _**Commissioner of Income Tax v. Dharamdas Hargovandas**_ **[(1961) XLII ITR 427]** and _**C.I.T. v. G.R.Karthikeyan**_ **[(1993) 201 ITR 866]** . 6. _**Bengal & Assam Investors Ltd.;**_ an insurance agent had excess amounts with them which was not commission and hence not trading receipts. The High Court found that these moneys were received - 5 - ITA.145/2012 by the assessee not as remuneration but rebates for timely payment of the premium, which were in fact amounts entitled to the insured on whose behalf the premium was paid. Though it was the assessee who paid the premium in time, the assessee had the liability to pass on the rebates or excess amounts over and above the premium to the policy holder. The mere fact that the assessee did not do so or that the insurance company or the policy holder did not do anything to get back the moneys would not for reason alone of such inaction be converted to remuneration. The taxability according to the Court had to be determined on the basis of the nature of the receipt; in what capacity it was received and not on the subsequent conduct or the entries made by the assessee. The assessee had received the amounts as an agent, but then not as a commission or remuneration, and hence not a trading receipt or income at his hands was the finding. The assessee was found to hold the said amounts in a fiduciary capacity. 7. _**Andhra General Finance Corporation**_ carried on the business of finance under hire-purchase agreements. When financing vehicles, it also insisted for the insurance to be paid through them, which amounts were transferred to the insurance company. There were some amounts remaining in excess with the insurance company which in the relevant assessment year, was debited to the running account it - 6 - ITA.145/2012 maintained with the insurance company and credited to its profit and loss account. However the assessee claimed it was not income, since they were obliged to refund it to their customers, if ever they claimed it. The AO found that the hire-purchase agreements against which the payments were received had long expired and the amounts were trading receipts especially since it was transferred to the P & L account. The Tribunal held that the transfer to the P & L account was irrelevant and the crucial test is the year in which the assessee became entitled to the amounts; which has to be determined with respect to the expiry of those individual hire-purchase agreements, on which there was an excess payment, the sum total of which was the amount credited to the P & L Account in that year. The Tribunal held that the amount cannot be taxed in that subject year. The High Court referred to a number of judgments in which amounts were received by the assessees in a fiduciary capacity and ruled the subject amount also to be not liable to be treated as trading receipts. 8. What distinguishes the present case from the facts available in the High Court decisions, is that the amount remaining in the account, after settlement of the dues to the Principals is not held by the assessee in a fiduciary capacity. The transactions entered into by the assessee on behalf of the Principals, saw amounts coming in to the - 7 - ITA.145/2012 running account of the Principal and the agent. The amounts expended on behalf of the Principal and the commission of the agent had to be deducted and the balance is the amount due to the Principal. When the Principal's dues are settled by Court order or by settlement and the expenses too are deducted, what remains in the account is not something which is retained in a fiduciary capacity and is income at the hands of the assessee. Only on settlement of accounts it will be disclosed as to what are the amounts available to the assessee. There can hence be no claim raised by the erstwhile Principals or any others to the amounts the agent, the assessee, received on behalf of the Principals. Admittedly the entire amounts from the customers of the principals were credited to the agent-assessee, who maintained a running account for the Principals. There is no determination of the commission and admittedly after the expenses incurred on behalf of the principal is met and the amounts due to the Principal is transferred what the assessee gets to enrich its coffers is the income obtained by the agent-assessee. The assessee has not attempted to apprise the authorities of the commission entitled or any determination of the same. Hence there can be no contention raised on the basis of the decisions of the two High Courts, cited, to contend that what remains in excess with the assessee are amounts received on behalf of the Principals; - 8 - ITA.145/2012 which they hold only in a fiduciary capacity. The amounts left in the account after deduction of expenses would be income taxable; especially since on settlement of the suit claims, the right if at all available to the Principals to such amounts, stands extinguished. 9. In _**The Commissioner versus Mahindra and Mahindra Ltd.**_ **[2018-TIOL-173-SC-IT]** _**,**_ the assessee, a company manufacturing motor vehicles, entered into a contract with a like foreign company, for purchase of die models and equipments and tools. A subsidiary company of the foreign company financed the purchase. The assessee had been regularly paying interest at the rate agreed upon. Later the financier was taken over by another, who waived the entire principal amount of the loan. The Income Tax Officer treated the entire principal amount waived as income of the previous year. Section 28(iv) was found to be not applicable since there was no benefit or perquisite arising from the business or profession. Section 41 was found to be a prohibition of a double benefit being claimed by the assessee; by virtue of an allowance or deduction in any previous year in respect of an expenditure or trading liability which later stood waived off by the creditor. The assessee therein had never claimed the purchase value as an expenditure, nor had claimed the interest paid as as a deduction under Section 36(1)(iii). The amortization benefit claimed in the previous - 9 - ITA.145/2012 years was held to be akin to depreciation on the machinery. In the present case there can be no doubt that on settlement of the accounts between the principal and the agent, after deductions made for expenditure incurred by the agent on behalf of the assessee; whatever amount remains, accrued in the account of the assessee, is the profits and gains arising from the business, and income of the assessee. 10. Testing the grounds raised as against the facts, it has to be noticed that there is nothing to substantiate the contention raised by the assessee that out of the alleged waiver of five crores, three crores were towards legal expenses incurred by the assessee and two crores towards possible future claims. The terms of settlement between the principals and the assessee, as was noticed by the Tribunal, was never placed on record by the assessee. Though we find that the legal expenses could be validly claimed to the extent evidenced, there is no reason to find the assessee holding any amounts in a fiduciary capacity. The contention is also belied by the action of the assessee in having offered the allegedly waived amounts, after making deductions, for assessment in the next year. We agree with the hypothetical situation narrated by the Tribunal as reflected in Paragraph 19 of the order. 11. We garner further support from the decision of the Supreme Court in _**G.R.Karthikeyan**_ ( _supra_ ). The assessee, a renowned - 10 - ITA.145/2012 Motor Rallyst, was allowed exemption from including in the income an amount of Rs.22,000/- having come out first in an All India Highway Motor Rally. The rally was basically one designed for testing the endurance driving, observance of traffic regulations, reliability of the automobiles and so on and so forth, with prizes awarded on the basis of overall classification. The classification itself was a system of penalty points with the competitor finishing with least rally violations coming out first. The Tribunal found that the amount received cannot be treated as income coming within Section 2(24)(ix), since the rally was not a game and tested the skill and endurance of the driver. The High Court too concurred with the view of the Tribunal and found the receipt not to represent winnings. Noticing the definition of 'income' under Section 2(24) as also the exclusion from total income specified under sub-section (3) of Section 10, it was held” “If the monies which are not earned - in the true sense of the word - constitute income why do monies earned by skill and toil not constitute income?” Finding the word “income” to be one not easy to define, it was held so: “Since the definition of “income” in section 2(24) is an inclusive one, its ambit, in our opinion, should be the same as that of the word income occurring in entry 82 of List I of the Seventh Schedule to the Constitution (corresponding to - 11 - ITA.145/2012 entry 54 of List I of the Seventh Schedule to the Government of India Act)”. The word “income”, according to the Supreme Court, had to be given the widest amplitude. It was held again that: “... even if a receipt does not fall within sub-clause (ix), or for that matter, any of the sub-clauses in Section 2(24), it may yet constitute income. To say otherwise, would mean reading the several clauses in Section 2(24) as exhaustive of the meaning of income' when the Statute expressly says that it is inclusive. It would be a wrong approach to try to place a given receipt under one or the other Sub-clauses in Section 2(24) and if it does not fall under any of the Sub-clauses, to say that it does not constitute income. Even if a receipt does not fall within the ambit of any of the Sub-clauses in Section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing an inclusive definition in Section 2(24) is not to limit its meaning but to widen its net. this Court has repeatedly said that the word income' is of widest amplitude, and that it must be given its natural and grammatical meaning. Judging from the above standpoint, the receipt concerned herein is also income. May be it is casual in nature but it is income nevertheless. That even the casual income is income' is evident from Section 10(3). Section 10 seeks to exempt certain "incomes' from being included in the "total income”. A casual receipt - which should mean, in the context, casual income - is liable to be included in the total income, if it is in - 12 - ITA.145/2012 excess of Rs. 1,000/-, by virtue of sub-section (3) of Section 10. Even though it is a clause exempting a particular receipt/income to a limited extent, it is yet relevant on the meaning of the expression “income”. In our respectful opinion, the High Court, having found that the receipt in question does not fall within Sub-clause (ix) of Section 2(24), erred in concluding that it does not constitute income”. 12. We also have to notice, in the context of the specific receipt of amounts by an agent, Section 2(24)(v) and 28(ii)(c): Sec.2(24): “income” includes-- xxx xxx xxx - (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59. ## Sec.28: **Profits and gains of business or profession** The following income shall be chargeable to income tax under the head “Profits and gains of business or profession”,-- xxx xxx xxx (ii) any compensation or other payment due to or received by,-- xxx xxx xxx (c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;” - 13 - ITA.145/2012 13. The amounts received by the assessee-agent, on behalf of the Principal, after setting of the expenditure incurred on behalf of the Principal and satisfying that due to the Principal, is not kept in its hands in a fiduciary capacity and is income in its hands. Tribunal was right in holding the amounts waived by the Principals; in accordance with a settlement arrived at with their agent as income in the hands of the assessee-agent. What is left with the assessee-agent after settlement of accounts with the Principals and after deducting the expenses incurred on behalf of the Principals, constitute the character of commission received and are trading receipts of the assessee. There is no question of any further liability arising from the litigation initiated by the Principals of the assessee, since the same has been settled and amounts due to the Principals satisfied. We hence answer the questions of law framed as 1 to 3 against the assessee and in favour of the revenue. 14. On the fourth question it is to be noticed that the expenditure claimed in the previous year was disallowed for reason of no deduction of TDS having been made. The assessing Officer would have to look at whether the assessee is entitled to the benefit available under the first proviso to Section 40(a)(ia). The Tribunal by a laconic statement dismissed the plea finding the dis-allowance of the earlier ITA.145/2012 - 14 - assessment year not arising in the subsequent one. The proviso speaks of payment in a subsequent year and the allowance being made in that subsequent year. The question hence is answered against the revenue and in favour of the assessee, but the actual allowance being left to be decided by the Assessing Officer who has to verify the claim and decide accordingly. The appeal is allowed in part. Parties are left to suffer their respective costs. Sd/K.Vinod Chandran Judge Sd/Ashok Menon Judge vku/- [ true copy ]