2018 (3) TMI 42 - AT - Income Tax

Allowable busniss expenses - Diversion of income - payment for services rendered by M/s Vanguard Jewels Ltd - proof of commercial expediency - Held that - In the present case, the assessee was a lady business person. She has received a huge export order. She sought help and assistance from M/s. Vanguard Jewels Ltd. who had earlier sufficient experience in dealing the export business. The facts of the case clearly indicate that the considerable service was provided by M/s. Vanguard Jewels Ltd. Under these circumstances, the order of the Assessing Officer that no amount was payable is not at all sustainable. Though the amount has been received by the assessee, the same is collected on behalf of the joint venture. There was a subsisting agreement with M/s. Vanguard Jewels Ltd. CIT (Appeals) has found that all the expenditure has been incurred out of the sums received from the consignee and no expenses have incurred by the assessee from her own funds. The mere accounting entry by which the entire receipt has been shown in the credit side and the payment to M/s. Vanguard Jewels Ltd. shown in the debit side cannot alter the substance of the transaction that it is a payment of the joint venture and there is an overriding title of M/s. Vanguard Jewels Ltd. in the said sum. It is the settled law that the accounting entries are not determinative of the actual nature of the transaction; it is the substance that prevails. - Decided in favour of assessee

Issues Involved:
1. Whether the amount of ? 1,00,62,430/- should be considered as diversion of income.
2. The legitimacy of the services rendered by M/s Vanguard Jewels Ltd. and the commercial expediency of the joint venture agreement.
3. Applicability of Section 194C regarding tax deduction at source (TDS) on the payment made to M/s Vanguard Jewels Ltd.
4. Allowability of the expenditure under Section 40(a)(ia) for non-deduction of TDS.
5. Allowability of the expenditure under Section 37(1) of the Income-tax Act, 1961.
6. Whether the payment constitutes a division of profits or an allowable expenditure.

Detailed Analysis:

1. Diversion of Income:
The Commissioner of Income Tax (Appeals) [CIT(A)] held that the payment to M/s Vanguard Jewels Ltd. was not a colorable device to avoid tax. The agreement between the assessee and M/s Vanguard Jewels Ltd. was found to be genuine and necessary for the assessee’s business due to her inexperience in handling large export orders. The CIT(A) observed that the major activities related to the export were handled by M/s Vanguard Jewels Ltd., and the assessee played a minimal role. The CIT(A) concluded that the profits were diverted by an overriding title to M/s Vanguard Jewels Ltd. and thus, 85% of the profit was not part of the assessee's income.

2. Services Rendered and Commercial Expediency:
The CIT(A) found that M/s Vanguard Jewels Ltd. had indeed provided substantial services, including negotiating purchase rates, quality control, and handling logistics. Correspondence with the overseas consignee confirmed the active involvement of M/s Vanguard Jewels Ltd. The CIT(A) rejected the Assessing Officer's (AO) claim that the services rendered were nominal and concluded that the joint venture agreement was commercially expedient and bona fide.

3. Applicability of Section 194C (TDS):
The CIT(A) held that the payment to M/s Vanguard Jewels Ltd. was not subject to TDS under Section 194C as it was made due to a contractual obligation. The CIT(A) noted that the amount was paid out of the funds received from the overseas consignee and not from the assessee’s own funds.

4. Allowability under Section 40(a)(ia):
The CIT(A) found that the provisions of Section 40(a)(ia) were not applicable as the payment was not liable for TDS. The CIT(A) also noted that M/s Vanguard Jewels Ltd. had included the amount in its income, thus fulfilling the conditions of the second proviso to Section 40(a)(ia), which has retrospective application.

5. Allowability under Section 37(1):
The CIT(A) concluded that the expenditure was allowable under Section 37(1) as it was incurred wholly and exclusively for the purposes of the business. The CIT(A) rejected the AO's view that the payment was a division of profits and not an allowable expenditure.

6. Division of Profits vs. Allowable Expenditure:
The CIT(A) held that the payment to M/s Vanguard Jewels Ltd. was not a division of profits but an allowable expenditure under the joint venture agreement. The CIT(A) emphasized that the agreement was binding and the profits were diverted by an overriding title, thus not forming part of the assessee’s income.

Conclusion:
The CIT(A) deleted the addition of ? 1,00,62,430/- and upheld the genuineness and commercial expediency of the joint venture agreement. The CIT(A) also ruled out the applicability of TDS under Section 194C and the disallowance under Section 40(a)(ia). The decision was based on the substantial services provided by M/s Vanguard Jewels Ltd. and the binding nature of the joint venture agreement. The appeal by the Revenue was dismissed, and the CIT(A)'s order was upheld.

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