2018 (9) TMI 1469 - HC - Income Tax

Amounts received by the assessee-agent on behalf of the Principal - nature of income - amount waived by the Principals taxable as revenue receipt in the hands of assessee - Held that - he 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. TDS liability expenditure claimed in the previous year was disallowed for reason of no deduction of TDS having been made - Held that - AO 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 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.

Issues Involved:
1. Taxability of the amount waived by the Principals as revenue receipt.
2. Classification of the waived amount as trading receipts in the nature of commission income.
3. Accrual of the waived amount during the current assessment year amidst pending litigation.
4. Allowability of balance expenditure disallowed in the prior assessment year under Section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Taxability of the Amount Waived by the Principals as Revenue Receipt:
The Tribunal held that the amount waived by the Principals is taxable as revenue receipt in the hands of the assessee. The assessee argued that the waiver did not result in actual income received and cited decisions from the High Court of Calcutta and Andhra Pradesh to support their claim. However, the court distinguished these cases, noting that the amounts in question were not held in a fiduciary capacity by the assessee. The court concluded that the balance remaining after settlement of the Principals' dues and expenses is income at the hands of the assessee, as it is not retained in a fiduciary capacity and represents profits and gains from business.

2. Classification of the Waived Amount as Trading Receipts in the Nature of Commission Income:
The court found that the amounts left with the assessee after settling the Principals' dues and deducting expenses are trading receipts in the nature of commission income. The court referred to Section 2(24)(v) and 28(ii)(c) of the Income Tax Act, which include compensation or payments received by an agent at the termination of an agency as taxable income. The court held that the amounts received by the assessee-agent, after settling the expenses and dues, constitute commission and are trading receipts.

3. Accrual of the Waived Amount During the Current Assessment Year Amidst Pending Litigation:
The court addressed the issue of whether the entire waived amount should accrue during the current assessment year, despite potential liabilities from pending litigation. The court noted that the terms of settlement between the Principals and the assessee were not placed on record, and there was no substantiation for the contention that part of the waiver was for legal expenses and future claims. The court agreed with the Tribunal's hypothetical situation and found no reason to hold the amounts in a fiduciary capacity. Therefore, the court held that the amounts remaining after settlement are taxable in the current assessment year.

4. Allowability of Balance Expenditure Disallowed in the Prior Assessment Year Under Section 40(a)(ia):
The court addressed the disallowance of expenditure in the previous year due to non-deduction of TDS. The court noted that the Assessing Officer must verify whether the assessee is entitled to the benefit under the first proviso to Section 40(a)(ia), which allows for the deduction in a subsequent year if the payment is made in that year. The Tribunal's dismissal of the plea was found to be laconic, and the court directed the Assessing Officer to verify the claim and decide accordingly. The question was answered in favor of the assessee, but the actual allowance was left to be determined by the Assessing Officer.

Conclusion:
The court upheld the Tribunal's decision on the first three issues, finding that the waived amounts are taxable as income and constitute trading receipts in the nature of commission income. The court rejected the assessee's claim of holding the amounts in a fiduciary capacity and found no basis for deferring the taxability to a subsequent year. On the fourth issue, the court directed the Assessing Officer to verify the claim for deduction under Section 40(a)(ia) and decide accordingly. The appeal was allowed in part, with each party bearing their own costs.

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