2019 (9) TMI 551 - AT - Income Tax

TP Adjustment - AMP expenditure - whether amount received by the assessee towards the contribution for advertisement marketing and promotion expenditure is not tainted with mutuality but, thus, income of the assessee chargeable to income tax under the income tax act? - claim of diversion by overriding title - HELD THAT - According to clause 4 of the above operating agreement the holding company may at the request of the assessee but subject to holding companies sole and absolute discretion paid to assessee any such amount as it may deem appropriate to support the AMP activities during any accounting period. Further it was clarified in the same clause that the holding company shall have no occasion to pay any such amount if it chooses not to do so. However the contribution of the franchisee is covered in clause 3 of the agreement wherein there is a mandatory requirement of contribution by this franchisee to the assessee. Even there is a condition which gives the right to the assessee to terminate this agreement in the even any amount is not paid by franchisee to the assessee. Even the payment of the contribution was also required to be supported with statement of sale is directed by the assessee from time to time. According to clause number 4.2 of the agreement the holding company shall pass on to assessee any rebates received by the holding company from advertisement and marketing companies and attributable to the AMP activities during the terms of this agreement further the board of director of the assessee company shall also be nominated by the holding company and the holding company has reserved its rights to nominate one representative of 2 franchisees on a rational basis further in clause number 7.5 of the agreement there is a binding requirement of increase in the contribution by the franchisee According to clause 10 of the agreement this of operating agreement with the franchisee shall be coterminous with the franchisee agreement and shall terminate automatically with immediate effect on the determination of the franchisee agreement. However on determination there is no provision of paying the balance outstanding amount of the franchisee from the assessee, which remains unspent. However as per clause number 10.3 in the event of termination or expiry of the agreement without determination of the franchisee agreements, the advertising contribution payable by franchisee will be paid by the franchisee to the holding company as per the provisions of the franchisee agreement from the effective date of termination of operating agreement. In view of above facts, the claim of the assessee is that the income of the assessee is diverted by overriding title and hence cannot be taxed in the hands of the company. The judicial propriety also demands that when a particular issue has been decided by the higher forum then, the lower forum should always refrain from deciding any aspect of that matter which can disturb the finding of the higher judicial forum. Therefore it will create a situation of confusion and as we understand, it is improper for us to consider any aspects of taxability of the sum, which was already decided by the Honourable High court. Such overriding power is absent in the hands of the tribunal whose authority is to amend and rectify its order. However when such an order has been challenged before the higher forum and higher forum adjudicate it on the issue, our understanding is that, the tribunal is precluded from dealing with any of the matter relating to the aspect of that particular ground. It cannot be said that if one alternative has failed, the assessee can agitate the alternative contention about the taxability of the same income, which has been considered by the higher forum. Thus, according to us the above issue raised before us in ground number 1 (b) of the grounds of appeal has already reached finality and we are barred by the principle of finality and to an extent the doctrine of merger. We dismiss ground number 1 (b) of the appeal of the assessee only on the issue of principles of finality and doctrine of merger. Application for admission of the additional evidences - Tribunal is empowered to admit the additional evidences if other substantial cause justifies the admission of those evidences. In the present case, we find that to determine the correct facts of the whole case if the assessee, could not produce the fact that its holding company and the Pepsi foods Ltd are also the contributors as well as beneficiaries of the activities of the assessee, we do not find any reason to not to admit those additional evidences. Therefore in the interest of the justice, we admit those additional evidences. Income of contribution from franchisee - For the similar reasons as given by us with respect to the holding company of the assessee, the contribution of the Pepsi foods Ltd is also tinged with commercial considerations. The honourable High Court has held that that principle of mutuality is applicable to those entities whose activities are not tinged with commercial purposes. Therefore according to us, the additional evidences submitted by the assessee do not make any impact on the income of the assessee. Further as per the operational agreement as discussed by us there is no obligation on the holding company to contribute for the advertisement expenditure. Even otherwise it is at the sole discretion of the holding company. Therefore, we do not find any reason to disturb the finding of the coordinate bench, which has been approved by the honourable High Court in assessee s own case for assessment year 2001 02 2009 (4) TMI 1 - DELHI HIGH COURT . Accordingly ground number 2 of the appeal for assessment year 2002 03 is dismissed. Receipts which represent advertising contribution received from the franchisees and the holding company are in fact diverted at source by overriding title and therefore the surplus over the expenditure is not liable to tax - The True nature of transaction in the present case is of a marketing arrangement by the holding company by forming Assessee Company where the licensees of the holding company shall contribute to the assessee company for a certain business activity. More so the Holding company is not a contributor but gives a direction for spending the fund. Fund is received from the franchisee owners but it is used as per directions of holding company Further treatment of income merely in a particular manner may not be determinative , however the business functions, various agreements, approvals, conditions attached in the agreements clearly show that it is a business arrangement. The issue whether an income is diverted by overriding title or applied cannot be answered with a straitjacket formula and each case has to be decided based on its own merits looking at the specific arrangements made by the assessee. Each and every fact needs to be carefully examined before giving it colour of diversion of income by overriding title at source. The utmost significant factor in deciding a case on such an issue is to see, as formulated in Sitaldas Tirathdas 1960 (11) TMI 17 - SUPREME COURT whether the income had at all reached the assessee or whether the same was diverted at the source itself. Assessee was legally or statutorily obliged to part with such an income by itself cannot be a criterion to decide this question. The nature of obligation is also significant factor to conclude. In the present case, to reach at the conclusion that income of the assessee is not diverted by overriding title, we have relied on the operating agreement, the franchisee agreement, the memorandum of Association, the annual accounts of the assessee as well as approval granted by the SIA. Accordingly we dismiss ground number 3 and 4 of the appeal of the assessee. Addition on account of unverified S. Creditors - HELD THAT - Before the learned CIT A the assessee explained the differences which is mainly due to the different accounting principles covering income and expenses by the appellant and the creditors and further the learned CIT A has admitted the additional evidences and also obtained the remand report. In fact 10/19 creditors confirmed balance though there were some differences in the closing balances in view of cases due to different method of revenue recognition. Further the assessee also explained the differences in closing balance and also submitted the certificate of the creditors with respect to payment made to them in subsequent years along with the details of the banks how the payments have been discharged. The learned departmental representative also could not show any infirmity in the order of the learned CIT A. In view of this we do not find any infirmity in the order of the learned CIT A in deleting the above addition. Accordingly appeal of the learned assessing officer is dismissed.

Summary

Issues Involved:
1. Principle of Mutuality
2. Diversion of Income by Overriding Title
3. Taxability of Surplus Income
4. Admissibility of Additional Evidence
5. Principles of Natural Justice
6. Levy of Interest under Section 234B and 234D
7. Initiation of Penalty Proceedings under Section 271B

Detailed Analysis:

1. Principle of Mutuality:
The core issue was whether the assessee's income was exempt under the principle of mutuality. The Tribunal and the High Court found that the principle of mutuality did not apply because the assessee received contributions from entities like Pepsi Foods Ltd. and YRIPL, which were neither franchisees nor beneficiaries of the AMP activities. The High Court emphasized that mutuality applies only to entities whose activities are not tinged with commercial purposes. The Tribunal upheld this view, noting that the contributions from Pepsi Foods Ltd. and YRIPL were tinged with commercial considerations, thus disqualifying the income from being exempt under mutuality.

2. Diversion of Income by Overriding Title:
The Tribunal examined whether the contributions received by the assessee were diverted at source by overriding title, making them non-taxable. The assessee argued that the contributions were meant for specific AMP activities and thus were not income. However, the Tribunal found that the contributions were credited to the profit and loss account and used for various expenditures, indicating that the income was not diverted at source but was applied after reaching the assessee. The Tribunal relied on the Supreme Court's decision in CIT vs. Sitaldas Tirathdas, which distinguishes between income diverted at source and income applied after receipt.

3. Taxability of Surplus Income:
The Tribunal consistently held that the surplus income over expenditure was taxable. This was based on the finding that the assessee's activities were commercial in nature and not covered by the principle of mutuality. The High Court's decision in the assessee's case for AY 2001-02, which was upheld by the Supreme Court, affirmed this position. The Tribunal noted that the contributions were treated as trading receipts and were not diverted by overriding title, making the surplus taxable.

4. Admissibility of Additional Evidence:
For AY 2002-03 and 2003-04, the assessee submitted additional evidence to show that Pepsi Foods Ltd. benefited from the AMP activities. The Tribunal admitted the additional evidence but found that it did not change the fundamental nature of the contributions, which were still tinged with commercial considerations. Thus, the additional evidence did not impact the taxability of the income.

5. Principles of Natural Justice:
The assessee argued that the assessment orders violated the principles of natural justice. However, the Tribunal found no specific instances or arguments to support this claim. Therefore, this ground was dismissed.

6. Levy of Interest under Section 234B and 234D:
The Tribunal held that the levy of interest under Section 234B and 234D was consequential and mandatory. No specific arguments were advanced against this levy, and thus, it was upheld.

7. Initiation of Penalty Proceedings under Section 271B:
The assessee contested the initiation of penalty proceedings under Section 271B. The Tribunal noted that mere initiation of penalty proceedings does not aggrieve the assessee, as they will have an opportunity to respond to the show cause notice. Therefore, this ground was dismissed.

Conclusion:
The Tribunal dismissed the appeals for all the assessment years, holding that the income was not exempt under the principle of mutuality, was not diverted by overriding title, and was taxable. The additional evidence did not alter the taxability, and the levy of interest and initiation of penalty proceedings were upheld. The principles of natural justice were found to be adhered to, and the appeals were disposed of accordingly.