2004 (10) TMI 261 - AT - Income Tax

Computation Of Undisclosed Income - expenditure incurred on payment of 'speed money' to the workers of port trust - search u/s 132(1) - bogus liabilities payable to the principals - detention charges - Levy of surcharge on tax determined u/s 113 of the IT Act - Assessee holding the funds on behalf of the principals in a fiduciary capacity - Whether the relationship between the assessee and the principals is of fiduciary nature or of a debtor and creditor - HELD THAT - Admittedly, all the payments are in cash and acknowledgement from the actual recipients are not available even in a single case. The Andhra Pradesh High Court, in the case of Transport Corporation of India Ltd. 2002 (6) TMI 44 - ANDHRA PRADESH HIGH COURT observed that if the vouchers are signed only by the employees of the assessee and not by the actual recipient, any number of such vouchers could be produced by the assessee to defraud the Revenue. In the present case, the details of such payment have been duly recorded which are compiled at pp. 127 to 153 of the paper book. In respect of each payment, there is a voucher wherein the details of import and export, number of containers, rate at which the payment is calculated, etc. have been mentioned. However, as mentioned above, 5 per cent has been added and Rs. 500 have been further added in respect of each shift. The assessee, apparently, is not in a position to establish that actually the payment has been made to the extent indicated in these vouchers. Considering the totality of facts and circumstances and the various cases cited before us and also the Tribunal's decision in the case of NDSTC, in our view, it would be fair and reasonable to disallow, on estimate basis, 25 per cent of the expenditure incurred by way of payment of 'speed money'. It is assumed that to that extent the payment was not made and this amount was appropriated by the assessee-company for its own purposes. The AO is directed to allow consequential relief to the assessee. In our view, the liabilities which are reflected as payable in the books of the assessee clearly fall into two different categories. In the first category come the detention charges which are collected by the assessee-company on behalf of the principals from the consignees with regard to inbound cargo where the containers are kept beyond free period granted to them. These collections, if made in surplus, remain with the assessee-company and there is no liability on the part of the assessee to utilize this amount for payment of any overdue expenses. Thus, this amount is held by the assessee entirely on behalf of the principals and this liability is not in connection with any expenses incurred by the assessee which may be payable in future. The surplus detention charges collected by the assessee are allowed to be remitted to the principals under the guidelines of the RBI. The assessee has to apply to the RBI and such application is considered and to the extent the RBI approves, the amount is remitted to the principals. As a matter of fact, a sum of about Rs. 2.14 crores has already been remitted from out of detention charges, as recorded by the learned CIT(A). Liabilities on account of brokerage, FAC and THC - From the record, it becomes clear that the liabilities fall into two distinct categories. Detention charges are not retained for disbursement of any expenses and these charges are allowed to be remitted by the RBI in part as per the guidelines of the RBI. On the other hand brokerage/THC/FAC are collected and retained with the assessee for the purpose of disbursement of expenses and these amounts cannot be used for any other purposes and cannot be remitted to the principals. Even accounting entries cannot be reversed and these amounts continue to be credited in the account of the assessee-company. Thus, for all practical purposes, if there is no disbursement by the assessee-company from out of these amounts, the surplus continue to remain with the assessee and the assessee has full control over such funds and these funds are reflected on the liabilities side of the balance sheet. Naturally, on the assets side of the balance sheet, these liabilities will go in the application into various assets of the assessee-company, including the balance in the bank account. Thus, for all practical purposes, these surpluses are available to the assessee for its own use. In our view, if such liabilities are not paid by the assessee, eventually the assessee is able to appropriate these funds and the same has to be brought to the charge of tax in the hands of the assessee. The receipts/collections have been made by the assessee-company during the course of its normal business activity and accordingly, as already mentioned above, they are in the nature of revenue receipts right from the very beginning. Against these receipts, the claim is that certain expenses are to be payable in future. If such expenses are never paid and the assessee has no record to substantiate that such expenses are actually payable in future, ultimately the surplus is going to remain with the assessee and for all practical purposes, it has to be treated as assessee's income chargeable to tax under s. 28(iv) of the IT Act. It is true that in the various judicial pronouncements relied upon by the learned CIT-Departmental Representative, the surpluses or liabilities were credited by the assessee to the P L a/c. In the case of the assessee, no such credit has been made to the P L a/c and the amounts are still reflected on the liabilities side of the balance sheet. However, the issue has to be decided on the basis of the real state of affairs and the character and nature of the liabilities. In our view, assessability of the amount cannot and should not depend solely upon the entries made by the assessee in its books of account, but it has to be decided having regard to the accompanying facts and circumstances. We, therefore, hold that with regard to brokerage/FAC/THC, the liabilities reflected in the books of the assessee have to be treated as assessee's income to the extent such liabilities have not been paid by the assessee towards any expenses in future. The AO is directed to verify this fact after allowing opportunity to the assessee. If it is found that any part of the liability has been paid subsequently, such portion should be reduced from the liabilities and only unpaid liabilities can be brought to the charge of tax. Here, a reference may be made to the contention of the learned counsel for the assessee that in future the assessee may be compelled either to pay all the expenses or to remit the amount under the directions of the RBI. In our view, the issue is required to be decided on the basis of facts and circumstances which prevail at present. As mentioned above, the assessee has no details about the brokerage and other expenses which are payable and till today the RBI has not permitted for remittance of any amount to the principals. In any case, if at any time in future, the assessee is compelled to part with any portion of such liabilities, which has already been brought to the charge of tax in its hands, the assessee can claim deduction under the provisions of the IT Act, which may be duly considered by the IT authorities as per the provisions of law As a matter of fact, substantial part has subsequently been remitted to the principals. We, therefore, hold that no addition is justified on account of detention charges. The addition partly sustained by the learned CIT(A) on this account is, therefore, directed to be deleted. Undisclosed income of the block period - There is no dispute that the search in the case of the assessee has been carried out prior to 1st June, 2002. The issue is squarely covered in assessee's favour by the three Tribunal decisions relied upon by the learned counsel for the assessee. This issue is, therefore, decided in assessee's favour and the AO is directed to delete the levy of surcharge on the tax payable on undisclosed income. In the result, the assessee's appeals are partly allowed and the Departmental appeal is dismissed.

Summary

Issues Involved:

1. Disallowance of expenditure on 'speed money'.
2. Addition of bogus liabilities payable to principals.
3. Levy of surcharge on tax u/s 113.
4. Disallowance under s. 43B for late payments to PF and ESIC.
5. Addition on account of repairs, maintenance, and replacement expenses on computers.

Summary:

1. Disallowance of Expenditure on 'Speed Money':

The first issue pertains to the confirmation of an addition of Rs. 50,60,127 made by the AO by disallowing expenditure incurred on payment of 'speed money' to port trust workers. The AO disallowed the expenditure on the grounds that the actual incurrence of the expenditure was not established and the expenditure was illegal and against public policy as per Explanation u/s 37(1). The Tribunal, after considering the facts and the practice of paying 'speed money' at ports, held that such payments were legitimate business expenditures and not opposed to public policy. However, due to lack of concrete evidence, the Tribunal estimated and disallowed 25% of the expenditure.

2. Addition of Bogus Liabilities Payable to Principals:

The AO added various amounts as bogus liabilities payable to the principals, including brokerage and terminal handling charges (THC), on the grounds that these liabilities were not permitted to be remitted to the principals by RBI regulations and remained with the assessee for its own use. The Tribunal held that no addition could be made for detention charges as they were collected on behalf of the principals and allowed to be remitted by RBI. However, for other liabilities like brokerage, THC, and FAC, the Tribunal directed the AO to verify the facts and allow any subsequent payments or remittances, treating only unpaid liabilities as income u/s 28(iv).

3. Levy of Surcharge on Tax u/s 113:

The issue of levy of surcharge on tax determined u/s 113 was decided in favor of the assessee. The Tribunal held that the proviso to s. 113, which mandates surcharge, was inserted w.e.f. 1st June 2002 and is prospective in operation. Since the search in the assessee's case was conducted before this date, no surcharge was applicable.

4. Disallowance under s. 43B for Late Payments to PF and ESIC:

The Tribunal differentiated between employer's and employees' contributions to PF and ESIC. For employer's contributions, it was held that payments made before the due date for filing the return of income should be allowed as per the amended s. 43B. For employees' contributions, payments made beyond the due date prescribed under the relevant Act were disallowed as per s. 36(1)(va).

5. Addition on Account of Repairs, Maintenance, and Replacement Expenses on Computers:

The Tribunal examined the nature of expenses incurred on computers and found that the expenditure was for configuration, upgradation, and replacements, which did not result in the creation of a new asset. It was held that the expenditure was for conducting business more efficiently and was allowable as revenue expenditure. The addition was deleted, and any depreciation allowed on the capitalized expenditure was directed to be withdrawn.