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TMI Blog1985 (12) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... inally entered into an agreement on 13-4-1976 with the firm Omar Khayyam in terms of which it was agreed that Indo Gulf, who is an exporter, will get the orders and then get the material manufactured from Omar Khayyam and the price which they will pay to Omar Khayyam will be the selling price at which they have booked the orders less 4 per cent. It was also agreed that all the drawbacks, licences, cash incentives, etc., i.e., whichever benefits which are attached with the exports and received by Indo Gulf will be handed over to Omar Khayyam. On 23-9-1977 a fresh agreement was again signed between Indo Gulf and Omar Khayyam and this agreement is valid for the year under consideration also. In terms of this agreement it was agreed between the parties as under: (i) That for all exports other than exports to Australia 5 per cent would be the difference in price of purchase and sale as against 4 per cent as in the earlier agreement. (ii) For exports to Australia the difference in price would be 12 per cent. (iii) All the benefits pertaining to drawback would be retained by the export house but so far as cash incentives were concerned, they will be passed on to the manufacturer, Om ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of profit from 4 to 6 per cent, but also retrieved for itself from the manufacturers duty drawback and import entitlements. By further change as per the agreement dated 22-3-1978, it further retrieved to itself 20 per cent of cash incentives. The progress of the three agreements would show that the assessee-firm continued to gain and what was initially agreed to be passed on completely was retrieved in two stages substantially. If the ITO could not find fault with the initial agreement dated 13-4-1976 as also with the second agreement dated 23-9- 1977, I fail to understand as to why the third agreement dated 22-3-1978 effective for the relevant previous year, could not be accepted. In fact, from the findings recorded by the lower authorities, they have not specifically thrown overboard the third agreement by branding it as sham or make believe. They, however, thought that on the facts as they are, it may be held on the authority of the Supreme Court decision, that the income in the shape of receipt from cash incentives had already reached in the hands of the assessee as its income, and that by passing on the same to Omar Khayyam it was merely an application thereof on discharge o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce it to say that whatever the ITO found in the preceding assessment year has no bearing on the issue, involved in this year. 1.6 In view of the above, I hold that the appellant had rightly claimed the deduction of 80 per cent of cash incentives which did not constitute part of its total income by virtue of the obligation it undertook as per the agreement with Omar Khayyam. I, therefore, delete the addition of Rs. 4,46,501." 5. Before the Tribunal on behalf of the revenue the only contention raised was that the disputed amount was received by the assessee. After receiving it, it was handed over to Omar Khayyam. So it was a case of application of income only. Reliance was placed on the ratio of the decision in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC). 6. On behalf of the respondent it was contended that the finding of the learned Commissioner (Appeals) is quite correct. According to the learned counsel for the assessee, the assessee is a partnership firm carrying on the business of export of readymade garments which they got manufactured from other manufacturers. They have also a small manufacturer of their own. An arrangement which they are following w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what is a charge upon the assessee's income. Reliance was placed on the ratio of the decision in the case of Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC). The learned counsel vehemently contended that it is not a case of application of income. As a matter of fact, it was submitted that the original agreement dated 13-4-1976, the copy of which is in the paper book, would clearly disclose the intention of the parties under which such arrangement was made. Such arrangement was made before any amount of incentive was received by the assessee. Under the agreement, the assessee was only going to get 4 per cent as its profit. The goods when delivered by the manufacturers would be completely ready for despatch, i.e., they would have been checked with regard to the quality, the quantity, the sizes and any other thing connected with the inspection of the goods. The manufacturers shall also get the goods packed in the manner and in bulk quantities as would be required by the importer which would be intimated by the exporters Indo Gulf to the manufacturers from time to time and no separate cost will be given for any special packing. In other words, all the costs connected with the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. The facts of the case have already been given in detail by the learned Commissioner (Appeals) in his order. The same has been reproduced in the preceding paragraphs. Apart from it, before the learned Commissioner (Appeals) the assessee has filed a statement of the case, a copy of which is in the paper book. The facts stated in the letter were as under: "The appellant is a partnership firm carrying on the business of exports of readymade garments which they get them manufactured from other manufacturers. They have also a small manufacture of their own. An arrangement which they are following with the supplier is that they pay him cost of the garments, the export price less 6 per cent plus 90 per cent of the cash incentive which they receive from the Government for 'exports'. Therefore, the purchase price is partly credited to the supplier on receipt of garments and the balance payment which is a definite figure, i.e., 80 per cent of the cash incentive received is credited to them on receipt of incentive. This being the price consideration for purchase, it is incorrect for the learned IAC and also the learned ITO to come to the conclusion that the income once received by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se facts in his order. 9. We may point out that the learned departmental representative was not disputing those facts. 10. At this stage we would make it clear that it is well settled that income which is suceptible to tax is the real income as is commercially understood. In support of this proposition we are fortified by the ratio of the decisions in the case of Poona Electric Supply Co. Ltd., H.M. Kashiparekh Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom.), CIT v. Arumugham Pillai [1969] 73 ITR 382 (Mad.). We may also state here that in determining the real income the question is not of any physical receipt of income but of the concept of receipt in law. Reference may be made to the ratio of the decision in the case of Udayan Chinubhai v. CIT [1978] 111 ITR 584 (Guj.). We may also point out that the word 'income' has not been deployed in the abstract and all notional income earned would also become income. While interpreting the 'income' in its natural and proper sense tax is exigible on income earned in reality. The assessee may undertake or be bound by an obligation of an overriding nature to others which might compel him to make payments to earn the profits. If as a result of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under : "... where a charge is created or, upon the facts and circumstances, a charge can be found, it would not be a case of mere application of a portion of his income by the assessee to discharge an obligation but a case in which an overriding charge is created by the assessee and he become only a collector of another's income: In other words, whenever a charge is created or exists, an overriding title is created in the charge-holder and, to the extent of the charge, the income of the assessee ceases to be his income, because the charge-holder has the paramount right by virtue of his overriding title to recover that income before it reaches the hands of the assessee..." In the decision of CIT v. Nariman B. Bharucha Sons [1980] 4 Taxman 76 (Bom.) it was held that where the assessee was a firm an effective and valid charge enforceable in a court of law was created to the extent of 25 per cent of its income in favour of the mother and its partners, it was held that the said 25 per cent must be treated as diverted at source and, hence, not part of the income of the firm at all. To the same effect is the ratio of the decision in the case of C.N. Patuck. 12. Now on the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther thing connected with the inspection of the goods. The manufacturers shall also get the goods packed in the manner and in bulk quantities as would be required by the importer which would be intimated by the exporters Indo Gulf to the manufacturers from time to time and no separate cost will be given for any special packing. In other words, it means that all costs connected with the manufacture of the items, its packing, its checking, etc., would be that of the manufacturers and, therefore, they would be totally responsible if any goods are received back or are not to the specifications. Any rejection whatsoever in any form would be the liability of the manufacturer and not of the exporter." To the same effects with slight modifications are the agreement dated 23-9-1977 and 22-3-1978. The paragraph 3 of the agreement dated 22-3-1978 runs as follows : "1. (3) That the exporters would continue to retain replenishment licence and drawbacks which they would receive against these exports in respect of articles manufactured by Omar Khayyam but as far as cash incentives are concerned they would retain 20 per cent of the same and would pass on the balance 80 per cent to the manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar Khayyam, and not of the exporter. If all these facts are taken into consideration in their entirety, the only conclusion which could be drawn is that such agreement was out of commercial expediency and but for such arrangement the assessee could not get any profit out of the export of the garments. On the aforesaid facts, the assessee was only a collector of another's income. In the present case, on the basis of the agreements a charge was created and was existing in the relevant accounting year and as a result of such a charge an overriding title is created in the charge-holder, namely, Omar Khayyam, the manufacturers, and to the extent of the charge, the income of the assessee, namely, 80 per cent incentives ceases to be its income because the charge-holder, namely, Omar Khayyam, the manufacturers, has the paramount right by virtue of its overriding title to recover that income before it reaches in the hands of the assessee. Such an agreement is also enforceable in law. 16. Looking to the aforesaid facts and the entirety of the circumstances, we are of the view that the finding of the learned Commissioner (Appeals) on this point is quite correct. 17. The other contention o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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