9911796707
TMI Blog2006 (7) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and supplying programmes to Satellite Television Asian Region Advertising Sales (" STAR" ), Hongkong ; and (iii) acting as a licensee in India in respect of star movies pay channel. 4. The assessee entered into an agreement on May 31, 1994, with Star Advertising Sales B. V. of Netherlands, holding exclusive rights in India from Satellite Television Asian Region Ltd., of Hongkong for television advertising on various television channels under which, the assessee was appointed as an agency in India to market television advertising for the channels. This agency arrangement was approved by the Reserve Bank of India (RBI) on July 22, 1994, and subsequently renewed from time to time. (pages 1 to 5 of the paper book). Under clause 3 of the agreement, the assessee was required to solicit the advertisements in India for the channels at such rates as may be fixed from time to time. After having solicited the advertisement, the assessee was further required by clause 6 of the agreement to forward each client` s requisition for telecast of its advertisements to its principal, and the principal reserved the right to accept or reject the aforesaid requisition. Under clause 7 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing it in consonance with clause 8 of the agency agreement with SAS BV ; In the Supreme Court case of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 mercantile system has been explained as one that brings into credit what is due, immediately when it becomes legally due and before it is actually received. Accordingly, the method of accounting continues to be mercantile, since the commission as per the agency agreement is legally due only upon payments made by advertisers." 7. Apart from the above note, the auditor of the assessee-company also appended note 13 to the financial statements as under : "13. Revenues.-In the prior year, the company recognised commission income on the sale of time spots in the period during which time spots were aired. During the year, the company has amended this policy to recognise commission income based on the advertisement collections made during the year to appropriately reflect the terms of the agency agreement with SAS BV. Had the company followed the accounting policy used in the prior year, commission income for the year ended March 31, 1997, would have been higher by Rs. 8,10,11,000 and the net loss for the year would have been ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Commissioner of Income-tax (Appeals) before whom the stand taken before the Assessing Officer was reiterated. However, the learned Commissioner of Income-tax (Appeals) confirmed the orders of the Assessing Officer by making the following observations : "(a) At the time of only part payment being made by the advertiser to the appellant or to SAS BV, it cannot be predicted that the advertiser would not pay the remaining amount later. Accordingly, it cannot be inferred that the commission did not accrue to the appellant on the entire invoiced amount, part of which was not paid later by the advertiser. (b) The advertiser can pay directly to SAS BV after retaining the commission of the appellant which is paid to the appellant separately. The part payment of the advertising charges to SAS BV, falling in one accounting period and remaining part falling in another accounting period would not affect the accrual of commission to the appellant and has to account for entire commission income in the year of accrual. (c) When the advertiser pays only partly direct to SAS BV without retaining the commission of the appellant, in one accounting period and remaining part is paid in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant the moment the advertisement solicited by the appellant on behalf of SAS BV is telecast. I hold that the Assessing Officer was right in rejecting the changed policy of the appellant for accounting of commission income. This ground of appeal is rejected." 12. Aggrieved by the same, the assessee is in appeal before the Tribunal for all the years. 13. Learned counsel for the assessee, Mr. Kaka, at the outset, pointed out that the assessee had been following mercantile method of accounting and there has been no change in such method of accounting in the year under consideration. The dispute, however, has arisen because of wrong interpretation of the agreement in ascertaining the point of time of accrual of income. It was submitted by him that in earlier years, accrual of income was taken when the advertisements solicited by it were telecast by its principal. According to him, on correct interpretation of terms of agreement, it was found that time of accrual of commission income was the date when money was realised from its clients. Hence, the assessee started declaring income on the basis that commission income accrued on realization of money from its clients. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign telecasting companies. It was submitted by him that as per the circular, 15 per cent. commission is retained by the advertising agents and 15 percent is retained by the Indian agent of foreign telecasting companies of the gross results and balance amount of 70 percent of gross receipt is remitted to such foreign telecasting companies. Then it was submitted that considering the special features of the business and other complexities, the Board instructed the Revenue officers to assess the income of such telecasting companies at the rate of 10 percent of the amounts remitted abroad. According to Mr. Kaka, no income accrued to the foreign companies unless the amount was remitted. In this background, it was pleaded that if the income did not accrue to the principal on the date of telecasting, how it could accrue to the assessee. Thus, the contention of Mr. Kaka is that income to the assessee cannot be said to accrue unless the amount payable to foreign companies is received by the assessee from the Indian clients inasmuch as right to receive accrued on the dates when right to retain was acquired. So, the aspect of payment of money is most crucial for determining the point of accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ownership in goods continued to vest in the assessee until the actual delivery to the buyers. According to the Income tax Officer, the delivery was effected to the buyer when railway receipts were given by the bank to the buyers at Kodarma against payment. In view of the same, it was held that income did not accrue to the assessee in Bhilwara or the Part B State and consequently no rebate was allowable to the assessee. The assessee remained unsuccessful till the stage of the Tribunal and the matter reached in High Court. The High Court held that profits in such cases, accrued when property in goods was transferred from seller to the buyer. On facts, it was held that profits accrued when the payment was made by the buyers to the broker, i.e., at Kodarma. Consequently, the assessee was not entitled to rebate. This judgment was confirmed by the hon'ble Supreme Court. On the basis of this authority, Mr. Kaka has pleaded that income accrues on the date of payment even when the assessee is maintaining mercantile system of accounting. 18. Lastly, it was argued that in such cases, theory of real income would apply. It was submitted by him that the assessee was not even able to recover the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation Act and had nothing to do with the accrual of income. Alternatively, the commission could be said to accrue when the invoice was raised by the principal. He also distinguished the judgment of the Bombay High Court in the case of Pfizer Corporation v. CIT [2003] 259 ITR 391 by submitting that in the case of non-resident, dividend income deemed to accrue under section 9(1)(iv) which provides payment of dividend rather than dividend declared or distributed. Thus, it was held that such income could be taxed on actual payment to non-resident. Since actual payment was the basis for taxing the same, it was held by the court that right to receive dividend accrued in the year in which the Reserve Bank of India approval was granted. Accordingly, it was pleaded that order of the learned Commissioner of Income-tax (Appeals) be upheld. 21. Rival submissions have been considered carefully in the light of materials placed before us and the case law referred to. Much has been said on behalf of the Revenue regarding change in the method of accounting from mercantile to cash system. Such contention of the Revenue is devoid of force and untenable in view of the clear admission of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes absolute, i.e., on the happening of the contingency. As per the settled legal position, a liability depending upon a contingency is not a debt either in present or in futuro till the contingency happens. However, where a debt is created, its quantification would not postpone the data of accrual. Reference can be made to the Supreme Court judgment in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675 at page 681. 24. The agency commission is contractual receipt. Under the contract of agency, unless different intention appears, the assessee acquires a right to receive the commission when the services are performed as per the agreement. For example, selling agent acquires a right to receive the commission as soon as the sale is effected by him. However, the parties may agree to the effect that right to receive commission would accrue on the happening of an event. In such case, the right to receive commission would accrue on the date when such event happens. Therefore, the accrual of commission income would depend upon the terms of agreement in each case. 25. Let us now explain the above view in the light of case law. In the case of E. D. Sassoon and Co. Ltd. v. CIT [1954 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case, the five annas share of the income of Amrit Chemicals or any part thereof for the year January 1, 1955, to December 31, 1955, accrued to the assessee and whether it could be charged in its hands ?" 28. The High Court agreed with the Revenue authorities that Ashokbhai had become full owner of the five annas share in Messrs Amrit Chemicals with effect from November 12, 1955, and not before, but upheld the alternative contention that no part of the share of profits which accrued to Ashokbhai on December 31, 1955, was liable to be included in the income of the assessee, because on the date of accrual the assessee had no interest in those profits, and recorded a negative answer to the question referred. 29. On appeal to the hon'ble Supreme Court, it was contended by the Revenue as under (page 47 of 56 ITR) : " Counsel for the Commissioner submitted that the judgment in E. D. Sassoon and Co. Ltd.` s case [1954] 26 ITR 27 proceeded upon the special character of a managing agency agreement and did not purport to lay down a general rule that accrual of income depends on quantification, or that right to payment of an ascertainable amount does not arise till accounts are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not before. 32. The above view is reiterated by the apex court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675. At pages 680 and 681, it observed as under : " It is, however, well-established that the income may accrue to an assessee without actual receipt of the same and if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on, on its being ascertained. The legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens." (emphasis1 supplied). 33. We would like to refer one more judgment of the apex court in the case of J. P. Shrivastava and Sons (Bhopal) P. Ltd. v. CIT [1965] 57 ITR 624. In that case, the assessee-company acted as managing agent of New Bhopal Textile Ltd. Clause 2(c) of the agreement provided (page 626 of 57 ITR) : " such commission shall become due and payable to the managing agents every year immediately on the passing of the audited accounts of the company by the shareholders at a general meeting at each and every year during the continuance of these presents." The accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d already been referred to while stating the facts and contentions of the parties. The perusal of the same clearly shows that a contingency has been provided in the agreement, i.e., payment of net invoiced amount to the assessee by its clients. In view of the judgments quoted by us, the assessee had no right to receive the commission till the happening of such contingency because right to retain the commission depended upon the payment of invoiced amount to the assessee. Once the invoiced amount is received by the assessee from its clients, the right to retain the commission would accrue immediately irrespective of the remittance to the non-resident. The payments by the clients are a condition precedent for accrual of income which has been placed in the agreement to ensure the recovery of the amount. This condition was deliberately provided in the agreement because the principal of the assessee was not only interested in getting the advertisements but also in recovering the advertisement charges. In commercial transactions, the recovery of the money is the major consideration. The principal of the assessee did not have any infrastructure in India and, therefore, depended on its age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t (i) consignment was sent to " self" as the railway receipt was taken in the name of the appellant, (ii) railway receipt along with bill of exchange was presented by the assessee to the bank for collection after endorsing the railway receipt in the name of bank, (iii) the goods were delivered to the buyers only when they paid the price to the bank and obtained the railway receipts endorsed in their favour. In view of the facts, their Lordships held that property in goods remained with the assessee till the payment was made since payment was a condition precedent for transfer of property in goods. (See page 166 of the report). So, this judgment is an authority for the proposition that profits accrue at the place where property in goods passes. Merely because in that case payment coincided with the date of transfer of property in goods, it cannot be ruled that profits accrue on the date of payment to non-resident. There may be cases where property of goods may pass even prior to the date of payment and, therefore, in such cases profits would accrue at a place where ownership passed and not at a place where payment was made. This view can be explained by referring to the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its principal. That is why our decision rests only on the interpretation of that agreement. 39. In the course of hearing, Mr. Kaka had drawn our attention to the letter of approval of the Reserve Bank of India regarding appointment of the assessee as an agent of the non-resident company to point out that the assessee could not remit the money without approval of the Reserve Bank of India. Accordingly, no income accrued to the assessee till the payment to non-resident. We are unable to accept this contention. The approval of the agreement is much prior to the services rendered by the assessee. Clauses (iv) and (v) of the approval letter provides that (i) remittance shall not be made to the principal until the advertisement is telecast, (ii) at the time of seeking remittance, the assessee shall submit invoices obtained for Star TV indicating the dates on which advertisements were permitted and net amount of advertisement charges. In our considered opinion, these clauses do not come in the way of the assessee` s right to retain the commission from the payments received from the clients. The conditions prescribed only with reference to remittance to the non-resident. Therefore, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made during the previous year. Since the payment was made after the accounting year, these amounts could not be allowed as deduction. Accordingly, disallowance of Rs. 7,68,747 was made. Similarly, disallowance of Rs. 81,96,460 was made for the assessment year 1999-2000. It may be mentioned at this stage that the assessee had contended before the Assessing Officer that no disallowance could have been made where the payments were made within the grace period. But this contention was rejected by the Assessing Officer. 43. The matter was carried in appeal before the learned Commissioner of Income-tax (Appeals), before whom, it was contended that payments were made within the grace period in respect of the assessment year 1998-99 and, therefore, no disallowance could have been made in view of the decision of the Tribunal in the case of Hansur Plywood Works Ltd. v. Dy. CIT [1995] 54 ITD 394 (Bang) and in the case of Dy. CIT v. Asher Textiles Ltd. [2002] 73 TTJ 727 (Mad). The learned Commissioner of Income-tax (Appeals) noted that the assessee himself made disallowance of its own for the sum of Rs. 58,11,980 in respect of provident fund and Rs. 10,19,118 for pension fund and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the provident fund, the provisions of section 2(24)(x) would be attracted and as a result thereof such payments must be made within due date provided in the relevant Act before claiming deduction under section 36(1)(va). Learned counsel for the assessee had nothing to say in view of the said decision. On the other hand, the learned Departmental representative relied on the orders of the Assessing Officer. 45. After hearing both the parties, we are of the view that entire disallowance is not justified. All the Benches of the Tribunal are consistently holding that the payments made within the grace period is an allowable deduction in view of the decision in the case of Hansur Plywood Works Ltd. v. Dy. CIT [1995] 54 ITD 394 (Bang). Recently, the Delhi Bench of the Tribunal in the case of Addl. CIT v. Vestas RRB India Ltd. [2005] 275 ITR (AT) 81, has held that amendment in section 43B is curative and, therefore, retrospective. It has been further held that disallowance can be made in view of the retrospective amendment where the payment has been made before the due date of filing of the return. Apart from this, the Delhi Bench of the Tribunal in the case of Gallium Equipment P. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h activity. Sample of advertisements showed that the advertisements were in the name of Star TV and not the assessee` s own name. Hence, there was no link between the expenditure and the assessee` s business. According to him, such advertisements and publicity increases the viewership of Star TV and, therefore, is not related to assessee` s business. Similar observations were made with reference to cable subscription activity. In view of these observations, he disallowed the claim of the assessee for both the years. 48. The matter was carried in appeal before the learned Commissioner of Income-tax (Appeals), before whom, it was contended that advertisements were inextricably linked with the business activities carried on by it. It was pleaded that expenses were incurred to promote the programme aired on the channels which results in creation of greater demand for the programmes and channels which in turn ensures that the assessee has buyer willing to purchase successful programmes. Further publicity facilitates the soliciting and marketing of advertising easier and, therefore, has direct impact on the assessee` s revenue. It was also contended that commercial expediency should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer held that expenditure was not incurred wholly and exclusively for the purpose of business. Such grounds taken by the Assessing Officer are in conflict with the settled legal position as explained by the apex court in the case of Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261. In that case, it was held that no disallowance could be made on the ground that it was not necessary for the assessee to incur such expenditure or it benefited the third party. Accordingly, the Assessing Officer was not justified in considering these factors for the purpose of disallowance. The only relevant factor is whether incurring of expenditure was for the purpose of the assessee` s business. The assessee was carrying on its business activity exclusively for Star TV and, therefore, survival of its business depends on the success of programmes transmitted by Star TV. The assessee was required to solicit the advertisements for Star TV channel. No person would give advertisement unless he is sure of large viewership of programmes on Star TV. Therefore, if the assessee incurs expenditure on advertisement with a view to increase the viewership of Star TV, in our opinion, such expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 is not admissible." 54. Apart from the above reasons, it was also observed by the Assessing Officer that conditions prescribed under section 36(2) of the Act were not satisfied. 55. The matter was carried in appeal before the learned Commissioner of Income-tax (Appeals), before whom, it was submitted that the conditions provided under section 36(2) were fully satisfied. Apart from this, it was submitted that the claim was allowable also under section 37(1) of the Act in view of various judgments reported as CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC) ; CIT v. Rohtas Industries Ltd. [1979] 120 ITR 110 (Cal) ; Travancore Tea Estates Co. Ltd. v. CIT [1992] 197 ITR 528 (Ker) and CIT v. Inden Biselers [1990] 181 ITR 69 (Mad). In respect of the sum of Rs. 25,00,000, it was submitted before the learned Commissioner of Income tax (Appeals) that this amount actually represented the refundable security deposit given for acquiring premises on leave and licence basis for the purpose of its business and, therefore, the claim was allowable as deduction under section 37. 56. The learned Commissioner of Income-tax (Appeals) found that the sum of Rs. 15,06,400 related to current y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x (Appeals) is, therefore, set aside and the entire matter is restored to the file of the Assessing Officer for fresh adjudication after collection of necessary material on record and considering the legal position with reference to sections 36, 37 and section 38 of the Act. 58. The last issue relates to disallowance of depreciation on motor car which was acquired on hire purchase basis. The assessee had claimed depreciation in respect of Opel Astra Car of which, purchase value was Rs. 7,62,158. This car was acquired under hire purchase agreement. The Assessing Officer, following the decision of the Special Bench of the Tribunal at Nagpur, in the case of Bhilai Engineering Works, held that depreciation was not allowable since the assessee was not the legal owner of the car. On appeal, it was contended that depreciation was allowable in view of the Delhi High Court judgment in the case of Addl. CIT v. General Industries Corporation [1985] 155 ITR 430. Reliance was also placed on Circular No. 9 dated March 23, 1943. The learned Commissioner of Income-tax (Appeals) examined the hire purchase agreement. After examination of the agreement, it was observed that ownership remained with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Abdulgafar A. Nadiadwala v. Deputy CIT [2000] 75 ITD 394 (Mum) was against the assessee. Subsequently, the decision of the Tribunal has been reversed by the Bombay High Court, since reported as Abdulgafar A. Nadiadwala v. Asst. CIT [2004] 267 ITR 488. In view of the Bombay High Court judgment, the claim of the assessee under section 80HHC of the Act is allowable as deduction. Accordingly, this ground has been taken. The learned Departmental representative has opposed the admission of this ground since it was not taken in the earlier proceedings. In our opinion, this ground has to be admitted in view of the judgment of the hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383. Accordingly, this ground is admitted. On the merits, the matter is restored to the file of the Assessing Officer to consider the claim of the assessee after verification of the material which may be placed before him for consideration. 62. In the result, the appeal of the assessee for the assessment year 1997-98 is allowed while the appeals of the assessee for the assessment years 199899 and 1999-2000 are partly allowed. On the other hand, the appeal of the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly upon payments made by advertisers. It may, at this stage, be useful to elaborate the factual background for better appreciation of issues involved. 66. The factual background of the case, in brief, is as follows : (i) There is no dispute that the assessee followed the mercantile or the accrual system of accounting. Being a company registered under the Companies Act, the assessee had no choice in the matter in that it was required by law to record its income and other transactions on the basis of the accrual system of accounting. The assessee is, therefore, under legal obligation to recognise both the revenue and the expenditure on accrual basis and not on cash basis. (ii) The assessee, namely, Star India P. Ltd. entered into an agency agreement on May 31, 1994 (hereinafter referred to as " agreement" ), with Satellite Television Asian Region Advertising Sales, Netherlands (hereinafter referred to as " principal" ), a non-resident company, whereby the principal appointed the assessee as non-exclusive independent agent in India to sell television advertising on various television channels of Star TV. (iii) The principal, a non-resident, was holding excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee accrued only upon payment of net invoiced amount by the clients in terms of the provisions of clause 8 of the agreement between the assessee and its principal ? (ii) Whether the point of earning of commission income in terms of the provisions of the agreement is sufficient to recognise the same as revenue in terms of the provisions of section 145 of the Income-tax Act, 1961, and accounting standards notified by the Central Government thereunder and in the light of the judgment of the hon'ble Supreme Court in the case of E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 and hence it should be taxed in the assessment years when such income is earned as against the traditional concept of accrual based upon acquisition of right to receive? (iii) In case, if it is held the income from commission accrued only upon payment of net invoiced amount by the clients, the further question that arises for consideration is whether the expenditure directly attributable to such commission should be claimed and allowed as an expenditure only in the period in which such commission is recognised as revenue following the well accepted accounting principle of matching of costs again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gent are desirous of recording the terms and conditions on which the agent shall work for the company. Now, therefore, this agreement witnesses, and it is hereby agreed by and between the parties hereto as follows : 1. Clause I : Appointment The company hereby appoints the agent as its non-exclusive independent agent in India to market television advertising for the said channels, and the agent unequivocally accepts such appointment` ." 69. From the perusal of the above, it is clear that the principal was desirous of appointing non-exclusive independent agent in India only to sale television advertising for the channels for which principal had exclusive rights in India from owner and to achieve this very objective. The principal appointed the assessee as its agent to market television advertising for the said channels and the assessee unequivocally accepted such appointment. Thus, the appointment of the assessee was for the limited purpose of selling the television advertising for the said channels and for no other purpose. Clause 3 Rate The agent shall solicit the advertisements in India for the said channels at such rates as the company may fix from time to time. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f advertisements, vary either positively or negatively but that by itself would not make any difference because if it is a debt the fact that the exact amount has to be ascertained does not make it any less a debt if the liability is certain and what remains is only a quantification of amount ; debitum in praesenti solvendum in futuro. This proposition is well supported by the decision of the hon'ble Supreme Court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675 wherein the hon'ble court held as under (page 680) : " The argument was, however, stressed on behalf of the respondent that in any event the share of the profit of the assessee from the partnership business for the period from October 1, 1950, to March 31, 1951, was not known to the assessee before its annual general meeting on May 17, 1951. It was pointed out that for the first time the Income-tax Officer was intimated on August 11, 1953, that the share of the profit of the assessee in the partnership was to the extent of Rs. 70,895 and should be included in its assessment. After receipt of the intimation the Income-tax Officer rectified the original assessment made on February 29, 1952, and included the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... underwritten or in the year when the accounts were thus made up. The assessee contended that the contracts into which it entered were executory contracts under which its services were not completed or paid for, as regards commission, until the conclusion of the relevant account ; the profit in the form of commission was not ascertainable or earned, and did not arise, until that time and the additional assessment which was made in the year in which the policies were underwritten should accordingly be discharged. The Special Commissioners allowed the assessee` s contention and discharged the additional assessment. The decision of the Special Commissioners was confirmed on appeal by Macnaghten J. in the King` s Bench Division of the High Court. The Court of Appeal, however, reversed this decision and a further appeal was taken by the assessee to the House of Lords. The House of Lords held that on the true construction of the agreements, the commissions in question were earned by the assessee in the year in which the policies were underwritten, and must be brought into account accordingly and confirmed the decision of the Court of Appeal. At page 96 of the report Lord Wright observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cited advertisements does not take place for any reason whatsoever, the assessee would remain entitled to receive the commission from the principal in respect of such cases also on the basis of requisition accepted by the principal. If the assessee does not claim commission in such cases, it would amount to relinquishment of income after its accrual. Thus, if the assessee does not recognise the income from commission in such manner, it would simply amount to postponement of recording of income which had already accrued to the assessee upon creation of debt and not that the income had not accrued to the assessee. 72. The aforesaid conclusions results into a situation where I am of the opinion that the assessee` s obligation under agreement are performed and the assessee becomes eligible to receive the consideration for the services rendered by him at the time of acceptance of solicited advertisement by the principal. However, the assessee, by its own conduct in past, accrued commission on the sale of times spots during the period in which such times spots were aired. This practice of recognition of commission income was also accepted by the Department. In this situation, if I go wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. As per clause 7(b), the assessee is required to collect all sums due from the client and hold the same in trust for the company pending remittance of the same to the principal. Once the principal has instructed the clients to make the payments to the assessee, obviously as a natural corollary of these instructions, the assessee would receive the same in trust for principal to remit money to principal in accordance with and subject to other provisions of the agreement. It is relevant to mention that no contractual obligation has been cast upon the assessee to make efforts to realise the amount from clients as it would have cost implications and the assessee is not getting any money from principal on this score, therefore, it leads to an obvious conclusion that the role of the assessee is limited to receive the amounts paid by the clients. In a nutshell, the assessee is under no obligation to realise the amount from the clients. Clause 13 Accounts " (a) The agent shall maintain an account of the advertisements bookings made by it and shall furnish to the company a weekly statement of such accounts. (b) If any dispute arises regarding the statement of accounts, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he net invoiced amount paid by the clients as commission. It seeks to pay what the assessee has already earned and which the assessee was entitled to receive and enforce in a court of law and not vice versa. It is only in pursuance of the assessee` s right to receive the consideration after it had earned the commission that clause 8 conferred the right on the assessee to retain the commission out of the money paid by the clients to the principal through the assessee. Thus, clause 8 does not, in any way, dilute the right of the assessee to receive the commission which has already accrued to the assessee upon its having solicited the advertisements for the principal. Having stated so, a closer look at the language employed in clause 8 would also confirm the aforesaid conclusion. The most important word used in this clause is " retain" . The general meaning of the word " retain" is " to continue to hold, have, use, recognise etc." or " to keep possession of" . Thus, this word employed in this clause, clearly depicts the intention of the parties in the sense that the assessee can retain, i.e., keep or continue to hold or possess what is already d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee have been defined not only to solicit television advertising for the owner but also to collect and remit advertisement charges. Further, entitlement to commission has also been restricted on the amounts actually collected by the assessee or received by the owner directly though such advertisement were solicited by the assessee. The relevant provisions of the representative agreement between the owner and the assessee are reproduced below to bring out the major differences between the present agreement dated March 31, 1994, and representation agreement dated April 1, 1999, to further confirm the conclusions already arrived at : " Excerpts from representation agreement between Star and the assessee dated April 1, 1999. Whereas Star telecasts various channels, namely channel (V), Star World, Star Plus, Star News, Star Movies and such other channels as may be added in the future, forming the 'Star TV Net Work' (hereinafter the ` said channels` of the 'Star Service') And whereas Star is desirous of appointing a non-exclusive independent representative in India (the territory) to solicit television advertising for the said channels and collect and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative commission and pay each directly and separately in Indian rupees and advertiser shall also deduct withholding tax imposed by the Government of India. (ii) In the alternative, an advertiser may pay to representative in Indian rupees the net billed advertising amount. Upon receipt, representative will deduct its commission and, subject to necessary Reserve Bank of India (RBI) approval and sub-clause (iii) herein below, immediately but in no event later than forty-five days from receipt of funds from the advertiser, and excluding time taken for approvals from the Reserve Bank of India provided that representative takes the steps referred to in sub-clause (iv) below relating to collection of papers and makes best efforts for speedy Reserve Bank of India approval remit such amount to Star directly in US dollars by wire transfer in accordance with instructions provided by Star. E. Compensation 1. Commission : Subject to the other provisions of this section, representative shall be paid commissions of fifteen percent of ` net billed advertising` actually collected by it or received by Star for advertisement solicited by the representative during the term of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esearch and promotion organisation to perform, and (i) Co-operating fully with Star in promoting and advancing its standing as a television advertising medium. G. Reports 1. Each month, representative will provide Star with a written statement detailing for the prior month the commissions received by the representative, any amounts collected by representative (broken down by advertiser invoice number and amount paid) the status of payments made directly to Star by advertisers, the status of amounts in respect of which applications are pending with Reserve Bank of India, and any other information reasonably requested by Star. 2. Each month Star shall inform the representative of amounts received by it directly from advrtisers (broken down by advertisers, invoice number and amounts paid)." 80. On a bare perusal of the aforesaid clauses of the representative agreement, it is amply clear that the scope of responsibilities has been materially altered and widened in the representation agreement than that of agreement existing at the material time. The responsibility of collecting of advertisement revenue from clients has been specifically included in the scope of work and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the clients after the date of telecast with the purpose of regulating the mode of payment and settlement of dues and not for creating a contingency upon which the commission income would accrue to the assessee. Three, the income which had already accrued to the assessee could not be defeated on the basis of uncertainties involved in the receipt of money from clients. If such an interpretation as suggested by the assessee is accepted, the concept of mercantile method of accounting based on fundamental accounting assumption of accrual would collapse. Further, a reference can be made to pages 47 to 49 of this order where the decision of the hon'ble High Court of Justice (Kings Bench) in the case of Commissioners of Inland Revenue v. Gardner Mountain and D` Ambrumenil Ltd. [1947] 29 TC 69 again to show that once a right is vested then the same would not be effected in spite of the fact that not only the valuation of which is postponed but also the same depends on all the contingencies which are inevitable in carrying out the business and which may or may not happen and the whole catalogue of uncertain future factors and for a moment if the payment by the clients after the telecast i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulted in more appropriate preparation or presentation of the financial statements as compared to earlier year for the reason of understatement of profit as reported by the auditors. Thus, change in such accounting policy is neither motivated by bona fide reasons nor it satisfies the tests laid down by the statute/ judicial decisions for change in the accounting policy. (iii) It was also contended that the change in the accounting policy was made to offer to tax only real income because inclusion of unrealised commission from the principal on invoiced remaining unpaid/part paid into income as per earlier practice resulted into taxation of unreal income as the same had to be claimed as bad debt subsequently. Bad debts are business reality. Simply because the assessee might have suffered some bad debts which it can subsequently claim as bad debt or business loss, that by itself would not authorise it to change the accounting policy. There may also be cases of intentional non-payments by the clients to the principal but in such situations, if the assessee does not get commission from the principal, then he can pursue the principal to make the payment and if such persuasion does not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 in support of its contention that no income from commission accrued until the clients made payment of the invoiced amount. In this regard it is very important to note that in that case the hon'ble apex court dealt with the issue of concept of accrual for the purposes of the Income-tax Act in the settings of peculiar facts of the case wherein in addition to rendering of services, completion of a contract for a definite period was a condition precedent to receive remuneration or commission stipulated there under which was not met. The relevant paragraph of the order is reproduced as under (page 52 of 26 ITR) : " If, therefore, on the construction of the managing agency agreements we cannot come to the conclusion that the Sassoons had created any debt in their favour or had acquired a right to receive the payments from the companies as at the date of the transfers of the managing agencies in favour of the transferees no income can be said to have accrued to them. They had no doubt rendered services as managing agents of the companies for the broken periods. But unless and until they completed their performance, viz., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or arise to the assessee in the taxable territories during the chargeable accounting period. Neither the word ` income` nor the words ` is received` , ` accrues` and ` arises` have been defined in the Act." 85. Thus, in my humble understanding, their Lordships after observing that the term " earned" was not used in the Act and the term " accrued" was not defined in the Act, differentiated the term " earned" from the term " accrual" in the context of the peculiar facts of that case only because these terms, in general, are used to indicate the generation of income in a commercial sense. The situation would have been entirely different if the term " accrual" was defined in the Act when the aforesaid judgment was rendered. The statutory changes made thereafter, have to taken note of and from the following discussion, it would emerge that the concept of accrual has to be viewed differently in view of statutory changes made incidentally from the assessment year 1997-98 and now there is no difference between " accounting thought on accrual" and " judicial thought on accrual." 86. Accrual is one of the postulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5(1) of the Income-tax Act, 1961 and Accounting Standard 1 notified by the Central Government under section 145(2) as under : "(a) Accrual " Revenue and costs are accrued, that is recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate . . ." 88. As per this definition, it would appear that the revenue and cost are recognised as they are earned or incurred and not as money is received or paid. "(b) Accounting standard 1 relating to disclosure of accounting policies ; as notified by the Central Government under section 145(2) reads as under : (1) All significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed. (2) The disclosure of the significant accounting policies shall form part of the financial statements and the significant accounting policies shall normally be disclosed in one place. (3) Any change in an accounting policy which has a material effect in the previous year or in the years subsequent to the previous years shall be disclosed. The impact of, and the adjustments resulting fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assumption that accounting policies are consistent from one period to another ; (d) 'Financial statements' means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance-sheet, profit and loss account and other statements and explanatory notes forming part thereof ; (e) 'Going concern' refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future." 89. Section 145(1) of the Income-tax Act, 1961, was amended with effect from April 1, 1997, to require an assessee to maintain books of account either on cash or mercantile system of accounting for computation of income under the head " Profits and gains of business or profession" and " Income from other sources" . It is also pertinent here to mention that, the assessee, being a company, is required to maintain books of account on accrual basis of accounting only as per the provisions of the Companies Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the First Volume of " The New Shorter Oxford English Dictionary" (1993 Edition) is as follows: "1. Receive or be entitled to (money, wages, etc.) in return for work done or services rendered ; bring in as income ; obtain or deserve in return for efforts or merit" . The term " earn" has been defined in Black` s Law Dictionary (Seventh Edition) at page 525 to mean " 1. To acquire by labour, service or performance. 2. To do something that entitles one to a reward or result, whether it is received or not." (emphasis supplied). Thus, earning of income takes place as soon as one performs his services or carries out his part of the contractual obligation regardless of whether he is paid for it immediately or in future. Actual receipt of earned income by the recipient has nothing to do with the earning of income. In the present case, the assessee earned the commission income as soon as it solicited the advertisements and forwarded them to the principal for approval. Any other interpretation of the term " accrual" would defeat the legislative intent as expressed in section 145(2) and the Accounting Standards notified by the Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged to profit and loss account of the period in which such commission receipts are recognised as revenue because matching of cost incurred with revenue earned during the accounting period is implicit in the " concept of accrual" . The fundamental difference between the cash basis of accounting and mercantile basis of accounting lies in the matter of time when the income and expenses are recognised. Accountants often describe the process of periodical net income determination as a proper " matching" of revenue and expenses by period. This is achieved by the accrual basis of accounting. Under accrual basis of accounting, the expenses are recognised by the following approaches : (i) Identification with revenue transaction costs directly associated with the revenue recognised during the relevant period (in respect of which whether money has been paid or not) are considered as expenses and are charged to income for that period. (ii) Identification with the period of time. In many cases, although some costs may have connection with the revenue for the period, the relationship so indirect that it is impracticable to attempt to establish it. However, there is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... likely to be defrauded. The Assessing Officer has given a categorical finding that the sole objective behind change in accounting policy is to reduce the tax liability of the assessee for years under consideration, which in the light of the above discussion, deserves to be upheld. However, in case it is felt that commission income should be recognized in some other year, then, the expenses pertaining to earning of such commission should also be considered for allowance in the same year. 95. Thus, in view of the discussion in foregoing paragraphs, I hold that the commission accrued to the assessee at the time of acceptance of the solicited advertisement by the principal but for the reasons mentioned in paragraph 5.2 at pages 50 and 51 of this order, the same would be recognised as revenue of the period in which telecast takes place. Accordingly, I uphold the decision of the Revenue authorities in this regard and this ground of the assessee is rejected for all the years under consideration. 96. The second issue is connected with the disallowance of advertisement expenses incurred by the assessee wherein both the assessee and the Revenue are in appeal and the grounds taken by them i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses were incurred to promote channel recall and other activities of its business. The Assessing Officer rejected the claim of the assessee and disallowed the expenditure in total on the following grounds : Programme manufacturing activity (a) The appellant charges 5 percent additional sum over and above the cost of manufacturing TV serials from Star TV. Therefore, the cost of advertisement should also be recovered from Star TV with additional 5 percent amount. (b) The advertisement for TV serials manufactured on behalf of Star TV would benefit Star TV and not the appellant. Therefore, there is no reason for the appellant to incur cost on advertisement for manufacturing TV serials. Commission activity (a) The appellant collects advertisements revenue on behalf of Star TV and charges 15 percent commission on ad-revenue so collected. (b) Being an agent for collecting advertisement revenue, the appellant is not required to incur expenditure on advertisement. (c) The advertisement and publicity shall increase the viewership and popularity of channels of Star network which shall be beneficial to Star Network and not to the appellant. The appellant only gets 15 percent com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Commissioner of Income-tax (Appeals) after considering the submissions made by the assessee and the cases cited by the assessee was of the opinion that the expenses had a bearing on the business of the assessee and accordingly allowed 20 percent of the advertisement expenses. 100. In this fact and background, the moot questions, which requires consideration are as follows: " (i) Whether the expenditure incurred on advertisement can be termed as incurred by the assessee wholly and exclusively for the business purposes of the assessee and is allowable on the ground of commercial expediency or not ? (ii) Whether the reasonableness of the expenditure can be looked into where the incurrence of expenditure is not in doubt ? (iii) Whether on the facts and circumstances can it be said that whether the expenditure was the primary obligation of the assessee and it merely benefited the third parties rather than it was an obligation of all the parties concerned where the assessee should have derived collateral benefits as third party." 101. Regarding the first two aspects, the discussion is made as under : In section 37(1) of the Act, the word " wholly" refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty and contents of programmes and not on advertisement. There have been several instances of resounding successes without much advertisement and notable failures in spite of vigorous advertisement campaigns. Resounding successes may include serials like " Ramayan" , " Mahabharat" , " KBC" , " Kyonki Saas bhi Kabhi Bahu Thi" , etc. Similarly, notable failures, though the list may be long include, " Kahin Naa Kahin Koi Hai" , " Sawaal Dus Karor Ka" , " Jeeto Chhappar Phad Ke" , " Kamjor Kadi Kaun" where not only big names like Madhuri Dixit, Anupam Kher, Govinda, Farida Jalal were associated but a good deal of advertisement was also done but plausibly nothing worked. Thus, these examples clearly demonstrate that there is no nexus between programme recall and advertisement. 103. Further, the assessee has merely attempted to justify the incurrence of advertisement expenditure on account of commercial expediency, but has not demonstrated that there was a direct and exclusive nexus between the expenditure incurred and increase of revenue/business volume of the assessee and there would have been no increase i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were indirectly benefited by the retrenchment of the services of the employees of the company and payment of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated as an expenditure laid out wholly and exclusively for business purposes of the company. It has to be observed here that the expression ` wholly and exclusively` used in section 10(2)(xv) of the Act does not mean ` necessarily` . Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure, it is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961, which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961, laid down the ` necessity` of the expenditure as a condition for claiming deduction under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itive criteria to be satisfied by the assessee for claiming deduction. 107. The positive test as laid down by the hon'ble court is whether the transaction is properly entered into as a part of the assessee` s legitimate commercial undertaking in order to facilitate the carrying on of its business and if that being so, then, it would be immaterial that any third party also benefits thereby. In every commercial transaction, there are two or more parties and every party thereto enters into only to derive some benefits and, therefore, according to my humble understanding what ratio has been laid down by the hon'ble Supreme Court is first with regard to the assessee` s legitimate needs of its business and if at this stage only, the allowability of expenditure is questionable, then, there is no need to look beyond that and the expenditure would be disallowed. But if this stage is cleared, then the expenditure incurred by the assessee cannot be disallowed merely for the reason that it also benefits the third party. On the basis of facts narrated hereinbefore, the obligation to incur advertisement expenses primarily rests on the legitimate commercial undertaking of the non-resident princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by law which obviously includes judge made law is further supported by the decision of the hon'ble Gujarat High Court in the case of CIT v. Navsari Cotton and Silk Mills Ltd. [1982] 135 ITR 546, wherein the hon'ble High Court has further elaborated positive/negative tests laid down by the hon'ble Supreme Court in the case of Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 and the relevant observations of the hon'ble court are reproduced below (page 554 of 135 ITR) : " In these facts and circumstances, the problem is posed whether the contribution made to the municipality for repairing the drainage pipeline is business expenditure under section 37, inter alia, incurred on account of commercial expediency which can be allowed by way of a deduction. Of course, before it can be claimed under section 37 of the Act, the following essential conditions will have to be satisfied, namely : 1. It must be expenditure in the nature of revenue expenditure and not in the nature of capital expenditure. 2. It must be laid out or expended wholly and exclusively for the purpose of the business or profession. 3. It must not be of the nature described in sections 30 to 36 and se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject to its being genuine and within reasonable limit. 8. Apparently for a factor listed as a positive factor in the left side column but in reality for one of the obnoxious purposes listed hereinabove. 9. on a nebulous plea or pretext by way of an alibi in the name of winning profits in remote future or promoting business prospects but really for one or the other of the abovementioned purposes. 10. It must not be a bogus, fictitious or sham transaction. 11. It must not be unreasonable and out of proportion. 12. It must not be an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith. 13. The advantage to be secured by incurring the expenditure must not be of the nature of a remote possible advantage depending on 'ifs' and 'buts', and if at all, to be secured at an uncertain future date which may be considered too remote." 110. It is apparently clear that the expenditure incurred by the assessee falls into more than one of the negative tests, i.e., clauses 1, 8, 11, 12 and 13 of the aforesaid negative list and, therefore, the same is not allowable under section 37(1) of the Act. 111. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 9,03,02,000 for the assessment year 199899 and Rs. 9,38,05,000 for the assessment year 1999-2000 under section 37 of the Income-tax Act, 1961 ?" 114. The case was fixed for hearing at Mumbai and Shri Porus F. Kaka, learned counsel, appeared for the assessee and Shri Indra Kumar, learned Departmental representative, appeared for the Department. 115. The facts of the case are given in detail in the proposed orders of my learned brothers and this order is to be read conjunctively with those orders and, therefore, I deem it unnecessary to give detailed facts here again. All the same, it is necessary to give few facts to bring home the controversy between the learned Members. 116. The assessee is a non-resident company engaged in the business of (i) procuring and collecting advertisement revenue on behalf of Satellite Television Asian Region Advertising Sales (" STAR" ), BV (" SAS BV" ) ; (ii) producing/procuring and supplying programmes to Satellite Television Asian Region Advertising Sales (" STAR" ), Hongkong ; and (iii) acting as a licensee in India in respect of Star Movies pay channel. 117. The assessee entered into an agreement on May 31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correctness of any statement referred to in article 13(a) herein in respect of the remittance so made by the agent. 11. Approvals. (a) This agreement shall be subject to the agent obtaining the necessary Reserve Bank of India approval to act as an agent for the company under the terms and conditions mentioned herein. (b) The agent shall arrange to obtain the necessary Reserve Bank of India approvals and/or such other approvals as may be necessary to remit the invoiced amount to the company` s bank account in Netherlands." 119. The assessee in the years under consideration as also in the earlier years followed mercantile system of accounting. In the past, the assessee took accrual of commission income on the dates when the advertisements were telecast by the principal and accordingly commission income was offered for taxation. The assessee subsequently realised that income did not accrue to it on the date of telecast of advertisements booked, but accrued when payment was received from clients. Accordingly, in the years under consideration, the assessee claimed that income accrued from commission from its principal on the date when the money was realised by it from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisements booked were telecast. This resulted in addition of Rs. 8,10,11,000, Rs. 8,30,00,449 and Rs. 35,48,804 for the assessment years 1997-98, 1998-99 and 1999-2000 respectively. 122. The assessee impugned the additions in appeal, but remained unsuccessful. The learned Commissioner of Income-tax (Appeals) held that commission income accrued to the assessee on the dates advertisements were booked for telecast. This, according to the learned Commissioner of Income-tax (Appeals), followed from clause 7 of the agreement between the parties. He also held that the word " paid" does not contemplate actual receipt of amount. The detailed reasoning of the learned Commissioner of Income-tax (Appeals) are noted in paragraph 7 of the proposed order of the learned Judicial Member. 123. The assessee being aggrieved carried the matter in appeal before the Appellate Tribunal. In the course of hearing of appeals before the Tribunal, learned counsel for the assessee did not dispute that the assessee had all along been following mercantile method of accounting and the same method was followed in the three years under appeal. He argued that as per the agreement, commission to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Therefore, the amounts about which there is no hope of recovery, cannot be added in one year as income and then treated as bad debts in the next year on the basis of the theory of real income. Reliance in this connection was placed on the decisions of the hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 and in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315. This way learned counsel for the assessee supported the order of the learned Judicial Member. 126. The learned Departmental representative submitted that the assessee could not be permitted to change the method of accounting from mercantile to cash system unless there were good and bona fide reasons to do so. There were neither any change in the terms and conditions of agreement between the assessee and its principal nor any plausible reason has been given by the assessee to change its method of accounting. The assessee intended to adopt hybrid system of accounting, which was not permissible under the amended section 145 of the Act. The learned Departmental representative further submitted that income had accrued to the assessee as per reasons given in detail by the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT [1954] 26 ITR 27, 30. However, where right to receive is inchoate it would accrue on the date when such right becomes absolute. In other words, if accrual of income depends on happening of any event or fulfilment of a condition, then income will accrue on happening of that event or fulfilment of the condition. The learned Judicial Member, in this connection, relied upon the decision of the hon'ble Supreme Court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675. 128. The learned Judicial Member thereafter observed in his proposed order that accrual of income would depend upon the agreement between the parties. He thereafter considered and discussed the decisions of the Supreme Court in the cases of E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27, CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 and J. P. Shrivastava and Sons (Bhopal) P. Ltd. v. CIT [1965] 57 ITR 624 and drew the following conclusion in paragraph 34 of his order : " In view of the above judgments of the apex court, it is clear beyond doubt that normally the commission income would accrue to the assessee when the services are rendered or completed. However, the parties, with mutual consent, may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arting, the learned Judicial Member observed that the decision of the Supreme Court in the case of Seth Pushalal Mansinghka P. Ltd. v. CIT [1967] 66 ITR 159 does not help the assessee. The learned Judicial Member has reproduced the relevant observations of the apex court at pages 22 and 23 of his proposed order. The learned Judicial Member also rejected the contentions of the assessee that income cannot accrue to it unless income has accrued to the principal. The learned Judicial Member also did not agree with the assessee that approval granted by the Reserve Bank of India to the assessee to remit amounts to its principal had nothing to do with accrual of income. Reasons for the aforesaid findings are given by the learned Judicial Member in paragraphs 24 and 25 of his proposed order. It has been held by the learned Judicial Member that the decision of the Supreme Court in the case of Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 relied upon by the learned Departmental representative was in no way conflict with the view, which was being taken in this case. 132. In the ultimate analysis the learned Judicial Member observed as under : " 30. In view of the above discussions, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him, such advertisements and publicity increases the viewership of Star TV and, therefore, is not related to the assessee` s business. Similar observations were made with reference to cable subscription activity." 135. The Assessing Officer had accordingly disallowed the claim for both the assessment years and the assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). It was submitted before the Commissioner of Income-tax (Appeals) that the expenses were incurred to promote the programmes on channels which resulted in great demand for the programmes aired by the principal. Thus, publicity carried through advertisements resulted soliciting and marketing of advertising easier and beneficial. It was argued that commercial expediency was required to be judged from the point of view of the businessman and not of the taxing Department. The learned Commissioner of Income-tax (Appeals) held that the assessee collected subscription not for itself but for Star India P. Ltd. Advertisements carried by the assessee only benefited Star TV. Only a small benefit was received by the assessee. The Commissioner of Income-tax (Appeals) accordingly allowed 20 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law. The order of the learned Commissioner of Income-tax (Appeals) is, therefore, modified and disallowance sustained by him is hereby deleted." 137. The learned Accountant Member did not agree with the view taken by the learned Judicial Member. He first referred to the grounds of appeal raised by the assessee. He observed that the assessee was obliged under law to follow mercantile system of accounting. The learned Accountant Member in his proposed order further noted that under the agreement dated May 31, 1994, the assessee had treated advertising commission as accrued at the time when time spots were aired and, therefore, change in system was sought to be made under the same agreement by giving new interpretation to clause 8 of the agreement. According to the learned Accountant Member, change in accounting policy was aimed to reduce tax liability for the assessment years under consideration. The learned Accountant Member also observed that the assessment in this case was to be made on the income as earned against traditional concept of actual receipt from right to receive. 138. The learned Accountant Member then referred to the agreement between the parties and repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepting of commission on sale of time spots. Accordingly, the learned Accountant Member observed that he would prefer not to disturb the accounting policy in which the commission income was recognised by the assessee in the past particularly agreement remained unaltered. The learned Accountant Member thereafter referred to clause 7 of the agreement relating to " invoicing and collection" and clause 9 relating to " net profit of agent" . With reference to the aforesaid clauses, the learned Accountant Member observed that the assessee had no contractual obligation to make efforts to realise amounts from clients as it would have caused implications and the assessee is not getting any money from principal on this score. Thus, the role of the assessee under the agreement is " limited to receive the amount paid by the clients. In a nutshell, the assessee is under no obligation to realise the amount from the clients" . After referring to certain other clauses, the learned Accountant Member refers to the more important clause 8 providing for retention of commission by the assessee. In respect of the above clauses, the learned Accountant Member has observed : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies otherwise i.e., if the cost are being charged to the profit and loss account of a particular period correspondingly the revenue related to such cost should also be credited in the profit and loss account of the period. In this view of the matter, the assessee` s conduct of claiming the cost related to such commission in the period under consideration also obliges the assessee to account for the revenue in relation to such cost in the same period. The assessee has not done so, resulting into distortion of results by way of understatement of profits which fact has also been pointed out by the statutory auditors. All these factors lead to the irresistible conclusion that such change is not guided by bona fide considerations. The bona fides of the change could have been established if the assessee would have simultaneously deferred the expenditure incurred in relation to income from commission not recognised as revenue to the period when such commission was recognised as revenue. It is also a settled judicial principle that the assessee, has, of course to satisfy the income-tax authorities, i.e., he is doing so in good faith and the Revenue is not likely to be defrauded. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct that emerges from these cases is that if the expenses is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party [Usher` s Wiltshire Brewery Ltd. v. Bruce [1914] 6 TC 399 (HL)]. Another test is whether the transaction is properly entered into as a part of the assessee` s legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that third party also benefits thereby [Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) ; [1951] SCR 594]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee." 145. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to responsibility of the assessee to collect fees due to its principal. He also submitted that principal of the assessee was a non-resident and was interested in amounts remitted to it. It was not interested in merely booking advertisements on Star TV. Having above in mind, it had provided in the agreement that commission would be due to the assessee only when amount due to the principal is collected by the assessee. 148. Shri Kaka vehemently contended that the learned Accountant Member was wrong in concluding that commission due to the assessee would accrue as soon as services are rendered by the assessee. The learned Accountant Member was also not correct in holding that the services rendered by the assessee would be taken as complete when advertisements solicited are approved by the principal and are aired. Income (here commission) would accrue only under the terms and conditions of the agreement and not when services are completed by the agent. In this connection, he drew my attention to a large number of decisions discussed hereinafter : (i) Shri Ambica Mills Ltd. v. CIT [1960] 39 ITR 1 (SC). In this case, the assessee, a managing agent, was entitled to commission at 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the end of the year. There was also a liability to pay back a portion of the commission in certain contingencies, which also could be determined only when the accounts were made up for the year. It is thus clear that there was no accrual of any commission till the end of the year. On this construction of the contract it cannot be held that the commission had accrued as and when the sales took place and that as a result of their agreeing to the modification of the agreement the managing agents had voluntarily relinquished a portion of their commission. On the other hand, under the original agreement the managing agents were entitled to receive commission only at the end of the year and before then the agreement was varied modifying its terms as from the beginning of the accounting year. We are of the opinion, therefore, that the High Court correctly found against the appellant and we, therefore, dismiss C. A. No. 145 of 1958 with costs. In view of this Mr. Palkhivala for the managed company did not press C. A. No. 323 of 1957, which is, therefore, dismissed but the parties will bear their own costs in that case because the result of that appeal is really dependent upon the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviso to it applicable to years 1950 and 1951 that if the directors having regard to the results of the working of the managed company were of the opinion that a lesser remuneration should be paid to the managing agent for any of the two years the directors shall have the right to fix such lesser remuneration either by way of a lump sum or at a reduced percentage rate and the managing agent shall be bound to accept the same. On March 17, 1951, there was a supplemental agreement embodying the terms of this resolution and on April 8, 1951, the directors by a resolution fixed the remuneration at Rs. 4,11,875 instead of the commission calculated at the old rates which worked out at Rs. 5,11,875. In this case also the question was whether the sum of Rs. 1,00,000 was subject to income-tax : Held, (i) that the agreement was one integrated and indivisible whole and that the managing agent` s commission was only determinable and accrued when the year was over ; (ii) that the fact that the amounts of commission were credited in the books of the managed company every six months only meant that as an interim arrangement the accounts of all sales were made up at the end of six months also. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany was made up. The Revenue contended that commission had accrued to the assessee as income and, therefore, could not be given up after the end of the financial year. This contention was repelled by their Lordships with the following observations (headnote of 89 ITR) : " (i) That the office allowance forgone by the respondent was allowable as revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. CIT v. Chandulal Keshavlal and Co. [1960] 38 ITR 601 (SC) followed. (ii) That, as the managing agency commission receivable could have been ascertained only after the managed company had made up its accounts and the respondent had given up the commission even before the managed company made up its accounts, and no date had been fixed in the agreement for payment of the commission, the mere fact that the respondent was maintaining its accounts on the mercantile system did not lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. The commission given up by the respondent could not be considered to be its real income. The High Court was, therefore, justified in refusing to answer the question relating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave accrued to the assessee. If no income has materialised, there can be no liability to tax on a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account, but what should be considered is, whether the income has really materialised or resulted to the assessee. The question whether real income has materialised to the assessee has to be considered with reference to commercial and business realities of the situation in which the assessee has been placed, and not with reference to his system of accounting." 151. Similar is the view taken by the Income-tax Appellate Tribunal Special Bench at Hyderabad, in the case of Deputy CIT v. Nagarjuna Investment Trust Ltd. [1998] 65 ITD 17. Relevant observations are reproduced below (page 58 of ITD) : " (c) From a reading of the provisions of section 145 in conjunction with the charging provisions contained in section 4, the scope of the total income defined in section 5 and other relevant provisions in the light of principles of law laid down in the various judgments discussed hereinbefore the following well-settled princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions are to be made without any charge to the company. 153. In the light of the above clause, it is difficult to hold that the assessee does not have obligation to collect sums due to its principal as the assessee was required to make collection on behalf of its principal and the service of the assessee would be treated as complete only when sums due to the principal are collected by the assessee. Therefore, even on principle accepted by the learned Accountant Member, commission could not accrue unless collection was made by the assessee. This position is made more explicit as per clause 8 of the agreement referred to above. 154. The learned Departmental representative supported the proposed order of the learned Accountant Member. He submitted that the learned Member had taken into account the concept of accrual of income and concept of real income. He has noted that under the mercantile system of accounting, point of accrual of income is when the assessee acquires a right to receive income. Right to receive in the present case accrued to the assessee as soon as the job was performed under the contract. As soon as the job was completed, right to receive commission arose to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rincipal and not by the assessee. It was, therefore, a case of diversion of income. The learned Departmental representative accordingly supported the impugned order of the learned Accountant Member. 157. I have given careful thought to the rival submissions of the parties and examined the orders of my learned brothers in the light of the above submissions. I have also carefully examined the agreement between the parties which has been reproduced in the earlier part of this order. There is no controversy that the assessee` s income is to be computed on the basis of mercantile system of accounting. It is nobody` s case that the assessee is following cash system of accounting. There is further no dispute that under the above system, income is liable to be taxed as soon as the assessee has right to receive the income. Likewise expenditure under the system is to be allowed on the basis of liability to pay. Actual payment is not relevant. There is further agreement that the aforesaid question has to be determined with reference to the provisions of sections 4 and 5 of the Income-tax Act. The main controversy involved here is at what point of time, income accrued to the assessee. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present case, it is seen as per clause 8, the assessee is entitled to, i.e., he gets a right to retain " 15 percent of the net invoice amount paid by the clients as commission" . Thus, commission is required to be worked and right of the assessee to receive commission is dependent on payment of charges by clients of the assessee` s principal. So it is clearly provided that right to receive/retain income would accrue after the amount is paid by the assessee` s client. It cannot accrue prior to or before payment is made by the assessee` s client. The payment or realisation of amount from client for the advertisement aired in TV channel is a condition precedent for accrual of income in this case. Though clause 8 of the agreement is in clear terms and is sufficient to indicate as to when income would accrue to the assessee, other terms of the agreement also support the same inference. 159. The learned Accountant Member, in the proposed order, on the basis of clause 7 of the agreement, has observed, " it is relevant to mention that no contractual obligation has been cast upon the assessee to make efforts to realise the amount from clients as it would have cast implicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crued to the assessee before the amount is actually realised and the assessee is in a position to remit the same to its foreign principal. 162. The learned Accountant Member in support of his view has placed strong reliance on the decision of the Supreme Court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675 and on the decision of the House of Lords in the case of Commissioners of Inland Revenue v. Gardner Mountain and D` Ambrumenil Ltd. [1947] 29 TC 69 (KB). 163. On the facts of the case and by applying the ratio of the aforesaid decision, the learned Member has concluded as under : " Once a debt is created the uncertainties attached thereto regarding quantification or realisation would not alter its character though the amount of profit may change depending upon the realisation, the delays and difficulties which may arise in a particular case. In the present case, a debt in favour of the assessee was created as soon as the assessee performed its part of contractual obligations and the quantification of commission based upon the contract with the clients, at the stage of acceptance of soliciting advertisements by the principal could be done. Therefore, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. Other clauses cannot be understood to be relating to relinquishment of income after its accrual. 165. In my opinion, the learned Accountant Member has not properly appreciated the ratio of the decision of the Supreme Court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675. In the said case, the assessee-company, apart from having its own business was also a partner in a firm Indian Steel Syndicate. The firm in which the assessee was a partner, closed its accounts on November 30, 1951. For the assessment year 195152, the assessee did not declare any dividend and dispute arose whether share of income of the assessee in the firm amounting to Rs. 70,895 was liable to be taken into account for purposes of section 23A which authorised the Assessing Officer to impose levy under section 23A of the Income-tax Act. Undisputedly section 23A was attracted if the aforesaid sum of Rs 70,895, i.e., the share income of the assessee-company from partnership was taken into account. The contention of the assessee was that meeting of board of directors to declare dividend was held on May 17, 1951, and by that time books of account of the firm were not made up nor share of profit was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant material, the House of Lords held that right to receive commission accrued to the assessee when the risk was underwritten. It was earned at that stage though profit resulting from insurance could not be ascertained at that time, the right of the assessee was a vested right. The conclusion has been arrived at after considering terms and conditions of the agreement between the parties, particularly terms relating to payment of commission or right to receive commission. The agreement provided that right to receive commission or payment would accrue to the assessee as soon as risk was underwritten. If the right to receive commission had accrued, then it was immaterial that there was difficulty in quantification of profit or realisation of amount of commission. Whether income accrued or not in case of a contract would depend on the terms and conditions of the contract. The decision of the House of Lords is based on peculiar terms of that contract. No material is brought on record to show that contract involved in the case before the House of Lords and one in the case before us were identical or so similar that from the terms of the contract, it can be held that right to receive c ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
