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TMI Blog2012 (8) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... d in receipt issued by the franchisee/commission agent does not amount to discharge an obligation by an overriding title rather the said payment amounts to discharge an obligation after such income reaches to the assessee. Since the assessee is liable to deduct TDS on the payment of commission under the provisions of section 194H of the Act and has failed to deduct the same, therefore, the Assessing Officer was justified in disallowing the payment of commission of Rs. 56,30,173 under the provisions of section 40(a)( ia) of the Act - IT APPEAL NOS. 3659 AND 6171 (MUM.) OF 2009 - - - Dated:- 8-7-2011 - D.K. AGARWAL AND J. SUDHAKAR REDDY, JJ. B. Jaya Kumar for the Appellant. Prakash Pandit for the Respondent. ORDER D.K. Agarwal, Judicial Member. - These two appeals by the revenue are directed against the separate orders dated 25-3-2009 and 29-9-2009 passed by the ld. CIT(A) for the assessment years 2005-06 and 2006-07 respectively. Since the facts are identical and common issue is involved, both these appeals are disposed of by this common order for the sake of convenience. ITA No. 3659/Mum/2009 (Assessment Year 2005-06): 2. Briefly stated facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rincipal. When the gross receipts are received by the assessee for the application, he has to divert 15 per cent of such gross receipts to the abovementioned parties retaining 35 per cent for himself and remit 50 per cent to his principal. To prove that the assessee is not liable to deduct TDS under section 194H, the assessee relied on the decision of the Hon'ble Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 wherein the Apex Court has clarified the difference between diversion of income and application of income. According to the assessee, it is a case of a diversion of income and not its application. He has a contractual obligation to divert 15 per cent of gross receipts to the above mentioned parties and the said sum never reaches him in the form of income. In other words, the assessee does not apply his income to make the commission payments. The assessee further explained that the provisions of section 194H or 194J of the Act provide that a person is supposed to deduct tax at source at the time of crediting such amount or at the time of payment in cash or by cheque to the other person. This implies that the above mentioned sections are applicable to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 88,558 = Rs. 56,30,173 paid to the parties by invoking the provision of section 40( a )( ia ) of the Act and added the same to the total income of the assessee. The Assessing Officer, after making some other disallowances, completed the assessment at an income of Rs. 88,17,150 vide order dated 27-12-2007 passed under section 143(3) of the Act. 3. On appeal, the ld. CIT(A), after considering the MOU and the sample copy of the receipt issued by franchisee (commission agent) to the students and the decisions of Hon'ble Apex Court in the case of Sitaldas Tirathdas ( supra ) and CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776 (SC) held that since the appellant did not receive the professional fee component from the liaison office as his income, consequently, when the appellant remitted back the professional fee component to the liaison office, appellant did not pay back the same to the liaison office as income by way of commission, therefore, provisions of section 194H rule with section 40( a )( ia ) were not applicable and hence the appellant was not required to deduct TDS thereon including the payments to parties with whom no written agreements were made and accordingly h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has credited the entire fees in his Profit and Loss Account and separately made the payment of commission does not mean that the assessee has received the entire amount of fees and not the net amount of fees i.e., after deducting 15 per cent commission thereon. The ld. counsel for the assessee, while referring to the sample copy of the receipt as reproduced by the ld. CIT(A) appearing at page 8 of his order, further submits that the receipt itself shows that the amount of fees is including of professional fees of Rs. 31,980, being 15 per cent of the total amount of fees payable to the LITR, London. The ld. counsel for the assessee, while referring to certain clauses, particularly clauses 4 and 8 of the MOU, submits that in view of the said clauses as mentioned in the MOU, it is a case of diversion of income by an overriding title as the assessee has to pay 15 per cent commission to the franchisee/commission agent and, therefore, the amount of 15 per cent commission did not reach to the assessee as his income and, therefore, he is not liable to deduct TDS on the said amount of commission and for this proposition reliance was also placed on the following decisions : 1. Sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reach to the assessee as his income and in support reliance was also placed on certain decisions ( supra ). 10. Per contra , the case of the revenue is that the assessee has credited the entire amount in his income and as per the agreement the assessee is bound to pay commission at the rate of 15 per cent, and since the assessee has made the payment of commission to the parties without deduction of TDS under section 194H, the Assessing Officer was fully justified in disallowing the payment of commission of Rs. 56,30,173 under section 40( a )( ia ) of the Act. 11. Here, it is necessary to take note of the relevant clauses of MOU dated 12-2-2003 entered into between the assessee i.e., liaison office as first party and franchisee/commission agent as second party and with the principal, i.e. , The London Institute of Technology Research, London ("LITR London"), as the confirming party. The relevant clause Nos. 4 8 of the said MOU appearing at pages 53 to 55 of the assessee's paper book are reproduced as under : "4. The Party of the First Part hereby agrees that the Party of the Second Part will be entitled to either deduct directly 15 per cent (fifteen per cent) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, in our view, is against the principles of law of agency and hence the same is immaterial. 13. In Sitaldas Tirathdas ( supra ), it has been held that where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the incomes is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. 14. In Tollygunge Club Ltd. ( supra ), it has been held the racing club received surcharge for "local charities" with each ticket for admission to the races, and spent the amount on such charities. Held, that the resolution to charge such surcharge was not one to apply a part of the income after the receipts had become the income of the assessee, but went to divert the amount to a trust created for that purpose. 15. In Raja Bejoy Singh Dudhuria ( supra ), it has been held that where an assessee inherits an asset along with liability, under the decree of the High Court, it may well be that such liability would be a charge on the asset with the result that income from such asset would stand diverted by the charges. 16. In Madras Race Club's case ( supra ), it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligation by an overriding title rather the said payment amounts to discharge an obligation after such income reaches to the assessee. Therefore, all the decisions relied on by the ld. counsel for the assessee are distinguishable and not applicable to the facts of the present case and accordingly the plea taken by the ld. counsel for the assessee that it is a charge governed by the principle of diversion by overriding title is not sustainable and the same is, therefore, rejected. This view also finds support from the following decisions : 20. In CIT v. Y.S. Desale [1982] 137 ITR 117 / 10 Taxman 115 (Bom.), it has been held (head note page 119) : "( iii )When income is received by an agent, he receives it for and on behalf of the principal and there is no question of any overriding title. Since the promoters received the income as agents of the shareholders within the meaning of section 182 of the Indian Contract Act, 1872, and the promoters did not have any title to the income, which really vested in the shareholders, there was no question of any overriding title of the shareholders because, even initially, the title to the income proportionate to the contribution of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying and selling of goods or in relation to any transaction relating to the following services : ( i )for services rendered (not being professional) ; ( ii )for any services in the course of buying and selling of goods or in relation to any transaction relating to any asset, valuable article or thing. 25. Applying the above provision of law to the facts of the present case, we find that what is paid to the franchisee/commission agent by the assessee is 15 per cent of the gross fees received from the students which is nothing but commission payable to the agent by the assessee. Explanation (i) to section 194H has a wide meaning and it covers any payment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered. In the case before us, no one can doubt that 15 per cent commission was paid by the assessee to the franchisee/commission agent is for advertisement campaign and other services etc. for the courses offered by the Londo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls within the ambit of section 194H read with section 40( a )( ia ) of the Income-tax Act, 1961." 29. At the time of hearing, both the parties have agreed that the facts of the present case are identical to the facts of the case for the assessment year 2005-06. Therefore, the plea taken by them in that appeal may be considered while deciding the present appeal. 30. Having carefully considered the submissions of the rival parties and perusing the material available on record and in the absence of any distinguishing feature brought on record by the parties, we, keeping in view of our finding recorded in the assessee's appeal for the assessment year 2005-06 ( supra ) hold that on the facts and in the circumstances of the case the assessee is liable to deduct TDS under section 194H of the Act and since he failed to deduct the same, the Assessing Officer was justified in disallowing the payment of commission Rs. 71,90,973 by invoking the provisions of section 40( a )( ia ) of the Act and accordingly the order passed by the CIT(A) is reversed and that of Assessing Officer is restored. The grounds taken by the revenue are, therefore, allowed. 31. In the result, the revenue ' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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