9911796707
TMI Blog2006 (7) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... d ₹ 9,38,05,000 for asst. yr. 1999-2000 under s. 37 of the IT Act, 1961? Third Member - HELD THAT:- The learned JM in his proposed order further observed that as per settled legal position income accrues when an enforceable debt is created in favour of the assessee; in other words, when a right to receive income is acquired. For the aforesaid proposition, reliance was placed on the decision of the Hon'ble Supreme Court in the case of E.D. Sassoon Co. Ltd. Ors. [ 1979 (5) TMI 3 - SUPREME COURT] . 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 JM, in this connection, relied upon the decision of the Hon'ble Supreme Court in the case of CIT vs. Shri Goverdhan Ltd. [ 1968 (1) TMI 2 - SUPREME COURT] . According to the learned JM, the assessee had no right to receive commission till the happening of such contingency as right to retain commission is dependant upon payment of invoice amount to the assessee. Once invoice amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in this case was to be made on the income as earned against traditional concept of actual receipt from right to receive. In the view of the learned AM, contractual obligations of the assessee comes to an end and once the client's requisition forwarded by the assessee is accepted by Principal, at this very point, assessee becomes eligible for its commission, i.e., a legally enforceable debt has been created in favour of assessee because the sale of time spots is completed, and the commission receivable by the assessee is also ascertainable on the basis of number of time spots sold at the rate accepted by the Principal and the client. Ascertainment or quantification of a debt will not affect accrual of income. Learned AM observed that the assessee had no contractual obligation to make efforts to realize amounts from clients as it would have caused implications and the assessee is not getting any money from Principal on this score. Thus, role of assessee under the agreement is limited to receive the amount paid by the clients. In nutshell, the assessee is under no obligation to realize the amount from the clients . After referring to certain other clauses, the learned AM refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was incurred on account of any commercial expediency. On the basis of the decision of the Hon'ble Supreme Court in E.D. Sassoon J. David Co. (P) Ltd. [ 1979 (5) TMI 3 - SUPREME COURT] the learned AM evolved the positive and negative steps to be applied to determine whether expenditure was incurred for the purpose of business and was admissible in law. On application of above tests, the learned AM held that expenditure incurred by the assessee was not deductible. It is nobody's case that 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 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 aforesaid question has to be determined with reference to provisions of ss. 4 and 5 of the IT Act. According to the assessee, commission income under the agreement could accrue to the assessee as per cl. 8 of the agreement which provided that the agent (assessee) shall be entitled to retain 15 per cent of net invoice amount paid by clients as commission. So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted if aforesaid sum of ₹ 70,895, i.e., the share income of 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 17th May, 1951 and by that time books of account of the firm were not made up nor share of profit was known. Therefore, income of ₹ 70,895 had not accrued to the assessee. The share income accrues to the partner as soon as the previous year of the firm comes to a close. It is immaterial that exact amount of profit is not known on the close of the year (31st March in the cited case). Whenever the profit is worked out, it would be the profit as on 31st March and liable to be taken in assessment year immediately following the previous year. Therefore, having regard to the facts involved in Goverdhan Ltd. (supra), no support can be derived by the Revenue from the decision. I find that there is no dispute about the genuineness of the expenditure incurred by the assessee. There can further be no dispute that expenditure incurred by the assessee on advertisement made had direct nexus with earning of income by the assessee. It is possible that expenditure on ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 ), Hong Kong; and (iii) acting as a licensee in India in respect of Star Movies pay channel. 3. The assessee entered into an agreement on 31st May, 1994 with Star Advertising Sales BV of Netherland holding exclusive rights in India from Satellite Television Asian Region Ltd. of Hong Kong 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 Reserve Bank of India (RBI) on 22nd July, 1994 and subsequently renewed from time-to-time (pp. 1 to 5 of the paper book). Under cl. 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 cl. 6 of the agreement to forward each client's requisition for telecast of its advertisements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts made by the advertisers during the year, to bring it in consonance with cl. 8 of the agency agreement with SAS BV; In the Supreme Court case of Keshav Mills Ltd. vs. CIT (1953) 23 ITR 230(SC) 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. 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 recognized 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 recognize 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 31st March, 1997, would have been higher by ₹ 8,10,11,000 and the net los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en before the AO was reiterated. However, the learned CIT(A) confirmed the orders of the AO 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 fact of 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 another accounting period the claim of the appellant is not affected and the commission income has to be accounted for the year of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, This ground of appeal is rejected. Aggrieved by the same, the assessee is in appeal before the Tribunal for all the years. 8. The learned counsel for the assessee, Mr. Kaka, at the outset, pointed out that assessee had been following mercantile method of account 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 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 realized from its clients. Hence, the assessee started declaring income on the basis that commission income accrued on realization of money from its clients. Accordingly, it has been pleaded that correct claim of assessee cannot be rejected merely on the ground that in earlier years the assessee declared the income on the basis that commission income accrued on the date of telecast of the advertisement. 9. Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... features of the business and other complexities, the Board instructed the Revenue officers to assess the income of such telecasting companies @ 10 per cent 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 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 accrual. According to him, the right to receive the commission remained inchoate till the assessee received the money from its clients since neither it could retain its commission nor it could remit the same to its principal. 11. To substantiate the above submission, he relied on the judgment of Bombay High Court in the case of Pfizer Corporation vs. CIT (2003) 180 CTR (Bom) 319: (2003) 259 ITR 391(Bom), where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee is maintaining mercantile system of accounting. 13. Lastly, it was argued that in such cases, theory of real income would apply. It was submitted by him that assessee was not even able to recover the various amounts from its clients due to various disputes and there was no point for offering income in one year and claiming deduction for bad debt in next year. Therefore, it would be appropriate, in such cases, to apply the real income theory as enunciated by the Supreme Court in various cases. Reliance was placed on the latest judgments of the apex Court in the case of Godhra Electricity Co. Ltd. vs. CIT (1997) 139 CTR (SC) 564: (1997) 225 ITR 746(SC) and in the case of CIT vs. Bokaro Steels Ltd. (1999) 151 CTR (SC) 276: (1999) 236 ITR 315(SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Court that right to receive dividend accrued in the year in which RBI approval was granted. Accordingly, it was pleaded that order of the learned CIT(A) be upheld. 16. 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 Revenue is devoid of force and untenable in view of the clear admission of the assessee that method of accounting continues to be mercantile. We have already extracted Note 2 appended to the computation of income in para 5 of our order wherein assessee has admitted that method of accounting continues to be mercantile. Even the learned counsel for the assessee has made the statement before us that there is no change in method of accounting and it continues to be mercantile. Accordingly, the arguments made by the learned Departmental Representative in this regard are rejected. 17. On the other hand, the dispute between the parties centres round the date of accrual of commission income. The contention made on behalf of assessee is that under mistaken advi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 20. Let us now explain the above view in the light of case law. In the case of E.D. Sassoon Co. Ltd. (supra), the assessee was the managing agent of a company called United Mills and was entitled to receive a percentage of annual profits of that company as its remuneration. The accounting period of that company was the calendar year. During the year 1943, the assessee assigned their office as managing agent and all their rights and benefits under the managing agency agreement to M/s Aggrawal Co., on 1st Dec., 1943. In the course of assessment proceedings of assessee, the question arose whether in respect of managing agency commission, tax was payable on the entirety of the commission by M/s Aggrawal Co. or by the assessee or it was liable to be apportioned between the two. The apex Court held that commission accrued onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soon Co. Ltd.'s case 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 made. Counsel also submitted that in sale transactions of a trading venture, profits accrue to the trader from transaction to transaction and are embedded in each transaction carried on by the trader, and the charge imposed by s. 4(1)(a) is not deferred till settlement of accounts. On that premises, counsel said, that profits dormant or embedded in the transactions carried on by M/s. Amrit Chemicals accrued from transaction to transaction till 12th Nov., 1955, and properly belonged to the assessee and were liable to be taxed in the hands of the assessee notwithstanding a subsequent disposition of those profits by the assessee. Such contention was negatived by the apex Court by holding as under : It is true that E.D. Sassoon Co. Ltd.'s case related to a managing agency transaction and the Court said that the managing agency being a service contract one and indivisible until the entire contract is performed, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accounting period of both companies was the financial year. The financial results for the accounting period ending 31st March, 1952 were passed by the shareholders at the meeting held on 28th March, 1953. The question arose whether commission of ₹ 41,842 due to assessee for the accounting period 1951-52 was assessable as income in asst. yr. 1952-53 or 1953-54. The Hon'ble Supreme Court held that assessee did not have any right to receive the commission till the general meeting of the managed company and, therefore, the same could form part of assessee's profit for the asst. yr. 1953-54. 24. 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 provide that commission would accrue on happening of future contingency. Therefore, in such cases, commission would not accrue until the happening of the contingency and AO would not be justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have any infrastructure in India and, therefore, depended on its agent. Therefore, to ensure the recovery of the advertisement charges, the implied condition was made in the agreement to the effect that assessee would be entitled to retain its commission @ 15 per cent of the net invoiced amount. It is because of this condition that assessee is required to put its best effort for recovery of the invoiced amount for its clients. Real effect of the cl. 8 is that assessee would never get any commission where the invoiced amount is not paid by the client. Therefore, contingency provided in the clause must happen before the right to receive the commission accrues. In the absence of payment by the clients, no enforceable debt is created in favour of assessee under the agreement since it cannot move the Court for recovery of the amount from its principal on the basis of telecasting of advertisement. The moment the advertising amount is paid by the clients, the assessee gets the right to retain its commission and consequently would be liable to pay tax in the year in which such amount is received. The date of remittance to the principal would be irrelevant. The claim of the assessee ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erring to the judgment of apex Court in the case of CIT vs. Mewar Textile Mills Ltd. 1973 CTR (SC) 443: (1973) 91 ITR 542(SC), where assessee sent the goods by rail from Bhilwara but the railway receipt was taken in the name of buyer who was dealer in British India and such railway receipt was sent by post. However, the buyer made the payment to the bank in British India who was banker of the assessee. On these facts, it was held that property in goods passed to the purchaser in Bhilwara and income did not accrue in India. The combined reading of the above two judgments clearly reveals that place of payment was not relevant for deciding the place of accrual of profits. What is important is the place where property in goods passes. In view of the above discussions, the judgment relied on by the assessee's counsel does not help the case of the assessee. 27. We are also unable to appreciate the contention of Mr. Kaka, the learned counsel for the assessee, that there cannot be accrual of income to assessee unless the income accrues to the principal of the assessee. The obligation of assessee's principal to telecast the advertisement and the obligation of assessee to perform the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion is not dependant on the RBI's condition and consequently, the judgment of Bombay High Court in the case of Pfizer Corporation (supra) is distinguishable on facts though the ratio of the judgment is relevant on the point of law in as much as it speaks of the legal position that in case of contingency, the accrual of income would depend on the happening of the contingency. 29. The judgment of the apex Court in the case of Morvi Industries vs. CIT 1974 CTR (SC) 149: (1971) 82 ITR 835(SC), heavily relied upon by the learned Departmental Representative also does not help the case of Revenue. In that case, it was held that once income accrues then the postponement of the payment or subsequent waiver of the same would not affect the taxability in the hands of the assessee. This judgment is nowhere in conflict with the judgments cited by us in the earlier part of our order. This judgment cannot be applied to a situation where the accrual itself depends upon the condition, i.e., payment of the amount in respect of which commission is to be received. 30. In view of the above discussions, we hold that in the present case, the income of commission accrued to the assessee when it recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance made for the asst. yr. 1999-2000 was also upheld. Aggrieved by the same, the assessee as well as Revenue are in appeal before the Tribunal for both the years. For the similar reasons, the disallowance was made for asst. yr. 1999-2000 which was also upheld by the learned CIT(A). 33. The learned counsel for the assessee has submitted before us that the assessee had challenged the disallowance for asst. yr. 1998-99 in respect of the entire amount notwithstanding the fact that the assessee had disallowed the amount of its own. He drew our attention to the statement of facts in this regard. Hence, the relief could not be restricted to a particular amount. Proceeding further, he relied on the decision cited before the learned CIT(A) for the proposition that no disallowance could be made where the payment was made within the grace period. Proceeding further, it was contended by him that in view of the omission of the second proviso to s. 43B by Finance Act, 2003, no disallowance can be sustained if the payments are made before the due date of filing of the return. This contention is based on the decision of the Tribunal in the case of Addl. CIT vs. Vestas RRB India Ltd. (200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese judgments can be applied only after verification of the necessary facts and the date of payments. Accordingly, the orders of the learned CIT(A) are set aside on this issue and the matter is remitted for both the years to the file of AO for de novo adjudication after verifying the necessary factual matrix. 35. The next common issue arising from cross-appeals relates to the disallowance of ₹ 9,03,02,000 for asst. yr. 1998-99 and ₹ 9,38,05,000 for asst. yr. 1999-2000 on account of advertisement expenses. The assessee was asked to explain the purpose for incurring such expenditure. In response to the same, following explanation was given : As submitted earlier, NTVI incurs expenditure for advertisements, which are undertaken to promote channel recall in the viewers minds. Customers see that advertisements for the channels, thus a demand is generated with the cable operator, who in turn approach NTVI for enabling channel viewing. 36. The AO noted that advertisement expenses were incurred in respect of (i) manufacturing programme for Star TV, (ii) activity of assessee as commission agent for collecting advertisements revenue for Star TV and (iii) activity of cable subscri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing manufacturing activity, he was of the view that such advertisements only benefited Star TV. Since assessee was manufacturing only programmes for Star TV, it was Star TV which was required to expend on advertisement and not the assessee. Regarding agency business, it was observed by him that though such advertisements benefit Star TV yet assessee also needs advertisements for its own activity. Similarly, for cable subscription activity, assessee is required to incur such expenses. Accordingly, it was held by him that entire expenditure could not be disallowed. Accordingly, he allowed 20 per cent of such expenditure. Aggrieved by the same, the assessee as well as Department are in appeal before the Tribunal. 39. The learned counsel for the assessee reiterated the arguments taken before the learned CIT(A). In addition, he has relied on the decisions reported as Sarda Plywood Industries Ltd. vs. CIT (2000) 163 CTR (Cal) 45: (1999) 238 ITR 354(Cal) at p. 356 and CIT vs. Aluminium Industries Ltd. (1995) 126 CTR (Ker) 150: (1995) 214 ITR 541(Ker). On the other hand, the learned Departmental Representative relied on the order of the AO. 40. After considering the rival submissions, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenues from cable operators ('subscription revenues') under agreements executed with Satellite Television Asian Region Limited ('Star Ltd.') and Indian Sky Broadcasting Limited ('ISkyB'). Copies of these agreements were filed with your office vide our letter dt. 4th Jan., 2001. As per the agreements, NTVI has been granted the right to collect subscription revenues on its own account. As you will note, the agreements do not require repatriation of any amounts, on account of the subscription business, to Star Ltd., or ISkyB. We respectfully submit that the income earned and the expenses incurred by NTVI with respect to the subscription business are on its own account and not on behalf of any other company. Given the above, any bad debts suffered by NTVI with respect to the subscription business are on its own account. 42. The AO noted that bad debts had been claimed against the head Programming for ₹ 83,15,000 and against subscription ₹ 25,00,000. The AO disallowed the claim of the assessee by observing as under : It is well known fact by this time that in programming the assessee gets 5 per cent additional sum on the total expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 25,00,000, it was held by him that the same could not be allowed as deduction on account of bad debt , as this amount had never been disclosed as income of the assessee. It was also noted by him that the assessee had been consistently claiming as bad debt and only in the course of appellate proceedings, it was stated that this amount represented security deposit for acquiring premises on leave and license basis. It was observed by him that attempt was deliberately made to camouflage the claim under the guise of Bad debt . Apart from this, it was observed by him that the expenditure was on account of capital and, therefore, disallowable. Aggrieved by the same, the assessee as well as Revenue are in appeal before the Tribunal. 45. After hearing both the parties, we feel that the matter has not been examined in the right perspective by the lower authorities. The learned CIT(A) has allowed deduction of ₹ 15,06,400 under s. 36(2) of the Act without giving any reason. On the other hand, the claim of the assessee under s. 37(1) of the Act has been rejected by the learned CIT(A) on surmises and without giving reason, as to how the claim could not be allowed. Accordingly, the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embedded in the payment made by the assessee under the hire-purchase agreement. Therefore, in principle, the claim of the assessee cannot be disallowed. However, it is pertinent to note that depreciation is allowable only with reference to the cost element embedded in the payment till the end of accounting year. It is not clear whether the entire payment was made by the assessee till the end of accounting period. Accordingly, this issue is restored to the file of AO with the direction that he shall ascertain the cost element in the hire-purchase payments made by the assessee upto the last day of accounting year and then allow depreciation on such amount. 48. The assessee has also taken the following grounds in respect of asst. yrs. 1997-98 to 1999-2000 : On the facts and in the circumstances of the case and without prejudice to the other grounds of appeal, where the income of the appellant is a profit, the appellant ought to have been allowed to deduction under s. 80HHC of the Act in respect of films/TV serials, etc. produced by it and exported 49. The learned counsel for the assessee submitted before us that this ground could not be taken earlier as the decision of the Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x (Appeals) [CIT(A)] has erred in upholding the assessment under s. 143(3) of the IT Act, 1961 ('Act'), on the following ground : 1. By not accepting the change in the accounting policy made by the appellant during the financial year ended 31st March, 1997 with respect to the recognition of commission earned under the agency agreement executed with Satellite Television Asian Region Advertising Sales BV. 2. The genesis of controversy lies in the qualified report given by the auditor's showing understatement of profits by ₹ 8,10,11,000 as a result of change in accounting policy shifting the point of time for recognition of commission as revenue, The assessee also appended a note to the computation of total income citing reasons for amendment in the policy of recognizing accrual of commission on the basis of payments made by the advertiser during the year to bring it in consonance with cl. 8 of the agency agreement with principal. The assessee also stated in the said note that there was no change in the method of accounting because as per the agency agreement, the commission was legally due only upon payments made by advertisers. It may, at this stage, be useful to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee during the assessment year under consideration on the profits of the year was reported by statutory auditors of the assessee-company and they qualified the financial results shown by the assessee-company, which have already been reproduced by respected JM in his proposed order. (vii) The AO took note of the aforesaid observations of the statutory auditors. After due consideration of all the relevant aspects of the case, the AO rejected the change in accounting policy with regard to the accrual of commission income on the ground that the sole objective of such change was to reduce the tax liability for the assessment years under consideration. (viii) On appeal, the learned CIT(A) confirmed, for the detailed reasons given in his appellate order, the order of the AO in this behalf. 4. With respect to the issue of accrual of income from commission, as per my understanding, following aspects are required to be considered : (i) Whether commission to the assessee accrued only upon payment of net invoiced amount by the clients in terms of provisions of cl. 8 of the Agreement between the assessee and its Principal ? (ii) Whether point of earning of commission income in terms of provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registered office at 47/53 Asgar Manzil, Janmabhoomi Marg, Fort, Bombay 400 001 (hereinafter referred to as the Agent which expression shall, unless it be repugnant to the meaning or context thereof mean and include its successors and permitted assigns of the other part. Whereas the Company has the exclusive rights in India from Satellite Television Asian Region Limited, a company incorporated in accordance with the laws of Hongkong and having its principal office at 12th Floor, Hutchison House, 10 Harcourt Road, Hongkong (hereinafter referred to as STAR ), for television advertising on various television channels (hereinafter referred to as the 'said channels'). And whereas the Company is desirous of appointing a non-exclusive independent agent in India to sell television advertising for the said channels. And whereas the Company and the agent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's advertisement would be discharged as per the terms and conditions between Principal and client. The cumulative effect of these provisions of the Agreement is that the contractual obligations of the assessee comes to an end and once the client's requisition forwarded by assessee is accepted by Principal, at this very point, assessee becomes eligible for its commission, i.e., a legally enforceable debt has been created in favour of assessee because the sale of time spots is completed, and the commission receivable by assessee is also ascertainable on the basis of number of time spots sold at the rate accepted by the Principal and the client. For a moment, even if it is assumed that exact amount of commission may, depending upon the number (of) actual telecast of 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 Hon'ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be made up and balanced at the end of the second clear year from the expiration of the period or year to which it relates and the amount then remaining to the credit of the account shall be taken to represent the amount of the net profit of the period or year to which it relates and the commission payable to the company shall be calculated and paid thereon.' The accounts for the underwriting done in the calendar year 1936 were made up at the end of 1938, and the question that arose was whether the assessee was liable to additional assessment in respect of the commission on underwriters' profits from the policies underwritten in calendar year 1936, in the year in which the policies were 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 accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he delays and difficulties which may arise in particular case. In the present case, a debt in favour of 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 Principal could be done. Therefore, there is no limitation as such to account for the income from commission at this very point. It also emerges from the perusal of the above decision that the future uncertainties, difficulties and delays, etc. would not affect the right to receive the income, therefore, even if one assumes a situation that the telecast of solicited advertisements does not take place for any reason whatsoever, the assessee would remain entitled to receive the commission from Principal in respect of such cases also on the basis of requisition accepted by 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 recognize the income from commission in such manner, it would simply amount to postponement of recording of income which had alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollection (a) The Company shall send the invoice for the advertisements telecast, to the clients and a copy to the agent, within thirty (30) days from the date on which the advertisement is so telecast, with instructions to the clients to make the payment thereof to the agent. (b) The agent shall, without any charge to the Company, collect all sums due from the clients and hold the same in trust for the Company pending remittance as hereinafter provided. Clause 7(a), clearly demonstrates the fact that Principal itself is sending the invoices directly to the clients and instructing them to make the payment to the assessee. As per cl. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on cl. 8 of the Agreement, which reads as under : Clause 8 Commission The agent shall be entitled to retain fifteen (15 per cent) of the net invoiced amount paid by the clients as commission. On bare perusal of aforesaid clause, the fact which readily emerges is that sole purpose of cl. 8 is to provide for rate, mode and mechanism for payment of commission to the assessee in consideration of its having solicited television advertisements for the Principal by authorizing the assessee to retain 15 per cent of 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 cl. 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 cl. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lecast, even then, with a view to further establish the same, I consider it relevant to mention the fact that a new Representation Agreement was signed between Owner and assessee on 1st April, 1999 (copy placed on record) whereby responsibilities of 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 assessee or received by Owner directly though such advertisement were solicited by assessee. The relevant provisions of the Representative Agreement between Owner and assessee are reproduced below to bring out the major differences between the present Agreement dt. 31st March, 1994 and Representative Agreement dt. 1st April, 1999 to further confirm the conclusions already arrived at : Excerpts from Representation Agreement between Star and assessee dt. 1st April, 1999. Whereas Star telecasts various channels, namely Channel (V), Star World, Star Plus, Star News, Star Movies and such other channel(s) as may be added in the future, forming the 'Star TV Network' (hereinafter the 'said channels' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llars in such manner and in such location as Star directs. In such instance, the advertiser shall pay Star after deducing from gross billed advertising amount any allowable agency commission and the 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-cl. (iii) hereinbelow, 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 RBI provided that representative takes the steps referred to in sub-cl. (iv) below relating to collection of papers and makes best efforts for speedy RBI 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 commission of fifteen per cent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory and supervisory services in matters of research and promotions as may be practicable and reasonable for representative or its research and promotion organization 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 RBI, and any other information reasonably requested by Star. 2. Each month Star shall inform the representative of amounts received by it directly from advertisers (broken down by advertisers, invoice number and amounts paid). On 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which provide for a credit period 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 pp. 47 to 49 of this order where the decision of the Hon'ble High Court of Justice (Kings Bench) in the case of IRC vs. Gardiner Mountain D'Ambrumenil Ltd. again to show that once a right is vested then the same would not be affected 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 is assum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accounting policy. (iii) It was also contended that the change in accounting policy was made to offer to tax only real income because inclusion of unrealised commission from 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 authorize 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 bear the fruit, then, assessee can take legal action a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced amount. In this regard it is very important to note that in that case Hon'ble apex Court dealt with the issue of concept of accrual for the purposes of IT 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 thereunder which was not met. The relevant para of the order is reproduced as under : If, therefore, on the construction of the managing agency agreements we cannot come to the conclusion that the Sassoon 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., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder no debt payable by the companies was crea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e term earned was not used in the Act and the term accrued was not defined in 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 be 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 asst. yr. 1997-98 and now there is no difference between accounting thought on accrual and judicial thought on accrual. 6.5 Accrual is one of the postulates of both accounting and taxation. It is a concept which seeks to stratify the mirage of real income which has eluded the accountant , the taxpayer and tax gatherers. The term 'accrual' is neither a term nor a code. It is only a concept. This concept is not static but is dynamic. Hence it is in the constant state of evolution and development as new circumstances and situations arise. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 from such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies, which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in any year subsequent to the previous year, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted. (4) Accounting policies adopted by an assessee should be such so as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e.f. 1st April, 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 Profit and gains of business or profession and Income from other sources . It is also pertinent here to mention that 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, 1956. Sec. 145(2) was inserted w.e.f. 1st April, 1997 which empowered the Central Government to issue Accounting Standards to be followed by any class of assessees or in respect of any class of income. In pursuance of such powers, Central Government notified AS 1 relating to disclosure of accounting policies and AS 2 relating to disclosure of prior period and extraordinary items and changes in accounting policies. The said notification came into force w.e.f. 1st April, 1996 and hence these Accounting Standards are applicable for asst. yr. 1997-98 and onwards. 6.8 Sec. 4 is the charging section. Sec. 5 of the IT Act, 1961 effectually mandates of the s. 4 of the Act. Sec. 145 lays down the method of computation of income and thus, it serves to the purpose of both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intent as expressed in s. 145(2) and the Accounting Standards notified by the Central Government in pursuance thereof. In this view of the matter, the assessee's contention that no accrual of commission income took place until the amounts were paid by the client deserves outright rejection being contrary to the plain provisions of s. 145 (1) and (2) r/w Expln. 6(b) of the AS 1 notified by the Central Government. Thus, the commission income, in my humble view, ought to have been recognised by the assessee and also taxed by the Department at the time when it was earned by the assessee, i.e., when the advertisements solicited by the assessee were accepted by the Principal. On the basis of aforesaid discussion also, it can be safely concluded that once the services of soliciting advertisements are rendered, commission income thereon has been earned by the assessee in accordance with the provisions of s. 145(2), the same has also accrued to the assessee. In my humble understanding, the decision given by the Hon'ble Supreme Court in the case of E.D. Sassoon Co. Ltd. (supra), which was rendered under the specific settings of that case although applied subsequently in general is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod costs and are expensed in the relevant accounting period, e.g., administrative expenses such as salaries of general staff, telecom, travelling, depreciation on office building, etc. Similarly, the costs, the benefits of which do not clearly extend beyond the accounting period are also charged as expenses of that accounting period. Thus, there is a direct nexus between income recognition and expense recognition and which is in total conformity with the concept of taxation of real income. Therefore, an attempt must be made to identify the costs with revenues and vice versa. If the income is recognised at the time of receipt of payment from the clients and all expenses are claimed as period costs then such accounting methodology is essentially hybrid system of accounting which is not permissible both under the provisions of the Companies Act, 1956 and the IT Act, 1961. 7.3 Admittedly, it is not the case of the assessee that the concept of matching of cost with the Revenue is not applicable to its case. The matching concept is not a one-way process in a sense that only the cost should be matched to the revenue but it also applies otherwise, i.e., if the cost are being charged to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and publicity during the financial year 1997-98. Ground of Revenue's appeal On the facts and in the circumstances of the case and in law, the learned CIT(A)-XI, Mumbai has erred in deleting the addition made of ₹ 1,80,60,400 out of advertisement expenses. 9.1 For better appreciation of the issue, I feel it pertinent to briefly narrate the relevant facts as under : (i) The assessee is a resident and is acting as agent of principal (a non-resident) holding exclusive rights for television advertising in India for Star (another non-resident assessee). The Star is owner of the channels and is a foreign telecasting company. Principal is having exclusive rights in India for television advertising from Star under a separate agreement (copy not placed on record). The assessee is also having separate activities for manufacturing programmes for Star and earning income on such programmes @ 5 per cent of the cost of such programmes (copy of agreement not placed on record) and Cable TV operations. All the parties are interlinked and Star is holding approximately 69 per cent of shareholdings of the assessee. (ii) The assessee is getting commission at the rate of 15 per cent of net i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld increase the demand of channels of Star TV and thereby result in higher collection for Star pay channels. This would not be beneficial to the appellant. (v) The assessee claimed before the CIT(A) that the publicity of the programmes facilitated soliciting and marketing of advertisement easier and had a direct impact on the revenue of the assessee. It was also claimed that the channel recall, as a result of advertisement and publicity, promoted the programme recall and thereby resulted in more subscribers and higher television rating points (TRP) and which consequently increased demand for advertisement on channels and higher revenue for appellant. It was also contended that though there was no contractual obligation to incur such expenses, appellant decided to advertise the TV programmes based upon the commercial expediency which had to be judged from the businessman's point of view and not of Revenue authorities. It was also submitted that advertisement expenses on the manufactured programmes were not recovered from Star because advertisement expenses were not part of production costs. With regard to subscription business, the assessee contended that merely because the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uations of the present case. Further, the expenditure should also qualify the tests laid down by the judicial authorities. Accordingly, if the expenditure incurred by the assessee is excessive or unreasonable having regard to the legitimate needs of the business or profession of the assessee or the benefits derived by or accruing to him, so much of the expenditure as is so considered to be excessive or unreasonable shall not be liable for deduction. In a number of judicial decisions, it has been held that the Revenue authorities can certainly look into the aspects of wholly and exclusively for the purpose of business because it is an essential condition for the allowance specifically put by the legislature and within the ambit of these aspects, the reasonableness can also be examined. Thus, the contention of the assessee that where the incurrence of the expenditure is not in doubt, the reasonableness of the same cannot be examined, is rejected. 9.5 With regard to the aspect of commercial expediency, it is worthwhile to mention that the term commercial expediency cannot be defined for universal application and it will have to be examined on the facts and circumstances of each case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are generally shared by and between the parties deriving such benefits. It is evidently clear from the material on record that the other parties deriving the benefits have not shared the expenses nor reimbursed the same to the assessee. The assessee has not been given any additional incentives even which is clearly an exception to the prevalent business practices and this leads to an apparent conclusion that by shifting their primary obligation of advertising for promoting their channels to assessee (resident assessee), both Principal and Star (non-resident assessees) have reduced the business profits of the assessee (resident assessee) to mitigate the tax liability of assessee and such practice clearly attracts the applicability of provisions of s. 92 of the Act which empowers the AO to determine the profits of resident assessee and the AO has, thus, rightly disallowed the expenditure by exercising his powers although the AO has not specifically mentioned the section in the assessment order. 9.8 The assessee has vehemently contended that the expenditure cannot be disallowed merely because it has benefited the third party and has put strong reliance on the decisions of the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 of 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 Brewary Ltd. vs. Bruce (1914) 6 Tax Cases 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. vs. CIT (1951) SCR 594 : (1951) 20 ITR 1(SC)]. 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. From the perusal of the above it is amply clear that Hon'ble apex Court has not given a blanket approval for the allowance of the expenditure and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d comes within the ambit of any of above negative criteria then such expenditure would not be allowable. In the present case, admittedly the Principal of the assessee and Owner, the owner of the television channels are liable to pay tax at 10 per cent of the gross receipts in accordance with the CBDT Circular No. 742 which means that although such expenditure Is apparently their obligation, but no tax benefit would be derived by them if such expenditure is incurred by them and because of their close connection with the assessee, business affairs have been so arranged as to reduce the profits of the business of the assessee, being a resident, thereby resulting into less incidence of tax on the assessee. Further as discussed in detail hereinbefore that the incurrence of advertisement expenditure is the primary and substantive obligation of parties other than the assessee and thus on this count also the expenditure amounts to have been incurred for fostering the business of another person only and thus it comes within the ambit of another negative test. In view of above discussion, it can be safely concluded that advertisement expenditure incurred by the assessee fails to satisfy both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard for all the years under consideration. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 19th Dec., 2005 Since there is a difference of opinion between the Members constituting the Bench on certain points, we request the Hon'ble President, Tribunal to kindly refer the following questions for the opinion of the Third Member. 1. Whether, on the facts and in the circumstances of the case and in law, the commission income under the agreement dt. 31st May, 1994 accrued to the assessee when it was received by it from its clients as held by the JM or accrued at the time of acceptances of the solicited advertisement by the Principal though could be assessed in the year in which such advertisement was telecast as held by the AM ? 2. Whether, on the facts and in the circumstances of the case and in law, the assessee is entitled to deduction of advertisement expenses amounting to ₹ 9,03,02,000 for asst. yr. 1998-99 and ₹ 9,38,05,000 for asst. yr. 1999-2000 under s. 37 of the IT Act, 1961? vimal gandhi, president (as third member) : 13th July, 2006 On account of the difference between the learned Members of Tribunal 'D' Bench Mumbai, the following questions have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertising for the said channels, and the agent unequivocally accepts such appointment. 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. Client requisition After having solicited the advertisements as above, the agent shall forward, by facsimile or telex, each client's requisition for telecast of its advertisement(s) to the company and the company reserves the right to accept or reject the aforesaid requisition at its sole discretion. Invoicing and collection The company shall send the invoice for the advertisements telecast, to the clients and a copy to the agent, within thirty (30) days from the date on which the advertisement is so telecast, with instructions to the clients to make the payment thereof to the agent. The agent shall, without any charge to the company, collect all sums due from the clients and hold the same in trust for the company pending remittance as hereinafter provided. 8. Commission The agent shall be entitled to retain fifteen per cent (15 per cent) of the net invoiced amount paid by the clients as commission. 9. No profit The agent shall not make any profit under thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t notes are reproduced in detail at pp. 4 and 5 of the proposed order of the JM. 7. When called upon to justify above change in policy, the assessee explained that under cl. 8 of agreement with its Principal, commission @ 15 per cent of net invoice amount accrued to the assessee when amount was paid by clients. Unless the amount was paid there was no accrual of income. 8. The AO did not accept above contention of the assessee for the reason that under the system of accounting regularly followed by the assessee income accrued or arose when a legal right in respect of it came into existence. The AO interpreted the word paid in cl. 8 of the agreement in the light of the decision of various High Courts, viz., Bombay High Court decision in Aziende Colori Nazionali Affini vs. CIT 1977 CTR (Bom) 299: (1977) 110 ITR 145(Bom); Kerala High Court decisions in Janatha Contract Co. vs. CIT (1976) 105 ITR 627(Ker) and Neroth Oil Mills Co. Ltd. vs. CIT (1987) 62 CTR (Ker) 33: (1987) 166 ITR 418(Ker). He was of the view that when question of accrual was to be determined on the basis of agreement, the whole agreement was to be considered to ascertain the true intention and not a particular clause. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also argued that Circular of CBDT No. 742 supported assessee's contention. As per above Circular, no income accrued even to the foreign Principal unless the amount was remitted. Thus, the learned counsel for the assessee contended, income to the assessee cannot be said to have accrued unless amount payable to its foreign Principal is received by the assessee from Indian clients. So, the aspect of payment of money was most crucial for determining the time of accrual. It was submitted that right to receive commission remained inchoate till the assessee received money from its clients, since neither the assessee could retain its commission nor it could remit the same to its Principal. 11. In support of the above claim, learned counsel for the assessee relied upon the decisions in the case of Pfizer Corporation vs. CIT (2003) 180 CTR (Bom) 319: (2003) 259 ITR 391(Bom) and in the case of Seth Pushlal Mansinghka (P) Ltd. vs. CIT (1967) 63 ITR 109(Raj). The latter decision was approved by apex Court and is reported at Seth Pushalal Mansinghka (P) Ltd. vs. CIT (1967) 66 ITR 159(SC). The learned counsel for the assessee also submitted that income did not accrue to the assessee as theor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said to have accrued when invoice was raised by the Principal. The decisions cited by the learned counsel for the assessee in the case of Pfizer Corporation (supra), as per the learned Departmental Representative was distinguishable as it related to a non-resident and pertained to accrual or deemed accrual of dividend income. 13. On consideration of rival contentions of parties and other materials referred to above, the learned JM at the outset recorded that there was no change in the mercantile system of accounting followed by the assessee throughout and in the years under consideration. The dispute was relating to the dates when commission income had accrued to the assessee. The aforesaid question was required to be determined in accordance with the terms of agreement between the parties and the case laws. If by mistake income was shown on some erroneous basis, the assessee could always show correct time of accrual of income in the subsequent year. The learned JM in his proposed order further observed that as per settled legal position income accrues when an enforceable debt is created in favour of the assessee; in other words, when a right to receive income is acquired. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission Above clause, according to the learned JM, clearly provided a contingency in the agreement, i.e., payment of net invoice amount to the assessee by its clients. According to the learned JM, the assessee had no right to receive commission till the happening of such contingency as right to retain commission is dependant upon payment of invoice amount to the assessee. Once invoice amount was received by the assessee, the right to retain commission would accrue immediately irrespective of the remittance to the non-resident. Thus, payment by the clients was a condition precedent for accrual of income, which has been provided in the agreement to ensure the recovery of the amount. The learned JM also observed that effect of cl. 8 of the agreement was that assessee would never get any commission where invoice amount is not paid by the clients. The date of remittance to the Principal would be irrelevant and the claim of the assessee could not be rejected because date of accrual coincided with the date of payment. The learned JM accordingly held that orders of lower authorities were not sustainable. 16. Before parting, the learned JM observed that decision of Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Star TV. The AO was of the view that such expenditure was not incurred wholly and exclusively for the purpose of business of assessee and, therefore, could not be allowed as deduction under s. 37. Regarding the manufacturing activity, it was observed by him that assessee was charging 5 per cent additional sum over and above cost of manufacturing TV serials for Star TV and, therefore, there was no reason for assessee to incur any expenditure as advertisement. In respect of commission activity, it was observed by him that there was no necessity to incur any expenditure for such 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 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. The AO had accordingly disallowed the claim for both the assessment years and the assessee carried the matter in appeal before the CIT(A). It was submitted before the CIT(A) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, survival of its business depends on the success of programmes transmitted by Star TV. 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 assessee incurs expenditure on advertisement with a view to increase the viewership of Star TV, in our opinion, such expenditure would be in the interest of assessee's business though it may also benefit its Principal. Accordingly, no disallowance was warranted in law. The order of the learned CIT(A) is, therefore, modified and disallowance sustained by him is hereby deleted. 20. The learned AM did not agree with the view taken by the learned JM. He first referred to the grounds of appeal raised by the assessee. He observed that assessee was obliged under law to follow mercantile system of accounting. The learned AM in his proposed order further noted that under the agreement dt. 31st May, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Cases 69 (HL). The learned AM also referred to Accounting Standard and provisions notified by the Central Government under s. 145(2) of the Act and the conduct of the assessee in the past accepting of commission on sale of time spots. Accordingly, the learned AM observed that he would prefer not to disturb the accounting policy in which the commission income was recognized by the assessee in the past particularly when agreement remained unaltered. The learned AM thereafter referred to cl. 7 of the agreement relating to invoicing and collection and cl. 9 relating to net profit of agent . With reference to aforesaid clauses, the learned AM observed that the assessee had no contractual obligation to make efforts to realize amounts from clients as it would have caused implications and the assessee is not getting any money from Principal on this score. Thus, role of assessee under the agreement is limited to receive the amount paid by the clients. In nutshell, the assessee is under no obligation to realize the amount from the clients . After referring to certain other clauses, the learned AM refers to the more important cl. 8 providing for retention of commission by the assessee. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c 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 recognized as revenue. It is also a settled judicial principle that the assessee, has, of course to satisfy the IT authorities, i.e., he is doing so in good faith and Revenue is not likely to be defrauded. The AO 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 above discussion, deserves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of 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 Brewary Ltd. vs. Bruce (1914) 6 Tax Cases 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. vs. CIT (1951) SCR 594 : (1951) 20 ITR 1(SC)]. 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. Accordingly, the learned AM set aside the order of the CIT(A) and restored that of the AO disallowing advertisement expenses. 24. The case was fixed for hearing at Mumbai and I have heard Shri Porus Kaka, the learned counsel for the assessee and Shri Indra Kumar, the learned Departmental Representative for the Revenue. Shri Kaka pointed out that the assessee was a marketing and col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee would accrue as soon as services are rendered by the assessee. The learned AM 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 large number of decisions discussed hereinafter : (i) Shri Ambika Mills Ltd. vs. CIT [sic-CIT vs. Harivallabhadas Kalidas Co.] (1960) 39 ITR 1(SC) : In this case, the assessee, a managing agent, was entitled to commission at 5 per cent on sale proceeds of yarn, three pies per pound on sale of cloth by the company, 10 per cent on sale proceeds of all other materials and 10 per cent on the bills of any ginning and pressing factories. The commission was payable after 31st December or such other date as the directors might have fixed. The board of directors through a resolution reduced rate of commission payable to the assessee, which was agreed to by the managing agent. The Revenue was of the view that the amount reduced had accrued to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement 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 result in C.A. No. 145 of 1958. (ii) In the case of CIT vs. Chamanlal Mangaldas Co. (1960) 39 ITR 8(SC) the assessee, a commission agent, was entitled to commission of 3.5 per cent on sale price of all cotton yarn and further commission of 10 per cent on the profit made by the company from its ginning or pressing operation. The company through a resolution decided that commission to managing agent be paid at ₹ 1,05,575 instead of ₹ 2,05,775 payable at the rate provided in the agreement. Their Lordships have noted the stand of the Revenue as under : The income-tax authorities held that the entire sum of ₹ 2,05,575, having accrued as commission during the previous year was taxable income, and that &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. But this did not affect the construction of the clause containing the terms for payment of commission nor the reduction made therein as a result of the modified arrangement. The amount which arose or accrued and which the managing agent had the right to receive was not affected by the manner in which the entry was made. (iii) That the managing agent was entitled to receive as commission only sum of ₹ 4,11,875 and that amount alone accrued to the managing agent; the amount of ₹ 1,00,000 was not taxable. CIT vs. Harivallabhadas Kalidas Co. (1960) 39 ITR 1(SC) referred to. (iii) In the case of Cotton Agents Ltd. vs. CIT (1960) 40 ITR 135(SC), the assessee, commission agent, was entitled to commission at 3.5 per cent on gross proceeds of sales. Clause 3 of the agreement provided as under : The commission shall bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting 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 to the allowability as revenue expenditure of the commission forgone. On the basis of the above arguments Shri Kaka argued that it is demonstratively established on the basis of the above pronouncements of the Supreme Court that income (out of Commission) does not accrue as soon as services are performed. It would accrue as provided in the agreement. In the present case, cl. 8 of the agreement clearly provided that agent was to realize amount due to the Principal and thereafter retain 15 per cent of the remittances. Therefore, unless condition relating to realization of amount is satisfied income will not accrue. To say that income will accrue at any stage earlier than realization of amount would be ignoring the terms of the agreement, which was not permissible in law. 27. Shri Kaka also argued that there is lot of difference between method of accounting, relevant for purpose of s. 145 of the Act, and accrual of income. Income will accrue to an assessee as provided in ss. 4 and 5 of the Act. Provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id down in various judgments the following well settled principles of law clearly emerges. (i) That the provision of s. 145 cannot override s. 5. If an income has neither accrued nor received within the meaning of s. 5. whatever s. 145 may say, such income cannot be charged to tax even though a book keeping entry has been made recognizing such hypothetical income, which in law and on fact did not really accrue or arise or received in previous year. Sec. 145 determines the mode of computing the taxable income. It does not affect the range of taxable income or the ambit of taxation. The computation provisions cannot enlarge or restrict the content of taxable income. The range of taxable income or ambit of taxation is to be determined in accordance with the charging provisions. (ii) The proviso to s. 145(1) does not merely confer a discretionary power upon the AO but also imposes a statutory duty on him to examine in every case whether income, profits and gains chargeable to tax in the relevant year, could properly be deduced from the method of accounting followed by the assessee. (iii) The term accrual of income used in the Companies Act, as explained in the various Accounting Standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed from customers for remittance to the Principal would tantamount to holding that assessee was following cash system of accounting. Admittedly, the assessee followed mercantile system of accounting and not cash and, therefore, right to receive income accrued to the assessee as soon as assessee performed his part of contract, i.e., when advertisement procured by the assessee was approved by the Principal. 31. The learned Departmental Representative further argued that learned AM, in the proposed order had taken into account application of ss. 4 and 5 of the IT Act, relevant Accounting Standards and dictionary meaning of accrual and other relevant words involved. By giving proper meaning to the word, the learned AM has rightly concluded that right to receive commission had accrued to the assessee. Actual receipt of commission was not relevant. The learned AM had also taken into account as to what is the true meaning of word earned . The learned Departmental Representative read out paras 6.8 and 6.9 of proposed order of learned AM. He relied upon various findings recorded by the learned AM in the proposed order. 32. On question of deductibility of expenditure mentioned in question N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue under the agreement unless assessee is in a position to exercise his right to retain 15 per cent of net invoice amount paid by assessee's Principal clients. The stand of the Revenue, as supported by proposed order of learned AM is that income would accrue to the assessee as soon as advertisements are solicited by the assessee for Principal. Both the parties agree that agreement between the assessee and its Principal is to be read as a whole to determine its legal implication. 34. Having regard to the case law cited on behalf of the assessee and noted earlier, I am inclined to agree with the submissions advanced on behalf of the assessee. In all the aforesaid decisions, the dispute between the assessee and the Revenue was that according to the Revenue income accrued as soon as sales were effected. The payable commission was to be worked out on the basis of sale. The assessee on the other hand had contended that under the agreement income could not accrue unless books of account were made up and amount was determinable as per terms and conditions of the agreement. It is agreed and even Supreme Court has emphasized that income would accrue as per terms and conditions of the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remittance as hereinafter provided. The aforesaid sub clause clearly cast duty on the assessee to collect sums due from the clients without any charge to the company (Principal). The amount is to be held in trust for the company pending remittance. In the light of above clause, it is difficult to hold that assessee has no obligation to realize amounts from clients and that role of the assessee is over as soon as assessee solicits TV advertisements from the customers for telecast in Star TV channel. Again with reference to cls. 9, 13, 14, etc., the learned AM in the proposed order has observed the cumulative effect of provisions of agreement is that contractual obligation of the assessee comes to an end and once client's requisition forwarded by the assessee is accepted by Principal, at this very point the assessee becomes eligible for its commission, i.e., legally enforceable debt has been created in favour of the assessee because the sale of time spots is completed and commission receivable by the assessee is also ascertainable on the basis of number of time spots sold at the rate accepted by the Principal and the client. 35. In my humble opinion, aforesaid observations are c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vations quoted above. It is nowhere provided that assessee would be entitled to receive its commission even if advertisements solicited by the assessee are not telecast or amount is not realized by the assessee's Principal. There is no clause in the agreement which would indicate that commission would accrue to the assessee as soon as advertisements are solicited by the assessee. The learned AM or learned Departmental Representative during the course of hearing could not show me any provision or case law under which right to receive commission could be said to have accrued in favour of assessee as soon as advertisements are solicited/booked by the assessee. In the agreement there are further steps to be taken and advertisements solicited are required to be sent for approval by the Principal. The Principal under the agreement is not only to approve the advertisement solicited by the assessee but also to raise invoices within 30 days from the date on which advertisement is so telecast. The Principal has also to issue instructions to the client to make payment thereof to its agent (assessee). The assessee is further obliged to collect all the sums due to its Principal. It is not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount : debitum in praesenti, solvendum in futuro.............. It is admitted in the present case that the Indian Steel Syndicate closed the accounts of the partnership for the first time for the first set of partners on 30th Nov., 1950, and for the other set of partners on 31st March, 1951, and the assessee as a partner was, therefore, entitled to the share of the profits as on the last day of the accounting period of the partnership, i.e., 31st March, 1951. 40. The proposition laid down in the aforesaid decision that share income accrues to the partner as soon as the previous year of the firm comes to a close. It is immaterial that exact amount of profit is not known on the close of the year (31st March in the cited case). Whenever the profit is worked out, it would be the profit as on 31st March and liable to be taken in assessment year immediately following the previous year. Therefore, having regard to the facts involved in Goverdhan Ltd. (supra), no support can be derived by the Revenue from the decision. 41. The Revenue and learned AM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be disallowed. The assessee clearly incurred expenses wholly and exclusively for purposes of its business and, therefore, was entitled to deduction of expenditure claimed in computing its income. The learned JM has given sound reasons for allowing expenditure in question. On facts of case, it is not possible for me to agree with learned AM on any of the reasons given by him to disallow the expenditure in question. 44. In the light of above discussion of both the points/issues raised before me, I agree with the order proposed by the learned JM. The addition made for alleged accrual of income and disallowance of expenditure claimed on advertisement, in my opinion, is not justified. 45. The appeal should now go before the regular Bench for disposal in accordance with law. k.c. singhal, j.m. : 28th July, 2006 These appeals were originally heard by the Division Bench. Since there was difference of opinion between the Members, the following points of difference were referred under s. 255 of the IT Act, 1961 for the opinion of Third Member : 1. Whether, on the facts and in the circumstances of the case and in law, the commission income under the agreement dt. 31st May, 1994 accrued t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
