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TMI Blog2018 (3) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd. shown in the debit side cannot alter the substance of the transaction that it is a payment of the joint venture and there is an overriding title of M/s. Vanguard Jewels Ltd. in the said sum. It is the settled law that the accounting entries are not determinative of the actual nature of the transaction; it is the substance that prevails. - Decided in favour of assessee - I.T.A. No.7382/Mum/2012 - - - Dated:- 23-2-2018 - SHRI SHAMIM YAHYA, AM AND SHRI PAWAN SINGH, JM For The Appellant : Shri T. A. Khan For The Respondent : Dr. K. Shivaram ORDER Per Shamim Yahya, A. M.: This appeal by the Revenue is directed against the order by the Commissioner of Income Tax (Appeals) dated 28.09.2012 and pertains to the assessment year 2009- 10. 2. The grounds of appeal read as under: 1) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in considering the amount of ₹ 100,62,430/- as diversion of income. Although this income of the assessee is only application of income and not diversion since the income has been received by the assessee and claimed as deduction as part of the purchase expense. 2) On the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Joint Venture agreement dated 16.10.2008. It was explained that the assessee had received a request for quotation from a UAE company (consignee) on 29.09.2008 for 80 drums of C. P. Glicol of a specific blend. Upon the assessee s response, the said company placed an order for 385 drums @ USD 1071 per drum on 10.10.2008. From the details of correspondence, the Assessing Officer found that order was seller driven, i.e., the assessee had full control over the export order. He further found that the assessee has herself received the entire amount. He further found that the above goods were delivered to the carrier by the assessee herself for shipment. He found that the assessee herself paid for the various port charges. The Assessing Officer noted that the assessee claimed that it shared 85% of the export profit amounting to ₹ 1,00,62,430/- with M/s. Vanguard Jewels Ltd. On Assessing Officer s query in this regard, the assessee submitted that she was new in the field of export and it was a big consignment of a specific quality of material. That it was beyond her capacity to take risk. Therefore to guard the risk, on advice of friends and relatives, she had approached Shri Jayant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt, as the assessee had considered the whole export proceeds to ₹ 1,63,72,125/- as its revenue receipt and made part of its sale. He found that the above was an application of income not allowable. 6. Against the above order, the assessee is in appeal before the ld. Commissioner of Income Tax (Appeals). 7. The ld. Commissioner of Income Tax (Appeals) after examination of the facts observed that he was convinced that the Assessing Officer was unjustified in holding that the payments made by the assessee to M/s. Vanguard Jewels Ltd. is a colorable device to avoid tax. He observed that the export made by the assessee together with M/s. Vanguard Jewels Ltd. was a bonafide business activity and agreement with the assessee and M/s. Vanguard Jewels Ltd. was a genuine need of the assessee s business. He observed that the assessee was highly inexperienced in the field of chemical business. He noted that the assessee had originally refused to accept the export order of 385 drums from the overseas consignee as against the initial quotation of 85 drums. He found that this fact underlines that the assessee was not capable of handling the export order of her own. He observed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointly agreed to accommodate your request in this change scenario to have a long term relation with your esteemed company. We have done our calculation and the best we can offer is a discount of 195 USD per drum. So now the reduced price will be 876 per drum. And the total order value will be 337260 USD. iv) Again, the overseas consignee has addressed a letter dated 15.12.2008 (Refer Paperbook Page-118) of jointly to Appellant and Mr. Kansara (Director of M/s Vanguard), confirming the acceptance new rate per barrel/drum of US$ 876/-. Subsequently, on 16.12,2008 (Refer Paperbook Page 119) the consignee, issued Letter of .Intent for Purchase (Rev.) jointly addressing to the Appellant and Mr. Kansara (Director of M/s Vanguard). Wherein the consignee agreed to purchase 385 drums of 200 kg. at the rate of 876 US$ per drum. 8. The ld. Commissioner of Income Tax (Appeals) further observed that even the Assessing Officer has indicated the performance of service by the representative of M/s. Vanguard Jewels Ltd. such as inspection of packaging as per specification of the consignee, attending the logistics, etc. and many other works. However, the ld. Commissioner of Income Tax (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same. Seen from the angle of real income also, the amount of ₹ 1,00,62,430/- cannot be treated as constituting income of the appellant. Taxing of the said amount in hands of appellant would amount to taxing unreal income or income belonging to M/s Vanguard in the hands of appellant, The observations made by the AR that profits accruing to M/s Vanguard assesses cannot be assessed in the hands of the assesses as it would amount to taxing the assessee in respect of income which neither belonged to the assessee nor which was retained by the assessee is quite convincing and acceptable. Keeping In view of the facts and circumstances of the case as discussed above, the addition of ₹ 1,00,62,430/- is deleted. 9. Thereafter the ld. Commissioner of Income Tax (Appeals) found that no adverse inference can be taken from the fact M/s. Vanguard Jewels Ltd. have loss or income in the return for assessment year 2009-10. The ld. Commissioner of Income Tax (Appeals) further held that the amount was also allowable u/s. 37(1). As regards the disallowance u/s.40(a)(ia), the ld. Commissioner of Income Tax (Appeals) held that TDS provisions are not applicable and the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee gave various submissions disputing the Assessing Officer s findings. The ld. Counsel of the assessee placed reliance on the decision in the case of S.A. Builders Ltd. vs. CIT (A) [2007] 288 ITR 1 (SC) for the following proposition : No businessman can be complelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. A transaction must be viewed from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 13. The ld. Counsel of the assessee further submitted that the assessee was not required to deduct tax at source, since the payment was not contractual payment. He further submitted that the assessee is not required to deduct the tax at source as M/s. Vanguard Jewels Ltd. has included the amount in its income. In this regard, he referred to the second proviso to section 40(a)(ia) of the Act which he claimed to have retrospective application. In this regard, he referred to the Hon ble Delhi High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entire amount. In this regard, we may gainfully refer to the Hon ble Apex Court decision in the case of CIT vs. Walchand and Co. Pvt. Ltd. [1967] 65 ITR 381 (SC). In this case, it was expounded that in applying the case of the commercial expediency for determining whether the expenses was wholly and exclusively laid out for the business, reasonableness of the expenses has to be adjudged from the point of view of businessman and not of Revenue. 18. Furthermore, we note that the facts of the case and the finding of the ld. Commissioner of Income Tax (Appeals) clearly indicate that the work done/assistance provided by M/s. Vanguard Jewels Ltd. cannot be termed as nominal, rather, it was substantial. M/s. Vanguard Jewels Ltd. had assisted in procuring the raw material from manufacturer/seller Swash Noniocs Pvt. Ltd. and had enabled to obtain discount in purchase also. M/s. Vanguard Jewels Ltd. had also given the guarantee to manufacturer on behalf of the assessee. Furthermore, the Assessing Officer himself has agreed that the services regarding the inspection of packaging as per specification of consignee, attending the logistic, etc. were performed by M/s. Vanguard Jewels Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further find that the ld. Commissioner of Income Tax (Appeals) has also considered the above payment as diversion of income by overriding title. He found that this point of view is also sustainable. There is an agreement between the assessee and M/s. Vanguard Jewels Ltd. for share of the profit. Thereafter, sufficient amount of work has been done by M/s. Vanguard Jewels Ltd. and it has received the share of 85% under the joint venture and offered the same for taxation. In such situation, the ld. Commissioner of Income Tax (Appeals) is correct in holding that the same is not taxable as the same is diversion of income by overriding title. This proposition is duly supported by the decision of the Hon ble Apex Court in the case of CIT vs. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) which reads as under: There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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