ACIT CIR 13(3), MUMBAI V. EDROOS SAYED MOHAMED ZAKIR, MUMBAI

ITA 3659/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49402 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 03-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 04-06-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B JAYA KUMAR
• Keywords: Diversion of income; TDS
• Section: 40(a)(ia)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E,MUMBAI BEFORE SHRI D.K. AGARWAL (JM) & SHRI J. SUDHAKAR R EDDY (AM) I.T.A.NOS.3659 & 6171/MUM/2009 (A.YS. 2005-06 & 2006-07 ) ASST. COMMR. OF INCOME-TAX CIR. 13(3), ROOM NO.430, 4 TH FLOOR, AAYKAR BHAVAN, M.K.ROAD, MUMBAI-400 020. VS. SHRI EDROOS SYED MOHAMMED ZAKIR, 13, M.A. SARANG MARG, DONGRI, MUMBAI-400 009. PAN: AADPE2591D APPELLANT RESPONDENT APPELLANT BY SHRI B. JAYA KUMAR. RESPONDENT BY SHRI P RAKASH PANDIT. O R D E R PER D.K. AGARWAL, JM : THESE TWO APPEALS BY THE REVENUE ARE DIRECTED AGAIN ST THE SEPARATE ORDERS DATED 25-03-2009 AND 29-09-2009 PAS SED BY THE LD. CIT(A) FOR THE ASSTT. YEARS 2005-06 AND 2006-07 RES PECTIVELY. SINCE THE FACTS ARE IDENTICAL AND COMMON ISSUE IS INVOLVE D, BOTH THESE APPEALS ARE DISPOSED OF BY THIS COMMON ORDER FOR TH E SAKE OF CONVENIENCE. ITA NO.3659/MUM/2009 (A.Y. 2005-06): 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE, AN INDIVIDUAL, IS RUNNING A BUSINESS AS A LIAISON OFFI CER FOR THE LONDON INSTITUTE OF TECHNOLOGY & RESEARCH, UK (LITR, LOND ON). THE RETURN WAS FILED DECLARING AN INCOME OF RS.3,50,270/-. DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTED THAT THE ASSES SEE DURING THE ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 2 RELEVANT ASSESSMENT YEAR HAS MADE COMMISSION PAYMEN T OF RS.56,30,173/- TO THE FOLLOWING PARTIES : S.NO. NAME OF THE PARTY AMOUNT (IN RS.) CONTRACTUA L AGREEMENT WITH THE ASSESSEE 1 UNIWORLD 16,04,717 WRITTEN 2 AUSTRALIA STUDY CENTRE 6,35,359 WRITTEN 3 UNIWORLD MIGRATION 6,93,573 WRITTEN 4 EDUCATION WORLD CONSULTANTS 3,00,000 WRITTEN 5 UNIWORLD EDUCATION 15,07,966 WRITTEN 6 SACHIN BRID 1,45,000 ORAL 7 MEGNUS CONSULTANTS 36,236 ORAL 8 MAXIM CONSULTANTS 1,54,178 ORAL 9 SHINDE 25,000 ORAL 10 DILIP SHAH 59,900 ORAL 11 USMAN KAZI 38,000 ORAL 12 ASHWIN DIWANI 40,000 ORAL 13 COMMISSION PAID TO VARIOUS OTHER PARTIES 3,90,244 ORAL TOTAL 56,30,173 ACCORDING TO THE AO, SINCE THE ASSESSEE HAS NOT DE DUCTED TAX AT SOURCE WHILE MAKING PAYMENTS OF COMMISSION TO THE P ARTIES, THEREFORE, IT IS A CASE OF CONTRAVENTION OF THE P ROVISIONS OF SEC. 194H OF THE I.T. ACT, 1961 (THE ACT). ACCORDINGLY , THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE SUM OF RS.56,30,173/ - SHOULD NOT BE DISALLOWED U/S.40(A)(IA) ON THE GROUND THAT NO TDS HAS BEEN DEDUCTED ON THE COMMISSION PAYMENTS DURING THE YEAR . IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE FIRST FIVE PARTIE S MENTIONED IN THE ABOVE TABLE, EACH HAVE ENTERED INTO A TRI-PARTY AGR EEMENT WITH THE ASSESSEE AND HIS PRINCIPAL LONDON INSTITUTE OF TEC HNOLOGY BASED IN LONDON. AS PER THE AGREEMENT, IT IS THEIR DUTY TO C OLLECT GROSS ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 3 RECEIPTS ON BEHALF OF THE PRINCIPAL, SEND THE GROSS RECEIPTS TO THE ASSESSEE IN ORDER TO REMIT THE SAME TO THE PRINCIPA L AND, IN TURN, THEY ARE ENTITLED FOR 15% ON THE GROSS RECEIPTS FR OM THE AMOUNT THEY HAVE COLLECTED ON BEHALF OF THE PRINCIPAL. WHE N THE GROSS RECEIPTS ARE RECEIVED BY THE ASSESSEE FOR THE APPLI CATION, HE HAS TO DIVERT 15% OF SUCH GROSS RECEIPTS TO THE ABOVEMENTI ONED PARTIES RETAINING 35% FOR HIMSELF AND REMIT 50% TO HIS PRINCIPAL. TO PRO VE THAT THE ASSESSEE IS NOT LIABLE TO DEDUCT TDS U/S.1 94H, THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN CIT V/S SITALDAS TIRATHDAS WHEREIN THE APEX COURT HAS CLARI FIED THE DIFFERENCE BETWEEN DIVERSION OF INCOME AND APPLICATION OF INCO ME. ACCORDING TO THE ASSESSEE, IT IS A CASE OF A DIVERSION OF INCOME AND NOT ITS APPLICATION. HE HAS A CONTRACTUAL OBLIGATION TO DIV ERT 15% OF GROSS RECEIPTS TO THE ABOVE MENTIONED PARTIES AND THE SAI D SUM NEVER REACHES HIM IN THE FORM OF INCOME. IN OTHER WORDS, THE ASSESSEE DOES NOT APPLY HIS INCOME TO MAKE THE COMMISSION PA YMENTS. THE ASSESSEE FURTHER EXPLAINED THAT THE PROVISIONS OF S EC. 194H OR 194J OF THE ACT PROVIDE THAT A PERSON IS SUPPOSED TO DED UCT TAX AT SOURCE AT THE TIME OF CREDITING SUCH AMOUNT OR AT THE TIME OF PAYMENT IN CASH OR BY CHEQUE TO THE OTHER PERSON. THIS IMPLIES THAT THE ABOVE MENTIONED SECTIONS ARE APPLICABLE TO THE ASSESSEE O NLY IF SUCH AMOUNT IS RECEIVED BY HIM AS AN INCOME AND HE IS MA KING PAYMENTS THEREOF. THE ASSESSEE, WHILE REFERRING TO CERTAIN C LAUSES OF THE MOU ENTERED INTO BY THE ASSESSEE WITH THE ABOVE MENTION ED PARTIES, SUBMITTED THAT THESE PARTIES ARE UNDER CONTRACTUAL OBLIGATION TO DELIVER THE SERVICES TO THE ASSESSEE AND IN TURN TH E PARTIES SHALL ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 4 RECEIVE 15% OF GROSS FEES RECEIVED/RECEIVABLE FROM THE STUDENTS BY WAY OF CONSIDERATION AS STATED IN CLAUSE IN CLAUSE 4 OF THE MOU. ACCORDING TO THE ASSESSEE, IN VIEW OF THE MOU SIGNE D BY THE ASSESSEE WITH THE SAID PARTIES, IT CAN BE SAFELY CO NCLUDED THAT THE SAID PARTIES ARE RENDERING SERVICES TO THE ASSESSEE AND ARE RECEIVING COMMISSION BY WAY OF CONSIDERATION FOR THE SERVICES RENDERED. THE ASSESSEE, AFTER EXPLAINING THE DIFFERENCE BETWEEN A PPLICATION OF INCOME AND DIVERSION OF INCOME, SUBMITTED THAT 15% OF GROSS RECEIPTS GET DIVERTED TO THE SAID PARTIES BEFORE RE ACHING TO HIM AND, THEREFORE, THE PROVISIONS OF SEC. 194H ARE NOT APPL ICABLE BECAUSE THE AMOUNT IS NOT RECEIVED BY HIM AS AN INCOME AND HE I S NOT MAKING PAYMENT THEREOF. HOWEVER, THE AO DID NOT ACCEPT THE ASSESSEES EXPLANATION. HE WAS OF THE VIEW THAT IN VIEW OF THE PROVISIONS OF SEC. 194H, WHEREVER THERE IS A PAYMENT BY WAY OF COMMISS ION TO A RESIDENT, TAX HAS TO BE DEDUCTED AT SOURCE BY THE P ERSON RESPONSIBLE FOR MAKING SUCH PAYMENT. IN THE PRESENT CASE, THE SAID PARTIES ARE RENDERING SERVICES TO THE ASSESSEE UNDER CONTRACTUA L CONDITIONS. THE ASSESSEE IS RESPONSIBLE FOR PAYING COMMISSION TO TH EM. THE QUANTUM OF THE COMMISSION IS FIXED AT 15% OF GROSS FEES COL LECTED BY THE SAID PARTIES FROM THE STUDENTS ADMITTED TO COURSES CONDU CTED BY LITR, LONDON. THEREFORE, THE ASSESSEE IS BOUND BY THE PRO VISIONS OF SEC. 194H OF THE ACT TO DEDUCT TAX AT SOURCE WHILE MAKIN G THE COMMISSION PAYMENTS. THE AO FURTHER OBSERVED THAT THE QUESTION WHETHER IT IS DIVERSION OF INCOME OR APPLICATION OF INCOME IN THE HANDS OF THE ASSESSEE DOES NOT ARISE AT ALL AS THE SAID PARTIES ARE RECEIVING INCOME BY WAY OF COMMISSION WHICH INDICATES THAT T AX HAS TO BE ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 5 DEDUCTED AT SOURCE BY THE PERSON PAYING SUCH INCOME BY WAY OF COMMISSION I.E. BY THE ASSESSEE. SINCE THE ASSESSE E HAS FAILED TO DEDUCT TAX AT SOURCE AS PER THE PROVISIONS OF SEC. 194H OF THE ACT, THE AO DISALLOWED THE TOTAL COMMISSION OF RS.47,41 ,615/- + RS.8,88,558/- = RS.56,30,173/- PAID TO THE PARTIES BY INVOKING THE PROVISION OF SEC. 40(A)(IA) OF THE ACT AND ADDED T HE SAME TO THE TOTAL INCOME OF THE ASSESSEE. THE AO, AFTER MAKING SOME OTHER DISALLOWANCES, COMPLETED THE ASSESSMENT AT AN INCOM E OF RS.88,17,150/- VIDE ORDER DATED 27-12-2007 PASSED U /S.143(3) OF THE ACT. 3. ON APPEAL, THE LD. CIT(A), AFTER CONSIDERING THE MOU AND THE SAMPLE COPY OF THE RECEIPT ISSUED BY FRANCHISEE (CO MMISSION AGENT) TO THE STUDENTS AND THE DECISIONS OF HONBLE APEX C OURT IN THE CASE OF CIT V/S SITALDAS TIRATHDAS AND CIT VS. TOLLYGU NGE CLUB LTD. HELD THAT SINCE THE APPELLANT DID NOT RECEIVE THE PROFE SSIONAL FEE COMPONENT FROM THE LIAISON OFFICE AS HIS INCOME, CO NSEQUENTLY, WHEN THE APPELLANT REMITTED BACK THE PROFESSIONAL FEE CO MPONENT TO THE LIAISON OFFICE, APPELLANT DID NOT PAY BACK THE SAME TO THE LIAISON OFFICE AS INCOME BY WAY OF COMMISSION, THEREFORE, P ROVISIONS OF SEC. 194H R.W.S. 40(A)(IA) WERE NOT APPLICABLE AND HENCE THE APPELLANT WAS NOT REQUIRED TO DEDUCT TDS THEREON INCLUDING TH E PAYMENTS TO PARTIES WITH WHOM NO WRITTEN AGREEMENTS WERE MADE A ND ACCORDINGLY HE DELETED THE DISALLOWANCE MADE BY THE AO. 4. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US. ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 6 5. THE REVISED GROUNDS TAKEN BY THE REVENUE READ AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE PAYMENT OF RS.56,30,173/- TO LIAISON OFFICE IS NOT AN INCOME LIABLE FOR TDS DEDUCTION. 2. THE LD. CIT(A) HAS ERRED IN BOTH IN FACTS AND IN LAW IN DELETING DISALLOWANCE OF RS.56,30,173/- WITHOUT APPRECIATING THE FACT THAT THE SAID AMOUNT PAID AS COMMISSION TO THE LIAISON OFFICES, FALLS WITHIN THE AMBIT OF SECTION 194H R.W.S. 40(A)(IA) OF THE I.T. ACT, 1961. 6. AT THE TIME OF HEARING, THE LD. D.R., WHILE RELY ING ON THE ORDER OF AO, FURTHER SUBMITS THAT IN VIEW OF THE REASONS MENTIONED IN THE ASSESSMENT ORDER, THE LD. CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT THE PAYMENT OF RS.56,30,173/- TO THE LIAISON OFFICE IS NOT AN INCOME LIABLE FOR TDS DEDUCTION. HE FURTHER SUBMITS THAT T HE LD. CIT(A) HAS ALSO ERRED IN DELETING THE DISALLOWANCE OF RS.56,30 ,173/- WITHOUT APPRECIATING THE FACT THAT THE SAID AMOUNT PAID AS COMMISSION TO LIAISON OFFICE FALLS WITHIN THE AMBIT OF SEC. 194H READ WITH SEC. 40(A)(IA) OF THE ACT. HE, THEREFORE, SUBMITS THAT T HE ORDER PASSED BY THE AO BE RESTORED. 7. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE, WHILE REITERATING THE SAME SUBMISSIONS AS SUBMITTED BEFOR E THE AO AND THE LD. CIT(A), FURTHER SUBMITS THAT IN VIEW OF THE TR I-PARTY AGREEMENTS WITH THE ASSESSEE, FRANCHISEE/COMMISSION AGENT AND HIS PRINCIPAL APPEARING AT PAGES 51 TO 74, RECEIPTS ISSUED TO U.K . BASED INSTITUTE APPEARING AT PAGES 75 TO 79 AND THE CONFIRMATION LE TTERS APPEARING AT PAGES 80 TO 97 OF THE ASSESSEES PAPER BOOK, THE ASSESSEE IS NOT ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 7 ENTITLED TO RECEIVE THE AMOUNT PAID RS.56,30,173/- BY VIRTUE OF AN OVERRIDING TITLE CREATED IN FAVOUR OF THE SAID PART IES. HE FURTHER SUBMITS THAT AS PER MOU IT IS CLEARLY ESTABLISHED THAT THE GROSS RECEIPTS WERE DIVERTED AT SOURCE AND AS SUCH IT WAS NEITHER THE INCOME OF THE ASSESSEE NOR RECEIPTS OF THE ASSESSEE . IN OTHER WORDS, THE PROFESSIONAL FEES RECEIVED BY THE ASSESSEE FROM THE FRANCHISEE/COMMISSION AGENT TO THE EXTENT OF 15% TH EREOF DID NOT ACCRUE TO THE ASSESSEE AT ALL. HE FURTHER SUBMITS T HAT MERELY BECAUSE THE ASSESSEE HAS CREDITED THE ENTIRE FEES IN HIS P & L ACCOUNT AND SEPARATELY MADE THE PAYMENT OF COMMISSION DOES NOT MEAN THAT THE ASSESSEE HAS RECEIVED THE ENTIRE AMOUNT OF FEES AND NOT THE NET AMOUNT OF FEES I.E. AFTER DEDUCTING 15% COMMISSION THEREON. THE LD. COUNSEL FOR THE ASSESSEE, WHILE REFERRING TO THE SA MPLE COPY OF THE RECEIPT AS REPRODUCED BY THE LD. CIT(A) APPEARING AT PAGE 8 OF HIS ORDER, FURTHER SUBMITS THAT THE RECEIPT ITSELF SHOW S THAT THE AMOUNT OF FEES IS INCLUDING OF PROFESSIONAL FEES OF RS.31 ,980/-, BEING 15% OF THE TOTAL AMOUNT OF FEES PAYABLE TO THE LITR, LONDO N. THE LD. COUNSEL FOR THE ASSESSEE, WHILE REFERRING TO CERTAI N CLAUSES, PARTICULARLY CLAUSES 4 AND 8 OF THE MOU, SUBMITS TH AT IN VIEW OF THE SAID CLAUSES AS MENTIONED IN THE MOU, IT IS A CASE OF DIVERSION OF INCOME BY AN OVERRIDING TITLE AS THE ASSESSEE HAS T O PAY 15% COMMISSION TO THE FRANCHISEE/COMMISSION AGENT AND, THEREFORE, THE AMOUNT OF 15% COMMISSION DID NOT REACH TO THE ASSE SSEE AS HIS INCOME AND, THEREFORE, HE IS NOT LIABLE TO DEDUCT T DS ON THE SAID AMOUNT OF COMMISSION AND FOR THIS PROPOSITION RELIA NCE WAS ALSO PLACED ON THE FOLLOWING DECISIONS : ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 8 1. CIT, MUMBAI V/S SITALDAS TIRATHDAS (1961) 41 IT R 367 (SC). 2. CIT V/S TOLLYGUNGE CLUB LTD. (1977) 107 ITR 776 (SC). 3. CIT V/S MADRAS RACE CLUB (1996) 219 ITR 39 (MAD ). 4. RAJA BEJOY SINGH DUDHURIA V/S CIT (1933) 1 ITR 135 (PC). 5. CIT V/S POMPEI TILE WORKS (1989) 175 ITR 1 (KA R.). HE, THEREFORE, SUBMITS THAT THE ORDER PASSED BY THE LD. CIT(A) DELETING THE DISALLOWANCE OF RS.56,30,173/- MADE BY THE AO U/S.40(A)(IA) BE UPHELD. 8. IN THE REJOINDER, THE LD. D.R. SUBMITS THAT SINC E THE ASSESSEE HAS CREDITED THE ENTIRE AMOUNT OF FEES IN HIS P & L ACCOUNT, THEREFORE, THE ASSESSEE ON THE PAYMENT OF COMMISSIO N TO THE COMMISSION AGENTS, IS LIABLE TO DEDUCT TDS U/S.194H OF THE ACT AND SINCE HE DID NOT DEDUCT THE TAX AT SOURCE, THE AO WAS JUSTIFIED IN DISALLOWING THE SAME U/S.40(A)(IA) OF THE ACT. THE LD. D.R. FURTHER SUBMITS THAT THE FACTS OF ALL THE CASES RELIED ON B Y THE LD. COUNSEL FOR THE ASSESSEE ARE DIFFERENT AND, THEREFORE, THE SAME ARE DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. HE, THEREFORE, SUBMITS THAT THE ORDER PASSED BY THE AO BE RESTORED. 9. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECOR D. WE FIND THAT THE FACTS ARE NOT IN DISPUTE. WE FURTHER FIND THAT IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE HAS PAID COMMISSION OF RS .56,30,173/- TO VARIOUS PARTIES WITHOUT DEDUCTING TAX AT SOURCE ON THE GROUND THAT IT HAD ENTERED INTO A TRI-PARTY AGREEMENTS AND AS PER THE AGREEMENT IT WAS THE DUTY OF THE FRANCHISEE/COMMISSION AGENT TO COLLECT FEES FROM THE STUDENTS ON BEHALF OF THE PRINCIPAL AND SEND TH E GROSS RECEIPTS TO THE ASSESSEE IN ORDER TO REMIT THE SAME TO THE PRI NCIPAL AND IN TURN ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 9 THESE PARTIES ARE ENTITLED TO 15% COMMISSION OF THE GROSS RECEIPTS FROM THE AMOUNT COLLECTED ON BEHALF OF THE PRINCIPA L AS PER THE AGREEMENT. ACCORDING TO THE ASSESSEE, WHEN THE GRO SS RECEIPTS WERE RECEIVED BY THE ASSESSEE, HE HAD TO DIVERT 15% OF S UCH GROSS RECEIPTS TO THE COMMISSION AGENT, RETAINING 35% FOR HIMSELF AND THE BALANCE TO BE REMITTED TO THE PRINCIPAL AND, THEREF ORE, THE ASSESSEE IS NOT LIABLE TO DEDUCT TDS ON SUCH PAYMENT OF COMM ISSION. IT WAS FURTHER CONTENDED THAT IT IS A CASE OF DIVERSION OF INCOME BY AN OVERRIDING TITLE AS THE AMOUNT OF 15% DID NOT REACH TO THE ASSESSEE AS HIS INCOME AND IN SUPPORT RELIANCE WAS ALSO PLAC ED ON CERTAIN DECISIONS (SUPRA). 10. PER CONTRA, THE CASE OF THE REVENUE IS THAT TH E ASSESSEE HAS CREDITED THE ENTIRE AMOUNT IN HIS INCOME AND AS PER THE AGREEMENT THE ASSESSEE IS BOUND TO PAY COMMISSION @ 15% , AND SINCE THE ASSESSEE HAS MADE THE PAYMENT OF COMMISSION TO THE PARTIES WITHOUT DEDUCTION OF TDS U/S.194H, THE AO WAS FULLY JUSTIF IED IN DISALLOWING THE PAYMENT OF COMMISSION OF RS.56,30,173/- U/S.40( A)(IA) OF THE ACT. 11. HERE, IT IS NECESSARY TO TAKE NOTE OF THE RELEV ANT CLAUSES OF MOU DATED 12-02-2003 ENTERED INTO BETWEEN THE ASSES SEE I.E. LIAISON OFFICE AS FIRST PARTY AND FRANCHISEE/COMMISSION AGE NT AS SECOND PARTY AND WITH THE PRINCIPAL, I.E., THE LONDON INSTITUTE OF TECHNOLOGY & RESEARCH, LONDON (LITR LONDON), AS THE CONFIRMING PARTY. THE RELEVANT CLAUSES NO. 4 & 8 OF THE SAID MOU APPEA RING AT PAGES 53 TO 55 OF THE ASSESSEES PAPER BOOK ARE REPRODUCED A S UNDER : ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 10 4. THE PARTY OF THE FIRST PART HEREBY AGREES THAT THE PARTY OF THE SECOND PART WILL BE ENTITLED TO EITHER DEDUCT DIRECTLY 15% (FIFTEEN PERCENT) OF THE GROSS FEES RECEIVED/RECEIVABLE FROM THE STUDENTS OR ITS WILL BE DUTY OF THE PARTY OF THE FIRST PART TO REMIT 15% OF THE GROSS FEES IMMEDIATELY TO THE PARTY OF THE SECOND PART AFTER ALL FORMALITIES IN CONNECTION WITH THE SAID ADMISSIONS HAVE BEEN COMPLETED AS AND BY WAY OF CONSIDERATION FOR ACTING AS THE FRANCHISEE FOR THE CONFIRMING PARTY VIZ. THE SAID LONDON INSTITUTE OF TECHNOLOGY & RESEARCH, LONDON. 8. THE PARTY OF THE FIRST PART HEREBY AGREES AND ACKNOWLEDGES THAT THERE WILL BE ALWAYS A CHARGE OF THE PARTY OF THE SECOND PART OVER THE GROSS FEES RECEIVED FROM THE STUDENTS TO THE EXTENT OF WHAT IS STATED IN CLAUSE 4 ABOVE. IN CASE THE PARTY OF THE FIRST PART FAILS TO MAKE PAYMENT THEN THE PARTY OF THE SECOND PART WILL BE AT LIBERTY TO DEDUCT THE SA ID 15% FROM THE GROSS RECEIPTS OF THE SUBSEQUENT FEES FROM THE STUDENTS, WHICH WILL BE ADMITTED BY THE PARTY OF THE SECOND PART ON BEHALF OF THE CONFIRMING PARTY VIZ. THE SAID LONDON INSTITUTE OF TECHNOLOGY & RESEARCH, LONDON. IN THIS CONTEXT, IT IS ALSO PERTINENT TO REFER TO THE SAMPLE COPY OF THE RECEIPT ISSUED BY THE FRANCHISEE/COMMISSION AGENT T O THE STUDENTS WHICH HAS ALSO BEEN REPRODUCED BY THE LD. CIT(A) AT PAGE 8 OF THE APPELLATE ORDER, WHICH IS EXTRACTED HEREUNDER : UNI WORLD EDUCATION DATE: 17 TH MAY, 2004. TO DIGVIJAYSINH VAGHELA, AHMEDABAD. R E C E I P T RECEIVED WITH THANKS FROM MR. DIGVIJAYSINH VAGHELA A CHQ.NO.079458 DATED 15-05-2004 FOR THE AMOUNT OF RS.2,13,200/- (TWO LACS THIRTEEN THOUSAND TWO HUNDRED ONLY) IN FAVOUR OF LONDON INSTITUTE OF TECHNOLOGY, MUMBAI, PROPRIETOR, EDROOS SYED MOHAMAD ZAKIR. THE FEES IS FOR THE ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 11 COURSE OF DIPLOMA PROGRAM IN HOTEL MANAGEMENT INCLUDING OUR PROFESSIONAL FEES OF RS.31,980/-. FOR: UNIWORLD EDUCATION SD/- AUTHORISED SIGNATORY 12. FROM THE COMBINED READING OF THE PHOTOSTAT COP Y OF THE UNREGISTERED TRI-PARTY MOU DATED 12-02-2003 AND THE SAMPLE COPY OF THE RECEIPT DATED 17-05-2004, IT IS OBSERVED THAT T HE FRANCHISEE/COMMISSION AGENT SHALL GET COMMISSION @ 15% OF THE GROSS FEES FROM THE ASSESSEE. THE RELATIONSHIP BETW EEN THE ASSESSEE AND FRANCHISEE/COMMISSION AGENT IS OF PRINCIPAL AND AGENT. WHERE AN AMOUNT OF FEES RECEIVED BY AN AGENT, HE RECEIVES IT FOR AND ON BEHALF OF HIS PRINCIPAL. THE TERMINOLOGY USED BY THE ASSES SEE THAT IT WILL BE A CHARGE FOR PAYMENT OF COMMISSION TO THE FRANCHIS EE/COMMISSION , IN OUR VIEW, IS AGAINST THE PRINCIPLES OF LAW OF A GENCY AND HENCE THE SAME IS IMMATERIAL. 13. IN SITALDAS TIRATHDAS (SUPRA), IT HAS BEEN HEL D THAT WHERE BY THE OBLIGATION INCOME IS DIVERTED BEFORE IT REACHES THE ASSESSEE, IT IS DEDUCTIBLE; BUT WHERE THE INCOMES IS REQUIRED T O BE APPLIED TO DISCHARGE AN OBLIGATION AFTER SUCH INCOME REACHES T HE ASSESSEE, THE SAME CONSEQUENCE, IN LAW, DOES NOT FOLLOW. 14. IN TOLLYGUNGE CLUB LTD. (SUPRA), IT HAS BEEN HELD THE RACING CLUB RECEIVED SURCHARGE FOR LOCAL CHARITIES WIT H EACH TICKET FOR ADMISSION TO THE RACES, AND SPENT THE AMOUNT ON SUC H CHARITIES. HELD, THAT THE RESOLUTION TO CHARGE SUCH SURCHARGE WAS NOT ONE TO APPLY A PART OF THE INCOME AFTER THE RECEIPTS HAD BECOME THE INCOME ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 12 OF THE ASSESSEE, BUT WENT TO DIVERT THE AMOUNT TO A TRUST CREATED FOR THAT PURPOSE. 15. IN RAJA BEJOY SINGH DUDHURIA (SUPRA), IT HAS BE EN HELD THAT WHERE AN ASSESSEE INHERITS AN ASSET ALONGWITH LIAB ILITY, UNDER THE DECREE OF THE HIGH COURT, IT MAY WELL BE THAT SUCH LIABILITY WOULD BE A CHARGE ON THE ASSET WITH THE RESULT THAT INCOME FROM SUCH ASSET WOULD STAND DIVERTED BY THE CHARGES. 16. IN MADRAS RACE CLUB (SUPRA), IT HAS BEEN HELD THAT DIVERSION OF INCOME BY OVERRIDING THE TITLE CAN BE CREATED EV EN BY A CONTRACT BETWEEN THE TWO PARTIES BEFORE THE INCOME REACHES T HE HANDS OF THE ASSESSEE. THEREFORE, NET COLLECTION ON THE THREE DA YS ON WHICH THE RACES WERE CONDUCTED FOR THE BENEFIT OF THE CHIEF MINISTERS RELIEF FUND AND THE BEGGARS REHABILITATION FUND WERE HEL D TO BE DIVERTED AT SOURCE OF OVERRIDING TITLE. 17. IN POMPEI TILE WORKS (SUPRA), IT HAS BEEN HELD THAT THE AMOUNT PAID (AS REQUIRED UNDER THE ORIGINAL DEED OF PARTNERSHIP) TO THE OUTGOING PARTNER BY THE RECONSTITUTED FIRM WAS HELD TO BE DIVERTED AT SOURCE BY OVERRIDING TITLE. 18. THUS, IN ALL THE ABOVE DECISIONS, IT HAS BEEN LAID DOWN THAT WHERE BY THE OBLIGATION INCOME IS DIVERTED BEFORE I T REACHES THE ASSESSEE, IT IS DEDUCTIBLE; BUT WHERE THE INCOMES IS REQUIRED TO BE APPLIED TO DISCHARGE AN OBLIGATION AFTER SUCH INCOM E REACHES THE ASSESSEE, THE SAME CONSEQUENCE, IN LAW, DOES NOT F OLLOW. IN OTHER WORDS, AN OBLIGATION TO APPLY THE INCOME IN A PARTI CULAR WAY BEFORE IT ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 13 IS RECEIVED BY THE ASSESSEE OR BEFORE IT HAS ACCRU ED OR ARISEN TO THE ASSESSEE RESULTS IN THE DIVERSION OF THE INCOME. ON THE OTHER HAND, AN OBLIGATION TO APPLY INCOME WHICH HAS ACCRUED OR ARISEN OR HAS BEEN RECEIVED AMOUNTS MERELY TO THE APPORTIONMENT O F THE INCOME, AND NOT TO ITS DIVERSION. 19. EXAMINED ON THE TOUCH-STONE OF THE AFORENOTED L EGAL PRINCIPLES, AND KEEPING IN VIEW OF OUR FINDING RECORDED IN PARA 12 OF THIS ORDER, WE ARE OF THE OPINION THAT WHERE AN INCOME IS RECEI VED BY AN AGENT, HE RECEIVES IT FOR AND ON BEHALF OF HIS PRINCIPAL. THERE IS NO QUESTION OF DIVERSION BY OVERRIDING TITLE AS THE AGENT IS BO UND TO MAKE OVER THE INCOME TO THE PRINCIPAL UNDER THE GENERAL LAW O F AGENCY. THEREFORE, THE PAYMENT OF COMMISSION AMOUNTS TO DIS CHARGE AN OBLIGATION AFTER SUCH INCOME REACHES TO THE ASSESS EE. THERE IS NO QUARREL WITH THE PRINCIPLES ENUNCIATED IN THE AFO RESAID DECISIONS BUT KEEPING IN VIEW THE LAW LAID DOWN BY THE HONBLE A PEX COURT IN THE CASE OF SITALDAS TIRATHDAS (SC) (SUPRA) THAT THE CA SE IS ONE OF APPLICATION OF A PORTION OF THE INCOME TO DISCHARG E AN OBLIGATION, WE ARE OF THE VIEW THAT THE ASSESSEES CASE FALLS OUTS IDE THE RULE LAID DOWN IN BEJOY SINGH DUDHURIAS CASE. THE PAYMENT OF COMMISSION THOUGH MENTIONED IN RECEIPT ISSUED BY THE FRANCHIS EE/COMMISSION AGENT DOES NOT AMOUNT TO DISCHARGE AN OBLIGATION BY AN OVERRIDING TITLE RATHER THE SAID PAYMENT AMOUNTS TO DISCHARGE AN OBLIGATION AFTER SUCH INCOME REACHES TO THE ASSESSEE. THEREFOR E, ALL THE DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSE SSEE ARE DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AND ACCORDINGLY THE PLEA TAKEN BY THE LD. COUNSEL F OR THE ASSESSEE ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 14 THAT IT IS A CHARGE GOVERNED BY THE PRINCIPLE OF DI VERSION BY OVERRIDING TITLE IS NOT SUSTAINABLE AND THE SAME IS , THEREFORE, REJECTED. THIS VIEW ALSO FINDS SUPPORT FROM THE FO LLOWING DECISIONS : 20. IN CIT V/S Y.S. DESALE (1982) 137 ITR 117 (BOM) , IT HAS BEEN HELD (HEAD NOTE PAGE 119) :- (III) WHEN INCOME IS RECEIVED BY AN AGENT, HE REC EIVES IT FOR AND ON BEHALF OF THE PRINCIPAL AND THERE IS NO QUES TION OF ANY OVERRIDING TITLE. SINCE THE PROMOTERS RECEIVED THE INCOME AS AGENTS OF THE SHAREHOLDERS WITHIN THE MEANING OF SE CTION 182 OF THE INDIAN CONTRACT ACT, 1872, AND THE PROMOTERS DI D NOT HAVE ANY TITLE TO THE INCOME, WHICH REALLY VESTED IN THE SHAREHOLDERS, THERE WAS NO QUESTION OF ANY OVERRIDING TITLE OF TH E SHAREHOLDERS BECAUSE, EVEN INITIALLY, THE TITLE TO THE INCOME PR OPORTIONATE TO THE CONTRIBUTION OF SHARE CAPITAL VESTED IN THE SHA REHOLDERS THEMSELVES AND THE PROMOTERS WERE MERELY ACTING AS AGENTS. 21. IN CIT V/S IMPERIAL CHEMICALS INDUSTRIES (IN DIA) (P)LTD. (1969) 74 ITR 17 (SC), IT HAS BEEN HELD (HEAD NOTE PAGE 1 9):- (III) THAT THE PAYMENT OF THE AMOUNTS BY THE RESPO NDENT TO THE OUTGOING AGENTS WAS NOT AN OVERRIDING TITLE CREATED EITHER BY ACT OF PARTIES OR BY OPERATION OF LAW, AND IT COULD NOT BE SAID THAT THE AMOUNT OF COMPENSATION PAID TO THE OUTGOING AGE NTS DID NOT FORM PART OF THE RESPONDENT'S INCOME. 22. THE NEXT ISSUE ARISES AS TO WHETHER THE PAYMENT MADE BY THE ASSESSEE TO THE FRANCHISEE/COMMISSION AGENT IS SUBJ ECT TO TAX DEDUCTION AT SOURCE AS COMMISSION U/S.194H OF THE A CT. 23. FOR EASY REFERENCE, WE EXTRACT HEREUNDER THE RELEVANT PORTION OF SECTION 194H FOR THE PURPOSE DECIDING THIS ISSUE :- ' 194H. COMMISSION OR BROKERAGE .-ANY PERSON, NOT BEING AN INDIVIDUAL OR A HINDU UNDIVIDED FAMILY, WHO IS RESP ONSIBLE FOR PAYING, ON OR AFTER THE 1ST DAY OF JUNE, 2001, TO A RESIDENT, ANY INCOME BY WAY OF COMMISSION (NOT BEING INSURANCE C OMMISSION REFERRED TO IN SECTION 194D) OR BROKERAGE, SHALL, AT THE TIME OF ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 15 CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT OF SUCH INCOME IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIE R, DEDUCT INCOME-TAX THEREON AT THE RATE OF TEN PER CENT. *** *** ** * PROVIDED ALSO THAT NO DEDUCTION SHALL BE MADE UNDER THIS SECTION ON ANY COMMISSION OR BROKERAGE PAYABLE BY BHARAT SA NCHAR NIGAM LIMITED OR MAHANAGAR TELEPHONE NIGAM LIMITED TO THEIR PUBLIC CALL OFFICE FRANCHISEES. EXPLANATION.-FOR THE PURPOSES OF THIS SECTION, - (I) `COMMISSION OR BROKERAGE' INCLUDES ANY PAYMENT RECEIVED OR RECEIVABLE DIRECTLY OR INDIRECTLY, BY A PERSON ACTI NG ON BEHALF OF ANOTHER PERSON FOR SERVICES RENDERED (NOT BEING PRO FESSIONAL SERVICES) OR FOR ANY SERVICES IN THE COURSE OF BUY ING OR SELLING OF GOODS OR IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING, NOT BEING SECURITIES.' *** *** *** 24. IT IS CLEAR FROM THE AFORESAID PROVISION THAT T AX IS TO BE DEDUCTED AT SOURCE BY A PERSON RESPONSIBLE FOR PAY ING ANY INCOME BY WAY OF COMMISSION OR BROKERAGE. THE EXPRESSION ' COMMISSION' OR 'BROKERAGE' HAS BEEN DEFINED IN THE EXPLANATION, W HICH INCLUDES ANY PAYMENT RECEIVED OR RECEIVABLE DIRECTLY OR INDIREC TLY BY A PERSON ACTING ON BEHALF OF ANOTHER PERSON FOR SERVICES RE NDERED (NOT BEING PROFESSIONAL SERVICES) OR FOR ANY SERVICES IN THE COURSE OF BUYING AND SELLING OF GOODS OR IN RELATION TO ANY TRANSAC TION RELATING TO THE FOLLOWING SERVICES : (I) FOR SERVICES RENDERED (NOT BEING PROFESSIONAL) ; (II) FOR ANY SERVICES IN THE COURSE OF BUYING AND S ELLING OF GOODS OR IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING. ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 16 25. APPLYING THE ABOVE PROVISION OF LAW TO THE FACT S OF THE PRESENT CASE, WE FIND THAT WHAT IS PAID TO THE FRANCHISEE/C OMMISSION AGENT BY THE ASSESSEE IS 15% OF THE GROSS FEES RECEIVED F ROM THE STUDENTS WHICH IS NOTHING BUT COMMISSION PAYABLE TO THE AG ENT BY THE ASSESSEE. EXPLANATION (I) TO SEC. 194H HAS A WIDE M EANING AND IT COVERS ANY PAYMENT RECEIVED OR RECEIVABLE DIRECTLY OR INDIRECTLY BY A PERSON ACTING ON BEHALF OF ANOTHER PERSON FOR SERVI CES RENDERED. IN THE CASE BEFORE US, NO ONE CAN DOUBT THAT 15% COMMI SSION WAS PAID BY THE ASSESSEE TO THE FRANCHISEE/COMMISSION AGENT IS FOR ADVERTISEMENT CAMPAIGN AND OTHER SERVICES ETC. FOR THE COURSES OFFERED BY THE LONDON INSTITUTE OF TECHNOLOGY & RES EARCH, LONDON, U.K., AND, THEREFORE, THE SAME FALLS WITHIN THE DEF INITION OF COMMISSION AS DEFINED UNDER EXPLANATION (I) TO SE C. 194H OF THE ACT. 26. WITH REGARD TO THE ASSESSEES PLEA THAT THE FRANCHISEE/COMMISSION AGENTS ARE ALLOWED TO RETAI N 15% OF THE COMMISSION OUT OF THE GROSS FEES RECEIVED BY HIM FR OM THE STUDENTS AND PAYABLE TO THE LONDON INSTITUTE OF TECHNOLOGY & RESEARCH, LONDON, U.K., THROUGH THE ASSESSEE, IN OUR VIEW, IS NOTHING BUT A PAYMENT MADE TO FRANCHISEE/COMMISSION AGENT IN ADVA NCE BY THE ASSESSEE BEFORE REMITTANCE OF NET AMOUNT OF FEES BY THE AGENT. IT IS CLEAR FROM SEC. 194H THAT PAYMENT INCLUDES CREDIT O F SUCH SUM TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT OF S UCH INCOME IN CASH OR BY THE ISSUE OF CHEQUE OR DRAFT OR BY ANY O THER MODE. THIS BEING SO AND KEEPING IN VIEW THAT THE ASSESSEE IN HIS BOOKS OF ACCOUNTS ACCOUNTED FOR I.E. CREDITED THE FULL AMOUN T OF COMMISSION ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 17 AS RECEIVED FROM THE FRANCHISEE/COMMISSION AGENT A ND DEBITED SEPARATELY THE AMOUNT OF COMMISSION PAID, THEREFORE , IN ANY CASE, THE ASSESSEE WAS LIABLE TO DEDUCT TDS ON THE COMM ISSION PAYMENT. 27. FOR THE REASONS AS DISCUSSED ABOVE, WE ARE OF T HE VIEW THAT SINCE THE ASSESSEE IS LIABLE TO DEDUCT TDS ON THE P AYMENT OF COMMISSION UNDER THE PROVISIONS OF SEC. 194H OF THE ACT AND HAS FAILED TO DEDUCT THE SAME, THEREFORE, THE AO WAS JU STIFIED IN DISALLOWING THE PAYMENT OF COMMISSION OF RS.56,30,1 73/- UNDER THE PROVISIONS OF SEC. 40(A)(IA) OF THE ACT AND THE LD. CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT THE PROVISIONS OF SEC. 19 4H READ WITH SEC. 40(A)(IA) ARE NOT APPLICABLE AND HENCE THE APPELLAN T WAS NOT REQUIRED TO DEDUCT TDS THEREON. THE ORDER PASSED BY THE CIT(A) ON THIS ACCOUNT IS REVERSED AND THAT OF AO IS RESTORED . THE GROUNDS TAKEN BY THE REVENUE ARE, THEREFORE, ALLOWED. ITA NO.6171/MUM/2009 (AY: 2006-07): 28. THE REVISED GROUNDS TAKEN BY THE REVENUE READ A S UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE PAYMENT OF RS.71,90,973/-TO LIAISON OFFICE IS NOT AN INCOME LIABLE FOR TDS DEDUCTION. 2. THE LD. CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN DELETING DISALLOWANCE OF RS.71,90,973/- WITHOUT APPRECIATING THE FACT THAT THE SAID AMOUNT PAID AS COMMISSION TO LIAISON OFFICES, FALL S WITHIN THE AMBIT OF SECTION 194H R.W.S. 40(A)(IA) OF THE I.T. ACT, 1961. ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 18 29. AT THE TIME OF HEARING, BOTH THE PARTIES HAVE A GREED THAT THE FACTS OF THE PRESENT CASE ARE IDENTICAL TO THE FACT S OF THE CASE FOR THE ASSTT. YEAR 2005-06. THEREFORE, THE PLEA TAKEN BY T HEM IN THAT APPEAL MAY BE CONSIDERED WHILE DECIDING THE PRESENT APPEAL. 30. HAVING CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSING THE MATERIAL AVAILABLE ON RECORD AND IN THE ABSENCE OF ANY DISTINGUISHING FEATURE BROUGHT ON RECORD BY THE PARTIES, WE, KEEPING IN VIEW OF OUR FINDING RECORDED IN THE ASSE SSEES APPEAL FOR THE ASSTT. YEAR 2005-06 (SUPRA) HOLD THAT ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE THE ASSESSEE IS LIABLE TO DEDUCT TDS U/S.194H OF THE ACT AND SINCE HE FAILED TO DEDUCT T HE SAME, THE AO WAS JUSTIFIED IN DISALLOWING THE PAYMENT OF COMMISS ION RS.71,90,973/- BY INVOKING THE PROVISIONS OF SEC. 4 0(A)(IA) OF THE ACT AND ACCORDINGLY THE ORDER PASSED BY THE CIT(A) IS R EVERSED AND THAT OF AO IS RESTORED. THE GROUNDS TAKEN BY THE REVENUE ARE, THEREFORE, ALLOWED. 31. IN THE RESULT, THE REVENUES APPEALS STAND ALL OWED. ORDER PRONOUNCED ON THE 8TH DAY OF JULY, 2011 . SD SD (J. SUDHAKAR REDDY) (D. K. AGARWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 8TH JULY , 2011. NG: ITA NOS. 3659 & 6171/M/09 EDROOS SYED MOHD. ZAKIR 19 COPY TO : 1. DEPARTMENT. 2. ASSESSEE. 3. CIT(A)-XXVII,,MUMBAI. 4. CIT,CITY-3,MUMBAI. 5. DR,B BENCH,MUMBAI. 6. MASTER FILE. BY ORDER, (TRUE COPY) ASST.REGISTRAR, ITAT, MUMBAI.