DCIT, Ernakulam V. M/s. Nortrans Marine services P.Ltd, Cochin

ITA 76/COCH/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58274 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2012
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 09-02-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 11-02-2010
• Court: TRIBUNAL
• Department Lawyers: S VIJAYAPRABHA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business income; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A NO. 60/COCH/2010 ASSESSMENT YEAR: 2006-07 NORTRANS MARINE SERVICES (P) LTD., TRANS ASIA CORPORATE PARK, XIV/396-C, SEAPORT AIRPORT ROAD, CHITTETHUKARA, KAKKANAD, COCHIN-682 037. [PAN:AACN 7786K] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX,CIRCLE-1(3), ERNAKULAM. (ASSESSEE -APPELLANT) (REVENUE- RESPONDENT) I.T.A NO.76 /COCH/2010 ASSESSMENT YEAR: 2006-07 THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1(3), KOCHI. VS. NORTRANS MARINE SERVICES (P) LTD., TRANS ASIA CORPORATE PARK, XIV/396-C, SEAPORT AIRPORT ROAD, CHITTETHUKARA, KAKKANAD, COCHIN- 682 037. (REVENUE-APPELLANT) (ASSESSEE RESPONDENT) ASSESSEE BY SHRI R.VIJAYARAGHAVAN, ADVOCATE REVENUE BY MS. S. VIJAYAPRABHA, JR. DR DATE OF HEARING 09/02/2012 DATE OF PRONOUNCEMENT 17 /02/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 30-11-2009 PASSED BY LD CIT(A)-II, KOCHI AND THEY RELATE TO THE ASSES SMENT YEAR 2006-07. I.T.A. NOS. 60 & 76/COCH/2010 2 2. IN THE APPEAL OF THE ASSESSEE, FOLLOWING TWO ISSUES ARE CONTESTED:- (A) DEDUCTION OF RS.3,99,288/- TO BE ALLO WED U/S 40(A)(IA) OF THE ACT. (B) TAXABILITY OF AMOUNT WAIVED BY M/S NO RASIA CONTAINER LINES AND ANOTHER RS.4.91 CRORES. 3. THE REVENUE IS ASSAILING THE DECISION OF LD C IT(A) IN DIRECTING THE AO TO EXAMINE AND ALLOW LEGITIMATE EXPENSES INCURRED BY THE ASSESSEE AGAINST THE AMOUNT WAIVED BY M/S NORASIA CONTAINER LINES AND AN OTHER . 4. IN ORDER TO UNDERSTAND THE ISSUES BEFORE US, IT IS PERTINENT TO SET OUT THE FACTS RELATING TO THEM IN BRIEF. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING STEAMER AGENCY SERVICES. IT WAS ACTING A S THE AGENT OF TWO FOREIGN SHIPPING LINE COMPANIES, VIZ., M/S COMPANIA SUD AME RICANA DE VAPORES S A (CSAV) AND M/S NORASIA CONTAINER LINES LTD (NCLL). FOR THE SAKE OF CONVENIENCE, WE SHALL REFER BOTH THE ABOVE SAID COM PANIES AS PRINCIPALS HEREIN AFTER. THE ASSESSEE COMPANY, IN ITS CAPACITY AS TH E AGENT OF THE PRINCIPALS, WOULD COLLECT THE AMOUNT ON BEHALF OF THE PRINCIPALS FROM THE CUSTOMERS AND REMIT THE SAME TO THEM AFTER DEDUCTING THE COMMISSION AMOUNT DUE TO IT. THE AMOUNT SO COLLECTED FROM THE CUSTOMERS WAS CREDITED TO THE RE SPECTIVE ACCOUNT OF THE PRINCIPALS. THE AMOUNT REMITTED TO THE PRINCIPALS AND THE COMMISSION DUE TO THE ASSESSEE WAS DEBITED TO THEIR RESPECTIVE ACCOUNT. THE BALANCE AVAILABLE IN THE RESPECTIVE ACCOUNT OF THE PRINCIPALS WAS SHOWN AS L IABILITY IN THE BALANCE SHEET. THE COMMISSION INCOME APPROPRIATED BY THE ASSESSEE WAS TAKEN TO ITS PROFIT AND LOSS ACCOUNT. 5 M/S CSAV FLOATED A SUBSIDIARY COMPANY IN INDIA TO CARRY ON THE SHIPPING AGENCY ACTIVITIES DURING THE YEAR 2004. ACCORDINGL Y, THE AGENCY AGREEMENT ENTERED WITH THE ASSESSEE BY THEM WAS TERMINATED AN D FOR THAT PURPOSE, A MEMORANDUM OF UNDERSTANDING (MOU) WAS ENTERED ON 16 .12.2004. IN THE MOU, I.T.A. NOS. 60 & 76/COCH/2010 3 THE EFFECTIVE DATE OF TERMINATION OF AGENCY WAS FIX ED AS 15.2.2005. HOWEVER, SUBSEQUENTLY DISPUTE AROSE BETWEEN THE PARTIES OVER THE SETTLEMENT OF THE ACCOUNTS, I.E. ON ENTITLEMENT AND RIGHTS. THE PRINCIPALS FIL ED A SUIT IN LONDON COURTS AGAINST THE ASSESSEE. AFTER PURSUING THE LEGAL SUITS FOR S OME TIME, BOTH THE PARTIES REACHED AN AGREEMENT AND AS PER THE COURT ORDER DATED 06-03 -2006, THEY ENTERED INTO A SETTLEMENT AGREEMENT. 6. IT WOULD BE PERTINENT HERE TO STATE THE DETA ILS OF DISPUTE IN BRIEF. AS PER THE BOOKS OF ACCOUNTS OF THE ASSESSEE, A SUM OF ABOUT R S.31 CRORES WAS SHOWN AS DUE TO THE PRINCIPALS AS ON 31.3.2005. HOWEVER, THE PR INCIPALS DEMANDED A SUM OF RS.45 CRORES AND ALSO FILED A SUIT AGAINST THE ASSE SSEE IN THE LONDON COURT. IT IS STATED THAT THE ASSESSEE PAID A SUM OF RS.13.35 CRO RES TO THE PRINCIPALS DURING THE FINANCIAL YEAR 2005-06, WHEN THE SUIT WAS PENDING. THERE AFTER, BOTH THE PARTIES CAME TO AN UNDERSTANDING AND ACCORDINGLY, THE DISPU TE WAS SETTLED BY PAYING FINAL AMOUNT OF RS.12.65 CRORES TO THE PRINCIPALS. IT IS STATED THAT THE LONDON COURT ALSO PASSED THE ORDER ACCORDINGLY ON 06-03-2006. THUS, AS AGAINST THE OUTSTANDING AMOUNT OF ABOUT RS.31 CRORES, THE ASSESSEE PAID A S UM OF RS.26 CRORES, RESULTING IN A WAIVER OF ABOUT RS.5 CRORES. IT IS STATED THAT THE PRINCIPALS HAVE GIVEN THE SAID WAIVER IN ORDER TO COMPENSATE THE ASSESSEE AGAINST THE LEGAL EXPENSES OF RS.3 CRORES THAT HAD ALREADY BEEN INCURRED BY IT AND A F URTHER SUM OF RS.2 CRORES TOWARDS POSSIBLE FUTURE CLAIMS UPON THE ASSESSEE FR OM OTHER BUSINESS ASSOCIATES. 7. IN THE FINANCIAL YEAR 2006-07 RELEVANT TO TH E ASSESSMENT YEAR 2007-08 (I.E., YEAR SUCCEEDING TO THE YEAR UNDER CONSIDERATION), T HE ASSESSEE CLOSED THE ACCOUNTS OF PRINCIPALS BY DEBITING THEIR ACCOUNTS WITH THE L EGAL AND OTHER EXPENSES AND TREATING THE BALANCE AMOUNT AS ITS INCOME. THE DET AILS OF THE SAID TRANSACTIONS HAVE BEEN EXTRACTED BY THE AO IN THE ASSESSMENT ORD ER AS UNDER:- I.T.A. NOS. 60 & 76/COCH/2010 4 NET DUE TO PRINCIPALS AS ON 31.3.2005 31,07,28,572 LESS:- REMITTANCE MADE TO PRINCIPALS UP TO 31.3.2006 25,99,75,641 LEGAL COST PAID TO PRINCIPALS AS PER COURT ORDER 37,64,180 LEGAL EXP, AND PROFESSIONAL FEE PAID BY THE ASSESSEE 2,57,05, 521 LOCAL EXPENSES PAID ON BEHALF OF PRINCIPALS 22,71,312 ------------------- 29,17,16,654 --------------------- BALANCE TRANSFERRED AS INCOME RS. 1,90,12,018 ============= 8. IN THE ASSESSMENT PROCEEDINGS OF THE YEAR UN DER CONSIDERATION, I.E. ASSESSMENT YEAR 2006-07, THE AO TOOK THE VIEW THAT THE AMOUNT OF RS.1,90,12,018/- IS ASSESSABLE AS THE INCOME OF THE ASSESSMENT YEAR 200 6-07 U/S 41(1) OF THE ACT, SINCE THE SAID LIABILITY HAS CEASED TO EXIST ONLY B Y THE ORDER OF LONDON COURT DATED 06-03-2006. THE AO ALSO TOOK THE VIEW THAT THE CON DITIONS PRESCRIBED U/S 41(1) OF THE ACT ARE FULLY SATISFIED IN RESPECT OF THE ABOVE SAID AMOUNT. THE AO ALSO FELT THAT THE FOLLOWING PAYMENTS MADE/EXPENSES INCURRED TOWARDS LEGAL EXPENSES CANNOT BE CONSIDERED AS PAYMENT TOWARDS DISCHARGE O F THE AMOUNT DUE TO THE PRINCIPALS.. LEGAL EXP, AND PROFESSIONAL CHARGES PAID - RS.2,57,05,521/- LEGAL COST PAID TO PRINCIPALS AS PER COURT ORDER - RS. 37,64,180/- LOCAL EXPENSES TO THE EXTENT NOT PROVED - RS. 7,05,226/- I.T.A. NOS. 60 & 76/COCH/2010 5 ACCORDINGLY HE HELD THAT THE ABOVE CITED THREE AMOU NTS ARE ALSO TAXABLE U/S 41(1) OF THE ACT. THE AO ALSO REFUSED TO ALLOW THE ABOVE SAID EXPENSES AS DEDUCTION ON THE GROUND THAT THE ASSESSEE HAS NOT CLAIMED THEM A S DEDUCTION IN ITS RETURN OF INCOME. FOR THE SAID VIEW, THE AO RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GOETZE INDIA LTD VS. CIT (204 CTR 182). IN EFFECT, THE AO WAS OF THE VIEW THAT THE AMOUNT OF RS1,90,12,018/- AND OTHER THREE AMOUNTS REFERRED ABOVE, AGGREGATING TO RS.4,91,86,995/- IS ASSESSABLE AS INCOME U/S 41(1) OF THE ACT AS THE LIABILITY IN RESPECT OF THE SAME HAS CEASED TO EXIST AS ON 31.3.2006. THE ASSESSEE CHALLENGED THE ADDITIONS M ADE BY THE AO IN THE APPEAL FILED BEFORE LD CIT(A). 9. THE LD CIT(A) NOTICED THAT THE PRIMARY CONDI TION FOR INVOKING THE PROVISIONS OF SEC.41(1) IS THAT THE RECEIPT/BENEFIT SOUGHT TO BE TAXED UNDER THAT SECTION SHOULD HAVE BEEN ALLOWED AS DEDUCTION IN COMPUTING THE INC OME OF THE ASSESSEE IN EARLIER YEARS. IN THE INSTANT CASE, THE LD CIT(A) NOTICED THAT THE AGGREGATE AMOUNT OF RS.4,91,86,995/-, REFERRED SUPRA, WAS NOT ALLOWED AS DEDUCTION IN COMPUTING THE INCOME OF THE ASSESSEE. ACCORDINGLY, HE HELD THE P ROVISIONS OF SEC. 41(1) SHALL NOT APPLY TO THE INSTANT CASE. HOWEVER, THE LD CIT(A) HELD THAT THE CESSATION OF LIABILITY HAS GIVEN RISE TO A BENEFIT TO THE ASSESS EE AND THE SAID ACCRUED BENEFIT IS TAXABLE IN THE YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07. ACCORDINGLY HE HELD THAT THE AMOUNT OF RS.4,91,86,945/- CITED ABOVE IS TAXABLE IN THE ASSESSMENT YEAR 2006-07. BEFORE THE LD CIT(A), THE ASSESSEE DID NO T PRESS THE ADDITION OF RS.7,05,226/-. HOWEVER, IT SOUGHT FOR DEDUCTION OF THE LEGAL EXPENSES AND OTHER EXPENSES STATED ABOVE. WITH REGARD TO THE SAID CLA IM PUT FORTH BY THE ASSESSEE, THE LD CIT(A) HELD THAT THE LEGAL AND OTHER RELATED EXP ENSES HAVE BEEN INCURRED ONLY TO BRING ABOUT THE CESSATION OF LIABILITY AND ACC ORDINGLY ACCEPTED WITH THE CLAIM OF THE ASSESSEE IN PRINCIPLE. HOWEVER, HE DIRECTE D THE AO TO EXAMINE THE SAID CLAIM AND ALLOW THE LEGITIMATE EXPENSES INCURRED BY THE ASSESSEE AGAINST THE INCOME OF RS.4.91 CRORES BROUGHT TO TAX, SINCE THE SAID CLAIM REQUIRED VERIFICATION. I.T.A. NOS. 60 & 76/COCH/2010 6 10. AGGRIEVED BY THE ORDER PASSED BY LD CIT(A), BOTH THE PARTIES ARE IN APPEAL BEFORE US. 11. WE SHALL FIRST TAKE UP THE APPEAL OF THE RE VENUE. THE FIRST AND FIFTH GROUNDS ARE GENERAL IN NATURE AND HENCE THEY DO NOT REQUIRE ANY ADJUDICATION. IN THE SECOND GROUND, IT IS CONTENDED THAT THE PROVISIONS OF SEC. 41(1) SHALL APPLY TO THE INSTANT CASE. THE UNDISPUTED FACTS ARE THAT THE AS SESSEE HEREIN HAS ACTED AS AGENT OF THE PRINCIPALS AND THE AMOUNT COLLECTED FROM THE CUSTOMERS HAVE BEEN CREDITED TO THE ACCOUNTS OF THE PRINCIPALS. THE ASSESSEE HA S DEDUCTED ITS COMMISSION FROM THE SAID COLLECTIONS AND HAS OFFERED THE SAID COMMI SSION INCOME ONLY IN ITS PROFIT AND LOSS ACCOUNT. THE REMAINING AMOUNTS WERE SHOWN AS LIABILITY PAYABLE TO THE PRINCIPALS IN THE BALANCE SHEET. THUS IT IS SEEN T HAT THE ASSESSEE HAD NEVER CLAIMED THE LIABILITIES OUTSTANDING IN THE NAME OF THE PRIN CIPALS AS A DEDUCTION IN COMPUTING ITS INCOME. THE PROVISIONS OF SEC. 41(1 ) STARTS WITH THE FOLLOWING WORDS:- 41(1) WHERE AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN TH E ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE (HEREINAFTER REF ERRED TO AS THE FIRST- MENTIONED PERSON) AND SUBSEQUENTLY DURING ANY PREVI OUS YEAR,- ON A PLAIN READING OF THE ABOVE SAID PROVISIONS, WE ARE OF THE VIEW THAT THE LD CIT(A) WAS RIGHT IN HOLDING THAT THE PROVISIONS OF SEC. 41(1) ARE ATTRACTED ONLY IF THE IMPUGNED AMOUNT HAD BEEN ALLOWED AS A DEDUCTION . IN OUR VIEW, THE DEDUCTION HERE SHOULD MEAN THE DEDUCTION WHILE CO MPUTING THE INCOME OF THE ASSESSEE. IN THE FOLLOWING CASE LAW RELIED UPON BY THE LD A.R, IT HAS BEEN HELD THAT THE REVENUE HAS TO PROVE THAT THE AMOUNTS HAD BEEN ALLOWED AS A DEDUCTION IN THE EARLIER YEARS IN ORDER TO INVOKE THE PROVISIONS OF SEC. 41(1) OF THE ACT:- (A) NARAYANA CHETTIAR INDUSTRIES VS. CIT (277 IT R 426)(MAD) (B) STEEL AND GENERAL MILLS CO LTD VS. CIT (97 IT R 438)(DEL) I.T.A. NOS. 60 & 76/COCH/2010 7 (C) CIT VS. ANCHERRY PAVOO KAKKU (160 ITR 8)(KER ) HENCE, IN OUR VIEW, THE LD CIT(A) WAS RIGHT IN HOLD ING THAT THE PROVISIONS OF SEC.41(1) SHALL NOT APPLY TO THE FACTS OF THE INSTA NT CASE. 12. IN THE THIRD GROUND, IT IS STATED THAT THE LD CIT(A) HAS EXCEEDED HIS AUTHORITY BY REMANDING THE MATTER OF DEDUCTION OF LEGITIMATE EXPENSES TO THE FILE OF AO. ON A CAREFUL PERUSAL OF THE ORDER OF LD CIT (A), WE NOTICE THAT THE FIRST APPELLATE AUTHORITY HAS CATEGORICALLY HELD THAT THE EXPENDITURE INCURRED IN BRINGING ABOUT THE CESSATION OF LIABILITY IS ALLOWABLE AS D EDUCTION. HOWEVER, SINCE THE QUANTUM OF EXPENSES THAT SHOULD BE ALLOWED (TERMED AS LEGITIMATE EXPENSES BY LD CIT(A)) CAN ONLY BE DETERMINED AT THE END OF THE AO, HE HAS DIRECTED THE AO TO EXAMINE AND ALLOW THE LEGITIMATE EXPENSES INCURR ED BY THE ASSESSEE. IN OUR VIEW, THE LD CIT(A) HAS NOT EXCEEDED HIS POWERS AND THE DIRECTION GIVEN BY HIM CANNOT BE CONSIDERED AS REMANDING OF THE MATTER. 13. IN THE FOURTH GROUND, IT IS STATED THAT THE CIT(A) OUGHT TO HAVE CONSIDERED THAT THE EXPENDITURE HAS NOT BEEN INCURRED FOR THE DISCHARGE OF THE LIABILITY AND HENCE NOT TO BE ALLOWED. IN THE SUBSEQUENT PARAGRA PHS, WE ARE DISCUSSING ABOUT THE CHARACTER AND NATURE OF THE EXPENSES VIS--VIS INCOME TAX PROVISIONS. IN TERMS OF SUCH DISCUSSIONS, THIS GROUND IS DISPOSED OF. 14. WE SHALL TAKE UP THE APPEAL OF THE ASSESSEE NOW. IT IS PERTINENT TO NOTE THAT THE ASSESSEE ITSELF HAS OFFERED A SUM OF RS.1,90,12 ,018/- AS ITS INCOME IN THE YEAR RELEVANT TO THE ASSESSMENT YEAR 2007-08. HOWEVER, BEFORE US, THE ASSESSEE HAS TAKEN THE STAND THAT THE ENTIRE AMOUNT WAIVED BY TH E PRINCIPALS CANNOT BE CONSIDERED AS INCOME IN THE HANDS OF THE ASSESSEE. IT WAS ALSO STATED THAT THE ASSESSEE IS CONTESTING THE TAXABILITY OF RS.1.90 CR ORES, WHICH WAS VOLUNTARILY OFFERED IN THE ASSESSMENT YEAR 2007-08. IN SUPPORT OF ITS CONTENTIONS THAT THE I.T.A. NOS. 60 & 76/COCH/2010 8 AMOUNT WAIVED BY THE PRINCIPALS CANNOT BE CONSIDERE D AS INCOME, THE ASSESSEE HAS ADDUCED DIFFERENT KIND OF REASONS, WHICH ARE NARRAT ED BELOW:- (A) THE PROVISIONS OF SEC. 41(1) SHALL NOT APPLY, SINCE THE IMPUGNED AMOUNT WAS NOT ALLOWED AS A DEDUCTION IN THE EARLIE R YEARS. (B) THE APPROXIMATE AMOUNT OF RS.5 CRORES WAIVED B Y THE PRINCIPALS CONSISTED OF RS.3 CRORES ALREADY SPENT BY THE ASSES SEE ON LEGAL EXPENSES AND RS.2 CRORES TOWARDS POSSIBLE FUTURE CLAIMS. IT IS STATED THAT THERE WERE MANY SUBSISTING LITIGATION AGAINST THE PRINCIPALS, WHEREIN THE ASSESSEE HAS ALSO BEEN INCLUDED. HENCE, THE PRINCIPAL HAS WAIVE D A SUM OF RS.2 CRORES TO TAKE CARE OF POSSIBLE FUTURE DEMANDS. SUCH SUBS ISTING LITIGATIONS HAVE NOT REACHED FINALITY AS ON 31.3.2006, NO PART OF WA IVED AMOUNT COULD BE CONSIDERED AS THE INCOME OF THE ASSESSEE. (C) THE ASSESSEE, IN ITS CAPACITY AS AGENT, HAS CO LLECTED THE AMOUNTS FROM THE CUSTOMERS ON BEHALF OF THE PRINCIPALS. HENCE, THE ASSESSEE WAS HOLDING SUCH COLLECTIONS IN FIDUCIARY CAPACITY. THEY CANNO T BE CONSIDERED AS PART OF TRADING LIABILITY. ACCORDINGLY, SUCH AMOUNTS ACQU IRE THE CHARACTER OF LOAN IN THE HANDS OF THE ASSESSEE. IT HAS BEEN H ELD BY VARIOUS COURTS THAT THE WAIVER OF LOAN LIABILITIES CANNOT BE CONSIDERED AS INCOME IN THE HANDS OF THE ASSESSEE, AS THEY ACQUIRE THE CHARACTER OF CAPI TAL RECEIPTS. THE PROVISIONS OF SEC. 41(1) ARE ALSO NOT ATTRACTED TO THE WAIVER OF LOAN LIABILITIES. (D) THE SAID RECEIPT SHOULD BE CONSIDERED AS DIV ERSION BY OVERRIDING TITLE. HENCE NO PART OF IT CAN BE CONSIDERED AS INCOME IN THE HANDS OF THE ASSESSEE. (E) THE IMPUGNED RECEIPT CAN BE CONSIDERED AS REC EIPT OF CAPITAL NATURE. I.T.A. NOS. 60 & 76/COCH/2010 9 15. THE LD A.R ALSO SUBMITTED THAT THE LD CIT(A ), HAVING HELD THAT THE PROVISIONS OF SEC.41(1) ARE NOT ATTRACTED IN THE IN STANT CASE, HAS NOT CITED ANY OF THE PROVISIONS OF THE ACT UNDER WHICH THE IMPUGNED AMOU NT WAS TAXABLE. THE LD CIT(A) COULD HAVE CONSIDERED THE PROVISIONS OF SEC. 28(IV) OF THE ACT FOR THE PURPOSE. HOWEVER, THE SAID SECTION IS APPLICABLE O NLY TO NON-MONETARY BENEFITS, IF ANY, RECEIVED BY AN ASSESSEE. 16. IN THE ALTERNATIVE, THE LD A.R SUBMITTED TH AT IF THE IMPUGNED AMOUNT WAIVED BY THE PRINCIPAL IS CONSIDERED AS INCOME, THEN THE EXPENSES INCURRED BY THE ASSESSEE IN DEFENDING THE LEGAL SUIT AS WELL AS LEG AL COST PAID TO THE LAWYERS SHOULD BE ALLOWED AS DEDUCTION. 17. THE ASSESSEE HAS RELIED UPON HOST OF DECISI ONS, WHICH ARE LISTED IN THE WRITTEN SUBMISSIONS, IN SUPPORT OF THE CONTENTIONS NARRATED ABOVE. HOWEVER, IT IS PERTINENT TO NOTE THAT NEITHER THE ASSESSEE NOR THE DEPARTMENT HAS BROUGHT ON RECORD THE DETAILS OF TERMS OF SETTLEMENT REACHED BETWEE N THE ASSESSEE AND THE PRINCIPALS. NORMALLY, THE VARIOUS CLAUSES REDUCED IN THE SETTLEMENT AGREEMENT WOULD HELP THROW LIGHT ABOUT THE NATURE OF ANY RECE IPTS, WHETHER THE SAID RECEIPTS OR ON CAPITAL ACCOUNT OR REVENUE ACCOUNT. IN OUR VI EW, THE TERMS AND CONDITIONS AGREED TO THEREIN WOULD HAVE HELPED TO DETERMINE TH E NATURE AND CHARACTER OF THE AMOUNT WAIVED BY THE PRINCIPALS. IN THE ABSENCE OF THE SAID AGREEMENT, WE ARE ALSO NOT ABLE TO APPRECIATE THE CONTENTIONS OF THE ASSESSEE THAT THE PRINCIPALS HAVE WAIVED A SUM OF ABOUT RS.5 CRORES ONLY TO MEET THE LEGAL EXPENSES/CLAIMS THAT HAS BEEN/MAY BE INCURRED, OR IT IS IN THE NATURE OF CAP ITAL RECEIPT. IN VIEW OF THE ABOVE, WE ARE CONSTRAINED TO DRAW INFERENCES ON THE BASIS OF AVAILABLE INFORMATION AND ACCORDINGLY WE PROCEED TO DISPOSE OF THE DISPUTES A GITATED BEFORE US. I.T.A. NOS. 60 & 76/COCH/2010 10 18. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE WAS ACTING AS THE AGENT OF THE TWO COMPANIES CITED EARLIER. IN A PRI NCIPAL-AGENT RELATIONSHIP, THE AGENT IS ACTING ON BEHALF OF THE PRINCIPAL AND ACCO RDINGLY THE ACTIONS OF THE AGENT ARE CONSIDERED TO BE THAT OF THE PRINCIPAL. THE AG ENT HOLDS THE AMOUNT COLLECTED ON BEHALF OF THE PRINCIPAL IN FIDUCIARY CAPACITY AND H E IS ACCOUNTABLE TO THE PRINCIPAL IN RESPECT OF THE SAME. THE AGENT IS ENTITLED TO A COMPENSATION FOR THE SAID SERVICES, WHICH IS USUALLY AGREED BETWEEN THEM MUTU ALLY. IN THE INSTANT CASES ALSO, IT IS STATED THAT THE ASSESSEE WAS GETTING COMMISSI ON FROM THE PRINCIPALS FOR THE SERVICES RENDERED TO THEM AND IT WAS ACCOUNTING FOR SUCH COMMISSION IN ITS PROFIT AND LOSS ACCOUNT. 19. NOW THE QUESTION THAT ARISES IS ABOUT THE NA TURE OF AMOUNT WAIVED BY THE PRINCIPALS IN FAVOUR OF THE ASSESSEE. BOTH THE PAR TIES HAVE TAKEN DIFFERENT STAND IN THIS REGARD. IN ORDER TO ANSWER THIS QUESTION, LET US CONSIDER A HYPOTHETICAL CASE. SUPPOSE AN AGENT A IS ACTING ON BEHALF OF THE PRI NCIPAL P IN CONNECTION WITH SALE OF CERTAIN COMMODITY. AS PER THE AGREEMENT BE TWEEN THEM, A IS ENTITLED TO A COMMISSION OF 2%. DURING A PARTICULAR YEAR, A EFFECTS A SALE OF RS.10.00 LAKHS AND ACCORDINGLY HE BECOMES ENTITLED TO A COMM ISSION OF RS.20,000/-. ACCORDINGLY, A WOULD COLLECT RS.10.00 LAKHS FROM THE CUSTOMERS, RETAIN THE COMMISSION AMOUNT OF RS.20,000/- AND REMIT THE BALA NCE AMOUNT OF RS.9.80 LAKHS TO THE PRINCIPAL. LET US ASSUME THAT THE P, ON B EING SATISFIED WITH THE SERVICES OF A, AGREES TO RECEIVE ONLY A SUM OF RS.9.70 LAKHS AND FOREGOES A SUM OF RS.10,000/- IN FAVOUR OF A. IN THAT CASE, WHAT W OULD BE THE CHARACTER OF RS.10,000/-, THAT WAS FOREGONE BY P. LET EXTEND THE CASE FURTHER. SUPPOSE A HAD TO INCUR CERTAIN ABNORMAL EXPENSE OF SAY RS.5,0 00/- IN THE COURSE OF SALE AND LODGES A CLAIM WITH P FOR REIMBURSEMENT AND THE P AGREES TO COMPENSATE A FOR THE SAID RS.5,000/- ALSO. THEN, WHAT WOULD BE T HE CHARACTER OF THE SAID RS.5,000/-. IN OUR VIEW, BOTH THE AMOUNTS OF RS.10 ,000/- AND RS.5,000/-, CITED ABOVE, WOULD ACQUIRE THE CHARACTER OF COMMISSION ONLY AS THEY HAVE BEEN PAID I.T.A. NOS. 60 & 76/COCH/2010 11 BY THE PRINCIPAL P TO THE AGENT A IN THE NORMAL COURSE OF CARRYING ON THE BUSINESS ACTIVITIES. THE AGENT A WOULD OFFER RS. 35,000/- (RS.20,000/- + RS.10,000/- + RS.5,000) AS HIS GROSS COMMISSION IN COME AND WOULD CLAIM, INTER ALIA, THE SUM OF RS.5,000/- AS EXPENSE. 20. IN OUR VIEW, THE RATIO DISCUSSED IN THE ABO VE SAID EXAMPLE CAN BE CONVENIENTLY APPLIED IN THE INSTANT CASE ALSO. ACC ORDING TO THE ASSESSEE, THE SUM OF ABOUT RS.5 CRORES HAVE BEEN WAIVED BY THE PRINCI PALS IN ORDER TO MEET THE LEGAL EXPENSES/CLAIMS THAT HAVE BEEN/MAY BE INCURRED. HE NCE, IN OUR VIEW, THE AMOUNT SO WAIVED BY THE PRINCIPALS WOULD ACQUIRE THE CHARA CTER OF COMMISSION INCOME ONLY IN THE HANDS OF THE ASSESSEE HEREIN. IN OUR VI EW, NO OTHER COLOUR CAN BE GIVEN TO SUCH RECEIPTS, AS CONTENDED BY LD A.R, AS THE AS SESSEE HEREIN HAS RECEIVED THE SAME IN THE NORMAL COURSE OF CARRYING ON THE AGENCY BUSINESS AND THE PRINCIPALS HAVE ALSO WAIVED THE SAME ONLY BECAUSE THE ASSESSEE HEREIN WAS THEIR AGENT.. ACCORDINGLY, IN OUR VIEW, THERE IS NO NECESSITY OF INVOKING THE PROVISIONS OF SEC. 41(1) OR 28(IV) TO DETERMINE THE SCOPE OF TAXABILIT Y OF THE SAID AMOUNT. THE IMPUGNED AMOUNT WAIVED BY THE PRINCIPALS WOULD BE A NORMAL REVENUE RECEIPT IN THE HANDS OF THE ASSESSEE HEREIN. ACCORDINGLY, WE REJECT VARIOUS SUBMISSIONS MADE BY THE LD. A.R. 21. THE NEXT QUESTION IS ABOUT THE YEAR IN WHIC H THE IMPUGNED AMOUNT IS TAXABLE. THE FACT REMAINS THAT THE SETTLEMENT WAS REACHED ON 06.3.2006 AND THE QUANTUM OF WAIVER SHOULD HAVE BEEN DETERMINED /GOT CRYSTALLISED ON THAT DATE. HENCE, IN OUR VIEW, THE AMOUNT WAIVED BY THE PRINCI PALS WOULD BE TAXABLE IN THE YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07 ONLY. 22. THE NEXT QUESTION IS ABOUT THE NATURE OF LE GAL EXPENSES INCURRED BY THE ASSESSEE. LET US LEAVE ASIDE, FOR A MOMENT, THE FA CT OF RECEIPT OF AMOUNT FROM THE PRINCIPALS BY WAY OF WAIVER. IN THE COURSE OF CARR YING ON THE BUSINESS, THE I.T.A. NOS. 60 & 76/COCH/2010 12 EXPENSES INCURRED BY AN ASSESSEE TO DEFEND A SUIT F ILED AGAINST HIM IN CONNECTION WITH BUSINESS TRANSACTIONS WOULD BE ALLOWABLE U/S 3 7(1) OF THE ACT. IN THE INSTANT CASE, IT IS STATED THAT THE DISPUTE AROSE BETWEEN T HE PARTIES IN CONNECTION WITH THE SETTLEMENT OF THE ACCOUNTS BETWEEN THEM, I.E. ACCOR DING TO THE ASSESSEE; IT HAD TO PAY A SUM OF RS.31 CRORES ONLY TO THE PRINCIPALS, W HILE THE PRINCIPALS DEMANDED A SUM OF RS.45 CRORES. IT IS STATED THAT THE PRINCIP ALS FILED A SUIT AGAINST THE ASSESSEE IN THE LONDON COURT FOR THE RECOVERY OF RS.45 CRORE S. ONCE A CASE IS FILED, THE ASSESSEE IS REQUIRED TO DEFEND THE CASE IN ORDER TO PROTECT ITS INTEREST. IN THAT CASE, THE LEGAL EXPENSES INCURRED BY THE ASSESSEE IS REQU IRED TO BE ALLOWED U/S 37(1), AS THEY HAVE BEEN INCURRED IN THE NORMAL BUSINESS COUR SE OUT OF COMMERCIAL EXPEDIENCY. THE SAID EXPENSES ARE ALLOWABLE IRRESP ECTIVE OF THE FACT WHETHER THE ASSESSEE HAS RECEIVED WAIVER BENEFITS OR NOT. 23. HENCE, IN OUR VIEW, THERE IS NO NECESSITY T O CREATE A LINK BETWEEN THE AMOUNT WAIVED BY THE PRINCIPAL AND THE LEGAL EXPENSES INCU RRED BY THE ASSESSEE. IN OUR VIEW, THERE IS NO CONNECTION BETWEEN THE TWO AND TH E QUESTION OF ALLOWABILITY OF LEGAL EXPENSES AND LEGAL COMPENSATION SHOULD BE EXA MINED INDEPENDENTLY. EVEN THOUGH THE QUANTUM OF WAIVER HAS BEEN DETERMINED ON THE BASIS OF THE LEGAL EXPENSES, YET IN OUR VIEW, BOTH THE ITEMS HAVE TO B E DEALT WITH INDEPENDENTLY. THE REASON IS SIMPLE. IT IS NOT THE CASE OF THE ASSESS EE THAT IT HAS INCURRED THE SAID LEGAL EXPENSES IN ORDER TO RECOVER ANY AMOUNT FROM THE PR INCIPAL. ON THE CONTRARY, THE ASSESSEE HAS INCURRED THE SAME IN ORDER TO DEFEND A SUIT FILED AGAINST HIM. 24. IT IS A WELL SETTLED PROPOSITION OF LAW THAT T HE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE CORRECT TOTAL INCOME IN THE HANDS OF THE ASSESSEE. IN VIEW OF THE SAID PROPOSITION ONLY, THE AO, IN THE INSTANT CASE, HAS PROCEEDED TO ASSESS THE IMPUGNED INCOME IN THE ASSESSMENT YEAR 2006-07, EVE N THOUGH THE ASSESSEE HAD OFFERED A PART OF THE SAME IN THE SUCCEEDING YEAR. WHILE DOING SO, IN OUR VIEW, I.T.A. NOS. 60 & 76/COCH/2010 13 THE AO IS ALSO REQUIRED TO ALLOW THE EXPENSES WHICH ARE REQUIRED TO BE ALLOWED UNDER THE ACT. 25. IN THE INSTANT CASE, THE ASSESSEE HAS NOT C LAIMED THE DEDUCTION OF LEGAL EXPENSES INCURRED BY IT AGAINST ITS NORMAL BUSINESS INCOME, BUT INSTEAD DEBITED THE SAME TO THE ACCOUNT OF THE PRINCIPALS. SIMILARLY, THE ASSESSEE HAS NOT OFFERED THE AMOUNT WAIVED BY THE PRINCIPAL AS ITS INCOME IN THE YEAR UNDER CONSIDERATION. THUS, THERE IS FAILURE TO OFFER INCOME AS WELL AS T HERE IS FAILURE TO CLAIM DEDUCTION OF EXPENSES. THE ASSESSEE MIGHT HAVE FOLLOWED THE S AID ACCOUNTING PRACTICE UNDER A DIFFERENT ANGLE. HOWEVER, IN THE PRECEDING PARAG RAPHS, WE HAVE HELD THAT THE AMOUNT WAIVED BY THE PRINCIPALS IS IN THE NATURE OF COMMISSION. ONCE THE MISTAKE OF THE ASSESSEE IN NOT OFFERING THE WAIVER AMOUNT A S ITS INCOME IS CORRECTED, THE EQUITY DEMANDS THAT THE MISTAKE OF NOT CLAIMING THE LEGAL EXPENSES/LEGAL COST IS ALSO REQUIRED TO BE CORRECTED. HENCE, IN OUR VIEW, THE AO IS REQUIRED TO ALLOW THE LEGAL EXPENSES/LEGAL COMPENSATION THAT HAS ACCRUED DURING THE YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07. ACCORDINGLY, WE DIRECT TH E AO TO EXAMINE THE CLAIM OF EXPENSES RELATING TO LEGAL EXPENSES/LEGAL COMPENSAT ION AND DECIDE THE SAME IN ACCORDANCE WITH LAW. THE ORDER OF LD CIT(A) STANDS MODIFIED ACCORDINGLY. 26. THE ASSESSEE HAS TAKEN ONE MORE GROUND REGAR DING THE AMOUNT ALLOWABLE U/S 40(A)(IA) OF THE ACT. THE LD CIT(A) HAS DISMISSED THE SAID GROUND FOR THE REASON THAT IT IS NOT EMANATING FROM THE ASSESSMENT ORDER. WE HAVE ALSO CAREFULLY PERUSED THE ASSESSMENT ORDER AND NOTICE THAT THE AO DID NOT DISCUSS ANY THING ABOUT THE ALLOWABILITY OF ANY AMOUNT U/S 40(A)(IA) FO THE ACT . IN OUR VIEW, THE ASSESSEE IS REQUIRED TO MAKE THIS CLAIM BEFORE THE AO. IF IT H AD BEEN SHOWN TO US THAT THE ASSESSEE DID MAKE THIS CLAIM BEFORE AO, BUT THE SAM E WAS NOT CONSIDERED, THEN IT WOULD HAVE BEEN POSSIBLE FOR LD CIT(A)/TRIBUNAL TO TAKE COGNIZANCE OF THE SAME AND ISSUE NECESSARY DIRECTIONS. IN VIEW OF THE ABO VE, WE DECLINE TO INTERFERE WITH I.T.A. NOS. 60 & 76/COCH/2010 14 THIS GROUND. HOWEVER, THE ASSESSEE IS FREE TO APPR OACH THE AO IN THIS REGARD IN ACCORDANCE WITH LAW. 27. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. PRONOUNCED ACCORDINGLY ON 17-02-2012. SD/- SD /- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 17TH FEBRUARY, 2012 GJ COPY TO: 1. M/S NORTRANS MARINE SERVICES (P) LTD., TRANS ASI A CORPORATE PARK, XIV/396-C, SEAPORT AIRPORT ROAD, CHITTETHUKARA, KAKKANAD, COCH IN-682 037. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1(3), ERNAKULAM. 3 THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1( 3), ERNAKULAM. 4. THE COMMISSIONER OF INCOME-TAX (APPEALS)-II, KO CHI.. 5. THE COMMISSIONER OF INCOME-TAX, KOCHI. 6. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 7.. GUARD FILE . BY ORDER (ASSISTANT REGISTRAR) ITAT, COCHIN BENCH