Varren Financial Services (P) Ltd. V. Commissioner of Income Tax, Patiala

ITA/72/2004

AI Insights

The case revolves around the taxation of consultancy income claimed by M/s Varren Financial Services (P) Ltd. from M/s Usha Services and Consultants Ltd. for the assessment year 1993-1994. The Income Tax Appellate Tribunal had earlier restored the Assessing Officer's decision, which added `12,00,000/- as income to the assessee's taxable income, despite the income being written off due to non-rendering of services. The Commissioner of Income Tax (Appeals) had earlier ruled that this income had neither accrued nor arisen to the assessee. The High Court, referencing various Supreme Court and High Court decisions, concluded that the income was not taxable as it was notional and hypothetical, being reversed before the completion of the assessment.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 808051 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 21-02-2012
• Assessment Year: misc
• Other Referred Cases: CIT vs. Kerla State Drugs and Pharmaceutical Ltd., CIT West Bengal-I vs. India Discount Co. Ltd., Sutlej Cotton Mills Ltd. Vs. CIT West Bengal, CIT Amritsar-I vs N.D. Radha Kishan & Co., CIT vs. Ferozepur Finance (P) Ltd., Godhra Electricity Co. Ltd. Vs. Commissioner of Income-Tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: SAVITA SAXENA
• Assessee Lawyers: PANKAJ JAIN
• Keywords: Accrual of income; Consultancy services; Hypothetical income; Notional income
• Section: 260-A

Judgement Text

"ITA No.72 of 2004 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.72 of 2004 (O&M) Date of decision: 21.02.2012 M/s Varren Financial Services (P) Ltd., Patiala ....Appellant Versus Commissioner of Income Tax, Patiala ....Respondent CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE ALOK SINGH Present: - Mr. Pankaj Jain, Advocate, for the appellant. Ms. Savita Saxena, Advocate, for the respondent. 1.Whether to be referred to the Reporters or not? 2.Whether the judgment should be reported in the Digest? ***** ALOK SINGH, J. The assessee has preferred present appeal under Section 260-A of the Income Tax Act, 1961, assailing order dated 31.7.2003 passed by Income Tax Appellate Tribunal Bench 'A', Chandigarh (for brevity 'the Tribunal') relatable to assessment year 1993-1994. The appellant has claimed a number of questions of law but the appeal was admitted on the following question of law: - “Whether under the facts and circumstances of the case the Tribunal was justified in holding that ` 12,00,000/- had accrued and arisen as income during the year under appeal and to be taxed in the hands of the assessee and that the claim of the appellant that the entries in the books are only notional and hypothetical is not sustainable?” 2. Brief facts inter alia are that assessee had undertaken job for providing consultancy services to M/s Usha Services and Consultants Ltd. for ` 30,00,000/-; assessee was required to provide project consultancy services for the new issue scheduled towards the end of ITA No.72 of 2004 -2- 1992 for financial computer software development programme, including the establishment of a joint venture company in USA for export of software; assessee was expected to prepare a feasibility report for setting up STD/ISD network in 1993 in Delhi for which assessee had received consultancy service charges of ` 30,00,000/-. However, the assessee could not render the consultancy services for establishment of a joint venture company in USA, therefore, consultancy income of ` 18,00,000/- out of total of ` 30,00,000/- was written off in the accounting year under reference; even the remaining income of ` 12,00,000/- was written off as the assessee could not render the services in connection with the public issue. 3. Learned Assessing Officer has added consultancy charges of ` 12,00,000/- as income of the assessee, however, learned Commissioner of Income Tax (Appeals) has held that income of ` 12,00,000/- had neither accrued nor arisen to the assessee. Learned Tribunal has reversed the order of the Commissioner of Income Tax (Appeals) and restored the order of the Assessing Officer vide impugned judgment dated 31.7.2003. Feeling aggrieved, present appeal was preferred before us by the assessee. 4. We have heard learned counsel for the parties and have carefully perused the record. 5. Undisputedly, assessee has received ` 30,00,000/- from M/s Usha Services and Consultants Ltd., which was credited in the books of accounts as income from consultation charges; since the assessee failed to carry out study in America or to procure a collaboration agreement in USA, a sum of ` 18,00,000/- was reversed on 3.12.1992 and ITA No.72 of 2004 -3- subsequently the agreement was cancelled by the other part when the balance amount of ` 12,00,000/- was also written off. 6. Learned Commissioner Income Tax (Appeals) has observed as under: - “2.3 I have carefully considered the rival contentions and I find that though an agreement had been entered into by the appellant company with M/s Usha Services and Consultants Ltd. and a total consideration of Rs.30 lakhs was paid to the appellant. However, since no services were rendered the agreement was cancelled and the entries reversed. The appellant had not incurred any expenditure and similarly the M/s Usha Services and Consultants Ltd. had also not claimed any expenditure on this account. The claim u/s 35D was withdrawn during the course of assessment proceedings. It is, therefore, crystal clear that no real income had accrued to the appellant. The ratio laid down by the Hon'ble High Court in the case of CIT vs. Kerla State Drugs and Pharmaceutical Ltd. (1991) 192 ITR page 325 is clearly applicable. Hypothetical income even though credited in the books of account has been held as not assessable. Similarly the ratio laid down by the Hon'ble Supreme Court in the case of CIT West Bengal-I vs. India Discount Co. Ltd.-73 ITR page 191 (SC) appellant's case as the Hon'ble Supreme Court has held that the receipt being one which in law could not regard as income, it could not become income merely because the respondent erroneously credited it to the profit and loss account. Similarly, the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT West Bengal-116 ITR page 137 (SC) held “It is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may be making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. “The Hon'ble jurisdictional High Court has held in the case of CIT Amritsar-I vs N.D. Radha Kishan & Co. ITA No.72 of 2004 -4- - 140 ITR 560 that “Income does not accrue by mere entry in books of accounts – Assets of old firm taken over by new firm at written down Value Assets revalued and differences debited to old firm – Debt entry reversed and interest charged from old firm earlier withdrawn in revised return resulting in reduction of interest income. No income derived from outside source-amount is only a Notional receipt and not assessable in hands of assessee- Firm.” They have upheld the decision of the Tribunal that “the mere passing of an entry did not mean that income had accrued to the assessee that the assessee did not derive any income from any outside source and that it was entitled to reverse the entry at any time retrospectively before the completion of the assessment for the relevant year.” They followed their earlier decision in the case of CIT vs. Ferozepur Finance (P) Lt. (980) 124 ITR 619 (P&H). In view of the above decisions of the Hon'ble Supreme Court of India and the jurisdictional High Court the law on the point is absolutely clear that notional income cannot be assessed irrespective of the fact that whether assessee has made any entry in their books of account. The assessee has the right to reverse the entries at any time before framing of the assessment. In the instant case, though a sum of Rs.30 lakhs has been credited as consultancy charges, the appellant did not carry out any work or rendered any services and, therefore, the agreement dated 16.3.1992 was cancelled and the entries reversed. Initially a sum of Rs.18 lakhs was debited and thereafter when the complete agreement was cancelled by M/s Usha Services and Consultants Ltd. the balance amount of Rs.12 lakhs was also debited. The appellant reversed the entries first for Rs.18 lakhs and subsequently for Rs.12 lacs. The return of income was also revised much before the assessment had been framed. The law laid down by the jurisdictional High Court is, therefore, applicable and addition of Rs.12 lacs made by the Assessing Officer is not sustainable and is, therefore, deleted. 7. Hon'ble Apex Court in the case of Godhra Electricity Co. Ltd. Vs. Commissioner of Income-Tax, 1997 Income Tax Reports, 746, has held as under: - “Income tax is a levy on income. No doubt, the ITA No.72 of 2004 -5- Income-tax Act takes into account two points of time at which the liability to tax is attracted viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax even though in book-keeping, an entry is made about a hypothetical income, which does not materialise.” 8. Applying the abovesaid ratio, we find that entry of ` 30,00,000/- was made in the account of the assessee since it was received in lieu of the services agreed to be provided, since assessee failed to provide services as agreed, ` 30,00,000/- were written off and returned to M/s Usha Services and Consultants Ltd. on two occasions, which is not disputed, therefore, we are of the view that order passed by Commissioner of Income-tax (Appeals) was perfectly valid and did not require any interference, which was wrongly disturbed by the Tribunal. We find that Tribunal was not justified in holding that ` 12,00,000/- accrued and arisen during the year under appeal since entries in the books are only notional and hypothetical. 9. Hence, question of law is answered in favour of the assessee and against the revenue. 10. In view of the findings recorded, appeal is allowed. Impugned order passed by Tribunal is set aside. (M.M. Kumar) Judge (Alok Singh) Judge February 21, 2012 R.S. "