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Judgment
Rajes Kumar, J.—These two appeals u/s 260-A of the Income Tax Act (hereinafter referred to as "the Act") both relating to the assessment year 1989-90 are directed against the order of the Tribunal dated 22-1-2002 in ITA No. 2426/A11./1992.
In appeal No. 26 of 2002, the following questions have been raised:
I. Whether the Income Tax Appellate Tribunal committed substantial error of law in disallowing the deduction of Rs. 23,63,140 as claimed by the assessee-appellant, by ignoring the material and vital evidence on record relating to the case of the assessee and by proceeding on incorrect and incomplete legal and factual promise in regard to its having received lesser payment for untrained and inexperienced staff, numbering 69, as trainees under a new and modified contract after the contractor had refused to accept them under the original contract ?
II. Whether the Income Tax Appellate Tribunal committed substantial error of law in overlooking and not appreciating and considering the contents of the correspondence relating to the subsequent agreement for accepting the untrained and inexperienced staff, number 69, as trainees ?
III. Whether the Income Tax Appellate Tribunal committed substantial error of law in not appreciating that the aforesaid deduction of Rs. 23,63,140 was under a fresh agreement in modification to the basis agreement dated 24-9-1987 on the subsequent proposal of the assessee ?
IV. Whether the Income Tax Appellate Tribunal committed substantial error of law in holding that the acceptance of lesser amount to the extent of Rs. 23,63,140 was a device to reduce the tax liability of the assessee inasmuch as there is no evidence, direct or circumstantial, in support of such view ?
V. Whether the Income Tax Appellate Tribunal committed substantial error of law in proceeding on the premise that the personnel, numbering 69, supplied by the assessee was trained and experienced as stipulated in the agreement ?
VI. Whether the Income Tax Appellate Tribunal committed substantial error of law in relying upon to the judgment of the Supreme Court in the case of McDowell and Co. Ltd. Vs. Commercial Tax Officer, inasmuch as on the facts of the present case, which are not in dispute, the proposition of law laid down in that case does not apply ?
VII. Whether the Income Tax Appellate Tribunal committed substantial error of law in not appreciating and applying the law laid down in the following cases to the case of assessee:
(i) Commissioner of Income Tax Vs. Nandkishore Sakarlal (Indl.) and Navanitlal Sakarlal,
(ii) Commissioner of Income Tax Vs. U.B.S. Publishers and Distributors,
(iii) ITR 69 SC 86
(iv) 55 ITD38
(v) Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co.,
VIII. Whether the Income Tax Appellate Tribunal committed substantial error of law in not accepting the contention of the appellant that the appellant was wholly free to modify the contract dated 24-9-1987 and or to enter into a fresh contract during the currency of the contract itself relating to the acceptance of labour as well as the consideration in regard thereto ?
IX. Whether the Income Tax Appellate Tribunal substantially erred in proceeding on the premise that the basic agreement of 24-9-1987 was registered ?
In Appeal No. 16 of 2003, the following questions have been raised:
Whether in view of the facts and circumstances the case of the learned ITAT was right in deleting the addition of Rs. 11,34,547 made by CIT(A) after carefully analyzing the agreement?
Whether in view of the facts and circumstances of the case the learned ITAT was right in law in holding that word "Repair" as appearing in the agreements mean only minor repairs and not major repairs and replacement of parts ?
Brief facts of the case-giving rise to the present appeals are that the appellant is a limited company incorporated under the Indian Companies Act. The assessee-company was deriving income from hiring of machines and supply of labourers. M/s. Jaiprakash Associates (a division of Jai Prakash Industries Ltd.) had taken a contract of Civil Engineering works in Sardar Sarover Project (Dam and power houses), Kevadia Colony District Behraich (Gujarat State), Lakhwar and Vyasi Dam at Lakhwar (U.P.), Chamera Project in (H.P.). The assessee-company and M/s. Jai Prakash Associates, entered into an agreement dated 24-9-1987 for the supply of some experienced and qualified technical staff for the execution of their project. The assessee had also taken a contract from the Irrigation Department for the construction work of Adit tunnel at Lakhwar Dam as per agreement dated 1-6-1985 which was sub-let to Jai Prakash Associates wherein it was agreed to charge three per cent profit from such contract.
Vide agreement dated 20-9-1986, the assessee had also hired its machinery i.e., Dozar, D-814-A, Catter Pillar to M/s. Jaiprakash Associates. The assessee had also hired Tippers and Ladders to M/s. Jaiprakash Associates vide agreement dated 1-4-1985. The assessee claimed expenditure towards replacement of parts etc., incurred on the hired machinery at Rs. 11,34,547. The assessing authority disallowed l/3rd of the aforesaid amount at Rs. 3,78,182 on the ground that the assessee had not to incur any such expenditure as per agreement dated 20-9-1986 and it was the hirer who had to incur the expenditure towards repair etc. The said addition was challenged in appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) after issuing the show cause notice disallowed the entire expenditure at Rs. 11,34,547. In the appeal before the Tribunal, the entire amount has been deleted which is impugned in the present appeals.
During the years under consideration, assessee had supplied skilled and technical labour to M/s. Jaiprakash Associates vide agreement dated 24-9-1987. As per certificate issued by M/s. Jaiprakash Associates the total supply of labour was for Rs. 85,54,775. However, a sum of Rs. 23,63,140 has been deducted by M/s. Jaiprakash Associates on account of unsatisfactory supply of labours and instead of Rs. 85,54,775. It was claimed that only a sum of Rs. 61,91,635 has been paid. The assessee claimed deduction in the account of labour charges at Rs. 23,63,140 which was the amount reduced by M/s. Jaiprakash Associates and claimed to have not been paid. The assessing authority disallowed the deduction of Rs. 23,63,140 added in the income, which has been sustained by Commissioner of Income Tax (Appeals) and confirmed by the Tribunal by the impugned order. In respect of the aforesaid two disputes, Tribunal recorded the following findings:
So far as dispute relating to Rs. 23,63,140 is concerned, Tribunal has recorded the following findings:
After carefully going through the agreement dated 24-9-1987 a copy of which has been placed on pages 12-16 of the paper and other relevant material, we find ourselves in agreement with findings recorded by the ld. CIT(A). We assign following reasons in support of our conclusion:
(I) As laid down in the agreement M/s. Jai Prakash Associates (Contractor) was in need of some experienced and qualified technical staff and the assessee (Sub-contractor) possessed of such staff and agreed to supply the same to the contractor on the terms and conditions contained in this agreement dated 24-9-1987. It may be pointed out that the remuneration of each category of staff were specifically laid down in Clause (3) of the agreement. In Clause (2), the following stipulations were laid down:
The Sub-contractor shall provide such Officers and Staff for the various posts who possess requisite qualifications and experience according to the norms applicable to the Contractor''s own officers and staff for similar posts, and the Contractor will be entitled not to accept such Officers/Staff who do not come up to those norms and/or are otherwise not up to its requirements,
(II) It may further be pointed out that by virtue of clause 10, the subcontractor was to submit the bill after 30th/31st day of each month and the Contractor was to verify the bills and make the payment in the first week of the month.
(III) In para 11, it was laid down that the Contractor was not liable to pay sub-contractor for the period for which the employees remained on leave or absented from work. Clause 12 stipulated that other party to the contract may terminate this agreement by giving six months'' notice.
(IV) Clause 13 related to reference of dispute to the Arbitrator:
A perusal of the above noted stipulations, particularly stipulations as contained in clause 2 reproduced above, goes to show that the Contractor was entitled not to accept such officers or staff, who do not come up to those norms or were otherwise not up to its requirement. In view of these stipulations, the unexperienced staff or staff, which was not found to be satisfactory could have been not accepted and not retained by the Contractor. Once this was not done, the contractor was to make full payment of the remuneration. In the instant case, as against these stipulations, the parties modified terms of contract and the assessee had agreed to receive reduced remuneration. That too at a later stage. The submission of the learned Counsel for the assessee that it was within the power of the assessee to have given up part of the claim or to receive reduced remuneration may be acceptable in thereby, but in the context of the facts and circumstances of the present matter, this definitely appears to be a device to reduce the income of the assessee by claiming deduction in respect of remuneration not received or charged not claimed.
It may also be pointed out that if the performance of the technical staff was not found to be satisfactory then they could have returned back in the very beginning and in view of the clause 2 of the agreement, there was no scope for any objection to the contractor. In view of the fact that the assessee and the Contractor were sister concerns and in view of the fact that the choice was not exercised by the contractor at the beginning of the endorsement of the contractor. It appears that a device was adopted by the assessee and its sister concern to reduce tax liability. So far as the decision in the case of Commissioner of Income Tax Vs. Nandkishore Sakarlal (Indl.) and Navanitlal Sakarlal, is concerned, in that case, the facts were different. The assessee in that case were Managing Director of the Company and out of the total remuneration payable to them at Rs. 2,19,335 a sum of Rs. 90,000 was paid to the three Directors and balance of Rs. 76,662 was not paid to them, but was paid to LIC for purchasing deferred annuity policies. In this context, Board had passed a resolution whereby it resolved to purchase single premium deferred annuity officers for the concerned Managing Director. Under these circumstances, the Hon''ble Gujarat High Court had held that the nature of transaction and intention of the parties, was clear and it was not created any benefit either in favour of the Managing Director or his dependants. The decision of Hon''ble Allahabad High Court in the case of ICT v. U.B.S. (supra), which related to accrual of liability on account of devaluation in current year too is distinguishable on facts.
Thus, after considering the totality of the circumstances and the conduct of the parties and particularly, the specific stipulation, incorporated in the agreement for supply of the skilled and technical staff, as mentioned above, we endorse the view taken by the CIT(A) that the deduction was not allowable.
So far as the disallowance of expenditure towards repair charges at Rs. 11,34,547 is concerned, Tribunal recorded the following finding:
We have carefully considered the facts and circumstances relating to this issue, the material to which our attention was invited and the rival submissions. After considering the entire relevant material, we are of the view that the claim of the assessee was justified and the deduction claimed by it should have been allowed. We, therefore, unable to support the view taken by the ld. CIT(A). We assign the following reasons in support of our findings, which are as under:
(A) The details of expenditure incurred by the assessee on two different Projects are given on page 4 and page 5 of the paper book. The details are being reproduced here.
JAIPRAKASH ASSOCIATES CONSTRUCTION LTD., LAKHWAR DETAILS OF MACHINERY SPARES & REPAIRS EXPENDITURE ACCOUNT FOR THE PERIOD 1-10-1987 TO 31-3-1989 ASSESSMENT YEAR 1989-90 ----------------------------------------------------------------------------------- Date Tyre & Battery Spare para Repairs Tolal Particulars Tube ----------------------------------------------------------------------------------- 1-5-1988 72,144.80 72,144.80 Cost of spares used in vehicle No. URM 4449, URM 4451 & URM 5162 by M/s. Jaiprakash Associates, Lakhwar. ----------------------------------------------------------------------------------- 28-3-1989 2,79,894.37 2,79,894.37 Cost of spares used in vehicle No. URM 5162, URM 4451, URM 4449, URM 5164, URM 5180 by M/s. Jaiprakash Associates, Lakhwar, ----------------------------------------------------------------------------------- 3,52,039.17 3.52,039.17 -----------------------------------------------------------------------------------
JAIPRAKASH ASSOCIATES CONSTRUCTION LTD., KEVADIA
----------------------------------------------------------------------------------- Dale Tyre & Battery Spare parts Repairs Total Particulars Tube ----------------------------------------------------------------------------------- 31-31989 1,03,073.00 1,03,073.00 M/s. Jaiprakash Associates, Kevadia Colony Advice No. 1096 dt. 31-3-1989 ----------------------------------------------------------------------------------- 31-3-1989 6,32.581.03 46,853.00 6,79,434.03 ----------------------------------------------------------------------------------- 6,32,581.03 46,853.00 1,03,078.00 7,82,507.83 -----------------------------------------------------------------------------------
SUMMARY
Tyre, Tube Rs. 6,32,581.03 Battery Rs. 46,853.00 Spare parts Rs. 1,03,073.80 __________________ Rs. 7,82,073.80 __________________
(B) The total expenditure incurred on repairs and replacement with the spare parts from 1-10-1987 to 31-3-1989, in relation to two sides, namely, Lakhwar, Kevadia is given at page 3 of the paper book, which is Rs. 3,52,039.17 + Rs. 7,82,507.83 = Rs. 11,34,547.00.
(C) It may be pointed out that neither the nature and details of expenditure have been disputed by the Department nor the figures thereof.
(D) So far as the Hirer is concerned in terms of paras 4 & 5 of the agreement dated 20-9-1986, the Hirer was to incur expenditure only on certain items like salary of drivers, operators, fuels and lubricants, repairs, road tax, etc., stipulations contained in Clauses (4) & (5) of this agreement are being reproduced below:
''The Hirer shall get the Dozer properly insured and shall also bear the insurance expenses. The Hirer shall also bear the running cost of Dozer such as salary of drivers/operators, fuels and lubricants, repairs, road tax and such other expenses incidental to the running/operating the above Dozer, as may be necessary.
The Hirer, during continuance of this agreement, shall keep the Dozer in good working condition and if any loss, damage or destruction is caused to the Dozer let on hire by the lessor, the Hirer hereby undertakes to compensate the lessor in appropriate manner in restoring the Dozer to good working order.
(E) Similar stipulation are contained in another agreement dated 1-5-1985.
(F) A close examination of the language used in the terms of agreements as reproduced above goes to show that the Hirer was to incur only those expenses which were incidental to the running/operating the machines such as fuels, lubricants, repairs, road tax and other expenses. The expenses on replacement on tyres & tubes and battery etc., cannot be treated to be expenses incidental to the running of machines. Here, although the term ''Repair'' has been used in Clause (4) of the agreement, but this term has a restricted meaning and has to take colour from the words and terms preceding and succeeding this word. It is a well known rule of interpretation of statute that a word takes its colour from the adjoining words and has to be interpreted in the context and category to which it belongs. The category of words used in Clause (4) goes to suggest that it was only in respect of minor repairs that the liability of hirer was laid down and not about the major repairs or replacement of part of machine.
(G) There is another aspect of the matter. The assessee had undertaken obligations to maintain the repairs of the machines vis-a-vis the Lessor, namely, M/s. Goodwill India Ltd. and M/s. Motor & General Finance, New Delhi, from whom the machines were taken on lease, Clause (9) of the agreement with M/s, Goodwill India Ltd., is being reproduced below:
Clause 9 of Agreement
''The LESSEE shall at all times keep and maintain the vehicle in good and substantial repair and working order at its cost. If the vehicle shall go out of order the LESSEE shall at its cost have the vehicle repaired by the person, firm or body corporate designated by the LESSOR and in the event of the LESSEE failing to do so then the LESSOR shall be entitled to take possession of the vehicle and have it repaired at the cost of the LESSEE and during such possession and repair, the lease charges shall nevertheless accrue and be payable by the LESSEE to the LESSOR. The LESSEE shall forthwith repay to the LESSOR and full cost of repairs incurred by the LESSOR.''
(H) Similar stipulation is contained in clause 10 of the agreement with M/s. Motor and General Finance Co., New Delhi.
(I) In view of these agreements, the lessee that is the assessee was to maintain the machines in good and substantial repairs and working order at its cost. It was further laid down in the agreement that if the equipment shall go out of order, the lessee shall at its cost have the equipment repaired and in the event it is failing to do so, then the LESSOR shall be entitled to take the possession of the equipments and have it repaired at the cost of the LESSEE.
(J) Thus, the terminology adopted in the stipulations, in these lease agreements go to indicate and show that the assessee as lessee of the machines was under legal liability to maintain the machines by making necessary repairs and replacing the spare parts. From this angle also, the liability of the assessee was there to maintain and repair the machines.
(K) Thus, the liability to maintain the machines and incur expenditure on repairs, including substantial repairs and replacement of spare parts, came from the lease agreements executed by the assessee, while taking the machines on lease.
It may be pointed out that it is not the case of the Department that similar expenditure on repairs/replacement was claimed by the LESSOR, namely, M/s. Goodwill India and M/s. Motor & General Finance or that the hirer, namely M/s. Jaiprakash Associates had also claimed the same expenditure on repairs in its profit & loss account. Thus, neither the amount of expenditure nor the items of expenditure are disputed nor the liability is unascertainable, particularly in the context of the relevant agreements mentioned above.
So far as the view of the ld. CIT(A) that the agreement entered into by the assessee with M/s. Goodwill India Ltd. and M/s. Motor General Finance Ltd., are concerned, the same are not relevant is not acceptable to us, because the liability of the assessee is to be ascertained by making reference to these agreements also. Likewise, the view of the ld. CIT(A) that the word ''Repair'' as used in the agreements between the assessee and M/s, J.P. Associates, is concerned, is not capable of two interpretations, the same too is not a correct approach.
It may be pointed out that an agreement is to be interpreted after keeping into consideration, the intention of the parties to the agreement and the sense in which they have understood the particular word. In the case of CIT v. Arun Dua(supra), the Hon''ble Calcutta High Court held that it is to be seen as to how the agreement had been interpreted by the company and the Employer. It was further observed that if the company and the employee had understood the agreement in a certain way and acted upon that agreement, it was not open to the 1TO to give another interpretation and tax the assessee on a hypothetical amount. In the instant case, the assessee and the sub-contractor of the Hirer had understood the term "Repair" in a particular sense and also acted upon the same sense and on that understanding the assessee had incurred expenditure on major repairs and replacement and which expenditure was not incurred by the Hirer. Thus, there being no dispute between the parties to the agreement about the sense in which they understood the term "Repair", it was not proper on the part of the Income Tax Authorities to have derived another necessary of the term "Repair", against the sense in which the parties to the agreement took it.
As laid down by the Hon''ble Allahabad High Court in the case of Commissioner of Income Tax Vs. Atherton West and Co. Ltd., , the extent of permissible repairs for Income Tax purposes will depend upon the nature of machinery used by the assessee. It was observed by the Hon''ble High Court that if a part of the machine becomes unserviceable due to wear and tear, replacement of such part will be covered by the expression "Repair". In the case of Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., , it was held that the view taken by the Hon''ble Court in the case of RAMKISHAN SUNDERLAL Vs. COMMISSIONER OF Income Tax, U.P., to the effect that expression "current repairs" must be confined to petty repairs cannot be accepted as good law. It was held in that case that the extent of possible repairs, for the purpose of Section 10(2)(5) of the Income Tax Act, 1922, will depend upon the nature of machinery employed by the assessee.
In view of the above, we are of the considered opinion that the assessee was justified in claiming deduction for sum of Rs. 11,34,547 on account of replacement/repairs of machinery hired to Jaiprakash Associates and the ld. CIT(A) was not justified in rejecting this claim. Consequently, we allow ground Nos. 1 and 3 to 9 in favour of the assessee. (Relief-Rs. 11,34,547).
Heard Sri S.P. Gupta, learned Senior Advocate assisted by Ms. Pushpila Bist, learned Counsel for the appellant and Sri D.D. Chopra, learned Standing Counsel for the respondents.
In respect of addition of Rs. 23,63,140 learned Counsel for the appellant has made the following submissions:
M /s. Jaiprakash Associates is a division of Jaiprakash Industries Ltd. It had taken a civil engineering contract of works in the ''Sardar Sarovar Project (Dams & Power Houses)''. It required experienced and qualified technical staff for the execution of this work. The contractor did not have such staff. M/s. Jaiprakash Associates Constructions Limited gave out that it was in a position to immediately supply such staff.
On 24-9-1987 the M/s. Jaiprakash Associates entered into an agreement with M/s. Jaiprakash Associates Constructions Limited for the supply of the required experienced and qualified technical staff. This agreement was to be effective from 1-10-1987. It was for period of one year (extendible further). One of the relevant conditions of the agreement was that M/s. Jaiprakash Associates would be entitled not to accept such officers/ staff who do not come up to the norms indicated in the agreement and/ or are otherwise not up to its (contractor''s) requirement. The agreement provided that the M/s. Jaiprakash Associates Constructions Limited would charge the contractor Rs. 200 per day for each Resident Engineers, Rs. 250 per day for each Field Engineer and Rs. 200 per day for each Junior Engineer. The M/s. Jaiprakash Associates Constructions Limited was to bear the salaries and all expenses of the staff. The dispute in the appeal relates to a sum of Rs. 23,63,160, which was not charged by the M/s. Jaiprakash Associates Constructions Limited in respect of the supply of Resident Engineers, Field Engineers and Junior Engineers in the circumstances stated hereinafter.
In pursuance to the above contract, the M/s. Jaiprakash Associates Constructions Limited supplied staff numbering 178 persons to M/s. Jaiprakash Associates. After watching their performance for some time, M/s. Jaiprakash Associates found that 69 personnel supplied by the M/s. Jaiprakash Associates Constructions Limited were neither experienced and nor up to the requirement of M/s. Jaiprakash Associates. It was discovered that the personnel had either no experience or experience of only about one year, if at all. The contractor complained to the M/s. Jaiprakash Associates Constructions Limited by letters dated 30-3-1988 and 2-4-1988 that the supplied staff was neither experienced nor up to the requirement and it should be taken back immediately. List of names of such staff was enclosed with these letters.
The facts on which the complaint was made by M/s. Jaiprakash Associates were incontrovertible. The M/s. Jaiprakash Associates Constructions Limited accepted the complaint of M/s. Jaiprakash Associates; but it requested M/s. Jaiprakash Associates by letters dated 7-5-1988 and 20-5-1988 that these persons be accepted by M/s. Jaiprakash Associates as trainees for one year (extendible further) otherwise it would suffer huge loss. The M/s. Jaiprakash Associates Constructions Limited offered to reduce the rates for the supply of these personnel. It offered to charge Rs. 40 per day for Junior Engineers (Diploma Holders) in place of either Rs. 200 per day and Rs. 50 per day for Field Engineers (Degree Holders) in place of earlier Rs. 250 per day.
M/s. Jaiprakash Associates agreed to keep these 69 persons as trainees at its works site at the aforesaid reduced rates offered by the M/s. Jaiprakash Associates Constructions Limited by its letters dated 21-7-1988 and 12-8-1988.
Existence of these letters has neither been disbelieved nor doubted. They had been written within the stipulated period of agreement and also with in the period of the previous year relevant to the assessment year. M/s. Jaiprakash Associates had unqualified right to reject the supplied staff on the ground of inexperience and not being up to the requirement. M/s. Jaiprakash Associates Constructions Limited was also within right to accept the objection of M/s. Jaiprakash Associates. It has not been disbelieved or doubted that M/s. Jaiprakash Associates and M/s. Jaiprakash Associates Constructions Limited altered/modified their agreement from the very beginning. But by applying the observations of the Supreme Court in the case of McDowell and Co. Ltd. Vs. Commercial Tax Officer, what has been observed is that these letters had been written and the agreement was altered/modified to avoid tax.
After the supply of the staff M/s. Jaiprakash Associates Constructions Limited had started issuing bills for the supplied staff at the initially stipulated rate. M/s. Jaiprakash Associates had started making payment of those bills at the initially stipulated rate. After the rejection of the supplied staff and, thereafter, accepting them as trainees at the reduced rates, M/s. Jaiprakash Associates wrote to M/s. Jaiprakash Associates Constructions Limited by letter dated 21-7-1988 that it shall issue debit notes for the excess payment made for such staff in due course. M/s. Jaiprakash Associates had made excess payment of Rs. 23,63,140. M/s. Jaiprakash Associates, therefore, issued 7 debit notes for a total sum of Rs. 23,63,140 to M/s. Jaiprakash Associates Constructions Limited against the excess payments during the period from 20-8-1988 to 17-1-1989 (i.e., within the period of contract and the previous years relevant to the assessment year, i.e., before the end of the assessment year). The amount of the charges which M/s. Jaiprakash Associates Constructions Limited had received was reduced by the aforesaid amount. The taxability of this amount of Rs. 23,63,140 is the subject matter of dispute in this appeal.
It is very relevant and important to submit the fact relating to the immediately next assessment year. On 30-9-1988, the agreement dated 24-7-1987 between M/s. Jaiprakash Associates and M/s. Jaiprakash Associates Constructions Limited was extended up to 31-3-1989 (i.e., for the remaining period of the assessment year) with the reduced rates of payment of the trainees as had been agreed. This agreement, with the same revised rates of the trainees in respect of which the aforesaid debit note for Rs. 23,63,140 had been issued, was further extended for the period of previous year relevant to assessment year 1990-91. In this year the payment for the trainees (the Field Engineers and Junior Engineers) continued to be made at the old reduced rate of Rs. 50 and Rs. 40 per day respectively. For assessment year 1990-91, the Assessing Officer has accepted the payment received by the M/s. Jaiprakash Associates Constructions Limited for the aforesaid personnel at the reduced rates. No dispute has been raised regarding this rate during the assessment of assessment year 1990-91.
M/s. Jaiprakash Associates Constructions Limited did not include this amount of Rs. 23,63,140 in its taxable income. It never became its income. It was not, could not be, a case of diversion of income. The altered agreement and reduction of rate of supply had come into existence during the previous year pertaining to the assessment year and also within the period of the contract. Under the Income Tax Act, 1961, taxable income accrues at the end of the relevant previous year and not during the relevant previous year. M/s. Jaiprakash Associates Constructions Limited had waived the claim of charges for supply of the personnel under the earlier contract; and had entered into a modified/altered contract. The contractual obligation to supply experienced and qualified staff, as complained by the contractor, had not been fulfilled by it. Its decision to waive the claim under the earlier contract cannot be doubted or disputed either under law or in the facts of the case. It was fully within his right to do so. According to its decision, the business expediency required it to modify/ alter the contract by reducing the charges instead of suffering total loss. Under the modified/altered contract it really got only that contracted amount which had been returned as income from that contract. The sum of Rs. 23,63,140 never was, or became, his income. The question of avoidance or diversion of income did not, and could not arise.
The Assessing Officer by his assessment order dated 27-3-1992 added the amount of Rs. 23,53,140 in the taxable income of M/s. Jaiprakash Associates Constructions Limited. The Assessing Officer accepted that there was a contract of supply of skilled labour by M/s. Jaiprakash Associates Constructions Limited; and that the labour had been supplied. The Assessing Officer did not disbelieve the existence of the letters of the complaint by M/s. Jaiprakash Associates that the supplied labour was neither experienced nor qualified; that M/s. Jaiprakash Associates Constructions Limited had offered that the supplied labour be kept by M/s. Jaiprakash Associates in different status (i.e., trainees) at the reduced charges; that M/s. Jaiprakash Associates had accepted the offer modified/altered contract on the condition that for the excess payment already made the contractor would issue debit notes; that the debit notes for Rs. 23,63,140 were actually issued by M/s. Jaiprakash Associates; and that M/s. Jaiprakash Associates in the statement of account specifically mentioned that out of the total amount of the charges, viz., Rs. 85,54,775, for the labour supplied by M/s. Jaiprakash Associates Constructions Limited, M/s Jaiprakash Associates had deduced Rs. 23,63,140. The deduction was by issuing debit notes which had been issued before 31-3-1989, i.e., before the expiry of the previous year relevant to the assessment year. The Assessing Officer held that labour, for which the deduction had been made, could not be unsatisfactory because it was supplied by the M/s. Jaiprakash Associates Constructions Limited as such and very high charges were quoted for its supply. On this premise Assessing Officer held : "under these circumstances, the deduction of labour charges at Rs. 23,63,140 on account of unsatisfactory quality of personnel is disallowed. The total deduction on account of labour charges is being added to the income of the assessee." It may be noted and appreciated that the deduction, which had not been disbelieved as a fact, was made by the contractor. It is not that the M/s. Jaiprakash Associates Constructions Limited had refunded the amount of Rs. 23,63,140 to the contractor. This fact has also not been found to be incorrect that M/s. Jaiprakash Associates Constructions Limited had actually received only Rs. 61,91,635 (i.e., Rs. 85,54,775 less Rs. 23,63,140).
The Income Tax authorities as well as the Tribunal misdirected itself in law. The assessee sub-contractor never received any income of the amount in dispute during the previous year relevant to the assessment year. In Commissioner of Income Tax, Gujarat Vs. Ashokbhai Chimanbhai, in which it was held that profit arises on the last day of the accounting year.
There was no real income. Reliance is placed on the decision in the cases of Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., and Godhra Electricity Co. Ltd., Ahmedabad Vs. Commissioner of Income Tax, Gujarat-II, Ahmedabad,
The law declared in the case of McDowell & Co. Ltd. (supra) is more a good law. Reliance is placed on Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 : 132 Taxman 373 (SC) pp. 753 to end.
It is not the function of the Tribunal to determine remuneration of employees, and the commercial expediency shall be judged from the point of view of the assessee. Reliance is placed on Commissioner of Income Tax, Bombay Vs. Walchand and Co. Private Ltd., Shahzada Nand and Sons Vs. Commissioner of Income Tax, Patiala, ; Aluminium Corporation of India Ltd. Vs. Commissioner of Income Tax, West Bengal, and Commissioner of Income Tax, Punjab, Haryana, J. and K., H.P. and Union Territory of Chandigarh Vs. Panipat Woollen and General Mills Co. Ltd.,
A contract can be inferred by correspondence. Reliance is placed on M/s. Rickmers Verwaltung GMB H Vs. The Indian Oil Corporation Ltd.,
There is no legal necessity to modify a registered contract only by a registered agreement/contract.
Sri D.D. Chopra, learned Standing Counsel submitted that both the assessee as well as M/s. Jaiprakash Associates were the sister concern and after eight months of the execution of the agreement which was registered agreement, just to reduce the income, assessee has made a device by issuing a debit note and asking M/s. Jaiprakash Associates to raise dispute about the standard of the technician supplied by the assessee. He submitted that the objection with regard to the supply of sub-standard technicians would be raised immediately on the supply and there was no reason for waiting for eight months and then to raise the objection. He submitted that no prudent businessman can accept such objection after eight months, but in the present case the assessee has accepted only because the agreement was with the sister concern and intent was to reduce the income. He submitted that in fact, a sum of Rs. 85 lakhs and odd was receivable as per agreement from M/s. Jaiprakash Associates and the agreement for the deduction of amount was the device and waiver on the part of the assessee to receive the amount. He submitted that in fact, a sum of Rs. 85 lakhs and odd was receivable and that was the real income of the assessee.
On the addition of Rs. 11 lakhs and odd, it is submitted that as per clause 4 of the agreement, expenditure towards repair were to be borne by the hirer and the assessee was not supposed to incur any expenditure on the repairs of machinery etc., given on hire, therefore, expenditure incurred was rightly disallowed by the assessing authority.
In the case of Shoorji Vallabhdas & Co. (supra), Apex Court held that Income Tax is a levy on income. Though the Income Tax Act takes into account two points of time at which the liability of tax is attracted, namely, the accrual of the income or its receipt, yet 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. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.
In the case of Godhra Electricity Co. Ltd. (supra), Apex Court had a occasion to consider various decisions on the issue that what is actually admissible to tax under the Income Tax Act. Apex Court held as follows:
Under the Act income chargeable to tax is that income that is received or is deemed to be received in India in the previous year relevant to the year for which assessment is made or the income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis, i.e., accrual of the right to receive payment and the accrual of the liability to disburse or pay. In Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., It has been laid down:
income tax is a levy on income. No doubt, the 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 materialised.
This principle is applicable whether the accounts are maintained on cash system or under the mercantile system. If the accounts are maintained under the mercantile system what has to be seen is whether income can be said to have really accrued to the assessee-company. In H.M. Kashiparekh and Co., Ltd. Vs. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, , the Bombay High Court had said (page 720):
Even so (the failure to produce account books), we shall proceed on the footing that the assessee-company having followed the mercantile system of accounting, there must have been entries made in its books in the accounting year in respect of the amount of the commission. In our judgment, we would not be justified in attaching any particular importance in this case to the fact that the company followed the mercantile system of accounting. That would not have any particular bearing in applying the principle of real income the facts of this case.
The said view was approved by this Court in Commissioner of Income Tax, West Bengal II Vs. Birla Gwalior (P) Ltd., where the assessee maintained its accounts on the mercantile system. In that case this Court, after referring to the decision in Morvi Industries Ltd. Vs. Commissioner of Income Tax (Central) Calcutta, which was also a case where the accounts were maintained on the mercantile system, has said (page 273):
Hence, it is clear that this Court in Morvi Industries Ltd. Vs. Commissioner of Income Tax (Central) Calcutta, did emphasis the fact that the real question for decision was whether the income had really accrued or not. It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income.
In Poona Electric Supply Co. Ltd. Vs. Commissioner of Income Tax, Bombay, this Court has said (page 530):
income tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income Tax Act.
In that case the court has approved the following principle laid down by the Bombay High Court in H.M. Kashiparekh and Co., Ltd. Vs. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra,
The principle of real income is not to be so subordinated as to amount virtuallyto a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language.
In State Bank of Travancore Vs. Commissioner of Income Tax, Kerala, after considering the various decisions of this Court, Sabyasachi Mukharji, J. (as the learned Chief Justice, then was), has said (page 154):
An acceptable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of the computation of income for the purpose of taxation is difficult to evolve. Besides, any straight-jacket formula is bound to create problems in its application to every situation, it must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of income are well-settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of the real income theory. After accrual, non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted. In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made ''no income''. (p. 756)
In the case of McDowell & Co. Ltd. (supra). Before the Constitution Bench of the Apex Court question was whether the excise duty payable by the holder of D-2 licence, namely, the manufacturer, paid by the purchaser forms the part of turnover of the manufacturer under the Andhra Pradesh Excise Act. Apex Court while dealing with the aforesaid question has also considered the concept of tax planning and tax avoidance device. Apex Court held as follows:
...In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai J. in Wood-Polymer Ltd., In re & Bengal Hotels Ltd., In re [1977] 47 Comp.Cas. 597 (Guj.), where the learned Judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.
It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to lake stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of ''emerging'' techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction." (p. 160)
In the case of Walchand & Co. (P.) Ltd. (supra), Apex Court held as follows:
In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue.
It is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee." (p. 381)
In the case of Shahzada Nand & Sons (supra), the question was the deduction of ex gratia payment of commission to employees. Apex Court held that reasonableness should be judged on commercial expediency from the point of view of the assessee.
In the case of Indian Oil Corpn. Ltd. (supra), Apex Court held that even if agreement not signed by the parties, consensus ad idem can be spelt out from contemporaneous correspondence exchanged between the parties. Court can construe the correspondence to gather the intention of the parties that emerged unequivocally and clearly from the expressions used therein, meaning the expressions conveyed and how the parties acted but the Court cannot make out a contract by going beyond the clear language used in the correspondence.
In the case of Azadi Bachao Andolan (supra), Apex Court has considered the judgment of Constitution Bench in the case of McDowell & Co. Ltd. (supra), Apex Court has considered in detail and the view of the Hon''ble Mr. Justice O. Chinnappa Reddy referred hereinabove has been virtually overruled.
In the case of Ashokbhai Chimanbhai (supra), Apex Court held as follows:
The words ''accrue'' and ''arise'' are used to contradistinguish the word ''receive''. Income is said to be received when it reaches the assessee; when the right to receive the income becomes vested in the assessee, it is said to accrue or arise.
Income becomes taxable on the footing of accrual only after the right of the taxpayer to the income accrues or arises, and in the case of an agreement which makes profits receivable at or on the happening of a contingency, the fact that the profits are the result of transactions spread over a period which covers a period preceding the happening of that contingency would not make the receipt liable to be paid to persons other than those who are entitled to receive it on the date on which it is actually received or became receivable.
In the gross receipts of a business day after day or from transaction to transaction lies embedded or dormant profit or loss. On such dormant profit or loss undoubtedly taxable profits, if any, of the business will be computed, but dormant profits cannot be equated to profits charged to tax under Sections 3 and 4 of the Indian Income Tax Act, 1922. The concept of accrual of profits of a business involves their determination by the method of accounting at the end of the accounting year or any shorter period determined by law.
''Profits'' do not accrue from day-to-day or even from month to month and have to be ascertained by a comparison of assets at two stated points. Unless the right to profits comes into existence there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise. (p. 42)
If we look into the scheme of Income Tax Act, we find that under the Income Tax Act the amount chargeable to tax is the real income as well as the deemed income. Under certain provisions like Sections 68 and 69 of the Act, in which though the deposits and the investment made by the assessee during the year under consideration are treated as income by fiction though they may not be a real income, in case, if the nature and source of such deposits and investment are not explained. The real income is either liable to tax on cash basis or on mercantile basis depending upon the nature of accounts being maintained by the assessee. The claim of the assessee is that they have agreed to supply the experienced and qualified staff at stipulated rate vide agreement dated 24-9-1987 to M/s. Jaiprakash Associates. It is also admitted that as per the agreement monthly bills have been raised at the stipulated rate and the payments have also been made by M/s. Jaiprakash Associates. On 30-3-1988 M/s. Jaiprakash Associates informed that the persons provided were not trained and they did not have the requisite work experience so as to able to render the services required at works. They requested to take back such persons. In this regard, further a letter had been written on 2-4-1988. Vide letter dated 20-5-1988 assessee informed that they agreed to depute these persons for a period of one year on a nominal remuneration of Rs. 40 per day for Junior Engineer and Rs. 50 per day for Field Engineer. Vide letter dated 21-7-1988 M/s. Jaiprakash Associates informed that the offer contained in the letter under reference dated 7-5-1988 was acceptable. It was further stated that we would be sending our debit notes in this regard in due course. It is claimed that debit notes had been issued subsequently and the refund has been claimed. Copy of the debit notes are Annexure-6 to the affidavit, but in none of the debit notes, the date of the debit notes are mentioned. On the query being made from the Bench it could not be informed that how and when the entries of such debit notes were made in the books of account in the year under consideration. Assessment order reveals that none of these correspondence letters filed along with the affidavit and memorandum of appeal are referred and considered by the assessing authority. It is doubtful whether they were filed before the assessing authority or not. The grounds of appeal filed before the Commissioner of Income Tax (Appeals), Annexure-8 to the affidavit also does not reveal that any such documents have been filed before the assessing authority. It has not been alleged that these papers were filed and have not been considered by the assessing authority. It has not been said that debit notes have been incorporated in the books of account and the amount received from M/s. Jaiprakash Associates have been reduced in the books of account and in the Profit & Loss Account for the year under consideration. The statement of facts before the Commissioner of Income Tax (Appeals) also does not suggest that such documents have been filed before the assessing authority referred hereinabove. It appears that written submission was filed and in the written submission, which has been referred in the order of Commissioner of Income Tax (Appeals). In such written submission there is reference of the letters written by M/s. Jaiprakash Associates and by the assessee referred hereinabove. It is also stated that M/s. Jaiprakash Associates submitted these debit notes on the under noted dates, which find reference in the appellant books of account and which has not been allowed as the deduction by the assessing authority. Perusal of the order of the Tribunal reveals that though the Tribunal had referred the various letters while referring the argument of learned Counsel for the assessee but no finding has been recorded in respect thereof. At no stage it has been examined that when the entries of debit notes were made in the books of account. It is surprising to see that if the entries of debit notes were available in the books of account and the amount received from M/s. Jaiprakash Associates was reduced by the amount of the debit notes, then where was the question of claiming any deduction. While in the present case, the deduction of the amount of the debit notes have been claimed, as stated in the written submission made before the Commissioner of Income Tax (Appeals). On the facts and circumstances, we are of the view that the real issue has not been examined by the Tribunal.
In the case of Shoorji Vallabhadas & Co. (supra), Apex Court held that where income has, in fact had been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Thus, we are of the opinion that whole matter requires reconsideration on the facts and in the light of the law laid down by the Apex Court and various High Courts referred hereinabove.
Now let us examine the question raised in Income Tax Appeal No. 16 of 2003 filed by the revenue is whether the Tribunal is legally justified in deleting the addition of Rs. 11,34,547 which was claimed by the assessee as a revenue expenditure incurred towards the repairs of dozer, tippers and loader taken on hire by the assessee from M/s. Goodwill India Limited and M/s. Motor and General Finance Ltd., New Delhi on hire and further given on hire to M/s. Jaiprakash Associates.
Assessing authority disallowed one-third of the expenditure on the ground that as per the agreement with M/s. Jaiprakash Associates the repairs expenditure had to be incurred by them. Commissioner of Income Tax (Appeals) disallowed the entire expenditure claimed at Rs. 11,34,547 having regard to the terms and conditions that the expenditure towards the repairs of the aforesaid machinery were to be incurred by M/s. Jaiprakash Associates. Tribunal by the impugned order has allowed the entire expenditure as revenue expenditure and deleted the addition. Tribunal held that a sum of Rs. 7,82, 073.80 was incurred for making the purchases of tyre, tube, battery, spare parts and a sum of Rs. 3,52,029.17 was incurred for the purchases of spare parts. Tribunal held that under the agreement M/s. Jaiprakash Associates were liable for minor current repairs only and under the agreement with M/s. Goodwill India Limited and M/s. Motor and General Finance Ltd., New Delhi, the assessee had to maintain the machines in good condition and to do substantial repairs and to keep the machines in working order at its cost. Thus, the assessee was under legal liability to maintain the machines by making necessary repairs and replacing the spare parts. Tribunal further held that it is not the case of the Department that similar expenditure of repairs/replacement was claimed by the lessor, namely, M/s. Goodwill India Limited and M/s. Motor and General Finance Ltd., New Delhi or that hirer namely, M/s. Jaiprakash Associates had also claimed the same expenditure towards repairs in its Profit & Loss Account. It is further held that neither the amount of expenditure nor the items of expenditure are disputed nor the liability is un-ascertainable.
We have gone through the order of the Tribunal and the authorities below and the submissions advanced by learned Counsel for the parties.
On the facts and circumstances we do not find any error in the order of Tribunal. The purchases of spare parts, tyre, tubes and battery etc. by the assessee had not been disputed. The agreement entered into with M/s. Goodwill India Limited and M/s. Motor and General Finance Ltd., New Delhi reveals that the assessee had to maintain the machines in good condition and to do the substantial repairs and to keep them in working order at its cost. Therefore, the assessee was under the legal liability to maintain the vehicles by necessary repairs and replacing the spare parts and M/s. Jaiprakash Associates had to incur the expenditure only towards the minor repairs of recurring nature. It is not the case of the revenue that any expenditure towards the tyre, tubes and battery etc., have been incurred by M/s. Jaiprakash Associates and they have claimed any such expenditure in its Profit & Loss Account. In this view of the matter, the expenditure incurred towards the replacement of spare parts to maintain the machinery cannot be disallowed. During the course of running of the machinery tyre, tubes and battery etc. are required to be replaced. Thus, on the facts and circumstances, we do not see any error in the order of Tribunal in allowing the expenditure towards repair charges being in the nature of revenue/business expenditure. The finding of the Tribunal in this regard is finding of fact and does not require any interference.
In the result, Income Tax Appeal No. 26 of 2002 is allowed in part. The order of the Tribunal to the extent deciding the question of addition of Rs. 23,63,140 is set aside and the matter is remanded back to the Tribunal to decide the issue afresh in the light of the observations made above.
Income Tax Appeal No. 16 of 2003 is dismissed. The questions raised in this appeal are answered in favour of the assessee and against the revenue. There shall be no order as to cost.