Delhi High Court

Emmpac Holdings Pvt. Ltd. vs Commissioner Of Income Tax, ... on 15 October, 2009

Author: A.K.Sikri

*     IN THE HIGH COURT OF DELHI AT NEW DELHI


+     ITA 968/2009 with
      ITA 999/2009

                                      Date of decision: 15th October, 2009

      EMMPAC HOLDINGS PVT. LTD.                        ..... Appellant
                            Through:             Mr. Satyen Sethi with
                                                 Mr. Johnson Bara, Advs.


                    versus


      COMMISSIONER OF INCOME TAX, DELHI-VIII & ANR.
                                      ...... Respondents

                                      Through:   Mr. Sanjeev Sabharwal,
                                                 Adv.


    % CORAM:
      HON'BLE MR. JUSTICE A.K.SIKRI
      HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

      1.       Whether reporters of local papers may be allowed to see
               the judgment?
      2.       To be referred to the Reporter or not?
      3.       Whether the judgment should be reported in
               the Digest?

                               JUDGMENT

A.K.SIKRI, J. (ORAL)

1. Appellant, who is engaged in the business of trading in

music/video/audio cassettes, CD's, VCD's, DVD's etc. filed return for

the assessment year 2002-03 and 2003-04 (out of which these two

appeals arise), and in these returns he had shown payment of license

fee in respect of premises at 42, Vasant Lok, Vasant Vihar, New Delhi

taken on license. In addition to the license fee paid in respect of the

aforesaid premises, the appellant had also claimed business expenses

paid @ Rs. 1,41,000/- per month to M/s Raas Consultants & Company

for purported consultancy services in connection of running of

aforesaid music shop. M/s Raas Consultants & Company is the sole

proprietorship concern of Mrs. Hina Jetha. She is the wife of

Mr. Vimal Jetha who is the landlord/owner of premises no. 42, Vasant

Lok, Vasant Vihar, New Delhi.

2. The Assessing Officer, in order to ascertain as to whether

any consultancy service was provided by Mrs. Hina Jetha, sent notice

to her. However, she did not respond and did not appear before the

Assessing Officer. On a questionnaire made to the Assessee itself

about the nature of service being provided by the said consultants, the

Assessee candidly admitted that no services were provided by

M/s Raas Consultancy Company. The Assessee come out with the plea

that the real motive of the licensor namely Mr. Vimal Jetha was that

Assessee firm should not have complete control on the usages of the

premises in question and with a view to accomplish the aforesaid

objective the Assessee had no option but to accept the above

condition of the licensor to enter into agreement with M/s Raas

Consultants & Company. Finding that in fact no consultancy services

were provided by the said consultants, the Assessing Officer

disallowed the aforesaid expense.

3. The CIT(Appeal), however, reversed this finding holding

that it was the Assessee's compulsion to incur such expenditure and

even if Mrs. Hina Jetha had not provided any consultancy services, it

was clear from the clauses of the agreement that this agreement was

to run concurrently with the lease agreement for the premises and

also co-terminus with the license dated 2nd July, 2001 executed

between Mr. Vimal Jetha and the Assessee. Therefore, for all practical

purposes the payment of consultancy fee was nothing, but part of the

rent so far as the Assessee was concerned and on this basis he

allowed the expenditure accepting the appeal of the Assessee herein.

4. The ITAT, in the appeal filed by the Department has,

however, reversed the aforesaid decision of the CIT(Appeal) and

restored the orders of the Assessing Officer. The ITAT had observed

that in the license agreement dated 2nd July, 2001 there is no

stipulation that the said agreement will be subject to entering into an

agreement with Mrs. Hina Jetha for consultancy services. Since, it is a

fact that Mrs. Hina Jetha had not rendered any service to the

Assessee, the expenditure incurred cannot be allowed as business

expenditure. The following observations of the Tribunal in this respect

are worth a note:

"Accordingly, in our considered view, the ld. CIT(Appeals) has wrongly concluded that the consultancy charges were in the nature of rent and the assessee was forced to enter into second agreement, but for which the assessee would not have got the premises from Shri Vimal Jetha. The payment has been made on account of consultancy services which were not rendered to the assessee. Therefore, the expenditure cannot be treated as incurred wholly and exclusively for the purposes of business. Even the initial onus cast on the assessee that the expenditure was incurred wholly and exclusively for the purpose of the business was not discharged. If the initial onus was discharged by the assessee and the same was not acceptable to assessing officer, the law required the assessing officer to bring contrary evidence on record to prove otherwise. The legal position is settled in this regard. It is an admitted fact as apparent from order of CIT (Appeals) was wrong in concluding that the assessing officer failed to bring any material on record to prove that the claim of payment was bogus or the funds were diverted back to the assessee. Since there is no clause in the deed of license compelling the assessee to make payment to Mrs. Hina Jetha nor any services having been rendered by Mrs. Hina Jetha to the assessee, the ld. CIT (Appeals) was not justified to concluded that the expenditure was incurred for acquisition of the premises and related to the business of

the assessee. Accordingly, we set aside the order of the ld. CIT (Appeals) and restore the order of the assessing officer.

5. Learned counsel for the Assessee submits that the

Tribunal misdirected itself by not going into the real nature of the

consultancy agreement entered into between the Assessee and

M/s Raas Consultancy Services. He reiterated the submission made by

the Assessee before the Tribunal as well as CIT (Appeal). Learned

counsel further submits that CIT (Appeal) had rightly concluded that

in reality it was an agreement for payment of rent which was clear

from the terms of the agreement, inasmuch as this agreement was co-

terminus with the license agreement and the Assessee was forced to

enter into such an agreement with the purported consultants, at the

instance of the licensor of the premises namely Mr. Vimal Jetha. He

also relies upon the judgment of the Supreme Court in the case of

Sassoon J. David and Co. P. Ltd. vs. Commissioner of Income

Tax, Bombay, 118 ITR 261 and Travancore Sugars and

Chemicals Ltd. vs. Commissioner of Income-tax, Kerala, 62 ITR

566, in support of the proposition that the authorities are bound to go

into the real nature of the agreement and nomenclature of the

agreement would not be of determinative effect.

6. While there is no quarrel with the aforesaid judgments, in

the present case we find that the Tribunal was not influenced merely

by the nomenclature of the agreement. We have gone into the various

clauses of the agreement, which has been filed by the appellant as

Annexure-A in these appeals. It is termed as "Consultancy Services

Agreement". Further, in consideration of a sum of Rs.1,41,000/- per

month payable by the Assessee to the said consultants, the agreement

stipulates that following kinds of services shall be provided by the

consultants:

"1.2 "Services" means consultancy services being provided by M/s Raas Consultants & Company in connection with the administration and management of the showroom to M/s Neo Planet.

...............

2. Appointment M/s. Neo Planet hereby engages M/s Raas Consultants & Co. to provide Consultancy Services to M/s Neo Planet in connection with the running of the music shop, on the terms and conditions as set forth in this Agreement.

3. Management and Consultancy Fees.

3.1 In consideration of M/s Raas Consultants & Co. providing the Services to M/s Neo Planet. M/s Neo Planet company shall pay to M/s Raas Consultants & Co. a sum of Rs.1,41,000/- (Rupees One lac forty one thousand only) for each month, during the subsistence of the Agreement. The said consideration shall be paid to M/s Raas Consultants & Co. on or before the 7th day of each English calendar month.