Commissioner Of Income Tax-Iv vs Fx Info Technologies Pvt. Ltd.
2011 Latest Caselaw 3245 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI


+                      ITAs No.112/2011 & 113/2011


                                         Reserved On:26.05.2011
%
                                     Date of Decision: 11.07.2011

COMMISSIONER OF INCOME TAX-IV                .... APPELLANT
            Through: Mr.Sanjeev Sabharwal, Advocate

                                Versus

FX INFO TECHNOLOGIES PVT. LTD.         .... RESPONDENTS
             Through: Mr.Prem Nath Monga and Mr.Manu
                      Monga, Advocates

CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA


1.    Whether reporters of Local papers be                  No
      allowed to see the judgment?
2.    To be referred to the reporter or not?                No

3.    Whether the judgment         should    be             No
      reported in the Digest?


M.L. MEHTA, J.

*

1. These two appeals are under Section 260A of the Income Tax

Act, 1961 (hereinafter referred to as the "Act") directed against

the order dated 31st March, 2010 of the Income Tax Appellate

Tribunal (for short "the Tribunal") pertaining to the assessment

years 2004-05 and 2005-06. The assessee was carrying on

business of distribution of Acer products, such as computers,

laptops, desktops, etc. of M/s. Acer India Pvt. Ltd. for about two

years. Due to some financial constraints, it could not make its

business venture a profitable one and in the process incurred

heavy losses. In the meeting of the Board of Directors held on

29th December, 2001, the assessee company decided to transfer

the distribution of the Acer producers to M/s. Salora International

Ltd. (for short "SIL"), for which M/s. Acer India Pvt. Ltd. had also

consented, by virtue of a written agreement between the

assessee and SIL. The distribution of the products was to be

taken over by SIL on certain terms and conditions including

payment of commission on sale at the rate of one per cent with

effect from 1st January, 2002. The assessee offered the

commission income gained from its business as"business

income" and set off the same against the business losses

incurred in the same business. It may be noted here that after

the transfer of distribution to SIL, the latter could achieve huge

profits within the short period of time and by virtue of the

commission received from SIL, the assessee also made profits of

the same business of which it was already running losses. The

Assessing Officer treated the income of the assessee from

commission as income from other sources and declined set off

against the brought forward business losses. The assessee

preferred appeals in respect of both the assessment years. In

the appeal in respect of assessment year 2004-05, assessee

produced three additional documents, namely, copies of letters

dated 27th December, 2001 by Acer India Pvt. Ltd. to SIL; by Acer

India Pvt. Ltd to the assessee and copy of resolution of Board of

Directors dated 29th December, 2001. The CIT called for the

comments of the Assessing officer under Rule 46A of Income Tax

Rules, 1962. The CIT(A) allowed the appeal with these reasons:

"I have considered the above facts and am of the view that the AO has not conclusively proved his view point for arriving at conclusion that the commission income so received by the appellant company from M/s. Salora International Ltd. is not a business income. There is no denying the fact that the appellant company has entered into an agreement with M/s. ACER India Pvt. Ltd. for distributionship of ACER products in India. The appellant company has shown income on this account in the earlier income tax returns which had been assessed by the Department u/s 143(1)/143(3). The distributionship business ran into losses when the appellant company decided to shift the same in the hands of its sister concern i.e. M/s. Salora International Ltd. to which M/s. ACER India Pvt. Ltd. also agreed. The AO agreed to all the above mentioned facts of the case. However, thereafter the AO disagreed and stated that agreement dated 1/1/2002 between ACER India Pvt. Ltd. and M/s. Salora International Ltd. does not contain any

reference to the appellant company. I fail to understand how the AO can say that the agreement between ACER India Pvt. Ltd. and M/s. Salora International Ltd. must contain reference of the appellant company. I do not see any justification on the part of the AO to conclude with certainty as to how and manner in which the business needs to be carried out. I again do not agree with the AO when he stated that M/s. Salora International Ltd. is a major share holder of the appellant company and the commission has been paid with a view to adjust the brought forward business losses of the appellant company and to avoid payment of tax by M/s. Salora International Limited. Is there any legal bar on M/s. Salora International Ltd. in making payment of commission to the appellant company simply because it is a major share holder of the appellant company? And to this, I do not see any reasonable ground on the part of the AO for arriving at a conclusion that the commission income so received is not business income. Letters dated 27/12/2001 written by ACER India Pvt. Ltd. to M/s. Salora International Ltd. clearly show that the appellant company could not continue the business of distribution of ACER products due to the financial constraints and as such agreed to the request of the appellant company to transfer and assign distribution business to M/s. Salora International Ltd. Ms/.ACER India Pvt. Ltd. is not concerned about any other arrangements made by the appellant company with M/s. Salora International Ltd. i.e. whether the commission is required to be paid to the appellant or not. In these circumstances, I do not consider it appropriate to accept the view point of the AO and accordingly, the AO is directed to delete the addition and treat the amount of Rs.52,91,670/- as business income and allow set off of brought forward losses if otherwise allowable as per law."

2. In the appeal pertaining to the assessment year 2005-06, the CIT

followed the reasons as recorded in the order for the assessment

year 2004-05 as noted above. Consequently, in this case also

the CIT(A) held the commission amount to be a business income

and the assessee was entitled to assessment of the carried

forward business losses.

3. The Revenue preferred appeals against both these orders of the

CIT(A), to the Tribunal which vide the impugned order dated 31st

March, 2010 dismissed both the appeals of the Revenue. It is

against these orders of the Tribunal that the Revenue is in

appeal before us.

4. Having regard to the material on record and the findings of the

CIT(A) and the Tribunal and also the material exchanged

between the assessee and the SIL regarding assignment of

distribution of Acer products, we notice that the transfer of

distribution business by assessee to SIL of the products of M/s.

Acer was by way of a written agreement between two of them

and also with the consent of M/s. Acer India Pvt. Ltd. The

substantial increase in the sales turnover year after year by SIL

clearly depict that the services as agreed were actually rendered

by the assessee. It is not only that, the assessee had also

provided supporting documents on various aspects of

arrangement as and when required by the SIL. All these are

finding of facts, which have been recorded by the authorities

below. It is also noted that SIL in its return had shown payment

of commission made to the assessee as business expenditure

and the same was allowed by the CIT(A). In appeal against the

order of the CIT(A), in case of SIL, the Tribunal upheld the order

of the CIT(A) by observing that SIL has utilized the establishment

and infrastructure of M/s.FX Info Technologies Ltd. (assessee

herein) for carrying out sale of Acer computers. The expenses

incurred by SIL in the shape of commission paid for the services

rendered by FX Info Technologies Ltd., is directly associated with

its business. There is nothing on record to suggest that the said

order of the Tribunal was challenged. That being so, it comes

out to be an accepted position that in the case of SIL, it was

accepted by the Revenue that the commission paid by SIL to the

assessee was business expenditure. If that was so, the business

expenditure in the hands of SIL by natural corollary is the

business income in the hands of FX Info Technologies Ltd., which

is the assessee in the present case.

5. It was, however, submitted by the learned counsel for the

Revenue that there was no clause in the memorandum of

association of the assessee that it could carry any business and,

therefore, such commission income cannot be treated as income

from business of assessee. The Tribunal in the impugned order

referred to Clause (8) of the objects as contained in

memorandum of association which reads as under:

"To enter into any arrangements with any Government or authorities whether municipal, local or otherwise or any person, firm or company, in India or abroad, that may seem conducive to the attainment of the company‟s objects or any of them, and obtain from any such Government, authority, person, firm or company any rights, privileges licences and concessions which the Company may consider necessary or desirable to obtain and to carry out, exercise, use or comply with any such arrangements, rights privileges or concessions."

6. Referring to above clause, the Tribunal dealt with similar

submission as under:

"It is crystal clear from the above clause of the memorandum that the assessee company had the power to enter into the arrangement with any company which may seem conducive to the attainment of the company's objects as also to obtain from such company which may seem conducive to the attainment of the company's objects as also to obtain from such company any rights, privileges or concessions which the company may consider necessary."

7. We do not find any reason to differ with the Tribunal on above

findings. We may reiterate that both the authorities below have

rightly arrived at a conclusion of the commission being business

income at the hands of the assessee and we do not see any

infirmity or perversity in those findings of the fact and thus we do

not see any substantial question of law involved in these

appeals. Hence, both the appeals are dismissed.

                                                     M.L.MEHTA
                                                      (JUDGE)



                                                      A.K. SIKRI
JULY 11, 2011                                          (JUDGE)
„Dev/awanish‟