Delhi High Court

Commissioner Of Income Tax vs Gautam R. Chadha on 27 July, 2011

Author: M. L. Mehta

*       IN THE HIGH COURT OF DELHI AT NEW DELHI

+                      ITA No.310/2009

    %                                         Date of Reserve: May 12, 2011
                                              Date of Decision: July 27, 2011

COMMISSIONER OF INCOME TAX                     ... Appellant
                  Through: Ms. Prem Lata Bansal, Sr. Advocate
                           with Mr. Deepak Anand, Advocates

                                         Versus

GAUTAM R. CHADHA                                               ... RESPONDENT
                               Through:       Mr. A.N. Hakser, Sr. Advocate with
                                              Mr. Udyan Jain and Mr. Ashok
                                              Sikka, Advocates
AND

                                   ITA No.358/2011


COMMISSIONER OF INCOME TAX                     ... Appellant
                  Through: Ms. Prem Lata Bansal, Sr. Advocate
                           with Mr. Deepak Anand, Advocates

                                         Versus

GAUTAM R. CHADHA                                               ... RESPONDENT
                               Through:       Mr. A.N. Hakser, Sr. Advocate with
                                              Mr. Udyan Jain and Mr. Ashok
                                              Sikka, Advocates

AND
                                  ITA No.1115/2010

COMMISSIONER OF INCOME TAX                     ... Appellant
                  Through: Ms. Prem Lata Bansal, Sr. Advocate
                           with Mr. Deepak Anand, Advocates

                                         Versus

GAUTAM R. CHADHA                                               ... RESPONDENT
                               Through:       Mr. A.N. Hakser, Sr. Advocate with
                                              Mr. Udyan Jain and Mr. Ashok
                                              Sikka, Advocates



ITA Nos.310/2009, 358/2011 & 1115/2010                               Page 1 of 14
 CORAM:
HON'BLE MR. JUSTICE A.K.SIKRI
HON'BLE MR. JUSTICE M.L.MEHTA


1. Whether the Reporters of local papers
   may be allowed to see the judgment?         Yes

2. To be referred to Reporter or not?          Yes

3. Whether the judgment should be              Yes
   reported in the Digest?


M.L.MEHTA, J.

1. These three appeals being ITA No. 310/09, 1115/10 and 358/11

are preferred against the orders passed by Income Tax Appellate

Tribunal („the Tribunal‟ for short) dated 22/08/08, 17/06/2009 and

16/07/2010 relating to assessment years 2003-04, 2005-06 and 2007-

08 respectively. Since the substantial questions of law in ITA 1115/10

and ITA 358/11 is also there in ITA 310/09, we propose to dispose of

these three appeals through this common order, taking ITA 310/09 as

the lead case.

2. Brief facts of the case are that the assessee was engaged in the

business of travel agency under the name and style of M/s Tirun Travel

Marketing. It is the representative of M/s Royal Caribbean Cruise

Limited (hereinafter, „RCCL‟ for short), responsible for marketing and

selling Royal Caribbean and Celebrity Cruise all over the world. The

respondent/assessee filed the return for Assessment Year 2003-04

declaring income at Rs. 79,59,400/- on 20.11.2003.

3. On perusal of balance sheet as well as tax audit report, the AO

noticed that assessee had disclosed a sum of Rs. 1,44,76,873/- as

money received in advance against booking by customers in INR and

USD. Though the said amount was received during the year, the same

was not taken into account as income of the current year. The AO

observed that the assessee was receiving booking amount in nominal

percentage, substantial money was being received before the sailing of

cruise and upon receipt of full amount, the money was being remitted

to RCCL after deducting commission @ 25%. He also observed that if

the person did not want to sail and cancel the trip then the entire

advance would get forfeited. Accordingly, AO treated the entire

amount of Rs. 1,44,76,873/- as the income of the assessee.

4. During the assessment proceedings, the Assessing Officer further

noticed that the assessee had incurred loss of Rs. 17,41,940/- on

account of share transaction and had transferred the loss to the Profit

and Loss Account of M/s Tirun Travel Marketing. On being asked to

explain, the assessee filed details of trading of various shares in 18

different securities. No documentary evidence, however, was filed.

Accordingly, the AO treated the amount of Rs.1741940/- as capital loss

and disallowed the claim.

5. Aggrieved by the order of AO, the assessee went in appeal

before the CIT(A) who partly allowed the appeal and held that the

aggregate advances received by the assessee from the customers

cannot be treated as profits in their entirety, however, it cannot be

denied that the advances received may be inclusive of some element

of profit which the appellant ultimately is entitled to receive.

Accordingly, it directed the AO to treat 25% of the advances as income

of the assessee and give credit of 10% on account of travel agents

commission after ascertaining actual outgoings in this regard. CIT (A)

also confirmed the order of the AO not allowing the adjustment of

losses in share transaction business to be set off against income from

the business of travel agency, holding that the accounts for each

business have to be maintained separately and the loss from one

activity cannot be set off against the income from the other.

6. Aggrieved by the order of CIT (A), the assessee again preferred

appeal before the Tribunal. The Tribunal allowed the appeal and

deleted the entire addition made by the AO holding that the receipt by

itself does not result into the income unless corresponding service

have been performed. Either under cash system of accounting or

mercantile system of accounting, the receipt becomes income only

when the customer boards the cruise and it departs. The Tribunal also

allowed the assessee to adjust the loss from share transaction

business against the profits of travel agency business holding that the

assessee was carrying on two businesses concurrently as Proprietor

and therefore, profits of one can be set off against loss of another in

view of provisions of Section 70 of the Income Tax Act.

7. Against this order of the Tribunal, the revenue is in appeal before

us. Following substantial questions of law arise in these appeals:

"(a) Whether the ITAT was correct in law in deleting

the addition made by the Assessing Officer, which

had been restricted by the CIT (A) to the extent of

15% of the advances, treating the same as income of

the assessee?

(b) Whether the receipts on account of booking of

cruise tickets assumed character of income in the

hands of the assessee when the amount was

received from the customers or when the cruise

departed?

(c) Whether the ITAT was correct in law in allowing

the assessee to adjust the losses incurred on share

transactions against the profit of commission agency

business under the name and style of M/s Tirun

Travel Marketing?"

8. The learned counsel for the revenue contends that there was

principal and agent relationship between RCCL and the assessee. It

was RCCL who was liable to render the services and not the assessee.

By booking the ticket, assessee created a legal relationship between

RCCL and the customer who wanted to sail on cruise. As soon as the

ticket was booked, agency came into existence and the assessee

became entitled to commission. Assessee was liable to his principle

only for booking of the tickets and to remit the entire amount of ticket.

Even in case were the ticket was cancelled, assessee was entitled to

commission thereon. Hence, the order of CIT (A) that the assessee was

entitled to commission @ 25% was justified. In this regard, reliance is

placed on the judgments of CIT v. Shri Goverdhan Limited 69 ITR

675 wherein it was held that, "It is well established that the income

may accrue to an assessee without actual receipt of the same and if

the assessee acquires a right to receive the same, the income can be

said to have accrued to him though it may be received later on, on its

being ascertained." and Morvi Industry Ltd v. CIT, 82 ITR 835

wherein it was observed that, "...once the income accrued, the fact

that payment was deferred till after the accounts had been passed in

the meetings of the managed company, did not affect the accrual of

the income. Income accrues when it becomes due".

9. On the other hand, learned counsel for the assessee heavily

relies on Section 5 Article 2 of the Agreement which defines the term

"Qualified Bookings" and lays down that qualified bookings are all F.I.T.

and group bookings which become sailed booking, which were made in

accordance with RCCL‟s applicable policies and procedures, and for

which full payment is received by RCCL. Learned counsel for the

assessee contends that the commission for such bookings is available

to the assessee only on qualified bookings. The assessee has no right

to receive any commission on the advance amounts received for the

bookings in case the cruise doesn‟t depart. The advance doesn‟t on its

own become revenue for the assessee till the booking becomes a

sailed booking and full payment is received by the RCCL. Once the sail

takes place and commission accrues to the assessee, he offers his

income for taxes. Taxing the advance received considering it as

income will also lead to double taxation since the assessee offers the

final income for taxation in the subsequent years. In this regard, he

relies upon the judgments of Raja Mohan Raja Bahadur v. CIT AIR

1968 SC 114, State Bank of Travelcore v. CIT, (1986) 2 SCC 11,

Devsons Pvt. Ltd v. CIT, 329 ITR 483 (Delhi), Amiantit

International Holding Ltd. IN Re 322 ITR 678 (AAR), CIT v. Dinesh

Kumar Goel, 331 ITR 10 (Delhi).

10. Admittedly, the assessee is following mercantile system of

accounting, where under, whenever the right to receive money in the

course of a trading transaction accrues or arises, even though income

is not realized, income embedded in the receipt is deemed to arise or

accrue as held by the SC in Raja Mohan Raja Bahadur, (Supra). In

State Bank of Travancore (Supra) also, the SC has held that it is the

income which has really accrued or arisen which is taxable. Similar

view has been expressed by this court in Devsons (Supra). It was

observed as under:

"... Even in the mercantile system of accounting it is the real income which has accrued in a practical sense that is to be brought to tax. In CIT v Shoorji Vallabhdas and Co. [1959] 36 ITR 25, the Bombay High Court held that the question whether the income accrued or not is not a mere matter of cogency of the entries made in the account books of the assessee, but is essentially one of substance and of the real nature of what happened. A mere book

entry is not conclusive of the question whether the assessee had become entitled to the sums or not and whether the income is accessable"

11. In Amiantit International (Supra), it was observed as under:

"We shall now look to the meaning of the expression" accrue or arise". The dicta of Mukherji, in Rogers Pyatt SI llac and Co. v Secretary of State for India [1925] 1 ITR 363 has been quoted with approval in a series of decisions of the Supreme Court (vide E.D. Sassoon and Co. Ltd. v CIT [1954] 26 ITR 27 (page 50):

"Now what is income? The term is nowhere defined in the Act.... In the absence of a statutory definition we must take its ordinary dictionary meaning.... The word clearly implies the idea of receipt, actual or constructive. The Policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. „Accrues‟, „arises‟ and „is received‟ are three distinct items. So far as receiving of income is concerned, there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning planner than the word „receiving‟ itself. The words „accrue‟ and „arise‟ also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. ‟Accruing‟ is synonymous with „arising‟ in the sense springing as a natural growth or result. The three expressions „accrues‟, „arises‟ and „is received‟ having been used in the section, strictly speaking, „accrues‟ should not be taken as synonymous with „arises‟ but in the distinct sense of growing up by way of addition or increase or as a accession or advantage, while the word „arises‟ means comes into existence or notice or presents itself. The former connotes the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable."

12. In Dinesh Kumar Goel (Supra), it was observed as under:

".....It is important, therefore, that receipt of a particular amount in the relevant year should be an "income‟ under the aforesaid provision. What is the relevant yardstick is the time of accrual or arisal for the purpose of its taxation, viz, in order to be chargeable, the income should accrue or arise to the assessee during the previous year. If income has accrued or arisen, even if actual receipt of the amount is not there, it would be chargeable to tax in the said year. Though the amount may be received later in the succeeding year, the income would be said to accrue or arise if there is a debt owned to the assessee by somebody at that moment. From this, it follows that there must be the " right to receive the income on a particular date". The court further explained that a right to receive a particular sum under the agreement would not be sufficient unless the right accrued by rendering of services and not by promoting for services and where the right to receive is anterior to rendering of service, the income, therefore, would accrue on rendering of services.... (para 13) "

13. The question for our consideration is as to when the income can

be said to be accrued to the assessee. It is when the ticket is booked

by the assessee or when the customer boarded the cruise and it

departed? We find force in the contention of the learned counsel for

the revenue, that it was RCCL and not the assessee who was

responsible to render all post booking services to the customers. As

per Section 5 of Article (2) of 2002 International Representation

Agreement as executed between the Assessee and RCCL, all bookings

which become sailed which were made in accordance with RCCL‟s

applicable policy and procedures and for which full payment is

received by RCCL in accordance with this agreement are termed as

qualified bookings. It also provides that bookings that are made by the

customers on the Cruise Line‟s website shall not be considered

qualified bookings. As per Section 16 thereof, the assessee was

required to remit for each booking to RCCL (a) quoted price or (b) the

quoted prices minus the commission payable to the assessee pursuant

to Section 6. Section 6 prescribed base commission which is payable

by RCCL to the assessee on the bookings. It prescribes 25% as

applicable base commission on individual and group bookings. From all

this, it is seen that where full payment is received, the latter is to remit

to RCCL the quoted booking price minus 25% base commission.

Section 12 provides the payment to the travel agents. It states that all

commission and other payments due and owing the travel agent, shall

be the sole responsibility of the assessee and not RCCL. It also

provides that assessee shall deduct and pay any such commissions

and payments from the commission. That being so, as per the scheme

of agreement, 10% commission payable by the assessee to the travel

agent from 25% commission to be charged from RCCL. was the sole

responsibility of the assessee, Thus, as and when the ticket is booked

and full payment is received, the assessee becomes entitled to deduct

the commission of 25% and remit the balance to RCCL. The

commission accrues to the assessee with the booking of tickets and

against full payment. This is notwithstanding that the customer may

not board the cruise or cancel the trip.

14. There is a procedure prescribed for cancellation of bookings.

Section 20 of the Agreement provides for cancellation charges. This

section reads as under:

"Section 20. Cancellation Charges.

IR acknowledges that RCCL suffers injury when (i) bookings are cancelled but RCCL does not receive proper notice, or (ii) bookings are cancelled close to the scheduled departure. IR shall be liable to RCCL for payment of cancellation charges in accordance with RCCL‟s applicable cancellation charge schedule as may be amended from time to time. The current cancellation charges for individual bookings are set forth in Exhibit B and for group bookings in Exhibit A. These cancellation charges are subject to the following rules:

(a) RCCL reserves the right to change cancellation charges and time frames upon written notice to IR.

(b) RCCL does not take responsibility for cancellations due to visa denials, incorrect documents, incorrect immigration forms, or absence of insurance.

15. As per this section, the assessee shall be liable to RCCL for

payment of cancellation charges in accordance with the applicable

cancellation charges schedule as may be amended from time to time.

Assuming that in some cases, the assessee, in case of cancellation of

trip, is liable to return the commission earned, it would be open for the

assessee to seek adjustment or claim a refund of tax from the

Authorities. We therefore, hold that the stand taken by the CIT (A) in

this regard was correct and 25% of the booking advances received

should be treated as income of the assessee assuming that there are

no cancellations. However, the assessee shall be entitled to 10% credit

on account of travel agents commission after ascertaining actual

outgoings in this regard.

16. The learned counsel for the revenue further contends that the AO

had treated the loss from share trading business as "Capital Loss"

since the assessee had not furnished any details i.e. contact notes,

mode of payments, details of shares etc. No specific finding has been

given by the CIT(A) as to whether loss incurred and claimed by the

assessee was a business loss or a capital loss. ITAT could not have

outrightly treated the loss as business loss, and the provisions of

Section 70 could not have been applied.

17. In this regard learned counsel for the assessee contends that the

disallowance was on the basis that the entire account of share

business is in the name of Gautam Chaddha and not in the name of

M/s Tirun Travel Marketing. The AO while doing so disregarded the

provision of Section 70 of the Act and the fact that travel business is

nothing but the proprietorship concern of Mr. Gautam Chadha. He

further contends that the loss incurred from share transaction business

was assessed under the head „Business Income‟ by the AO and

confirmed by the CIT (A) as well as by the Tribunal. Once it is held to

be business loss, provisions of Section 70 of the Act will apply. In this

regard, he relies upon the judgment of CIT v. P K Muthuraman

Chettiar, 1962 ITR Vol. XLIV SC 710.

18. In P K Muthuraman Chettiar (Supra), the Hon‟ble SC has

observed as under:

"......It is wrorthy of note that though the profits of each distinct business may have to be computed separately, the tax is chargeable under section10, not on the separate income of every distinct business, but on the aggregate of the profits of all the businesses carried on by the assessee. It follows from this that where the assessee carried on several businesses, he is entitled under section 10, and not under section 24(1), to set off losses in one business against profits in another....... "

19. Admittedly, the assessee was doing share trading business

although in his own name and not in the name of M/s Titun Travel

Market. The assessee was dealing in shares not for the purpose of

investment but for the purpose of business. It is settled position of law

that where shares are traded for the purpose of business, any loss

arising therefrom will be considered as "Business Loss". (CIT v.

Ashoka Marketing Co., 1971 (III) UJ 895). Hence, we are of the view

that the Tribunal was right in holding that the assessee is entitled to

set off the loss in share trading business from that of travel agency

business. The case of the assessee comes within the purview of

Section 70 of the Act. Accordingly, this issue is decided in favour of

assessee and against the revenue.