ORDER
Moksh Mahajan, Accountant Member
1. There are two effective grounds of appeal on which the assessee has agitated the order of the Commissioner of Income-tax (Appeals) dated 3-12-1990 for the assessment year 1987-88. The department has also filed a cross-appeal pertaining to the same assessment year. As the common issues are involved, they are disposed of by a common order.
2. Shri G.C. Sharma, the learned counsel who appeared on behalf of the assessee explaining the circumstances in which the addition of Rs. 6,22,795 came to be sustained out of an addition of Rs. 7,98,717 submitted that the assessee is an individual who was in employment with various companies as an Executive Officer including that of Jyotsna Holding (P.) Ltd. till March 1986. On 14-3-1986 the assessee entered into an agreement as a result of which he agreed to act as a consultant to Morocco company, i.e., Office Cherifier Des Phosphate, Casablanca of Morocco (OCP). The company is a supplier of fertilizers intermediates to various concerns in private as well as public sector in India. As per the agreement the company agreed to pay a sum of Rs. 40,000 per month as a consultancy fee. In the profit & loss account for the accounting period which was from 1-1-1986 to 31-12-1986 the assessee showed Rs. 4,03,298 as receipt of fees from OCP, Morocco. In addition, the assessee also received a sum of Rs. 7,98,717 by way of advances from M/s. OCP in pursuance of the agreement. The latter amount was to be adjusted against the expenses to be incurred by him in execution of the work carried on, on behalf of the company. The full details of the remittances received from M/s. OCP with the copy of the agreement dated 14-3-1986 were produced before the Assessing Officer. The Assessing Officer added the entire amount of Rs. 7,98,717 as the assessee’s income on the ground that for similar work done by the assessee for M/s. Jyotsna Holding Pvt. Ltd. where he was once an employee, much larger amounts were paid by OCP, and that as per duties assigned, the assessee cannot be held to be a correspondent. The advances for reimbursement was thus considered to be a facade device for paying less taxes. The learned CIT(A) agreeing with the finding of the Assessing Officer, however, allowed deduction in respect of expenses incurred. While doing so, none of the authorities disputed the fact that books of accounts were regularly maintained and that the contemporaneous record of the transactions as they took place at the relevant time were kept. It was also not alleged that the assessee did not render any services. The advances were received through the normal banking channels. The Assessing Officer wrongly mentioned that the details of reimbursed expenses were not submitted. On the other hand, the assessee appeared personally with books of accounts which contained necessary details. At no point of time in the course of assessment, the assessee or his representative was called upon to furnish the details of expenses so incurred. As the agreement was not doubted, it Is not understood as to how reimbursement of expenses which arose on account of the aforesaid contract came to be unaccepted. In its profit & loss account filed, the assessee showed the expenses incurred on its own account. The analysis of monthly reimburseable expenses incurred on behalf of the principals as placed at page 30 of the Paper Book, clearly showed that the expenses had nothing to do with the assessee’s own income earned from consultancy. As the amount received constituted advances In their inception, the conclusion drawn by the department that the same was the Income of the assessee was not correct. The agreement has to be read as a whole. The assessee cannot be placed with negative burden of proving that It was not Income. For this, reliance was placed on the various decisions as cited below:-
(1) Maharaja Chintamani Saran Nath Sah Deo v. CIT [1971] 82 ITR 464 (SC);
(2) Dr. K. George Thomas v. CIT [1985] 156 ITR 412 (SC);
(3) Baghapurana Co-operative Marketing Society Ltd. v. CIT [1989] 178 ITR 653 (P & H);
(4) Bedi & Co. (P.) Ltd. v. CIT [1983] 144 ITR 352 (Kar.);
(5) CIT v. Sandersons & Morgans [1970] 75 ITR 433 (Cal.);
(6) Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC).
3. The learned Departmental Representative Shri S.C. Gupta on the other hand, argued that the facts as they emerge from the orders of the revenue authorities clearly showed that the agreement as entered Into by the assessee with Moroccan company cannot be accepted at its face value. It was not denied that prior to doing the work on his own, the assessee was an employee of Jyotsna Holding (P.) Ltd. drawing remuneration of Rs. 8,000 per month. Jyotsna Holding (P.) Ltd. was earning considerable amount of income from the said contract. Since for the same work Jyotsna Holding (P.) Ltd. was earning substantial income, there were basis for doubting the amount received under the garb of advances which was in fact his income. On scrutiny of the accounts It was found that in assessment year 1987-88 while the amount received was Rs. 7,98,717, the expenditure incurred was only to the tune of Rs. 1,76,582. It is hard to believe that any party could have paid amount in advance for meeting the unknown expenses for the next several years as is the case. This is further confirmed by absence of a provision in the contract for advances as received by the party. The expenses were to be Incurred not only with the prior agreement, the same had to be on the basis of ‘Justificative vouchers’. The telex vide which the advances for reimburseable expenses were confirmed was dated 2-5-1990, which was subsequent to the assessment year under consideration and hence had no evidenciary value. The main issue in question is whether the assessee could have been allowed to bifurcate the receipts into two parts, one as remuneration and the other as advances not taxable. As the entire receipt had come as a consequence of an agreement, the same was taxable. In the circumstances, argued the learned Departmental Representative, the learned CIT(A) rightly confirmed the order of the Assessing Officer.
4. We have carefully considered the rival submissions. We have also gone through the material placed before us. The issue in question is whether the stated reimburseable expenses constitute an income of the assessee and whether the same is taxable. It is a settled law that the taxability of an amount would depend on the nature and character of the receipt in its initial stage. If the amount initially received is of the character of a trading receipt, it would necessarily be taxable as an income. The nature of the receipt has, however, to be determined from commercial point of view, though, legal aspect is equally relevant. Applying the aforesaid test, we find that the contract which is in the form of a letter reads as under:-
I am pleased to confirm my agreement to entrust you with the duty of being our Group’s correspondent in India with a view of ensuring a link between our office in Casablanca and all our Indian customers as well as the Indian administration as from March 1st. 1986, in accordance with formal instructions you will be given.
This agreement, to come into effect as of March 1st. 1986, may be terminated by either party against a 3 months notice.
Your monthly remuneration is set at 40,000 Rupees.
The exact value of the expenses to be incurred, with our prior agreement, while accomplishing your duty as a correspondent, will be refunded to you against justificative vouchers.
Periodically and at my own discretion, a bonus may be granted to you according to the quality of services rendered to our Group.
It is understood that, during the term of this agreement, you shall not take part, either directly or indirectly, in activities of any other firm, and that you take the commitment to respect the confidential nature of the business you will happen to know within the accomplishment of your duty.
Practical modalities of your duty shall be settled in mutual agreement at a later stage.
In pursuance of this contract, the assessee’s account was credited from 21-4-1986 to 26-12-1986 with an amount of Rs. 11,61,064.59 which included ‘advance for reimburseables’ of Rs. 7,98,700. This is as per copy of the certificate of foreign inward remittances of Indian Overseas Bank, Delhi. This certificate is dated 11-2-1987. The assessee was in receipt of further amount of Rs. 9,19,547.32 (From January 1987 to September 1988), as per the certificate of Foreign Inward remittances of Indian Overseas Bank dated 14-12-1988. As per the latter document, the aforesaid amount did not include any amount of reimburseable expenses. Here we may as well refer to the third document which is dated 24-1 -1990 vide which the payments till 27-12-1989 were shown at Rs. 8,02,928.35. Thus out of the total amount received till 27-12-1989, the bifurcation of the advances for reimburseable expenses are as under:-
Period Total amount Retmbursedble Remuneration
advance fore xpences
21-4-1986 to Rs. 28,83,534 Rs. 9,57,783 Rs. 19,25,751
27-12-1989
The expenses incurred till December, 1989 as per the monthly analysis sheet worked out to Rs. 9,33,932. (Paper Book pages 32 & 33). Out of the total expenses stated to have been incurred from March 1986 to December 1986 for which bills were submitted at Rs. 1,77,457 (page 30 of the Paper Book), Rs. 1,72,028 were approved by OCP, the remaining amount stood disallowed as is evident from the material placed on record. The nature of the amount being that of reimburseable expenses is also confirmed by the party vide letter dated 2-5-1990 (Paper Book P. 49). The functions of the correspondent (as given at P. 30 of the Paper Book) were stated to be as under:-
FI. FUNCTIONS AS CORRESPONDENT
As OCP have their own fleet of vessels with a carrying capacity of around 20,000 MT solution each, my primary function is to ensure a full complement of cargo for each vessel. As it is not always possible to offload the entire cargo of each vessel at one port due to storage limitations at each receiver, and I am therefore, required to check with each receiver so as to ensure the best possible combination of ports ensuring the least possible waiting time and expense to the vessel owners. This entails locating receivers having need for the acid on more or less same dates, and on the same coast.
As there are often requests at the last minute for diversion of vessels from various receivers, either due to plant problems, or emergent requirements of some receiver, I coordinate with the receiver and OCP to find the best possible solution.
Follow up with receiver to ensure timely release of payments.
Follow up for settlement of Demurrage claims and shortage claims.
All these functions naturally entail travelling, and telex/telephonic communications.
As rock phosphate is imported by MMTC on a FOB basis, unlike Acid which is on a C & F basis my functions in respect of rock phosphate are mainly to ensure coordination between OCP and MMTC to ensure equitable liftings by MMTC, confirmation of…by OCP, and ensuring timely payments by MMTC, and settlement of disbursements account due OCP from shipowners.
5. The agreement as well the material evidencing receipt and vouchers submitted to the OCP are not in doubt.
6. The nature of receipt has to be viewed in the above background. The agreement is neither happily worded nor is a comprehensive one. The former is evident from the way it is drafted and the latter from the fact that an important aspect pertaining to the duties has not been detailed. As regards former, we may refer to the observations of their Lordships of Calcutta High Court in the case of Prankrishan Das v. Controller of Estate Duty AIR 1968 Cal. 469 at 499 :-
Now the golden rule of construction is to ascertain the intention of the parties to the instrument, after considering all the words, in their ordinary and natural sense. To ascertain this intention, a court has to consider the relevant portion of the document as a whole and also to take into account the circumstances under which the particular words were used. Very often the status and the training of the parties using the words have to be taken into consideration. It has to be borne in mind that very many words are used in more than one sense and that sense differs in different circumstances. Again, even where a particular word has to a trained conveyancer a clear and definite significance, and one can be sure about the sense in which conveyancer would use it, it may not be reasonable and proper to give the same strict interpretation of the word, when used by one who is not so equally skilled in the art of conveyancing.
Thus the ‘intention’ of the parties has to be gathered from the whole of the agreement rather than placing specific emphasis on particular words. For this, conduct of the parties is material. The party namely OCP advanced certain amounts as reimburseable expenses in addition to the remuneration paid and the vouchers of expenditure allegedly incurred on behalf of party were submitted to it for approval. These vouchers were not only gone through by OCP, but were also approved by it subject to certain disallowances. This is not disputed. If it be so the terms of the contract with reference to ‘prior approval’ and ‘adjudicative vouchers’ stood modified as evident from the subsequent conduct of the parties. The approval could have been as a result of discussion on telephone or on the visit of officials of party in India. The fact nonetheless remains that while the assessee was able to show that he was allowed ‘reimburseable expenses’, no evidence to the contrary was brought on record that in actuality the advances were the income of the assessee and submission of vouchers for approval was only a made up affair. Thus the amounts received in their very inception were of the nature of the advances, otherwise the question of approval of the party would not have arisen. As regards the advances of substantial amount by the party in the very beginning of the contract, it may be stated that the aforesaid factor while can be a starting point for an enquiry but cannot by itself clinch the issue against the assessee. More so, when within a period of three years the receipts and expenditure have more or less equalised. At this juncture, it may also be mentioned that by and large the expenses have not been doubted by the department. As regards comparison made with Jyotsna Holding (P.) Ltd., as the terms of the contract under which the substantial amounts were stated to have been received by the parties are not before us, we are not aware of whether there existed any provision for reimbursement of expenses or not. Accordingly, we offer no comments. The nature of the contract appears more akin to the assessee being an agent of the party which is clear from the expressions like ‘in accordance with formal instructions you will be given’, and ‘At my own discretion’ used in the contract. The burden was on the department to prove that the apparent state of affairs was not the real one, as maintained by the assessee relying on various decisions as cited.
7. What emerges from the above facts is that the expenditure was to be incurred on behalf of OCP and not on its own account. In this context, we may refer to the decision of Calcutta High Court in the case of CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493. In the aforesaid case, the assessee a non-resident English Company which had a world net work of subsidiaries and associated companies, maintained in the United Kingdom (London) extensive technical research establishments. Agreement was entered into between the assessee-company and its Indian subsidiary which provided that the assessee-company shall on its request would be provided with information, processes and inventions which could be used by it in connection with the manufacture of similar goods. As per clause 5 of the agreement, all costs and expenses incurred by the assessee-company in connection with the communication of the information, processes and inventions or giving of any advice or assistance provided for by the assessee-company to the Indian company shall be paid by the Indian company. The Indian company was also to pay a proportionate part of the cost and expenses incurred by the assessee-company in the acquisition, discovery and development of information processes and inventions. The assessee-company contended that the amount received by it from the Indian company did not constitute income as the payments were merely reimbursement of the expenditure incurred in connection with the research work etc. On the facts, their Lordships of the Calcutta High Court, held that the Tribunal was right in arriving at the view that the payment was for the recoupment of the expenses incurred and as such did not constitute the income assessable to tax.
8. On the strength of the above facts and the case law cited, we are of the considered view that the amount received by the assessee at Rs. 7,98,717 under the head ‘Advances for reimburseables’ is not of trading nature and hence cannot be brought to tax in the hands of the assessee. In the circumstances, we delete the addition of Rs. 6,22,795 as sustained by the CIT(A).
9. The next ground of appeal pertains to interest charged under Sections 215 & 216 of the Income-tax Act. As regards interest charged under Section 216 it was submitted by the learned counsel for the assessee that the assessee paid advance tax in three instalments as under:-
29-9-1986 Rs. 40,000
21-8-1987 Rs. 40,000
13-3-1987 Rs. 80,000
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Rs. 1,60,000
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Since charge of understatement of advance tax payable in either of the first two instalments was not proved, the question of levy of interest under Section 216 did not arise. Accordingly, the interest charged under Section 216 of the Act should be deleted.
10. On careful consideration of the facts of the case, we find that the assessee’s submission is devoid of any force. It was not shown that at the time when the first two instalments were paid, the same were in accordance with the income earned by him. On the other hand, as the assessee’s income consisted of fixed remuneration from OCP, the understatement in the first two instalments is not explainable. This is more so when it was not shown that the first two instalments were paid in accordance with the material as was available before the assessee. In the circumstances, we would uphold the levy of interest under Section 216 of the Act. This would however be subject to the modification in view of the relief allowed by us as above. As regards levy of interest under Section 215 of the Act which is pleaded to be consequential in nature, we would direct the Assessing Officer to modify the same in view of the relief allowed by us.
11. As regards the departmental appeal, the order of the CIT(A) has been agitated on the following ground:-
On the facts and in the circumstances of the case, the CIT(A) has erred in directing the Assessing Officer to allow deduction of an amount of Rs. 1,75,922 on account of expenses incurred by the assessee for earning the remuneration received by him from the principals, M/s. OCP.
In view of our finding in para 8 above wherein we have held that the entire amount of Rs. 7,98,717 is not taxable in the hands of the assessee, the expenditure as allowed by the CIT(A) is also not allowable. In the circumstances, the department appeal is allowed, though on different grounds.
12. In the result, the assessee’s appeal is allowed and so is that of the department.