ORDERTerminal benefits paid to honorary representative of an American company in India allegedly charged to tax
Catch Note:
The assessee was formely appointed, as chairman and managing director of an Indian company, by the American company. Subsequently he was made honorary representative of American company in India. During the relevant assessment years he was paid US Dollars 1 lakh and a imported car. The assessee contended that above stated amount was not taxable as the same was received as consideration of personal esteem and goodwill. The assessing officer without scrutiny framed assessment under section 143(1). The order passed by the assessing officer, accepting assessee’s claim, without any scrutiny was erroneous and prejudicial to the interest of revenue. Therefore, direction of the Commissioner, to charge amount as well as car as terminal benefit, though categorized as paid out of esteem and goodwill were chargeable to tax, was perfectly justified.
Ratio:
The order passed by the assessing officer, accepting assessee’s claim, without any scrutiny was erroneous and prejudicial to the interest of revenue. Therefore, direction of the Commissioner, to charge amount as well as car as terminal benefit, though categorized as paid out of esteem and goodwill were chargeable to tax, was perfectly justified.
Held:
The information about the receipt of US $ 1,00,000 and the Benz Car, may have been given to assessing officer but, it was not examined by assessing officer. The submission of the assessee that information having been supplied to assessing officer and it must be deemed as having been examined would all be relevant in case of reopening of assessment under section 148. Accordingly the order of Commissioner is upheld in setting aside the assessment to be redone after giving the assessee a reasonable opportunity of hearing. On merits of the case, the assessee accepts that he was the honorary representative of the US Company in India and that there was no employee of the representative office and that the car was imported for the use of the representative in India. The assessee also accepts that soon after the waiting period of transfer of imported car was over, it was transferred to him. It was for past services to the said company. This is obviously in the nature of termination benefits though it may be categorized as paid out of esteem and goodwill. In the light of the aforementioned facts US $ 1,00,000 was justifiably treated as income for the assessment year 1987-88. The car having been transferred to the assessee in March 1990, it was rightly treated as income for the assessment year 1990-91.
Application:
Also to current assessment year.
Decision:
In favour of revenue.
Income Tax Act 1961 s.263
Income Tax Act, 1961 Section 4
Revision under s. 263–ERRONEOUS AND PREJUDICIAL ORDERTerminal benefits paid to honorary representative of an American company in India allegedly charged to tax
Catch Note:
The assessee was formely appointed, as chairman and managing director of an Indian company, by the American company. Subsequently he was made honorary representative of American company in India. During the relevant assessment years he was paid US Dollars 1 lakh and a imported car. The assessee contended that above stated amount was not taxable as the same was received as consideration of personal esteem and goodwill. The assessing officer without scrutiny framed assessment under section 143(1). The order passed by the assessing officer, accepting assessee’s claim, without any scrutiny was erroneous and prejudicial to the interest of revenue. Therefore, direction of the Commissioner, to charge amount as well as car as terminal benefit, though categorized as paid out of esteem and goodwill were chargeable to tax, was perfectly justified.
Ratio:
The order passed by the assessing officer, accepting assessee’s claim, without any scrutiny was erroneous and prejudicial to the interest of revenue. Therefore, direction of the Commissioner, to charge amount as well as car as terminal benefit, though categorized as paid out of esteem and goodwill were chargeable to tax, was perfectly justified.
Held:
The information about the receipt of US $ 1,00,000 and the Benz Car, may have been given to assessing officer but, it was not examined by assessing officer. The submission of the assessee that information having been supplied to assessing officer and it must be deemed as having been examined would all be relevant in case of reopening of assessment under section 148. Accordingly the order of Commissioner is upheld in setting aside the assessment to be redone after giving the assessee a reasonable opportunity of hearing. On merits of the case, the assessee accepts that he was the honorary representative of the US Company in India and that there was no employee of the representative office and that the car was imported for the use of the representative in India. The assessee also accepts that soon after the waiting period of transfer of imported car was over, it was transferred to him. It was for past services to the said company. This is obviously in the nature of termination benefits though it may be categorized as paid out of esteem and goodwill. In the light of the aforementioned facts US $ 1,00,000 was justifiably treated as income for the assessment year 1987-88. The car having been transferred to the assessee in March 1990, it was rightly treated as income for the assessment year 1990-91.
Application:
Also to current assessment year.
Decision:
In favour of revenue.
Income Tax Act 1961 s.263
Income Tax Act 1961 s.4
ORDER
A. Kalyanasundharam, Sr. Vice President
1. These are appeals preferred by the assessee against two different sets of proceedings. The first of the appeal is against the order of Commissioner of Income-tax (CIT for short) passed under Section 263 of the Income-tax Act, 1961 (hereinafter referred to as the Act). The second set of appeal is based on the proceeding initiated consequent to the direction of CIT in his order made under Section 263 of the Act. One other appeal preferred by the assessee is against the imposition of penalty for wrong estimate of advance tax and this is with reference to the same issue as is contained in the quantum appeals. These appeals are grouped for the aforesaid reasons and are disposed by this combined order.
2. The background facts of assessee is quite interesting and it is brought out hereunder. The assessee was the employee of an American company M/s. Chasebrough-Pond’s Inc. till it was allowed to carry on its business in India. Because of the ruling of the Government allowing foreign company’s to carry on business in India only by being a shareholder to the extent of 49% in the Indian company, Ponds (India) Ltd. was formed with the foreign company holding 49% equity of the Indian company. The assessee was made the Managing Director of the company and subsequently he was made the Chairman and Managing Director. The American company continued to have its representative office in India and the assessee was its representative in India with no remuneration. The assessee has varied responsibilities as representative of the American company. During the financial year relevant to the assessment year 1987-88, the American company paid the assessee US Dollars 1 lakh. In 1983 the American company also imported a car for the exclusive use of its representative in India and this was allowed to be transferred in favour of the assessee in March 1990. The transfer of the imported car was delayed in view of the restriction in the sale of imported cars for certain period. The assessee was not required to pay any price for the imported car. The common issues in the present appeals are the nature of receipt of US Dollars one lakh and the value of the imported car.
3. The contention of the appellant before CIT was that US Dollars one lakh was remitted from America through normal banking channels and that the circumstances under which the payment was received was within the knowledge of the Department. The submission of the assessee in his own words was, “at the time the above sum was received from Chasebrough-Pond’s Inc. I was not an employee of Chasebrough-Pond’s Inc. nor was this amount given to me in consideration of any services rendered or in discharge of any legal obligation by the said corporation to me. The amount was paid to me, as would be evident from the correspondence, which was already within the knowledge of the Department, in consideration of the personal esteem and goodwill that they bore to me….I invite your kind attention to the copies of the enclosed letters and statements, where specific reference has been made to this receipt…I have specifically mentioned about the receipt of the aforesaid sum, while submitting the return of income, the copies of correspondence were again enclosed for easy reference, so that at the time of assessment, the fact was well within the knowledge of the Deputy Commissioner. Hence, the assessment for the year 1987-88, was completed including therein the interest income received by me in respect of the aforesaid sum, which was invested by me since after the receipt. There was a substantial increase in the interest income between the previous year and the year 1987-88, and this fact, along with the correspondence, would necessarily have been examined by the Deputy Commissioner….
3.1 I may further submit, in this connection, that the sum of US $ 1,00,000 docs not constitute my income for the following reasons, among others, (i) the amount was received by me specifically by was of a gift from Chasebrough-Pond’s Inc.; (ii) this was evidenced by the letter issued by the Chasebrough-Pond’s wherein they have clearly stated that the amount is paid in consideration of the personal esteem and goodwill only; (iii) at the time the amount was received, I was not an employee of Messrs. Chasebrough-Pond’s Inc. nor did I render any services in consideration of the aforesaid payment.
3.2 Messrs. Chasebrough-Pond’s Inc. closed its business operations in India in 1977. After the formation of the Indian company, Messrs. Chasebrough-Pond’s Inc. was only a shareholder in the Indian company – Pond’s (India) Limited. I was then the Managing Director and subsequently the Chairman and Managing Director of Messrs. Ponds (India) Limited. Messrs. Chasebrough-Pond’s Inc. had a representative office in India, with the permission of the Reserve Bank of India, but there was no employee with remuneration working for the representative office in India. I was nominated by Messrs. Chasebrough-Pond’s Inc. as one of their Nominee Directors on the Board of Messrs. Ponds (India) Limited. This position I held since I was already the Managing Director and Chairman. No remuneration was either allowed or paid for being the nominee of Chasebrough-Pond’s Inc. on the board of Messrs. Ponds (India) Limited. My remuneration was by Ponds (India) Limited for whom I was rendering services. Thus there was no quid pro quo for the receipt of US $ 1,00,000 or any other sum at all from Messrs. Chasebrough-Pond’s Inc. and this amount did not constitute either remuneration or consideration for the services rendered.
3.3 Messrs. Chasebrough-Pond’s Inc. has specifically declared as evidence by its letter dated December 31, 1986 (copy enclosed) that the amount is paid to me towards personal esteem and goodwill and not in consideration of any services or in discharge of any obligation clue to me…As regards the Benz car, the relevant facts are as follows: the Mercedes Benz car bearing registration number TMF 1836 was imported into India for the use of Chasebrough-Pond’s Inc.’s Indian Representative office with the approval of the Chief Controller of Imports & Exports vide CCP dated 29th December, 1983. In June 1989, after the expiry of the ‘No sale period’ of five years, an application was made to the Government of India. The approval was received on 18th January, 1990 and the car was thereafter transferred in my name with effect from 20th March, 1990. The car was delivered to me as a gift and not in consideration of any services rendered by me or by way of remuneration due to me or in discharge of any obligation in my favour. In this connection, a copy of the letter dated 5th January, 1987 from Messrs. Chasebrough-Pond’s Inc. to me, is enclosed.
3.4 The appellant had enclosed a letter addressed to IAC-Asstt. Range 1, Madras dated February 16, 1987 mentioning the subject as ‘advance income tax – assessment year 1987-88 – filing of estimate of income’. The content of the letter reads – “enclosed please find an estimate of income under Section 209A of the Income-tax Act, 1961 in respect of my income for the assessment year 1987-88. The revised estimate is on account of interest income of Rs.10,900 on the deposit of US $ 1,00,000 with Grindlays Bank, 164, Mount Road, Chennai – 600002 made on 23rd January, 1987. The aforesaid deposit of US $ 1,00,000 represents amount received by me from Messrs. Chasebrough-Pond’s Inc. Connecticut, USA, at the time of their merger through acquisition by Unilever Company. This amount has been sent to as honorary head of their representative office in India over a span of years and as a token of their goodwill and esteem”.
3.5 The assessment was completed under Section 143(1) of the Act. CIT considering that the assessment was framed without scrutiny of the facts that the assessee was the former employee of Chasebrough-Pond’s Inc. and was its representative in India for which the amount was sent, concluded that the assessment made without scrutiny of the relevant facts, was erroneous and prejudicial to the interest of revenue.
4. In our considered opinion after considering the rival submissions of the parties and the materials placed on our record, there is justification in the action of CIT in coming to the conclusion that the assessment was framed without any scrutiny and it resulted in the order being prejudicial to the interest of revenue inasmuch as it was erroneous. The assessment framed was without scrutiny is evident from the fact that the assessment was framed under Section 143(1) of the Act. Section 143(1) of the Act states ‘where a return has been made under Section 139, the Assessing Officer may, without requiring the presence of the assessee or the production of any evidence in support of the return, make an assessment of the total income or loss of the assessee after making such adjustments to the total income or loss declared in the return as are required to be made under Clause (b)…’. The information about the receipt of US $ 1,00,000 and the Benz Car, may have been given to Assessing Officer but, it was not examined by Assessing Officer. The submission of the assessee that information having been supplied to Assessing Officer and it must be deemed as having been examined would all be relevant in case of reopening of assessment under Section 148 of the Act. We accordingly uphold the order of CIT in setting aside the assessment to be redone after giving the assessee a reasonable opportunity of hearing.
5. Considering the issue on merits of the case, the facts as are on record show that the US $ 1,00,000 and the Benz car was given to the assessee for representing the Chasebrough-Pond’s Inc. in India. The assessee accepts that he was the honorary representative of the US Company in India and that there was no employee of the representative office and that the car was imported for the use of the representative in India. The assessee also accepts that soon after the waiting period of transfer of imported car was over, it was transferred to him. It was for past services to the said company and paid at the time of merger with Unilever Company. In assessee’s own words, “this amount has been sent to as honorary head of their representative office in India over a span of years”. This is obviously in the nature of termination benefits though it may be categorized as paid out of esteem and goodwill. In the light of the aforementioned facts we are of the opinion that US $ 1,00,000 was justifiably treated as income for the assessment year 1987-88. The car having been transferred to the assessee in March 1990, it was rightly treated as income for the assessment year 1990-91. We accordingly uphold the orders of the authorities below and dismiss the appeals.