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From the Courts »
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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Commissioner Of Income Tax-Ix Vs. Aman Khera
September, 27th 2016
$~
*       IN THE HIGH COURT OF DELHI AT NEW DELHI
16.
+                                          ITA 653/2012

        COMMISSIONER OF INCOME TAX-IX               ..... Appellant
                    Through: Mr. Zoheb Hossain, Senior Standing
                    Counsel with Mr. Deepak Anand, Advocate.

                                  versus

        AMAN KHERA                                                ..... Respondent
                                  Through: Mr. M. P. Rastogi with Mr. K. N. Ahuja,
                                  Advocates.

                                           WITH
17.
+                                          ITA 476/2014

        COMMISSIONER OF INCOME TAX-IX                ..... Appellant
                    Through: Mr. Rahul Chaudhary, Senior Standing
                    Counsel with Mr. Raghvendra Singh, Advocates.

                                  versus

        RAMAN KHERA                                               ..... Respondent
                                  Through: Mr. M. P. Rastogi with Mr. K. N. Ahuja,
                                  Advocates.

                                           WITH
18.
+                                          ITA 19/2015

        COMMISSIONER OF INCOME TAX-14                ..... Appellant
                    Through: Mr. Rahul Chaudhary, Senior Standing
                    Counsel with Mr. Raghvendra Singh, Advocates.

                                  versus

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 1 of 28
        JYOTI KHERA                                               ..... Respondent
                                  Through: Mr. M. P. Rastogi with Mr. K. N. Ahuja,
                                  Advocates.

                                           WITH
19.
+                                          ITA 21/2015

        COMMISSIONER OF INCOME TAX-14                ..... Appellant
                    Through: Mr. Rahul Chaudhary, Senior Standing
                    Counsel with Mr. Raghvendra Singh, Advocates.

                                  versus

        AMAN KHERA                                                ..... Respondent
                                  Through: Mr. M. P. Rastogi with Mr. K. N. Ahuja,
                                  Advocates.

                                           AND
20.
+                                          ITA 326/2015

        COMMISSIONER OF INCOME TAX-IX               ..... Appellant
                    Through: Mr. Ashok K. Manchanda, Senior
                    Standing Counsel.

                                  versus

        RAMAN KHERA                                               ..... Respondent
                                  Through: Mr. M. P. Rastogi with Mr. K. N. Ahuja,
                                  Advocates.

        CORAM:
        JUSTICE S. MURALIDHAR
        JUSTICE NAJMI WAZIRI



ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 2 of 28
                                  ORDER
%                                 03.08.2016

Dr. S. Muralidhar, J.:

1. These are five appeals by the Revenue under Section 260A of the Income
Tax Act, 1961 (Act`). Three of them i.e. ITA Nos. 653 of 2012, 19 of 2015
and 326 of 2015 pertain to quantum proceedings and two of them i.e. ITA
Nos. 476 of 2014 and 21 of 2015 pertain to penalty proceedings.

Background facts
2. The background facts are that an agreement was entered into on 31st
October 2005 between Dr. B.L. Khera Charitable Trust (hereafter 'the
Trust'), a society incorporated under the Societies Registration Act, 1860
and Heart Institute, Noida represented by Dr. Purshotam Lal, the Director of
Metro Hospital and Heart Institute.

3. The agreement noted that the Trust was the owner of a hospital situated
on a plot of approximately 1.5 acres in Pandav Nagar, Naraina Road, New
Delhi with a building consisting of a basement, ground floor and four floors
known as Khera Hospital. The agreement noted that the Khera Hospital had
not been functioning except for an Out-Patient Department and that too on a
small scale. The hospital was stated to be ill-equipped and facing financial
problems.

4. The agreement noted that the Trust had approached the management of
Metro Hospital, Noida to run and manage the Khera Hospital and that the
Metro Hospital had agreed to the proposal. The clauses of the agreement
relevant for the present purposes read as under:
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 3 of 28
        1. Khera society will allow Metro Hospital to make necessary
        changes, alterations or additions and/or demolitions,
        renovations accordingly in Khera Hospital building and other
        places.

        2. Khera Society shall facilitate and empower Metro Hospital in
        sorting out the legal and other disputes relating to Khera
        Hospital.

        3. Khera Hospital shall make available all records, deeds,
        writings, files and documents to Metro hospital to facilitate
        proper day to day working in Khera Hospital within seven days
        of signing of this agreement.

        4. Metro Hospital shall pay a monthly lump sum amount as
        mutually decided to Khera Society and all receipts of monthly
        in cash or by cheque shall belong to Metro Hospital.

        5. Metro Hospital shall have full freedom in fixing rates for
        various medical procedures, consultation and treatment
        procuring medicines, consumables equipments, recruiting staff,
        maintenance of buildings, equipments etc.

        6. Metro Hospital has to manage Khera Hospital to the best of
        its ability and capability.

        7. Metro Hospital shall be entitled to use all the assets existing
        and to be procured in future for Khera Hospital to run and
        manage the Hospital for all purposes, intents and externs
        exclusively.

        8. This managing agency agreement shall remain valid for
        twenty five years;

        This agreement may be terminated by giving 12 months notice
        in writing to the other party provided consideration, if any, in
        any form and interest accruing thereon from the day it was
        taken from Metro Hospital or its nominees is cleared and

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 4 of 28
        discharged by Khera Hospital at the time of serving of notice.
        No notice of termination will be valid if the financial
        involvement is not discharged.

5. The agreement could be terminated by either party by giving 12 months `
notice to the either party. Interestingly, the agreement provided that in the
event of such termination, the consideration taken from Metro Hospital and
interest accruing thereon should be discharged by Khera Hospital at the time
of serving of notice. It was stipulated that no notice of termination will be
valid if "the financial involvement is not discharged".

6. The agreement was signed on behalf of the Trust by its Trustees Dr.
Krishan Khera, Dr. Raman Khera (the Respondent Assessee in ITA Nos.
476/2014 and 326/2015) and Ms. Jyoti Khera (the Respondent Assessee in
ITA No. 19 of 2015).

7. The case of the Assessees/Respondents is that on 12th December 2005,
UG Hospitals Pvt. Ltd. (UGHPL`) which was running Metro Hospital and
the Heart Institute issued a letter to Dr. Aman Khera in the following terms:
        We are glad to appoint you as a management consultant for the
        chain of hospitals run and managed by us for a period of 5
        years. The tenure of your appointment shall start w.e.f. 1st
        January 2006. You have been paid a consolidated amount of
        Rs.1,21,83,494/- in advance for the above mentioned
        appointment. An amount of Rs.6,83,494/- has been deducted as
        TDS from the above-mentioned amount. A detailed MOU with
        all terms and conditions shall be executed at a later date.

8. A similar letter was issued to both Dr. Raman Khera and Ms. Jyoti Khera
as well. All the three were each paid a lump sum consolidated amounts of Rs
121,83,494 after deduction of TDS of Rs 6,83,494 in each case.
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 5 of 28
9. The three Assessees i.e. Dr. Aman Khera (Respondent in ITA No.
653/2012), Dr. Raman Khera (Respondent in ITA No. 326/2015) and Ms.
Jyoti Khera (Respondent in ITA No. 19/2015) filed their respective returns
of income for the AY 2006-07. While Dr. Aman Khera declared an income
of Rs.5,46,616 on 31st October 2006, Dr. Raman Khera filed a return on 31st
October 2006 declaring an income of Rs. 3,82,155 and Ms. Jyoti Khera filed
a return on 31st March, 2007 declaring an income of Rs 33,950. None of
them disclosed the entire amount received from UGHPL in their respective
returns.

Assessment orders
10. The returns of income were picked up for scrutiny and assessment orders
under Section 143(3) of the Act were passed on 22nd December 2008 in the
cases of Dr. Aman Khera and Dr. Raman Khera, and on 26th December 2008
in the case of Ms. Jyoti Khera for AY 2006-07. Each of them claimed that
the     amount         received        from       UGHPL           was     on   account     of
professional/management consultancy. Significantly, the AO noted in each
of the assessment orders that none of the Assessees were able to produce
their regular books of accounts or receipts to show the source of the salary
income or the income from business.

11. As regards the receipt from UGHPL, the AO noticed that TDS had been
deducted on the entire payment made in lump sum by UGHPL. The claim of
the Assessees that the amount was received as advance on account of
appointment as hospital/management consultant for five years and,
therefore, the amount should be spread over for a period of five years, was
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015          Page 6 of 28
not accepted by the AO. He observed that it was unbelievable that a hospital
would all of a sudden need so many Hospital Consultants from a single
family all closely related to each other by blood and pay all of them in
advance for five years a hefty sum amounting to crores for their services as
claimed. He also noted that Dr. K.L. Khera, the father of three Assessees,
who was the senior most among the recipients had been paid only
Rs.58,26,888 for the same period of five years whereas his children with
much less experience had received sums of over Rs.1 crore.

12. The AO further noticed that from the period mentioned on the TDS
certificates it was clear that the Assessee`s claim of advance receipt for five
years was not correct. Importantly, the AO noticed that there was no reason
why a business entity like UGHPL would advance such a huge sum to
doctors of a particular family for such a long period without any formal
written agreement or contract. The AO noted that the assessee and the
Hospital both were requested to furnish copy of agreement if any signed at
any point of time, but no such agreement has been furnished and accordingly
it is presumed that there is no written agreement or contract between the
payer & the payees of so called advance for hospital consultancy.





13. The AO also noted that neither the Assessees nor their father appeared in
response to the summons issued under Section 131 of the Act. However, in
response to a further letter asking them why the entire receipt from UGHPL
should not be added to the income, a written submission was filed on 11 th
December 2008. The AO noticed that there was no further acceptable
evidence to spread over the lump sum amount over five years as claimed by

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 7 of 28
the Assessees. It was noticed that there is no regular books of accounts
maintained by the Assessees in any system cash or mercantile.
Accordingly, the entire receipt from UGHPL by each of the Assessees was
treated as their respective income for the AY in question.


14. The AO then proceeded to deal with the claim of expenditure which
might have been incurred by the Assessees. Considering it not to be in the
interest of justice to disallow expenses, the AO permitted roughly 35% of
the total receipt on an estimated basis as expenses and took the balance
amount as income of the Assessee which was added to the return income.
Penalty proceedings under Section 271(1)(c) of the Act were also directed to
be initiated.


Proceedings before the CIT (A)
15. The Assessees appealed to the Commissioner of Income Tax (Appeals)
[CIT (A)`]. By separate orders dated 24th November 2010, the CIT (A)
partly allowed each of the appeals. Significantly, before the CIT (A) for the
first time, the Assessees placed on record the letters issued by UGHPL to
each of them at the time of their appointment as Hospital Consultants; copy
of the accounts of UGHPL in the books of the Assessees; confirmation
receipt from UGHPL about the treatment of the payment in their books;
income tax returns for each of the Assessees for AY 2007-08 and 2008-09
which showed that the proportionate fees in those respective AYs were
shown in the income and offered to tax by the Assessees.


16. An alternative submission was made before the CIT (A) by each of the
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 8 of 28
Assessees as under:
        if your Honour is of the view that the receipt for the period
        01.01.2006 to 31.12.2010 is to be taxed in this year itself, it is
        prayed that the ld. Assessing Officer be directed to modify the
        assessment for the assessment years 2007-2008 to 2011-12 to
        that extent after allowing expenses incurred in those years,
        because in law the same income cannot be taxed twice.


17. The CIT (A) appears to have raised specific questions which were
answered as under:
        1. Whether there is any agreement between the appellant and
        UG Hospital. How UG Hospitals will recover the advance
        received in case of failure of appellant to provide
        services/consultancy to the Hospital.

        Answer: There is no agreement between me and UG Hospitals.
        There is only a letter of appointment dated 12.12.2005 which is
        already on record. Confirmation of UG Hospitals was also
        received in assessment proceedings in response to summons
        under Section 133(6) of the Income Tax Act, 1961. Another
        confirmation is being attached which has been recently taken
        from UG Hospitals reconfirming the same facts. Already four
        years of this appointment are over and the possibility of failing
        to provide hospital management consultancy services to the UG
        Hospital is unlikely. Also, I would like to mention that we are
        already negotiating to extend this appointment for another 5
        years once the term is completed. The details however have not
        yet been worked out.

        2. Evidence for service rendered; name of patients attended,
        time period of consultancy, fees received from patient.

        Answer: We are not doctors there. We are management
        consultants who are involved in corporate management of the
        hospitals run by UG Group of hospitals. We do not have to go
        to the hospital everyday. We meet at the head office as and
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 9 of 28
        when required.

        The nature of our services are advisors in corporate affairs like
        decisions as to which new hospital to acquire, feasibility study
        of new projects, planning of new projects, procurement and
        decision as to which equipments to buy, doing market study as
        to which specialty of medical service to promote etc.

        Please note that we are not working in the capacity of
        administrators or looking after day to day working of the
        hospitals, but working as advisors at the corporate level.

        3. With whom of Metro Group/UG Hospitals negotiation has
        taken place?

        Answer: With Dr. Purshottam Lal.

        4. How the sum had been working out at an odd figure - basis
        of receipt by the appellant.

        The sum demanded by me was Rs. 3 lacs per month. Then it
        was negotiated to Rs. 2 lacs a month if all was paid in advance.
        This was Rs. 1 crore and 20 lacs. This was finally settled at Rs.
        1 crore and Rs. 15 lacs. Then came the issue of TDS. Since I
        wanted Rs 1 crore and 15 lacs in hand, the whole amount was
        re-calculated so that the TDS was paid and I got Rs. 1 crore and
        15 lacs.

        6. Khera Hospitals, Pandav Nagar - whether it has been
        transferred or not. Who is running the hospital?

        Khera Hospital is owned by Dr. R.L.Khera Charitable Trust. It
        is now being run and managed by UG Hospitals under a
        management agreement. I have been appointed as a consultant
        to all the hospitals under the UG Group of Hospitals to assist
        them in the capacity of hospital management consultant
        including Khera Hospital. Copy of agreement attached.


ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 10 of 28
         The balance documentation/information required is furnished
         below:
         1. Trust deed of R.L. Khera Charitable Hospital: attached

         2. Is there any Agreement between R.L.Khera Charitable
         Hospital and UG Hospital if so copy of that Agreement: already
         filed under cover of our letter dated 17.09.09

         3. Service rendered by the assessee to R.L. Khera Charitable
         Hospital. Are they getting any salary/reimbursement or any in
         kind for these services: None.

         4. What actual expenses incurred for giving consultancy to UG
         Hospital: as per income and expenditure account attached to
         return: produce bill/vouchers: produced herewith.


18. The Assessees produced before the CIT (A) for the first time an
agreement dated 15th June 2010 entered into between Metro Institute of
Medical Sciences Private Limited formerly UGHPL and each of the
Assessees. Interestingly, in the Preamble to this agreement there is no
reference to the letters dated 12th December 2005 issued by the UGHPL to
each of them. However the contract period shown to be five years
commencing with the effective date from which the Consultant joins the
Metro Institute whether the originally stipulated date, suspended date or
extended date. Clause 2.2 stated the term of the agreement and read as
under:
         2.2 The term of this Agreement shall begin as on 1st January
         2006 and shall continue in full course and effect for a period of
         five years from the effective date unless it is terminated earlier
         in accordance with the terms and conditions stated herein or on
         account of Force Majeure or any unforeseen circumstance
         rendering the present Agreement unenforceable.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 11 of 28
19. Further clause 2.6 reads as under:
        2.6 The Metro Institutes has agreed to pay unto the consultant
        an amount of Rs.1,21,83,494/- (Rupees One Crore Twenty One
        Lacs Eighty Three Thousand Four Hundred and Ninety Four
        Only) the date of the execution of this Agreement being the
        fixed consultancy fees for the entire term of five years of
        consultancy. The Metro institute shall, however, deduct any or
        all applicable taxes as are statutorily required.

20. Article 4 which spelt out the representations and warranties did not
require the Consultant to return any amount in case he failed to perform any
part of the contract. Interestingly, Article 9.2 stated as under:
        9.2 In the event, that Metro Institute for any reason disclosed
        or otherwise chooses to seek premature termination of the
        Services of the consultant prior to the expiry of the fixed period
        of 5(five) years, the consultant shall not be liable under any
        circumstance to refund any amount of the consultancy fees and
        the same shall deemed to have been forfeited and no claim in
        respect thereof shall be entertainable.

Order of the CIT (A)
21. An issue was raised before the CIT (A) on whether this additional
evidence in the form of the above agreement which was obviously entered
into nearly four years after the so-called engagement of the Assessees as
Hospital Consultant could be taken on record by the CIT (A) under Rule
46A of the Income Tax Rules, 1962 (Rules`). The CIT (A) concluded that
these evidences only enable the undersigned to pass an order on this issue
one way or other. The CIT (A) held that the nature of evidence is such that
these do not give rise to any new principle or lead to any new facts requiring
fresh investigation and by filing the additional evidence the assessee is not

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 12 of 28
seeking to make any fresh line of enquiry. 


22. On the merits of the appeal, the CIT (A) came to the following
conclusions:

        (i) The evidence brought on record showed that UGHPL instead of
        making payment to the Trust on monthly basis as per agreement made
        payments of Rs. 4 crores excluding income tax to the Trustees of the
        Trust. The lump sum tax free payment was made in the following
        manner namely Rs.1.15 crores each to Dr. Aman Khera, Dr. Raman
        Khera and Ms. Jyoti Khera and Rs.55 lakhs to Dr. R.L. Khera.

        (ii) It is not understood how UGHPL was utilising the expertise of the
        three Assessees. One of them Ms. Jyoti Khera was not a doctor and
        was also not having a degree in hospital management.

        (iii) The payments appear to have been made not for their expertise
        but otherwise. The payments to the Assessees were made irrevocable
        because they were not related to the specific services. There was no
        obligation on the Assessees to refund or repay the fees received.


23. Consequently, the CIT (A) upheld the conclusions of the AO that
receipts from UGHPL was chargeable in this year.


24. The CIT (A) then turned to the question of allowing expenses at 35%.
The CIT (A) held that since the entire receipt from the UGHPL was
chargeable the allowance of expenses over and above the claimed expenses
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 13 of 28
was unjustified. The claimed expenses as against the business income had
already been allowed by the AO. Consequently, the CIT (A) added back the
expenses allowed by the AO at 35%.


Impugned order of the ITAT
25. Aggrieved by the order of the CIT (A) the three Assessees went in
appeal before the ITAT which by the impugned order allowed the appeals
after coming to the following conclusion:

        (i) When examined in the light of the decision in E.D. Sasoon & Co.
        Ltd. v. Commissioner of Income Tax (1954) 26 ITR 27(SC), it is
        seen that the Assessees had not served the entire period of five years
        and had, therefore, not awarded emoluments in the sums paid to each
        of them. In other words, the entire income could not be said to have
        accrued to the Assessee as the Assessee had not created a debt or a
        right to receive the payment.

        (ii) Accounting Standard 9 (AS 9`) issued by the Institute of
        Chartered Accountants of India (ICAI`) which talks of recognition of
        revenue in the rendering of services was relevant. It specifies that in
        the proportionate completion method, the revenue is recognised
        proportionately by reference to the performance of each act. In case of
        service contracts the revenues are recognised on proportionate basis.

        (iii) Relying on the decision in Commissioner of Income Tax v.
        Dinesh Kumar Goel (2011) 331 ITR 10 (Del), it was held that the
        amount received by each of the Assessee has to be proportionately
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 14 of 28
        spread over five years.


26. The orders of the AO and the CIT (A) were accordingly set aside and the
appeals were allowed.


Question of law
27. While admitting these appeals on 23rd January 2014, this Court framed
the following question of law in each of the appeals:
         Did the Tribunal fall into error in accepting the assessee's
        contention that the sum of Rs. 1,21,83, 494/- received by him
        and offered in AY 2006-07 as income to be spread over a
        period of five years on the basis of an agreement entered into
        with M/s. UG Hospital Private Limited?

28. A similar question as above framed in the other two quantum appeals on
9th January 2015 (Jyoti Khera) and 25th May 2015 (Raman Khera).


29. In the penalty appeal in the case of Mr Aman Mehra, i.e. ITA 21/2015,
while admitting the appeal on 9th January 2015, this Court framed the
following question of law:
        "Did the ITA T fall into error in deleting the penalty in the case of the
        assessee in the circumstances of the case?"

30. However, in the penalty appeal in the case of Mr Raman Mehra i.e. ITA
Nos. 476 of 2014, no question as such was framed and the matter was
simply kept for hearing along with the quantum appeals.


31. However, it should be noted that as far as the penalty proceedings were

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 15 of 28
concerned, the CIT (A) allowed the appeals of the Appellants by separate
orders dated 22nd May 2013 on the ground that in the quantum proceedings
the ITAT had deleted the additions made in the AY 2006-07. As a result the
appeals were allowed and the penalty orders passed by the AO on 13th
March 2012 and 30th March 2012 under Section 271(1)(c) of the Act was set
aside.


Submissions of counsel for the Revenue
32. This Court has heard the submissions of Mr. Zoheb Hossain, Mr. Ashok
K. Manchanda and Mr. Raghvendra Singh, learned counsel appearing on
behalf of the Revenue and Mr. M.P. Rastogi, learned counsel for the
Assessee.


33. The submissions on behalf of the Revenue could be summarised as
under:
         (i) There was no agreement entered into between the Assessees and
         UGHPL at the time of making of the payment on 12th December
         2005. Further although the letter dated 12th December 2005 to Dr.
         Aman Khera by UGHPL termed the amount as being in advance for
         the abovementioned appointment it was clear that what was paid was
         consolidated amount` from which Rs.6,83,494 was deducted as TDS.


         (ii) The payment had in fact to be made by UGHPL to the Trust under
         the agreement dated 31st October 2005. The payment made to the
         Assessees was, therefore, not related to any specific service. There
         was no live link between the payment made by UGHPL and the
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 16 of 28
        services rendered by the Assessees.


        (iii) The Assessees did not maintain any books of accounts. If indeed
        the Assessees had maintained the accounts on cash basis, the question
        of accrual of income or the right to receive income or the creation of a
        debt justifying the income received did not arise. The question of
        spreading over said income over five years also did not arise.


        (iv) The decision in Commissioner of Income Tax v. Dinesh Kumar
        Goel (supra) was distinguishable on facts. The decision in E.D.
        Sasoon & Co. Ltd. v. Commissioner of Income Tax (supra) was
        relevant for companies and not individual Assessees. The matching
        principle or AS-9 could not be pressed into service when the
        assessment was of individuals.


        (v) The Assessees failed to produce vouchers or any books of
        accounts and, therefore, the AO is justified in treating the entire
        income received by the Assessees to be taxable in the relevant AY. In
        the absence of books of accounts, the presumption was that the
        Assessees were following the cash system of accounting. The receipts
        were liable to be taxed in the year in which they were actually
        received.


        (vi) The CIT (A) ought not to have permitted additional evidence to
        be produced at the stage of appeal since none of the conditions under
        Rule 46A was satisfied. Reliance was placed on the decision in
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 17 of 28
        Commissioner of Income Tax v. Manish Buildwell (2012) 204
        Taxman 106 (Delhi).

Submissions of counsel for the Assessees
34. On behalf of the Assessees it was submitted by Mr. M.P. Rastogi,
learned counsel, as under:
        (i) Under Section 4 of the Act, tax was chargeable on the total income
        which in terms of Section 5 included income derived from three
        sources (a) income received or deemed to be received in India (b)
        income that accrues or arises or deemed to accrue or arise in India (c)
        income that accrues or arise outside India.


        (ii) The liability of tax was attracted at the stage of accrual of income
        and at the stage of receiving income. To begin with there was an oral
        agreement that the Assessees would render services to UGHPL for
        five years. Therefore for the AY in question, the Assessees declared
        professional income from UGHPL in proportion to the period i.e.
        January to March 2006 for which each of them rendered services. The
        emoluments were spread over and declared in the subsequent years in
        proportion to the period of services rendered in those very years. This
        has been acknowledged in the orders of the CIT (A) as well as the
        ITAT.


        (iii) With the Revenue having processed the returns filed by the
        Assessees for the AYs subsequent to the AY in question i.e. 2006-07
        in which the proportionate amount received from the UGHPL was

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 18 of 28
        offered to tax, which has been accepted by the Revenue, an exception
        cannot be made for the AY in question by treating the entire amount
        received to tax. Reliance is placed on the decision in Parimisethi
        Seetharamamma v. CIT (1965) 57 ITR 532 (SC) in support of the
        proposition that all incomes are receipts but all receipts are not
        income. It is only receipts which bear the characteristic of income that
        can be taxed.


        (iv) Relying on the decision in E.D. Sasoon & Co. Ltd. v.
        Commissioner of Income Tax (supra) it was submitted that in the AY
        in question in relation to bringing the entire amount received from
        UGHPL to tax it would have to be shown that the Assessee must have
        either rendered all the services or created a debt in his favour in the
        AY in question. In other words, unless it was shown that he has
        brought into existence a debt or a right to receive the payment, it
        cannot be said that the income was accrued to him.


        (v) AS-9 issued by the ICAI recognised that revenue from service
        transactions should be proportionate to the period during which the
        services were rendered and computed either by the proportionate
        completion method or by the completed service account method.
        Under the proportionate completion method, revenue is recognised
        proportionate to the performance of each act and when services are
        provided by an indeterminate number of acts over a specific period of
        time. In such an event, the revenue is recognised on a straight line
        basis over the specific period. Reliance is placed on Commissioner of
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 19 of 28
        Income Tax v. Dinesh Kumar Goel (supra) where on facts it was
        held that since the services of a coaching institute had to be rendered
        in two years, the entire fee received had to be spread over in two years
        and assessed proportionately. Reliance is also placed on the decision
        of this Court in Commissioner of Income Tax, Delhi v. Om Prakash
        Khaitan 62 taxmann.com 324 (Del) where the monies received by
        lawyers from clients were treated as income in the hands of lawyers in
        the year in which the money is received since some portion of the
        monies were to meet out-of-pocket payment in the conduct of the
        case.


        (vi) In any event, the Assessees having offered the proportionate
        income in subsequent AYs, there was no justification to bring the
        entire amount received from UGHPL in this year i.e. AY 2006-07.
        Reliance is placed on the decision in Commissioner of Income-Tax v.
        D.C. Gandhi Associates (1994) 210 ITR 929 (Guj) where it was held
        that even in a cash system of accounting, income accrues upon
        rendering of service. Reference was also made to the decision in
        Commissioner of Income-tax v. Winner Business Link (P). Ltd.
        [2015] 55 taxmann.com 468 (Guj) where the Gujarat High Court
        following the decision in Commissioner of Income Tax v. Dinesh
        Kumar Goel (supra) held that the entire receipt of the membership
        fees in the business of discount cards was required to be spread over
        the period of membership and income had to be recognised
        proportionately.


ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 20 of 28
        (vii) Whether it is a mercantile or cash basis of accounting, income
        would be said to have accrued only with the rendering of service.
        Income could be, therefore, sought to have accrued in the proportion
        to the services rendered to the Assessees over a period of five years. It
        is submitted that the payment made by UGHPL to the Trust under the
        agreement dated 31st October 2005 was an independent transaction
        not connected with the Assessees. It is asserted that UGHPL engaged
        the services of the Assessees on account of their qualification.


        (viii) The alternative plea before the CIT (A) was that if the entire
        income is to be taxed in this year then the tax already paid on the
        proportionate amount in the subsequent years should be accounted for
        and in that event the expenditure claimed in the subsequent years
        should be allowed in full. Emphasis was placed on the matching
        principle and the decision in Calcutta Co. Ltd. v. Commissioner of
        Income Tax (1959) 37 ITR 1 (SC).


35. In response to the above plea, it was submitted by Mr. Raghvendra
Singh, learned counsel appearing for the Revenue, that the matching
principle will not apply in the case of individuals. It is relevant only in the
limited context as explained by the Supreme Court in Taparia Tools v. Joint
Commissioner of Income Tax (2015) 372 ITR 605 (SC). He further
submitted that expenses of later years cannot be allowed in this year. Since
there was admittedly only a cash system of accounting the concept of
accrual of income did not arise in the facts and circumstance of the case.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 21 of 28
Analysis and reasons
36. The ITAT appears to have proceeded on the basis that since the services
were to be performed by each of the Assessees for over a period of five
years, the amount received from UGHPL had to be spread over a period of
five years in proportion and for this purpose the ITAT referred to the
decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax
(supra).


37. The Court finds that the decision in E.D. Sasoon & Co. Ltd. v.
Commissioner of Income Tax (supra) was on an entirely different set of
facts. There the Assessee company was a managing agent of other
companies i.e. E.D. Sassoon United Mills Ltd., Elphinstone Spinning &
Weaving Mills Company Ltd. The Assessee company agreed to transfer the
managing agency of the said companies to M/s. Agarwal & Co.,
Chidambaram Mulraj & Co. Ltd. and Rajputana Textile (Agencies) Ltd. by
separate letters. The shareholders of the respective companies also agreed
for the transfer. Formal deeds of assignment and transfer were duly
executed. It is in the above context that it was held that the remuneration or
commission was given by the transferee company to the managing agents
only on completion of a definite period of service. It was held that such
remuneration constituted a debt only at the end of period of service and no
remuneration or commission was payable to the managing agents for broken
periods.


38. The above decision is of no assistance to the Assessees. In the first place
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 22 of 28
the entities involved in the above decision i.e. the managing agencies had
been transferred from one company to another. The question of any right
accruing only at the completion of a definite period which existed in the
decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax
(supra) does not find place here. There is nothing to show that the Assessees
would have to return the monies if they did not perform the services. In fact
the agreement between the Trust and the UGHPL indicated that it is the
Trust which is saddled with the responsibility of making good the losses.


39. The mere terming of the money received as advance` will not per se
render the payment as such when in fact it admittedly was paid upfront as a
lump sum amount on which TDS was been deducted as such for the period
1st January to 31st March 2006. The decision in Commissioner of Income
Tax v. Dinesh Kumar Goel (supra) is distinguishable on facts. There the
issue was about collecting fees from students for coaching classes, payable
for two years at one point in time. There the Court noted that the amount had
to be treated as refundable even though there was no clause as such since
complaints could be filed in the consumer forum by the students. The spread
over of the receipt over two years was specific to the facts of the case which
involved a coaching institute offering courses for two years. There could be
no comparison of those facts with the case on hand. Here the payments were
irrevocable and non-refundable.





40. There is merit in the contention of the learned counsel for the Revenue
that since admittedly no books of accounts were maintained by any of the
three Assessees it had to be presumed that they followed the cash system of
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 23 of 28
accounting. In that view of the matter, the question of income accruing or
the right to earn income accruing only upon the performance of a service at
the end of a period would not arise.


41. As rightly pointed out by learned counsel for the Revenue, the matching
principle or the application of AS-9 issued by the ICAI which deals with the
principle of revenue recognition appear to apply only to companies and not
individuals. Once it is clear that it is the cash system of accounting that is
followed, the further question whether the sum received in one year could be
spread over several years, and that too in the absence of any agreement at
the time of such payment would not arise. The ITAT could not have
overlooked the fact that the agreements produced before the CIT (A)
regarding engaging the Assessees as hospital consultant was more than four
years after the amount had been paid. Such agreements were not reliable
pieces of evidence.


42. Mr. Rastogi repeatedly stressed that the proportionate income disclosed
by each of the Assessees in the years subsequent to the AY in question was
in fact offered to tax and therefore, there cannot be a double taxation of the
same amount.


43. While it may be true that the Assessees had offered to tax in the later
AYs the sum proportionate to the period of service, the fact remains that the
entire sum was received upfront in the year in question and TDS was also
deducted on that basis. The agreements purportedly entered into between
each of the Assessees and UGHPL was a document drawn up four years
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 24 of 28
after they received the entire remuneration upfront in December 2005.
Consequently, the Court is of the view that the ITAT erred in concluding
that the sum received in each of the AYs in question could be spread over
five years on the basis of the subsequent agreements dated 15th June 2010
between the UGHPL and the Assessees.


44. Significantly, what the Trust was being paid was only a monthly
payment whereas over a sum of Rs.4 crores as lump sum payment was made
to the Assessees. The questions raised by the CIT (A) do not appear to have
been satisfactorily answered by the Assessees. In the facts and
circumstances, the Court is of the view that the CIT (A) was right in
affirming the order of the AO to the extent of bringing the entire amount
received by the Assessees to tax in the year in question.


45. For the aforementioned reasons the question framed is answered in the
affirmative i.e. in favour of the Revenue and against the Assessees.


Consequential directions
46. Mr. Rastogi then made an earnest plea for directions to be issued
to the AO to take into account, while giving the appeal effect to this
order, the fact that each of the Assessees having paid tax on the
proportionate income over the subsequent AYs.


47. From the side of the Revenue, a reference is made to Section 240
of the Act which reads as under:
        240. Refund on Appeal, etc. ­ Where, as a result of any order
ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 25 of 28
        passed in appeal or other proceeding under this Act, refund of
        any amount becomes due to the Assessee, the Assessing
        Officer shall, except as otherwise provided in this Act, refund
        the amount to the Assessee without his having to make any
        claim in that behalf:

        Provided that where, by the order aforesaid,--

        (a) an assessment is set aside or cancelled and an order of fresh
        assessment is directed to be made, the refund, if any, shall
        become due only on the making of such fresh assessment;

        (b) the assessment is annulled, the refund shall become due
        only of the amount, if any, of the tax paid in excess of the tax
        chargeable on the total income returned by the assessee.

48. The Court would like to observe that although the Assessees may have
offered the proportionate sum to tax in the subsequent AYs, it will not
change the correct legal position that where accounts are maintained on cash
basis and there is nothing to show that there was any agreement about
spreading the income over several years, the entire amount received should
be brought to tax in the year of the receipt. As regards the expenditure of the
subsequent years, where it has actually been incurred, it should be allowed
in that year. The question of allowing the expenditure of later years in the
year under consideration does not arise. There is no question of any
matching principle or application of AS-9 in this instance.


49. Section 240 of the Act does envisage a situation where an AO has to,
while giving an appeal effect to the order of a Court, account for tax that
may have been paid in the subsequent years. Nevertheless, the Court does
not find any reason to interfere with the order of the CIT (A) to the extent

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 26 of 28
that he has disallowed expenditure at an estimated 35% beyond what has
already been allowed in relation to the business income in the returns of the
Assessees. There is indeed no basis for any estimation of expenditure with
the Assessees not maintaining accounts and being unable to produce any
vouchers or bills as proof of any expenditure.

50. Accordingly, the questions framed in the case of quantum appeals, i.e.
ITA Nos. 653 of 2012, 19 of 2015 and 326 of 2015, are answered in the
affirmative, i.e., against the Assessee and in favour of the Revenue. The
ITAT`s order is accordingly set aside and the order of the CIT(A) is
sustained.

Penalty appeals
51. As far as the penalty appeals are concerned, since the CIT (A) set aside
the penalties imposed by the AO only on the ground that the ITAT had
deleted the addition, it is necessary for the Court as a result of setting aside
the order of the ITAT to remand the appeals concerning the penalty issue to
the file of the CIT (A).


52. Accordingly, the orders dated 22nd May, 2013 of the CIT (A) and later
affirmed by the ITAT in the penalty proceedings, which are challenged in
ITA Nos. 476/2014 and 21/2015 are hereby set aside and the penalty appeals
are restored to the files of the respective CIT (A) for a fresh decision in
accordance with law.


53. The appeals are disposed of in the above terms but in the facts and

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015   Page 27 of 28
circumstances with no order as to costs.

CM No. 8784/2015 in ITA 326/2015 (for condonation of delay of 574
days in re-filing the appeal)
54. Although the delay in re-filing the appeal is extraordinary, considering
that this and the two connected appeals arise from a common impugned
order of the Income Tax Appellate Tribunal (ITAT`), the delay is
condoned.


55. The application is allowed.

                                                                    S.MURALIDHAR, J




                                                                    NAJMI WAZIRI, J
AUGUST 03, 2016
dn




ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015        Page 28 of 28

 
 
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