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  82 ITR 464 (SC);
(2) Dr. K. George Thomas v. CIT  156 ITR 412 (SC);
(3) Baghapurana Co-operative Marketing Society Ltd. v. CIT  178 ITR 653 (P & H);
(4) Bedi & Co. (P.) Ltd. v. CIT  144 ITR 352 (Kar.);
(5) CIT v. Sandersons & Morgans  75 ITR 433 (Cal.);
(6) Parimisetti Seetharamamma v. CIT  57 ITR 532 (SC).
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.
(3.) 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:-
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.;