Trident Shipping Agencies Ltd. Vs. Joint Commissioner of Income Tax - Court Judgment

Excerpt:
1. the present appeal has come up out of cit(a) order no. cit(a) ooc-1 dc. 1(3) it 182/03-04, dt. 21st oct., 2004, on the following grounds of appeal: (i) regarding addition of rs. 13,26,78,581 made under section 68 of the it act; (ii) addition of rs. 3,64,235 on account of entertainment under section 37(2); (iii) addition of rs. 4,06,762 representing the medical cost of treatment of wife of ceo; and both the parties were heard regarding the issues raised in this appeal and its legal implications.2. the facts of the case, briefly, are that the appellant-company, m/s trident shipping agencies ltd. (tsal), were shipping agents for a foreign company called m/s nedlloyd lines (nl) of rotterdam. in terms of the agreement entered into between the two companies effective from 1st feb., 1986, the appellant-company was to act as the agent of nedlloyd covering the territories of bombay, western india, pune, ahmedabad, indore, and kandla, and northern india covering delhi, ludhiana, kanpur, varanasi, jodhpur, jaipur, jalandhar and amritsar.the agent's job was to procure cargo for the principal from the above places for loading and unloading the ships of nl and their transportation to and from the territories indicated above. the agent was responsible for handling all matters connected with shipping, i.e., apart from loading and unloading of goods, it was also required to obtain port clearance and transact with the customs authorities.3. as per p. 5 of the terms of agreement, the appellant was entitled to commission only, at rates varying from 1 to 2.5 per cent on various items of work covered under the agreement. in addition, the appellant was also entitled to reimbursement for certain types of office expenditures specified in the agreement. the agreement also stipulated that the agent was not to engage in any other business activity which would come in conflict with the agency work.4. the agent had to deal with a large number of customers covering a very wide territory, i.e., whole of north india and west india. apart from the functions outlined in the preceding paragraph, the agent was also required to stuff and de-stuff containers, execute bonds in favour of customs authorities in respect of imported containers in which goods are received and other miscellaneous activities. on these activities, which were incidental to the agency business, commission was not payable by the principal. the appellant had to furnish guarantee to the customs authorities for the imported containers as under the customs regulations the imported containers had to return to the port of origin within a period of six months. in the event of their failure to reach the port within the stipulated period, the appellants were liable to be charged custom duty on them. similarly, if the containers got damaged while in transit, the appellants were to be personally responsible for the loss and damages. in view of these additional risks covered by the appellant on behalf of the principal, it was the usual practice for the appellant to seek advance payments from the consignee/consignor, for adjustment against the actual expenditure incurred subsequently. the appellant-company usually kept a cushion and collected a little higher amount to take care of unanticipated expenditure in future. these monies were held in trust for and on behalf of the principal and were accounted for in the principal's account.5. as per the agreement, the appellant-company was required to furnish to the principal weekly statements containing information of the freights collected, port trust charges, taxes paid to the customs and it departments. it was not required to report to the principal the deposits collected by the appellant-company to meet other expenses not connected with the above. these deposits, most of the time in excess of estimated expenditure, were collected to settle liabilities which could arise after the transaction with the particular customer had concluded.many times the customs authorities demanded extra duty, demurrage and penalty, etc. long after the customer had concluded transaction with the appellant.6. over the period from 1986 to 1997, the running balances in this account came to rs. 17.25 crores. the opening balance in the account in this year was rs. 14.71 crores.7. on 2nd april, 1998, the agency agreement between the appellant and the principal company, nl was terminated. an mou signed under which the appellant-company paid rs. 5.78 crores to the principal from the account standing in the name of the principal. also, as per the mou, the new agents took over contingent liabilities to the extent of rs. 9.57 crores. after this settlement all uncertainties ceased and since it was no longer necessary to keep any cushion for any anticipated liability, the appellant-company brought into its p&l a/c the residual amount of rs. 9.94 crores from the above account and offered it for taxation in the asst. yr. 1999-2000.8. during the course of the assessment proceedings, the ao wanted confirmation of balance in the sundry creditors account between the applicant-company and the principal, m/s nedlloyd. m/s nl in a letter reported that the balance outstanding against the appellant-company as on 1st april, 1997, was rs. 3.98 crores as against rs. 17.25 reported by the appellant-company. the ao, therefore, added the difference between the two, amounting to rs. 13.26 crores in asst. yr. 1997-98.the ao also disallowed certain other claims such as rs. 3.64 lakhs on account of entertainment expenses and rs. 4.06 lakhs expenditure incurred for reimbursement of medical expenses of its ceo. the appellant thereafter went up in appeal before the cit(a). the learned cit(a) vide his ex paite order dt. 27th may, 2002, dismissed the appeal on account of the appellant's alleged failure to comply with his notice for hearing. the appellant thereafter came in appeal before the tribunal, bombay bench, and the 'd' bench by order dt. 2nd dec, 2002, in ita no. 4575/mum/2002 after hearing the rival submissions passed the following orders: "we, therefore, set aside the impugned order of the learned cit(a) with a direction to him to record a clear finding regarding the assessment year in which the impugned addition is liable to be made, that is, in the asst. yrs. 1997-98 or 1999-2000 and to determine the quantum of addition to be made, if any, after allowing reasonable opportunity of being heard to the parties. he shall also record his findings as to the allowability or otherwise of the expenses to the extent of rs. 9,10,889 under s. 32(2) of the act." 9. the cit(a) in pursuance of the directions contained in the order of the tribunal as above, passed his order no. xxi/dc.1(3)1t 182/03-04 on 21st oct., 2004, against which the appellant has come up in the present appeal before us.10. mr. s.k. tulsiyan, advocate, who appeared on behalf of the appellant, submitted before us a paper book containing written submissions and submitted that the learned cit(a) has erred in law and facts in confirming the orders of the learned ao.11. he first took us through the facts of the case and explained that owing to improper appreciation of the facts of the case, the additions have been confirmed by the learned cit(a). according to him, the appellant was only an agent of the principal and the entire activities including receipt of money from various customers and their disbursement was entirely on account of the principal. according to him, the account which was maintained on behalf of the principal could be analysed from two angles, i.e., (1) the weekly statements which sent to the principal containing receipts and expenses incurred on activities covered in the terms of agreement on which commission was payable, and (2) and the other receipts and expenses covering several ancillary activities connected with the execution of agency work for (which) payments were taken from the customers to meet specified liabilities arising from time-to-time. on these activities which were incidental to the agency business, no commission was payable by the principal. it was, therefore, natural that when reconciliation was made between the accounts maintained by the principal and by the appellant, there was discrepancy. it had to be remembered that amounts were also collected for carrying out various activities not required to be reported to the principal. under the agency agreement, it was neither required nor the assessee was obliged to report the other part of the balance amount to the principal. these were essentially collected, as stated earlier, to cover the sums guaranteed in bonds with the customs authorities, penalties which were levied or excess duty or demurrage charged subsequent to settlement of accounts with the customer.12. mr. tulsiyan countered the observations of the cit(a) point by point and explained the position. in the first place, referring to the observation made by the cit(a) at para 7, p. 7 of his order that it was incumbent on the appellant to reconcile the differences of the two balances, i.e., one reported by the appellant and the other by the principal, shri tulsiyan submitted that as explained earlier, the reconciliation can be made only when both segments of the accounts are taken into consideration, i.e., one with which the principal was directly involved and on the basis of which commission was received by the appellant and the other which was a closely connected activity on behalf of the principal in which funds had to be kept to take care of unanticipated expenses which could be taken care of, even long after the customer had left. that these were not imaginary liabilities has been proved by the fact that the new agent had taken over liabilities to the extent of rs. 9.57 crores as per mou signed on 2nd april, 1998.besides this, the appellant had met expenses to the extent of rs. 1.52 crores in asst. yr. 1998-99 and had paid rs. 5.78 crores to the principal in the asst. yr. 1999-2000 from this very account. the total of these come to rs. 16.87 crores, against the sum of rs. 17.25 crores withheld by it up to the asst. yr. 1997-98. this squarely proved the bona fides of the appellant. but for the liabilities taken over by the new agent, the appellant could not have been in a position to offer rs. 9.94 crores for taxation in the asst. yr. 1999-2000.13. regarding the refusal of the cit(a) to allow the appellant's application under r. 46a on the grounds that sufficient evidence was not produced to prove the contention that entries in the accounts were only through crossed cheque/account payee cheque/draft, it was submitted by shri tulsiyan that the appellant in its application itself vide pp. 274 and 275 of paper book had clearly indicated the nature and source of the credit in the account in question and had all the supporting documents for each and every entry in the account. since the entire material was voluminous, only sample copies had been furnished to establish genuineness of the claims made by the appellant. the additional evidence produced under r. 46a were copies of the general ledger for the period 1st march, 1997 to 31st march, 1997, of nl, voyage expense, bpt deposits and copies of bills of lading, etc. in spite of the voluminous documentary evidence submitted before him, the cit(a) had chosen to reject the claim of the appellant summarily.14. regarding cit(a)'s refusal to accept the contention that these balances belonged to the principal and were properly accounted for in that account, on the grounds that these should have been credited in the account of the customers, shri tulsiyan submitted that certain expenses which the appellant had to incur in carrying the agency work with which the principal was not involved, it had to collect additional money from all customers. but, since the business was being carried on exclusively on behalf of the principal, all accounting entries had to be made in the account of the principal. it is the credit balances from these accounts which the appellant had been carrying forward from 1986 to 1998. as explained earlier, these amounts were actually meant to take care of post-settlement expenses of the customer, such as covering the amount for the bonds signed with customs authorities, additional demurrage charges levied later, penalties imposed later, etc., for which the agent was wholly and exclusively liable. the appellant always apprehended that if it did not withhold the amount it would create problems of recovery from the customers who had already settled their accounts.15. regarding the clt(a)'s observations that the actual amount of difference between nl account and appellant account was rs. 13.26 crores as against the claim of the appellant of rs. 9.94 crores, it was submitted by shri tulsiyan that the learned cit(a) failed to take note of the fact that that the credit balance as on 31st march, 1997, rs. 17.25 crores less expenditure incurred on behalf of the principal was rs. 1.52 crores in the financial year 1997-98 and less amount paid to the principal on 2nd april, 1998, rs. 5.78 crores. that left a balance of rs. 9.94 crores only which had been offered by the appellant for assessment in the asst. yr. 1999-2000 and voluntary self-assessment tax had been paid on the same amount. it was also pointed out by shri tulsiyan that the amount was assessable only in the asst. yr.1999-2000, since the final settlement was arrived at in the asst. yr.1999-2000 when all uncertainties ceased. the figure of rs. 13,26,78,581 taken by the cit(a) for assessment in the asst. yr. 1997-98 was also wrong as it violated established accounting principle. in adopting this figure he has deliberately ignored to take into account rs. 14.71 crores which was the opening balance in the same account. as per section 4 of the it act, it is the income which accrued and had arisen during the previous year which could be assessed.16. shri tulsiyan, discussing the observation of the cit(a) regarding the existence of contingent liabilities as on 31st march, 1997, explained that as per clause (b) of the agreement, it was the responsibility of the agent to bear the entire del credre risk. thus, any extension of credit to shippers or others in respect of freight or any other amount due to the company was the sole responsibility of the agent. thus, acting as an del credre agent the appellant credited to the account of its principal all the amounts related to this risk which was on him to pay and was necessary to cover the huge risk incurred by way of expenditure on port charges such as short lading, late delivery, damage to consignment and penalty thereon, etc. the appellant was, therefore, forced to collect these deposits from the customers to insulate itself against such charges which could be imposed on it subsequent to settlement of accounts of the customers. therefore, the cit(a) was not justified in ignoring the claims of the appellant by observing that the claims were extremely contingent in nature and were, therefore, not acceptable. the deposits taken by the appellant varied from customer to customer and meeting the expenses from the advance deposit collected and finally carrying over the balance of the deposit was very much within the scope of the activity which the applicant had to perform on behalf of the principal. the conclusion of the cit(a) was, therefore, completely misplaced. in coming to this wrong conclusion. the cit(a) had failed to take note of section 148 of the customs act, 1962, which imposes liability on an agent and on whom penalties can be imposed and. from whom confiscation of goods can be made for all acts done by him or on behalf of the principal. thus, all duties and penalties leviable by the customs authorities were payable by the agent if originally there was short levy or incorrect claim.shri tulsiyan further stated that, for the purpose of indemnifying timely return of container it had to execute bonds of several crores of rupees with the customs authorities. he cited the example of two indemnity bonds, which the appellant had executed aggregating to rs. 75.26 crores which were dt. 3rd feb., 1997, and 19th dec, 1997. this was available at sch. c of the mou signed in april, 1998.17. objecting to the refusal on the part of the cit(a) to accept the figure of rs. 9.94 cores as the correct amount assessable in the asst.yr. 1999-2000, shri tulsiyan explained that the following facts clearly show why the applicant's claim should have been accepted by the cit(a).the cessation of all uncertainties and the quantification of the surplus came in asst. yr. 1999-2000 after the mou was signed on 2nd april, 1998. till this date the uncertainty always existed as to the amount which would be payable by the appellant. it is on this date it was agreed that the foreign company was to be paid rs. 5.78 crores as per sch. a of the mou and the new agent was to takeover rs. 9.57 crores of contingent liabilities as per sch. d and f of the mou. out of the balance standing as on 31st march, 1997, the applicant had already made payment to the extent of rs. 1.52 crores in the asst. yr. 1998-99 on "arious items, like port authorities, claims, etc. therefore, the remaining balance of rs. 9.94 crores which could be finally ascertained on 2nd april, 1998, was due for inclusion in the income of the appellant for the asst. yr. 1999-2000. in view of this, the cit(a) was not justified in rejecting the claim of the appellant that a sum of rs. 9.94 crores (rs. 9,94,51,784) offered by the appellant was assessable in the asst. yr. 1999-00.18. shri tulsiyan further explained that from the order of the cit(a) it appeared as if he was not sure whether to tax the amount as business income under section 28 or under section 41(1) as income arising out of cessation of liability or under section 68 as income from undisclosed source. this as evident from the fact that in taxing the amount rs. 13.26 crores, he has alternatively applied all three sections to justify his order. he submitted that section 41(1) applied only when there is remission or cessation of a liability which had been allowed as a deduction in its assessment in an earlier year. in the case of the appellant, there was neither any such claim nor the ao allowed any such deduction. therefore, application of section 41(1) to the appellant's case was wholly misplaced. similarly, application of section 68 was also uncalled for since the entire receipts had come through crossed and account payee cheques and they had been properly accounted for in the regular accounts of the appellant. these were trading receipts/advances from the customers. therefore, by no stretch of imagination, they could be covered under section 68.19. shri tulsiyan invited our attention to various legal provisions and decisions of the courts on the basis of which the appellant's claim for inclusion of the balance amount of rs. 9.94 crores was to be assessed in the asst. yr. 1999-2000. he explained that section 4 of it act brought into tax only the income accruing or arising in any previous year. no receipt could be converted into income in a particular assessment year unless that receipt can be attributed to the corresponding previous year. similarly, the receipt will acquire the attribute of profits or gain of a business under section 28 of the act only when all outgoings from such receipts have been accounted for and all uncertainties and claims against the receipts had ended. the appellant-company received the advance deposits from the customers in its fiduciary capacity as an agent of the principal and the amounts were held as a trust. at the time of the receipt, the advances were kept for services to be rendered in future and until such services had been rendered, accounts settled and uncertainties of future claims ceased, they could not constitute income. the learned counsel drew our attention to some of the decisions of courts in support of his arguments. he referred to the case of morley v. tattersall 22 tax cases 51 (ca) : (1939) 7itr 316 (ca). according to him, here the viewpoint of the appellant had been clearly vindicated. in a. recent supreme court's ruling in travancow rubber & tea co. ltd. v. cit , wherein the decision of the supreme court in cit v. karamcahand thapar was explained with reference to the ratio laid down "in morley (inspector of taxes) v. tattersall (1939) 7 itr 316 (ca), it had been held that the quality and nature of a receipt for income-tax purposes were fixed once and for all when the subject of the receipt would be received and that no subsequent operation could change the nature of the receipt. however, in cit v. karam chand thapar , the supreme court held that the proposition enunciated in tattersall's case (supra) was absolute and that in given cases, amounts which were not received initially as trading receipts could eventually be regarded as business income by reason of subsequent events. the subsequent events must be such that a different quality is imprinted on the receipt. however, the cancellation of a sale of capital assets would not be such a subsequent event so as to change the nature of the receipt of the forfeited amounts".20. the learned counsel drew our attention to the case of pioneer consolidated company of india ltd. v. cit quoted with approval by the supreme court in cit v. tv. sundaram ayengar & sons ltd. in which the allahabad high court had held that the unclaimed deposits of the clearing and. forwarding agent due to the customers were assessable when they were transferred to the p&l a/c and not when they were realized.21. similarly, he pointed out that the calcutta high court even went to the extent of holding that unclaimed excess premium collected by an insurance agent was not taxable as its income at all even in the year the sum was transferred to the credit of its p&l a/c as miscellaneous income vide bengal & assam investors ltd. v. cit . he also drew our attention to the decision of bombay high court in the case of cit v. ml. bhapkar which took a similar view of excess octroi collected by an assessee from its customers. finally, the learned counsel cited a case of cit v. t.v. sundaram ayengar & sons ltd. (supra) where the supreme court had at p. 353 of its order had held: "if a comrnonsense view of the matter were taken, the assessee because of the trading operation had become richer by the amount which it transferred to its p&l a/c. the moneys had arisen out of ordinary trading transactions. although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. by lapse of time, the claim of the deposit became time-barred and the amount attained a totally different guality. it became a definite trade surplus".22. shri tulsiyan also emphasized upon the fact that the position of acceptance of advances from the clients of the principal and keeping the amounts in the credit account in the name of the principal (as the appellant does not maintain separate accounts in respect of the clients) has been accepted by the department since the very beginning of the business of the appellant, i.e., 1986. the appellant has been filing its returns of income since asst. yr. 1988-89 and in none of the earlier years this method of accounting followed by the appellant in a consistent manner has been questioned. shri tulsiyan, admitting that strictly speaking res judicata not applying to income-tax proceedings but emphasized at the same time that the fundamental aspect permeating through several years having been accepted by the parties to the dispute, no attempt should be made to disturb the position. in support of this contention, he relied upon the supreme court decisions in cit v. radhasoami satsang and berger paints india ltd. v.cit . he thus argued that there is no warrant in choosing any particular intermediate year like asst. yr. 1997-98 and suddenly trying to book the difference between the balances in the accounts of the two parties to tax in that year by disturbing the accepted position and allowing the difference to continue till the matter is finally settled, in this particular case in asst. yr.1999-2000.23. referring to three other grounds of appeal, i.e., addition under the headings entertainment expenses and disallowance of medical reimbursement made to ceo and for charging interest under section 234b, shri tulsiyan pointed out that the cit(a) was not justified in disallowing the above claims the alleged entertainment, expenses were not entertainment expenses but expenditure incurred in hiring cars and on food and beverages served during seminars and also on the advertisement and publicity expenses. the detailed list of expenditure provided by the appellant and reproduced in the ao order would clearly demonstrate that the entire expenditure of rs. 10.8 lakhs was incurred fully and exclusively for the purpose of business. similarly, the claim of rs. 4,06,762 incurred as expenditure for the treatment of the wife of the chief executive officer of the company should have been fully allowed. it was necessary for the company to reimburse such expenses incurred by the employee of the company and such expenditure was wholly and exclusively necessary for the purpose of company business. the ao had not doubted the genuiness of the expenditure incurred by the employee's wife. the employees were entitled for reimbursement for expenses incurred for their own and family's treatment and the company was duty-bound to reimburse such expenditure. the expenditure was, therefore, allowable. finally, shri tulsiyan objected to the charging of interest under section 234b of the it act. he argued that this should not have been charged as the direction to charge such interest was not there in the assessment order passed by the ao. this was taken as an additional ground before the cit(a) and the cit(a) refused to entertain the ground on the plea that the appeal which was before him was on limited issues for deciding to quantify the amount appearing in the credit balance and determine the year in which it was to be assessed. therefore, he was debarred from going into grounds beyond the direction of the tribunal. alternatively, he held the view that supreme court's decision in cit v. anjum h. ghaswala. made it mandatory for the ao to charge interest. shri tulsiyan, on the other hand, relied upon the decision of the supreme court in the case of cit v. ranchi club ltd. , where it was held as under: "interest--return of income filed by assessee--notice to produce accounts or documents--interest not leviable for failure to comply with notice--it act, 1961, sections 142(1)(ii)(iii), 234a--interest--specific direction giving reference to section necessary in assessment order--absence of reference to section under which interest to be levied interest not leviable through notice of demand--it act, 1961, sections 156, 234, 234b, 234c--notice of demand--interest not leviable through notice of demand without specific direction in assessment order--it act, 1961, section 156." 24. shri tulsiyan further argued that the matter being a purely legal ground and not requiring the settlement of any new facts, the same could be raised at any time by the appellant. in this connection, reliance was placed on the decision of the supreme court in the case of national thermal power co. ltd. v. cit (1998) 229 itr 383 (sc) in which it was held: "appeal to appellate tribunal--powers of tribunal--question of law arising from facts found by it authorities and having a bearing on tax liability of assessee--question raised for first time before tribunal--tribunal has jurisdiction to decide such question--it act, 1961, s 254".25. it was further contended by shri tulsiyan that apart from the non-mention of the charging of the interest, it was to be noted that the assessee-company could not foresee that the ao would make an addition of rs. 13,26,78,581 under section 68 of the act. under section 207 of the it act, 1961, the liability for payment of advance tax arose when the law could expect from a person what was possible. since the addition made by the ao could not be foreseen by the assessee, it could not form part of the total income computed by the assessee for the purpose of the computation of the advance tax and consequently, for the purpose of the charging of interest. moreover, in the view of the submission of the appellant whereby the additions have been challenged as absolutely unjust and incorrect on the basis of the facts of the case, the said charging of the interest should automatically fall through.26. in summing up the arguments, shri tulsiyan concluded that in view of the explanation offered the balance in the nl account appearing as at 31st march, 1997, should be taken as the correct position. the uncertainties and claims on the amount finally ceased on 2nd april, 1998, after the agency was terminated and mou was signed with the principal under which an amount of rs. 5.78 crores was paid to the principal and the new agents took over contingent liabilities to the extent of rs. 9.57 crores. the balance amount, of rs. 9.94 crores was brought into the p&l a/c in the asst. yr. 1999-2000 and was offered for taxation in that assessment year in accordance with ratio of decision given by the supreme court in the case of mr. t.v. sundaram ayengai referred to earlier. the amount is, therefore, assessable in the asst.yr. 1999-2000 only. he added that in any case, there is no scope for disturbing the accepted position in asst. yr. 1997-98 without any genuine particular reason.27. the claims pertaining to expenditure connected with the holding of seminar, business meetings, etc. and the reimbursement of medical expenses to the ceo of the company for the treatment of his wife were clearly allowable in full as they were incurred fully and exclusively for the business purpose. the charging of interest by the ao under section 234b was clearly illegal since the direction to charge such interest had not been given by him in the assessment order. in accordance with the decision of the supreme court in the case of cit v.ranchi club (supra) referred to above the charge is illegal and should be quashed.28. the departmental representatives who argued the case on behalf of the department wholly relied on the order of the authority below. he particularly read out the relevant extract from the order of the cit(a).29. we have carefully considered the rival submissions. according to us, the appellant's plea can be analyzed as under: 30. whether the advance deposits collected by the agent were business receipts of the principal or of the agent 31. from the documents furnished in the paper book by the appellant and the facts narrated in the order of the ao as well as the cit(a), we find that the appellant was working solely as an agent for the principal, m/s nelldloyd. it had no other business except carrying on the agency work on behalf of the principal. by the agreement effective from february, 1986, the agent was required to perform functions specified in clauses (2) to (8) of the agreement which mainly provided for transhipment of cargo from and to the port, loading and unloading of cargo, payment of freight, customs duty and income-tax. for this purpose the appellant-company was entitled to commission bearing from 1 to 2.5 per cent on different items of works and reimbursement of certain office expenses. in performing the work as an agent, as has been explained by the learned counsel for the appellant and also as mentioned in the orders of the ao and cit(a), it had to perform certain ancillary work, such as stuffing and de-stuffing containers, executing bonds for containers with customs authorities, etc. while the appellant was entitled to commission on all the items of work covered under the agreement, for the other work connected with the agency for which it had also to incur expenditure, no. commission was payable by the principal. for example as mentioned in the clause of the agreement, no commission was payable for expenses incurred for stuffing and de-stuffing of containers. the appellant before undertaking the work of a customer on behalf of the principal was collecting in advance certain moneys as advance deposits to cover the expenses which were to be incurred subsequently for the customer. such advances, therefore, constituted business receipts of the principal which were held in trust by the agent. we, therefore, are of the view that the receipts form part of the business receipts of the principal which was held in trust and properly accounted for in the agent accounts of the principal.32. the next point for consideration is at what point of time such receipts partake the character of income in the hands of the appellant according to the ao and the cit(a), since a part of the deposit received by the appellant had not be reported to the principal and there was discrepancy in the balance as reported by the foreign principal, nl and the appellant the entire difference was, therefore, assessable either as business income of the appellant under section 28 or under section 41(1) being remission of liability from the principal alternatively, according to cit(a), as income from undisclosed sources under section 68 of the act. according to the learned counsel for the appellant, section 41(1) did not apply since at no point of time the assessee had made any claim for deduction nor was it allowed by the ao.similarly, section 68 also was not applicable since the advances were business receipts of the principal received and collected by the agent in the course of normal business activity. according to the counsel, the balances have been coming since 1986 and there has been no change in the facts or accounting procedure in the assessment year under consideration. these amounts have been received by cheques and properly accounted for in the accounts of the principal. according to the learned counsel, the lack of awareness on the part of the principal or the failure on the part of the appellant to report the amount could not convert the receipt into income until ail claims against if ceased and uncertainty ended. the appellant remained apprehensive throughout that at any time a customer could come and claim the balance. we agree with this view of the learned counsel. we find that uncertainties relating to claims from the customers as well as principal continued during asst. yr. 1997-98 and upto the asst. yr. 1999-2000, the amount in question could not be brought to tax in the asst. yr. 1997-98.33. next issue is, at what point of time these receipts became income following from the facts mentioned above and relying on the decision of the supreme court in the case of mr. t.v. sundaram ayengar & sons already referred to earlier, we are of the view that the appellant was in a position to quantify the amount of unclaimed surplus as it's income in the asst. yr. 1999-2000 after the mou was signed on 2nd april, 1998. we, therefore, hold that the cit(a) was not correct in holding the view that an amount of rs. 13,26,78,581 was assessable in the asst. yr. 1997-98. even otherwise, strictly from the accounting view also, the amount taken by the cit(a) is not correct. if he was not satisfied with the explanation of the appellant, at the most, an amount of rs. 2,54,61,694 could have been added in asst. yr. 1997-98 after excluding the opening balance. however, since we are satisfied that the unclaimed surplus could be quantified only in the asst. yr. 1999-2000, no amount is assessable in the asst. yr. 1997-98. the department is free to take appropriate action to assess the surplus in the asst. yr.1999-2000, as surrendered by the appellant.34. we also find sufficient force in the other submission on behalf of the appellant that, in any case, there is (no) warrant for the department to suddenly disturb the accepted position about existence of discrepancy between the balances in the accounts of the appellant and its principal in asst. yr. 1997-98. the genuineness of the credit balance in the name of the principal was never called in question in the earlier years. it is, therefore, not for the department to suddenly try to question such genuineness in this year and to bring to tax the difference amount which all along existed in the books of account of the appellant. the supreme court decisions as cited by the learned counsel for the appellant surely support this proposition. from this angle also, there is no scope for making the impugned addition.35. we have carefully considered the submissions of the learned counsel regarding the claim of the appellant for allowing in full the expenses incurred for conducting business seminars, meetings, etc. having regard' to the nature of expenditure incurred, it will be very difficult to clearly demarcate what constitutes entertainment and what constitutes wholly business expenditure when it is incurred in providing food and transportation to the delegates. an element of entertainment cannot be clearly ruled out in such expenditure. in view of this, we are satisfied that expenses as allowed by cit(a) is reasonable. we, therefore, decline to interfere.36. the appellant has claimed allowance of the expenditure incurred in reimbursing the ceo, medical expenses for the treatment of his wife. we have examined the facts brought out in the order of cit(a) and we find that the appellant has nowhere produced evidence to prove that shri n.mahalingam was a regular employee of the company. on the contrary, from the facts brought on record, it appears he was only authorized to operate the bank accounts of the company. unless a person is a regular employee of the company and there is a master and servant relationships, such claims are not allowable. we, therefore, decline to interfere.37. the appellant's last ground of appeal is against charging of interest under section 234b of the act on the ground that the ao did not specifically direct this in his assessment order. we are of the view that supreme court's order in the case of cit v. anjum h. ghaswala (supra) has made charging of interest mandatory. non-mention of the direction in the assessment order by the ao is only a technical omission which cannot prevent the mandatory provisions of the act to come into operation. we, therefore, decline to interfere.

Judgment:
1. The present appeal has come up out of CIT(A) order No. CIT(A) OOC-1 DC. 1(3) IT 182/03-04, dt. 21st Oct., 2004, on the following grounds of appeal: (i) Regarding addition of Rs. 13,26,78,581 made under Section 68 of the IT Act; (ii) Addition of Rs. 3,64,235 on account of entertainment under Section 37(2); (iii) Addition of Rs. 4,06,762 representing the medical cost of treatment of wife of CEO; and Both the parties were heard regarding the issues raised in this appeal and its legal implications.

2. The facts of the case, briefly, are that the appellant-company, M/s Trident Shipping Agencies Ltd. (TSAL), were shipping agents for a foreign company called M/s Nedlloyd Lines (NL) of Rotterdam. In terms of the agreement entered into between the two companies effective from 1st Feb., 1986, the appellant-company was to act as the agent of Nedlloyd covering the territories of Bombay, Western India, Pune, Ahmedabad, Indore, and Kandla, and Northern India covering Delhi, Ludhiana, Kanpur, Varanasi, Jodhpur, Jaipur, Jalandhar and Amritsar.

The agent's job was to procure cargo for the principal from the above places for loading and unloading the ships of NL and their transportation to and from the territories indicated above. The agent was responsible for handling all matters connected with shipping, i.e., apart from loading and unloading of goods, it was also required to obtain port clearance and transact with the customs authorities.

3. As per p. 5 of the terms of agreement, the appellant was entitled to commission only, at rates varying from 1 to 2.5 per cent on various items of work covered under the agreement. In addition, the appellant was also entitled to reimbursement for certain types of office expenditures specified in the agreement. The agreement also stipulated that the agent was not to engage in any other business activity which would come in conflict with the agency work.

4. The agent had to deal with a large number of customers covering a very wide territory, i.e., whole of North India and West India. Apart from the functions outlined in the preceding paragraph, the agent was also required to stuff and de-stuff containers, execute bonds in favour of customs authorities in respect of imported containers in which goods are received and other miscellaneous activities. On these activities, which were incidental to the agency business, commission was not payable by the principal. The appellant had to furnish guarantee to the customs authorities for the imported containers as under the customs regulations the imported containers had to return to the port of origin within a period of six months. In the event of their failure to reach the port within the stipulated period, the appellants were liable to be charged custom duty on them. Similarly, if the containers got damaged while in transit, the appellants were to be personally responsible for the loss and damages. In view of these additional risks covered by the appellant on behalf of the principal, it was the usual practice for the appellant to seek advance payments from the consignee/consignor, for adjustment against the actual expenditure incurred subsequently. The appellant-company usually kept a cushion and collected a little higher amount to take care of unanticipated expenditure in future. These monies were held in trust for and on behalf of the principal and were accounted for in the principal's account.

5. As per the agreement, the appellant-company was required to furnish to the principal weekly statements containing information of the freights collected, port trust charges, taxes paid to the Customs and IT Departments. It was not required to report to the principal the deposits collected by the appellant-company to meet other expenses not connected with the above. These deposits, most of the time in excess of estimated expenditure, were collected to settle liabilities which could arise after the transaction with the particular customer had concluded.

Many times the customs authorities demanded extra duty, demurrage and penalty, etc. long after the customer had concluded transaction with the appellant.

6. Over the period from 1986 to 1997, the running balances in this account came to Rs. 17.25 crores. The opening balance in the account in this year was Rs. 14.71 crores.

7. On 2nd April, 1998, the agency agreement between the appellant and the principal company, NL was terminated. An MOU signed under which the appellant-company paid Rs. 5.78 crores to the principal from the account standing in the name of the principal. Also, as per the MOU, the new agents took over contingent liabilities to the extent of Rs. 9.57 crores. After this settlement all uncertainties ceased and since it was no longer necessary to keep any cushion for any anticipated liability, the appellant-company brought into its P&L a/c the residual amount of Rs. 9.94 crores from the above account and offered it for taxation in the asst. yr. 1999-2000.

8. During the course of the assessment proceedings, the AO wanted confirmation of balance in the sundry creditors account between the applicant-company and the principal, M/s Nedlloyd. M/s NL in a letter reported that the balance outstanding against the appellant-company as on 1st April, 1997, was Rs. 3.98 crores as against Rs. 17.25 reported by the appellant-company. The AO, therefore, added the difference between the two, amounting to Rs. 13.26 crores in asst. yr. 1997-98.

The AO also disallowed certain other claims such as Rs. 3.64 lakhs on account of entertainment expenses and Rs. 4.06 lakhs expenditure incurred for reimbursement of medical expenses of its CEO. The appellant thereafter went up in appeal before the CIT(A). The learned CIT(A) vide his ex paite order dt. 27th May, 2002, dismissed the appeal on account of the appellant's alleged failure to comply with his notice for hearing. The appellant thereafter came in appeal before the Tribunal, Bombay Bench, and the 'D' Bench by order dt. 2nd Dec, 2002, in ITA No. 4575/Mum/2002 after hearing the rival submissions passed the following orders: "We, therefore, set aside the impugned order of the learned CIT(A) with a direction to him to record a clear finding regarding the assessment year in which the impugned addition is liable to be made, that is, in the asst. yrs. 1997-98 or 1999-2000 and to determine the quantum of addition to be made, if any, after allowing reasonable opportunity of being heard to the parties. He shall also record his findings as to the allowability or otherwise of the expenses to the extent of Rs. 9,10,889 under s. 32(2) of the Act." 9. The CIT(A) in pursuance of the directions contained in the order of the Tribunal as above, passed his order No. XXI/DC.1(3)1T 182/03-04 on 21st Oct., 2004, against which the appellant has come up in the present appeal before us.

10. Mr. S.K. Tulsiyan, advocate, who appeared on behalf of the appellant, submitted before us a paper book containing written submissions and submitted that the learned CIT(A) has erred in law and facts in confirming the orders of the learned AO.11. He first took us through the facts of the case and explained that owing to improper appreciation of the facts of the case, the additions have been confirmed by the learned CIT(A). According to him, the appellant was only an agent of the principal and the entire activities including receipt of money from various customers and their disbursement was entirely on account of the principal. According to him, the account which was maintained on behalf of the principal could be analysed from two angles, i.e., (1) the weekly statements which sent to the principal containing receipts and expenses incurred on activities covered in the terms of agreement on which commission was payable, and (2) and the other receipts and expenses covering several ancillary activities connected with the execution of agency work for (which) payments were taken from the customers to meet specified liabilities arising from time-to-time. On these activities which were incidental to the agency business, no commission was payable by the principal. It was, therefore, natural that when reconciliation was made between the accounts maintained by the principal and by the appellant, there was discrepancy. It had to be remembered that amounts were also collected for carrying out various activities not required to be reported to the principal. Under the agency agreement, it was neither required nor the assessee was obliged to report the other part of the balance amount to the principal. These were essentially collected, as stated earlier, to cover the sums guaranteed in bonds with the customs authorities, penalties which were levied or excess duty or demurrage charged subsequent to settlement of accounts with the customer.

12. Mr. Tulsiyan countered the observations of the CIT(A) point by point and explained the position. In the first place, referring to the observation made by the CIT(A) at para 7, p. 7 of his order that it was incumbent on the appellant to reconcile the differences of the two balances, i.e., one reported by the appellant and the other by the principal, Shri Tulsiyan submitted that as explained earlier, the reconciliation can be made only when both segments of the accounts are taken into consideration, i.e., one with which the principal was directly involved and on the basis of which commission was received by the appellant and the other which was a closely connected activity on behalf of the principal in which funds had to be kept to take care of unanticipated expenses which could be taken care of, even long after the customer had left. That these were not imaginary liabilities has been proved by the fact that the new agent had taken over liabilities to the extent of Rs. 9.57 crores as per MOU signed on 2nd April, 1998.

Besides this, the appellant had met expenses to the extent of Rs. 1.52 crores in asst. yr. 1998-99 and had paid Rs. 5.78 crores to the principal in the asst. yr. 1999-2000 from this very account. The total of these come to Rs. 16.87 crores, against the sum of Rs. 17.25 crores withheld by it up to the asst. yr. 1997-98. This squarely proved the bona fides of the appellant. But for the liabilities taken over by the new agent, the appellant could not have been in a position to offer Rs. 9.94 crores for taxation in the asst. yr. 1999-2000.

13. Regarding the refusal of the CIT(A) to allow the appellant's application under r. 46A on the grounds that sufficient evidence was not produced to prove the contention that entries in the accounts were only through crossed cheque/account payee cheque/draft, it was submitted by Shri Tulsiyan that the appellant in its application itself vide pp. 274 and 275 of paper book had clearly indicated the nature and source of the credit in the account in question and had all the supporting documents for each and every entry in the account. Since the entire material was voluminous, only sample copies had been furnished to establish genuineness of the claims made by the appellant. The additional evidence produced under r. 46A were copies of the general ledger for the period 1st March, 1997 to 31st March, 1997, of NL, voyage expense, BPT deposits and copies of bills of lading, etc. In spite of the voluminous documentary evidence submitted before him, the CIT(A) had chosen to reject the claim of the appellant summarily.

14. Regarding CIT(A)'s refusal to accept the contention that these balances belonged to the principal and were properly accounted for in that account, on the grounds that these should have been credited in the account of the customers, Shri Tulsiyan submitted that certain expenses which the appellant had to incur in carrying the agency work with which the principal was not involved, it had to collect additional money from all customers. But, since the business was being carried on exclusively on behalf of the principal, all accounting entries had to be made in the account of the principal. It is the credit balances from these accounts which the appellant had been carrying forward from 1986 to 1998. As explained earlier, these amounts were actually meant to take care of post-settlement expenses of the customer, such as covering the amount for the bonds signed with customs authorities, additional demurrage charges levied later, penalties imposed later, etc., for which the agent was wholly and exclusively liable. The appellant always apprehended that if it did not withhold the amount it would create problems of recovery from the customers who had already settled their accounts.

15. Regarding the ClT(A)'s observations that the actual amount of difference between NL account and appellant account was Rs. 13.26 crores as against the claim of the appellant of Rs. 9.94 crores, it was submitted by Shri Tulsiyan that the learned CIT(A) failed to take note of the fact that that the credit balance as on 31st March, 1997, Rs. 17.25 crores less expenditure incurred on behalf of the principal was Rs. 1.52 crores in the financial year 1997-98 and less amount paid to the principal on 2nd April, 1998, Rs. 5.78 crores. That left a balance of Rs. 9.94 crores only which had been offered by the appellant for assessment in the asst. yr. 1999-2000 and voluntary self-assessment tax had been paid on the same amount. It was also pointed out by Shri Tulsiyan that the amount was assessable only in the asst. yr.

1999-2000, since the final settlement was arrived at in the asst. yr.

1999-2000 when all uncertainties ceased. The figure of Rs. 13,26,78,581 taken by the CIT(A) for assessment in the asst. yr. 1997-98 was also wrong as it violated established accounting principle. In adopting this figure he has deliberately ignored to take into account Rs. 14.71 crores which was the opening balance in the same account. As per Section 4 of the IT Act, it is the income which accrued and had arisen during the previous year which could be assessed.

16. Shri Tulsiyan, discussing the observation of the CIT(A) regarding the existence of contingent liabilities as on 31st March, 1997, explained that as per Clause (b) of the agreement, it was the responsibility of the agent to bear the entire del credre risk. Thus, any extension of credit to shippers or others in respect of freight or any other amount due to the company was the sole responsibility of the agent. Thus, acting as an del credre agent the appellant credited to the account of its principal all the amounts related to this risk which was on him to pay and was necessary to cover the huge risk incurred by way of expenditure on port charges such as short lading, late delivery, damage to consignment and penalty thereon, etc. The appellant was, therefore, forced to collect these deposits from the customers to insulate itself against such charges which could be imposed on it subsequent to settlement of accounts of the customers. Therefore, the CIT(A) was not justified in ignoring the claims of the appellant by observing that the claims were extremely contingent in nature and were, therefore, not acceptable. The deposits taken by the appellant varied from customer to customer and meeting the expenses from the advance deposit collected and finally carrying over the balance of the deposit was very much within the scope of the activity which the applicant had to perform on behalf of the principal. The conclusion of the CIT(A) was, therefore, completely misplaced. In coming to this wrong conclusion. The CIT(A) had failed to take note of Section 148 of the Customs Act, 1962, which imposes liability on an agent and on whom penalties can be imposed and. from whom confiscation of goods can be made for all acts done by him or on behalf of the principal. Thus, all duties and penalties leviable by the customs authorities were payable by the agent if originally there was short levy or incorrect claim.

Shri Tulsiyan further stated that, for the purpose of indemnifying timely return of container it had to execute bonds of several crores of rupees with the customs authorities. He cited the example of two indemnity bonds, which the appellant had executed aggregating to Rs. 75.26 crores which were dt. 3rd Feb., 1997, and 19th Dec, 1997. This was available at Sch. C of the MOU signed in April, 1998.

17. Objecting to the refusal on the part of the CIT(A) to accept the figure of Rs. 9.94 cores as the correct amount assessable in the asst.

yr. 1999-2000, Shri Tulsiyan explained that the following facts clearly show why the applicant's claim should have been accepted by the CIT(A).

The cessation of all uncertainties and the quantification of the surplus came in asst. yr. 1999-2000 after the MOU was signed on 2nd April, 1998. Till this date the uncertainty always existed as to the amount which would be payable by the appellant. It is on this date it was agreed that the foreign company was to be paid Rs. 5.78 crores as per Sch. A of the MOU and the new agent was to takeover Rs. 9.57 crores of contingent liabilities as per Sch. D and F of the MOU. Out of the balance standing as on 31st March, 1997, the applicant had already made payment to the extent of Rs. 1.52 crores in the asst. yr. 1998-99 on "arious items, like port authorities, claims, etc. Therefore, the remaining balance of Rs. 9.94 crores which could be finally ascertained on 2nd April, 1998, was due for inclusion in the income of the appellant for the asst. yr. 1999-2000. In view of this, the CIT(A) was not justified in rejecting the claim of the appellant that a sum of Rs. 9.94 crores (Rs. 9,94,51,784) offered by the appellant was assessable in the asst. yr. 1999-00.

18. Shri Tulsiyan further explained that from the order of the CIT(A) it appeared as if he was not sure whether to tax the amount as business income under Section 28 or under Section 41(1) as income arising out of cessation of liability or under Section 68 as income from undisclosed source. This as evident from the fact that in taxing the amount Rs. 13.26 crores, he has alternatively applied all three sections to justify his order. He submitted that Section 41(1) applied only when there is remission or cessation of a liability which had been allowed as a deduction in its assessment in an earlier year. In the case of the appellant, there was neither any such claim nor the AO allowed any such deduction. Therefore, application of Section 41(1) to the appellant's case was wholly misplaced. Similarly, application of Section 68 was also uncalled for since the entire receipts had come through crossed and account payee cheques and they had been properly accounted for in the regular accounts of the appellant. These were trading receipts/advances from the customers. Therefore, by no stretch of imagination, they could be covered under Section 68.

19. Shri Tulsiyan invited our attention to various legal provisions and decisions of the Courts on the basis of which the appellant's claim for inclusion of the balance amount of Rs. 9.94 crores was to be assessed in the asst. yr. 1999-2000. He explained that Section 4 of IT Act brought into tax only the income accruing or arising in any previous year. No receipt could be converted into income in a particular assessment year unless that receipt can be attributed to the corresponding previous year. Similarly, the receipt will acquire the attribute of profits or gain of a business under Section 28 of the Act only when all outgoings from such receipts have been accounted for and all uncertainties and claims against the receipts had ended. The appellant-company received the advance deposits from the customers in its fiduciary capacity as an agent of the principal and the amounts were held as a trust. At the time of the receipt, the advances were kept for services to be rendered in future and until such services had been rendered, accounts settled and uncertainties of future claims ceased, they could not constitute income. The learned counsel drew our attention to some of the decisions of Courts in support of his arguments. He referred to the case of Morley v. Tattersall 22 Tax Cases 51 (CA) : (1939) 7ITR 316 (CA). According to him, here the viewpoint of the appellant had been clearly vindicated. In a. recent Supreme Court's ruling in Travancow Rubber & Tea Co. Ltd. v. CIT , wherein the decision of the Supreme Court in CIT v. Karamcahand Thapar was explained with reference to the ratio laid down "In Morley (Inspector of Taxes) v. Tattersall (1939) 7 ITR 316 (CA), it had been held that the quality and nature of a receipt for income-tax purposes were fixed once and for all when the subject of the receipt would be received and that no subsequent operation could change the nature of the receipt. However, in CIT v. Karam Chand Thapar , the Supreme Court held that the proposition enunciated in Tattersall's case (supra) was absolute and that in given cases, amounts which were not received initially as trading receipts could eventually be regarded as business income by reason of subsequent events. The subsequent events must be such that a different quality is imprinted on the receipt. However, the cancellation of a sale of capital assets would not be such a subsequent event so as to change the nature of the receipt of the forfeited amounts".

20. The learned counsel drew our attention to the case of Pioneer Consolidated Company of India Ltd. v. CIT quoted with approval by the Supreme Court in CIT v. TV. Sundaram Ayengar & Sons Ltd. in which the Allahabad High Court had held that the unclaimed deposits of the clearing and. forwarding agent due to the customers were assessable when they were transferred to the P&L a/c and not when they were realized.

21. Similarly, he pointed out that the Calcutta High Court even went to the extent of holding that unclaimed excess premium collected by an insurance agent was not taxable as its income at all even in the year the sum was transferred to the credit of its P&L a/c as miscellaneous income vide Bengal & Assam Investors Ltd. v. CIT . He also drew our attention to the decision of Bombay High Court in the case of CIT v. ML. Bhapkar which took a similar view of excess octroi collected by an assessee from its customers. Finally, the learned counsel cited a case of CIT v. T.V. Sundaram Ayengar & Sons Ltd. (supra) where the Supreme Court had at p. 353 of its order had held: "If a comrnonsense view of the matter were taken, the assessee because of the trading operation had become richer by the amount which it transferred to its P&L a/c. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different guality. It became a definite trade surplus".

22. Shri Tulsiyan also emphasized upon the fact that the position of acceptance of advances from the clients of the principal and keeping the amounts in the credit account in the name of the principal (as the appellant does not maintain separate accounts in respect of the clients) has been accepted by the Department since the very beginning of the business of the appellant, i.e., 1986. The appellant has been filing its returns of income since asst. yr. 1988-89 and in none of the earlier years this method of accounting followed by the appellant in a consistent manner has been questioned. Shri Tulsiyan, admitting that strictly speaking res judicata not applying to income-tax proceedings but emphasized at the same time that the fundamental aspect permeating through several years having been accepted by the parties to the dispute, no attempt should be made to disturb the position. In support of this contention, he relied upon the Supreme Court decisions in CIT v. Radhasoami Satsang and Berger Paints India Ltd. v.CIT . He thus argued that there is no warrant in choosing any particular intermediate year like asst. yr. 1997-98 and suddenly trying to book the difference between the balances in the accounts of the two parties to tax in that year by disturbing the accepted position and allowing the difference to continue till the matter is finally settled, in this particular case in asst. yr.

1999-2000.

23. Referring to three other grounds of appeal, i.e., addition under the headings entertainment expenses and disallowance of medical reimbursement made to CEO and for charging interest under Section 234B, Shri Tulsiyan pointed out that the CIT(A) was not justified in disallowing the above claims The alleged entertainment, expenses were not entertainment expenses but expenditure incurred in hiring cars and on food and beverages served during seminars and also on the advertisement and publicity expenses. The detailed list of expenditure provided by the appellant and reproduced in the AO order would clearly demonstrate that the entire expenditure of Rs. 10.8 lakhs was incurred fully and exclusively for the purpose of business. Similarly, the claim of Rs. 4,06,762 incurred as expenditure for the treatment of the wife of the chief executive officer of the company should have been fully allowed. It was necessary for the company to reimburse such expenses incurred by the employee of the company and such expenditure was wholly and exclusively necessary for the purpose of company business. The AO had not doubted the genuiness of the expenditure incurred by the employee's wife. The employees were entitled for reimbursement for expenses incurred for their own and family's treatment and the company was duty-bound to reimburse such expenditure. The expenditure was, therefore, allowable. Finally, Shri Tulsiyan objected to the charging of interest under Section 234B of the IT Act. He argued that this should not have been charged as the direction to charge such interest was not there in the assessment order passed by the AO. This was taken as an additional ground before the CIT(A) and the CIT(A) refused to entertain the ground on the plea that the appeal which was before him was on limited issues for deciding to quantify the amount appearing in the credit balance and determine the year in which it was to be assessed. Therefore, he was debarred from going into grounds beyond the direction of the Tribunal. Alternatively, he held the view that Supreme Court's decision in CIT v. Anjum H. Ghaswala. made it mandatory for the AO to charge interest. Shri Tulsiyan, on the other hand, relied upon the decision of the Supreme Court in the case of CIT v. Ranchi Club Ltd. , where it was held as under: "Interest--Return of income filed by assessee--Notice to produce accounts or documents--Interest not leviable for failure to comply with notice--IT Act, 1961, Sections 142(1)(ii)(iii), 234A--Interest--Specific direction giving reference to section necessary in assessment order--Absence of reference to section under which interest to be levied interest not leviable through notice of demand--IT Act, 1961, Sections 156, 234, 234B, 234C--Notice of demand--Interest not leviable through notice of demand without specific direction in assessment order--IT Act, 1961, Section 156." 24. Shri Tulsiyan further argued that the matter being a purely legal ground and not requiring the settlement of any new facts, the same could be raised at any time by the appellant. In this connection, reliance was placed on the decision of the Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC) in which it was held: "Appeal to Appellate Tribunal--Powers of Tribunal--Question of law arising from facts found by IT authorities and having a bearing on tax liability of assessee--Question raised for first time before Tribunal--Tribunal has jurisdiction to decide such question--IT Act, 1961, s 254".

25. It was further contended by Shri Tulsiyan that apart from the non-mention of the charging of the interest, it was to be noted that the assessee-company could not foresee that the AO would make an addition of Rs. 13,26,78,581 under Section 68 of the Act. Under Section 207 of the IT Act, 1961, the liability for payment of advance tax arose when the law could expect from a person what was possible. Since the addition made by the AO could not be foreseen by the assessee, it could not form part of the total income computed by the assessee for the purpose of the computation of the advance tax and consequently, for the purpose of the charging of interest. Moreover, in the view of the submission of the appellant whereby the additions have been challenged as absolutely unjust and incorrect on the basis of the facts of the case, the said charging of the interest should automatically fall through.

26. In summing up the arguments, Shri Tulsiyan concluded that in view of the explanation offered the balance in the NL account appearing as at 31st March, 1997, should be taken as the correct position. The uncertainties and claims on the amount finally ceased on 2nd April, 1998, after the agency was terminated and MOU was signed with the principal under which an amount of Rs. 5.78 crores was paid to the principal and the new agents took over contingent liabilities to the extent of Rs. 9.57 crores. The balance amount, of Rs. 9.94 crores was brought into the P&L a/c in the asst. yr. 1999-2000 and was offered for taxation in that assessment year in accordance with ratio of decision given by the Supreme Court in the case of Mr. T.V. Sundaram Ayengai referred to earlier. The amount is, therefore, assessable in the asst.

yr. 1999-2000 only. He added that in any case, there is no scope for disturbing the accepted position in asst. yr. 1997-98 without any genuine particular reason.

27. The claims pertaining to expenditure connected with the holding of seminar, business meetings, etc. and the reimbursement of medical expenses to the CEO of the company for the treatment of his wife were clearly allowable in full as they were incurred fully and exclusively for the business purpose. The charging of interest by the AO under Section 234B was clearly illegal since the direction to charge such interest had not been given by him in the assessment order. In accordance with the decision of the Supreme Court in the case of CIT v.Ranchi Club (supra) referred to above the charge is illegal and should be quashed.

28. The Departmental Representatives who argued the case on behalf of the Department wholly relied on the order of the authority below. He particularly read out the relevant extract from the order of the CIT(A).

29. We have carefully considered the rival submissions. According to us, the appellant's plea can be analyzed as under: 30. Whether the advance deposits collected by the agent were business receipts of the principal or of the agent 31. From the documents furnished in the paper book by the appellant and the facts narrated in the order of the AO as well as the CIT(A), we find that the appellant was working solely as an agent for the principal, M/s Nelldloyd. It had no other business except carrying on the agency work on behalf of the principal. By the agreement effective from February, 1986, the agent was required to perform functions specified in Clauses (2) to (8) of the agreement which mainly provided for transhipment of cargo from and to the port, loading and unloading of cargo, payment of freight, customs duty and income-tax. For this purpose the appellant-company was entitled to commission bearing from 1 to 2.5 per cent on different items of works and reimbursement of certain office expenses. In performing the work as an agent, as has been explained by the learned counsel for the appellant and also as mentioned in the orders of the AO and CIT(A), it had to perform certain ancillary work, such as stuffing and de-stuffing containers, executing bonds for containers with customs authorities, etc. While the appellant was entitled to commission on all the items of work covered under the agreement, for the other work connected with the agency for which it had also to incur expenditure, no. Commission was payable by the principal. For example as mentioned in the clause of the agreement, no commission was payable for expenses incurred for stuffing and de-stuffing of containers. The appellant before undertaking the work of a customer on behalf of the principal was collecting in advance certain moneys as advance deposits to cover the expenses which were to be incurred subsequently for the customer. Such advances, therefore, constituted business receipts of the principal which were held in trust by the agent. We, therefore, are of the view that the receipts form part of the business receipts of the principal which was held in trust and properly accounted for in the agent accounts of the principal.

32. The next point for consideration is at what point of time such receipts partake the character of income in the hands of the appellant According to the AO and the CIT(A), since a part of the deposit received by the appellant had not be reported to the principal and there was discrepancy in the balance as reported by the foreign principal, NL and the appellant the entire difference was, therefore, assessable either as business income of the appellant under Section 28 or under Section 41(1) being remission of liability from the principal alternatively, according to CIT(A), as income from undisclosed sources under Section 68 of the Act. According to the learned counsel for the appellant, Section 41(1) did not apply since at no point of time the assessee had made any claim for deduction nor was it allowed by the AO.Similarly, Section 68 also was not applicable since the advances were business receipts of the principal received and collected by the agent in the course of normal business activity. According to the counsel, the balances have been coming since 1986 and there has been no change in the facts or accounting procedure in the assessment year under consideration. These amounts have been received by cheques and properly accounted for in the accounts of the principal. According to the learned counsel, the lack of awareness on the part of the principal or the failure on the part of the appellant to report the amount could not convert the receipt into income until ail claims against if ceased and uncertainty ended. The appellant remained apprehensive throughout that at any time a customer could come and claim the balance. We agree with this view of the learned counsel. We find that uncertainties relating to claims from the customers as well as principal continued during asst. yr. 1997-98 and upto the asst. yr. 1999-2000, the amount in question could not be brought to tax in the asst. yr. 1997-98.

33. Next issue is, at what point of time these receipts became income Following from the facts mentioned above and relying on the decision of the Supreme Court in the case of Mr. T.V. Sundaram Ayengar & Sons already referred to earlier, we are of the view that the appellant was in a position to quantify the amount of unclaimed surplus as it's income in the asst. yr. 1999-2000 after the MOU was signed on 2nd April, 1998. We, therefore, hold that the CIT(A) was not correct in holding the view that an amount of Rs. 13,26,78,581 was assessable in the asst. yr. 1997-98. Even otherwise, strictly from the accounting view also, the amount taken by the CIT(A) is not correct. If he was not satisfied with the explanation of the appellant, at the most, an amount of Rs. 2,54,61,694 could have been added in asst. yr. 1997-98 after excluding the opening balance. However, since we are satisfied that the unclaimed surplus could be quantified only in the asst. yr. 1999-2000, no amount is assessable in the asst. yr. 1997-98. The Department is free to take appropriate action to assess the surplus in the asst. yr.

1999-2000, as surrendered by the appellant.

34. We also find sufficient force in the other submission on behalf of the appellant that, in any case, there is (no) warrant for the Department to suddenly disturb the accepted position about existence of discrepancy between the balances in the accounts of the appellant and its principal in asst. yr. 1997-98. The genuineness of the credit balance in the name of the principal was never called in question in the earlier years. It is, therefore, not for the Department to suddenly try to question such genuineness in this year and to bring to tax the difference amount which all along existed in the books of account of the appellant. The Supreme Court decisions as cited by the learned counsel for the appellant surely support this proposition. From this angle also, there is no scope for making the impugned addition.

35. We have carefully considered the submissions of the learned counsel regarding the claim of the appellant for allowing in full the expenses incurred for conducting business seminars, meetings, etc. Having regard' to the nature of expenditure incurred, it will be very difficult to clearly demarcate what constitutes entertainment and what constitutes wholly business expenditure when it is incurred in providing food and transportation to the delegates. An element of entertainment cannot be clearly ruled out in such expenditure. In view of this, we are satisfied that expenses as allowed by CIT(A) is reasonable. We, therefore, decline to interfere.

36. The appellant has claimed allowance of the expenditure incurred in reimbursing the CEO, medical expenses for the treatment of his wife. We have examined the facts brought out in the order of CIT(A) and we find that the appellant has nowhere produced evidence to prove that Shri N.Mahalingam was a regular employee of the company. On the contrary, from the facts brought on record, it appears he was only authorized to operate the bank accounts of the company. Unless a person is a regular employee of the company and there is a master and servant relationships, such claims are not allowable. We, therefore, decline to interfere.

37. The appellant's last ground of appeal is against charging of interest under Section 234B of the Act on the ground that the AO did not specifically direct this in his assessment order. We are of the view that Supreme Court's order in the case of CIT v. Anjum H. Ghaswala (supra) has made charging of interest mandatory. Non-mention of the direction in the assessment order by the AO is only a technical omission which cannot prevent the mandatory provisions of the Act to come into operation. We, therefore, decline to interfere.