Facts:
The assessee was into the business of running coaching classes. The assessee had entered into standardised agreements with various persons willing to run similar coaching classes in form of franchisees. The franchisees were allowed to use the trademark, tradename and course material belonging to the assessee, in lieu of which assessee received an amount equal to 25% of the net value earned from the operations. The assessee showed ‘Franchisee payments’ under the head ‘administrative and other expenses’. The Revenue held that payment made by the assessee to the franchisees was in nature of payment to contractor/sub-contractor and hence provisions of section 194C were applicable. Resultantly, the expenses were disallowed u/s.40(a) (ia). The CIT(A) upheld the order.
Held:
As per the agreement, the franchisees make payment to the assessee and not the other way round. However, the accounts of the assessee have been drawn in a manner which shows that the assessee pays to franchisees. This anomaly between the agreement and the accounts has not been explained by either party. This matter has also not been dealt with by the lower authorities. At this juncture, the matter has to be decided as per law and not merely as per entries in the books of account, which may only be indicative in nature, but not conclusive of the matter.
The franchisees set up the premises, equipment and infrastructure at their own cost as per specifications of the assessee. The assessee was to provide entire study material, upgradation thereof, technical knowhow and product details. The franchisee collected fees from students and taxes/duties leviable were borne by them. They retained 75% of the profit from operations and handed over 25% to assessee. Hence, from the facts of the terms, it clearly emerges that the franchisee is not doing work for the assessee and it is a case of running a study centre and apportionment of profits thereof between the assessee and the franchisee. The agreement is not regarding work done on behalf of the assessee rather it is a case of sharing fees under the contract.
Though the term ‘work’ in explanation of section 194C is wide enough, it does not cover the case of the assessee. Thus, the ground was allowed in favour of the assessee. Facts: The assessee paid bonus to directors who were also the shareholders of the assessee-company. The AO held that bonus was paid instead of dividends so as to avoid payment of dividend distribution tax. Hence, by invoking provisions of section 36(1)(ii) bonus was disallowed. The CIT(A) also upheld action of the AO. Held: Section 36(1)(ii) provides that any sum paid to an employee as bonus or commission for services rendered is to be deducted in computing the total income, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission.
Taking the example of director A, it is clear that if the amount of Rs.7,02,231 had not been paid to him as bonus, the same amount would not have been paid to him as dividend, because he would have got 40.93% as dividend from the total dividend declared. In other words, he would have received higher dividend than the bonus. The position in case of S would be opposite. He was paid bonus of Rs.4,13,077 although his sharehold-ing is only 1.09%. Relevant facts are similar in case of other directors. Thus, it can be said that none of the directors would have received the bonus as dividend in case bonus was not paid. Also the bonus was paid as per resolution of Board of Directors. Therefore, the provision of 36(1)(ii) was not applicable. Facts: Being a coaching class, the assessee received nonrefundable fees in a year. However, the coaching was to be rendered in current year and subsequent year. Hence, the obligation was to be discharged in two accounting years. The assessee booked part fees in this year and part in the subsequent year. However, the AO added the entire amount to income.
The CIT(A) also upheld AO’s observation. Held: The decision as held in case of K. K Khullar v. Dy. CIT, (2008) 304 ITR (AT) 295 was considered. It was held that a distinction has to be made between the terms ‘receipt’ and ‘income’. Income is liable to be taxed and not receipt. Hence, only that part of receipt was taxable to assessee which accrued as income. Thus, the accounting policy followed by the assessee was correct. The CIT(A) erred in treating the nonrefundable deposit as income.
