Category: In The High Courts: Part B-Unreported Decisions

9. M/s. J.S. & M.F. Builders vs. A.K. Chauhan and others [Writ Petition
No. 788 of 2001 A.Ys.: 1992-93, 1993-94, 1994-95 and 1995-96 Date of order: 12^th
June, 2020 (Bombay High Court)

 

Reopening – Capital gains arising on conversion of the land into
stock-in-trade – Closing stock has to be valued at cost or market price
whichever is lower – No reason to believe income had escaped assessment –
Reopening bad in law: Sections 45(2) and 147 of the Act

 

The petitioner had challenged the legality and validity of the four
impugned notices, all dated 25^th February, 2000 issued u/s 148 of
the Act, proposing to re-assess the income of the petitioner for the A.Ys.
1992-93, 1993-94, 1994-95 and 1995-96 on the ground that income chargeable to
tax for the said assessment years had escaped assessment.

 

The case of the petitioner is that it is a partnership firm constituted by
a deed of partnership dated 21^st October, 1977. The object of the
firm is to carry out business as builders and developers.

 

An agreement was entered into on 8^th November, 1977 between one
Mr. Krishnadas Kalyanji Dasani and the petitioner whereby and whereunder Mr.
Dasani agreed to sell, and the petitioner agreed to purchase, a property
situated at Borivali admeasuring approximately 6,173.20 square metres. The
property consisted of seven structures and two garages. The property was
mortgaged and all the tenements were let out. The aggregate consideration for
the purchase was Rs. 3,00,000 and a further expenditure of Rs. 44,087 was
incurred by way of stamp duty and registration charges. The said property was
purchased subject to all encumbrances. The purchased property was reflected in
the balance sheets of the petitioner drawn up thereafter as a fixed asset. For
almost a decade after purchase, the petitioner entered into various agreements
with the tenants to get the property vacated. In the process, they incurred a
further cost of Rs. 9,92,427.

 

In the balance sheet as on 30^th September, 1987 the Borivali
property was shown as a fixed asset the value of which was disclosed at Rs.
13,36,514; a detailed break-up of it was furnished. With effect from 1^st
October, 1987, the petitioner converted a portion of the property into
stock-in-trade and continued to retain that part of the property which still
remained tenanted as a fixed asset. The market value of the entire Borivali
property as on 1^st October, 1987 was arrived at Rs. 69,38,000 out of
which the value of the property that was converted into stock-in-trade was
determined at Rs. 66,29,365.

 

The petitioner thereafter demolished the vacant structures and commenced
construction of a multi-storied building. In the balance sheet as on 31^st
March, 1989, the petitioner reflected the tenanted property as a fixed asset at
a cost of Rs. 2,86,740 and the stock-in-trade at a value of Rs. 66,29,365.. A
revaluation reserve of Rs. 55,58,759 was also credited. In the Note
accompanying the computation of income it was clearly mentioned that the
conversion of a part of the Borivali property was made into stock-in-trade and
the liability to tax u/s 45(2) of the Act would arise as and when the flats
were sold. During the previous year relevant to the A.Y. 1992-93, the
petitioner had entered into 14 agreements for sale of 14 flats, the total area
of which admeasured 10,960 square feet (sq. ft.).

 

For the A.Y. 1992-93 the petitioner declared income chargeable under the
head ‘profits and gains of business or profession’ at Rs. 9,37,385 and the
income chargeable under the head ‘capital gains’ at Rs. 8,10,993. The ‘capital
gains’ was arrived at by determining the difference between the market value of
the land converted into stock-in-trade as on 1^st October, 1987 and
the cost incurred by the petitioner which came to a figure of Rs. 55,87,591.
Having regard to the total built-up area of 37,411 sq. ft., the ‘capital gains’
per sq. ft. was computed at Rs. 149.36 on a pro-rata basis. Accordingly,
having regard to the area of 10,960 sq. ft. sold, the ‘capital gains’ was
determined at Rs. 16,36,986. Along with the return of income, a computation of
income as well as an audit report in terms of section 44AB of the Act were also
filed. The A.O. completed the assessment u/s 143(3) of the Act assessing the
petitioner at the income of Rs. 17,85,560.

 

For the A.Y. 1993-94, as in the previous A.Y., income was computed both
under the head ‘profits and gains of business or profession’ as well as under
the head ‘capital gains’ for 12 flats sold during the relevant previous year.
The return was accompanied by the tax audit report as well as the profit and
loss account and balance sheet. The A.O. completed the assessment u/s 143(3)
assessing the petitioner at an income of Rs. 17,30,230. It is stated that in
the assessment order the A.O. specifically noted that income from ‘long-term
capital gains’ was declared in terms of section 45(2) of the Act.

 

The petitioner’s return of income for the A.Y. 1994-95 was processed u/s
143(1)(a) of the Act and an intimation was issued on 30^th March,
1995.

 

For the A.Y. 1995-96, the petitioner filed its return declaring income
under both heads, i.e., ‘income from business’ and ‘capital gains’. The income
of the petitioner was computed in a similar manner as in the earlier years with
similar disclosures in the tax audit report, profit and loss account and
balance sheet furnished along with the return. In the course of the assessment
proceedings, the petitioner furnished details of flats sold as well as the
manner of computing profit in terms of section 45(2). The assessment for the
A.Y. 1995-96 was completed u/s 143(3) of the Act determining the taxable income
at Rs. 1,32,930.

 

According to the petitioner, it received on 8^th March, 2000  four notices, all dated 25^th
February, 2000, issued u/s 148 of the Act for the four assessment years, i.e.,
1992-93 to 1995-96.

 

The reasons recorded for each of the assessment
years were identical save and except the assessment details and figures. The
A.O. broadly gave four reasons to justify initiation of re-assessment
proceedings. Firstly, the petitioner was not justified in assuming that the
market value of the stock adopted as on 1^st October, 1987 would
continue to remain static in the subsequent years. In other words, the closing
stock of the land should have been valued at the market price as on the date of
closing of accounts for the year concerned. This resulted in undervaluation of
closing stock and consequent reduction of profit.

 

Secondly, even though the petitioner might have entered into agreements and
sold certain flats, the ownership of the land continued to remain with the
petitioner. The whole of the land under the ownership of the petitioner
constituted its stock-in-trade and it should have been valued at the market
price as on the date of closing of accounts for the year concerned. Thus, the
assessee had suppressed the market price of the closing stock, thereby reducing
the profit.

 

Thirdly, for the purpose of computing the ‘capital gains’ in terms of
section 45(2) of the Act, the petitioner was not justified in taking the cost
of the entire land; rather, the petitioner ought to have taken only a fraction
of the original cost of Rs. 3,00,000. Thus, there was inflation of cost.
Lastly, in terms of section 45(2), the ‘capital gains’ arising on conversion of
the land into stock-in trade ought to have been assessed only in the year in
which the land was sold or otherwise transferred. As the land was not conveyed
to the co-operative society, the petitioner was not justified in offering to
tax the ‘capital gains’ in terms of section 45(2) of the Act on the basis of
the flats sold during each of the previous years relevant to the four A.Y.s
under consideration.

 

The Court admitted the writ petition for final hearing.

 

The petitioner submitted that it had fully complied with the requirement of
section 45(2) of the Act and the capital gains arising on the conversion of the
land into stock-in-trade was offered and rightly assessed to tax in the years
in which the flats were sold on the footing that on the sale of the flat there
was also a proportionate sale of the land. This methodology adopted by the
petitioner is in accordance with law. It was also submitted that it is not
correct to think that any profit arises out of the valuation of the closing
stock. In this connection, reliance was placed on a decision of the Supreme
Court in Chainrup Sampatram vs. CIT, 24 ITR 481.

 

The Petitioner also referred to a decision of this Court in CIT vs.
Piroja C. Patel, 242 ITR 582 to contend that the expenditure incurred
for having the land vacated would certainly amount to cost of improvement which
is an allowable expenditure.

 

The case of the Revenue was that the A.O. after recording the sequence of
events from acquiring the property vide the deed of conveyance dated 23^rd
April, 1980 noted that the assessee had converted part of the property
into stock-in-trade on 1^st October, 1987 with a view to construct
flats. On the date of conversion into stock-in-trade, the value thereof was
determined at Rs. 66,29,365. Up to A.Y.1991-92 there was no construction. After
the building was constructed, the constructed flats were sold to various
customers. On the sale of flats, the assessee reduced the proportionate market
value of the land as on 31^st March, 1989, in the same ratio as the
area of the flat sold bore to the total constructed area. However, the assessee
valued the closing stock at market price prevailing as on 1^st
October, 1987. According to the A.O., the closing stock should have been valued
at the market price on the close of each accounting year. This resulted in
undervaluation of closing stock and consequent reduction of profit.

 

Secondly, land as an asset is separate and distinct from the building. The
building was shown as a work in progress in the profit and loss account
prepared by the assessee and filed with the return. Even after construction of
the building and sale of flats, the stock, i.e., the land was still under the
ownership of the assessee. Ownership of land was not transferred. As the land
continued under the ownership of the assessee, its value could not be reduced
on the plea that a flat was sold. The whole of the land under ownership of the
assessee constituted its stock-in-trade and it should have been valued at the
market price as on the date of closing of the accounts for the year under
consideration. Therefore, the A.O. alleged that the assessee had suppressed the
market price of the closing stock, thus reducing the profit.

 

The third ground given was regarding computation of ‘capital gains’
furnished with the return of income. The A.O. noted that the total capital
gains as on 1^st October, 1987 was arrived at by deducting the cost
of the land as on 1^st October, 1987, i.e., Rs. 10,41,774, from the
fair market value of the land, i.e., Rs. 66,29,365, which came to Rs.
55,87,591. According to the A.O., the assessee made deduction of the cost
incurred for the entire land whereas only a fraction of the said land was
converted into stock-in-trade where construction was done.

 

The A.O. worked out that the cost of the converted piece of land was only
Rs. 13,260. He arrived at this figure by deducting Rs. 2,86,740, which was the
value of the tenanted property from the cost of the property, i.e., Rs.
3,00,000. Thus, he alleged that there was inflation of cost by Rs. 10,28,514
(Rs. 10,41,774 – Rs.13,260).

 

The last ground given by the A.O. was regarding offering of long-term
capital gain by the assessee. He noted that for the purpose of computation of
long-term capital gain, the assessee estimated the fair market value of the
land converted to stock as on 1^st October, 1987 at Rs. 66,29,365
which was reduced by the cost incurred as on 1^st October, 1987,
i.e., Rs. 10,74,774. However, the A.O. also noted that the method of
computation of cost was not clear in view of the fact that the whole of the
land with tenanted structures was purchased for Rs. 3,00,000. The A.O. further
noted the methodology adopted by the assessee for computation of long-term
capital gain. According to him, the assessee had worked out the difference
between the fair market value of the land converted to stock and the cost and
thereafter divided it by the total permissible built-up area. The quotient was
identified by the assessee as capital gains per sq. ft. The assessee thereafter
multiplied the built-up area of individual flats sold with such quotient and
claimed it to be the ‘capital gains’ for the year under consideration. By
adopting such a computation, the assessee was claiming sale of land in
different years in the same ratio as the area of flat sold bore to the total
permissible FSI area. But this calculation was not accepted by the A.O.
primarily on the ground that land as a stock was different from the flats.
Selling of flats did not amount to selling of proportionate quantity of land.

 

The Court held that u/s 45(2) of the Act, ‘capital gains’ for land should
be considered in the year when land was sold or otherwise transferred by the
assessee. Though flats were sold, ownership of the land continued to remain
with the assessee. ‘Capital gains’ would be chargeable to tax only in the year
when the land was sold or transferred to the co-operative society formed by the
flat purchasers and not in the year when individual flats were sold.

 

The Court accepted the contention of the petitioner that the A.O. proceeded
on the erroneous presumption that stock-in-trade had to be valued at the
present market value. In Chainrup Sampatram (Supra), the Supreme
Court had held that it would be wrong to assume that the valuation of the
closing stock at market rate has for its object the bringing into charge any
appreciation in the value of such stock. The true purpose of crediting the
value of unsold stock is to balance the cost of those goods entered on the
other side of the account so that the cancelling out of the entries relating to
the same stock from both sides of the account would leave only the transactions
on which there had been actual sales in the course of the year showing the
profit or loss actually realised on the year’s trading. While anticipated loss
is taken into account, anticipated profit in the shape of appreciated value of
the closing stock is not brought into the account as no prudent trader would
care to show increased profit before its actual realisation. This is the theory
underlying the rule that the closing stock has to be valued at cost or market
price whichever is lower and it is now generally accepted as an established
rule of commercial practice and accountancy. In such circumstances, taking the
view that profits for income tax purposes are to be computed in conformity with
the ordinary principles of commercial accounting unless such principles have
been superseded or modified by legislative enactments, the Supreme Court held
that it would be a misconception to think that any profit arises out of
valuation of the closing stock.

 

With regard to the third ground, i.e., computation of ‘capital gains’, the
Court held that the cost incurred included not only the sale price of the land,
i.e., Rs. 3,00,000, but also the expenditure incurred by way of stamp duty and
registration charges amounting to Rs. 44,087. That apart, the assessee had
incurred a further sum of Rs. 9,92,427 in getting the entire property vacated.
The contention of the A.O. that there was inflation of cost is not correct.
Thus, for computing the income under the head ‘capital gains’, the full value
of consideration received as a result of transfer of the capital asset shall be
deducted by the expenditure incurred in connection with such transfer, cost of
acquisition of the asset and the cost incurred in improvement of the asset. The
expression ‘the full value of the consideration’ would mean the fair market
value of the asset on the date of such conversion. The meaning of the
expressions ‘cost of improvement’ and ‘cost of acquisition’ are explained in
sections 55(1) and 55(2) of the Act, respectively.

 

The expression ‘capital asset’ occurring in sub-section (1) of section 45
is defined in sub-section (14) of section 2. ‘Capital asset’ means property of
any kind held by an assessee whether or not connected with his business or
profession as well as any securities held by a foreign institutional investor,
but does not include any stock-in-trade, consumable stores or raw materials,
personal effects, etc.

 

Again, the word ‘transfer’ occurring in sub-section (1) of section 45 has
been defined in section 2(47) of the Act. As per this definition, ‘transfer’ in
relation to a capital asset includes sale, exchange or relinquishment of the
asset or the extinguishment of any rights therein, or compulsory acquisition of
the asset, or in case of conversion of the asset by the owner into
stock-in-trade of the business carried on by him, such conversion or any
transaction involving the allowing of possession of any immovable property to
be taken or retained in part performance of a contract, or any transaction
whether by way of becoming a member of or acquiring shares in a co-operative
society, etc. which has the effect of transferring or enabling the enjoyment of
any immovable property.

 

In the case of Miss Piroja C. Patel (Supra), the court held
that on eviction of the hutment dwellers from the land in question, the value
of the land increases and therefore the expenditure incurred for having the
land vacated would certainly amount to cost of improvement.

 

Thus, the cost incurred on stamp duty, etc., together with the cost
incurred in carrying out eviction of the hutment dwellers would certainly add
to the value of the asset and thus amount to cost of improvement which is an
allowable deduction from the full value of consideration received as a result of
the transfer of the capital asset for computing the income under the head
‘capital gains’.

 

Insofar as the fourth ground is concerned, the A.O. has taken the view that
long-term capital gains arising out of sale or transfer of land would be
assessed to tax only in the year in which the land is sold or otherwise
transferred by the assessee. Opining that land as a stock is a different item
of asset than a flat, the A.O. held that ownership of land continued to remain
with the assessee notwithstanding the sale of flats. Therefore, he was of the view
that ‘capital gains’ would be chargeable to tax only in the year when the land
is sold or otherwise transferred to the co-operative society formed by owners
of the flats and not in the year when individual flats are sold.

 

According to the A.O., the assessee had erred in
offering to tax ‘capital gains’ in the year when the individual flats were
sold, whereas such ‘capital gains’ could be assessed to tax only when the land
was transferred to the co-operative society formed by the flat purchasers. If
the assessee had offered to tax as ‘capital gains’ in the assessment years
under consideration that which should have been offered to tax in the
subsequent years, it is beyond comprehension as to how a belief can be formed
that income chargeable to tax for the assessment year under consideration had
escaped assessment. That apart, the flat purchasers by purchasing the flats had
certainly acquired a right or interest in the proportionate share of the land
but its realisation is deferred till the formation of the
co-operative society by the owners of the flats and eventual transfer of the
entire property to the co-operative society.

 

The Court also referred to various other decisions, namely, Prashant
S. Joshi [324 ITR 154 (Bom)], Additional CIT vs. Mohanbhai Pamabhai, 165 ITR
166 (SC), Sunil Siddharthbhai vs. CIT, 156 ITR 509 (SC) and
Addanki Narayanappa vs. Bhaskara Krishnappa, AIR 1966 SC 1300, wherein
the Court held that what is envisaged on the retirement of a partner is merely
his right to realise his interest and to receive its value. What is realised is
the interest which the partner enjoys in the assets during the subsistence of
the partnership by virtue of his status as a partner and in terms of the
partnership agreement. Therefore, what the partner gets upon dissolution of the
partnership or upon retirement from the partnership is the realisation of a
pre-existing right or interest. The Court held that there was nothing strange
in the law that a right or interest should exist in praesenti but
its realisation or exercise should be postponed. Applying the above principle,
the Court held that upon purchase of the flat, the purchaser certainly acquires
a right or interest in the proportionate share of the land but its realisation
is deferred till formation of the co-operative society by the flat owners and
transfer of the entire property to the co-operative society.

 

Thus, on an overall consideration of the entire matter, the Court held
that there was no basis or justification for the A.O. to form a belief that any
income of the assessee chargeable to tax for the A.Y.s under consideration had
escaped assessment within the meaning of section 147 of the Act. The reasons
rendered could not have led to formation of any belief that income had escaped
assessment within the meaning of the aforesaid provision.

 

Therefore, in the facts and circumstances of the case, the impugned
notices issued u/s 148 of the Act dated 25^th February, 2000 were set
aside and quashed.

 

 

 

18.  The Pr.
CIT-Central-4 vs. M/s Shreya Life Sciences Pvt. Ltd. [Income tax Appeal No. 180
of 2017]; Date of order: 19^th March, 2019; A.Y.: 2010-11

 

DCIT CC-44 vs. M/s Shreya Life Sciences Pvt. Ltd. [ITA No. 2835/Mum./2014;
Bench E; Date of order: 20^th November, 2015]

 

Penalty u/s 221(1) r/w/s 140A(3) of the Act – Default on payment of
self-assessment tax – Acute financial constraints – Good and sufficient reasons
– Penalty deleted

 

The assessee is a pharmaceutical company manufacturing a wide range of
medicines and formulations. It filed its e-return on 15^th October,
2010 and was liable to pay self-assessment tax of Rs. 2,61,19,300. But the
assessee did not pay the tax and merely uploaded the e-return. Asked the
reasons for not depositing the tax, it was submitted before the AO that the
assessee company was in great financial crisis.

 

However, the assessee’s contention was not accepted and the AO issued
notice u/s 221(1) r/w/s 140A(3) of the Act holding that the assessee had failed
to deposit self-assessment tax due to which a penalty was imposed u/s 221(1) of
the Act.

The CIT(A) deleted the penalty to the extent of Rs. 10 lakhs and upheld
the balance amount of Rs. 40 lakhs.

 

Both the assessee as well as the Department went in appeal before the
ITAT. The Tribunal, while deleting the penalty referred to relied upon the
further proviso to sub-section (1) of section 221 of the Act which provides
that where the assessee proves to the satisfaction of the AO that the default
was for good and sufficient reasons, no penalty shall be levied under the said
section.

 

The Tribunal accepted the assessee’s explanation that due to acute
financial constraints the tax could not be deposited. The assessee pointed out
that even the other dues such as provident fund, ESIC and bank interest could
not be paid. The assessee also could not deposit the government taxes such as
sales tax and service tax. In fact, the recoveries of the tax could be made only
upon adjustment of the bank accounts.

 

The financial crisis was because of non-receipt of proceeds for its
exports. Attention was drawn to the amount of outstanding receivables which had
increased from Rs. 291,96,24,000 to Rs. 362,54,82,000 during the year under
consideration.

 

On further appeal to the High Court, the Revenue appeal was dismissed.   

 

 

17.  The Pr. CIT-7 vs. M/s Graviss
Foods Pvt. Ltd. [Income tax Appeal No. 295 of 2017]; Date of order: 5^th April, 2019; A.Y.: 2010-11

 

Dy. Commissioner of Income-tax, Circle-6(3) vs. M/s Graviss Foods Pvt.
Ltd. [ITA No. 4863/Mum./2014]

 

Pre-operative expense – New project unconnected with the existing
business – Deductible u/s 37(1) of the Act

 

The assessee is a private limited company engaged in the business of
manufacturing ice cream and other milk products. For the AY 2010-11 the
assessee had incurred an expenditure of Rs. 1.80 crores (rounded off) in the
process of setting up a factory for production of ‘mawa’, which project the
assessee was forced to abandon.

 

The AO was of the opinion that the expenditure was incurred for setting
up of a new industry. The expenditure was a pre-operative expenditure and could
not have been claimed as revenue expenditure.

 

The AO held that the assessee had entered a new field of business of
producing and supplying ‘mawa’ (or ‘khoa’) which is entirely different from the
business activity carried on by it. The AO completed the assessment and
disallowed the expenditure on the ground that it was incurred in connection
with starting a new project, that the expenditure was incurred for setting up a
new factory at Amritsar and thus not for the expansion and extension of the
existing business but for an altogether new business. The CIT(A) allowed the
appeal. The Tribunal relied upon its earlier decision for A.Y. 2009-10 and
confirmed the view of the CIT(A) and dismissed the Revenue’s appeal.

 

Before the Hon’ble High Court counsel for Revenue submitted that the
assessee was previously engaged in the business of manufacturing ice cream. The
assessee desired to set up a new plant at a distant place for production of
‘mawa’. This was, therefore, a clear case of setting up of a new industry.

The High Court observed that there was interlacing of the accounts,
management and control. The facts on record as culled out by the Tribunal are
that the assessee company was set up with the object to produce or cause to be
produced by process, grate, pack, store and sell milk products and ice cream.
In furtherance of such objects, the assessee had already set up an ice cream
producing unit. Using the same management control and accounts, the assessee
attempted to set up another unit for production of ‘mawa’, which is also a milk
product. The Tribunal, therefore, rightly held that the expenditure was
incurred for expansion of the existing business and it was not a case of
setting up of new industry, therefore it was allowable as revenue expenditure.

 

The High Court relied on the decision of the Supreme Court in the case
of Alembic Chemical Works Co. Ltd. vs. CIT, Gujarat, [1989] 177 ITR 377,
and the Bombay High Court decision in the case of CIT vs. Tata Chemicals
Ltd. (2002) 256 ITR 395 Bom.

 

The Department’s appeal was dismissed.

 

16.  The Pr. CIT-27 vs. Mrs.
Supriya Suhas Joshi [Income tax Appeal No. 382 of 2017]; Date of order: 12^th April, 2019; A.Y.: 2009-10

 

The DCIT vs. Mrs. Supriya Suhas Joshi [ITA No. 6565/Mum./2012; Bench: L;
Date of order: 31^st May, 2016; Mum. ITAT]

 

Income from salary vis-a-vis income from contract of services – Dual
control – Test of the extent of control and supervision

 

The assessee is the sole proprietor of M/s Radiant
Services, engaged in Manpower Consultancy and Recruitment Services in India and
overseas. The said Radiant Services had entered into an agreement with M/s
Arabi Enertech, a Kuwait-based company, in 2007-08 for providing manpower to it
as per its requirements. Individual contracts were executed for providing the
personnel. As per the contract, the Kuwait-based company paid a fixed sum out
of which the assessee would remunerate the employee.

 

The AO treated the payments made by the assessee to
the persons recruited abroad as not in the nature of salaries and applied the
provisions of section 195 r/w/s 40(a)(ia) and disallowed the same as no TDS was
done by the assessee. The AO concluded that there was no master and servant
relationship between the assessee and the recruited persons and therefore the
payments could not be held to be salaries. He did not accept the assessee’s
stand that the persons so employed worked in the employment of the assessee and
were only loaned to the Kuwait-based company for carrying out the work as per
the requirements of the said company. It is undisputed that in case of payment
to a non-resident towards salary, it would not come within the scope of section
195 of the Act, and hence this controversy. The assessee carried the matter in
appeal. The CIT(A) took note of the documents from the records, including the contract
between the assessee and the Kuwait-based company and the license granted by
the Union Government to enable the assessee to provide such a service. The
Commissioner was of the opinion that the assessee had employed the persons who
had discharged the duties for the Kuwait-based company. The assessee was,
therefore, in the process making payment of salary and, therefore, there was no
requirement of deducting tax at source u/s 195 of the Act.

 

The Tribunal confirmed the view of the CIT(A) upon
which an appeal was filed before the High Court.

 

The Hon’ble High Court observed that the contract
between the assessee and the Kuwait-based company was sufficiently clear,
giving all indications that the concerned person was the employee of the
assessee. The preamble to the contract itself provided that as per the contract
the assessee would supply the Commissioning Engineer to the said company on
deputation basis for its ongoing project. Such deputation would be on the terms
and conditions mutually discussed between the assessee and the said company.
The contract envisaged payment of deputation charges which were quantified at
US$ 5,500 per month. Such amount would be paid to the assessee out of which the
assessee would remunerate the employee. The mode of payment was also specified.
The same would be released upon the assessee submitting invoices. The record
suggested that the assessee after receiving the said sum from the Kuwait-based
company would regularly pay to the employee US$ 4,000 per month, retaining the
rest. In clear terms, thus, the concerned employee was in the employment of the
assessee and not of the Kuwait-based company, contrary to what the Department
contended.

 

The Department argued that looking to the
supervision and control of the Kuwait-based company over the employee, it must
be held that he was under the employment of the said company and not of the
assessee. In this regard, it placed heavy reliance on the decision of the
Supreme Court in the case of Ram Prashad vs. Commissioner of Income tax
(1972) 86 ITR 122 (SC). The Court observed that the test of the extent
of control and supervision of a person by the engaging agency was undoubtedly a
relevant factor while judging the question whether that person was an agent or
an employee. However, in a situation where the person employed by one employer
is either deputed to another or is sent on loan service, the question of dual
control would always arise. In such circumstances, the mere test of on-spot
control or supervision in order to decide the correct employer may not succeed.
It is inevitable that in a case such as the present one, the Kuwait-based
company would enjoy considerable supervising powers and control over the
employee as long as the employee is working for it.

Nevertheless, the assessee company continued to
enjoy the employer-employee relationship with the said person. For example, if
the work of such person was found to be wanting or if there was any complaint
against him, as per the agreement it would only be the assessee who could
terminate his services. Under the circumstances, no question of law arises. The
Department’s appeal was dismissed.