M/S VARREN FINANCIAL SERVICES P LTD vs. COMMISSIONER OF INCOME TAX

ITA/72/2004HC Punjab & HaryanaPHHC01051594200421 February 2012Author: MR. JUSTICE M.M. KUMAR,MR. JUSTICE ALOK SINGH5 pages
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What were the facts?

The assessee, M/s Varren Financial Services (P) Ltd., Patiala, is in appeal before the High Court against an order of the Income Tax Appellate Tribunal (ITAT) for assessment year 1993-1994. The assessee had received consultancy charges of ₹30,00,000/- from M/s Usha Services and Consultants Ltd. for providing project consultancy services. However, the assessee could not render services for establishing a joint venture company in the USA, leading to the write-off of ₹18,00,000/- and subsequently the remaining ₹12,00,000/-. The Assessing Officer added ₹12,00,000/- as income. The Commissioner of Income Tax (Appeals) deleted this addition, holding that no real income had accrued. The ITAT reversed the CIT(A)'s order, restoring the Assessing Officer's addition.

What did the High Court hold?

The High Court held that the Tribunal was not justified in holding that ₹12,00,000/- had accrued and arisen as income. The Court reasoned that income tax is a levy on income, and while the Act considers accrual or receipt, the substance is the income itself. If income does not result, there cannot be a tax, even if a hypothetical income is entered in books. The assessee had received ₹30,00,000/- for services agreed to be provided. However, since the assessee failed to provide the services, the entire amount was written off and returned to M/s Usha Services and Consultants Ltd. in two tranches, which was not disputed. The Court found the order of the CIT(A) to be valid and wrongly disturbed by the Tribunal. The question of law was answered in favour of the assessee and against the revenue. The impugned order of the Tribunal was set aside. The appeal was allowed.

What were the issues?

1. Whether, under the facts and circumstances, the Tribunal was justified in holding that ₹12,00,000/- had accrued and arisen as income during the year under appeal and was taxable in the hands of the assessee, and that the assessee's claim that book entries were notional and hypothetical was unsustainable? (Question of law) Assessee's Contention: The assessee argued that the entries in its books were merely notional and hypothetical, as the services for which the consultancy charges were received could not be rendered. The agreement was cancelled, and the entries were reversed. The assessee relied on the decisions in CIT vs. Kerla State Drugs and Pharmaceutical Ltd. (1991) 192 ITR 325, CIT West Bengal-I vs. India Discount Co. Ltd. 73 ITR 191 (SC), Sutlej Cotton Mills Ltd. Vs. CIT West Bengal-116 ITR 137 (SC), CIT Amritsar-I vs N.D. Radha Kishan & Co. 140 ITR 560, and CIT vs. Ferozepur Finance (P) Lt. (1980) 124 ITR 619 (P&H). Revenue's Contention: The judgment does not record specific arguments made by the revenue before the High Court, other than implicitly supporting the ITAT's order.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 35D

AI-generated summary — verify with the full judgment below

ITA No.72 of 2004 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.72 of 2004 (O&M)

Date of decision: 21.02.2012 M/s Varren Financial Services (P) Ltd., Patiala ....Appellant Versus Commissioner of Income Tax, Patiala ....Respondent CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE ALOK SINGH Present: - Mr. Pankaj Jain, Advocate, for the appellant.

Ms. Savita Saxena, Advocate, for the respondent. 1.Whether to be referred to the Reporters or not? 2.Whether the judgment should be reported in the Digest? ***** ALOK SINGH, J.

The assessee has preferred present appeal under Section 260-A of the Income Tax Act, 1961, assailing order dated 31.7.2003 passed by Income Tax Appellate Tribunal Bench 'A', Chandigarh (for brevity 'the Tribunal') relatable to assessment year 1993-1994. The appellant has claimed a number of questions of law but the appeal was admitted on the following question of law: - “Whether under the facts and circumstances of the case the Tribunal was justified in holding that ` 12,00,000/- had accrued and arisen as income during the year under appeal and to be taxed in the hands of the assessee and that the claim of the appellant that the entries

The order continues below.

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