COMMISSIONER OF INCOME TAX- 14 vs. AMAN KHERA

Advocates.

WITH 19. +

ITA 21/2015

COMMISSIONER OF INCOME TAX-14 ..... Appellant

Through: Mr. Rahul Chaudhary, Senior Standing

Counsel with Mr. Raghvendra Singh, Advocates.

versus

AMAN KHERA

..... Respondent

Through: Mr. M. P. Rastogi with Mr. K. N. Ahuja,

Advocates.

AND 20. +

ITA 326/2015

COMMISSIONER OF INCOME TAX-IX ..... Appellant

Through: Mr. Ashok K. Manchanda, Senior

Standing Counsel.

versus

RAMAN KHERA

..... Respondent

Through: Mr. M. P. Rastogi with Mr. K. N. Ahuja,

Advocates.

CORAM: JUSTICE S. MURALIDHAR JUSTICE NAJMI WAZIRI

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 3 of 28

O R D E R %

03.08.2016

Dr. S. Muralidhar, J.:

Background facts 2. The background facts are that an agreement was entered into on 31st October 2005 between Dr. B.L. Khera Charitable Trust (hereafter 'the Trust'), a society incorporated under the Societies Registration Act, 1860 and Heart Institute, Noida represented by Dr. Purshotam Lal, the Director of Metro Hospital and Heart Institute.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 4 of 28

―1. Khera society will allow Metro Hospital to make necessary changes, alterations or additions and/or demolitions, renovations accordingly in Khera Hospital building and other places.

This agreement may be terminated by giving 12 months notice in writing to the other party provided consideration, if any, in any form and interest accruing thereon from the day it was taken from Metro Hospital or its nominees is cleared and

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 5 of 28

discharged by Khera Hospital at the time of serving of notice. No notice of termination will be valid if the financial involvement is not discharged.‖

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 6 of 28

Assessment orders 10. The returns of income were picked up for scrutiny and assessment orders under Section 143(3) of the Act were passed on 22nd December 2008 in the cases of Dr. Aman Khera and Dr. Raman Khera, and on 26th December 2008 in the case of Ms. Jyoti Khera for AY 2006-07. Each of them claimed that the amount received from UGHPL was on account of professional/management consultancy. Significantly, the AO noted in each of the assessment orders that none of the Assessees were able to produce their regular books of accounts or receipts to show the source of the salary income or the income from business.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 7 of 28

not accepted by the AO. He observed that it was unbelievable that a hospital would all of a sudden need so many Hospital Consultants from a single family all closely related to each other by blood and pay all of them in advance for five years a hefty sum amounting to crores for their services as claimed. He also noted that Dr. K.L. Khera, the father of three Assessees, who was the senior most among the recipients had been paid only Rs.58,26,888 for the same period of five years whereas his children with much less experience had received sums of over Rs.1 crore.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 8 of 28

the Assessees. It was noticed that ―there is no regular books of accounts maintained by the Assessees in any system cash or mercantile.‖ Accordingly, the entire receipt from UGHPL by each of the Assessees was treated as their respective income for the AY in question.

Proceedings before the CIT (A) 15. The Assessees appealed to the Commissioner of Income Tax (Appeals) [‗CIT (A)‘]. By separate orders dated 24th November 2010, the CIT (A) partly allowed each of the appeals. Significantly, before the CIT (A) for the first time, the Assessees placed on record the letters issued by UGHPL to each of them at the time of their appointment as Hospital Consultants; copy of the accounts of UGHPL in the books of the Assessees; confirmation receipt from UGHPL about the treatment of the payment in their books; income tax returns for each of the Assessees for AY 2007-08 and 2008-09 which showed that the proportionate fees in those respective AYs were shown in the income and offered to tax by the Assessees.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 9 of 28

Assessees as under: ―if your Honour is of the view that the receipt for the period 01.01.2006 to 31.12.2010 is to be taxed in this year itself, it is prayed that the ld. Assessing Officer be directed to modify the assessment for the assessment years 2007-2008 to 2011-12 to that extent after allowing expenses incurred in those years, because in law the same income cannot be taxed twice.‖

Answer: There is no agreement between me and UG Hospitals. There is only a letter of appointment dated 12.12.2005 which is already on record. Confirmation of UG Hospitals was also received in assessment proceedings in response to summons under Section 133(6) of the Income Tax Act, 1961. Another confirmation is being attached which has been recently taken from UG Hospitals reconfirming the same facts. Already four years of this appointment are over and the possibility of failing to provide hospital management consultancy services to the UG Hospital is unlikely. Also, I would like to mention that we are already negotiating to extend this appointment for another 5 years once the term is completed. The details however have not yet been worked out.

Answer: We are not doctors there. We are management consultants who are involved in corporate management of the hospitals run by UG Group of hospitals. We do not have to go to the hospital everyday. We meet at the head office as and

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 10 of 28

when required.

The nature of our services are advisors in corporate affairs like decisions as to which new hospital to acquire, feasibility study of new projects, planning of new projects, procurement and decision as to which equipments to buy, doing market study as to which specialty of medical service to promote etc.

Please note that we are not working in the capacity of administrators or looking after day to day working of the hospitals, but working as advisors at the corporate level.

Answer: With Dr. Purshottam Lal.

The sum demanded by me was Rs. 3 lacs per month. Then it was negotiated to Rs. 2 lacs a month if all was paid in advance. This was Rs. 1 crore and 20 lacs. This was finally settled at Rs. 1 crore and Rs. 15 lacs. Then came the issue of TDS. Since I wanted Rs 1 crore and 15 lacs in hand, the whole amount was re-calculated so that the TDS was paid and I got Rs. 1 crore and 15 lacs.

Khera Hospital is owned by Dr. R.L.Khera Charitable Trust. It is now being run and managed by UG Hospitals under a management agreement. I have been appointed as a consultant to all the hospitals under the UG Group of Hospitals to assist them in the capacity of hospital management consultant including Khera Hospital. Copy of agreement attached.‖

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 11 of 28

The balance documentation/information required is furnished below: 1. Trust deed of R.L. Khera Charitable Hospital: attached

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 12 of 28

Order of the CIT (A) 21. An issue was raised before the CIT (A) on whether this additional evidence in the form of the above agreement which was obviously entered into nearly four years after the so-called engagement of the Assessees as Hospital Consultant could be taken on record by the CIT (A) under Rule 46A of the Income Tax Rules, 1962 (‗Rules‘). The CIT (A) concluded that ―these evidences only enable the undersigned to pass an order on this issue one way or other.‖ The CIT (A) held that ―the nature of evidence is such that these do not give rise to any new principle or lead to any new facts requiring fresh investigation and by filing the additional evidence the assessee is not

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 13 of 28

seeking to make any fresh line of enquiry.‖

(i) The evidence brought on record showed that UGHPL instead of making payment to the Trust on monthly basis as per agreement made payments of Rs. 4 crores excluding income tax to the Trustees of the Trust. The lump sum tax free payment was made in the following manner namely Rs.1.15 crores each to Dr. Aman Khera, Dr. Raman Khera and Ms. Jyoti Khera and Rs.55 lakhs to Dr. R.L. Khera.

(ii) It is not understood how UGHPL was utilising the expertise of the three Assessees. One of them Ms. Jyoti Khera was not a doctor and was also not having a degree in hospital management.

(iii) The payments appear to have been made not for their expertise but otherwise. The payments to the Assessees were made irrevocable because they were not related to the specific services. There was no obligation on the Assessees to refund or repay the fees received.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 14 of 28

was unjustified. The claimed expenses as against the business income had already been allowed by the AO. Consequently, the CIT (A) added back the expenses allowed by the AO at 35%.

Impugned order of the ITAT 25. Aggrieved by the order of the CIT (A) the three Assessees went in appeal before the ITAT which by the impugned order allowed the appeals after coming to the following conclusion:

(i) When examined in the light of the decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax (1954) 26 ITR 27(SC), it is seen that the Assessees had not served the entire period of five years and had, therefore, not awarded emoluments in the sums paid to each of them. In other words, the entire income could not be said to have accrued to the Assessee as the Assessee had not created a debt or a right to receive the payment.

(ii) Accounting Standard 9 (‗AS 9‘) issued by the Institute of Chartered Accountants of India (‗ICAI‘) which talks of recognition of revenue in the rendering of services was relevant. It specifies that in the proportionate completion method, the revenue is recognised proportionately by reference to the performance of each act. In case of service contracts the revenues are recognised on proportionate basis.

(iii) Relying on the decision in Commissioner of Income Tax v. Dinesh Kumar Goel (2011) 331 ITR 10 (Del), it was held that the amount received by each of the Assessee has to be proportionately

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 15 of 28

spread over five years.

Question of law 27. While admitting these appeals on 23rd January 2014, this Court framed the following question of law in each of the appeals: ― Did the Tribunal fall into error in accepting the assessee's contention that the sum of Rs. 1,21,83, 494/- received by him and offered in AY 2006-07 as income to be spread over a period of five years on the basis of an agreement entered into with M/s. UG Hospital Private Limited?

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 16 of 28

concerned, the CIT (A) allowed the appeals of the Appellants by separate orders dated 22nd May 2013 on the ground that in the quantum proceedings the ITAT had deleted the additions made in the AY 2006-07. As a result the appeals were allowed and the penalty orders passed by the AO on 13th March 2012 and 30th March 2012 under Section 271(1)(c) of the Act was set aside.

Submissions of counsel for the Revenue 32. This Court has heard the submissions of Mr. Zoheb Hossain, Mr. Ashok K. Manchanda and Mr. Raghvendra Singh, learned counsel appearing on behalf of the Revenue and Mr. M.P. Rastogi, learned counsel for the Assessee.

(i) There was no agreement entered into between the Assessees and UGHPL at the time of making of the payment on 12th December 2005. Further although the letter dated 12th December 2005 to Dr. Aman Khera by UGHPL termed the amount as being ―in advance for the abovementioned appointment‖ it was clear that what was paid was ‗consolidated amount‘ from which Rs.6,83,494 was deducted as TDS.

(ii) The payment had in fact to be made by UGHPL to the Trust under the agreement dated 31st October 2005. The payment made to the Assessees was, therefore, not related to any specific service. There was no live link between the payment made by UGHPL and the

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 17 of 28

services rendered by the Assessees.

(iii) The Assessees did not maintain any books of accounts. If indeed the Assessees had maintained the accounts on cash basis, the question of accrual of income or the right to receive income or the creation of a debt justifying the income received did not arise. The question of spreading over said income over five years also did not arise.

(iv) The decision in Commissioner of Income Tax v. Dinesh Kumar Goel (supra) was distinguishable on facts. The decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax (supra) was relevant for companies and not individual Assessees. The matching principle or AS-9 could not be pressed into service when the assessment was of individuals.

(v) The Assessees failed to produce vouchers or any books of accounts and, therefore, the AO is justified in treating the entire income received by the Assessees to be taxable in the relevant AY. In the absence of books of accounts, the presumption was that the Assessees were following the cash system of accounting. The receipts were liable to be taxed in the year in which they were actually received.

(vi) The CIT (A) ought not to have permitted additional evidence to be produced at the stage of appeal since none of the conditions under Rule 46A was satisfied. Reliance was placed on the decision in

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 18 of 28

Commissioner of Income Tax v. Manish Buildwell (2012) 204 Taxman 106 (Delhi).

Submissions of counsel for the Assessees 34. On behalf of the Assessees it was submitted by Mr. M.P. Rastogi, learned counsel, as under: (i) Under Section 4 of the Act, tax was chargeable on the total income which in terms of Section 5 included income derived from three sources (a) income received or deemed to be received in India (b) income that accrues or arises or deemed to accrue or arise in India (c) income that accrues or arise outside India.

(ii) The liability of tax was attracted at the stage of accrual of income and at the stage of receiving income. To begin with there was an oral agreement that the Assessees would render services to UGHPL for five years. Therefore for the AY in question, the Assessees declared professional income from UGHPL in proportion to the period i.e. January to March 2006 for which each of them rendered services. The emoluments were spread over and declared in the subsequent years in proportion to the period of services rendered in those very years. This has been acknowledged in the orders of the CIT (A) as well as the ITAT.

(iii) With the Revenue having processed the returns filed by the Assessees for the AYs subsequent to the AY in question i.e. 2006-07 in which the proportionate amount received from the UGHPL was

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 19 of 28

offered to tax, which has been accepted by the Revenue, an exception cannot be made for the AY in question by treating the entire amount received to tax. Reliance is placed on the decision in Parimisethi Seetharamamma v. CIT (1965) 57 ITR 532 (SC) in support of the proposition that all incomes are receipts but all receipts are not income. It is only receipts which bear the characteristic of income that can be taxed.

(iv) Relying on the decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax (supra) it was submitted that in the AY in question in relation to bringing the entire amount received from UGHPL to tax it would have to be shown that the Assessee must have either rendered all the services or created a debt in his favour in the AY in question. In other words, unless it was shown that he has brought into existence a debt or a right to receive the payment, it cannot be said that the income was accrued to him.

(v) AS-9 issued by the ICAI recognised that revenue from service transactions should be proportionate to the period during which the services were rendered and computed either by the proportionate completion method or by the completed service account method. Under the proportionate completion method, revenue is recognised proportionate to the performance of each act and when services are provided by an indeterminate number of acts over a specific period of time. In such an event, the revenue is recognised on a straight line basis over the specific period. Reliance is placed on Commissioner of

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 20 of 28

Income Tax v. Dinesh Kumar Goel (supra) where on facts it was held that since the services of a coaching institute had to be rendered in two years, the entire fee received had to be spread over in two years and assessed proportionately. Reliance is also placed on the decision of this Court in Commissioner of Income Tax, Delhi v. Om Prakash Khaitan 62 taxmann.com 324 (Del) where the monies received by lawyers from clients were treated as income in the hands of lawyers in the year in which the money is received since some portion of the monies were to meet out-of-pocket payment in the conduct of the case.

(vi) In any event, the Assessees having offered the proportionate income in subsequent AYs, there was no justification to bring the entire amount received from UGHPL in this year i.e. AY 2006-07. Reliance is placed on the decision in Commissioner of Income-Tax v. D.C. Gandhi Associates (1994) 210 ITR 929 (Guj) where it was held that even in a cash system of accounting, income accrues upon rendering of service. Reference was also made to the decision in Commissioner of Income-tax v. Winner Business Link (P). Ltd. [2015] 55 taxmann.com 468 (Guj) where the Gujarat High Court following the decision in Commissioner of Income Tax v. Dinesh Kumar Goel (supra) held that the entire receipt of the membership fees in the business of discount cards was required to be spread over the period of membership and income had to be recognised proportionately.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 21 of 28

(vii) Whether it is a mercantile or cash basis of accounting, income would be said to have accrued only with the rendering of service. Income could be, therefore, sought to have accrued in the proportion to the services rendered to the Assessees over a period of five years. It is submitted that the payment made by UGHPL to the Trust under the agreement dated 31st October 2005 was an independent transaction not connected with the Assessees. It is asserted that UGHPL engaged the services of the Assessees on account of their qualification.

(viii) The alternative plea before the CIT (A) was that if the entire income is to be taxed in this year then the tax already paid on the proportionate amount in the subsequent years should be accounted for and in that event the expenditure claimed in the subsequent years should be allowed in full. Emphasis was placed on the matching principle and the decision in Calcutta Co. Ltd. v. Commissioner of Income Tax (1959) 37 ITR 1 (SC).

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 22 of 28

Analysis and reasons 36. The ITAT appears to have proceeded on the basis that since the services were to be performed by each of the Assessees for over a period of five years, the amount received from UGHPL had to be spread over a period of five years in proportion and for this purpose the ITAT referred to the decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax (supra).

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 23 of 28

the entities involved in the above decision i.e. the managing agencies had been transferred from one company to another. The question of any right accruing only at the completion of a definite period which existed in the decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax (supra) does not find place here. There is nothing to show that the Assessees would have to return the monies if they did not perform the services. In fact the agreement between the Trust and the UGHPL indicated that it is the Trust which is saddled with the responsibility of making good the losses.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 24 of 28

accounting. In that view of the matter, the question of income accruing or the right to earn income accruing only upon the performance of a service at the end of a period would not arise.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 25 of 28

after they received the entire remuneration upfront in December 2005. Consequently, the Court is of the view that the ITAT erred in concluding that the sum received in each of the AYs in question could be spread over five years on the basis of the subsequent agreements dated 15th June 2010 between the UGHPL and the Assessees.

Consequential directions 46. Mr. Rastogi then made an earnest plea for directions to be issued to the AO to take into account, while giving the appeal effect to this order, the fact that each of the Assessees having paid tax on the proportionate income over the subsequent AYs.

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 26 of 28

passed in appeal or other proceeding under this Act, refund of any amount becomes due to the Assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the Assessee without his having to make any claim in that behalf:

Provided that where, by the order aforesaid,—

(a) an assessment is set aside or cancelled and an order of fresh assessment is directed to be made, the refund, if any, shall become due only on the making of such fresh assessment;

(b) the assessment is annulled, the refund shall become due only of the amount, if any, of the tax paid in excess of the tax chargeable on the total income returned by the assessee.‖

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 27 of 28

that he has disallowed expenditure at an estimated 35% beyond what has already been allowed in relation to the business income in the returns of the Assessees. There is indeed no basis for any estimation of expenditure with the Assessees not maintaining accounts and being unable to produce any vouchers or bills as proof of any expenditure.

Penalty appeals 51. As far as the penalty appeals are concerned, since the CIT (A) set aside the penalties imposed by the AO only on the ground that the ITAT had deleted the addition, it is necessary for the Court as a result of setting aside the order of the ITAT to remand the appeals concerning the penalty issue to the file of the CIT (A).

ITA Nos. 653 of 2012, 476 of 2014, 19 of 2015, 21 of 2015 & 326 of 2015 Page 28 of 28

circumstances with no order as to costs.

CM No. 8784/2015 in ITA 326/2015 (for condonation of delay of 574 days in re-filing the appeal) 54. Although the delay in re-filing the appeal is extraordinary, considering that this and the two connected appeals arise from a common impugned order of the Income Tax Appellate Tribunal (‗ITAT‘), the delay is condoned.

S.MURALIDHAR, J

NAJMI WAZIRI, J AUGUST 03, 2016 dn