Case Law Details
Jayaram Rangan Vs ACIT (ITAT Chennai)
ITAT Chennai held that professional fees received cannot be taxed under the head Salary merely because consultant/ professional is appointed as managing director of the company. Various details filed undoubtedly proves that professional service is rendered and accordingly taxable under ‘income from profession’.
Facts- During the course of assessment proceedings, it was noticed that the assessee derives consultancy income from M/s. Fichtner Consulting Engineers (India) P.Ltd. and sitting fees from M/s. Consolidated Construction Consortium Ltd. The assessee has treated consultancy fees and sitting fees received from two companies as his professional income and claimed various expenses against professional income. AO did not accept claim of the assessee and according to him, although, the assessee receives periodic professional fees from the company, but if you go through service agreement between the assessee and the company, it is in the nature of employer and employee agreement for appointing a person for carrying out day to day management of the company. Therefore, assessed consultancy fees under the head ‘salary’ and disallowed various expenses claimed by the assessee.
CITI(A) confirmed the action of AO. Being aggrieved, the present appeal is filed.
Conclusion- There is no dispute with regard to fact that there is agreement between the assessee and company for rendering professional services. As per the agreement between the parties, the assessee has been engaged as a professional on professional fee which shall be payable in monthly equated installments.
But, AO treated the professional income received from the company under the head ‘income from salary’ is nature of services rendered by the assessee to the company. As per agreement between the parties, the assessee shall be designated as Managing Director, and he has been entrusted with work of day to day overall operations of the company. No doubt, the assessee is working as Managing Director and in-charge of day to day affairs of the company. In our considered view, there is no restriction under law for appointing consultant / professional as managing director of the company and to entrust day to day affairs of the company.
In this case, various details filed by the assessee undoubtedly proves that the assessee is engaged for rendering professional services in the company and same has been rightly considered for taxation. The Assessing Officer without appreciating facts simply assessed income of the assessee under the head ‘salary’.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. This appeal filed by the assessee is directed against order of the learned Commissioner of Income Tax (Appeals)-2, Chennai, dated 27.03.2019 and pertains to assessment year 2013-14.
2. The assessee has raised following grounds of appeal:-
“1The appellant objects to the Commissioner of Income tax (Appeals) [CIT(A)]’s order Dismissing the appeal against the Assessment order, for 2013-14 a/y
(i) Assessing professional Gross receipts of Rs.1,54,34,001, as salary income;
(ii) Non allowance of expenditure and depreciation totaling to Rs.2,10,917 against professional income:
iii) Non deduction of interest paid, Rs. 1,10,000 from the income of Rs.9, 17,985 assessed under ‘other sources’:
on the following grounds:
1. The Learned Commissioner of Income Tax (Appeals) [CIT(A)J erred in upholding the assessment of consultancy receipts of Rs. 1,54,34,00 1 under the head ‘salaries’, ignoring the facts of the case; payment of service tax on the consultancy receipts & TDS u/s 194J.
2. The CIT(A) erred in upholding the non-allowance of expenditure of Rs.2, 15,767 and depreciation of Rs.5, 150, totaling to Rs.220917 from the Professional income, by the AO.
3. The CIT(A) erred in upholding the non-allowance of interest paid, Rs. 1,10,000 from the income from other sources, Rs.9, 17,985, by the AO.
On these grounds and on such other grounds as may be put forth at the time of hearing, the appellant prays that the:
i) 1,54,34,001 be assessed under “Income from Profession’, instead of ‘salary’ income;
ii) Expenditure and depreciation totaling to Rs.2,l0,9 17, be allowed as deduction against professional income:
iii) Deduction of interest paid, Rs. 1,10,000 be allowed from the income of Rs.9, 17,985 assessed under ‘other sources’; and justice rendered.”
3. Brief facts of the case are that the assessee is an individual, filed his return of income for the assessment year 2013-14 by disclosing income from house property, income from profession and income from other sources. During the course of assessment proceedings, it was noticed that the assessee derives consultancy income from M/s. Fichtner Consulting Engineers (India) P.Ltd. and sitting fees from M/s. Consolidated Construction Consortium Ltd. The assessee has treated consultancy fees and sitting fees received from two companies as his professional income and claimed various expenses against professional income. The Assessing Officer did not accept claim of the assessee and according to him, although, the assessee receives periodic professional fees from the company, but if you go through service agreement between the assessee and the company, it is in the nature of employer and employee agreement for appointing a person for carrying out day to day management of the company. The Assessing Officer further noted that as per agreement between the parties, the assessee shall be designated as Managing Director and further, he was in-charge of overall operations of the company. From the above, it is very clear that there is an employee-employer relationship between the assessee and the company and thus, consultancy fees received from the company is in the nature of salary assessable under the head ‘income from salary’. Therefore, assessed consultancy fees under the head ‘salary’ and disallowed various expenses claimed by the assessee. The assessee carried the matter in appeal before the first appellate authority, but could not succeed. The learned CIT(A), for the reasons stated in his appellate order dated 27.03.2019 sustained additions made by the Assessing Officer. Aggrieved by the learned CIT(A) order, the assessee is in appeal before us.
4. The learned A.R for the assessee referring to professional service agreement submitted that the assessee has received consultancy fees from the company on monthly basis for which he had charged service tax. He further submitted that the company has deducted TDS u/s.194J of the Act, as applicable to professional charges. The assessee has maintained regular books of account and his books of account are audited u/s.44AB of the Income Tax Act, 1961. Therefore, merely for the reason that the assessee works as a Managing Director, it cannot be said that professional fees received from the company is salary assessable under the head ‘income from salaries’.
5. The learned DR, on the other hand, supporting order of the learned CIT(A) submitted that the Assessing Officer has brought out clear facts to the effect that as per service agreement between the parties, the assessee works as Managing Director and he directly reports to Chairman of the The scope of work of the assessee has been described in the agreement as per which, he is looking after day to day affairs of the company. In addition to monthly professional fees, he had been paid 2% of the profit of the company as additional professional fees. From the above, what is clear is that scope of work of the assessee with the company has clearly established employer and employee relationship and thus, amount received from the company needs to be taxed under the head ‘income from salary’.
6. We have heard both the parties, perused material available on record and gone through orders of the authorities There is no dispute with regard to fact that there is agreement between the assessee and company for rendering professional services. As per the agreement between the parties, the assessee has been engaged as a professional on professional fee which shall be payable in monthly equated installments. It is also undisputed fact that the assessee has raised professional bills along with service tax for every month and the company has paid professional charges after deducting applicable TDS, as per provisions of section 194J of the Income Tax Act, 1961. It is also an undisputed fact that the assessee maintained regular books of account and his books of accounts are audited u/s.44AB of the Income Tax Act, 1961. All these evidences clearly prove that amount received by the assessee from the company is for rendering professional services. But, only objection of the Assessing Officer to treat professional income received from the company under the head ‘income from salary’ is nature of services rendered by the assessee to the company. As per agreement between the parties, the assessee shall be designated as Managing Director, and he has been entrusted with work of day to day overall operations of the company. No doubt, the assessee is working as Managing Director and in-charge of day to day affairs of the company. But, what is required to be seen is whether a consultant can work as managing director or only a regular employee is entitled to work as managing director. In our considered view, there is no restriction under law for appointing consultant / professional as managing director of the company and to entrust day to day affairs of the company. In our considered view, by profession, if he is competent enough to discharge his function, then the company may appoint any person to suitable post. Therefore, merely for the reason that the assessee had been designated as managing director, it cannot be said that professional fee received by the assessee for rendering professional services cannot be treated as salary, which is derived from employer and employee relationship. In this case, various details filed by the assessee undoubtedly proves that the assessee is engaged for rendering professional services in the company and same has been rightly considered for taxation. The Assessing Officer without appreciating facts simply assessed income of the assessee under the head ‘salary’. The learned CIT(A), without appreciating facts has simply sustained additions made by the Assessing Officer. Hence, we set aside findings of the learned CIT(A) and direct the Assessing Officer to assess income of the assessee under the head ‘income from profession’ as claimed by the assessee and also allow expenses claimed against professional income.
7. The next issue that came up for consideration from ground no.3 of assessee appeal is disallowance of interest paid at Rs.1,10,000/- against interest income. The assessee has reported interest income under the head ‘income from other sources’ at Rs.9,17,985/-. The assessee claimed that it has availed loan from HUF and paid interest of Rs.1,10,000/- and further, same has been deducted against interest received from deposits.
8. Having heard both parties, we find that the fact of set off of interest paid on loans borrowed from HUF against interest received is not forthcoming from the orders of the lower Further, on perusal of profit & loss account, the assessee has debited interest paid on loan from HUF to the profit & loss account. Therefore, it is very difficult to ascertain purpose of loan availed by the assessee, whether it was for making investments in fixed deposits or for business purpose of the assessee. If at all, the assessee has availed loan and made investments in fixed deposits, then interest paid on loan should be deducted against interest earned from fixed deposits, because there is direct nexus between income and expenses. If at all, the assessee availed loan from HUF for the purpose of business, then also it needs to be allowed as deduction, because the assessee has treated professional fees as income and thus, whatever expenditure including interest paid, if any, needs to be allowed as deduction. Therefore, the Assessing Officer is directed to verify claim of the assessee and allow the deduction accordingly.
7. In the result, appeal filed by the assessee is treated as allowed for statistical purposes .
Order pronounced in the open court on 16th March, 2022
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