2009 (1) TMI 536 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reopening under section 148.
2. Classification of non-compete fees/commission as salary or business income.
3. Alleged tax avoidance through different accounting methods.
4. Interest charge under section 234B.

Issue-wise Detailed Analysis:

1. Validity of Reopening under Section 148:
The CIT(A) confirmed the reopening under section 148 as valid. The original returns were processed under section 143(1), and subsequent survey under section 133A provided information that led the Assessing Officer (AO) to believe that income had escaped assessment. The CIT(A) held that the AO only needed "reasons to believe" that income had escaped assessment, irrespective of full disclosure in the original return. Thus, the reopening was upheld.

2. Classification of Non-Compete Fees/Commission:
The AO treated the non-compete fees/commission as salary income under sections 16 and 17 of the Income-tax Act, arguing that it was received due to the employer-employee relationship. The assessee contended that the commission was business income under section 28(va) and offered it on a cash basis. The CIT(A) sided with the AO, stating that the non-compete agreement was a facade to avoid tax, as the assessee was controlling the firm and manipulating accounts to reduce tax liability.

The Tribunal, however, found that the non-compete agreement was genuine and accepted by the department in the firm's assessment under section 143(3). It held that the income should be taxed under section 28(va) as "business income" because it arose from an agreement not to carry out any business activity, independent of the employer-employee relationship. The Tribunal also noted that the assessee had the right to choose the cash system of accounting, which was not a colorable device.

3. Alleged Tax Avoidance through Different Accounting Methods:
The AO and CIT(A) claimed that the assessee's use of different accounting methods (mercantile for the firm and cash for the assessee) was a tax avoidance strategy. The Tribunal disagreed, stating that the use of different accounting methods is permissible and does not constitute a colorable device. The Tribunal emphasized that the assessee disclosed all relevant facts in the return, and the arrangement was within legal limits.

4. Interest Charge under Section 234B:
The assessee argued that interest under section 234B should not be charged on income considered as salary, as TDS was deductible at source, and no advance tax was payable. Since the Tribunal upheld the assessee's main ground that the income was "business income," the additional ground regarding section 234B became infructuous.

Conclusion:
The Tribunal allowed the assessee's appeals partly, holding that:
- The reopening under section 148 was valid.
- The non-compete fees/commission should be taxed as "business income" under section 28(va) on a cash basis.
- The use of different accounting methods was permissible and not a tax avoidance device.
- The additional ground on section 234B became irrelevant.