2013 (3) TMI 248 - HC - Income Tax

Personal expenses - whether can be taxed in the hands of assessee u/s 2 (24)(iv) as the amount was routed through the franchisee, which was the HUF of the assessee? - reopening of assessment - Revenue contented that ITAT instead of looking into the contents of the transaction, has chosen to look into the form of the transaction and ought to have upheld the orders of the AO as company has simply used the medium of HUF of the Directors in whose name the franchisee stood, to make payment towards their personal expenses and therefore ought - Held that - A perusal of the records reveals that the assessees have various avathars in various establishments. The assesses are Directors in the company called M/s.C.R.S.Sons & Co. Ltd., . They are the partners, representing the Hindu Undivided Family, so far as CRS Holdings are concerned. Two out of the four assesses represent the HUF in M/s.Sri Sundaravalli Collections , which is the purchasing arm for the M/s.CRS Sons & Co. Ltd., Apart from that, they also represent as franchisees (owned by the HUF, of which they are the co-parceners and karthas). Each of the unit has different composition. Each unit has varied number of members. Under such circumstances, the acceptability of the finding given by the Income Tax Appellate Tribunal has to be considered that the amounts paid by the company towards personal expenses of the assessee cannot be taxed in its hands under Section 2 (24)(iv). So far as the commission from SSVC is concerned, ITAT ordered remand of the issue on the ground that the commission by SSVC was not received by the assessees, but by the HUF of the assessees. The reasoning given by the Tribunal was that when the assessees claimed that the commission payments were made to the CRS Holdings, which is an income tax assessee and whereas, the CIT (A) held that commission was paid to HUF of the assessees and to sort out this contradiction, the Tribunal felt it appropriate to remand the matters to the AO. It is the contention of the Revenue that CRS Holdings did not file any return of income before the survey and the entire things were stage managed after survey. Only based on this statement of the Revenue, ITAT felt that it is a case to be investigated by the AO. It is also relevant to point out that the assessee in all these cases did not file any return in their individual capacity and notices under Section 147 were issued only on the ground that they did not file any return disclosing the perquisites and benefits received by them from the company and that they are guilty of omission to file the returns. ITAT has ordered remand only after considering the nature and circumstances of the transaction and in fact, after considering the modus operandi of the entire group. Learned counsel for the respondent has also filed the assessment order for the assessment year 2000-2001, by way of additional typed set of papers. Under such circumstances, the order of remand made by the Income Tax Appellate Tribunal is perfectly justified. No interference, having regard to legal and factual aspects discussed above - revenue appeal dismissed.

Summary

Issues Involved:
1. Taxation of amounts paid by the company towards personal expenses of the directors under Section 2(24)(iv) of the Income Tax Act.
2. Remand of the issue of receipt of commission by the directors from the purchasing arm of the company, SSVC.

Issue-wise Detailed Analysis:

1. Taxation of Personal Expenses:

The primary issue was whether the amounts paid by the company towards the personal expenses of the directors could be taxed under Section 2(24)(iv) of the Income Tax Act. The directors were part of a company engaged in retail-selling of silk sarees and other textiles, which made purchases from SSVC, an entity of the HUF of two directors. The company effected sales through franchisees owned by different HUFs, which were paid franchisee commissions.

During a survey, it was found that personal expenses of the directors, such as tuition fees and travel expenses, were paid by the company. The Assessing Officer treated these expenses as income of the directors under Section 2(24)(iv). However, the Tribunal held that these expenses could not be taxed in the hands of the directors as the payments were routed through the franchisees owned by their HUFs, not directly to the directors.

The Tribunal's decision was based on the following findings:
- CRS & Sons Co. Ltd. paid franchise commission to firms owned by the HUFs of the directors based on existing agreements.
- The payments were made to the franchisees, not directly to the directors.
- If the franchisees used the commission to meet the directors' personal expenses, it was not the company's responsibility.

The Tribunal concluded that Section 2(24)(iv) could not be invoked as the payments were not directly made to the directors. The High Court upheld this finding, noting that the Tribunal's decision was supported by factual and legal reasoning.

2. Remand of the Issue of Receipt of Commission:

The second issue concerned the receipt of commissions from SSVC. The Tribunal remanded the matter to the Assessing Officer due to a lack of clarity regarding the payment and mode of payment of commissions. The directors claimed that the commissions were paid to CRS Holdings, an entity in which they were partners. However, the CIT (A) found that no commissions were paid.

The Tribunal ordered a remand because:
- There was a contradiction in the findings regarding the payment of commissions.
- The Tribunal felt it necessary to investigate further to resolve this contradiction.

The Revenue contended that the remand was unwarranted, especially since CRS Holdings was formed only after the survey. However, the Tribunal noted that CRS Holdings was an income tax assessee and felt that the case needed further investigation by the Assessing Officer.

The High Court upheld the Tribunal's decision to remand the matter, noting that the Tribunal had considered the nature and circumstances of the transactions and the modus operandi of the entire group. The High Court found that the Tribunal's order of remand was justified and did not warrant interference.

Conclusion:

The High Court dismissed all the Tax Case Appeals, confirming the orders of the Income Tax Appellate Tribunal. The Tribunal's findings on both issues were supported by factual and legal reasoning, and there was no scope for evasion of tax. The High Court's judgment emphasized the need to look at the substance of the transactions rather than their form, and the importance of thorough investigation in cases involving complex financial arrangements.