2022 (3) TMI 1470 - AT - Income Tax

Income Assessment of the assessee under the head income from profession - Assessing professional Gross receipts as salary income - expenses claimed against professional income - only objection AO 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 - HELD THAT - 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. 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.AO 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 AO. 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. Disallowance of interest paid against interest income - assessee has reported interest income under the head income from other sources -assessee claimed that it has availed loan from HUF and paid interest and further, same has been deducted against interest received from deposits - HELD THAT - As 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 authorities. 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.

Summary

Issues:
Assessment of professional income as salary, disallowance of expenses and depreciation, non-deduction of interest paid from other sources.

Analysis:
1. Assessment of Professional Income as Salary:
- The assessee received consultancy fees treated as professional income but assessed under the head "income from salary" due to an alleged employer-employee relationship.
- The Assessing Officer contended that the nature of services rendered indicated an employer-employee relationship, thus assessing the consultancy fees as salary.
- The CIT(A) upheld the AO's decision, leading to the appeal.
- The Tribunal observed that the agreement between the parties, regular billing, service tax, and TDS deductions indicated a professional service arrangement.
- Designation as Managing Director did not automatically imply an employment relationship, and the professional fees were rightly considered for taxation as professional income.
- The Tribunal set aside the CIT(A)'s decision and directed the Assessing Officer to assess the income under the head "income from profession."

2. Disallowance of Expenses and Depreciation:
- The Assessing Officer disallowed various expenses and depreciation claimed against professional income.
- The Tribunal found that the expenses were legitimate deductions against professional income, and the Assessing Officer's disallowance was unjustified.
- The Tribunal directed the Assessing Officer to allow the claimed expenses against the professional income.

3. Non-Deduction of Interest Paid from Other Sources:
- The assessee reported interest income under "income from other sources" but claimed a set-off for interest paid against the interest received.
- Lack of clarity regarding the purpose of the loan availed from HUF led to confusion about the deductibility of interest paid.
- The Tribunal directed the Assessing Officer to verify the purpose of the loan and allow the deduction accordingly.

In conclusion, the Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to reassess the professional income, allow claimed expenses, and verify the deduction of interest paid against interest received. The judgment clarified the distinction between professional income and salary, emphasizing the need for a factual assessment of the nature of services rendered to determine the appropriate tax treatment.