2016 (3) TMI 1012 - AT - Income Tax

Nature of receipts of the assessee - income from salary or professional receipts - whether the relationship between the assessee and the Resonance was of employee and employer or Consultant and Principal? - Held that - The document before us i.e. Consultancy Agreement is not colorful device but only an admitted document and no material whatsoever has been brought on record to show that it is a colorful device. No notice u/s 131 was issued to Resonance Institute to confront that the agreement is a colorful device. In view of that we decide the issue in favour of the assessee and against the revenue. Once we have held that the relationship between the assessee and the Resonance was of Consultant/Professional, therefore, the consequences of being professional are required to be given to the assessee. As per the ld. CIT (A), the only reason for denying the expenses etc was that the assessee has been treated as a salaried employee instead of Consultant. Once we have held that the assessee is a consultant, therefore, as a consequence, the assessee is entitled to benefit under the Act. Therefore, ground no. 1.1 and 1.2 are also decided in favour of the assessee. No reason whatsoever has been given by the authorities below for rejecting the books of account. The sole reason given by the authorities below was that the assessee is a salaried employee and not the professional. Since we have held that the assessee is a professional, therefore, this ground is also decided in favour of the assessee.

Summary

Issues Involved:
1. Classification of income as salary or professional receipts.
2. Rejection of books of accounts without invoking Section 145(3) of the Income Tax Act, 1961.
3. Disallowance of expenses incurred by the assessee.

Detailed Analysis:

Issue 1: Classification of Income as Salary or Professional Receipts
The primary issue was whether the income received by the assessee from M/s. Resonance was to be classified as salary or professional receipts. The assessee, an engineering graduate from IIT Kanpur, entered into a Consultancy Agreement with M/s. Resonance, under which he was to provide consultancy services in Chemistry. The agreement explicitly stated that the relationship between the assessee and Resonance was that of consultant and principal, not employer and employee. The agreement allowed the assessee freedom in methodology, scheduling, and structuring of his work, with specific duties listed, such as advising on course structure, developing entrance tests, and teaching certain topics. The payment was structured as consultancy fees, with no provision for statutory benefits like PF, ESI, Gratuity, Bonus, or Leave Encashment, which are typical for employees.

The AO concluded that the assessee had converted his income from salary to professional receipts to claim deductions not allowable under salary income. The AO did not reject the books of accounts but disallowed the expenses claimed by the assessee, stating that the income should be classified as salary. The CIT (A) upheld this view, stating that the contract was a "contract of service" and thus an employer-employee relationship existed.

However, the Tribunal observed that the agreement and the nature of duties performed indicated a professional relationship. The Tribunal noted that the assessee had significant freedom in his work, was not subject to day-to-day supervision, and was not entitled to employee benefits. The Tribunal concluded that the relationship was that of a consultant and principal, not employer and employee, and thus the income should be classified as professional receipts.

Issue 2: Rejection of Books of Accounts Without Invoking Section 145(3)
The assessee argued that the AO erred in rejecting the books of accounts without invoking the provisions of Section 145(3) of the Income Tax Act, 1961. The AO had disallowed the expenses claimed without rejecting the books of accounts, which the assessee contended was improper. The CIT (A) supported the AO's decision, stating that the issue was a legal one regarding the classification of income and did not require invoking Section 145(3).

The Tribunal found that the AO's decision to disallow expenses without rejecting the books of accounts was incorrect. Since the Tribunal held that the income was professional, the rejection of expenses without proper examination of the books was unjustified. Therefore, the Tribunal decided in favor of the assessee on this ground.

Issue 3: Disallowance of Expenses Incurred by the Assessee
The AO disallowed expenses amounting to Rs. 1,022,167 incurred by the assessee on the grounds that these were not allowable if the income was classified as salary. The CIT (A) upheld this disallowance, maintaining that the income was salary and thus the expenses could not be claimed.

The Tribunal, having concluded that the income was professional, held that the assessee was entitled to claim expenses incurred wholly and exclusively for earning professional income under Section 37 of the Income Tax Act, 1961. The Tribunal noted that no specific reasons were given by the authorities for rejecting the books of accounts and disallowing the expenses, other than the misclassification of income. Consequently, the Tribunal allowed the expenses claimed by the assessee.

Conclusion:
The Tribunal concluded that the relationship between the assessee and M/s. Resonance was that of a consultant and principal, not employer and employee. Therefore, the income should be classified as professional receipts, and the assessee was entitled to claim the related expenses. The appeal was allowed in favor of the assessee.