2016 (5) TMI 1029 - AT - Income Tax

Salary income or professional income - Amount received by the managing director as consultancy charges - TDS was deducted u/s 194J - Disallowance of expenditure land and professional income is treated on par with salary income of the assessee - Held that - The assessee is eligible to receive consultancy fees and claim expenditure. The nature of expenditure being travelling, lodging, conveyance incurred at various places of Thermal power station, refinery and such expenditure was incurred wholly and exclusively for the purpose of profession and due to expertise opinion of the assessee, the company could fetch export orders and improved the brand image which is not disputed by the Assessing Officer The assessee being professional and employees are below the limit for applicability of ESI and PF provisions. The assessee most of time is out stations and electricity bills are meagre and claimed in his personal account. At the time of hearing ld. Counsel drew our attention to the statement of salary and professional income received for assessment year 2006-07 and 2007-08 explaining with comparable turnover of the company and export turnover. The assessee is rendering service for past several years and connected with the company and due to his efficient advice the company could able to increase its turnovers. We found as per the provisions of section 17 of the Act which includes certain items of receipts as salary but in order that a particular receipt is treated as salary, it is fundamental requisite that employee and employer are related by agreement and any income derives from connection is treated as salary. But in receipt of professional income of B21,66,939/-, the assessee is a consultant to the company as per the minutes of Board of Directors and form no.16A was issued on such terms and conditions agreed between them. Therefore, we are of the opinion that the assessee has provided expertise in product management of the business due to national and international experience in the field of Boilers and has rightly offered the income under the profession and claimed establishment expenditure. Therefore, we direct the Assessing Officer to exclude the professional income clubbed in salary income and we allow the appeal of the assessee.

Summary

Issues Involved:
1. Classification of professional income as salary income.
2. Disallowance of expenditure claimed against professional income.

Issue-wise Detailed Analysis:

1. Classification of Professional Income as Salary Income:
The primary issue in these appeals is whether the professional income disclosed by the assessee should be treated as salary income. The assessee, a Managing Director of M/s. Geeco Enercon (P) Ltd., disclosed professional receipts separately from his salary income. The Commissioner of Income Tax observed that the professional receipts should be considered as salary income under Sec. 17(1)(iv) of the Income Tax Act, 1961, and disallowed the expenditure claimed by the assessee.

The Assessing Officer consolidated the professional income with the salary income, disallowing the expenditure claimed. This decision was based on the report of an Inspector who found discrepancies in the employment records and the absence of credible proof for the personnel's employment. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, emphasizing the lack of evidence to substantiate the consultancy services rendered separately by the assessee.

However, the Tribunal found that the professional income was rightly offered under the profession and claimed as establishment expenditure. It was noted that the assessee was appointed as a consultant by the Board of Directors and had issued Form 16A for the professional income. The Tribunal directed the Assessing Officer to exclude the professional income from the salary income, thus allowing the appeal of the assessee.

2. Disallowance of Expenditure Claimed Against Professional Income:
The second issue pertains to the disallowance of expenditure claimed by the assessee against the professional income. The assessee claimed deductions for expenses such as traveling, lodging, and conveyance incurred for consultancy services. The Assessing Officer disallowed these expenditures, citing the Inspector's report, which highlighted the absence of credible proof for the personnel's employment and the lack of records for PF, ESI, and other employment details.

In the appellate proceedings, the assessee argued that the consultancy services were rendered separately and that the expenses were incurred wholly and exclusively for the purpose of the profession. The Tribunal acknowledged that the assessee, being a highly qualified engineer, provided expertise that significantly contributed to the company's business growth. The Tribunal found that the professional income was rightly offered under the profession and that the claimed expenditures were legitimate. Consequently, the Tribunal directed the Assessing Officer to allow the claimed expenditure, thereby allowing the appeal of the assessee.

Conclusion:
The Tribunal concluded that the professional income disclosed by the assessee should not be treated as salary income and that the claimed expenditures against the professional income were legitimate. The appeals for the assessment years 2006-07 and 2007-08 were allowed, directing the Assessing Officer to exclude the professional income from the salary income and to allow the claimed expenditures.