2017 (1) TMI 950 - AT - Income Tax

Nature of amount paid by the company to the director - temporary advances or salary - AO observed that initially the payments were received as salary and later on surrendered or foregone - Held that - If one has to look at the payments dehors the said explanation available to the Assessing Officer no other feature is present which could justify the characterization of the said amount as salary. Firstly the payments have been made on varying dates between 21/06/2010 to 21/03/2011. Secondly even the amounts vary and the payments have not been subject to any tax deduction at source which would normally the position if the payments were in the nature of salary. Thirdly there is no material to suggest that any Board of Director s resolution was available permitting the company to pay salary to the assessee -director. In fact before the CIT(A) assessee referred to a resolution passed in the meeting of the Board of Directors of the company dated 25/04/2011 which approved the salary payment to the assessee-director for the financial year 2011-12 which corresponds to the next assessment year. In this manner assessee sought to point out that so far as instant year is concerned there is no resolution of the Board of directors of the company authorizing the payment of salary to the assessee-director Assessing Officer has been overtly influenced by the explanation of the representative of the assessee without appreciating attendant facts which clearly show that the impugned amount could not be construed as payment of salaries by the company to the assessee-director. Therefore the income tax authorities have erred in adding a sum to the income of the assessee as salary. - Decided in favour of assessee

Summary

Issues:
1. Characterization of a sum as salary income by the income tax authorities.

Analysis:
The appeal pertains to the assessment year 2011-12 where the assessee contested the treatment of a sum of ?16,01,172/- as assessable salary income by the income tax authorities. The Assessing Officer observed that the amount received by the assessee from the company was initially considered as salary but later reversed due to inadequate profits. The Assessing Officer categorized a portion of the amount as a perquisite under section 17(2)(iv) of the Income Tax Act and the remaining balance as salary income. The CIT(A) upheld this decision, stating that surrendered or foregone salary is still taxable under the head 'salary'. The assessee argued before the Tribunal that the amounts were temporary advances and not salaries, emphasizing the lack of TDS deduction and citing the company's financial position as evidence. The representative highlighted the absence of a Board resolution authorizing salary payments for the relevant year. The Tribunal noted that the Assessing Officer's decision was primarily based on the assessee's explanation, which did not align with the facts. The Tribunal found no justification to classify the amount as salary, considering the varied payment dates, absence of TDS deduction, and lack of board authorization for salary payments. The Tribunal concluded that the income tax authorities erred in adding the amount to the assessee's income as salary and directed the deletion of the addition, allowing the appeal of the assessee.

This judgment emphasizes the importance of factual evidence and proper authorization in determining the nature of income for tax purposes. It highlights the need for income tax authorities to consider all relevant aspects beyond mere explanations provided during assessment proceedings. The decision underscores the significance of a clear and consistent financial trail to support the characterization of income, especially in cases involving complex financial transactions.