2019 (11) TMI 758 - HC - Income Tax

Treatment to person as a Principal Officer of the company - Key Management Personnel - HELD THAT - No person can be treated as a 'Principal Officer' of the company recognising him as the Key Management Personnel of the company. The details of such information on the basis of which the Key Management Personnel tag is made, has to be explicitly expressed in the notice of the intention of treating any person as a Principal Officer by the Assessing Officer. Neither in the show cause notice nor in the order impugned, such connection of the petitioner with the management or administration of the company M/s Kingfisher Airlines Limited is established. The phrase 'Key Management Personnel' of the company has a wide connotation and the same has to be supported with certain material unless such connection is established, no notice served on the petitioner would empower the respondent Authority to treat the petitioner as a Principal Officer. In the present case, the question inasmuch as neither service of notice nor hearing of the petitioner before treating the petitioner as a Principal Officer is involved. The fulcrum of dispute revolves around the aspect whether the petitioner is the person connected with the management or administration of the company. Such finding has to be supported by substantial material and has to be reflected in the notice issued under Section 2(35) to treat a person as a Principal Officer of the company which will have wider consequences. The said aspect is lacking in the present order impugned. Merely on surmises and conjectures, no person shall be treated as a Principal Officer.

Summary

Issues:
Challenge to order treating petitioner as Principal Officer under Section 2(35) of the Income Tax Act, 1961 based on objections not considered properly.

Analysis:
The petitioner contested an order by the respondent designating them as a Principal Officer of a company for specific financial years under Section 2(35) of the Income Tax Act, 1961. The petitioner argued that being labeled as a Principal Officer would have severe consequences and highlighted they did not hold key management positions within the company. The petitioner's objections were allegedly not adequately reviewed before the decision was made. The petitioner sought to overturn the order on these grounds.

The respondent, represented by counsel, justified the decision by stating that the petitioner served as the Treasurer of a group of companies during the relevant years, justifying the classification as a Principal Officer. It was contended that serving a notice of intention to treat an individual as a Principal Officer was sufficient, and no personal hearing or further order was required. The revenue's counsel cited a judgment from the High Court of Calcutta to support their argument.

Upon evaluating the arguments from both sides and examining the case records, the court found that to classify an individual as a Principal Officer under Section 2(35) of the Act, a connection with the management or administration of the entity is essential. This connection must be supported by substantial evidence. The court emphasized that without a clear basis and supporting material, an individual cannot be designated as a Principal Officer, especially in the context of being considered a Key Management Personnel. The court highlighted the necessity for explicit disclosure of information forming the basis for such classification in the notice served by the Assessing Officer.

In contrast to a judgment referenced by the revenue's counsel, which dealt with a different context, the court clarified that in the present case, the crucial issue was whether the petitioner had a genuine connection with the management or administration of the company. The court emphasized the importance of substantial evidence and explicit reflection of such findings in the notice under Section 2(35) to avoid arbitrary decisions. The court ruled in favor of the petitioner, setting aside the impugned order and granting liberty to the Department to proceed lawfully in the matter.