2021 (12) TMI 507 - AT - Income Tax

Professional income V/s Salary income - as per AO appellant did not provide details and nature of professional and technical services rendered to the company - whether the receipt from company is to be assessed as professional income or salary income - appellant failed to proof nexus between providing the loan taken on his name to the company - HELD THAT - The assessee has not submitted the details of nature of professional and technical services rendered to the company. Even before the Tribunal, no efforts were made by the learned AR to substantiate the claim that the amount received by the assessee from the company are professional charges. A director may have duel capacity. He may be both director as well as employee. This principle is enumerated in the judgment of the Hon ble Apex Court in the case of Ram Prashad v. CIT 1972 (4) TMI 1 - SUPREME COURT When an assessee insists that he is rendering professional / technical services to a company, the burden is on him to prove the same. As mentioned earlier, the assessee has not furnished any evidence to prove that the services rendered by him to the company are of professional in nature. The treatment in the company s books of account that the remuneration paid to the assessee are professional charges and deduction of tax at source is made u/s 194J of the Act is not the determinative factor to decide in the hands of the assessee whether the remuneration is salary income or income from business or profession. Therefore, we have no hesitation to hold that the receipt from company is nothing but salary income. Moreover, the interest expenditure cannot be deducted from the amount received from the company because there is no nexus between them. Only such expenditure which has been incurred wholly and exclusively to earn a particular income is allowable as a deduction from such income. In the instant case, there is no relation whatsoever between the interest expenditure from a mortgaged loan and the payment received for rendering certain services. Advancing interest free loans to the employer company cannot be a ground for claiming deduction of interest expenditure from the salary income received from it. In the instant case, it is not established that funds borrowed and diverted to SML are out of commercial expediency and for the purpose of assessee s business. For the aforesaid reasoning, the common issue raised for assessment years 2013-2014 to 2015-2016, is dismissed. Disallowance u/s 14A - CIT(A) restricted the disallowance u/s 14A of the Act to the exempted income earned during the relevant assessment year - HELD THAT - CIT(A) has relied on various judicial pronouncements in granting relief to the assessee. The assessee has not made out a case that the CIT(A) s order is erroneous. Therefore, we confirm the CIT(A) s order as correct and in accordance with law. It is ordered accordingly.

Summary

Issues:
1. Whether income received by the assessee from a company should be treated as salary income instead of professional income.
2. Whether the interest expenditure claimed by the assessee is allowable as a deduction.
3. Disallowance under section 14A of the Income Tax Act for the assessment year 2015-2016.

Analysis:

Issue 1:
The common issue in the appeals is whether the income received by the assessee from the company should be classified as salary income or professional income. The Assessing Officer (AO) directed the assessee to explain why the professional income should not be treated as salary income and why interest expenditure could be deducted from the professional charges. The AO rejected the assessee's contentions, stating that the assessee did not prove the nature of services rendered to the company. The CIT(A) upheld the AO's decision, emphasizing the lack of evidence regarding professional services. The Tribunal noted that the burden of proof was on the assessee to establish the professional nature of services. It cited legal principles to explain that remuneration paid to a director, apart from sitting fees, is taxable as salary income. The Tribunal concluded that the income from the company was salary income due to the absence of evidence supporting professional services.

Issue 2:
Regarding the interest expenditure claimed by the assessee, the Tribunal highlighted the lack of nexus between the interest expenditure and the income received from the company. It emphasized that only expenditure directly related to earning specific income is allowable as a deduction. The Tribunal distinguished the case cited by the assessee, emphasizing the need for commercial expediency in advancing funds, which was not proven in this case. The Tribunal dismissed the claim for deduction of interest expenditure from the income received from the company.

Issue 3:
For the assessment year 2015-2016, the assessee raised grounds related to disallowance under section 14A of the Income Tax Act. The AO computed the disallowance based on the exempted dividend income earned by the assessee. The CIT(A) partially allowed the appeal by restricting the disallowance to the exempted income earned during the relevant assessment year. The Tribunal upheld the CIT(A)'s decision, noting that the assessee failed to establish any error in the order. The disallowance under section 14A was confirmed at the reduced amount, as determined by the CIT(A).

In conclusion, the Tribunal dismissed the appeals, upholding the decisions of the lower authorities regarding the classification of income, deduction of interest expenditure, and disallowance under section 14A for the relevant assessment years.