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TMI Blog2009 (1) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... oration and offered for taxation as business income by him on cash system of accounting by treating the same as salary. Thus, the addition so made by wrongly appreciating the facts and considering the commission income as salary should be deleted. 3. The CIT(A) eared in law and on facts in confirming the said addition by incorrectly holding that the assessee has made an arrangement to avoid payment of tax by booking the expenditure in the hands of the firm on mercantile basis and recording income in the hands of the assessee on cash basis ignoring that both mercantile and cash system are accepted method of accounting and different assessees can adopt different method of accounting. Thus the addition so made ignoring the facts and law should be deleted." Assessee has also raised following additional ground, which being legal in nature, is admitted : "The Assessing Officer erred in law and on facts in charging interest under section 234B of the Act on the amount of income considered salary by it though on which TDS was deductible at source under section 209(1)( d ) and no advance tax was payable by the assessee on the said salary income which is a pre-condition under the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee were originally processed under section 143(1). 5. Thereafter a survey was carried out in the case of firm M/s. UC on 10-2-2006 where it was observed that the said firm had credited to the account of the assessee commission consequent to the said NPA and claimed the same as business expenditure whereas the assessee was offering such commission as business income on cash basis and was paying taxes accordingly. Assessing Officer was of the opinion that the non-compete fee constitutes a part of salary being received from employer as per sections 16 and 17 of the Income-tax Act and the same was assessable as salary income and not as business income . On this basis, notices under section 148 were issued and Assessing Officer proceeded to frame the re-assessment. 6. During the course of reassessment assessee was specifically asked to show cause as to why the said income may not be considered as salary income and the commission credited in the books of account of M/s. UC be added to his income. Assessee replied as under : "(1) The commission in question was payable to the assessee by M/s. Uzind Corporation for not taking away the business of M/s. Uzind Corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a controller of the business and, therefore, the authorities mentioned above clearly support the contention of the assessee. (5) There is no debate to the fact that a person can always render service to his employer or anybody else in dual capacity. This contract of the assessee with M/s. Uzind Corporation was an independent contract and had no relationship with his earlier employment contract. It is also stated that in terms of the said agreement the assessee was eligible to receive the said amount from M/s. Uzind Corporation even if the assessee did not remain in employment of the said firm. The said agreement also stipulates that for other services provided by the assessee to the said firm, separate fee or remuneration would be payable. Thus, the agreement clearly stipulates that the amount receivable in terms of the said agreement is not for the services and, therefore, the amount is not at all assessable as salary." Assessing Officer, however, did not agree with the assessee by holding as under: ( i )Assessee had not denied that he was an employee of M/s. UC from which salary income was shown in the return besides the accountant of the firm during the course of survey a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of the firm because of the proximity of relation between assessee and Uzbekistan Airways. Assessee can be in employment of a company and can have other legal relationship which goes beyond the terms of employment and any proceeds of such legal lights which do not have any relevance to the employment cannot be treated as salary income by section 17 of the Income-tax Act. Assessee contended that even if his employment was terminated, the right to receive non-compete commission remain intact because they were independent of any concern with the employer-employee relationship. Assessee raised a contention that there is no bar for any person to receive amounts in dual capacity from any business concern and relied on following case laws : ( a ) CIT v. Ramajayam [2004] 136 Taxman 33 (Mad.); ( b ) ITO v. Ranjan Mathur [1998] 60 TTJ (Delhi) 264; ( c ) B. Malick v. CIT [1968] 67 ITR 616 (All.); ( d ) Down (Inspector of Taxes) v. Compston [1938] 6 ITR 596 (KB); ( e ) CIT v. R.M. Investment Trading Co. (P.) Ltd. [1994] 209 ITR 121 (Cal.); ( f ) CIT v. S.N.N. Sankaralinga Iyer [1950] 18 ITR 194 (Mad.); ( g ) Mehboob Productions (P.) Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, understanding or action is formal or in writing: or (B)whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;" It was contended that as per these provisions the amount received by assessee for not carrying out any activity in relation to any business is statutorily includible under the head "Profits and gains of business or profession", the same can be by way of oral or written agreement. The agreement executed by assessee was in relation to not carrying on activity of business of cargo fares and air tickets, therefore, such income becomes taxable as business income by section 28( va ). Assessee pleaded that where an item of income falls specifically under one head, it has to be charged under the same head and not under any other head. Reliance was placed on following judgments : ( a ) S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC); ( b ) East India Housing Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC); ( c ) Tinsukia Development Corpn. Ltd. v. CIT [1979] 120 ITR 466 , 475 (Cal.); ( d ) United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 , 703 (SC); ( e ) CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m nor any action under section 263 has been undertaken. Therefore, the finding of CIT(A) that Assessing Officer has not inquired in this behalf in regular assessment is totally unfounded from record. Once an assessment under section 143(3) is framed, such a presumption cannot be raised besides the survey dated 10-2-2006 in the case of firm itself is the basis of the knowledge of all these facts so as to re-open the assessee s assessments, this clearly establishes the fact that the department was in full knowledge of these facts. If there was any doubt about the expenditure being bogus or facade, the firm s assessments could have been re-opened as in the case of assessee. Therefore, it is too late for the department now to say that agreement is a facade having accepted the same in case of firm in a scrutiny assessment by allowing expenditure. 11. Even in the case of the assessee, department is not raising any doubt about the income from non-compete commission, objection is only on the issue whether the income should be treated under the head "Salary income" or "Business income". Therefore, the issue about agreement being a colourable device is not relevant to the issue. Apropos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said NPA was for carrying out any activity in relation to any business. With these facts, the same is assessable only under the head "Business income" by virtue of section 28( va ), this being a specific provision, the income has to be assessed under this head and not under the head "Salary". It was further contended that CIT(A) has accepted the proposition that there can be receipts from the same person in dual capacity and assessee can follow cash system of accounting. Having observed on these findings, he has merely said that the attempt of the assessee to treat it as salary income was a thinly veiled attempt to avoid tax. It was contended that there cannot be any veiled attempt inasmuch as assessee in his return of income disclosed all these facts in computation of income if the same is not offered in this year, the same will be offered in subsequent years when the commission is received. This type of arrangement of source following mercantile system and recipient following cash system is well recognized and followed and assessee does not fall as an exception. The assessee chose to follow cash system of accounting and all this does not amount to any colourable device. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise than in his role as a director, the provision of section 40( c ) shall not touch such transactions". CIT v. McDowell Co. Ltd. [2007] 288 ITR 666 (Kar.) : Guarantee commission paid to the chairman of a company who is not obliged to offer such guarantee for the benefit of the company cannot be treated as part of his functions as a chairman and director of the company. This cannot be treated as remuneration paid to the chairman. Therefore, such amount cannot be treated as one coming under the provisions of section 40( c ) of the Income-tax Act, 1961. The chairman and director of the assessee was paid guarantee commission at the rate of one per cent of the amount of loan on guarantee furnished by him in his personal capacity against the loans taken by the assessee from various concerns for its business purposes. The assessee contended that the guarantee commission was not to be subject to any disallowance under section 40( c ). The Assessing Officer as well as appellate authority did not accept the contention but the Tribunal held that the guarantee commission would not fall within section 40( c ) On appeal : Held, that the guarantee commission paid to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court judgment in the case of McDowell Co. Ltd. ( supra ), the same confine only to the issue about business income or salary income as the revenue has chosen to treat the same as salary and not business income. In our view, once these are clear facts, the controversy before us is limited to whether the income is assessable under the head "Business income" as claimed by the assessee or taxable under the head "Salary income" as held by the department; or ( b ) whether this attempt on the part of the assessee is a colourable device. Coming to the issue about taxability of the head, it is clear that CIT(A) has held that there is no quarrel to dual capacities of assessee and the assessee s right by choosing cash system. First we will take the issue about colourable device. In our view, consequent to Hon ble Supreme Court judgment in the case of Azadi Bachao Aandolan ( supra ), McDowell Co. Ltd. s case ( supra ) does not have the same force by holding that the arrangements made by the assessee within four corners of law it reduces taxes, is colourable device. Section 28( va ) clearly postulates a specific treatment to the sum received consequent to agreement not to carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no resort could be made to section 12. The liability to tax under section 9 of the Income-tax Act, 1922, is of the owner of the buildings or land appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under section 9 even if the object of the assessee in purchasing the landed property was to promote and develop a market thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting up markets thereon. The residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded." It is a settled proposition that when the income can be taxed in two heads, the one which is specific is to be invoked, consequently, section 28( va ), being a specific head, the income earned by assessee by non-compete fee is assessable under the head "Business income". Our view is strengthened by the fact that relationship consequent to this agreement is on principal to principal basis and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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