PRAVEEN BAKSHI ,NEW DELHI vs. DCIT, CENTRAL CIRCLE- 8 , NEW DELHI

Ld. CIT(A) has erred in upholding the additions of business expenditure in nature of direct and indirect which are as per Audited Profit and Loss Account in the relevant assessment year amounting Rs.8,41,586/-.”

Facts of these cases giving rise to these appeals are that the appellant/assessee, Director of D-Art Furniture System Pvt. Ltd. was searched on 19.10.2010 under section 132 of the Income Tax Act, 1961 (hereinafter, the ‘Act’) along with Suppliers of Common Wealth Games Group Cases searched together by the Income Tax Department. Thereafter, the notices under section 153A of the Act were issued for the relevant years on 24.11.2011. The appellant/assessee filed his Income Tax Returns (hereinafter, the ‘ITR’) declaring income of Rs.8,79,896/- and Rs.23,65,680/- for AYs. 2010-11 and 2011-12 respectively.

In AY 2010-11; the Assessing Officer (hereinafter, the ‘AO’) held that the appellant/assessee, Director of D-Art Furniture system Pvt. Ltd. could not be held as an employee of D-Art Furniture system Pvt. Ltd. as he had full control over D-Art Furniture system Pvt. Ltd. as promoter. Placing reliance on the decision of the Hon’ble Supreme Court in the case of Ram Prasad 86 ITR 122, the AO held that there was no employee-employer relationship; hence, the salary income shown in the ITR was assessed as income from other sources.Consequently, the claim of deduction/exemption of conveyance allowances of Rs.9,600/- and HRA of Rs.24,000/- was disallowed and charged to tax. Further, the AO held bank deposits of Rs.28,50,025/- as unexplained and taxed the same accordingly. Further, the AO disallowed 50% of business expenditure (Trading and P & L Account) of the proprietary concern; D- Art Furniture System on the reasoning that the appellant/assessee had failed to file any evidence in support of the expenses. The relevant part of the assessment order is reproduced herein under: 3

In AY 2011-12, the appellant/assessee had shown aggregate salary of Rs.22,08,987/- received from D-Art Furniture System Pvt. Ltd. and ESAJV D-Art Indo India Pvt. Ltd. The details furnished by the appellant/assessee revealed that he had received salary for 12 months from D-Art Furniture System Pvt. Ltd. @ Rs. 10,000/- per month from April to July and thereafter @ Rs.1,50,000/- per month. However, the AO worked out salary @ Rs.1,50,000/- per monthfor 12 months from D- Art Furniture System Pvt. Ltd. because the appellant/assessee had received salary of Rs.1,50,000/- in the month of April and thereafter in Nov. (Rs.1,50,000/-), Dec. (Rs.3,00,000/-) and March (Rs.6,00,000/-). The AO, inferring the employment for 12 months, worked out salary on accrual basis for 12 months at Rs.18,00,000/- and assessed the same under the head income from other sources on the reasoning that there was no employee-employer relationship based on the finding mentioned above in para 4 for AY 2010-11. Further, salary of Rs.13,50,000/- received from ESAJV D-Art Indo India Pvt. Ltd. had been also treated as income from other sources. Accordingly, income of Rs.31,50,000/- (Rs.22,08,987/- shown in the ITR + accrued salary of Rs.9,41,013/-) was taxed in AY 2011-12 under the head income from other sources. The AO also held bank deposits of Rs.40,64,626/- unexplained and taxed it accordingly. Further, the AO disallowed 50% of business expenditure debited in Trading and P & L Account on the reasoning that the appellant/assessee failed to produce any evidence thereof. Besides the above in para-5, certain other additions were also made.

The Ld. Authorized Representative (hereinafter, the ‘AR’) submitted that neither the Ld. CIT(A) nor the AO had brought any material on the record before inferring that there was no employee and employer relationship between the appellant/assessee and D-Art Furniture System Pvt. Ltd. & ESAJV D-Art Indo India Pvt. Ltd. The Ld. 7 AR submitted that the appellant/assessee had 13.8% shares of D-Art Furniture System Pvt. Ltd. It was further contended that the salary received by the Director of any company had to be assessed under the head salary income and not under the head income from other sources. In support of the arguments, the Ld. AR placed reliance on the decision of Hon’ble Delhi High Court in the case of UK Bose in order dated 30th November, 2012. The Ld. AR distinguished the case laws, relied upon by the AO, on facts. Further, the Ld. AR submitted that the deduction/exemption with respect to conveyance allowance and HRA had to be allowed as per law.

As far as the bank deposit of Rs.7,00,000/- in AY 2010-11 was concerned, the Ld. AR submitted that this bank deposit was nothing but the deposit of the sale consideration received on sale of 2nd floor of one of the properties. To substantiatethe claim, the Ld. AR drew our attention to the sale deed dated 29.04.2009 and contended that the credit of Rs.7,00,000/- in the bank account on 02.05.2009 was from the same cheque which found mentioned in the sale deed dated 29.04.2009. Hence, the Ld. AR submitted that the source of the bank deposit of Rs.7,00,000/- got explained and thus, prayed for consequential relief.

For disallowances of business expenditure of Rs.18,11,296/- and Rs.8,41,586/- of AY 2010-11 and 2011-12, the Ld. AR submitted that these expenditures were genuine and paid through banking channels whereas the AO made disallowances without providing any opportunity of being heard and rejecting the book results, which was against the principle of natural justice. In support of the claim, the Ld. AR submitted copy of the office note where in the AO had admitted that the books of account of the assessee were called for and verified for on test check basis. In such circumstances the disallowances were not justified and hence, prayed for relief on this score.

The Ld. CIT-DR with the help of facts mentioned in the assessment order and appellate order submitted that reasonable opportunities of being heard were provided to the appellant/assessee by the AO and Ld. CIT(A) but the appellant/assessee tactfully ensured non- compliance. Reiterating the finding of the Ld. CIT(A), he prayed for upholding of orders of the lower authorities. Our attention was drawn to the fact that the Ld. AR did not bring any material on the record to explain the creditworthiness of Shri Radhey Intermediaries Pvt. Ltd. and Kanha Enterprises Pvt. Ltd. From whom loans aggregating to Rs.15,00,000/- was received in AY 2011-12. It was argued that the subsequent repayment of the said loans did not explain loans in the relevant year. The Ld. AR further contended that the Ld. AR had failed to explain the genuineness of loans aggregating to Rs.15,00,000/- received in AY 2011-12. It was also contended that the AO did not provide proper opportunity of being heard before making the addition of Rs.15,00,000/-. Thus, it was against the principle of natural justice and hence, prayed for relief on this score. Further, the Ld. CIT-DR submitted that the appellant/assessee had not produced any primary document; such as bills & vouchers of business expenditure before the AO and Ld. CIT(A). He drew our attention to the fact that the Paper-Book submitted by the Ld. AR also did not contain bills & vouchers of business expenditure.

We have heard the rival contentions and have perused the material available on record. The first issue is the assessment of salary under the head income from other sources. The action of the Ld. AO to assess salary under the head income from other sources results some disallowance; viz, standard deduction, value of perquisite, disallowance of HRA, conveyance allowances, etc. Even after the search, under section 132 of the Act, on the appellant/assessee, the AO has not referred any adverse material in support of his finding that there was no employee-employer relationship between the appellant/assessee and D- Art Furniture System Pvt. Ltd. &ESAJV D-Art Indo India Pvt. Ltd. The AO has not specified any reason for assessing salary received from ESAJV D-Art Indo India Pvt. Ltd. under the head income from other sources. In ESAJV D-Art Indo India Pvt. Ltd. It is worth mentioning that the appellant/assessee is not a major share-holder of ESAJV D-Art Indo India Pvt. Ltd. We are also surprised to note that the AO, who had assessed the salary @ Rs.10,000/- per month in AY 2010-11, has not accepted the salary @ Rs.10,000/- per month in April to July, 2011 ignoring the appellant/assessee’s submission in this regard. The assumption of salary @ Rs.1,50,000/- per month in AY 2011-12 by the AO is not corroborated by any evidence; hence, we are of the considered view that the AO is not justified in assessing salary @ Rs.1,50,000/- per month in AY 2011-12. It is very surprising to note that the AO has worked out salary on accrual basis in AY 2011-12 and has assessed the same under the head income from other sources as both cannot go together. Such inference in absence of any corroboratory evidence is not justified. 11

The revenue implication of assessing salary under the head income from other sources is very minimal than that of the litigation cost. Admittedly, the company is a juristic person and it is governed by the board of directors and is altogether an independent entity other than the directors. The appellant/assessee had 13.8% shares of D-Art Furniture System Pvt. Ltd. and supervises sales only. He received fixed remuneration for that. The said remuneration is not linked with the profit of D-Art Furniture System Pvt. Ltd. The director involved certain kind of responsibility to be carried out in terms of his appointment whether specified or not. The Board of Directors has a right to appoint. It has right to determine the nature of the duties to be performed by the whole-time directors. It has right to determine the salary to be paid. Therefore, the company could be an employer while appointing one of its directors as whole-time director on a particular remuneration and prescribing the terms and conditions of his appointment.In common parlance, the whole-time director may not be an employee but even then the character of the receipt or remuneration having come within the definition of salary under section 17(1)(iv) being a fee or remuneration by whatever name it is called and not being excluded by the Explanation 2 to section 15. The appellant/assessee had a dual capacity. He was entrusted to manage the business. The appointment was of employment and not for employment. Therefore, 12 having regard to the material placed before us, we are of the considered view that the appellant/assessee’s receipt is assessable under the head 'Salary'. Therefore, the remuneration received by the appellant/ assessee have to be assessed income under the head 'Salary' and not as income from other sources.Accordingly, we order so for both years. The AO is further directed to allow deduction of conveyance allowance and HRA, as per the law, in AY 2010-11.

In view of the foregoing discussions and in absence of any corroboratory evidence, we are of the considered view that there is no rationale and justification for addition of Rs.9,41,013/- in AY 2011-12 under the head income from other sources. Accordingly, we delete the addition of Rs.9,41,013/-made in AY 2011-12.

The next issue is the bank deposit of Rs.7,00,000/- in AY 2010- 11. We find merit in the Ld. AR submission that this bank deposit was nothing but the deposit of the sale consideration received on sale of 2nd floor of one of the properties as the cheque from which the sale consideration received is found mentioned in the sale deed dated 29.04.2009 and also in the bank passbook. The Ld. CIT-DR was not able to contradict the argument of the Ld. AR with the help of any evidence. We, therefore, are of the considered view that the bank deposit of Rs.7,00,000/- in AY 2010-11 is explained and thus, the same is deleted.

The next issue is the bank deposit of Rs.15,00,000/- in AY 2011- 12. We find merit in the Ld. CIT-DR’s submission that the Ld. AR had failed to explain the creditworthiness and genuineness of loans of Rs.15,00,000/- received from Shri Radhey Intermediaries Pvt. Ltd. and Kanha Enterprises Pvt. Ltd. in AY 2011-12. This issue was neither properly dealt by the AO nor by the CIT(A). Therefore, in totality of facts & circumstances of the case as discussed above and in the interest of justice, we are of the considered view that this issue requires restoration back to the AO for deciding it afresh. Accordingly, we order so. The appellant/assessee is also directed to cooperate and furnish all the details, documents, etc., to explain loans of Rs.15,00,000/- in AY 2011- 12, before the AO.

The disallowance of business expenditure was upheld in both years by the CIT(A) on the reasoning that the appellant/assessee had failed to produce not only the bills & vouchers of these expenditures but also failed to establish genuineness such expenditures. We find merit in the Ld. CIT-DR’s submission that the Ld. AR had not brought any material on the record to contradict the finding of the CIT(A). We have perused the Paper Book and find that it contains only the ledger 14 accounts of various heads of business expenditures. The office note of the assessment order also says so. The Ld. AR had not brought any material to contradict the finding of the lower authorities. Therefore, in totality of facts & circumstances of the cases as discussed above and in the interest of justice, we are of the considered view that this issue for both years requires restoration back to the AO for deciding it afresh. Accordingly, we order so. The appellant/assessee is also directed to cooperate and furnish all the details, documents, etc. to substantiate his claim before the AO.