Darshan L. Gandhi, Mumbai vs Assessee

Darshan L. Gandhi, ITO - 8(2)(2), Bunglow No.7, "Swadhin", Aayakar Bhavan, Golden Acres Co-Op. Society, Mumbai - 400020 Vs. Ruia Park, Military Road, Juhu, Mumbai - 400 049 PAN: AACPG8714D (Appellant) (Respondent)

Assessee by : Shri M.P. Mehwala, A.R. Revenue by : Shri Premanand J, D.R.

Date of Hearing : 17.12.2014 Date of Pronouncement : 13.03.2015

ORDER

Per Sanjay Garg, Judicial Member:

The present appeal has been preferred by the assessee against the order dated 24.09.2013 of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] relevant to assessment year 2010-11.

2. The assessee has taken the following grounds of appeal:

"1. In the facts and circumstances of the case and in law the learned CIT (Appeal) erred in upholding the impugned assessment order assessing sum of Rs.19,01,300/- in entirety as income chargeable to tax under the head salary under section 5(1)(a) of the Act, holding that the appellant had generated right to receive salary at the end of month and that the return of the same in pursuance of Board's resolution was nothing but application of income after receiving.

2. In the facts and circumstances of the case and in law the learned CIT (Appeal) erred in upholding the impugned assessment order without appreciating that for application of section 5(1)(a) of the Act it is essential in the first instance to determine as to whether the impugned 2 ITA No.7192/M/2013 Darshan L. Gandhi

sum at all fell due as income "under the head salary" as required by section 15 of the Act.

3. In the facts and circumstances of the case and in law the learned CIT (Appeal) failed to appreciate that return/refund of money by the appellant to the company i.e. M/s. Lok Housing and Constructions Ltd. was not of his own volition but under a compelling situation caused by Resolution dtd.29.01.2010 by the Board of Directors in compliance with sections 198 309(5A), 309(5B) and Schedule XIII of the Companies Act, 1956 thereby leaving the appellant bereft of his very "right to receive"

salary/remuneration from the said company and that when there was no such "right to receive" there could not be any accrual of income exigible to tax u/s 5(1)(a) of the Act.

4. In the facts and circumstances of the case and in law and in the light of the said resolution dtd.29.01.2010 the learned CIT (Appeal) ought to have appreciated that unless and until there was created in favour of the appellant a "debt due" by the Lok Housing and Constructions Ltd. it could not be said that he had acquired a "right to receive" the income or that income had accrued to him which is the basic requirement under the taxing statute.

5. Without prejudice to the grounds aforesaid the learned CIT (Appeal) erred in not assigning any reasons for not applying the ratio of decisions of various courts including those of Supreme Court as referred to by him in para 1.3 of the impugned Appellate order even though they fully support the case of the appellant thereby rendering the impugned order as perverse and unsustainable in the eyes of law.

6. Without prejudice to the above grounds of appeal the learned CIT (Appeal) erred in not appreciating that once tax is deducted at source it becomes imperative for the A.O. that its credit is given as required by section 199 irrespective of whether there is positive income or not and therefore further erred in not giving direction to the A.O. accordingly.

7. The Appellant craves leave to, add to, amend, alter, and I or to delete any of the above grounds of appeal."

3. The brief facts of the case are that the Assessing Officer (hereinafter referred to as the AO) during the assessment proceedings observed that, the assessee during the year had initially received the salary of Rs.19,01,300/- @ Rs.1,76,330/- per month from April, 2009 to January, 2010 from M/s. Lok Housing & Constructions Ltd. as a Director and the company had also 3 ITA No.7192/M/2013 Darshan L. Gandhi

deducted taxes from the salary. However, the assessee did not offer any income under the head 'Salary' but claimed the credit of the taxes deducted from salary. Hence, the assessee was asked as to why the salary received from M/s. Lok Housing & Constructions Ltd. should not be assessed in the hands of the assessee. The assessee filed replies dated 16.10.12, 22.10.12 and 31.10.12 which were considered by the AO. In his replies, the assessee submitted that the board of 'Lok Housing & Construction Ltd.' has passed a resolution on 29.01.10 in compliance to the provisions of section 309 of the Companies Act, 1956. The said section prohibits payment of salary to the director or managing director of the company in excess of 11% of net profit of the company. The net profit of the assessee for assessment year 2010-11 was set to be Rs. 3.12 crores and therefore, the maximum remuneration to the directors could have been paid only to the extent of 34.32 lakhs. The total remuneration paid to all the directors in the year under consideration was Rs.84.45 lakhs which exceeded the limit of 11%. The assessee also pointed out that as per the provisions of section 309(5A) of the Companies Act, in the event of excess payment of remuneration to the directors, the excess amount is required to be refunded. The assessee contended that the excess amount was accordingly returned by director to the assessee company. However, the AO held that the remuneration received by the assessee from M/s. Lok Housing & Construction Ltd. was accrued and liable to be taxed as salary and the said remuneration was paid in lieu of the services rendered by the assessee in the capacity of the 'Executive Director' of the company. The remuneration was payable on monthly basis at the end of each month and the assessee had generated right to receive the salary at the end of the month and received the money also. As per the provisions of sec. 5(1)(a), the total income of the assessee include all income from whatever sources derived 4 ITA No.7192/M/2013 Darshan L. Gandhi

which is received in India in such an year. Thus the salary received by the assessee from M/s. Lok Housing & Construction Ltd. had been accrued to the assessee at the end of each month and was taxable on both accrual as well as receipt basis. The assessee's decision to return the same pursuant to board resolution was in fact the application of the income and further, that the board resolution cannot be retrospective. Aggrieved by the order of the AO, the assessee preferred appeal before the Ld. CIT(A).

4. Ld. CIT(A) also observed that the refund of income by the assessee to the company was nothing but the disposal of the income. He therefore upheld the order of the AO. The assessee has, thus, come in appeal before us.

5. We have heard the rival contentions of the Ld. Representatives of both the parties and have also gone through the records. The Ld. A.R. of the assessee has brought our attention to the resolution dated 29.01.10 of the company wherein it has been mentioned that due to inadequate profits, the company has made defaults in repayment of its debts and therefore as per the provisions of the Companies Act, the remuneration received by the executive directors was liable to be refunded to the company. It has also been pointed out in the resolution that as per section 309(5A) of the Companies Act, 1956, until the remuneration paid to the directors is refunded, they shall hold the remuneration so received by each of them in trust for company. It has also been provided in the resolution that the salary paid to the three executive directors of the company for the year under consideration shall be treated as reduced to '0' (zero). It has been further resolved that 'the income under the head 'Salary' is treated as not accrued to these three executive directors by operation of law and is deemed never to have been paid or payable to them for the said period and 5 ITA No.7192/M/2013 Darshan L. Gandhi

that the TDS already affected under section 192 and paid to the credit of Central Government is deemed to have been wrongly deducted at source or is deducted in excess'. As per the said resolution, the assessee had refunded the amount of salary to the company. In our view, the said refund of salary by the directors, in compliance or due to the requirement of statutory provisions, cannot be said to be the application of income. Such an interpretation of the provisions of the Income Tax Act, in our view, is not correct. The tax is leviable on an income accrued or received by the assessee. Such an accrual is considered when a right is created in favour of the assessee to receive that income and the assessee has not waived that right. However, in case, the assessee waives his right to receive an income, it cannot be presumed that the income has accrued and tax is to be levied. The definition of accrual cannot be stretched to tax a person of the income which he has not received or if received but refunded due to operation of law and treated as never paid or received. The facts of the case clearly reveal that whatever salary was received by the assessee was refunded by the assessee not as an application of money but as per the board's resolution as well in compliance of the statutory provisions of the Companies Act and was treated as never paid to the assessee. Under such circumstances, the levy of tax on such an amount is not justified. We accordingly set aside the impugned order.

6. In the result, the appeal of the assessee is hereby allowed.

Order pronounced in the open court on 13.03.2015.

Sd/- Sd/- (R.C. Sharma) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 13.03.2015 6 ITA No.7192/M/2013 Darshan L. Gandhi

* Kishore, Sr. P.S. Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.