Thursday 21 February 2013

Whether commission paid by company to an HUF consisting of Directors of company can be construed as perquisites in hands of Directors u/s 2(24)(iv) - NO: Madras HC

THE issues before the Bench are - Whether commission paid by the company to an HUF consisting of the Directors of the company can be construed as perquisites in the hands of Directors u/s 2(24)(iv); Whether it is irrelevant through whom the amount was paid/routed, when once it is established that amount received from the company is used for meeting personal expenses of the directors; Whether admission made during survey proceedings u/s 133-A can be made basis for making any addition of amount, which is liable to be taxed and Whether when there is contradiction on the factual aspects of modus operandi of payment of commission arising out of complex group of transactions, the matter can be remanded for fresh consideration. And the ruling goes in favour of the assessee.
Facts of the case
The assessees are, C.S.Narasimhan, C.S.Srivatsan, C.S.Seshadri and C.S.Varadhan, who are the Directors of a Company, 'M/s. C.R.S. Sons & Co. Limited'. The company is engaged in the
business of retail-selling of silk sarees and other textiles. The said company made all purchases from M/s.Sri Sundaravalli Collections (SSVC), an HUF of two of the Directors of the company. SSVC paid guarantee commission to CRS holdings, an entity in which all the four brothers are partners, representing their minor HUFs. The company 'M/s. C.R.S. Sons & Co., Limited' effected its sale through franchisees, which was owned by different HUFs. These franchisees were paid franchisee commissions by the company for the sales effected by them. A survey was conducted in the company in which the assessees admitted that commissions were received by the Directors from SSVC, which is the purchasing arm of the company. Notices u/s 148 were issued in respect of the AYs 1996-1997 to 2001-2002. The AO treated the personal expenses of the assessees and their family members (Franchisee commission paid to different HUF) paid by the company as the income of the Directors, by invoking the provisions of Section 2(24)(iv). The Commissions received from SSVC were also brought to tax in their hands for the AYs 2000-2001 and 2001-2002.
On appeal, the CIT(A) held that since the company had not claimed the amounts paid for personal expenses of the assessees, the same cannot be treated as income in the hands of its Directors. So far as commission from SSVC is concerned, it was held that although the assessees admitted the same by way of a letter, yet later on it was retracted, and there was no other evidence except the retracted letter.
The Revenue filed appeal before the Tribunal, where it was held that the personal expenses met out of the company's money cannot be treated as income in the hands of the assessees as the money had not been paid directly to them, but to the franchisees, which their HUF owned. Regarding the commission paid to CRS Holdings by SSVC, the matter was remanded due to disparity in the factual aspect.
Aggrieved, the Revenue filed these appeals before the High Court.
The main contention of the Revenue was that when the factum of each of the Directors, having received benefit towards the personal expenses, was not disputed, it was irrelevant and immaterial that the company had not claimed the amount as an expenditure in its profit and loss account. When the payment of expenses was admitted, through whom it was paid was also irrelevant, i.e., whether such expenses were directly paid by the company or through franchisee. The second contention was that the Tribunal, instead of looking into the contents of the transaction, had chosen to look into the form of the transaction when the company had simply used the medium of HUF of the Directors in whose name the franchisee stood, to make payment towards their personal expenses. In support of these contentions, the Revenue relied on several decisions.
Another contention of the Revenue was that the Tribunal ought not to have remanded the issue relating to receipt of commissions from the purchase wing of the Company and failed to see that CRS Holdings, which was supposed to have received the commissions, was formed only after the survey.
In the counter argument, the counsel for the assessees contended that the AO has made addition of income (from undisclosed sources) only on the basis of statement alleged to have been recorded during survey u/s 133A of the Act and that any admission made during such statement cannot be made the basis for such addition.
Having heard the parties, the High Court held that,
++ so far as the principles enunciated in the above decisions, there cannot be any contra argument. So far as these cases are concerned, the dispute did not centre around the Directors and the company alone. But it centres around institutions covering the company, its franchisees, the purchasing arm of the company (SSVC) and CRS Holdings. Moreover, the directors also play multiple roles in different capacities in different institutions, namely, Director in M/s.CRS Sons & Company Limited, partners in M/s.CRS Holdings, co-parceners in the Hindu Undivided Family in the franchisees, etc., Therefore, what is essential to be considered is, whether the income has been allowed to escape from being taxed or not;
++ it is the finding of the Assessing Officer that during the course of survey it was brought to light that the Directors of the company had received certain benefits from the company and the value of such benefits is assessable to tax in the hands of Directors, as per Section 2(24)(iv) of the Act;
++ during the course of survey under Section 133-A of the Act, it was noted that certain personal expenses, such as, tuition fees of children, travel expenses of wife and children of the Directors were paid by the company. With regard to these payments, the contention of the assessees was that it was claimed by the company only as franchisee commission and that the amount treated by the Assessing Officer, as personal expenses of the Directors, have not been claimed by the company in its profit and loss account. It was pointed out that the amounts paid were debited to the account of respective franchisees. Under those circumstances, it was contended that additions made by the Assessing Officer invoking the provisions of Section 2(24)(iv) of the Act have to be deleted;
++ the Income Tax Appellate Tribunal has taken note of the following aspects and has given the specific findings:- (i) CRS & Sons Co. Ltd. paid franchise commission to various firms owned by HUF of Directors; (ii) This has been done on the basis of agreement entered into which were in force; (iii) The payment by CRS & Sons Co. Ltd., on the basis of franchise agreement to various persons cannot be treated as payment to Directors who have substantial interest in the company and Section 2 (24) (iv) cannot be invoked; (iv) If the receiver of franchise commission has met the personal expenses of the Director, it is not the responsibility of the company for such act of the receiver of franchise commission;
++ the findings rendered by the Income Tax Appellate Tribunal do not warrant any interference, as it is supported by factual matrix and legal reasoning;
++ from the legal position, what emerges is that the admission made during the survey proceedings cannot be the basis for making any addition of amount which is liable to be taxed. But there had been subsequent proceedings under Section 147 of the Act;
++ a perusal of the records reveals that the assessees have various avataars in various establishments, as pointed out already. The assessees are Directors in the company called 'M/s.C.R.S.Sons & Co. Ltd.,'. They are the partners, representing the Hindu Undivided Family, so far as 'CRS Holdings' are concerned. Two out of the four assessees represent the HUF in 'M/s.Sri Sundaravalli Collections', which is the purchasing arm for the M/s.CRS Sons & Co. Ltd., Apart from that, they also represent as franchisees (owned by the HUF, of which they are the co-parceners and karthas);
++ each of the unit has different composition. Each unit has varied number of members. Under such circumstances, the acceptability of the following finding given by the Income Tax Appellate Tribunal has to be considered;
++ so far as the commission from SSVC is concerned, the Income Tax Appellate Tribunal, ordered remand of the issue on the ground that the commission by SSVC was not received by the assessees, but by the HUF of the assessees. The reasoning given by the Tribunal was that when the assessees claimed that the commission payments were made to the CRS Holdings, which is an income tax assessee and whereas, the CIT (A) held that commission was paid to HUF of the assessees and to sort out this contradiction, the Tribunal felt it appropriate to remand the matters to the Assessing Officer;
++ only based on this statement of the Revenue, the Income Tax Appellate Tribunal felt that it is a case to be investigated by the Assessing Officer. It is also relevant to point out that the assessee in all these cases did not file any return in their individual capacity and notices under Section 147 were issued only on the ground that they did not file any return disclosing the perquisites and benefits received by them from the company and that they are guilty of omission to file the returns. The Income Tax Appellate Tribunal has ordered remand only after considering the nature and circumstances of the transaction and in fact, after considering the modus operandi of the entire group. Counsel for the respondent has also filed the assessment order for the assessment year 2000-2001, by way of additional typed set of papers. Under such circumstances, the order of remand made by the Income Tax Appellate Tribunal is perfectly justified

No comments:

HC upholds validity of provisions restricting ITC where supplies are taxed under RCM

  This Tax Alert summarizes a recent judgement of the Delhi High Court (HC) [1] dealing with the issue of denial of input tax credit (ITC) ...