2024 (10) TMI 415 - AT - Income Tax

ITAT reverses demand after tax authority wrongly recharacterized MD salary as commission under Section 194A

ITAT Pune allowed the assessee's appeal against NFAC's recharacterization of salary payments to Managing Director as commission under Section 194A instead ... Additional late deduction/collection default u/sec.201(1A) - changing head of it’s payment from salary disclosed in form-24Q to commission in proceedings u/sec.154 r.w.s.200A -Recharacterization of salary paid to the Managing Director as fees for professional services - NFAC jurisdiction to change the “head” of the corresponding TDS provision and more particularly from “salary u/sec.192” to “commission u/s.194A” As stated assessee’s remuneration paid to Mr. Kairus Dadachanji in fact amounts to commission requiring TDS deduction u/sec.194(1)(ba) of the Act - HELD THAT:- We hardly see any reason to cause our agreement with the Revenue’s arguments supporting the NFAC’s foregoing directions invoking sec.194A qua assessee’s salary payment(s) attracting TDS deduction u/sec.192 as sec.200A appears to be in the nature of a complete code in itself for the purpose of processing of TDS returns. Faced with this situation, we invoke stricter interpretation thereof as per Commissioner of Customs vs. Dilip Kumar And Co. & Ors. [2018 (7) TMI 1826 - SUPREME COURT] And that sec.200A of the Act is a specific provision having overriding effect over all other general provisions going by the principle of ‘Generalis Specialibus non Derogant’. Revenue’s next plea is that nothing prevents the learned field authorities to make such an adjustment in case of an incorrect claim u/sec.200A(a)(ii) r.w.s. Explanation (ii) thereof - It’s instant latter plea is also found to be devoid of merits once Explanation-(i) and (ii) to Sec.200A itself specify the scope thereof to any mutually inconsistent items vis-à-vis another entry in form- 24Q or qua rate of deduction; respectively. There is no indication that sec.200A “processing” could in any way change head of the TDS applicability; what so ever. We thus conclude that once the assessee having deducted TDS u/sec. 192 of the Act “at the time of payment”; the CPC’s intimation going by the date of credit i.e., 31.03.2019 (supra) as well as the NFAC’s impugned action changing “salary” head to “commission”, have erred in law and on facts in raising the demand in issue. The same stands reversed. We accept the assessee’s foregoing main as well as additional ground(s) in very terms. Ordered accordingly. Issues Involved:1. Violation of principles of natural justice due to non-serving of show-cause notice.2. Recharacterization of salary paid to the Managing Director as fees for professional services.3. Incorrect levy of interest under Section 201(1A) of the Income Tax Act for late TDS deduction.4. Jurisdiction of NFAC to change the nature of payment from salary to commission.Issue-wise Detailed Analysis:1. Violation of Principles of Natural Justice:The assessee contended that the order under Section 250 was passed without proper serving of a show-cause notice, violating the principles of natural justice. The CIT(A) allegedly failed to provide an opportunity for the assessee to respond to proposed enhancements, making the enhancement to income on an assumption basis without calling for facts or evidence. The tribunal acknowledged this procedural lapse and emphasized the necessity of adhering to the Faceless Appeal Scheme, 2021, which mandates serving notices and allowing the opportunity to be heard.2. Recharacterization of Salary as Professional Fees:The CIT(A) treated the payment to the Managing Director as fees for professional services, requiring TDS under Section 194J(1)(ba) instead of treating it as salary under Section 192. The assessee argued that the Managing Director was a full-time employee, and the payment was based on the company's profits, thus qualifying as salary. The tribunal examined the relationship between the company and the Managing Director, emphasizing the dual capacity of a director as an employee and an agent. It concluded that the CIT(A) erred in recharacterizing the payment without considering the employer-employee relationship and the terms of employment as outlined in the company's board resolution.3. Incorrect Levy of Interest Under Section 201(1A):The interest was levied due to a delay in TDS deduction, calculated from the date of salary credit rather than the date of payment. The assessee argued that TDS under Section 192 should be deducted at the time of payment, not at the time of credit. The tribunal noted that the CPC's intimation relied on the credit date, leading to an erroneous demand. It highlighted that the TDS return filed by the assessee indicated compliance with Section 192, and thus, the interest levy was incorrect.4. Jurisdiction of NFAC to Change Payment Nature:The tribunal addressed the NFAC's jurisdiction in changing the payment nature from salary to commission under Section 154 read with Section 200A. The assessee argued that NFAC lacked authority to alter the TDS head from salary to commission in the processing of TDS statements. The tribunal agreed, stating that Section 200A is a complete code for processing TDS returns and does not allow for changing the nature of payment. It emphasized that the NFAC's action exceeded its jurisdiction, as Section 200A does not permit such adjustments, and any change in the TDS head was beyond its scope.In conclusion, the tribunal found in favor of the assessee, allowing the appeal and reversing the demands raised by the NFAC. The tribunal underscored the importance of adhering to procedural requirements and the specific provisions of the Income Tax Act, particularly regarding TDS processing and jurisdictional limits. The appeal was allowed, and the tribunal ordered accordingly.