2025 (11) TMI 419 - HC - Income Tax

Ruling upholds income recharacterization: Rs 66 lakh treated as salary; Rs 45.27 lakh interest deduction denied.

HC upheld the Tribunal and AO, holding that a Rs. 66,00,000 receipt was salary, not professional/technical fees, because the taxpayer failed to produce ... Salary income v/s professional/technical service fee - receipt as a director - AO held that in the absence of details regarding the nature of professional/technical services rendered to the company, the receipt of the same cannot be considered as income from profession/business HELD THAT:- On careful perusal of the materials on record, even though the AO granted sufficient opportunity to the assessee to place the details/materials and nature of professional and technical services rendered by the assessee to the company, the assessee has failed to produce the same. Without placing any document, the assessee cannot claim that he has rendered the services as a financial expert to the Company and he has received the professional fee and not the salary. Assessee had also been failed to prove the nexus of providing the loan to the Company which was taken in his own name. Hence, it is rightly observed by the AO that getting paid by the Company as professional service and claiming that the loan has been taken in his own name leads to the conflict of interest - AO and the CIT(A) have rightly considered that when the charges towards professional and technical service rendered is considered as salary, it would be more beneficial for the assessee than the disallowance of interest expenditure. As in the absence of proof of services rendered to the company, the receipt cannot be considered as income from profession/business. The Appellate Tribunal on analysis of facts, has rightly held that receipt of Rs. 66,00,000/- is salaried income. The Appellate Tribunal further rightly held that the deduction of tax at source as professional charges is not the determinative factor for taxation under heads of the income. Appellate Tribunal has also rightly held that interest expenditure of Rs. 45,26,956/- has no nexus with the business carried on by the assessee to claim as expenditure against the business/professional income. The mere raising of loan by mortgaging the assessee's property and advancing it to the company itself would not be considered as the expenditure incurred for the purpose of business/profession. Assessee has not placed any material to contradict the finding of the Appellate Tribunal on both the issues. In the absence of such material in contra, there is no reason to differ from the view taken by the Appellate Tribunal. Decided against the assessee and in favour of the Revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether receipts of Rs. 66,00,000 from a company in which the recipient was a director are income from profession/business (professional/technical fees) or salary. 2. Whether findings/decisions of another revenue arm (service tax/central excise) treating the same payment as professional fees or production of additional evidence can preclude re-characterisation as salary in income-tax assessment proceedings. 3. Whether interest of Rs. 45,26,956 (and related amounts for subsequent years) incurred on loans raised by the recipient and advanced to the company is an allowable deduction against the alleged professional/business receipts-specifically, whether there is requisite nexus/commercial expediency to treat interest as business expenditure or business loss. 4. In the alternative, whether the interest could be allowed as a separate source loss and set off against income determined as salary. 5. For assessment year 2015-16, whether disallowance under section 14A r.w. Rule 8D as computed by the Assessing Officer and modified by the first appellate authority was justified. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of receipt: professional income vs salary Legal framework: Determination of head of income depends on nature of services, terms of engagement, articles/agreement, and whether remuneration is paid as salary (assessable under the head 'salaries') or for professional/technical services (business/profession). Sectional references to taxation principles and Companies Act definitions (remuneration per s.2(78), managerial remuneration limits under s.197) were applied as contextual law. Precedent treatment: The Court relied on the principle in Ram Prashad v. CIT that a director may have dual capacity (director and employee) and that the nature of the relationship may be determined by articles/terms of employment. Authorities invoked by the appellant (e.g., Durga Kumar Nanda) were considered but held inapplicable on facts; S.A. Builders and Rajeev Lochan Kaneria were distinguished on factual matrices. Interpretation and reasoning: The Court examined the record and found absence of documentary evidence from the recipient to establish the nature/details of professional/technical services rendered. The mere treatment in the company's books and deduction of TDS under s.194J (treatment by payor) are not determinative of the recipient's correct head of income. Given the lack of articles of association, contractual terms or contemporaneous particulars describing professional engagement, and in light of the Assessing Officer's opportunity afforded to the assessee, the Court accepted the conclusion that the receipts were salary. The dual-capacity principle was applied to underscore that a director's remuneration apart from sitting fees is generally taxable under salary unless convincingly shown as professional remuneration. Ratio vs. Obiter: Ratio - where an assessee who is a director fails to prove the nature/terms of services, receipts from the company can be treated as salary; company's accounting treatment or TDS under service-head is not conclusive. Obiter - general observations on director dual capacity and Companies Act definitions as contextual guidance. Conclusion: The Court upheld the Tribunal's finding that the receipt of Rs. 66,00,000 is salary income and not income from profession/business. Issue 2 - Admissibility/weight of additional evidence: service tax/central excise proceedings treating payments as professional fees Legal framework: Principles governing characterisation of income in tax proceedings and admissibility/weight of foreign or collateral revenue findings when assessing income-tax liability. Precedent treatment: The Court noted that prima facie findings by another revenue arm are not binding in income-tax assessments and that the onus to prove the nature of services rests on the taxpayer in income-tax proceedings. Interpretation and reasoning: The Tribunal and the Court considered the central excise/service-tax treatment presented by the assessee but found no substantive documentary evidence in the assessee's hands to explain the nature of services. The Court held that proceedings under different statutes or different arms of revenue do not preclude the Income Tax Department from independently examining and reaching a contrary conclusion on the nature of receipts when the assessee has not discharged the burden of proof in the income-tax assessment. Ratio vs. Obiter: Ratio - administrative or judicial treatment of a transaction by a different revenue authority does not conclusively determine the nature of receipts for income-tax purposes where the assessee fails to substantiate the claim in assessment proceedings. Obiter - remarks on inter-departmental findings' persuasive value rather than binding effect. Conclusion: The Tribunal was justified in disregarding the service-tax/central excise treatment as determinative; additional evidence did not cure the assessee's failure to prove services rendered. Issue 3 - Allowability of interest expenditure: nexus/commercial expediency Legal framework: Deductibility requires expenditure to be incurred wholly and exclusively for the purpose of business/profession; borrowing cost allowed where nexus to income-earning activity is established. Commercial expediency and business nexus are recognized tests (including applicability of principles from cases like S.A. Builders where funds advanced to related concerns were for commercial expediency). Precedent treatment: The Court analysed S.A. Builders (found favourable to claim where commercial expediency was proved) and Rajeev Lochan Kaneria (where investment in shares was the assessee's business), and distinguished both because on present facts the assessee failed to demonstrate that advancing funds to the company was out of commercial expediency or for purpose of his own business. Interpretation and reasoning: The assessee advanced funds taken on his name to the company but failed to show the loans and advances were in furtherance of his business/profession. The Court accepted the tax authorities' view that advancing money to the company in which the assessee was a director, without proving commercial expediency or business purpose, amounts to absence of nexus between interest expenditure and the alleged professional income. The potential conflict of interest arising from being paid by the company and also advancing loans was noted as undermining the claim. Mere raising of loans and passing funds to the company does not suffice to treat interest as business expense or to characterise resulting outflow as deductible against income characterised as salary. Ratio vs. Obiter: Ratio - interest on loan used to advance funds to a company is deductible only if nexus/commercial expediency to the assessee's business/profession is satisfactorily established; absence of such proof mandates disallowance. Obiter - comparative discussion of precedents where facts differed. Conclusion: The Tribunal and Court rightly disallowed interest deduction for lack of nexus/commercial expediency; the interest amounts were not allowable as deduction against the receipts. Issue 4 - Alternative claim: allowance as separate source loss and set-off against salary Legal framework: Principles of set-off/allowance of losses under the Income-tax Act and requirement that claimed losses relate to recognised heads of income. Interpretation and reasoning: The Court considered the appellant's alternative plea that interest should be allowed as business loss or as a separate source loss to be set off against income determined as salary. Given the primary conclusions that (a) receipts were salary and (b) interest lacked nexus to business/profession of the assessee, the Court found no basis to allow the interest as business loss or as a separate deductible source. Ratio vs. Obiter: Ratio - where expenditure lacks nexus to a business/profession, it cannot be admitted as loss under business/profession head nor as a separate source loss for set-off against salary. Obiter - procedural observations on burden of proof for alternative pleas. Conclusion: Alternative claims for treating interest as business loss or separate source loss for set-off were not sustainable and were rejected. Issue 5 - Section 14A disallowance for AY 2015-16 Legal framework: Section 14A read with Rule 8D governs disallowance of expenditure in relation to exempt income; appellate scrutiny permissible as to proportionality and methodology. Interpretation and reasoning: The Assessing Officer computed a section 14A disallowance; the first appellate authority reduced the disallowance to the amount of exempt income. The Tribunal and the Court found no error in the CIT(A)'s partial relief, noting reliance on judicial pronouncements and absence of a case to overturn that modification. Ratio vs. Obiter: Ratio - partial reduction of section 14A disallowance to the exempt income amount was sustainable on facts; the CIT(A)'s exercise was endorsed. Obiter - no extended commentary on Section 14A principles beyond affirming the factual correctness of reduction. Conclusion: The CIT(A)'s modification of the section 14A disallowance for AY 2015-16 was confirmed.