Tax in Separate Heads if Salary & Commission received by Employee from employer : ITAT

ORDER

L.P. Sahu, Accountant Member. – This appeal has been filed by the assessee against the order of Commissioner of Income Tax (Appeals)-2, Bhubaneswar, dated 15.09.2016 for the assessment year 2010-2011.

2. The sole issue involved in this appeal as raised by the assessee in concise grounds of appeal is that the CIT (A) erred in confirming the addition made by the AO under the head “salary income”.

3. Brief facts of the case are that the assessee is a salaried employee of Seashore Agricultural Promotion Company Private Limited and filed his return of income on 31.07.2010 declaring total income of Rs. 4,99,960/-. Thereafter the assessee filed revised return of income on 31.07.2011 declaring total income of Rs. 9,39,360/-. The AO after taking note of the income declared in the original return of income filed on 30.07.2010 and receipt credited to the assessee by his employer the case was selected for scrutiny. Statutory notices were also issued to the assessee. In response to the same, the assessee appeared and filed necessary details as required by the AO during the assessment proceedings. Thereafter the AO passed assessment order u/s. 143(3) of the Act computing the total income of the assessee at Rs. 19,11,480/-.

4. Feeling aggrieved, the assessee appealed before the CIT (A) and the CIT (A) after considering the findings of the AO and submissions of the assessee has dismissed the appeal of the assessee.

5. Now, the assessee is in further appeal before the Income Tax Appellate Tribunal.

6. Ld.AR before us filed paper book containing pages 1 to 31 and in the written notes of submission, the assessee submitted as under :—

“The appeal has been filed against the addition of Rs. 11,12,211/- made by the learned AO and confirmed by the learned CIT(Appeals) treating the said amount as not commission but as “salary” income without allowing deduction u/s. 37 of the IT. Act, 1961, the expenses incurred to earn the said commission. But in fact, the entire receipt is commission and not salary as it would be clear going though the fact of the case. The claim of the assessee is that the income earned by way of commission for expansion of business of the Principal i.e. M/s. Seashore Agricultural Promoters Co-operation should be taken after allowing the deduction of expenses to earn that incomes.

The fact of the case is that the learned authorities below are wrongly influenced by the nomenclature “salary”. In fact the appellant is appointed by the Company as a marketing staff for working as an agent to purchase the product like coconut, wheat, rice, moongdal etc by moving village areas. To carry on the works smoothly the assessee in turn appointed some marketing staff under him at different village areas. They contacted the farmers who help for purchasing their products. For that the assessee had filed a profit and Loss account with regard to commission income. Against commission receipt he had debited expenses incurred under the head salary, meeting expenses, business promotion expenses, travelling, telephone and other expenses related expenses.

The assessee also engaged in marketing another product for investment in preferential share for Seashore Security Limited. Again for that work also he has to incur various expenses and engage other staff to convince the respective investors. To monitor all these work, he is called as “Team Leader”.

The money collected from the customers are invested by the Company in different sectors like Flour mills, medicine factory, diary farming, courier and cargo, shipping and dal producing units in preferential shares to earn dividend.

It is pertinent to note that if the assessee is not active and does not fulfill the target fixed by the Company as a “Team Leader” then, his salary is liable to be deducted. Merely to influence the customers the assessee is appointed giving the attractive title as “Team Leader”. To achieve targets the assess in turn has to appoint persons or agents for arranging the customers. For all this work done the “Team Leader” spends money out of his commission receipt. It is settled law that tax is leviable on net income only and not on gross income. All the expenses incurred to earn the income is deductible u/s. 37(i) of the IT. Act, 1961 as per law.

The case laws relied upon by the A.O. and CIT (A) are distinguishable on facts. They are not all relevant to the facts of the instant case.

It is settled law decided by Hon’ble Supreme Court of India that where ‘ there are two reasonable views the one favourable to the assessee has to be adopted.

It is the law that the expenses incurred to earn a particular income is deductable and the net income which is the “real income” which comes to the pocket of the assessee is only taxable.

Section. 37(1) of the IT. Act, 1961 reads : – “Any expenditure ( not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profit and gains of business or profession”

Therefore, from the above facts and circumstances of the case it would be clear that the assessee though received his remuneration as commission under the head “salary & commission”. But the employment depends upon achievement of the business. Further, had it been salary it would have been amount. It is not fixed “salary” but subject to achievement of business target. If target is not achieved, it is reduced. It is settled by High Court and Supreme Court that the activities of an assessee in an organized manner to earn income is a business or trading activity. Hence, business income.

Even in “House rent” cases where the assessee receives a fixed house rent it has been decided by Hon’ble Supreme Court in the case of S.G. Mercantile Corporation v. CIT, 83 ITR 700 (SC) & Narsingha Kaur v. CIT, 113 ITR 712 (Ori), CIT v. MP. Bajaj & Others, 200 ITR 131 (Ori.). That an activity carried continuously in an organized manner with a set purpose with a view to earn profit is a business or trading activity and the assessee’s earning income from salary & commission like that.

So in the instance case since the assessee gets his commission and remuneration or profit for procuring business under the head of wrong “nomenclature” of salary but in infact it is not salary but commission business or trading income. All the relevant expenses incurred to earn the said income should be allowed as deduction u/s. 37(1) of the IT. Act, 1961 out of the Gross receipt. Profit & Loss account and Balance Sheet in given page 13 & 14 of the Paper Book.

It may kindly be noted that under similar circumstances Hon’ble Cuttack Bench of the Tribunal in the case of Jayanti Kumar Mohapatra v. ITO in ITA No. 298/CTK/2007 has allowed the expenses incurred by the assessee. The copy of the order is enclosed herewith in page 28 to 30 of the Paper Book.

PRAYER

Therefore in view of the facts stated above, the appeal of the assessee may kindly be allowed. And for this act of your kindness the assessee as in duty bound shall ever pray.

In addition to the above written submission, ld. AR further submitted that the AO has only considered the income from revised return without considering the TDS amount, therefore, total TDS amount as claimed in revised return which is reflected in 26AS also, may kindly be allowed.

7. On the other hand, ld. DR relied on the orders of authorities below.

8. After hearing both the sides and perusing the entire material on record, we find that the assessee before authorities below has stated that on the amount tax has been deducted u/s. 194H & 194D of the Act by Seashore Agricultural Promotion Company Pvt. Ltd. ,therefore, this is a non-salary income. It was found by the lower authorities that the assessee was working for Seashore Agricultural Promotion Company Pvt. Ltd and the salary as well as the alleged commission has been received by him during the normal course of working for Seashore Agricultural Promotion Company Pvt. Ltd. The CIT (A) found that the assessee himself in the return of income as well as the statement of computation filed during the course of appellate proceedings, has accepted that amount of Rs. 7,50,000/- is the salary of the assessee. Therefore, the CIT (A) observed that relationship between Employer Company Seashore Agricultural Promotion Company Pvt. Ltd. and the assessee is in the nature of employer-employee relationship has been accepted. Ld. AR submitted before us that the salary and commission received from Seashore Agricultural Promotion Company Pvt. Ltd and Seashore Securities Pvt Ltd was not in the nature of salary but in the nature of business commission paid by the companies to the assessee for promotion of the business and intrinsically connected with the achievement of business by the assessee should have been considered. The remuneration was subject to achievement of target. Therefore, the said receipt in the hands of the assessee is business receipt and not salary as envisaged under the IT. Act, 1961. It is profits and gain of the business or profession which was carried on by the assessee during the relevant year and is assessable u/s. 28 of the IT. Act and not salary to be considered u/s. 17 of the IT. Act, 1961. Further the ld. AR submitted that the staff were working for purchase of produce like rice, Mung Dal, Wheat, leaf for rope, coconut from farmers and supply them at cities like Bhubaneswar etc. and they are working for attracting investments in Seashore Securities Ltd. In turn the Company was invested in Floor Mill, Medicine Factory, Diary Farm, Cargoship, Preferential Shares and Dal Processing Unit to earn income so as to pay profit and dividend to the investor. These are nothing but business activities for which the assessee had to appoint staff and make expenditure under the above mentioned heads in Profit & Loss Account filed before the lower authorities.

9. From the assessment order, we observe that as the assessee could not substantiate its claim before the AO, therefore, the AO treated the commission receipt as income of the assessee from salary. The CIT (A) relying on the decision of Hon’ble Delhi High Court in the case of CIT v. Kanwaljit Singh [2012] 28  (Delhi) upheld the action of AO. Before us, the assessee produced ledger account of staff salaries, meeting expenses ledger account, business promotion expenses ledger account, rent and electricity charges ledger account etc. In respect of computation of income submitted by the assessee before the revenue authorities, he has himself considered Rs. 7,50,000/- under the head income from salary and rest amount has been taken as business income which is not accepted by the revenue authorities. Further the assessee has submitted profit and loss account in which he has shown commission received of Rs. 11,12,211/- and in the debit side he has debited some expenses which has not been examined by lower authorities. We also noticed that the assessee has been issued Form No.16 for the salary received and Form No.16A for the commission paid to the assessee in which the applicability rate of TDS has been deducted. The assessee submitted before us copy of ledger accounts which has not been considered by the lower authorities. However, in our opinion, to arrive the correct profit from the above activity carried out by the assessee, the expenses need to be verified on the part of the AO. Therefore, this issue is sent back to the file of AO for verification of expenses debited into the profit and loss account. Needless to say that reasonable opportunity of being heard shall be given to the assessee and the assessee is directed to appear before the AO and cooperate in the assessment proceedings and he also directed to substantiate the expenses claimed with credible evidence before the AO. Accordingly, the issue raised by the assessee is allowed for statistical purposes.

10. In the result, the appeal of the assessee is allowed for statistical purposes.