By TIOL News Service

MUMBAI, JAN 17, 2017: THE ISSUE IS - Whether variable payments made to an individual without deducting TDS can be construed as 'salary', merely on basis of AR's statement that 'amount received was salary provision to the director', if those payments were reversed on account of inadequacy of profits during the year. NO is the answer.

Facts of the case: The assessee individual is a director of a public limited company. AO noted that during the year, assessee had received a sum of Rs.16,09,472/- from the company between the period from 21/06/2010 to 21/03/2011 and then the amount was reversed. In the assessment order, it was noted by AO that on being show-caused, the representative of assessee submitted that the amounts were received towards salary, but since the company did not have adequate profits, such payments were reversed on 21/03/2011. AO noted that out of the total amount of Rs.16,09,472/-, a sum of Rs.8,300/- was an expense incurred on behalf of the company and a sum of Rs.23,622/- was payment received towards telephone. AO excluded the sum of Rs.8,300/- and treated the sum of Rs.23,622/- as perquisite u/s 17(2)(iv) and the balance Rs.15,77,550/- as salary. Thus, sums of Rs.15,77,550/- and Rs.23,672/-, totalling to Rs.16,01,172/- was assessed under the head salary. In coming to such conclusion, AO observed that it was a case where initially the payments were received as salary and later on surrendered or foregone and, therefore, the same was, in any, case taxable as salaries. CIT(A) had also affirmed the stand of AO on the ground that the salary foregone or surrendered on a later date was still liable to be taxed under the head 'salary'.

On appeal, the ITAT held that,

++ it is noted that representation were made before AO that the payments have been reversed on account of inadequacy of profits with the company. Be that as it may, if one has to look at the payments dehors the said explanation available to the Assessing Officer, no other feature is present which could justify the characterization of the said amount as salary. Firstly, the payments have been made on varying dates between 21/06/2010 to 21/03/2011. Secondly, even the amounts vary and the payments have not been subject to any tax deduction at source, which would normally the position if the payments were in the nature of salary. Thirdly, there is no material to suggest that any Board of Director's resolution was available permitting the company to pay salary to the assessee director. In fact before CIT(A), assessee referred to a resolution passed in the meeting of the Board of Directors of the company, which approved the salary payment to assessee-director for the FY 2011-12, which corresponds to next AY. In this manner, assessee sought to point out that so far as instant year is concerned, there is no resolution of the Board of directors of the company authorizing the payment of salary to assessee-director. The aforesaid explanation of assessee had been unjustly brushed-aside by CIT(A). In my considered opinion, AO has been overtly influenced by the explanation of the representative of assessee without appreciating attendant facts, which clearly show that the impugned amount could not be construed as payment of salaries by the company to assessee-director. Therefore, having regard to the facts and circumstance of the case, the income tax authorities have erred in adding a sum of Rs.16,01,172/- to the income of the assessee as salary.

(See 2017-TIOL-46-HC-MUM-IT)