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2016 (3) TMI 1012 - ITAT JAIPUR

2016 (3) TMI 1012 - ITAT JAIPUR - TMI - Nature of receipts of the assessee - income from salary or professional receipts - whether the relationship between the assessee and the Resonance was of employee and employer or Consultant and Principal? - Held that:- The document before us i.e. Consultancy Agreement is not colorful device but only an admitted document and no material whatsoever has been brought on record to show that it is a colorful device. No notice u/s 131 was issued to Resonance Inst .....

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f Consultant. Once we have held that the assessee is a consultant, therefore, as a consequence, the assessee is entitled to benefit under the Act. Therefore, ground no. 1.1 and 1.2 are also decided in favour of the assessee. No reason whatsoever has been given by the authorities below for rejecting the books of account. The sole reason given by the authorities below was that the assessee is a salaried employee and not the professional. Since we have held that the assessee is a professional, ther .....

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Lower authorities have erred in law and in the facts and circumstances of the case in holding that the receipts of the assessee is income from salary instead of income fro professional receipts. 1.1. That the ld. Lower authorities have erred in law and in the facts and circumstances of the case in rejecting the books of accounts without invoking provisions of section 145(3) of the Income tax Act, 1961. 1.2. That the ld. Lower authorities have erred in law and in the facts and circumstances of th .....

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of the assessee with Resonance. Thereafter, the assessee filed return of income for AY 2006-07. He claimed himself to be a professional and on 1st April, 2006 he entered into a Consultancy Agreement with M/s. Resonance. The recital of the said agreement provides as under :- Whereas the party of the first part is engaged in the business of imparting coaching, guidance and tuitions to students for preparing them to appear in various regular and competitive examinations in India, more particularly .....

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ts for such examinations. (This paragraph will have to be individually drafted to reflect his academic qualification and teaching/coaching experience) WHEREAS, after detailed discussions and negotiations, the first party wishes to engage the party of the second part as CONSULTANT and the second party is agreeable to such an engagement. The para 1.1 and 1.2 of the said agreement provides that the assessee would be discharging his duties as Consultant for Chemistry Part of Resonance Institute and .....

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. The broad duties of the consultant were provided in para 2.3 of the agreement. The relevant clauses of the duties, as mentioned in clauses 2.3 are reproduced herein below : a) To advise the Institute in designing the Course structure of Chemistry for the IIT JEE aspirants; c) Development of entrance tests (subject : Chemistry) into Resonance itself; e) Setting the overall pace of teaching Chemistry depending on prior preparedness of students (class XI, class XII, droppers, etc.) i) To assist a .....

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of subject - However, the size, depth and difficulty level shall be decided by the Consultant based on his assessment of preparedness of the Students whom he is guiding; n) Guiding teachers of the Institute for effective content delivery in classes; o) Grooming young teachers to be effective educators; p) Helping the institute in attracting new teaching talent as well as conducting interviews to identify and hire the best available teachers. 2.2. Similarly, the Resonance s obligations are provi .....

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rights in respect to the study material, notes, question papers, test papers, mock tests which are prepared exclusively by the consultant without using the resources of the Institute irrespective of the fact whether they are distributed amongst the students of the Institute or not. The agreement has also provided a Non-Compete clause as under :- 8.1. In consideration of the mutual covenants and considerations contained in this agreement, receipt and adequacy whereof is acknowledged by the party .....

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hing/teaching institute, study centre, setup or enterprise to carry on the activities significantly similar to the activities of the Institute, whether by way for giving direct tuitions or by way of distant coaching or by correspondence. The agreement also provides that any of the parties can terminate the agreement after giving one month notice to the other on account of reasons mentioned in para 11; of the Agreement. 2.3. Now, after entering into agreement, the consultant assessee filed the re .....

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, the AO has not allowed the expenses incurred/claimed by the assessee in the return of income,on the pretext that if the assessee got income from salary then he could not claim the expenditure. Therefore, the AO has not rejected the books of account and without rejecting the books of account, the AO has rejected the claim of expenditure in the return of income. The reasoning given by the AO in concluding the assessment order, is mentioned in para 10, which is as under :- From the above discussi .....

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s grossly erred in making the assessment order u/s 143(3) without applying and complying the provisions of section 145(3)/144 of the Income Tax Act, therefore the order is bad in law and void ab initio. 2. On the facts and circumstances of the c assessee the learned Assessing officer has grossly erred in treating the professional income amounting ₹ 26,00,000/- as a salary income without examining the books of accounts of the appellant and without verifying the facts of the case. 3. On the .....

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me of assessee as income under the head salary and computed the income on the basis of details furnished by assessee himself. Moreover, factually no amount was disputed. There was no dispute on facts the only issue was whether the receipt from Resonance Coaching Institute was taxable under the head salary or under the head business and profession which was a legal issue. Therefore, there was no need to invoke provisions of section 145(3)/144. However, in respect of the other, the ld. CIT (A) has .....

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e assessee has submitted as under :- If a person was earning the salary income in A Y 2005-06 it does not mean that the income in A Y 2007-08 should also be treated as salary income. It could be a professional income. Further if he attend the class of Senior faculty that does not change the nature of income from professional receipt to salary receipt. If any people change his teaching subject (Physics to chemistry) it does not change the nature of income. If any person is affiliated with a coach .....

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t the nature of income. In the similar case of kamlesh soni ITAT Jaipur bench has decided the case in the favor of assessee. Relevant para is reproduced here in below: The assessee is an engineering professional holding degree of B.E. (civil). The terms and conditions of the agreement relevant to the nature of relation between the two parties are that schedule of teaching hours was decided by the assessee; question paper and answer sheet for test conducted by ACI are prepared by the assessee wit .....

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s no relation of employer and employee between ACI and the assessee. The terms and condition of the agreement between the parties are more akin to the relation between the two as a professional. The CIT(A) has there for rightly accepted the claim of the assessee that the receipt in question was professional income and not a salary income. The correctness of expenses is yet to be examined by AO as to whether these claim are verifiable or not or have been supported with sufficient evidence, though .....

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issue involved in the grounds is as to whether the assessee was working with M/s Allen Career Institute as their employee or as a professional and if he was working as a professional as to whether he was entitled to the claim of ₹ 3,18,328 under sec. 37 (1) of the act. The undisputed facts are that the assessee had furnished return of income declaring income under the head Income from business / profession and Income from other sources . It was noted by the AO that prior to joining M/s All .....

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dent. The AO noted further that assessee tried to categorize the service given by him as vocation instead of salary ehile the relation of the assessee and the management of the institute were that of principal and servant. The AO accordingly concluded that the assessee has wrongly claimed income under the head professional income instead of income under the salary. He also denied the expenditure claimed by assessee on stationery, newspapers and magazines, etc. The learned CIT(A) has however allo .....

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le placing reliance on assessment order submitted that the assessee in his statements recorded by the AO under sec. 131 of the Act had stated that prior to joining services at M/s Allen Career Institute, he was employee of Central Academy School as a teacher and was also doing private tuition. All these circumstances suggest that assessee was a salaried employee of M/s Allen Career Institute and learned CIT (A) was not justified in allowing the claim of assessee of professional income and the cl .....

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consideration. Thus CTO had recognized the assessee as a professional. Prior to asst. yr. 2001-02, in number of assessment year the income of the assessee has been charged and assessed by the Department in the status of professional. There was no relation of employer and employee between the M/s Allen Career Institute and the assessee, which is required to charge the income under he head salary. The learned athorised Representative submitted that the rate of 33 percent instead of 5 percent cann .....

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Chief Inspector AIR 1974 SC 37; (iii) CIT vs. Mrs. Durga Khote (1952) ITR 22 (Bom); (iv) Indian Medical Association vs. v.p. Shantha 86 comp cas 806 (SC). The learned Authorised Representative submitted further in similar other case like Mr. Vinod Kumawat ( page Nos. 22 to 31 of the paper book), Mr. Chinarao Chaudhary ( page nos. 32 to 40 of the paper book) the Department has accepted the receipt as professional income. These persons are also associated with the same institute. He also referred .....

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contentions of the learned Authorised Representative that the nature of relationship between the assessee and M/s Allen Career Institute can be inferred from the terms and condition of the agreement between the two under which M/s Allen Career Institute was agreed to pay ₹ 2,50,000 to the assessee for the service to be rendered by him on the agreed terms and condition of the agreement between the two. The assessee is an engineering professional holding degree of BE (civil). The terms and c .....

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loyed by him for assisting him and prepared notes for students on the besis of which he had filed return of income charging income under the head salary; last contract was for ₹ 5 lac for asst. yr. 2000-01 and subsequently in asst. yr. 2001-02 the contract amount increase to ₹ 9 lac; and dearness allowance, conveyance allowance, perquisites, provident fund contribution or other benefits were not provided to the assessee. All these terms and conditions of agreement suggest that there .....

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uisites, provident fund contribution or other benefits which are generally provided to an employee by his employer. In the case of CIT vs. durga Khote ( supra), the hon ble Bombay high court was pleased to hold that mere establishedment of relationship of master and servant is not sufficient when we are dealing with a person who is practicing a profession because in the course of practice of that profession it may become necessary for the person to get himself or herself engaged to a particular .....

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tent of control of a person who is taking services from other for an agreed payment, the manner in which the person gets services and the duration of service besides type of facilities provided by the person getting the work done. In the case of an employer and employee, the nature of control and its manner are different than those in a case done on contract basis. In our view in the present case the term services used for the assigned job done by the assessee for the institute have been treated .....

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tionship between the two parties in a case of agreement is generally shorter and extension or renewal thereof depends upon the discretion of each other. In the present case before us, the terms and conditions of the agreement between the parties are more akin to the relation between the two as professional. The learned CIT(A) has therefore rightly accepted the claim of the assessee that the receipt in question was professional income and not a salary income so far as ground No. 2 is concerned, w .....

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37(1) of the act. The matter is thus set aside to the file of the AO to verify the correctness of claimed amount in expenditure after affording opportunity of being heard to the assessee on the basis of material already available on record in this regard. The issue raised in the grounds is thus decided in favour of the assessee subject to aforesaid verification so far as correctness of claimed expenditure amount is concerned. We further submit that as per decided case of Mcdowell & co. in Ho .....

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submit that coaching has deducted the TDS on the amount of professional income and not on salary. And the same has been claimed in the profit and loss account as a professional fee. In the light of above decisions it is clear that the income earned during the year under appeal was/is of professional nature instead of salary income. And all the expenditure should be allowed as a expenditure spent wholly for earning professional income and there is direct nexus between the expenses and the profes .....

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and employer and not of the consultant and the principal. 4.2. We have heard the rival submissions and perused the material on record. The consultancy agreement dated 1.4.2006 reveals that the appointment as Consultant is for a period of one year. It also mentioned that the relationship between the assessee and the Resonance would be governed by the terms and conditions of the contract. The consultancy fee, for providing the consultancy for Chemistry was agreed for a sum of ₹ 26 lacs excl .....

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reement i.e. to say that the agreement has restricted the subject of consultancy to Chemistry only. Whereas as per the case of the revenue, the assessee was teaching Physics in the year 2005-06, therefore, the consultant, in our view was free to render the services as Consultant for the subjects of Physics and Maths. However, providing the consultancy services in respect of the subjects Physics and Maths or any other subject should not be in conflict in terms of the Agreement. 4.3. The basic iss .....

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employer relationship. If it is for contract for services , then it is between the Professional and the Entrepreneur. 4.4. Admittedly, the assessee was a B-Tech qualified Engineer and was having 4 years experience in advising, guiding and coaching the students for such examination. Thus the assessee being the Engineering Graduate from IIT Kanpur had 4 years experience after completing his graduation to provide consultancy services of coaching for examination. This fact is not disputed by the Re .....

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and the Hon ble Supreme Court in the matter of Pyre Lal Adishwar lal vs. CIT, (1960) 40 ITR 17 (SC) has held that the correct method of approach is whether having regard to the nature of work there was due control and supervision by the employer. The receipt of remuneration for holding an office does not necessarily gives rise to relationship of master and servant. Whether a person is a servant or an agent would be determined by the duties of employee, the nature of business, terms of his employ .....

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tise. It is an admitted case that the assessee is a professional having B-Tech degree and four years experience in advising, guiding and teaching various subjects relevant for preparation of entrance examination for engineering colleges. The conclusion drawn by AO that the agreement between the assessee and Resonance is a colorable device, in our view, is not correct and not supported by any investigation or reasoning brought on record. In our view, the assessee was given the freedom to take the .....

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ers of the Institute for delivery in classes. This clearly shows that the relationship between the assessee and Resonance was not of employee and employer. The conclusion of the AO that the assessee has joined the Institute in A.Y. 2005-06 after his graduation and at the stage of his training is without any basis and is contrary to record. The agreement provides that the agreement in recital mentioned that the assessee is B-Tech qualified engineer having his degree from IIT and 4 years experienc .....

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g, guiding and coaching the students during his student career. His career, in our understanding, as a teacher will commence only after completing the graduation and thereafter he will acquire the experience for advising, guiding and teaching. Further to say that the assessee was taking the classes from Shri R.C. Sharma and was to take classes on same pattern, in our opinion, the same does not help the AO. It does not lead to any conclusion that Shri R.C. Sharma was a faculty of Chemistry or Phy .....

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he ld. Counsel for the assessee and more particularly in the matter of Kamlesh Soni, 107 TTJ 836 wherein in the identical facts and circumstances, the relationship between the teacher and the Institute was held to be of consultant in nature. In the light of the above, we have no hesitation to hold that the relationship between the assessee and that of the Resonance was of employee and employer. We would like to add that even in the tax return filed by the Resonance, the TDS was deducted on accou .....

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