TMI Blog2011 (1) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... the I. T. Act in respect of claim of assessee as income from capital gain on transaction of purchase and sale of shares. ITA No.2828/Ahd/2008: AY: 2005-06 1. On the facts and in circumstances of the case as well as law on the subject, the learned CIT(Appeals) has erred in confirming the action of the Assessing Officer in treating the remuneration of ₹ 11,25,000/- received by assessee from company as salary as against assessee s claim of remuneration as business income. 2. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. 3. Both the appeals are decides as under. ITA No.2814: AY 2004-05 4. On ground No.1 of the appeal, the AO made addition of ₹ 7,25,400/- treating the remuneration received by the assessee from the company as salary against assessee s claim of such remuneration as business income. The facts of the case are that the assessee is a director of M/s. Ganesh Laxmi Processors Pvt. Ltd. During the year, he received remuneration of ₹ 7,25,400/-, which he claimed as business income and claimed various expenses against such inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was challenged before the learned CIT(A) and it was explained that the learned Counsel for the assessee has explained the role played by the assessee in promoting the company and developing its business. It has been contended that the AO had wrongly placed reliance on the case of B. Nagi Reddy (supra) and that of Ram Prasad (supra). By relying on the decision in the case of B. Nagi Reddy (supra) the point that the AO was trying to make was that, if the assessee was pursuing the conduct of the company as his business then the income earned by him would be assessable as business income. There was nothing in the formation and maintenance of the said company which would contradict such principle. By relying on the case of Ram Prasad (supra) what the AO was trying to argue was that, if the Article put a limitation on the powers of the directors and he was subjected to supervision and control of the Board of Directors, he would be treated as a servant of the company. However, in the case of the assessee, neither the Articles nor the Board of Directors put any restriction on the functioning of the assessee as a director. The resolution adopted by the Board of Directors did not call for an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als with the remuneration payable to a whole time Director. As per this Article, a Director may be paid such remuneration and/or commission or under participation in profits or by any other mode or modes. The Assessee s functions and his remuneration were determined by the Board of Directors in a meeting held on 1/4/2003. The minutes begins with the sentence, RESOLVED THAT Shri Maheshkumar Gupta, Director is hereby appointed as Director-in-Charge of Finance and Production of th4e company on the following terms . The very first sentence of the resolution clearly shows that the Assessee was appointed as a Director which clearly establish the employer-employee relationship. Clauses (a), (b) (c) of the minutes lay out the power and function of the Assessee, while clause (d) deals with his remuneration. As per this clause, the Assessee was to be paid a monthly remuneration of ₹ 40,080 per month for 5 months and ₹ 75,000 per month for 7 months ending with March, 2004. The total sum payable as remuneration was thus ₹ 7,25,400 for the whole year. It was further made clear that the company was not to bear any expenditure or reimburse any expense incurred by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was in the nature of salary income. The AO therefore, was fully justified in treating the sum of ₹ 7,25,400 as income from salary. 7. The learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that there is no relationship of employee employer between the assessee and the company and referred to Articles of Association of the company copy of which is filed at page 11 of the paper book and also submitted that the assessee cannot be dismissed from his assignment and there was no supervisory control upon the assessee by the Board of Directors or by the Managing Director. Therefore, the assessee rightly claimed the receipt as business income. He has relied upon the following decisions: 1) Ram Prasad Vs CIT 86 ITR 122 2) Sardar Harpeet Singh Vs CIT 187 ITR 679 3) CIT Vs Smt. Shanti Devi and Others 199 ITR 800 4) Dwijendra Chandra Chowdhury Vs CIT 61 ITR 97 He has also submitted that in the earlier years the claim of the assessee has not been disputed by the revenue department even though returns were processed u/s 143(1) of the IT Act. 8. On the other hand, the learned DR relied upon the orders of the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the director and the company has been brought about, where under the director is constituted an employee of the company, if such be the case, his remuneration will be assessable as salary under section 7. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment. If the company is itself carrying on the business and the assessee is employed to manage its affairs in terms of its articles and the agreement, and he could be dismissed or his employment can be terminated by the company if his work is not satisfactory, it can hardly be said that he is not a servant of the company. 9.1 The Hon ble Allahabad High Court in the case of Sardar Harpeet Singh Vs CIT 187 ITR 679 observed as under: The Appellate Assistant Commissioner, after taking into account the resolutions and the relevant articles of association passed by the company by which the assessee was appointed joint managing director, held that the assessee while acting as joint managing director, was no working as an employee of the company and was also not subject to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. He might be a director as well as an employee, but that he is an employee must not be merely on paper, rather it would be proved and established on record as a fact. Where the memorandum of association stated that a director may be called upon to perform extra service for the company and, in such an event, the company would remunerate such director and there was a resolution by the board of directors allotting specific duties to the directors but no proof of extra services rendered by the directors: Held, that, in the instant case, the relationship of employee and employer was lacking, and this being so the assessee was rightly assessed by the Income-tax Officer without taking into account the claim for deduction under section 16(i) of the Income-tax Act, 1961. 10. Considering the facts of the case in the light of the above decisions, it is clear that the authorities below were not justified in denying the claim of the assessee. The articles of association of the company provide whole time directors and managing directors as servant. Article 40 provides the first time directors of the company shall be Maheshkumar Hukamchand Gupta, Shri Dineshkumar Raghubirprasad Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hers and no relationship of employee and employer was established between the assessee and the company. In view of the above discussions, it is clear that the amount received by the assessee was his business/professional income. The authorities below were, therefore, not justified in denying the claim of the assessee. We accordingly, set aside the orders of the authorities below and direct the AO to treat the receipt of the assessee as business income of the assessee and shall grant benefit accordingly. In the result, ground No.1 of the appeal of the assessee is allowed. 11. On ground No.2 of the appeal, the AO made addition of ₹ 5,36,065/- as unexplained cash credit u/s 68 of the IT Act. The AO noted that the assessee had claimed a sum of ₹ 5,36,065/- as long term capital gain on sale of shares. The details of the transactions leading to the alleged earning of capital gain which was furnished by the assessee, has been reproduced by the AO at Para 5 of the assessment order. When asked to produce the requisite evidence in support of such claim, the assessee furnished copies of contract notes and bills as evidence of alleged share transaction. On a scrutiny of the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares could not be accepted. Hence, all the three alleged transactions of three different shares through three different brokers and three different stock exchanges, were bogus. The AO, therefore, treated the um of ₹ 5,36,065/- as income from undisclosed sources within the meaning of section 68 of the IT Act and consequently added the same to the income of the assessee. 12. The assessee submitted during the course of appellate proceedings that all the transactions were off market transactions and were not conducted through the stock exchanges. Therefore, information furnished by the stock exchanges was irrelevant. This was because; there would be no record of such transactions with the concerned stock exchanges. The purchase and the sale of shares were fully supported by copies of contract notes and bills along with account confirmation etc. It has been further submitted that the purchase of the shares were duly recorded, these were made out of disclosed funds and the payments were made by account payee cheques. Both the purchases and sales were fully disclosed in the returns of income filed by the assessee. The brokers through whom such transactions were made would have co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchanges are required to send a report to SEBI with regard to such transactions. Thus, in cases of all listed shares/securities which are not transacted through the stock exchange, such transactions are required to be reported to the stock exchange on the same date. In the case of the Assessee, no such report was received by the concerned exchanges. This clearly meant that the shares of M/s. Eltrol Ltd. was not listed on the Ahmedabad Stock Exchange and the shares of M/s. Hazoor Media were not listed on the Bombay Stock Exchange. As regards M/s. Sarita Software, the National Stock Exchange reported that neither the broker was registered with the sock exchange nor was the company listed. The AR has stated that the shares of M/s. Sarita Software were originally listed on the Bombay Stock Exchange and not on the National Stock Exchange. In any case, when the shares of this company were allegedly transacted, it was not listed in any stock exchange. These facts clearly show that shares of none of the three companies were listed in any of the stock exchanges. Therefore, the Assessee was not entitled to be taxed at a reduced rate of 10% on the capital gains. 10.1 Coming to the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anjaykumar Agarwal deleting the similar addition is confirmed by ITAT Ahmedabad Bench in the case of DCIT Vs Shri Sanjaykumar Agarwal in ITA No.3142/Ahd/2007 dated 12-02-2010 (copy at PB-18). He has submitted that same decision is followed by the Tribunal in the case of Sheth Heena Akshay Vs DCIT in ITA No.118/Ahd/2008 vide order dated 04-06-2010 (copy of which is filed at page 5 of the paper book). He has also relied upon the decision of the Hon ble Punjab Haryana High Court in the case of CIT Vs Anupam Kapoor 299 ITR 179. 15. On the other hand, the learned DR relied upon the orders of the authorities below and submitted that genuineness of the sources of sale of shares is doubted. Therefore, addition u/s 68 of the IT Act has been rightly made. The learned DR submitted that some of the papers in the paper book have not been signed by the parties which create doubt. The learned Counsel for the assessee in the rejoinder however, submitted that some of the papers are computerized papers on which no signatures are required as per the practice and copy itself is admissible. 16. We have considered the rival submissions and material available on record. It was submitted by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the assessee submitted that the same CIT(A) who passed the impugned order has considered identical issue in the case of Shri Sanjaykumar Agarwal (supra) and deleted the similar addition vide order dated 29- 05-2007 copy of which is filed at page 23 of the paper book. The order of the learned CIT(A) in the case of Shri Sanjaykumar Agarwal has been confirmed by the Tribunal in ITA NO,3142/Ahd/2007 dated 12-02-2010 and Para 7 of the order of the Tribunal reads as under: 7. We have heard the rival contentions of both the parties. Looking to the facts of the case and circumstances of the case, the CIT(A) has called for the Remand Report and the remand report of the A. O. it was seen that CSE vide their letter had clearly confirmed that the shares of both the companies were listed with the exchange. We find that the genuineness of the transactions of purchase and sales of shares. In the remand report it was clearly mentioned that the transaction has been clearly confirmed by the brokers but also through separate letter issued by the brokers dt. 6.3.2006. We find that the CIT(A) has called for the remand report and the inquiries were conducted to ascertain whether or not tra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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