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Roshini Arya (Partner)     10 January 2014

Urgent problem resolution u/s 147

Dear Seniors 
My client has received a notice u/s 147 from IT dept Pune for detailed scrutiny for AY 2010-11. 
Here are the facts of the case My client was a director in company ABC and XYZ which was promoted by the same person.However he received salary only in ABC and not in XYZ. He also resigned as a director from XYZ in 2010 but still continues to be a director in ABC which is non operational. 
The TDS of amt Rs 10000 has been deducted under 92 for AY 2010-11 as salary received in company ABC. 
Hoever the problem is with the contractor income he received under 94C. 
My client has always received a salary income and has filed his ITR till AY 2013-14. 

My client in good faith & on the initiation of the promoter of ABC & XYZ accepted an amount of Rs 15 lacs from another company into his account in the June 2009.This amount of Rs 15 lacs was paid to my client for advertisement expenses supposedly carried by him.The company which paid him Rs 15 lacs deducted the TDS @ 2% + ST+ cess and the same is reflecting in his Form 26S. 
The amount after deduction of TDS was deposited in my client's bank account and the very next day the entire amount of Rs 15 lacs (less TDS etc) was RTGS to bank account of company XYZ. 

My client filed his IT returns for AY 2010-11 stating this was contract income that he received and the entire amt was transferred to company XYZ from his bank a/c in which he wasdirector as he had sub contracted the entire advertisement campaign to company XYZ. As he was an individual he need not have to deduct TDS of 1% for sub contracting.The TDS for salary was adjusted to the TDS deducted on account of TDS deduction under 94C. 

However the company XYZ converted the entire amount of Rs 15 lacs as equity in the name of my client and have filed their annual returns for the given year.But my client resigned as a director from company XYZ in May 2010 and his shares were transferred to another director of company XYZ and no amount was paid to him for the share transfer nor was the same claimed by my client. In fact no share certificates were issued in the name of my client as far his best knowledge. 

As of now the IT department is not convinced with my client's theory and insist that the amount of Rs 15 lacs is his income and have computed tax on the same.
However my client has been explaining them that this has been contract income that he sub contracted to the company XYZ in which he was a namesake director receiving no perks or salary what so ever. But the IT department want's to know why was the amount given by my client converted into equity.
To this my client has stated that if it was his investment on his resignation he would have asked for the amount back corresponding to the total shares,which is not the case.Also since he received no salary what so ever from the company XYZ why would he invest his supposedly hard earned Rs 15 lacs. 

My question is based on the above facts What is my clients best line of defense as this income was not generated by him nor was his.
 

  • It was only in good faith & trust that he accepted the income and filed his returns for AY 2010-11.
  • What would the company XYZ explanation for showing contract income as equity in the name of my client considering that on his resignation neither my client has asked for the money given nor the company has given any money during equity transfer from my client to another director.
  • In case the company denies having done any sub contracting work how can my client prove the same as this was a verbal contract between my client and company XYZ.
  • Can my client now accept this as his money and show expenses to avoid huge tax liability.



Please respond as I am unable to find the answers to the same. 

Regards 


Roshini



Learning

 9 Replies

Rajesh Thakker (Advocate)     10 January 2014

Dear Roshini,

The company had converted the amount so called returned by your client into equity of the company. Your client is director of the company. Therefore, it is in knowledge of this conversion. Therefore, there is no room for saving your client from section 147. This Rs. 15 lacs absolutely your client's income. Now, the contract income is covered u/s 44AD. Show the 8% income of Rs. 15 lac and file the return of income in response to notice u/s 147, this is only the best solution for your client.

Please always check form 26AS before submitting of return. Never rely upon your client. 

Regards,

Roshini Arya (Partner)     10 January 2014

Thank you Rajesh ji

However prior to A/Y 2011-12, this section was only applicable to the business of civil construction.

My client AY 2010-11.hence can he still show the same.

please respond

Rajesh Thakker (Advocate)     10 January 2014

Yes you are correct. Please prepare the accounts keeping in mind that it will be deeply scrutinize. Therefore, written the genuine expenditure. Do't be emotional otherwise you may lose case and reputation. In our line reputation is big asset rather than client.

Roshini Arya (Partner)     10 January 2014

Dear Rajesh ji

That's the problem. There is not much to work with.

What we have is one entry of Rs 15 lacs on a given day and RTGS of the same the very next day to the company XYZ bank account. As my client never carried out any of the contract work but sub contracted it to company XYZ where he was a director.

Our problem is that money has been unknowingly shown as equity by company XYZ for which there is no share certificate issued and on resignation of my client from company XYZ in May 2010 his shares have been transferred to another director of the company XYZ without any financial transaction involved.

This is the fact that has happened.Can you suggest a resolution based on your solid experience and expertise as I am unable to find a resolution.

 

Regards

 

Roshini

Rajesh Thakker (Advocate)     10 January 2014

Dear Roshini,

If your client resign from the company and his share transferred to other director, then please check the transfer share amount is original or addition of 15 lac. If the addition of Rs. 15 lac, no room. But excluding this Rs. 15 lac, gather the evidence. What is the treatment made by the company in next year? Please check and gather the evidence. 

Regards,

Rajesh Thakkar

Ashish (Director)     11 January 2014

need to speak to your client and explain him to get more details

Roshini Arya (Partner)     11 January 2014

Dear Rajesh ji

I could not understand the concept.Can you please elaborate.

The entire amount of Rs.15 lacs  was converted to equity by company XYZ and the entire equity worth 15 lacs was transferred to another director in May 2010.This continues to be the other Director's equity as per ROC records.

However the IT dept considers this secondary.My Client needs to prove that this income was offset against 100% expenditure as the entire process was subcontracted to company XYZ in which my client was a Director before the sub contracting occured.

Hence is there a way we can prove the same with regards to my client and push the onus of explanation to the company XYZ as this is the truth.

 

Please Help

 

JSK

 

Roshini

Rajesh Thakker (Advocate)     11 January 2014

Dear Roshini

The amount transferred to XYZ company by your client. The company had converted the said amount into equity in the name of your client. Is it true? Please contact me on mobile no. 89804 53624 so I can understand better or my email address rajthakker7@gmail.com.

ABHIMANYU JHAMBA (PROPRIETOR)     22 January 2014

Hi Roshini

The only way you can get out of this is by establishing "bonafides" of your client in the entire transaction.

In the past, courts have been giving benefit to the assessee's where bonafides are established.  Also would suggest you to file a Writ Petition once the objections stand disposed by the Assessing Officer. 

Regards

Abhimanyu 

 

 

 

 

 


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