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.