Principal Officer (condition precedent) – Section 2(35) of ITA, 1961 – Where neither service of notice nor hearing of petitioner before treating petitioner as a Principal Officer was involved, and connection of petitioner with management and administration of company was also not established, A.O. could not have named petitioner as Principal Officer

13. A. Harish Bhat vs. ACIT (TDS)

[2019] 111 taxmann.com 210 (Karn.)

Date of order: 17^th October, 2019

F.Ys.: 2009-10 to 2012-13

Principal Officer (condition
precedent) – Section 2(35) of ITA, 1961 – Where neither service of notice nor
hearing of petitioner before treating petitioner as a Principal Officer was
involved, and connection of petitioner with management and administration of
company was also not established, A.O. could not have named petitioner as
Principal Officer

The petitioner was treated as a
Principal Officer of the company Kingfisher Airlines for the F.Ys. 2009-10 to
2012-13 u/s 2(35) of the Income-tax Act, 1961. The petitioner filed a writ
petition and challenged the order.

He contended
that to come within the ambit of key management personnel, the petitioner had
to be either Managing Director or the Chief Executive Officer, whole-time
director / company secretary / chief financial officer / or in any way be
connected with the management or administration of the company. The Revenue, on
the other hand, justifying the said order, submitted that the petitioner was
the treasurer of the U.B. Group of Companies during the relevant financial
years and hence he was treated as Principal Officer. Further, neither a
personal hearing nor an order was necessary to treat the person as a Principal
Officer. It was sufficient if a notice of the intention of the A.O. of treating
any person as Principal Officer was issued. The petitioner assailed the order
of the Commissioner on the ground that the objections submitted by the
petitioner to the notice had not been duly considered and hence sought to set
aside the said order.

The Karnataka High Court allowed
the writ petition and held as under:

‘i) The impugned order deserves to be set aside for the reason that a
Principal Officer, as contemplated u/s 2(35), used with reference to a local
authority or a company or any other public body or any association of persons
or any body of individuals, means the secretary, treasurer, manager or agent of
the authority, company, association or body, or any person connected with the
management or administration of the local authority, company, association or
body upon whom the A.O. has served a notice of his intention of treating him as
the Principal Officer thereof.

ii) It is clear that to treat any person as a Principal Officer, such
person should be connected with the management or administration of the local
authority / company or association or body. Such connection with the management
or administration is the basis for treating any person as a Principal Officer.
Such connection has to be established or to be supported with substantial
material to decide the connection of any person with the management or
administration. Without disclosing the basis, no person can be treated as a
“Principal Officer” of the company recognising him as the Key Management Personnel
of the company. The details of such information on the basis of which the Key
Management Personnel tag is made, have to be explicitly expressed in the notice
of the intention of treating any person as a Principal Officer by the A.O.
Neither in the show cause notice nor in the order impugned was such a
connection of the petitioner with the management or administration of the
company Kingfisher Airlines Limited established. The phrase “Key Management
Personnel” of the company has a wide connotation and the same has to be
supported with certain material; unless such connection is established, no
notice served on the petitioner would empower the respondent authority to treat
the petitioner as a “Principal Officer”.

iii) In the instant case, the question inasmuch as
(sic) neither service of notice nor hearing of the petitioner before
treating the petitioner as a Principal Officer is involved. The fulcrum of
dispute revolves around the aspect whether the petitioner is the person
connected with the management or administration of the company. Such finding
has to be supported by substantial material and has to be reflected in the
notice issued u/s 2(35) to treat a person as a Principal Officer of the company
which will have wider consequences. The said aspect is lacking in the present
order impugned. Merely on surmises and conjectures, no person shall be treated
as a Principal Officer.