Income Tax Dept moves Madras HC alleging AR Rahman evaded tax payments on "professional fees" worth over Rs 3 crores

The Madras High Court on Friday issued notice on an appeal moved by the Principal Commissioner of Income Tax, Chennai which alleges that music composer, AR Rahman had evaded paying tax on an amount of over Rs 3.47 crores which he received as remuneration for music composition services rendered back in 2010-2011.

The plea challenges an order of the Income Tax Appellate Tribunal (ITAT), which had ruled in Rahman's favour earlier.

Challenging the correctness of this order, the Income Tax Department has contended that Rahman had evaded tax payments by passing off the Rs 3.47 crores as donations to his charitable foundation, the AR Rahman Foundation.

The contentions made by the Income Tax authorities include:

• Rahman had entered into a three years’ collaboration agreement with Lebara Mobiles, United Kingdom.

• For services rendered including the composition of exclusive ringtones and songs, Rahman is stated to have received US $ 7,50,000 or Rs 3,47,77,200 from Lebara mobiles during the year 2010-2011 in his individual capacity as “an Artist.”

• This should have been considered for taxation in the hands of Rahman as an “Individual” under the head of “Professional fees” for the assessment year 2011-12.

• However, Rahman has not admitted these professional receipts in his income tax returns for 2011-12.

• Instead of receiving the Rs 3.47 crore amount as professional charges in his individual capacity, Rahman got these payments diverted to M/s AR Rahman Foundation, which is registered as a tax-exempt entity under the Income Tax Act.

• In other words, the Income Tax Department contends that the amount which ought to have been received as “Professional Fees” has been passed off as “Donation” to the AR Rahman Foundation.

• The Assessing officer of the Foundation has brought evidence to show that the purported donations received by the AR Rahman Foundation are payments which were actually due to Rahman, the authorities argue.

• Rahman, who is also the managing trustee of the AR Rahman Foundation has used the Foundation as a conduit for accounting his own untaxed income, the authorities add.

Notice has now been issued on this plea by a Bench of Justices TS Sivagnanam and Bhavani Subbaroyan. Whereas the plea was moved back in February this year, it was registered earlier this week, after clearing registry objections.

The trail of events, as per the Income Tax Department:

• Rahman admitted an income of Rs 15,98,04,415 while filing his income tax returns for the assessment year 2011-2012 in September 2011.

• The scrutiny of this assessment was completed on March 3, 2014, under Section 143(3) of the Income Tax Act, at which which point the authority assessed Rahman’s income at Rs 18,01,20,808. A notice for re-opening assessment was issued under Section 148.

• It is stated that Rahman had not recorded some amounts he had received as professional receipts, which has escaped income. Rahman is stated to have explained that this amount was to be taxed under Section 155BBC as a donation received by the AR Rahman Foundation, of which Rahman is the Managing Trustee.

• Reassessment by the Assessing Officer was completed in March 2016 by accepting the original assessment order.

• The Income Tax department issued a show cause notice on the ground that the Assessing Officer did not consider certain amounts received by Rahman in his individual capacity as taxable income under "Professional fees." This was erroneous and prejudicial to the interest of revenue, the IT department says.

• After hearing objections, the IT Department passed an order in 2018, setting aside the re-assessment order and directed the AO to bring an amount of Rs 3,47,77,200 as an amount to be taxed under the head of “Professional fees” recieved by Rahman in his capacity as an individual for the year 2011-12.

• Aggrieved by the revision, order, Rahman moved an appeal before the Income Tax Appellate Tribunal, which allowed the appeal in favour of Rahman.

• This ITAT order has now been challenged as erroneous in law, opposed to facts, passed without application of mind and without considering relevant provisions of the IT Act.