COMMISSIONER OF INCOME-TAX VS S. VARADARAJAN
1998 P T D 2254
[224 I T R 9]
[Madras High Court (India)]
Before Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
versus
S. VARADARAJAN and another
Tax Cases Nos.1258 and 1959 (References Nos.758 and 759 of 1982), decided on 05/03/1996.
Income-tax---
----Income---Benefit received by Director or person with substantial interest from company---Buses transferred by transport company to its Director and a person who had substantial interest in company at prices much lower than their market value---Difference between fair market value of buses and price paid was assessable as income---Indian Income Tax Act, 1961, S.2(24)(iv).
If a director is an employee, the value of any benefit or amenity granted by the company would be taxable as salary. If the director is not an employee and his remuneration is assessable under section 56 of the Income Tax Act, 1961, as income from other sources, the value of the benefit or perquisite would still be assessable as income within the meaning of section 2(24)(iv) of the Income Tax Act, 1961. Even if the benefit received by the director. of the company is of capital nature, it can also be brought under the term "value of any benefit" as contemplated under section 2(24)(iv) of the Act. The intention of the Legislature was to tax any benefit if it is received by a director or by a relative of the director or such person, who is having substantial interest in the company, irrespective of the fact whether the director is an employee director or the benefit received was in the nature of capital, or whether there is any direct receipt in the transaction or whether there is any detriment to the company or not in the transaction.
The assessee, V, who was a director of a transport company, S, had purchased five vehicles from the company S at certain price. In the assessment of the company, the Revenue had found that the market value of the vehicles was very much higher and the sale was effected at a lower price. The provisions of section 52(2) had been invoked in the case of the company and the fair market value of the vehicles transferred to the assessee had also been fixed. As there was a difference between the fair market value and the price paid, according to the Income-tax Officer, it was clear that the assessee had received a benefit within the meaning of section 2(24)(iv) of the Income Tax Act, 1961, which was determined at Rs.52,600. He accordingly, reopened the assessment for the assessment year 1975-76 and assessed the amount of Rs.52,600. In the case of the assessee E, for the assessment year 1975-76, the Income-tax Officer noticed that the assessee who had a substantial interest in the transport company S, had purchased from the said company four vehicles. The Income-tax Officer held that the difference of Rs.82,200 was assessable in the hands of the assessee, E, under the provisions of section 2(24)(iv) of the Act. The Income-tax Officer, processed the assessments of both the assessees together. The Tribunal held that the additions made in the case of both the assessees by invoking the provisions of section 2(24)(iv) were not warranted. In the case of the company it was held by the Tribunal that the provisions of section 52(2) did not apply because it was shown that no extra consideration had actually passed. On a reference:
Held, that there was a difference between the written down value of the buses, which were sold to the two assessees by the company and the fair market value of the buses determined by the Department. The fact that the provisions of section 52(2) did not apply in the case of the company had no relevance for applying the provisions of section 2(24)(iv) to tax any benefit received by the assessee as a director from the company. The fact that there was no direct receipt to the assessees while transferring the buses was also not relevant. The price paid by the assessees for the acquisition of the vehicles at a consideration which was admittedly lower than their true market value constituted a benefit within the meaning of section 2(24)(iv) of the Act?. The Tribunal was not justified in deleting the additions.
CIT v. Krishnaram Baldeo Bank (P.) Ltd. (1983) 144 ITR 600 (MP); CIT v. Kulandaivelu Konar (C.) (1975) 100 ITR 629 (Mad.); CIT v. Nar Hari Dalmia (1971) 80 ITR 454 (Delhi); CIT v. Oberoi (P.R.S.) (1990) 183 ITR 103 (Cal.); CIT v. Prem Narain Aggarwal (1982) 136 ITR 407 (Delhi); CIT v. Salkia Transport Associates (1983) 143 ITR 39 (Cal.); CIT v. Venkataraman (G.) (1978) 111 ITR 444 (Mad.); Malik (K.S.) v. CIT (1980) 124 ITR 522 (Delhi); Neterwalla (D.M.) v. CIT (1980) 122 ITR 880 (Bom.); and Weight (H.M. Inspector of Taxes) v. Salmon (1935) 19 TC 174 (HL) ref.
C.V. Rajan for the Commissioner.
V. Ramakrishnan for N.C. Ananthachari for the Assessees.
JUDGMENT
THANIKKACHALAM, J.---In pursuance of the direction given by this Court in T.C. Ps. Nos.185 and 129 of 1981, dated November 2, 1981, the Tribunal referred the following two common questions in the case of two of the assessees, for the assessment year 1975-76, for the opinion of this Court, under section 256(2) of the Income Tax Act, 1961:
Tax Case No. 1258 of 1982: .
"(1)????? Whether, on the facts and in the circumstances of the case,. the Appellate Tribunal was justified in holding that the price paid by the assessee for the acquisition of 5 vehicles from Seethapathy Transports (P.) Ltd., at a consideration which is admittedly lower than the true market value, is not a benefit within the meaning of section 2(24)(iv) of the Income Tax Act, 1961?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in deleting the addition of Rs.52,600 on the ground that the provisions of section 2(24)(iv) of the Income Tax Act, 1961, are not applicable in the assessee's case?"
Tax Case No. 1259 of 1982: .
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the price paid by the assessee for the acquisition of four vehicles from Seethapathi Transports (P.) Ltd., at a consideration which is admittedly lower than the true market value, is not a benefit within the meaning of section 2(24)(iv) of the Income Tax Act, 1961?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in deleting the addition of Rs.82,200 on the ground that the provisions of section 2(24)(iv) of the Income Tax Act, 1961, are not applicable in the assessee's case?"
In the case of Shri S. Varadarajan, for the assessment year 1975-76, the relevant accounting year being the financial year, the original assessment was completed on a total income of Rs.51,640. Subsequently, it came to the notice of the Income-tax Officer that the assessee, who was a director of one Seethapathy Transport (P.) Ltd., had purchased five vehicles at certain price. In the assessment of the company, the Revenue had found that the market value of the vehicles was very much higher and the sale was effected at a lower price. The provisions of section 52(2) had been invoked in the case of the company and the fair market value of the vehicles transferred to the assessee had also been fixed. As there was a difference between the fair market value and the price paid, according to the Income-tax Officer, it was clear that the assessee had received a benefit within the meaning of section 2(24)(iv) of the Income Tax Act, 1961. He accordingly reopened the assessment.
The five vehicles in question were purchased by the assessee from the company at price detailed below:
???????????
| SI. No. | Registration No. of the vehicles | Purchaseprice (Rs.) |
| 1. | MDT 7205 | 4,000 |
| 2. | MDT 8564 | 7,900 |
| ???????????????? 3. | ????????? MDT 9473 | ????????????? 9,000 |
| ???????????????? 4. | ????????? MDI 0554 | ????????????? 14,000 |
| ??????????????? 5. | ????????? TWT 1121 | ?????????????? 35,000 |
The Income-tax Officer fixed the market value of the said vehicles in the case of the company. The difference between the purchase price and the market value fixed by the Income-tax Officer was considered to be the benefit under section 2(24)(iv) in the case of the assessee, which comes to Rs.52,600 and the said amount is, arrived at, in the following manner:
| SI. No. | Registration No. | Market value fixed | Difference to be assessed |
| | | | (Rs.) |
| 1. | MDT 7205 | 7,500 | 3,500 |
| 2. | MDT 8564 | 14,000 | 6,100 |
| 3. | MDT 9473 | 16,000 | 7,000 |
| 4. | MDI0554 | 25,000 | 11,000 |
| 5. | TWT.1121 | 60,000 | 25,000 |
| | | | 52,600 |
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So also in the case of Smt. S. Esakki Animal, for the assessment year 1975-7G, the relevant accounting period ending on March 31, 1975. The assessee is an individual. The Income-tax Officer noticed that the assessee who had a substantial interest in a concern Seethapathy Transports (P.) Ltd., had purchased from the said company four vehicles. The details are as under:
| SI. No. | Registration No. of the vehicles | Purchase price |
| | | (Rs.) |
| 1. | MDT 6584 | 2,300 |
| 2. | MDT 9248 | 9,000 |
| 3. | TWT 1364 | 34,000 |
| 4. | TNT 2453 | 54,000 |
According to the Income-tax Officer, the market value of the vehicles was much higher and the difference of Rs.62,200 was assessable in the hands of the assessee under the provisions of section 2(24)(iv). The break-up of the relevant figures are as under:
| SI. No. | Registration No. | Market value fixed | Difference to be assessed |
| (Rs.) | (Rs.) |
| 1. | MDT 6584 | 4,000 | 1,700 |
| 2. | MDT 9248 | 16,000 | 7,000 |
| 3. | TST 1364 | 62,500 | 28,500 |
| 4. | TNT 2453 | 1,00,000 | 46,000 |
| | | | 82,200 |
The Income-tax Officer processed the assessments of both the assessees together. The plea of the assessees before the Income-tax officer was that there was no income, which could be included within the meaning of section 2(24)(iv). The assessees contended that the action of the Income?-tax Officer in the case of the company in invoking section 52(2) was the subject of appeal and further it was urged that since the transport industry was facing a crisis due to impending nationalisation, there would have been no third party willing to purchase the vehicles, and, therefore, the prices at which the purchases were effected, did not result in any benefit to the assessees. The Income-tax Officer stated that the assessees had shown profits in the subsequent year and it was, therefore, clear that the trade was lucrative. Further, according to the Income-tax Officer it was common knowledge that the written down value arrived at by allowing depreciation of 30 per cent. annually was much lower than the real market value. The Income-tax Officer also referred to the Second Schedule to the Tamil Nadu Stage Carriages and Contract Carriages (Acquisition) Act, 1973, which prescribed a mode of valuing the vehicles, which were to be acquired with reference to the age and stated that applying such principles the purchase price was too low. Finally, he brought to tax by invoking the provisions of section 2(24)(iv) an amount of Rs.52,600 in the case of S. Varadarajan, and Rs.82,200 in the case of S. Esakki Animal.
The assessees appealed to the Appellate Assistant Commissioner. He held that the assessees had acquired the vehicles at a price which was very low and the Income-tax Officer was justified in treating the difference between the market value and the purchase price as income under the provisions of section 2(24)(iv) as there was a clear benefit to the assessees from payment of price lower than the market value. Accordingly the Appellate Assistant Commissioner dismissed the appeal filed by the assessees.
The assessees challenged the order passed by the Appellate Assistant Commissioner before the tribunal. The assessees submitted before the Tribunal that though the amount fixed by the Income-tax Officer as fair market value in the case of each vehicle was either equal to or lower than the price which would have been worked out in accordance with the schedule to the Tamil Nadu Stage Carriages and Contract Carriages (Acquisition) Act, 1973, the fact was that the vehicle had been sold at the book value, i.e., at the written down value at the beginning of the year less the amount of depreciation at the appropriate percentage prescribed under the Income-tax Act for the year of use before sale and hence no benefit accrued to the assessees. The assessees further contended that though the aforesaid Acquisition Act has been struck down by the High Court and the operation of the order was stayed only in respect of Nilgiris, the State Government was renewing permits only for four months at a time and, therefore, nobody would have purchased the vehicles in question at any higher value inasmuch as the period of ownership and operation was very uncertain. The assessees further contended that under section 2(24)(iv) defining the expression "income" there can be a benefit only if there is a receipt, which is of income nature and hence even if it was held that a lesser price was paid in the present case, the lower price paid could not be construed as benefit within the meaning of section 2(24)(iv).
On the other hand, the Revenue contended that the buses being transferred on the written down value, which was much lower than the market value, the assessees had received a benefit, which was taxable. According to the Tribunal, there is nothing to link the transfer to the assessees at the written down value as an incident of the services rendered as director. Actually, the transfers were effected in view of the impending nationalisation. By transferring at a price which was lower than the market value as computed by the Income-tax Officer, there is no outgoing from the company and no receipt in the hands of the assessees. The assessees had only paid a lesser amount. Therefore, in the absence of a receipt, there can be no amount to be brought to tax under the general concept of income. Even if the assessees had derived a benefit, it is clearly in respect of a capital asset acquired. In the hands of the company it was held by the Tribunal that the provisions of section 52(2) did not apply because it was shown that no extra consideration has actually passed. Therefore, the finding cannot be construed as conclusive of what would have been the market value of the buses transferred. The Tribunal further pointed out that even if there is difference between the market value and the written down value, but what the assessee had obtained is a capital asset by paying a lower price than the market value. Therefore, according to the Tribunal, such a lower price paid cannot result in a benefit within the meaning of section 2(24)(iv) having regard to the concept of income, which is the subject of taxation under the Income-tax Act. Accordingly, the Tribunal held that the additions made in the case of both the assessees by invoking the provisions of section 2(24)(iv) of the Act are not warranted. In that view of the matter, the additions are deleted.
Before us learned counsel for the Department submitted that the concept of distribution of capital asset to be treated as income within the purview of section 2(24)(iv), read with the definition of "dividend" in section 2(22) was well-known. Therefore, it was submitted that even if the benefit was in respect of a capital item, it did not fall outside the purview of section 2(24). According to learned standing counsel, the term "income" was not restricted and has to be given its widest meaning. The buses were transferred on the .written down value, which was much lower than the market value, looking into the income earning capacity, etc. Therefore, according to learned standing counsel, the Tribunal was not correct in holding that there is no benefit for the assessees while purchasing the buses for a price, which is less than the market value. Learned standing counsel further pointed out that there was no finding given by the Tribunal that the book value can be taken as the market value. Even, according to the Tribunal, the market value prevalent for the buses sold is higher than the price paid by the assessees on the basis of the written down value. Learned standing counsel further pointed out that for the purpose of invoking the provisions of section 2(24), it is not necessary that the director should be an employee director. Under section 2(24)(iv) any benefit derived by a director from the company, is income chargeable to tax, irrespective of the fact whether he is rendering any service for the company. Section 52(2) will not stand in the way of assessing a director, who receives benefit from the company. In order to tax the benefit received by the director from a company under section 2(24)(iv), it is also not necessary that the payment by the company is to its detriment. For these reasons, it was submitted that the Tribunal was not correct in holding that the difference between the price paid by the assessees on the basis of the written down value and the fair market value, cannot be taxed as benefit derived by the director of the company, under section 2(24)(iv) of the Income Tax Act, 1961.
On the other hand, learned counsel appearing for the assessees, while supporting the order passed by the Tribunal, submitted that in the case of the company it was held that the provisions of section 52(2) of the Act were not applicable. According to learned counsel, the difference between the written down value paid by the assessees and the fair market value determined by the Income-tax Officer cannot be treated as benefit derived by the director, when the transaction was not done between the director of a company and the company. In fact, what happened was that the vehicles sold by the company were purchased by persons, who happened to be the directors of the company. Therefore, the sale of vehicles by the company was not because the purchasers are directors of the company. It was further submitted that the fair market value determined by the Income-tax Officer on the basis of the Acquisition Ordinance, 1973, is more or less equal to the written down value for which the vehicles were purchased. The vehicles were sold for the written down value because of the impending acquisition proceedings, during which time there were no purchasers for purchasing the vehicles for the fair market value. Hence, the price for which the vehicles were sold reflects the market value of the vehicles as on that date. Therefore, no benefit was derived by the assessees by purchasing the vehicles from the company for the price at which the vehicles were sold. According to learned counsel, the vehicles had been sold at the written down value at the beginning of the year less the amount of depreciation at the appropriate percentage prescribed under the Income-tax Act for a year of use before sale. According to learned counsel, if appropriate adjustments were made, it cannot be said that the vehicles were sold for undervalue. According to learned counsel though the aforesaid Act has been struck down by the High Court and the operation of the order was stayed only in respect of Nilgiris, the State Government was renewing permits for only four months at a time, and, therefore, nobody would have purchased the vehicles in question at any higher value inasmuch as the period of ownership and operation was very uncertain. Learned counsel further submitted that unless the director is an employee director, it is not possible to tax the benefit received by the director under section 2(24)(iv). Learned counsel also submitted that even though there is a difference between the written down value and the market value, the benefit received by the assessees would be of capital nature, and, therefore, it cannot be brought to tax as in the nature of income chargeable under section 2(24)(iv). Learned counsel also submitted that by selling the buses at the written down value, there was no loss or detriment suffered by the company. Unless there is any detriment to the company in selling the buses, the benefit derived by the director in the matter of purchasing the vehicles cannot be brought to tax by treating the same as income under section 2(24). For these reasons, learned counsel appearing for the assessees submitted that the Tribunal was correct in deleting the additions made by the Income-tax Officer, by resorting to the provisions under section 2(24)(iv) of the Income Tax Act, 1961.
We have heard the rival submissions. The fact remains that the assessees are directors of a transport company, known as Seethapathy Transports (P.) Ltd. They have purchased the buses sold by the company. The buses were sold at the written down value. The difference between the written down value and the fair market value was considered to be the benefit derived by the directors of the company under section 2(24)(iv) of the Income Tax Act, 1961. The written down value, the market value and the difference between both in respect of each of the buses are already stated in detail. Section 2(24)(iv) of the Income Tax Act, 1961, stated as under:
"'Income', includes-----
(iv) The value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid."
The point for consideration is, whether the difference between the written down value and the fair market value determined by the Income-tax Officer would constitute benefit derived by a director from the company as contemplated under section 2(24)(iv) of the Act. The fair market value was arrived at by the Income-tax Officer on the basis of the guidelines prescribed under the Tamil Nadu Stage Carriages and Contract Carriages (Acquisition) Ordinance, 1973. According to the assessees, even if the market value is determined as per the above-said Ordinance, in view of the impending above?said Ordinance, there was no intending purchaser, since the licences for running the buses were granted by the Government only for a block period of four months. Therefore, according to the assessees, the prices for which the buses were sold are more or less equivalent to the fair market value as prevalent during these times. Hence, there is no benefit derived by the directors in purchasing the vehicles. But, however, the Tribunal recorded a finding stating that the buses were sold for a lesser price than the fair market value, and, therefore, there is difference. in prices between the written down value for which the vehicles were sold and the fair market value determined by the Income-tax Officer. Therefore, on the facts, the assessees derived benefit in purchasing the vehicles from the company. According to the assessees, no direct benefit was received from the company while purchasing the vehicles for the written down value. So also the benefit derived is not of income nature, but what was derived by purchasing the capital asset is only of capital nature, and, therefore, not taxable. Again the case of the assessees was that the purchase was made by the assessees not as a director of a company, but as a third party purchaser. Therefore, the benefit is not a benefit derived by a director from the company. The assessees further made it clear that in these transactions there was no detriment to the company warranting any benefit to the assessees in purchasing the vehicles.
A similar question came up for consideration before the Delhi High Court in K.S. Malik v. CIT (1980) 124 ITR 522. According to the facts arising in that case, the assessee, a director of a private company, had taken loans from the company for purchasing the shares in that company. The company debited interest to the assessee's account in its books. At the request of the assessee, the board of directors of the company passed a resolution, dated March 28, 1957, to the effect that the amount due from the assessee be written off and the shareholders in the general meeting held on March 31, 1957, affirmed the board's resolution. The salary and dividends he received from the company as well as the interest payable by him were entered in the account books maintained by him. The previous year in these accounts ended on September 30. The question was, whether the amount written off by the company was a benefit or perquisite obtained from the company and could be assessed in the hands of the assessee as deemed income under section 2(6-C)(iii) of the Act of 1922. While answering this question, the Delhi High Court held as under (headnote):
(i) as a result of the resolution of the company writing off the amount, the assessee had obtained a benefit within the meaning of section 2(6-C)(iii) of the 1922 Act, corresponding to section 2(24)(iv) of the 1961 Act, and the benefit was assessable to tax as deemed income in his hands;
(ii) section 2 (6-C)(iii) of the Act of 1922 is not restricted in its application only to cases where the company has paid out certain moneys or incurred certain expenditure, the benefit of which the assessee receives. Having regard to the enactment of a fiction in very sweeping terms, cases of remission of debts cannot be excluded from its ambit.
It is well-settled that the concept of income indicates something which goes into the pocket of the assessee and not what saves his pocket. It has also been held that the remission of a debt by a creditor would not result in the creation of income in the hands of the debtor.
Even in construing an inclusive definition one has to give full effect to the ordinary meaning of the words employed in the statute."
???????????
In CIT v. Nar Hari Dalmia (1971) 80 ITR 454 (Delhi), the facts are that the assessee, a part-time director of a private company, undertook, pursuant to a resolution of the company, a foreign tour accompanied by his wife. The cost of the tour amounted to Rs.29,793 and the company paid the amount to the assessee. That amount was not allowed as an expenditure incurred by the company in the company's assessment. In the reassessment proceedings against the assessee for the relevant year the above-said sum was brought to tax in the hands of the assessee as his income within the meaning of section 2(6-C)(iii) of the Indian Income-tax Act, 1922. On the above facts, a question arose whether the amount of Rs.29,793 was liable to be taxed in the hands of, the assessee. While answering this question, the Delhi High Court held that though the sum of Rs.29,793 did not amount to a perquisite, it was a benefit received by the assessee from the company of which he was a director.
The words "has a substantial interest in the company" in section 2(6-C)(iii) qualified only the words "any other person" and not the words "a director", and, as such, it was not necessary for the amount to be treated as a benefit within the meaning of section 2(6-C)(iii) that the director should have a substantial interest in the company. It was further held that the amount was received by the assessee in the exercise of an occupation and, therefore, did not fall within the exemption contemplated by section 4(3)(vii). Therefore, the amount of Rs.29,793 was liable to income?-tax in the hands of the assessee. The Legislature, when it dealt with the words "business, profession, vocation or occupation" intended to bring in all aspects of a person's activity as distinct from a chance pursuit.
According to the facts arising in D.M. Neterwalla v. CIT (1980) 122 ITR 880 (Bom.) from September, 1946, till September 30, 1956, the assessee was a whole-time director and manager of W.I.T. Ltd. On this date, he gave up the appointment with a view to work for a new concern proposed to be formed, viz., C.F.M. (P.) Ltd. The assessee was the proposed director?-in-charge of the new company. On October 11, 1956, the assessee and four other persons as promoters applied to the Controller of Capital issues. The Controller of Capital Issues authorised the issue of capital and formation of the company, and sanctioned the issue of 600 shares, which were to be free of payment. The company was thereafter incorporated on December 7, 1956, with seven directors, one of whom was the assessee. The board of directors of the said company met on February 27, 1957, and appointed the assessee as director-in-charge on certain remuneration. The board also allotted the promoters' 600 shares among seven persons, among whom the assessee was allotted 60 shares. In the assessment for the assessment year 1957-58, the Income-tax Officer held that the sum of Rs.60,000 being the value of the 60 shares allotted to the assessee, was received without consideration by him as an employee and was taxable under section 7 of the Indian Income-tax Act, 1922. On these facts, on a reference, it was contended for the assessee that there was consideration for the allotment of the shares to the assessee, viz., the agreement not to carry on competitive business. It was also contended that the benefit or perquisite, even though it had been received by the assessee when he was a director, had not been received from the company but only in pursuance of an arrangement among the promoters of the company. The Bombay High Court held that though the allotment of 60 shares to the assessee was in pursuance of an arrangement between the assessee and the other promoters of the company, the allotment of the promoters' shares was by the company. This was a clear. benefit to the assessee from the company, the provisions of section 2(6-C)(iii) were attracted and the value of the benefit had to be considered as income of the assessee.
This Court had an occasion to consider a question of a similar nature in CIT v. C. Kulandaivelu Konar (1975) 100 ITR 629. According to the facts arising in that case, the assessee, who was the managing director of a company, used to deposit various amounts like salary received by him as managing director, rents received by him from certain properties, value received on sale of plantain leaves, paddy, etc., in the account he had with the company. He was also withdrawing moneys out of its account for his personal expenses. For the assessment year 1963-64 relevant to the year ending March 31, 1963, the assessee's account showed an opening debit balance of Rs.3,00,611 and a closing debit balance of Rs.3,59,912. As the company was not charging any interest on this overdrawing by the managing director, but was paying interest on its borrowings, the Income-tax Officer disallowed in the company's hands an estimated sum of Rs.29,718 as the interest referable to the amounts withdrawn by and standing to the debit of the assessee. The officer also added this sum as a perquisite in the hands of the assessee and brought the same to tax. On these facts, a question arose, whether the Tribunal was right in law in holding that the sum of Rs.16,692 was not includible under the provisions of section 17(2) of the Income Tax Act, 1961. While answering this question, this Court held that in cases where the company permits an employee to utilise its funds for his own benefit, it shall be deemed to have given a personal benefit to such employee and the benefit was not derived by the employee de hors his status as an employee. The assessee was, therefore, granted a benefit within the meaning of section 17(2)(iii), which could be added to the assessee's income.
In CIT v. G. Venkataraman (1978) 111 ITR 444 (Mad), while considering the provisions of section 2(6-C)(iii) of the Indian Income-tax Act, 1922, this Court held that the benefit or perquisite contemplated in section 2(6-C)(iii) cannot be money itself as (a) if it is money, the question of its value being taken into account or the benefit or perquisite being converted into money will not arise, and (b) the same section makes a distinction between "benefit or perquisite" on the one hand and "any sum paid" on the other indicating that the "benefit or perquisite" contemplated by the section is other than money.
The Calcutta High Court had an occasion to, consider a similar question in CIT v. P.R.S. Oberoi (1990) 183 ITR 103. According to the facts arising in that case, the assessee, who is a director of the company, obtained an interest-free loan. The Income-tax Officer held that the assessee got a benefit from the aforesaid company in the shape of getting funds without any obligation to pay any interest thereon. As the assessee was a director of the aforesaid company, he invoked the provisions of section 2(24)(iv) of the Income Tax Act, 1961, and taxed the interest income at the rate of 12 per cent. per annum written off by the company. A question arose, whether the Tribunal was justified in deleting the interest not charged by the company on the ground that the provisions of section 2(24)(iv) of the Income Tax Act, 1961, were not attracted. While answering this question, the Calcutta High Court came to the following conclusion (headnote):
"Clause (24) of section 2 of the Income Tax Act, 1961, gives an inclusive definition of 'income'. Under sub-clause (iv) thereof, the value of any benefit or perquisite, whether convertible into money or not, obtained from company either by a director or by a person who has a substantial interest in the company, or by their relatives, is treated as income. The intention of the Legislature seems to be very clear, that the expression 'benefit' and/or 'perquisite' does not include the enjoyment of loan or credit, free of interest or a concessional rate. This aspect has been recognised by the statute itself and to bring such items in the net of taxation, the law was amended by the Taxation Laws (Amendment) Act, 1984, which added a new sub-clause (vi) in section 17(2) and sub-clause (vi) in clause (b) of Explanation 2 to section 40-A(5). Subsequently, however, these new provisions were deleted. The very fact that the statute had to be amended at the first instance to bring the said item within the purview of the expression 'perquisite' and it later sought to delete the same from the date of its insertion clearly shows that Parliament does not intend treating interest-free loan or loan at a concessional rate as any benefit or perquisite granted provided by the lender-company to the director or employee, as the case may be. If the loan granted to an employee or a director or a person who has a substantial interest in the company without charging any interest or at a concessional rate of interest does not constitute any benefit for the purposes of Explanation 2(b)(iii) to section 40-A(5) or section 17(2)(iii) of the Act, by the same yardstick, such loan cannot also be construed as a benefit or perquisite for the purpose of section 2(24)(iv) of the Act."
In CIT v. Prem Narain Agarwal (1982) 136 ITR 407 (Delhi), a question arose as to whether bonus or rights shares received by a director in respect of shares owned by him can be taxed as perquisite under section 2(24)(iv). While answering this question, the Delhi High Court held that even in the personal assessment of a -director or a managing director rights or bonus shares received by him in respect of his own shares would not be perquisite within the meaning of section 2(24)(iv) of the Income Tax Act, 1961. There is a difference between rights shares and income. The bonus or rights shares are not received for nothing. In the case of a director or managing director, his personal position qua the company in respect of his shares are not different from that of the other shareholders of the company. All ordinary shareholders receiving rights or bonus shares are not treated as having received any income because they have got the rights or bonus shares. Similarly, a director or other person having a substantial interest in the company who received bonus or rights shares does not receive them because he is a director or managing director of the company or as a person having a substantial interest in the company, but because he is a shareholder, and he is to be treated exactly like any other shareholder. If the "income" in question is not taxable in the hands of a director or managing director, who happens to hold the shares in his own right, it would follow that the same rights or bonus shares cannot be taxed in the hands of the Hindu undivided family which the managing director or director may represent for the purpose of holding the shares.
The Madhya Pradesh High Court had an occasion in CIT v. Krishnaram Baldeo Bank (P.) Ltd. (1983) 144 ITR 600 to consider a question whether the department was justified in taxing the sum of Rs.42,53,148 representing the difference between the book value of the trading assets and the price paid therefore to the predecessor, as revenue benefit in the hands of the assessee-bank for the assessment year 1959-60 While answering this question, the Madhya Pradesh High Court held that the difference between the book value of any part of the trading assets acquired by an assessee and the price paid by the assessee for the same cannot be regarded as a revenue profit directly arising from the purchase of the trading assets. It could not be said that any profit at all is made by the assessee from the purchase of any of the assets. What can be said is that assets worth a particular amount are purchased by the assessee for a small amount, but, that does not represent the profit of the assessee and cannot be added to the assessable income of the assessee. According to the Madhya Pradesh High Court the difference between the book value and the trading assets and the price paid therefore to the predecessor-bank by the assessee-bank, could be regarded only as share premiums and could not be assessed as revenue profit. The amount had been treated as capital by the assessee-bank. The Supreme Court dismissed the Special Leave Petition (Civil) No.7705 of 1980 filed by the Department against the judgment, on March 30, 1983 (vide (1983) 141 ITR (St.) 49).
Our attention was drawn to a decision of the Calcutta High Court in CIT v. Salkia Transport Associates (1983) 143 ITR 39. According to the facts arising in this case, the assessee--firm took on hire 23 buses from a transport agency under an agreement, dated March 29, 1963, with the object of plying the buses. Clause 10 of the agreement provided that the assessee shall keep the motor vehicles in good running condition, and, if necessary, shall replace the motor vehicles at its own cost, keeping the owners informed about it and that the vehicles replaced would be the property of the assessee. The assessee replaced five of the worn out buses by five new buses. The assessee paid to the transport agency a sum of Rs.1,76,172 as part of the consideration representing the cost of one chassis and the cost of building bodies of the 23 buses and claimed deduction of the amount as revenue expenditure. On these facts, the Calcutta High Court held that when lump sum payments were made by the assessee-firm for taking the buses on hire, the expenditure was treated by the Department to be of capital nature and not deductible for the purpose of computing the assessee's business income. The assessee, in its turn, hired out the buses and received some lump sum payments. On a parity of reasoning these receipts could not also be regarded as of revenue character. Furthermore, the Tribunal found that the Department had not been able to bring on record any evidence to show that the lump sum payments represented advance payment of part of hire charges and not premium for parting with the capital assets. Therefore, the amount received by the assessee from the sub-lessees were premiums for parting with a capital asset and the same were capital receipts. This decision was rendered while considering the provisions of section 32 of the income Tax Act, 1961.
We have also come across a decision in Weight (H.M. Inspector of 'faxes) v. Salmon (1935) 19 TC 174 (HL). According to the facts arising in that case the respondent was a managing director of a limited company and entitled under a service agreement to a fixed salary. In addition, the directors of the company by resolution each year gave the respondent the privilege of applying for certain un-issued shares in the company at their par value., which was considerably less than their current market value; the shares he applied for were duly allotted to and taken up by him, and had, in fact, been retained by him. The earlier resolutions recited that this privilege was granted having regard to the "eminent and special services" the respondent had rendered to the company, but the resolutions relating to the years covered by the appeal made no reference to his services.
The respondent was assessed to Income-tax under Schedule "E" on the basis of the difference between the market value of the shares taken up and the par price actually paid for them. On appeal, he contended that he had not received a profit assessable to Income-tax. The Special Commissioners discharged the assessments. On further appeal, the House of Lords held that the privilege granted to the respondent represented money's worth and was assessable to income-tax as a profit of his office as managing director.
It was further held as under (at page 193):
"I think it is really impossible to appreciate the argument which suggests that was not an immediate profit in the nature of money's worth received by the director as remuneration for his services. It appears to me to correspond very closely in substance to a case where a company might have sold 1,000 tons of its product, if the company were a colliery company, to a director who was in the coal trade, at a price which was one-third of the market price of the day. There no question could arise that the person was receiving that profit in the nature of money's worth to the extent of the difference between the price he. could get for it and the price he had actually paid."
A plain reading of the decisions cited (supra) would go to show that if a director is an employee, the value of any benefit or amenity granted by the company would be taxable as salary. If the director is not an employee and his remuneration is assessable under section 56 as income from other sources, the value of the benefit or perquisite would still be assessable as income within the meaning of section 2(24)(iv) of the Income Tax Act, 1961. According to the facts arising in the present case, there is difference between the written down value of the buses, which were sold to the assessee by the company and the fair market value of the buses determined by the Department. According to the Department, the difference is benefit as contemplated under sectionq2(24)(iv) of the Act. Even if the benefit received by the director of the company is of capital nature, it can also be brought under the term "value of any benefit" as contemplated under section 2(24)(iv) of the Act. In order to tax the benefit received by a director from the company, it is not necessary that the director should be an employee?-director. The service rendered by the director has no connection for taking any benefit derived by the director under section 2(24)(iv) of the Income Tax Act, 1961. The fact that in the hands of the company it was held by the Tribunal that the provisions of section 52(2) did not apply, since it was shown that no extra consideration has actually passed, has no relevance for applying the provisions of section 2(24)(iv) to tax any benefit received by the assessee as a director from the company. The fact that there was no direct receipt to the assessees while transferring the buses for undervalue is also not relevant for the purpose of bringing any benefit to tax under section 2(24)(iv) of the Act. The fact that the company would not suffer any detriment because of this transaction is also immaterial for taxing any benefit received by a director from the company. The intention of the Legislature was to tax any benefit if it is received by a director or by a relative of the director or such person, who is having substantial interest in the company, irrespective of the fact whether the director is an employee-director or the benefit received was in the nature of capital, or whether there is any direct receipt in the transaction or whether there is any detriment to the company or not in the transaction, or whether section 52(2) was held to be not applicable in the case of the company, since no extra consideration actually passed, under the provisions of section 2(24)(iv) of the Income Tax Act, 1961, as deemed income.
In view of the foregoing discussions, we answer the questions referred to us in the case of both the assessees in the negative and in favour of the Department. No costs.
M.B.A./1381/FC ??????????????????????????????????????????????????????????????????????????????? Reference answered.