1. This reference under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), raises the following question for the opinion of the court :
'Whether, on the facts and in the circumstances of the cases the Tribunal was right in holding that the perquisite of rent-free accommodation, provided to the assessed by the employer was not includible in his total income under the head 'Salary' for the reason that the assessed did not make use of the same during the previous year ?'
2. The assessed is an individual deriving income from a steel re-rolling mill at Kamptee. The assessment year to which the question relates is the year 1964-65 relevant to the previous year ended on March 31, 1964. Besides deriving income from property, the assessed is also a managing director of a company known as M/s. Bawa Iron & Steel Works Ltd., (hereafter referred to as 'the company'), which had its registered office at Sonepat. The assessed received a remuneration of Rs. 9,750 from the company. The company provided the assessed a rent-free house, a car and a telephone and a few other amenities which were not specified. In respect of all these perquisites, the ITO estimated their value at a sum of Rs. 2,400 as in the previous year and included it as income of the assessed. The assessed did not show any value for these perquisites on the ground that the assessed had not used the perquisites provided by the company. The ITO negatived this contention and included the value of Rs. 2,400 in the assessment. Aggrieved by this addition, the assessed preferred an appeal to the AAC. The AAC, on the facts and in the circumstances, thought it fair to make an addition of Rs. 2,000 by way of perquisites. He thus reduced this addition by Rs. 400.
3. The assessed went in appeal before the Income-tax Appellate Tribunal. The Tribunal deleted the entire addition. It held that although the employee had acquired the right to make use of perquisites provided by the employer, it has to be seen whether the expression 'provided' used in s. 17 of the Act, means the accommodation provided by the employer must in fact be used by the employee or whether it was sufficient if the employer merely makes available the accommodation for use irrespective of the fact whether the employee had made use of the accommodation thus provided. The Tribunal drew a distinction between the expression 'due' and 'provided' and came to the conclusion that if the employee for any reason is unable to derive benefit out of the rent-free accommodation provided, then the employee is not liable to be taxed in respect of the value of the perquisite. The Tribunal observed that taxing of a perquisite is taxing a notional income and if notional income is to be taxed, the legal fiction must be carried to the logical end. If notional income is to result, there must be performance of that part of the contract which the employee has to perform normally using the accommodation provided, otherwise the notional income does not come into being. The Tribunal held the view that the notional income would come into being only if the assessed derived benefit out of the perquisites and not otherwise. It accordingly deleted the addition of Rs. 2,000.
4. It is necessary to notice the provisions of ss. 15 and 17 of the Act. Section 15 reads as follows :
'The following income shall be chargeable to income-tax under the head 'Salaries' -
(a) any salary due from an employer or a former employee to an assessed in the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.
5. Explanationn : For the removal of doubts, it is hereby declared that where any salary paid in. Advance is included in the total income of any person for any previous year, it shall not be included again in the total income of the person when the salary becomes due.'
Section 17, in so far as it is relevant, is reproduced :
'(1) 'Salary' includes - ...
(iv) any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages; ...
(2) 'perquisite' includes -
(i) the value of rent-free accommodation provided to the assessed by his employer;...'
6. A combined reading of ss. 15 and 17 is that the salary would include amongst other things perquisites, Sub-s(2) of s. 17 gives a further inclusive definition of perquisite as including the value of rent-free accommodation provided to the assessed by his employer. By this legal fiction, the salary is made to include the value of rent-free accommodation provided to the assessed by his employer. This would bring to charge as a perquisite the value of rent-free accommodation. On facts it is found that the rent-free accommodation was provided to the assessed by his employer. The only question is that the assessed had not utilized the rent-free accommodation provided to him. The statute has used the word 'provided' which means making it available for the use of the assessed. There may be circumstances under which the employee may not make use of the rent-free accommodation provided to the assessed. In our opinion, unless the assessed forgoes his right to the provision of rent-free accommodation provided to the assessed by his employer or waives his right before the income accrues, the notional income has to be brought to charge as a perquisite equivalent to the value of rent-free accommodation.
7. The law is well-settled that the income-tax is a levy on income. Though the I.T. Act takes into account two points of time at which the liability to tax is attracted, namely, the accrual of the income or its receipt, yet the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable (see CIT v. Shoorji Vallabhdas and Co. : 46ITR144(SC) ). The real test in each case is whether the income has really accrued or not. In this case, there is a finding of fact that the assessed was provided with rent-free accommodation by his employer. By the provision of rent-free accommodation income has resulted by accrual even though the assessed may not have utilized the rent-free accommodation. The voluntary forgoing by the employee of the salary due to him is normally a mere application of income and the salary is none the less taxable. Under s. 15, as we have noticed, salary would be taxable on the further ground that the section brings to charge salary which is due, whether paid or not. There have been judicial pronouncements relating to cases where salary is forgone before it becomes due and it cannot be taxed. There are cases where the commission or other income is forgone before it accrues, if cannot be taxed at all because the act of surrender prevents the accrual of income. In CIT v. Mehar Singh Sampuran Singh Chawla : 90ITR219(Delhi) , a Bench of this court held that the salary, commission and bonus had not accrued to the assessed during the accounting year and were not taxable income in his hands. The questions for determination in such cases were, when did salary, commission and bonus accrue to the assessed and whether the assessed gave up his right to claim them from the company prior to those amounts crystallizing into a debt due from the company to the assessed and becoming recoverable by him as such from the company.
8. In CIT v. Bachubhai Nagindas Shah : 104ITR551(Guj) , the question arose about taxing the fixed monthly remuneration of a director of the company in a case when the director waived it after the end of the accounting year. It was held that it is the very basis of the principle of a particular amount being considered as income on the basis of accrual that if at any subsequent point of time it is found that the amount is not deemed to have been received on the basis of accrual or has not in fact been received and the right to receive that amount has been given up because of the circumstances of the particular case, then in the year in which this right to receive the money has been waived or given up or agreed to be given up is the period during which an appropriate relief must be given by way of deduction to the assessed concerned, because, if that were not done, the very basic principle of accrual is violated; and that principle is that though not actually received, on the basis of accrual, it is due to be received and the tax is payable and thus to be paid on that basis. The right to receive the income was waived after the end of the accounting year and hence held to have accrued.
9. As the assessed was provided with a rent-free accommodation by the employer and as he had not forgone or waived his right at the time when it was so provided, the perquisite has to be bought to charge. We answer the reference in the negative, i.e. in favor of the Revenue and against the assessed. On the facts and in the circumstances of the case, we make no order as costs.