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R. Dalmia Vs. the Commissioner of Income-tax, Delhi - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome Tax Reference Appeal No. 31 of 1967
Judge
Reported inILR1971Delhi567; [1972]84ITR661(Delhi)
ActsIncome tax Act, 1922 - Sections 2(6)
AppellantR. Dalmia
RespondentThe Commissioner of Income-tax, Delhi
Advocates: Bishambar Lal,; B.R. Dewan and; Randhir Chawla, Advs
Cases ReferredBombay City v. Nandlal Gandalal
Excerpt:
income-lax act (1922) - section 2(6c)(iii) --person 'concerned in the management of business of company' --who if --expenses incurred by a company for a person so 'concerned' --whether his income --'concerned' --meaning of- --(words and phrases).; in the instant case a company spent a certain amount for meeting the personal necessities of the assessed who was the beneficial owner of 33% of total equity shares and was not the director of the company. the question arose as to whether the assessed could be said to be a person 'concerned in management of business of the compnay' and whether the amount so spent was his income.; that the word 'concerned' is very wide in its extension and has been used in several statutes as also in certain restrictive covenants relating to business. it cann to.....hardayal hardy, j.(1) the following question has been referred to this court by the income-tax appellate tribunal (delhi bench) b' under ction 66(1) of the income-tax act, 1922. 'whetheron the facts and in the circumstances of the case, the sum of rs. 53,398.00 spent by bharat union agencies p. ltd. after the personal necessities of the assessed is income within the meaning of section 2(6c)(iii) of the income-tax act, 1922'(2) the assessed is shri r. dalmia. the assessment year is 1955-56. the previous year ended on 30-19-1954. (3) bharat union agencies private limited, a private limited company had spent a sum of rs. 53,398.00 to meet the personal necessities of the assessed during the previous year without charging for the same. the assessed was not a director of the company although he.....
Judgment:

Hardayal Hardy, J.

(1) The following question has been referred to this Court by the Income-tax Appellate Tribunal (Delhi Bench) B' under ction 66(1) of the Income-tax Act, 1922.

'WHETHERon the facts and in the circumstances of the case, the sum of Rs. 53,398.00 spent by Bharat Union Agencies P. Ltd. after the personal necessities of the assessed is income within the meaning of section 2(6C)(iii) of the Income-tax Act, 1922'

(2) The assessed is Shri R. Dalmia. The assessment year is 1955-56. The previous year ended on 30-19-1954.

(3) Bharat Union Agencies Private Limited, a private limited company had spent a sum of Rs. 53,398.00 to meet the personal necessities of the assessed during the previous year without charging for the same. The assessed was not a director of the company although he was the beneficial owner of 1800 equity shares out of the total of 5000 equity shares in the said company during the previous year.

(4) Similarly, Allen Berry and Co. Private Limited had spent a sum of Rs. 4406.00 after the personal necessities of the assessed without charging the same. The assessed was neither a director of the said company nor was he the beneficial owner of any share in the said company.

(5) The Income-tax Officer holding that section 2(6C)(iii) of the Income-tax Act, 1922 applied to the assessment year in question, whatever may be the relevant previous year, held that the total amount of Rs. 57,804.00 was assessed's income and charged it to tax along with several other items of income.

(6) The assessed preferred an appeal against the above decision before the Appellate Assistant Commissioner wherein he contended :-

(A)that as section 2(6C)(iii) came into force with effect from 1-4-1955, the benefits and perquisites received prior to that date, were not governed by that provision; (b) that as he did not have substantial interest in either of these two companies the provision was not applicable in any event.

(7) The Appellate Assistant Commissioner held that the provisions of section 2(6C)(iii) applied to the case. He next held that the assessed was the beneficial owner of shares of Bharat Union Agencies Private Limited carrying more than 20% of the voting power and also because the assessed had 100% of the share-holding control of Allen Berry and Co. Private Limited through Yogiraj Charity Trust and Briguraj Charity Trust created by him, he was well within the provision of the section. The Appellate Assistant Commissioner, however did not specifically deal with the question whether the assessed was 'concerned in the management of boththe e companies'. Nevertheless he up-held the order of the Income-tax Officer.

(8) The assessed preferred a further appeal before the Income-tax Appellate Tribunal wherein he raised a two-fold contention. He urged that he was not a director in. either of the two companies. .The first part of section 2(6C) (iii) thereforee did not apply to the facts of the case. He next urged that he was not concerned in the management of the business of either of these two companies, though he admitted the position that he controlled both these companies. He stated that to control the company was not to manage the company or to be concerned with the management of the company. Relying upon certain provisions of the Companies Act, he argued that only a Managing Agent or a Managing Director or a Secretary of the company can be said to be a person concerned in the management of the company. In the circumstances, the latter part of section 2(6C) (iii) also did not apply to the case.

(9) The Revenue on the other hand, contended that though the assessed was neither a share-holder nor a director nor an office-bearer of Allen Berry and Co. Pvt. Limited and though he was merely a share-holder of Bharat Union Agencies Private Limited; he controlled both these companies and was thereforee a person concerned in the management of the business of both the companies. The, benefit received by the assessed from these companies had been thereforee rightly treated as his income by virtue of Section 2(6C) (iii) of the Income-tax Act, 1922.

(10) The Revenue further contended that even if the benefit received by the assessec cannot be treated as his income by virtue of Section 2(6C) (iii) for any reason, it should none-the-less be treated as his income in its normal and rammatical sense. It was also argued that the assessed was repeatedly receiving such benefits year after year. Such benefits thereforee, deserved to be treated as his income.

(11) The Tribunal held that as the assessed was not a director in either of the two' companies, the first part of section 2(6C) (iii) was clearly in-applicable. But since the expression 'a person who has a substantial interest in the company' used in section 2(6C) (iii) has been equated by the use of the words 'that is' with a person who is 'concerned in the management of the business of the company' being the beneficial owner of shares other than preference shares carrying not less than 20 per cent of the voting power, two conditions must be satisfied. He should firstly be concerned, in the management of the company and secondly, he should be the beneficial owner of shares other than preference shares carrying not less than 20 per cent of the voting power. The question for consideration, thereforee, was whether the expression 'concerned in the management of the business of the company' includes persons who are visibly and ostensibly managing the business of the company by virtue of certain position held by them in the company or whether it also includes persons who imperceptibly carry on the management of the business of the company without holding any position or post in the company.

(12) The Tribunal held that it was not Necessary that the management should be carried on in an ostensible manner or that the management should both be seen and felt. It was quite sufficient if it was felt without being seen. The assessed was accordingly held as a person concerned with the management of the business of both the companies.

(13) As regards the second condition, the Tribunal held that so far as Bharat Union Agencies Private Limited was concerned, the assessed was the beneficial owner of 1800 out of 5000 equity shares. The said condition was thereforee satisfied. The sum of Rs. 53398.00 spent by the company after the necessities of the assessed was accordingly his income by virtue of Section 2(6C)(iii) of the Income-tax Act, 1922.

(14) As the assessed was not the beneficial owner of a single share of Alien Berry and Co. Private Limited the second condition remained unsatisfied in that case and thereforee the benefit of Rs. 4406.00 received by the assessed from that company could not be treated as his income under section 2(6C) (iii) of the Act.

(15) The Tribunal also pointed out that the Revenue had not established that the assessed was receiving such benefits from the companies year after year. In any case, such benefits were in the form of gifts and benefits and were capital receipts and a mere recurrence of such benefits for a number of years without any right or justification to receive the same cannot convert the capital receipts into income liable to tax. The sum of Rs. 4406.00 was thereforee deleted from the income of the assessed.

(16) At the instance of the assessed the question of law mentioned above has been referred to this court.

(17) It was contended by the learned counsel for the assessed that Section 2(6C)(iii) came into force on 1-4-1955 while the previous year relevant to the assessment year in question was from 1-10-1953 to 30-9-1954. Section 2(6C)(iii) thereforee did not apply to the case. The contention is not well founded. Section 20(i) of the Finance Act, 1955 specifically suggests the time when the amendments referred to in Sections 3 to 19 would have effect. The amendment in Section 3 of the Finance Act refers to the amendment of Section 2 including clause (6C) of the Income-tax Act, 1922. Section 20 also specifically gives the period for which it would be applicable to different types of income as mentioned in Section 20(2), Section 20 (3) and Section 20(4). Further, it is well recognised that the specific dates which are mentioned in the Income-tax Act, have reference to the assessment years and have nothing to do with the accounting years of an assessed which may differ from person to person. The amendment contained in the Finance Act, 1955 in respect of Section 2(6C)(iii) was thus applicable to the assessment year 1955-56 and was rightly invoked by the Income-tax Officer.

(18) Counsel for the assessed next referred to Section 2(6C)(iii) and urged that the assessed was neither a director of the two companies nor was he 'a person who was concerned in the management of the business of either company.' The value of any benefit or perquisite received by him from the companies would thereforee not come within the definition of the word 'income' in Setion 2(6C)(iii) of the Act. The section reads :-

'6(C)'income' includes- (i) dividend; (ii) the value of any perquisite or profit in lieu of salary taxable under section 7; (iii) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by any other person who has a substantial interest in the company (that is to say, who is concerned in the management of the business of the company, being the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power), 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:'

(19) It was argued that substantial interest which a person has in a company, has not been left vague. It has been equated by the use of the words 'that is to say' with a person who is concerned in the management of the business of the company. He should also be a person who is the beneficial owner of shares other than preference shares carrying not less than 20 per cent of the voting power. The assessed being the beneficial owner of 1800 out of 5000 equity shares satisfied the second condition. The question for determination is whether he also satisfied the first condition. The key words in the section are 'who is concerned in the management of the business of the company.' Could a person who was not a director or office-bearer of a company be treated as a person 'concerned in the management of the business of the company'. The assessed was a mere share-holder of Bharat Union Agencies Private Limited. He was not a Director or a Managing Director or Managing Agent or any other office-bearer of the said company. Such a person, it was urged, could by no stretch of imagination be described as a person 'concerned in the management of the business of the company.'

(20) The word 'concerned' is very wide in its extension and has been used in several statutes in the Industrial Disputes (Appellate Tribunal) Act 48 of 1950, the word 'concerned' occurred in section 22 whereby it was provided that 'during the period of 30 days allowed for the filing of an appeal under S. 10 or during the pendency of any appeal no employer shall-(a) alter to the prejudice of the workmen concerned in such appeal, the conditions of service applicable to them immediately before the filing of such appeal or (b) discharg or punish whether by dismissal or otherwise, any workmen concerned... The question whether a particular workman is or is not a 'workman concerned' in an appeal came up for consideration in some cases to which we shall presently refer.

(21) Similarly the words 'workman not concerned' with the pending industrial dispute, occur in Sections 33(1)(a) and 33A of the Industrial Disputes Act, 1947 and have been considered in some decisions and will be refered to hereafter.

(22) The word 'concerned' also occurred in the Sea Customs Act, 1878. In Section 167(8) the person who was 'in any way concerned' in the commission of the offence of bringing into India or taking out of the country goods with respect to which certain prohibitions or restrictions existed, was penalised.

(23) The word has also been used in certain restrictive covenants relating to business. A person selling to another person a running business may enter into a covenant with him that he would not 'solely or jointly with any other person either directly or indirectly carry on or be 'concerned' or 'interested' in any trade of the like nature sold by him to the other in any particular area. The decisions which deal with such restrictive covenants appear to us of greater value than those under the Industrial Disputes Act. Thes cases relate to the conduct of business and, thereforee, the use of the word 'concerned' in that connection can be of some help to us in ascertaining the meaning of the word 'concerned' in Section 2(6C)(iii).

(24) In this connection, the assessed's counsel referred us to a decision of the House of Lords in William Cory & Son Ltd. v. C. W. Harrison and others 1906 A.C. 274 where the respondent a coal merchant carrying on both a home and an export business, sold the home business to the appellants and convenanted with them that he would not 'solely or jointly with any other person either directly or indirectly carry on or be concerned or interested in the coal trade in any part of Great Britain or the Isle of Man.' He afterwards sold the export business to a company and took the purchase money in shores. The company afterwards sold the export business to a firm, the purchase money being payable to the company by Installments lasting over several years. The firm having begun to carry on both a home and an export business, the appellants brought an action against the respondent for breach of covenant. It was held that the respondent was not 'concerned or interested in' the home business in the business sense which must be attributed to these words, and that there was no breach of covenant. Earl of Halsbury L. C. observed ;-

'BUTwhen you are dealing with the carrying on of a business and endeavoring to prevent the carrying on of that business directly or indirectly, or the having any part or concern in that business, I think every business man would quite comprehend that the mere fact of being a creditor of the firm is not being 'concerned or interested in' it. Although, in a certain sense, every creditor is interested 'in the solvency of his debtor, and in that sense there is an interest, that is not the sort of interest that is contemplated by this covenant.'

(25) We were next referred to a decision of the Queen's Bench in Morris v. Howden 1897(1) A.B. 378 . This was a case stated under the Summary Jurisdiction Acts by the stipendiary police magistrate for the city of Sheffield. By Section 341 of the Merchant Shipping Act, 1894, a 'passage broker' was defined as 'any person who sells or lets, or agrees to sell or let or is any wise concerned in the sale or letting of steerage 'passages in any ship proceeding from the British Islands to any place out of Europe not within the Mediterranean Sea', and by section 342, 'a person shall not act directly or indirectly as a passage broker' unless he holds the prescribed license',

(26) The respondent in consideration of 22 1. paid to him by C agreed to place C's son as a farm pupil in Canada and out of 22 1. to procure a steamship passage from Liverpool to Quebec. Subsequently the respondent obtained for about 91 from shipowners a contract ticket for a voyage from Liverpool to Quebec and sent it to the son. The respondent made no profit or commission out of. the later transaction. It was held that he had not been 'concerned in the sale or letting of a passage within the meaning of Section 341. Bruce J. who wrote the judgment of the Court observed : 'To be concerned in a sale or letting means, I think, to have a part or share in the sale or letting-to have something to do with the sale or letting-to have some interest in the transaction, or in some way to derive some profit or advantage from it. If the father, James Craven, had purchased of Messrs. Cook & Son through their authorized agent a ticket for his son, E. W. Craven, he would not, I think, have been guilty of any breach of the provisions of the 341st section; and as regards the act of the purchase of the ticket, I cannot see upon what principle it is possible to distinguish between a purchase of a ticket by a father for a son and the purchase made by the defendant.'

(27) The case of Batts Combe Quarry Limited v. Ford and others 1943(l)Ch.51 is a judgment of the Court of Appeal. The vendors of the Batts Combe quarry covenanted with the purchasers 'that they would not within ten years either solely or jointly with or as agent officer, manager, servant director or share-holder of any other person or company directly or indirectly carry on or assist in carrying on or be engaged concerned interested or employed in the business of a quarry within 75 miles as the crow flies of Batts Combe quarry.'

(28) One of the vendors within ten years provided a sum of money to enable his three sons to purchase the Chelms Combe quarry in the immediate neighborhood of the Batts Combe quarry and for working capital. He also took part on his sons' behalf in preliminary negotiations for the purchase of machinery and equipment for the Chelms Combe quarry. He was not a partner in the son's business nor in any way financially interested in it, and he took no part in its management.

(29) It was held that, by providing the capital of the sons' business, the father 'assisted in carrying it on:' that, both by the provision of the capital and the business: and that in taking part in the negotiations, he was 'employed in' the business; and that he had broken the covenant in these respects. Lord Greene M. R. while explaining the meaning of the words 'concerned in' remarked: 'The word 'concerned' is of quite general import. Clearly it cannot be limited to 'concerned' in the sense of financial interest or of being an employee of the business. Again, T can sec no more effective way of being concerned in a business than by providing the capital necessary to establish it, and the word 'concerned' seems also to cover the assistance given. by the father in the course of negotiations.'

(30) We have already said that in sections 33(1)(a) and 33A of the Industrial Disputes Act, 1947 the words 'workmen concerned in such dispute' occur. In M/s. New India Motors (P) Ltd. v. K. T. Morris : (1960)ILLJ551SC it was held that 'the expression 'workmen concerned in such dispute'' occurring in s. 33(1)(a) of the Industrial Disputes Act, 1947, as amended by Act 36 of 1956, includes not merely such workmen as are directly or immediately concerned with the dispute, but also those on whose behalf the dispute is raised as well as those who. when the award is made. will be bound by it.'

(31) In State of Madras v. T. S. Veiikataswami Naida : (1959)IILLJ622Mad P. V. Rajamannar C.J. while dealing with the word 'concerned' as used in section 22 of the Industrial Disputes (Appellate Tribunal) Act 48 of 1950 observed that the question whether a particular workman is or is not a 'workman concerned' in an appeal pending before the Labour Appellate Tribunal was a question of fact. But obviously there is a difference in the meaning of the two words 'concerned' and 'interested.' 'Concerned' connotes a more intimate and direct relation to the matter than the word 'interested'. The distinction can well be brought out by giving a concrete instance. If a dispute arises between the management and the workers of a particular industrial establishment, say as regards the principles on which bonus should be granted it would be not inappropriate to say that even workers in other industrial establishments are also 'interested' the result of the adjudication.'

(32) In Radha Kishan Bhalia v. The Union of India and others : 1965CriLJ154 the connotation of the words 'concerned in' Clime up for discussion in the context of Section 167(8) of the Sea Customs Act, 1878. It was observed : 'It is immaterail what meaning be attributed to the word 'concerned'. It may have the meanings 'involved' or 'engaged' or 'mixed up'. The requirements of the expression 'concerned in any such offence' in the penalty part of S. 167(8) are that the person to be penalised must be interested or involved or engaged or mixed up in the commission of the offence referred to in the first column of Section 167(8). The interest or the involvement or the engagement or the mixing up of the person in the commission of the offence must be at a stage prior to the completion of the offence of illegal importation of goods, the offence which is complete when the goods have crossed the customs frontier. Once the goods have been imported, any subsequent interest in the smuggled goods cannot bring the person showing such interest within the purview of S. 167 (8) for the purposes of the imposition of penalty.'

(33) Applying the rule laid down in the above decisions to the facts of the present case, it is obvious thill the question referred to us is a mixed question of law and fact. The Tribunal has found in the case of Bharat Union Agencies Private Limited that the assessed had contributed capital to the extent of 1800 equity shares out of a total of 5000 equity shares. It was also admilted on behalf of the assessed that he was controlling both the companies. The term control obviously - means de-facto control and not merely the right or power to control. Ill Commissioner of income-lux, Bombay City v. Nandlal Gandalal (40 Itr 1) the Supreme Court was dealing with the meaning of the expression 'control and management' in Section 4A(b) of the Income-tax Act. 1922 which reads.-

'4A.For the purposes of this Act- (b) a Hindu undivided family, firm or other association of persons is resident in the taxable territories unless the control and management of its affairs is situated wholly without the taxable territories.' It was said :- 'The expression 'control and management' under section 4A(b) signifies controlling and directive power, 'the head and brain' as it is sometimes called, furthermore it is settled, we think, that the expression 'control and management' means de facto control and management and not merely the right or power to control and manage.'

When the assessed was controlling both the companies having already invested over 33 per cent capital in Bharat Union Agencies Private Limited without holding any office therein, the power exercised by him was one of de facto control un-accompanied by any right or power to control.

(34) Counsel for the assessed, however, contended that the control is not to manage the business of the company. According to him, only a managing agent or managing director or a manager or a secretary of a company can be said to be the persons concerned in. the management of the business of the company. But if the assessed was in de facto control of the companies, the part taken by him in the management of the business, of the companies was more to be felt than to be seen. Whoever was the managing director or managing agent or manager or secretary of these companies, would have to carry out the wishes of the assessed, otherwise there is no reason to suppose that the assessed was controlling the companies. The control exercised by him may embrace the laying down of policies which the managing director and other office-bearers have to put into effect or it may include the day to day conduct of tire companies' business. In any event, the control exercised by the assessed must be felt. The policies pursued by the managing director and the officers of the companies must bear the impress of the assessed's control. At times, it may be seen but generally its effect must be felt in all that happens in these companies. It may be ostensible or covert but it must exist all through. The Tribunal oliserved :-

'THEquestion for consideration is whether the expression includes persons who are visibly and ostensibly managing the business of the company by virtue of certain position held by them in the company or whether it also includes persons who imperceptibly carry on the management of the business of the company without holding any position or post in the company. In other words, the question for consideration, is whether it is necessary for the purpose of this expression that the part taken in the management of the business of the company should both be seen and felt, or that it would be enough, even if it is felt. but not seen,'

'TOexercise control over a company is something more than to manage the company. A person who manages the company may not necessarily be in a position to control the business or affairs of the company. He may be managing under the instructions of those who are controlling the company. But a person who controls a company also directly or indirectly through the managerial staff manages the business of the company. Hence, in our opinion, one who controls the company is necessarily one who manages the business of the company. It is again not necessary that the person who manages the business of the company should be rightfully entitled to do it. A person who is not rightfully entitled to manage the business of the company but usurps the power by virtue of his certain position, is, in our opinion, certainly a person covered by this expression. It is also not necessary, in our opinion, that the management should be carried on in an ostensible manner. One who carried on the management indirectly and imperceptibly through the persons who outwardly and ostensibly carry on the management is covered by this expression. It is not necessary, in. our opinion, that the management should be both seen and felt; it is sufficient if it is felt, without being seen.'

(35) The above appears to be in consonance with the underlying intention of the legislature in introducing the clause in question and if we take into account the meaning attributed to the word 'concerned' it cannot be limited to 'concerned' in the sense of being an employee of the business or holding an office in the companies. Counsel for the assessed finally referred to sub-clause (iv) of clause (24) of section 2 of the Income-tax Act, 1961 which reads as under:-

'(24)'income' includes-- (i) profits and gains: (ii) dividend: (iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17; (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;'

He contended that Section 2(6C)(iii) of the Income-tax Act. 1922 differed from the present sub-clause in two respects: first it deemed a. person to have a substantial interest in the company only if he was concerned in the management of the company's business and was also the beneficial owner of the prescribed percentage of share capital and, secondly, it did not apply at all to relatives of a director or of a person who had a substantial interest in the company. The present sub-clause applies to such relatives as fall within the definition of 'relative' in clause (41) of section 2. It was urged that the very fact that in the Act of 1961, the deeming provision has been deleted and the words 'substantial interest in the company' have been retained as in the Act of 1922, shows that S. 2(6C) (iii) in the Act of 1922 by itself could not cover the case unless the provision regarding substantial interest was equated with the person 'concerned in the management of the business' of the company. The mere qualification of having a substantial interest in the company, was not considered enough for the purpose.

(36) The argument has not much substance. On a pure construction of clause; 2(6C) (iii) we have come to the conclusion that if the assessed was controlling the Bharat Union Agencies Private Limited and had also contributed over 33 per cent of the capital of the company, he came within the clause. The mere deletion, of a portion of that clause from Section 2(24)(iv) of the new Act, will not make any difference and will reflect what the Legislature had always intended the law to be. It cannot alter the meaning of the old Section 2(6C)(iii).

(37) The result is that the question is answered in the affirmative. The Commissioner will also have his costs. Counsel's fee Rs. 300.00.


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