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M.N. Kanagasabai Chettiar Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 220 of 1965
Judge
Reported in[1970]75ITR672(Mad)
ActsIncome Tax Act, 1961 - Sections 256(1)
AppellantM.N. Kanagasabai Chettiar
RespondentCommissioner of Income-tax
Appellant AdvocateK. Srinivasan, ;D.S. Meenakshisundaram and ;K.C. Rajappa, Advs.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredK.R. Kothandaraman v. Commissioner of Income
Excerpt:
- - on a further appeal to the appellate tribunal, it negatived the assessee's contentions and did not agree that the waiver effected by the assessee resulting in his forgoing a part of the interest does not tantamount to the forgoing of a trade debt and, in any event, it could not be said that that part of the debt waived had become a bad debt......of the debt, even if it were to be considered to be one, having regard to the constitution of the debtor-company and in the absence of proof that such a waiver was legitimate. on an application made by the assessee under section 256(1) of the income-tax act, 1961, the appellate tribunal referred the following; question for our decision :'whether, on the facts and circumstances of the case, the disallowance of the sum of rs. 16,746 claimed as deduction from rs. 19,219 by the assessee in the computation of his income either under the head ' business ' or ' other sources' is valid in law?'3. we have no hesitation in answering the question against the assessee. the company, who was the debtor in this case, consisted of two shareholders of which the assessee as karta of the hindu undivided.....
Judgment:

Ramaprasada Rao, J.

1. The question involved in this tax case is whether a voluntary gesture on the part of an assessee to waive interest, which was admittedly payable to him by a third party and which was assessable under 'other sources', can be treated as an admissible expenditure. The assessee advanced amounts to Jayanthi Films, Madurai Private Ltd., which was a private limited company and which consisted of two shareholders, namely, the assessee and his wife, the former being its managing director. The assessee was submitting returns as the karta of an Hindu undivided family. During the previous year ending March 31, 1962, relevant for the assessment year 1962-63, the assessee was running a business under the name and style of 'Rajaram Talkies' which he took on lease. The assessee handed over charge of the theatre during the currency of the previous year to its owners. The advances made by the assessee were entered in the books of account maintained for the theatre business. As on December 31, 1961, the total of the advances made by the assessee to the above private limited company was Rs. 8,68,307. Originally, the advance was made at an interest of 18 per cent. per annum and, in fact, such interest income was assessed in the hands of the assessee for the years 1959-60 and 1960-61. For the assessment year 1961-62, however, interest was charged and credited in the books only at the rate of 12 per cent. per annum. During the previous year ending December 31, 1961, it is common ground that the assessee's account with the company was credited with a sum of Rs. 19,219. This was apparently reckoned at the interest rate of 12 per cent. per annum. It appears that the board of directors of the above mentioned company, which board apparently consisted of the assessee and his wife, passed a resolution on July 12, 1961, running as under :

' Resolved to debit the accounts of all the directors for the excess interest of 6 per cent. charged for their credits in the company in the years 1958-59 as the market rate of interest paid to other creditors is lesser and also as the company's result is not so encouraging.'

2. On the basis of the above resolution, the assessee whilst submitting a return of the income for the previous year ending March 31, 1962, implemented the resolution and deducted a sum of Rs. 16,746 from Rs. 19,219, which was the interest to which the assessee was entitled for the previous year, and returned only a sum of Rs. 2,473 as business income. It may benoted that such interest received by the assessee in the past was made exigible to tax under the head 'other sources'. The Income-tax Officer was of the view that the deduction of Rs. 16,746 was not admissible. The Appellate Assistant Commissioner, on appeal, sustained the assessment. On a further appeal to the Appellate Tribunal, it negatived the assessee's contentions and did not agree that the waiver effected by the assessee resulting in his forgoing a part of the interest does not tantamount to the forgoing of a trade debt and, in any event, it could not be said that that part of the debt waived had become a bad debt.' It also found as a fact that there was no commercial expediency for the assessee giving up the portion of the debt, even if it were to be considered to be one, having regard to the constitution of the debtor-company and in the absence of proof that such a waiver was legitimate. On an application made by the assessee under Section 256(1) of the Income-tax Act, 1961, the Appellate Tribunal referred the following; question for our decision :

'Whether, on the facts and circumstances of the case, the disallowance of the sum of Rs. 16,746 claimed as deduction from Rs. 19,219 by the assessee in the computation of his income either under the head ' business ' or ' other sources' is valid in law?'

3. We have no hesitation in answering the question against the assessee. The company, who was the debtor in this case, consisted of two shareholders of which the assessee as karta of the Hindu undivided family was one, and the other shareholder was his wife. Though, in the eye of law, the corporate entity of such a company is preserved for all purposes, yet whilst considering whether the waiver or the forgoing of the interest or the debt is admissible or not, certain other considerations do necessarily enter into the discussion. It is not in dispute that, in the books of account maintained by the assessee, the amount of Rs. 19,219 was credited as interest payable by the debtor-company for the previous year in question. By a resolution of the board of the company, which was a self-serving resolution, it could not alter the situation and voluntarily give certain tax benefits to the assessee and gain certain advantages to itself under the guise and in exercise of the powers of the indoor management of the company. The credit in the books of account has a significance of its own. It is not stated or urged that the accounts were kept in a mercantile system. On the other hand, it appears to be on accrual basis and the assessee has treated such an income as having been accrued to him as karta of the Hindu undivided family. The question to be posed is whether the resolution of the board of directors of the company is enforceable in the eye of law and whether the assessee is bound by it. The resolution does not even state that the company is incurring a loss. It is said that the rate of interest charged by other creditors was less and ' thecompany's result was not encouraging.' The Appellate Tribunal found as a fact that there is no proof that there was any legitimate or genuine ground to demand such a waiver of a portion of the interest or debt. Such being the essence of the resolution, to which the assessee was a party, it cannot be taken advantage of by the assessee in a different capacity for gaining tax a benefit. In our opinion, the interest income was rightly assessed under ' other sources ' and the voluntary gesture on the part of the assessee in giving up a portion of the interest on the basis of the resolution, which is obviously self-serving, is an unsustainable claim. The amount of Rs. 16,746, which apparently represented the interest calculated on the rate of interest as originally agreed to and subsequently reduced by the company, cannot, by an overt act on the part of the assessee himself and particularly in the peculiar circumstances of this case, be treated as an admissible deduction. If such a concession is available to him, then any assessee can impose a restriction on himself without any lawful authority or basis therefore and, whilst giving concessions to third parties, concurrently obtain a tax benefit to himself. An expenditure, in order that it may be treated as an admissible expenditure, should be one which, in the circumstances of the case and having regard to the nature of the activity of the assessee, was one incurred by him solely for purposes of the activity and in connection thereto. This essential detail is singularly absent in this case. This interest income to which the assessee is entitled is only to be treated as quid pro quo for advances of large sums of money lent by him to the company and in the course of such money-lending the amount was earned by him and is shown and reckoned in the books of account as having accrued. In such a context the assessee cannot, by himself and without necessity therefor, waive a portion of the same and on the basis of such waiver claim fiscal benefits.

4. In the instant case, the interest income having been rightly assessed under the head ' other sources ', the claim of the assessee that it was a debt payable to him by the company is absolutely without any basis whatsoever. The receipt in question is undoubtedly income. It may not be business income in the strict sense, but it is certainly income from 'other sources'. The contention of Mr. Srinivasan is that it should be considered as a trade debt and the waiver of a portion thereof was in the name of commercial expediency. As already observed, the Appellate Tribunal found that that there was no commercial expediency for forgoing a portion of the debt. The constitution of the company, the vague resolution which was the basis for the waiver and the system of accounting maintained by the assessee, which was on the accrual basis, are all indicative of the fact that it was inexpedient on the part of the assessee, when he gave up a portion of the debt, even if it should be treated and considered as one. In ouropinion, it is not a trade debt. On the other hand, it is an income from 'other sources'. As pointed out by my very learned brother in K.R. Kothandaraman v. Commissioner of Income-tax, [1966] 62 I.T.R. 348. :

' Though book entries are not necessarily conclusive and it cannot invariably be said that income results from such entries of credit, yet it could be judged in the context of each case and in the light of the circumstances therein whether such entries relating to the assessee in his books did result in an accrual of the income.'

5. In the instant case, no doubt need be entertained that the sum of Rs. 19,219, was income as ordinarily and popularly understood and the assessee, therefore, had no right either in law or in equity to voluntarily waive a portion of the said income and claim a tax benefit.

6. The question is, therefore, answered against the assessee and in favour of the department with costs. Counsel's fee Rs. 250.


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