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Additional Commissioner of Income-tax, Madras-i Vs. Late A. K. Lakshmi and Others. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Cases Nos. 199 of 1973, 219, 227, 390 and 400 of 1974 (Reference Nos. 25 of 1973, 95, 103, 203 a
Reported in[1978]113ITR368(Mad)
AppellantAdditional Commissioner of Income-tax, Madras-i
RespondentLate A. K. Lakshmi and Others.
Cases ReferredSt. Aubyn v. Attorney
Excerpt:
- .....the use of the amounts made available by the company free of any interest payable to the company as a benefit derived by the assessee without cost coming within the ambit of section 17(2) (iii) of the income-tax act, 1961. it must be mentioned that the income-tax officer relied also on section 17(2)(iv). the tribunal considered both the aspects and came to the conclusion that neither section 17(2)(iii) nor section 17(2)(iv) has any application and, therefore, held that the amounts mentioned in the various years relating to the three assesses could not be treated as perquisites within the meaning of section 17(2) of the act. we shall now read sections 17(2)(iii) and (iv) :'17. (2) perquisite includes -......(iii) the value of any benefit or amenity granted or provided free of.....
Judgment:

P. GOVINDAN NAIR C.J. - The same question arises for consideration in these tax references. They relate to the assessments to income-tax of three directors of the Midland Theatres Private Ltd. In T.C. Nos. 219 and 390 of 1974 the director concerned is A. K. Ramachandran, who, at the time of the assessment, was no more. These two cases deal with respectively the assessments for the years 1967-68, 1968-69,1 1969-70 and 1970-71. The question of law referred to this court in T.C. No. 219 of 1974 is in these terms :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 7,142 and Rs. 10,396 were not includible in the hands of the assessee under the provisions of section 17(2) of the Income-tax Act, 1961, for the assessment years 1967-68 and 1968-69, respectively ?'

The questions of law referred in T.C. No. 390 of 1974 read as follows :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 22,000 was not includible in the hands of the assessee as perquisite under the provisions of section 17(2) of the Income-tax Act, 1961, for the assessment year 1969-70 ?'

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 50,800 was not includible in the hands of the assessee as perquisite under the provisions of section 17(2) of the Income-tax Act, 1961, for the assessment year 1970-71 ?'

Another director, A. R. Srinivasan, is the assessee concerned in T.C. No. 400 of 1974 and the years in question there are the four years 1967-68 to 1970-71. The question of law referred to this court reads thus :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sums of Rs. 3,018, Rs. 4,505, Rs. 15,929 and Rs. 15,200 were not includible in the hands of the assessee under the provisions of section 17(2) of the Income-tax Act, 1961, for the assessment years 1967-68, 1968-69, 1969-70 and 1970-71, respectively ?'

T.C. Nos. 199 of 1973 and 227 of 1974 relate to another director, A. K. Lakshmi, who was also deceased at the time of assessment. The two references relate respectively to two years 1968-69 and 1969-70. The question of law that is referred to us in T.C. No. 199 of 1973 for our opinion is :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 4,967 was not includible in the hands of the assessee under the provisions of section 17(2) of the Income-tax Act, 1961, for the assessment year 1968-69 ?'

The question of law referred to this court in T.C. No. 227 of 1974 is as follows :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 10,000 was not includible in the hands of the assessee under the provisions of section 17(2) of the Income-tax Act, 1961, for the assessment year 1969-70 ?'

The facts are similar, though not identical, because the question relates to the interest at 10% on the amounts made use of by the three directors in the concerned years. The income-tax authorities considered the use of the amounts made available by the company free of any interest payable to the company as a benefit derived by the assessee without cost coming within the ambit of section 17(2) (iii) of the Income-tax Act, 1961. It must be mentioned that the Income-tax Officer relied also on section 17(2)(iv). The Tribunal considered both the aspects and came to the conclusion that neither section 17(2)(iii) nor section 17(2)(iv) has any application and, therefore, held that the amounts mentioned in the various years relating to the three assesses could not be treated as perquisites within the meaning of section 17(2) of the Act. We shall now read sections 17(2)(iii) and (iv) :

'17. (2) Perquisite includes -......

(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases -

(a) by a company to an employee who is a director thereof;

(b) by a company to an employee being a person who has a substantial interest in the company;

(c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head salaries exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds eighteen thousand rupees;

(iv) any sum paid by the employer in respect of any obligation which, but for such payment would have been payable by the assessee.'

Just to get an idea of how the amounts mentioned in the various questions have been arrived at, it will be useful to extract paragraph 2 of the statement of the case in T.C. No. 219 of 1974 :

'The deceased assessee, now represented by his legal representative, Shri A. R. Srinivasan, was a shareholder and director of M/s. Midland Theatres Private Ltd. The assessee had current account in the books of the company and entries were made therein towards his remuneration due to be paid by the company and also towards amounts withdrawn by him for his personal use. For the assessment year 1967-68, the opening debit balance against the assessee was Rs. 50,200 and the closing debit balance was Rs. 78,241 and the average of the overdrawings by the assessee was worked out at Rs. 64,222. Similarly, for the assessment year 1968-69, the opening debit balance was Rs. 78,241 and the closing debit balance was Rs. 1,12,561 and the average overdrawing of the assessee was worked out at Rs. 90,204. The company did not charge any interest on this over interest thereon. The Income-tax Officer came to the conclusion that by not charging interest on the sums advanced to the assessee out of the interest-bearing borrowings of the company, the company had provided perquisite to the assessee. The Income-tax Officer worked out the interest attributable to the amounts overdrawn by the assessee from M/s. Midland Theatres Private Ltd., at Rs. 7,142 for the assessment year 1967-68 and Rs. 10,000 for the assessment year 1968-69, and assessed the same in the hands of the assessee as perquisite under section 17(2)(iii). Copies of the assessment orders passed by the Income-tax Officer for both assessment years are marked as annexures A and A-1 and form part of the statement of the case.'

The matter has been dealt with by the Tribunal in relation to the appeals taken by the legal representatives of A.K. Ramachandran for the two years 1967-68 and 1968-69 in paragraphs 18 and 19 of its order, which also we shall extract :

'18. Now, it is accepted that there were no resolutions of the company nor any other material to show that the sums debited to these accounts were in the nature of loans and in any event that the bargain between the company and the directors was that interest should be charged on these sums drawn in excess of the remuneration. Therefore, it is not as if the company had forgone any interest and conferred any benefit on the directors. It is not stated and it is no ones case that the company was doing money-lending business or it was the normal practice of the company to charge interest if any such sums were debited to any account in its books as had been debited to the accounts of these directors. Our finding is that the directors did not receive any benefit merely because no interest was charged on the sums they were permitted to withdraw from the resources of the company. In this view of the matter, there is no justification for sustaining the additions which are in dispute.

19. Shri Ramakrishna further sought to support the orders of the Appellate Assistant Commissioner relying upon section 17(2)(iv), which is as below :

17. 'Salary', 'perquisite' and 'profits in lieu of salary' defined. - For the purposes of sections 15 and 16 and of this section - ......

(2) 'Perquisite' includes - .....

(iv) any sum paid by the employer in respect of any obligation which, but for such payment would have been payable by the assessee.

The authorities below have not actually relied upon the provisions of this section at all.'

We are in agreement with what has been stated by the Tribunal that section 17(2)(iv) has no application to any of these cases. The question is whether section 17(2)(iii) will be attracted or not, and that turns on the further question whether the assessee can be said to have derived any benefit free of cost or at concessional rate. The further condition that is necessary for the application of this section is that this benefit must be derived by the persons mentioned in sub-clauses (a), (b) or (c). It is said that the sub-clause applicable is sub-clause (a) which states that the benefit may be granted by a company to an employee who is a director thereof, and the assessees concerned were directors and it is not disputed before us that sub-clause (a) would apply.

Counsel for the department contended that getting the benefit of the use of fairly large sums of money belonging to the company by the directors without any obligation to pay interest would be a benefit granted by the company to the directors who are admittedly employees of the company. There is a direct ruling on this point of this court, namely, Commissioner of Income-tax v. C. Kulandaivelu Konar : [1975]100ITR629(Mad) , which, on very similar facts, if not identical, took the view that such use of the monies of the company would amount to a benefit granted by the company without cost and would attract section 17(2)(iii) of the Act. Learned counsel for the assessee contended that it was open to company to decide whether it should lend monies by charging interest or without charging interest. He emphasised that this was not a case in which monies had been given away by the company and pointed out that the assessees and/or their estates were liable to return the amounts made available to them by the company, to the company and, therefore, by receipt of the monies as such there was no benefit that had accrued to the assessee. In such circumstances, he said, it will not be proper to urge that a borrower had derived any benefit by the borrowing and the resulting or consequential availability of the monies for his own use. Counsel cited a decision of the House of Lords in St. Aubyn v. Attorney-General [1951] 2 All ER 473; [1952] AC 15; 3 EDC 292 and invited our attention to a passage from the judgment of Lord Simonds, where the learned judge considered the effect of section 47 of the Finance Act, 1940, dealing with estate duty in England. The facts with reference to which the question was considered were that one Lord St. Levan, on the basis of two mortgages executed in favour of a company, was entitled to receive certain specified amounts on certain specified dates and he had received those benefits during his lifetime till his date of death. Considering this aspect, the learned judge observed 3 EDC 292 :

'The question is whether the advances so made were benefits within the meaning of section 46. The argument for the Crown is a simple one. Under section 47 (which I have already cited) any periodical payment out of the resources of the company is to be treated as a benefit, the loans or advances were payments made to Lord St.Levan out of the resources of the company and they were made periodically, and they were received by Lord St.Levan for his own benefit directly or indirectly. Therefore, they were benefits. The company, on the other hand, appeals once more to the plain use of ordinary words and denies that a man can fairly be said to receive for his own benefit a sum which he receives by way of loan and has to repay, and further relies on the omission of loan from a definition which refers to payment by way of dividend or interest or by way of remuneration or any other payment. The latter argument may derive some force from the contention of the Crown that a transaction of loan was just what the section was aimed at. But, perhaps, that contention had only become common form by the time this stage of the case had been reached. My Lords, here again is a question on which I find it impossible to express a confident opinion. It is indeed strange that no reference is made to a transaction of loan, and the result of holding such a transaction to be a benefit must, as learned counsel for the Crown was constrained to admit, have strange results. But I have come to the conclusion, never the-less, that the contention of the Crown must be upheld. I cannot escape from the fact that as each periodical loan was made to Lord St. Levan there was a payment to and receipt by him. And I cannot think that he received it any the less for his own benefit because he had, or his estate had, at a later date to repay it. He had the beneficial use of what he received and can fairly be said to have received it for his own benefit. I may add that I do not find it possible to find in the definition of periodical payment any genus of payments created from which, by the application of the ejusdem generis rule, a loan could be excluded, nor can I obtain any assistance from the provisions of Schedule VII to the Act to which reference was made. I am, therefore, of opinion that the loans were benefits within section 46. But this is only relevant if Lord St.Levan transferred property to the company within the same section except in a fiduciary capacity, and this, in my opinion, he did not.'

We do not think that this decision will be of any help. But for section 47 of that Act it appears to us that the learned judge would have been inclined to take the view that no benefit has been received because the learned judge himself confessed (See [1951] 2 All ER 473; 3 EDC 292 :

'..... here again is a question on which I find it impossible to express a confident opinion.'

After having stated as above, construing the section, the view has been taken (See [1951] 2 All ER 473; 3 EDC 292 :

'I cannot escape from the fact that as each periodical loan was made to Lord St.Levan there was a payment to and receipt by him. And I cannot think that he received it any the less for his own benefit because he had, or his estate had, at a later date to repay it. He had the beneficial use of what he received and can fairly be said to have received it for his own benefit.'

As we said earlier, the conclusion turned entirely on the wording of the section which was considered and will not be of much use for us in construing section 17(2)(iii) of the Income-tax Act, 1961. Further, in these cases we are not concerned with the question whether the receipt of the amounts as such is a receipt of any benefit, talking from the point of view of the assessees, or granting of any benefit from the angle of the company, without any cost. Since there is a liability to repay the amount, it is doubtful whether mere making available of funds from the company with an obligation to repay could be the grant of any benefit without any cost. That question does not arise before us and naturally we would not deal with it. The point to be considered is whether the receipt of the amounts by the assessee or the grant of the amounts by the company without any interest would be a receipt of any benefit without any cost. Here the question is whether the non-liability to pay any interest would be a benefit and whether what has been determined is the cost of that benefit. But this question again is not one free from difficulty, because in a way it is mingled with the further question whether the section intends to restrict the discretion of the right of a company or of any other employer to give monies to its or his employees by charging interest or by charging only nominal interest or even without charging interest. We have no doubt that this section is not intended to restrict the discretion of the right of the company to advance amounts to its employees with or without interest or at any specified rate of interest. But the question would still arise whether granting amounts of the company for the personal use of its employees without charging interest would be the grant of any benefit. Our answer here must be in the affirmative. It is well known that it is difficult, if not impossible, to borrow amounts for ones own use without having any liability to pay interest. Putting it positively, ordinarily borrowing can be had only be incurring an obligation to pay interest. What would be the amount of interest will be, unless there are statutory provisions governing the matter, a matter of agreement between the lender and the borrower. But, if either due to magnanimity or with a view to help an employee any amounts are advanced by an employer to an employee without an obligation to pay any interest, we have no hesitation in coming to the conclusion that the employee would be deriving a benefit in that he gets the use of the monies belonging to the company or any other employer, without having any liability to pay interest. The cost of the benefit would depend upon what is fair, just and reasonable, as envisaged by rule 3(g) of the Income-tax Rules. This will have to be determined by the assessing authorities by applying the provisions contained in that rule. In the cases before us, the percentage of the benefit has been calculated by applying 10% interest on the average outstanding during the year. No question seems to have been taken before the Tribunal that the assessment of the cost at 10% on the average advances during the year is either unreasonable and unjust or unfair and that matter does not, therefore, arise for consideration before us. The only other question is what is posed by the various questions which we have extracted earlier in this judgment as to whether the Tribunal was right in holding that no benefit has been received to the extent mentioned in the questions. Our answer to this is in the negative, that is, in favour of the department and against the assessees. The interest that are chargeable on the average advances during the relevant years, which has been fixed at 10% is a benefit that had accrued to the assessees without cost attracting the definition of the term 'perquisite' under section 17(2) of the Act and falling under section 17(2)(iii)(a).

In the light of the above, we answer all the questions in all these tax cases in the negative. The department will have its costs from the three sets of assessees, that is, the legal representatives of A.K. Ramchandran in T.C. Nos. 219 and 390 of 1974, the legal representatives of A. K. Lakshmi in T.C. Nos. 199 of 1973 and 227 of 1974 and from the assessee, A.R.Srinivasan, in T.C. No. 400 of 1974. Since the question involved is the same and there has been only one set of arguments, we allow only one set by way of counsels fee, which we fix at Rs.250.


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