TMI Blog1996 (3) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 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 ? T. C. 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 ₹ 82,200 on the ground that the provisions of section 2(24)(iv) of the Income-tax, 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 ₹ 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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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: Sl. 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 ₹ 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: Sl. No. Registration No. Market value fixed (RS) Difference to be assessed (RS) 1 MDT 6584 4,000 1,700 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nied by his wife. The cost of the tour amounted to ₹ 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 abovesaid sum was brought to tax in the hands of the assessee as his income within the meaning of section 2(6C)(iii) of the Indian Income-tax Act, 1922. On the above facts, a question arose whether the amount of ₹ 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 ₹ 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(6C)(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(6C)(iii) that the director should have a substantial interest in the company. It was further held that the amount was received by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... romoters' shares was by the company. This was a clear benefit to the assessee from the company, the provisions of section 2(6C)(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, 1965, the assessee's account showed an opening debit balance of ₹ 3,00,611 and a closing debit balance of ₹ 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 ₹ 29,718 as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (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 a 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 at 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 40A(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 treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsider a question whether the Department was justified in taxing the sum of ₹ 42,53,148 representing the difference between the book value of the trading assets and the price paid therefor 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 therefor to the predecessor-bank by the assessee-bank, could be regarded only as share premiums and could not be assessed as revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each year gave the respondent the privilege of applying for certain unissued 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 : I think it is really impossible to appreciate the argument which suggests that that was not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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