TMI Blog1979 (11) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee ") was one of the governing directors of M/s. Phelps Company Pvt. Ltd. (hereinafter referred to as " the company"). The company was owned by some Europeans till 1944. Its share capital consisted of 2,000 ordinary shares of the face value of Rs. 100 each and a preference share capital of Rs. 1 lakh. The assessee and his brother, Ujjal Singh, purchased these shares in 1944 for a total consideration of Rs. 11 lakhs. They did not, however, have sufficient funds with them for payments towards the consideration. The assessee therefore borrowed an amount of Rs. 3,45,000 from the company itself and this amount was debited to his account in the company's books and paid by the company on behalf of the assessee to the vendors. The amount of dividends payable to the assessee in respect of the shares held by him was credited to the account and the amount of the loan also carried interest which was debited to the account. On January 31,1957, the debit balance of the assessee in this account was Rs. 3,83,996. The position was similar in the case of the assessee's brother also. The assessee and his brother appear to have addressed letters to the company requesting that the amount lyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sons was also upheld by the Tribunal in relation to the assessment year 1953-54 by its order dated February 27, 1958, for that assessment year. For the assessment year 1957-58, the assessment was completed in the first instance on a total income of Rs. 17,208. Subsequently, the assessment was reopened under s. 147(a) read with s. 148 as the ITO was of opinion that the amount of Rs. 3,83,996 written off by the company was includible in the assessee's total income under s. 2(24)(iv) of the I.T. Act, 1961. The assessee filed, in response to the notice under s. 148, a return of income showing the same income as had been assessed previously but including in Part F of the return the above sum of Rs. 3,83,996. This inclusion has been upheld by the AAC and on further appeal by the Tribunal and hence this reference. The first question for consideration is whether the sum of Rs. 3,83,996 can be treated as the income of the assessee. It is quite obvious that this sum cannot constitute the income of the assessee in the normal acceptation of that expression. It is well settled that the concept of income indicates something which goes into the pocket of an assessee and not what saves his p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there should be some expenditure or payment made by, the company either to the assessee or a third person by which the assessee stands to gain. He further emphasised that the reference to the word " obtained " in the section shows that the benefit which an assessee receives should be something not ex gratia as in the present case but one which he is entitled to receive as a matter of right. Interesting as these arguments are, we are unable to find any scope for introducing all these refinements into the simple language of the section. Even in construing an inclusive definition one has to give full effect to the ordinary meaning of the words employed in the statute. As pointed out by the department the assessee was indebted to the company in a large sum and it can hardly be gainsaid that when the company acceded to the request of the assessee to write off the said amount, the assessee did receive a benefit at the hands of the company. In some cases a benefit which an assessee obtains from the company may not be easily convertible in terms of money but the provisions require that even in such a case an attempt should be made to evaluate the benefit and treat the value as the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept where the expenditure incurred by the company resulted in the acquisition or production of an asset which remained its property, the director, or the employee was liable to be taxed on an amount of equivalent value and also on the expenditure of repairs. In other words, the more expensive the repair, the greater would be the amount to be notionally added to his income. Lord Dilhorne proceeded to observe (p. 642) : " I cannot believe that it was the intention of Parliament that these provisions should have this effect. As I have said, the object of this Chapter appears to have been to prevent avoidance of tax liability by the payment of expenses allowances and, as a corollary to that, to bring into tax the value of benefits in kind. I cannot believe that it was the intention of Parliament to treat the cost of carrying out repairs, for which a landlord is normally responsible and the carrying out of which is to both his and the tenant's advantage, as a benefit in kind to the tenant."d Lord Reid said (p. 645) : " Section 160 deals with sums paid by the company to the director. Section 161 deals with sums paid by the company to other persons. It appears to me obvious that sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the company was income within the meaning of s. 2(6C)(iii) because the family had derived a benefit, namely, interest free loans. The assessee would have normally paid interest had he been forced to borrow money outside and, therefore, to the extent the company had paid interest on loans which were diverted to the family the family derived a benefit taxable under s. 2(6C)(iii). This inclusion was not upheld by the High Court. The court pointed out that there were two aspects of the matter to be considered with reference to the above statutory provisions. In the first place, the use of the expression " whether convertible into money or not " indicated that the benefit or perquisite contemplated by the section could not be money itself. Also the very same section made a distinction between benefit and perquisite on the one hand and " any sum paid " on the other. This would show that the benefit or perquisite contemplated by this section should be other than money. The other aspect to which the High Court made a reference was that even assuming that money could be considered to be a benefit or perquisite, it should have been obtained from the company. It had been so held in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company misappropriated or forcibly taken against the wishes of a company by a director or other persons referred to in that section will come within the scope of that section. In their Lordships' opinion, this would not be so and the language of the section would only take in such benefits or perquisites which the company had agreed to provide and which the person concerned could claim as of right based on such agreement and a mere advantage derived from the company without its authority or knowledge will not amount to a benefit or perquisite obtained. The word " obtained " was agreement-oriented, in their Lordships' opinion. The subsequent case of Venkataraman [1978] 111 ITR 444 (Mad), as already mentioned, was a case of embezzlement by one of the directors. While Sri Manchanda relies upon these decisions strongly, Sri Kirpal, for the department, contends that the language of the clause in question does not warrant the qualifications placed thereon by the Madras High Court. We find that the Madras view on the two aspects referred to above have been recently accepted by the Calcutta High Court-See M. M. Metha v. CIT [1979] 117 ITR 362 and CIT v. Kanan Devan Hills Produce Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. Act, an assessee is taxed in every assessment year on the total income of the previous year. The previous year varies, even in respect of the same assessment year, in respect of different sources of income. Section 2(11) of the 1922 Act makes it clear that an assessee is entitled to have different previous years in respect of separate sources of his income. This would be so even where the sources of income fall under the same head. He is even permitted to treat each branch of a business as a separate source. It has also been held in this context that the expression "source" means not a legal concept but something which a practical man would regard as a real source of income. Section 2(11) also provides that where in respect of a particular source of income an assessee has once exercised an option in respect of the previous year he will not be entitled to vary the meaning of the expression in respect of the said source except with the permission of the ITO and subject to such conditions as he might impose. Similarly, once such a previous year has been adopted in respect of any particular source of income it will not be open to the department to vary the previous year for any subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the company agreeing to forgo the debt due from the assessee. Though it suited the assessee's purpose to maintain one single set of accounts for all his transactions with the company it could hardly be said that he had only one source of income from which all this income was derived. His salary income was derived because of his agreement to serve the company as an employee. His dividend income was derived because of the shares he held in the company. The other items of income, if any, recorded in this set of books were derived because of the mutual transactions between the assessee and the company. This did not constitute the source for the notional income that is now sought to be taxed. This being a separate source of income, the assessee is liable to be taxed on the financial year as a previous year in respect of it unless he can I prove, that even in respect of this source he has opted for the same previous year as in respect of salary, dividend, etc. There is no such evidence of any action having been exercised by the assessee in this particular case. As pointed out by the Madhya Pradesh High Court in Binodi Ram Balchand v. CIT [1962] 44 ITR 249 [subsequently affirmed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clared income and merely because the amount of loan to which it is related appears in the books of the assessee closed to a particular accounting year, it cannot be said that this income must also have that previous year. To give an example questions have arisen as to the previous year to be adopted in cases where certain cash credits appear in the books of an assessee and are sought to be assessed as his income because the assessee's explanations therefor are found to be unsatisfactory. In such cases, the department adopted, but unsuccessfully, the previous year to which the accounts had been closed as the previous year in respect of such cash credits. It was pointed out that though the credits appeared in the books of account they were being taxed as secret profits from undisclosed sources and, therefore, they would be relatable to a separate source in respect of which the financial year would be the previous year and that except in cases where the cash credits are added back as the undisclosed income of the business for which the accounts are maintained they cannot be treated as the income of the previous year of the business itself. This position was well settled (vide Kanga's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not earned in the carrying on of the business of managing agency it was clear that the source of the receipt was the managing agency business itself and it could not be said that the receipt was income from a new and independent source. In our opinion, this decision is not of much help in the context of the present case. Section 10(5A) of the 1922 Act deemed the amount of compensation or other payments for termination, etc., of certain categories of agreements as profits and gains of a business carried on by the recipients. It was on the basis of these words that an argument was put forward that the statute had created a new and independent source for the deemed income. This argument was rejected and it was pointed out that the section was only confined to treating as income something which was not considered to be so and with providing a head under which the receipt could be brought to tax. It was pointed out that the section was not concerned with creating a new source for that deemed income. The sub-section being out of the way, the position was that the assessee had a business and the payment made to him Was directly related to that business. From a practical point of view, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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