TMI Blog1978 (7) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... cence dated 18th October, 1954, issued by the Ministry of Commerce and Industry under r. 15(4) of the Registration and Licensing of Industries Undertaking Rules, 1953. The said companies had also obtained a licence subsequently, dated 2nd September, 1955, for importing plant and machinery for the said project. These two companies had also completed negotiations for the purchase of machinery from a firm at Oslo and had entered into another contract with Messrs.Continental Ore Corporation, New York, for the purposes of the project. The assessee was neither a director nor a shareholder of these two companies nor was he concerned with the management thereof. However, he was one of the promoters and proposed director-in-charge of the new company to be formed, viz., Messrs. Cambata Ferro-Manganese Private Ltd. On 11th October, 1956, a solicitors' firm acting on behalf of the promoters preferred an application to the Controller of Capital Issues ; a copy of the said application is to be found annexed as annex. " A " to the statement of case. In the said application, apart from the assessee, the following four persons were shown as promoters of the proposed company, 1. K. S. Cambata, 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without any consideration as fully paid promoters' shares. According to the ITO, the assessee was required to be considered as an employee of the company and such amount received without consideration by him as an employee was taxable under s. 7 of the Act as benefit received for services, coming within Expln. 2 to s. 7(1) of the Indian I.T. Act, 1922. The assessee carried the matter in appeal to the AAC, who agreed with the conclusion of the ITO. According to the AAC, it could not be denied that the assessee was an employee of the company. It appears to have been contended before the AAC that on the date of allotment the promoters' shares had no market value. Accordingly, it was submitted that the allotment of these shares should not be taxed. In his order rejecting the contentions advanced on behalf of the assessee the AAC referred to the provisions of s. 2(6C)(iii) and held that as the assessee was a salaried director, the allotment would constitute his income which was liable to be taxed under the head " Salary " under s. 7. In the penultimate paragraph of his order the AAC went on to state what in the opinion of the AAC was the consideration for allotment of shares. As far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t their rights inter se in respect of moneys and labour put in by them till the formation of the company. We may, however, mention here that so far as Mr. Neterwalla is concerned, he was the whole-time director of Western India Theatres Ltd. till September, 1956, and as such has not rendered any material service for the promotion of the company. The sixty shares allotted to him are in consideration of his agreement not to start competitive business at any time. " The ITO had asked the company further as to when and at what stage the assessee had joined for the promotion of the company ; and in reply to this question the company stated that the assessee had joined the company in October, 1958, when everything in connection with the promotion of the company had been done except its incorporation. In his remand report these facts were emphasised by the ITO, who also in the said report indicated his own view as to the assessability of the amount. The matter was thereafter considered de novo by the AAC. In para. 11 of the order of the AAC, the arguments advanced on behalf of the appellant-assessee have been summed up as follows : " 11. The arguments advanced on behalf of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was that in any case the assessment of the amount was justified in view of the provisions contained in s. 2(6C)(iii) of the Indian I.T. Act, 1922. As far as the alternative contention was concerned, it was urged on behalf of the assessee that the department was not entitled to raise such a contention before the Tribunal. The view of the Tribunal was that the department cannot be shut out from urging that the amount was taxable under s. 2(6C)(iii). The preliminary objection raised on behalf of the assessee to the raising of the alternative contention was, therefore, rejected by the Tribunal. It then proceeded to consider the alternative contention. On behalf of the department, it was submitted that only two conditions were required to be satisfied under s. 2(6C)(iii) for making an assessment and that both these conditions were satisfied in the present case. The first condition was that the assessee should receive a benefit from a company and, secondly, he should be a director of the company at the time of receipt of such benefit. Against these submissions the assessee's counsel submitted that the shares had been received by the assessee not in the capacity of a director bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the Tribunal was justified in law in holding that the shares of the face value of Rs. 60,000 were the assessee's income under the head ' Other sources' ?" As far as question No. 1 is concerned, Mr. Khanna on behalf of the assessee has drawn our attention to a decision given by a Division Bench of this High Court (to which I was a party) in CIT v. Gilbert Barker Manufacturing Co. [1978] 111 ITR 529, and has very fairly stated that as far as this court is concerned, in view of the said decision the question would be required to be answered in the affirmative and in favour of the revenue. He pointed out, however, that the two decisions of the Supreme Court, on which he had placed reliance before the Tribunal at the time of maintaining his preliminary objection, had not been brought to the attention of the Division Bench. It was, however, conceded that as far as this court was concerned, the point appears to be concluded by the decision in Gilbert Barker Manufacturing Co.'s case [1978] 111 ITR 529 (Bom) and question No. 1 would be required to be answered in accordance with the said decision. As far as question No. 3 is concerned, it was stated that the principal question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad received by the issue and allotment of the promoters' shares to him and further proceeded to include the entire amount of the value of these shares in his income. Since no question complaining against that computation of the benefit has been raised, it would follow and would have to be assumed that there was no complaint against the valuation of the said benefit at Rs. 60,000. It has, however, been very strenuously urged that in order to qualify as income within the definition of s. 2(6C)(iii) the assessee must have received the alleged benefit or perquisite in his capacity as a director; and since, admittedly, he was allotted these shares as one of the promoters it was submitted by counsel on his behalf that there was no income within the meaning of the statutory provision contained in s. 2(6C)(iii). Before dealing with the other aspect arising from the arguments advanced at the bar, it will become necessary to consider this argument, for, if we are inclined to accept the same, then the question will be required to be answered in favour of the assessee and against the revenue. Our attention was drawn to three decisions of various courts in India which had occasion to consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an employee receives from the employer in addition to salary. The respondent was a part-time director and it is nobody's case that he was paid any salary. The plain perusal of sub-clause (iii) of section 2(6C) would show that any benefit or perquisite obtained from a company by a director would answer to the description of income. It is immaterial whether the benefit or perquisite is convertible into money or not. Although the amount in question paid to the respondent may not amount to a perquisite we have no doubt in our mind that the amount received by him was a benefit received by the respondent from the company of which he was a director. A, such, the amount constituted income in his hands. We are not impressed by the argument of Mr.Mitra that the benefit obtained by a director from the company can be considered to be income only if it is expressly mentioned that the benefit was being given to him because of his being a director. The definition makes it manifest that it is enough that a director of a company receives a benefit from the company and it is not essential to expressly say so that the benefit was being conferred upon him to enable him to act as a director. In the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Lakshmipat Singhania v. CIT [1974] 93 ITR 162, where it was held that s.2(6C) of the Indian I.T. Act, 1922, was in absolute terms and as soon as a person receives a benefit from a company and he happens to be a director of the company. the value of such benefit will be deemed to be his income. According to the Allahabad High Court, there was no further requirement of any kind and it was not necessary that the benefit should have been received by him under an enforceable right. It was contended specifically before the Division Bench of the Allahabad High Court that s. 2(6C) would only apply if the benefit is received by a person in his capacity as a director and not merely because he happens to be a director. The court found no force in this contention. According to it, as soon as a person receives a benefit from a company and he happens to be a director of that company, s. 2(6C) would be attracted and the value of such benefit would be deemed to be his income. In our view, the phraseology employed by the legislature in the statutory provision under construction is clear and unambiguous and we are in respectful agreement with the view expressed by the Allahabad High Court in Laks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee cannot be permitted to urge any such contention before us inasmuch as he had not invited the Tribunal to give a finding as to the value or worth of these shares on the date of allotment or in the assessment year in question. It does not appear to have been the assessee's case at that stage that the shares had no value whatsoever or had insignificant value. This will also be borne out by the fact that the assessee had not in the reference objected to the valuation made by the Tribunal of this benefit at Rs. 60,000. If that be so, how can, he be now heard to say before us, although he has raised no such question before the Tribunal that in fact the promoters' shares were not worth anything and they merely had a potential or future value which was required to be ignored? One must observe that this was a matter on which the assessee was required to seek a finding from the Tribunal. It is clear that he has not sought such finding. He has accepted and not objected to the valuation put by the Tribunal and he cannot now be permitted to base any such contention on an assumed nil or insignificant value of the promoters' shares as on the date of the allotment or in the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e before us. It was submitted that the allotment of shares, even though it may be regarded as a benefit or perquisite and considered as having been received by the assessee when he. was a director, was not one which he had received from the company. It was submitted that the assessee had received the allotment of 60 promoters' shares in pursuance of an arrangement between himself and the Cambatas who were promoters of the company, and it could not be said that the assessee had been given this benefit or perquisite by the company. This argument is certainly borne out from the passage in the statement of case which we have extracted earlier. It is true that the allotment of 60 shares to the assessee was in pursuance of an inter se arrangement between the assessee and the other promoters of the company. But from this it would not follow that the allotment of the shares to the assessee is by the promoters. The allotment of the promoters' shares to the promoters including the assessee is by the company. If these shares can be regarded as a benefit, this benefit is given to the assessee when the allotment of shares is made by the board of directors of the company. It is in our opinion a ..... 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