[1980] 124 ITR 545 (Mad

[1980] 124 ITR 545 (MAD.)

HIGH COURT OF MADRAS

Commissioner of Income-tax

P.R. Ramakrishnan

SETHURAMAN AND BALASUBRAHMANYAN, JJ.

TAX CASE NOS. 285 TO 290 OF 1976

NOVEMBER 14, 1979

JUDGMENT

Sethuraman, J.—The Commissioner of Income-tax has come under reference under section 256(1) of the I.T. Act, 1961, on the following two questions:

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the value of perquisite to be assessed in the hands of the assessee need not be the amount disallowed in the assessments of the companies under section 40(c) and accordingly upholding the assessment of lesser amount?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount assessed under section 2(24)(iv) in the hands of the Hindu undivided family as a perquisite obtained from a different company should be excluded in computing the value of perquisite to be assessed in the assessment of the assessee as individual?"

The assessee was the additional managing director of M/s. Jayalakshmi Mills Ltd. and M/s. Ramakrishna Industries Ltd. The remuneration received by him as such additional managing director is being assessed in his hands and was similarly assessed for the assessment years 1967-68 to 197273. He was also a partner in the firm of managing agents which managed M/s. Madras Aluminum Company Ltd. His share income from the managing agency was included in the assessment of the HUF consisting of himself, his wife and children. The assessee had the use, for personal purposes, of motor car and telephone belonging to the company. In the assessments of M/s. Jayalakshmi Mills Ltd., a portion of the expenses claimed by it on the maintenance of the motor cars was disallowed on the ground that one of its cars was being used for the personal purposes of one of the directors. Similarly, in the case of M/s. Ramakrishna Industries Ltd., a portion of the motor car expenses and a portion of the telephone expenses were disallowed. The ITO had originally assessed the assessee. Subsequently, when it came to his knowledge that there was disallowance in the hands of the firm or companies which had spared the use of the motor car or the telephone, the ITO was of the opinion that the original assessment required to be reopened so as to assess the amounts disallowed in the hands of the company as the income or perquisite of the assessee. The various amounts that were added for the relevant years are set out in the form of a table by the Tribunal. It is unnecessary to burden our judgment with the repetition of those figures. The assessee appealed to the AAC. The AAC found that neither the assessee nor his wife owned a motor car. He was, therefore, of the opinion that the question is to how much was chargeable as perquisite in the hands of the assessee would depend upon the extent of the benefit derived by the assessee. In other words, how much it would have cost the assessee to keep a car or a telephone on his own for his exclusive use or for the use of his family would alone be the criterion. The AAC, therefore, considered that it would not be proper to take into account the amount disallowed in the hands of the company as the perquisite. He determined the perquisite for the use of the motor car at Rs. 500 per month and for the telephone at Rs. 75 per month. This, according to him, would be the expenditure that the assessee would have incurred for the purpose of satisfying the needs of himself and his family with reference to transport and telephone. The additions were accordingly restricted to the amounts so estimated for the several years. The result was that a part of the amount added as income had to undergo modification correspondingly. The department preferred appeals to the Tribunal and its contention was that once it was found as a fact in the assessments of the companies that certain assets belonging to the company were used for the personal purposes of the director and that the benefit or amenity granted to the director in this respect was liable to be disallowed under section 40(c), it followed as an automatic consequence that the amount so disallowed in the hands of the company was liable to be treated as perquisite in the hands of the concerned director. The contention was to the effect that whatever was disallowed in the hands of the company should be correspondingly taken as the perquisite enjoyed by the assessee-neither more nor less. The Tribunal held that the benefit enjoyed by the assessee could not exceed the total amount required to he spent by him for his personal purposes for conveyance and for telephone. The order of the AAC was, therefore, upheld. It is this order of the Tribunal that has given rise to the present reference on the questions already set out. There is a decision of this court for the earlier year in the case of this very assessee. But the problem that required consideration turned on different lines.

Section 2(24) defines income and sub-clause. (iv) is relevant for our present purpose. The provision, in so far as it is material, runs as follows:

" 'income' includes . . . . .

(iv) 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 a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid."

The extent of the income that is sought to be taxed under this provision is the value of any benefit or perquisite obtained from the company or any sum paid by the company in respect of any obligation which, but for such payment, would have been payable by the director. We are concerned with the later part of sub-clause (iv) dealing with the sum paid by the company in respect of any obligation which, but for such payment, would have been payable by the director. The meaning of the words "which, but for such payment, would have been payable by the director" would, prima facie, quantify the amount at an estimated figure of what the director would have spent having regard to his personal or family needs. In the present case, the revenue wants us to look into the provisions of section 40(c) in this connection and apply whatever was disallowed under that provision in the company's hands, as the amount taxable in accordance with the concept of income in the statute mentioned above. Section 40(c), in so far as it is material, runs as follows:

"Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',....

(i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be,

(ii) any expenditure or allowance in respect of any assets of the company used by any person referred to in sub-clause (i) either wholly or partly for his own purposes or benefit,

if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause (i) shall, in no case, exceed—....... "

The ceiling that has been fixed is Rs. 72,000 for each period of one year. If the provision was applicable for a period of less than one year, then the maximum disallowable amount would have to be calculated at Rs. 6,000 for each month or part thereof comprised for the period relevant for the assessment. The ceiling was fixed only by an amendment which became effective from the assessment year 1972-73 which is one of the years now under consideration. As regards the other years, there was no ceiling or maximum. There is an Explanation to section 40(c) which provides that the provisions of the said clause would apply notwithstanding that any amount, not to be allowed under this clause, is included in the total income of any person like a director or a person having substantial interest in the company or a relative of the director or of the person having substantial interest in the company. The Explanation has been brought in, as would be clear from its language, only for the purpose of warding off any argument of double taxation by reason of the disallowance in the hands of the company and by reason of the amount being taxed in the hands of the director or other person concerned.

From a reading of clause (c) of section 40, it would be clear that it applies only to a case where the person concerned is either a director or has substantial interest in the company or his relative. In the present case, we are concerned with sub-clause (ii) of section 40(c) because the motor cars and telephones are found to be the assets of the company. The expenditure has been incurred by the company on the motor cars as well as the telephones. In such a case, the ITO must apply his mind to find out whether the expenditure is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. It would, thus, be clear from section 40(c) that it applies only to a case where excessive expenditure had been incurred by the company with reference to its assets which were used by the director or a person who had a substantial interest in the company or his relative. The disallowance is also limited to the excess so determined by the 1TO.

We are. however, concerned with the case of the director himself. In such a case, what is necessary to be looked into is the amount that he would have incurred as expenditure for himself and for his family. The purposes behind the two provisions are so wholly different that it is not possible to dovetail section 40(c) into the consideration of the assessment of the director or the person having a substantial interest in the company. We may make our idea clear by taking an example. Supposing the company had incurred an expenditure of a sum of Rs. 1,000 per month on the provision of a motor car for a director, part of that expenditure may have been incurred for the purpose of utilising the conveyance for the actual business needs of the company. In such a case, the ITO is to find out as to what would be the expenditure that the company would have incurred for its own purposes and what would be the expenditure that would have been incurred excessively or unreasonably beyond its legitimate needs. The part of the expenditure in excess of the legitimate needs would come in for consideration under section 40(c). But when it comes to the assessment of the director himself, what has to be found out is what would be the expenditure that he would have incurred if he had himself maintained a motor car. If it is estimated that the maintenance of a motor car would cost him less than what the company has spent, then to the extent to which he would have incurred his own expenditure, he would be liable to be taxed. In other words, the test for applying section 40(c) is not what is reasonable expenditure that he was likely to incur, but what is the unreasonable expenditure that has been incurred by the company. We have already indicated that section 2(24)(iv) falls into two parts. We are, in the present case, considering only the second part of that provision. With reference to the first part, it may not be relevant to consider as to what he would have incurred as his own expenditure, but for the fact that the company incurred the expenditure on his behalf. In the context of the difference in approach pointed out above in applying the two provisions the revenue does not appear to be right in seeking to link the assessment of the director with the disallowance in the hands of the company. As the standards are different, it may even be conceivable that a director may be assessed on a larger figure than what has been disallowed in the hands of the company as the officer assessing the company may have been more liberal in applying section 40(c) to the company, or he may not have disallowed at all anything under section 40(c). His failure to apply section 40(c) cannot rule out the assessment on the director, based on section 2(24)(iv). It is not always that the ITO assessing the company is the same person who assesses the director. One may fail to refer to the other. Thus, though we would not exclude the assessment on the company applying section 40(c) as irrelevant, we would not accept the stand of the revenue in this case to the effect that the director's assessment must be based on the disallowance in the hands of the company. The result is that the first question referred is answered in the affirmative and in favour of the assessee.

On the second question the problem arises in this manner. It has already been seen that the assessee is also the karta of a HUF consisting of himself and others. The family was in receipt of some benefit by the provision of motor car and telephone from companies in which the family had interest. That benefit was estimated at the value of Rs. 1,250, Rs. 1,500 and Rs. 2,000, respectively, for the assessment years 1967-68, 1968-69 and 1969-70. The AAC, therefore, directed that the amounts already taxed in the hands of the family under section 2(24)(iv) would have to be excluded. The Tribunal confirmed the order of the AAC on this point also. It is this finding of the Tribunal that has given rise to the second question.

Having regard to the fact that in the present case the needs of the individual as well as of the family are the same, it would be proper to evaluate the amount of expenditure that would have been incurred by all the members of the family so as to find out the appropriate amount to be taxed under section 2(24)(iv). When once this has been done, then the AAC rightly considered it proper to take into account the benefit received from another company by the family. The constitution of the family in the general sense and of the HUF in this case is identical. In arriving at the estimate, it is thus necessary to take into account what has already been taken as benefit and assessed applying the same provision. The circumstances that the two assessable entities are different, cannot affect the quantum of the estimate of the expenses needed by the same set of members constituting the different assessable units. The estimate has to be based only on the needs and not on the categories under which the assessments are to be made or the number of units from whom it was derived. Judged in this light, there is no error in the order of the Tribunal on this point also. The second question is answered in the affirmative and in favour of the assessee. The assessee will be entitled to his costs. Counsel's fee Rs. 500.