1988 (2) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of interest income received by the assessee's wife from M/s. Sri Hari Mills Limited under Section 64(1)(iii) of the Income-tax Act, 1961.
2. Assessment of perquisites received by the assessee from M/s. Sri Hari Mills Private Limited for the assessment years 1965-66, 1967-68 to 1971-72.

Detailed Analysis:

Issue 1: Inclusion of Interest Income under Section 64(1)(iii)
The first question was whether Rs. 5,790 received by the assessee's wife as interest from M/s. Sri Hari Mills Limited on the deposit of sale proceeds of agricultural lands, which had been gifted by the assessee, should be considered as the assessee's income arising indirectly from such transferred assets under Section 64(1)(iii) of the Income-tax Act, 1961.

The Tribunal held that there was no nexus between the interest income and the gift of agricultural lands by the assessee to his wife. It opined that if the wife had retained the agricultural lands, the income therefrom could not have been assessed either in her hands or in the assessee's hands. Therefore, the interest from the deposit of the sale proceeds could not be treated as income arising indirectly from the transferred assets within the meaning of Section 64(1)(iii).

The court analyzed the provisions of Section 64(1)(iii) and the relevant case law, including CIT v. C. W. Kothari, Janab K. T. M. S. Mahamood v. CIT, Sevantilal Maneklal Sheth v. CIT, and Mohini Thapar v. CIT. The court emphasized the necessity of a proximate connection between the transfer of assets and the income sought to be taxed, as laid down in CIT v. Prem Bhai Parekh. The court noted that the transfer of agricultural lands occurred in 1954, and the lands were sold by the wife in 1959, indicating a significant time gap. This time gap weakened the nexus between the transfer and the income.

The court concluded that the interest income could not be included in the assessee's income under Section 64(1)(iii) due to the lack of proximate connection between the transfer of assets and the income. Therefore, the first question was answered in the negative and against the Revenue.

Issue 2: Assessment of Perquisites
The second question pertained to whether the entirety of the amount disallowed in the assessment of M/s. Sri Hari Mills Private Limited for the assessment years 1965-66, 1967-68 to 1971-72, attributable to the personal use by the assessee of the cars, telephones, etc., should be considered as perquisites and brought to tax in the assessments made on the assessee.

The Appellate Assistant Commissioner held that the value of the perquisites should be assessed based on the benefit derived by the assessee, rather than automatically treating the disallowed amounts in the company's assessment as the value of the perquisites. The Tribunal upheld this reasoning, confirming that the value of the perquisites should be based on the extent of benefit derived by the assessee, as established in CIT v. P. R. Ramakrishnan and CIT v. S. S. M. Lingappan.

The court agreed with the Tribunal's conclusion, stating that the correct approach was to assess the value of the perquisites based on the benefit derived by the assessee. The court reiterated that the amount disallowed in the company's assessment should not be automatically treated as the value of the perquisites in the hands of the assessee. Therefore, the second question was answered in the negative and against the Revenue.

Conclusion:
Both questions were answered against the Revenue. The interest income received by the assessee's wife could not be included in the assessee's income under Section 64(1)(iii) due to the lack of proximate connection. Additionally, the value of the perquisites should be assessed based on the benefit derived by the assessee, not on the amounts disallowed in the company's assessment. The Revenue was directed to pay the costs of the respondent.