1972 (4) TMI 27 - HC - Income Tax

Whether the financial advisor of the company is a servant of the company and whether the value of rent-free accommodation is assessable u/s 7 - Whether the Tribunal was correct in holding that the provisions of section 7 of the Indian Income-tax Act 1922 did not apply to the facts and circumstances of the case and in deleting the addition? - It is not possible from the resolution of the board itself to draw an inference that there existed the relationship of master and servant between the assessee and the company. Unless such a relationship is established section 7 has no application

Summary

Issues:
1. Whether the value of rent-free accommodation provided to the assessee by a company can be assessed as income under section 12 or section 7 of the Indian Income-tax Act, 1922 for the assessment years 1958-59 and 1959-60.

Detailed Analysis:
The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, initiated by the Commissioner of Income-tax, U.P., Lucknow, regarding the assessment of L. Lakshmipati Singhania, an individual, for the assessment years 1958-59 and 1959-60. The issue revolved around the treatment of the benefit received by the assessee in the form of rent-free residential accommodation from a company named J. K. Jute Mills Ltd. The Income-tax Officer initially assessed the value of the accommodation as income under section 12 of the Act. Subsequently, the Assistant Commissioner of Income-tax considered it assessable under section 7, which deals with tax on salaries, and reduced the quantum of assessment. Both the assessee and the department appealed to the Income-tax Appellate Tribunal, which ruled in favor of the assessee, stating that section 7 was not applicable in this case. The main question referred to the High Court was whether section 7 applied to the facts of the case and the addition of Rs. 28,000 for each assessment year was justified.

The High Court analyzed the provisions of section 7 of the Indian Income-tax Act, 1922, which pertain to the taxation of salaries, perquisites, and profits in lieu of salary. It was highlighted that for an amount to be taxed under section 7, there must exist an employer-employee relationship between the payer and payee. The court cited precedents emphasizing that merely holding an office and receiving remuneration does not establish a master-servant relationship. In the case of a director, unless specific terms or contracts indicate an employment relationship, the director is not considered an employee of the company. The court noted that in the present case, the assessee was appointed as a financial adviser through a resolution without detailed terms of engagement. The absence of control by the company over the assessee's functions and duties further indicated a lack of an employer-employee relationship, which is essential for the application of section 7.

Consequently, the High Court concurred with the Tribunal's decision, affirming that section 7 was not applicable in this scenario. The court answered the referred question in the affirmative, ruling in favor of the assessee. Additionally, the court awarded costs amounting to Rs. 200 to the assessee.