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TMI Blog1994 (3) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and not in respect of the value of the benefit derived by the assessee's relatives from the company in which he is a director ? " A few introductory facts leading to this reference deserve to be noted at the outset. The assessee is an individual. The relevant assessment year is 1980-81. The accounting year ended on March 31, 1980. The assessee is a director of Messrs. Escannon Auto Parts (P.) Ltd. In the books of the private limited company in the account of the director (hereinafter referred to as " assessee " for the sake of convenience) there were four credit entries dated January 9, 1980. They read as under : Rs. 9-1-1980 by cash received 1,00,000 9-1-1980 by cash received 1,00,000 9-1-1980 by cash received 1,00,000 9-1-1980 by cash received 1,00,000 The Income-tax Officer felt that they should be treated as cash credits. He also noted that no promissory notes written nor interest tax was payable on these alleged loans taken by the assessee. That these amounts undoubtedly represented money kept by the assessee, he, therefore, made an addition of Rs. 4 lakhs towards the cash credits as discussed in his order. As the variation in the income made by the Income-tax Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount invested by Kannan and got back and, therefore, section 2(24)(iv) was wholly inapplicable. The Inspecting Assistant Commissioner came to the conclusion from the aforesaid stand taken on behalf of the assessee by his father, K. Srinivasan, that it was clearly established that the assessee and other shareholders of the company on one part had entered into an agreement with Messrs. Gautham Investments (P.) Ltd. to transfer the entire shares for a total consideration of Rs. 20,75,000 and that on January 9, 1980, amounts were advanced from the company's coffers to the relatives of the assessee who are none other than shareholders. Therefore, it was clear that the funds of the company were appropriated by Sri S. Kannan (assessee), through the medium of his relatives or shareholders. Under the circumstances, the assessee could not deny the benefit that accrued to him directly or indirectly. Further, it was held that sums paid to the relatives of Kannan by the company could not have been credited in his account to the extent of Rs. 4 lakhs, but for the fact that the advances made by the company were written off. In the circumstances, section 2(24)(iv) was wholly applicable and, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f loans through his mother and sisters which were written off on April 30, 1980. It was observed that it is not clear as to how the company decided to treat these items as irrecoverable and wrote it off in the books. These persons had means for payment and if really the appellant owed Rs. 3 lakhs to them, why should the company write off these items as irrecoverable ? It was ultimately found that considering all these transactions as a whole, the giving of loans of Rs. 1 lakh each to the appellant's mother, and three sisters, they in turn giving money to the assessee, the assessee in turn introducing the same money in the books of the company on the same day and the subsequent write off of the amount due from the mother and the sisters of the assessee by the company, clearly established the intention that an arrangement was made so that the assessee will have the benefit of the company's funds to the extent of Rs. 4 lakhs. Under these circumstances, section 2(24)(iv) came into play and the amount of Rs. 4 lakhs became assessable in the hands of the assessee on that score. The appeal of the assessee was, therefore, dismissed. The assessee carried the matter in the second appeal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f account a device which Mr. Dattu calls a colourable device was resorted to. Pursuant to the said device mere book entries were effected by the assessee-director of the private limited company. What he did was that first on January 3, 1980, he advanced a sum of Rs. 1 lakh to the company. That amount became part of the company's funds. Utilising this fund, under the scheme account entries were resorted to on January, 9, 1980. On January 9, 1980, the following entries were effected in the company's books of account : (i) Rupees 1 lakh was advanced by the company to Smt. Laxmi Srinivasan, mother of the assessee ; (ii) Immediately she in turn advanced Rs. 1 lakh to the assessee ; (iii) The assessee again advanced Rs. 1 lakh on January 9, 1980, to the company ; (iv) The company in turn advanced on the very same day Rs. 1 lakh to Mrs. Sai Prasanna, sister of the assessee ; (v) The assessee's sister, Mrs. Sai Prasanna, in turn advanced Rs. 1 lakh to the assessee ; (vi) The assessee on the same day advanced an amount of Rs. 1 lakh to the company ; (vii) The company on the same day in turn advanced Rs. 1 lakh to Smt. Vijayalaxmi Raman, sister of the assessee ; (viii) On the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect bearing on the applicability of the section 2(24)(iv) of the Act to the facts of the present case and, consequently, the finding reached by the Tribunal is patently perverse and vitiated in law. On question No. 2, placing reliance on a decision of the Delhi High Court in CIT v. Nar Hari Dalmia [1971] 80 ITR 454, it was submitted that even if benefit is received by the assessee's relatives from the company it can be said to enure for the assessee-director himself and, therefore, section 2(24)(iv) can be applicable to the facts of this case even on that ground. Learned counsel for the assessee on the other hand submitted that question No. 1 as framed is on the assumption that there were genuine loan transactions by the company on January 9, 1980, in favour of the assessee's mother and three sisters. That it was never argued before the Tribunal that all these were colourable devices and should be ignored. That such a contention cannot be permitted for the first time in this reference proceeding. That these transactions are genuine and that the assessee might have got loans from his mother and sisters on the same day amounting to Rs. 1 lakh each and might have re-lent the money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... country of its origin. When in fact even in the later House of Lords decision in the case of Craven (Inspector of Taxes) v. White (Stephen) ; Same a White (Brain) and IRC and Bowater Property Developments Ltd., and Baylis (Inspector of Taxes) and Gregory (Conjoined Appeals) in [1990] 183 ITR 216, page 224, the doctrine was only explained. It was, therefore, contended by him that on the facts found by the Tribunal both the questions should be answered against the Revenue and in favour of the assessee. We shall now take up for consideration the referred questions seriatim : Question No. 1 : For answering this question it is necessary to keep in view section 2(24)(iv) of the Income-tax Act. The said section defines income which is chargeable under the Income-tax Act to include amongst others : (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 af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it to the assessee. Relying on the Madras High Court decision in CIT v. Alagusundaram (L.) [1977] 109 ITR 508, it was submitted that the loans given by the company were for the benefit of the assessee. It is true that in support of this contention an argument was not raised that it was a colourable device which is frowned upon by the Supreme Court in McDowell's case [1985] 154 ITR 148. It is also true that in paragraph 11 of the judgment of the Tribunal, the Tribunal assumed that these loan transactions were genuine transactions. However, once the aforesaid contention was raised before the Tribunal touching upon the real nature of the transactions, whether they were a colourable device or not would certainly remain one aspect of this very submission for attracting section 2(24)(iv). It must, therefore, be held that this contention of Mr. Dattu, relying upon McDowell's case [1985] 154 ITR 148 (SC), clearly flows from the submissions made before the Tribunal as noted in para 10 of the judgment. It must be kept in view that both the lower authorities, viz., the Inspecting Assistant Commissioner and the Appellate Assistant Commissioner, had in terms held that these transactions were fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it is open to the High Court to consider the question in the light of evidence on record. In the case of Keshav Mills Co. Ltd. v. CIT [1965] 56 ITR 365 at page 382, the Supreme Court held that an aspect of the case which arises from the question referred by the Tribunal, can be argued in reference proceedings for the first time. We may refer to a later judgment of the Supreme Court in the case of CIT v. Biju Patnaik [1986] 160 ITR 674, wherein it has been in terms held that when a material aspect of the question was not considered by the Tribunal even though the question may be a question of fact, the said question becomes a question of law for the opinion of the High Court. In that case, the question was whether the assessee was the real owner of certain shares ostensibly standing in the names of others. While answering that question, the Tribunal had not considered the facts showing the financial capacity of the shareholders. The Supreme Court held that such a question was a question of law for decision under reference proceedings under section 256(2). The Supreme Court Bench, speaking through Sabyasachi Mukharji J., held that the ignoring of the fact as to whose money was dona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1 lakh each was advanced by the company as a loan to the assessee's mother and his three sisters meaning thereby Rs. 4 lakhs have purportedly gone out of the company's coffers in favour of these four loanees. Now, the question is what is the real nature of these transactions. It is not in dispute that the company did not take any security from any of them nor is it on record that these persons were in need of such loans from the company on that day. Not only that but it is clearly established from the record that they were not in such need because it is the assessee's own case, that the moment they received this money from the company, they passed it on to the director by further loans. It is easy to visualize that if the loanees wanted this money for their own purpose they would not have simultaneously loaned them to the director. Even the assessee was not in need of money on that day and simultaneously and automatically he ploughed back these monies to the company and brought them back in the company's coffers. In this connection, no resolutions were passed by the company for giving loans of Rs. 1 lakh each to the director's mother and three sisters. No further resolutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aster Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on the one side and the tax-gatherer and his perhaps not so skilful advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it.' Last, but not the least, is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guileless, good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, 'Taxes are what we pay for a civilized society. I like to pay taxes. With them I buy civilization'. But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, so that when ultimately the purchaser purchased the assets and liabilities of the company the purchaser had to give the entire balance of the credit account of the director to the said assessee to square off that liability of the company. This tax planning and colourable device was resorted to in such a way that if these entries are given their effect as they are and they are not x-rayed and not brushed aside as colourable transactions, section 2(24)(iv) which otherwise would be applied would remain unattracted to the facts of the case. Consequently, there is no escape from the conclusion that this device was a shrewd and colourable device resorted to by the director on the advice of his father, Sri K. Srinivasan, tax consultant and expert, with a view to get out of the tentacles of section 2(24)(iv). Whether the assessee might have passed this benefit to his mother or sisters is totally irrelevant. Once the assessee is in the tax net and the amount becomes his income as per section 2(24)(iv) he has to pay tax on it and thereafter it is his choice how he utilises that money. He may gift these amounts to his mother and sisters out of love and affection. The taxing event being com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 1980-81--F. No. 144B/R-V/82-83--Your letter dated 2-6-1983. I am writing this letter to you not in my capacity as an advocate but in my capacity as Kannan's father. I am aware about the details of the transactions referred to by you in your letter under above reference and hence I will be able to satisfy you as to the reasons which prompted recording the entries on January 9, 1980, in the books of Escannon Auto Parts (P) Ltd. (hereinafter referred to as 'the company'). Sri S. Kannan had agreed orally to transfer all his shares in the company and to transfer the shares of his mother, his sisters and Mr and Mrs. Bhuvaneshwariah in the company to Gautham Investments (P) Ltd. (hereinafter referred to as 'the purchaser') for a total consideration of Rs. 20,75,000. But Kannan wanted to get another extra sum of Rs. 4 lakhs from the purchaser over and above the sum of Rs. 20,75,000 as additional consideration. But the purchaser did not want to pay, any sum over Rs. 20.75 lakhs. In order to get the additional sum of Rs. 4 lakhs, he devised a method. He credited his account in the books of the company with Rs. 4 lakhs and debited his mother's account and his sisters' accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantee would be in the names of the ladies and in case the bank guarantee was not encashed on the due date the ladies would have to go to court which was found undesirable. Further, Kannan wanted that money for starting an industry and he wanted to pay the ladies later. But subsequently Kannan dropped that idea and went abroad for studies. I am afraid your conclusion that Kannan derived/obtained benefit from the company may not be correct. The company did not enter into the picture. The ladies advanced money to Kannan and Kannan invested the same in the company. How can it be said that Kannan derived benefit from the company ? The writing off was an independent transaction subsequent to the transaction in question. Further, as already stated, the purchaser of the shares and not the company had agreed to pay Kannan and had issued the bank guarantee. Similarly, your proposal to invoke section 2(24)(iv) may not be permissible. No sum was paid by the company to Kannan's relatives. No sum was payable by the company to Kannan's relatives. So far as payment to Kannan was concerned, it was the amount invested by Kannan and it was got back. Section 2(24)(iv) is wholly inapplicable. " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This purpose is achieved by ultimately getting a bank guarantee for this amount from the purchaser. It is for this purpose that this device was created by Sri K. Srinivasan, as clearly admitted by him. But in the process one intermediate link which became very relevant is by-passed by learned author of the scheme, K. Srinivasan, in his letter. He says by this scheme no benefit passed from the company to the director, S. Kannan It is difficult to agree. By this device, Kannan's account with the company which had a credit balance of Rs. 1 lakh on January 3, 1980, swelled by Rs. 3 lakhs more by three credit entries of Rs. 1 lakh each on January 9, 1980, in his favour and it is this benefit flowing from entries in the company's books of account which got fructified ultimately by knocking off additional consideration from the purchaser, Gautham Investments (P) Ltd. But that was the ultimate benefit. The proximate and the initial benefit was given by the company to the director by artificially increasing his credit balance from Rs. 1 lakh to Rs. 4 lakhs, i.e., by Rs. 3 more lakhs, by making them available from the company's coffers to the director, though he has not brought a single pi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the assessee and then the finding of the Tribunal would remain justified. But if the mother and sisters were mere name-lenders, the entire argument would fall through, on the principle " mulo nastikutho shakha " (if there are no roots, how can there be branches ?). Unfortunately, the Tribunal had completely ignored the letter written by Sri K. Srinivasan, the assessee's father, and the admissions contained therein. Consequently, the Tribunal has come to a lopsided unsustainable and unreal conclusion on the material evidence on record. When such dubious and colourable transactions are placed for consideration we cannot blink our eyes at the realities, we cannot ignore the admissions contained in the letter of the author of the scheme himself. We cannot be so gullible as to accept the genuineness of these smoke-screen entries, nor can we refuse to peep into the real nature of the transactions. In fact, persuading us not to undertake such an exercise and to accept such entries on their face value, would result in our failure to exercise our jurisdiction and to discharge our duty. The court is not so helpless as to raise its hands in despair and to allow such dubious transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced by the company to " K " was for the benefit of the assessee. The learned advocate for the assessee was right when he submitted that the aforesaid decision of the Madras High Court was concerned with a loan advanced by the company to the director which would be covered by section 2(6A)(e) of the Income-tax Act. Still, however, the aforesaid decision clearly indicates that the court can x-ray the transaction and can find out who is the real beneficiary of the transaction. Mr. Dattu also invited our attention to a decision of the Delhi High Court in the case of K. S. Malik v. CIT [1980] 124 ITR 522. A Division Bench of the Delhi High Court, speaking through S. Ranganathan J., had to consider whether the amount written off by the company was a benefit or perquisite obtained from the company and could be assessed in the hands of the assessee as deemed income under section 2(6C)(iii) of the Act of 1922 and the corresponding section 2(24)(iv) of the Act of 1961. Answering this question, it was held that in view of the express language of the provision a fiction is enacted in very sweeping terms resulting in cases of remission of debts also as deemed income of the assessee. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee, it is not shown that the fourth loan amount of Rs. 1 lakh was also brought back by the assessee in the coffers of the company nor is there any fourth credit entry for Rs. 1 lakh in favour of the assessee so far as the fourth loan amount given to Geetha Lata is concerned. Therefore, our answer to question No. 1 would be that the Tribunal was not right in law in deleting the addition of at least Rs. 3 lakhs by holding that the provisions of section 2(24)(iv) are not attracted. On the contrary it is held that the provisions of section 2(24)(iv) are attracted so far as Rs. 3 lakhs are concerned and not to the extent of Rs. 4 lakhs. Mr. Dattu, learned counsel for the Revenue, also did not seriously dispute this factual position, Accordingly, question No. 1 is answered in the negative to the extent of Rs. 3 lakhs in favour of the Revenue and against the assessee by answering that the Tribunal was not right in law in deleting the addition of Rs. 3 lakhs by holding that the provisions of section 2(24)(iv) of the Income-tax Act, 1961, are not attracted in this case. However, to the extent deletion of the addition of Rs. 1 lakh is concerned out of the total addition of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds of the recipient if the benefit flows from the company's coffers and goes either to (i) a director or (ii) to a person who is substantially interested in the company or (iii) to relatives of the director or (iv) to a relative of the person who has substantial interest in the company. Therefore, even assuming that any benefit flows from the company to the relative of the director, such benefit can be deemed as income in the hands of the recipient only, and it cannot be automatically treated as a benefit accruing to the director himself. There is no such further deeming fiction in section 2(24)(iv). In this connection we may refer to section 60 to section 64 of the Income-tax Act by way of illustrations, wherein the Legislature itself has created legal fictions by which incomes accruing to other persons can be added as income of the concerned assessee by artificially clubbing them to his income. No such clubbing by way of legal fiction is contemplated by section 2(24)(iv). Reliance placed by Mr. Dattu in this connection on the Delhi High Court decision in CIT v. Nar Hari Dulmia [1971] 80 ITR 454 is of no avail. In that case, the company had resolved to meet the foreign travel exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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