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TMI Blog1983 (11) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... his represents merely a transfer from the accounts of the creditors to the P L A/c unilaterally and without any concurrence from the creditors themselves. It would be still open to them at any time to claim the amounts, since they have neither waived the same nor given up the liability. The Commissioner (A)'s order is upheld. 4. (2) Disallowance under s. 40A(5): Certain alleged perquisites relatable to the Managing Director were sought to be disallowed by the Department under s. 40A(5) and not s. 40(c). The Commissioner(A), following the decision of the Tribunal in the case of Geoffrey Manners co. Ltd. vs. ITO, accepted the assessee's claim. Following the above mentioned Tribunal's decision, the Commissioner (A)'s order had to be upheld on this point. 5. (3) Deferred payment of annuity policy: In Connection with the application of s. 40A(5) the ITO included a sum of Rs. 42,000 as premium paid by the company towards a deferred annuity policy in favour of the Managing Director. The facts of the case are that the Managing Director Shri Rahul Kumar Bajaj was entitled to commission at a particular rate in addition to his fixed salary and other items of remuneration and perqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al followed its earlier decisions in I.T.A. nos. 2962 and 2963 (Bom)/1974-75, 2098(Bom)/1974-75 and 3310 3311(Bom)/1977-78. The Tribunal also considered the decision in I.T.A. No. 537(Bom)/1978-79 in the matter of Shri Amitabh Bachhan in coming to the above conclusion. For the assessment under appeal a sum of Rs. 42,000 was payable as commission. Pursuant to the Board's Resolution instead of paying the commission directly to the Managing Director, the assessee purchased a Deferred Annuity Policy. When the matter came up before the Tribunal, it was felt that the prior decision of the Benches of the Tribunal referred to on this point required reconsideration in the first place and secondly did not relate to the employer but to the employee. The matter thus was referred to a Special Bench in view of its importance. 6. The ld. Departmental counsel has pointed out that this was a clear case of remuneration paid in kind, apart from the alternative question of utilisation of income already accrued. Even if, therefore, the annuity policy as such is considered as not being the income of the employee—assumed for argument sake—the sum of Rs. 42,000 was clearly disallowable even if not tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pn. vs. Union of India Ors. (1965) 56 ITR 91 (SC). It is also pointed out that the Managing Director had a vested right in the policy. The mere fact of delay in payment does not take this away from him. The policy itself according to the ld. Counsel, is a benefit. In fact the Revenue is concerned with the present right to the future annuity which means in fact the date on which the policy vests. It is also pointed out that the resolution requires the payment to be made to the employee. If it is a case of the employee giving up his right to receive payment, the company cannot claim the expenditure. Even though cash payment is postponed, there is an assurance of future payment and this assurance during the year is a benefit during the year. Reference is also made to the decisions CIT vs. Duncan Bros. Co. Ltd. (1981) 23 CTR (Cal) 240 : (1983) 140 ITR 335 (Cal), CIT, Delhi vs. Lala Shridhar (1972) 84 ITR 192 (Del) and Gestetner Duplicators (P) Ltd. vs. CIT (WB) (1979) 8 CTR (SC) 371 : 117 ITR 1 (SC). Certain passages at p. 124 of Palkhivala's Commentary on Income-tax are also referred to. The ld. Counsel has pointed out that this is a direct case of receipt of remuneration in kind. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther expenditure or deduction thereafter would be claimed. The dispute, according to the ld. Counsel, centres round the premium paid for the policy and not the other ingredients of the transaction. 10. The facts lie within a narrow compass. Shri Rahul Kumar Bajaj as Managing Director of the assessee-company is entitled to certain payments by way of ready salary and also certain amounts calculated as commission. There is no dispute that the original agreement provided for such payment of commission and if the employee received the commission that would have been his income. On 5th Dec., 1973 the assessee-company passed a resolution (extracted above) where under the commission payable to the Managing Director is to be spent by the company every year towards the purchase of a Deferred Annuity Policy. The assessee's claim is that under the terms and in view of the nature of the policy the assessee parted with a sum of money for the purpose of its business but the employee did not receive any benefit during the previous year relevant to the asst. yr. In applying the provisions of s. 40A(5) to the payments, etc., made to this Managing Director, the ITO included the computed figure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. We may straight away dismiss this claim as not acceptable. Pensionary payments become allowable only when they are paid to a recipient directly or to a recognised fund specifically recognised for such purposes by the authorities. 13. Secondly, the employee-director was entitled to a commission for which the services were rendered and the computation also was made on that basis. The stand taken by the assessee in this regard is that the original agreement to pay the commission has been modified by the resolution of the company and it is under the terms of this resolution that the nature of the payment both in the hands of the company as well as in the hands of the director has to be considered. Apparently there could be no quarrel with this claim. If the original contract setting out a mode of payment has been modified and substituted by another contract with a different mode of payment, certainly the legal effect of the latter contract could be considered in dealing with the issue before us. In our view of the matter, latter contract does not in any way alter the nature of the payment by the company or receipt by the employee. Instead of paying cash across the counter (inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kind of policy could be made by an employer on the life of the employee, the employee himself on his own life or a third party on the said employee, subject of course in all cases to the legal requirement of an insurable interest. This last point is important because there is a difference between types of policy depending on the insurable interest and to whom the benefit enures. If the company were to take out a policy on the life of an employee but with the benefit enuring to itself, the company is the beneficiary of the policy. If the company were to take an insurance policy with no benefit to itself but only to the employee, the latter is the beneficiary. If a third party were likewise to take a policy to enure for the benefit of the employee, here also the employee is benefited. Whereever, therefore, the benefit of the insurance policy enures to the employee there would be no difference whether the insurance is purchased by the employee himself or a company-employer or a thirty party. When as in the present case the company purchased an insurance policy, deferred annuity policy it did exactly what the employee would have done to benefit himself in any particular way and nothing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Maybe, there are certain conditions regarding advance mode of payment such as splitting the payment into annuities instead of a lump sum, time of payment, exercise of certain options one way or other, or the mode of discharge in the case of contingency, etc. None of these, altered the fact that the benefit under the policy clearly belongs to the employee. Thirdly, the company does not benefit at all under the policy. The position here is not like that of an accident or other policy taken out by an employer to compensate the employer himself when an accident happens to an employee. When once Rs. 42,000 has gone out of the company's resources, it is spent for ever with no further advantage to it than the services already rendered by the employee for which the sum of Rs. 42,000 is the consideration. Fourthly, the several clauses in the policy as stated earlier are only options which the employee would like to have in any type of policy. The fact that the policy is proposed and paid for by the company does not alter the nature of the options. This clearly means that what the company has done is what the employee would have allowed any one to do for himself. Fifthly, a point was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll. Only the obligations accepted by the insurer are so devised as to postpone payments and make payments of annuities at specified period. The employee thus has received the remuneration or commission due to him and in a form where he can regard himself as the owner of the asset and even deal with it. The employer having no rights in the policy once purchased and all benefits thereunder enuring to the employee only, the latter could certainly deal with this particular item of property as any other item he owns. If the employee wants to transfer or assign the benefits under this policy to any one, we see no legal objection to his doing so. He would be doing exactly what he would have done in such a case had he purchased a Deferred Annuity Policy himself. This is a clear case thus of an employee receiving remuneration if not in cash, certainly in kind. 14. For the above reasons, we have no hesitation in holding that the value of the assets comprised in the Deferred Annuity Policy is not only accrued income but an actual receipt in kind in the hands of the employee. While applying the provisions of s. 40(C) or 40A(5) the value of this asset has to be considered not necessarily as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for that reason be assessable during the year but the ld. Members of the Division Benches, whose decision were quoted before us have not considered the question of the entire policy purchased by the company only to benefit the employee and as a package and a payment in kind to the employee for services rendered. The question is also not merely one of considering certain benefits to be treated as perquisites but one of payment in kind for services rendered. Our discussions detailed above indicate that the position in these cases is also the latter. Irrespective, therefore, of the position of the annuities arising and payment under the Deferred Annuity Policies, the package represented by the purchased asset, viz., the policy itself has to be included in the total income of the employee. For the reasons stated in detail above, therefore, we would respectfully hold that these decisions do not represent the correct position either as a matter of fact or in law. The order of the Commissioner is vacated on this point and the ITO's order is restored 17. (4) Repairs to building, gardening, etc.: The ITO included two amounts of Rs. 6,492 and Rs. 720 respectively being repairs to building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the Department by its order in ITA. Nos. 2153 and 2086 (Bom)/1979. The Commissioner's order is upheld on this point. 23. (7) Conference expenses, expenditure on tea and entertainment: The ITO disallowed a sum of Rs. 5,019 allegedly spent for dinner, etc., given to business associates, a sum of Rs. 8,587 being expenditure on tea, coffee, etc., to visitors and a sum of Rs. 5,626 being another item of alike nature, the first amount, the Commissioner sustained an addition of Rs. 2,401 and deleted the balance. In so doing, he relied on the Tribunal's order in ITA No. 220/(Bom) 1977-78 for the asst. yr. 1973-74. The sum of Rs. 8,587 was allowed relying on the Bombay High Court's decision in the case of CIT vs. Shah Nanji Nagji (1978) CTR (Bom) 305 : (1979) 116 ITR 292 (Bom). The addition of Rs. 5,626 was also deleted by the Commissioner after scrutinising the details. With regard to this amount, the Commissioner found that the assessee was negotiating a deal for technical know-how with an Indonesian party and expenses were incurred for showing customary hospitality to the foreign guests at the time of negotiation. In allowing this amount he also relied on the decision in ITA No. 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constituents require no advertisement for purchasing the assessee's articles. 31. (10) Drawback and cash assistance :The company, a manufacturer and seller of scooters, makes substantial sales in the foreign market, thus becoming entitled to receive certain duty draw back and cash assistance. On account of the sales made in the export market during the financial year relevant to the year under appeal the assessee was entitled to receive such draw back and assistance to the extent of Rs. 8,43,989. The assessee maintains its accounts on the mercantile basis and till the year of appeal had been showing such assistance and draw back receipts on the above basis. During the year of account the assessee claimed that in respect of this item it has bona fide changed its method of accounting to the cash basis in view of certain difficulties. The ITO did not accept the claim but added the sum of Rs. 8,43,989 in the total income of the assessee. 32. On appeal the Commissioner deleted the addition. He came to the conclusion that the assessee had changed the method of accounting in respect of this item for all time to come and it was not a temporary or casual change for the year. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture of the excise duty in relation to import duty rates, the change in material inputs, alteration in design of product and the variety in items of export themselves. It was, therefore, according to the ld. counsel, difficult if not almost impossible to ascertain in advance the rates of duty or the amount of assistance the assessee was entitled to. The outstanding cash assistance and duty draw back were not settled promptly partly on account of the difficulty in qualifying them and partly for other reasons and often years lapsed before the assessee could receive the amounts. On the contrary the accounts had to be finalised within a short period after the end of the year and the assessee was in fact taking a risk in taking these receipts into account while computing the profit at the time of Annual General Meeting and fixing dividends on the basis. It is also pointed out that the entire amount receivable being brought into account as and when received, there was no loss to revenue. Decisions in Indo-Commercial Bank Ltd. vs. CIT (1962) 44 ITR 22 (Mad) and 74 ITR 480 (SC) are cited in support of the claim. 35. On a consideration of the facts, we find no reason to interfere with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose at least of paying tax. It would be more difficult for the assessee to pay tax, subject himself to all the consequences such as diminution in the cash balance, etc., following from it and then if he does not get the relief, to claim the refund after a long time. On the contrary, it would be more equitable for him to pay the tax after the assistance or due draw back has been quantified and he becomes sure of receiving it. It has been claimed that such quantification and payment takes substantial time. By not taking the "accrued" duty draw back and cash assistance for the year, for the point of view of method of accounting, it cannot be stated that any taxable amount will go untaxed. After all even the Government has yet to decide whether to pay this amount to the assessee and how much. We cannot, therefore, hold that the change made by the assessee is not bona fide in the first place. We cannot also hold that he has not acted as a prudent businessman or taxpayer. The extreme inequity if we accept the stand of the Department would be clear if we think of a case God forbid where a businessman having made an export and becoming entitled to a duty draw back or cash assistan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that listing in the Stock Exchange is a matter closely inter wined with the company and its business, it has got a high relevance also with the IT Act. Insofar as the status of a company is one in which the public are substantially interested or not depends to some extent on its listing in the Stock Exchange. The business of the company also carries better prestige and a better status when listed in the Stock Exchange. It will not be even incorrect to say that such listing adds several advantages to the business carried on by the assessee, particularly, in the matter of confidence of the customers, loyalty of the employees, a large advertisement value etc. 42. (13) Export market development allowance under s. 35B: The assessee's claim for relief under s. 35B relating to three items viz., hotel expenses for foreign guests Rs. 5,626, entertainment expenses of foreign guests Rs. 4,076 and packing expenses Rs. 2,82,456 was disallowed by the ITO but allowed by the Commissioner on appeal. The Department has challenged this allowance. 43. The first two items, we find, are allowable on the basis on the decision of the Tribunal in J. Hemchand Co.'s case. The Tribunal in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er issued under s. 144B, there was no direction for charging interest under s. 216 at all. This item was not mentioned even in the proceeding under s. 144B before the IAC or in his direction to the ITO. The ITO levied the interest only at the time of finalising the assessment order. This technical objection raised by the assessee was found by the Commissioner as acceptable. The Commissioner also found on merits estimate made was reasonable and based on available date. Elabrate discussion on this point obtains at paragraph 65 of his order. 50. The ld. Counsel for the Department has pointed out that the technical objection made out cannot be accepted insofar as the levy of interest, penalty, etc., in an assessment order comes in subsequent to he computation of the income and consequences which flow from it. It is, therefore, not necessary in fact, according to the ld. Counsel, it is almost impossible either for the ITO or for the IAC to envisage levy of interest the stage of 144B proceedings. The powers of the ITO to levy the interest and the tax and all other consequential imposts are not taken away by the provisions and procedure of 144B. 51. Having heard the ld. Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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