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Judgment
Sethuraman, J.—It is convenient to take T. C. No. 865 of 1976 as typical of all the cases now before us as both parties agree that the main
discussion is in this case and that the decision here has been followed in the other cases. The question referred in this case runs as follows :
Whether, on the facts and in the circumstances of the case, it has been rightly held by the Tribunal that the free use of the company''s car by the
director could not be a perquisite or benefit within the meaning of section 2(24) of the Income Tax Act, 1961, and that, therefore, it cannot be
assessed as the income of the assessee ?
The assessee is an HUF. In the assessment year 1970-71 there was an addition of Rs. 5,394 as perquisite received from M/s.S.S. M. Brothers
(P.) Ltd. According to the ITO the karta of the assessee-family was a director of the said company and had obtained the benefits in the shape of
the use of the companys'' assets, viz., motor car, telephone, etc. In the assessment of the company there was a disallowance of the expenditure
relating to the above assets, under s. 40(c) of the Act, on the ground that the expenditure was excessive and unreasoanble having regard to the
legitimate business needs of the company. In the present case, the ITO took into account the possible extent of use of the company''s assets, viz.,
motor car, telephone, etc., and evaluated the benefits obtained by the assessee under s. 2(24)(iv) of the Act, at Rs. 5,394. The break-up of Rs.
5,394 is as follows :
Rs.
Motor car 4,894
Telephone 100
Travelling 100
Messing 300
________
5,394
________
The assessee contested before the AAC the inclusion of the said sum of Rs. 5,394 in its hands as perquisites. The AAC rejected the assessee''s
claim. When the matter came before the Tribunal, an earlier order of the Tribunal in the case of S.S. M. Balakrishnan in I. T. A. No. 1908
(Madras) of 1973-74, dated April 16, 1974, was relied on. In that case it had been held that the free use of car by the director could not be
perquisite within the meaning of s. 2(24)(iv) of the Act and could not be assessed as the income of the assessee. The revenue was unable to
distinguish that case from the facts of the present case, therefore, the Tribunal, following its earlier decision, held that the assessment of the
perquisite could not be sustained. The assessment was, therefore, directed to be revised accordingly. Against this order of the Tribunal, the matter
has come before this court under reference of the question extracted above.
In the order of the Tribunal in I. T. A. No. 1908 (Madras) of 1973-74, dated April, 1974, which has been followed in this case, a similar claim
was considered and the Tribunal, relying on a decision of this court in Commissioner of Income Tax Vs. A.R. Adaikappa Chettiar and Another, ,
held that the said ruling governed the facts of the present case and that the unauthorised use of the car belonging to the company was not a benefit
or perquisite within the meaning of s. 2(24). The addition was, therefore, deleted.
The decision of this court in Commissioner of Income Tax Vs. A.R. Adaikappa Chettiar and Another, was rendered on the following facts : A
firm was the managing agent of a mill. The four partners of the firm were sharesholders as well as directors of the mill. The Company claimed in its
assessment the expenditure incurred in the maintenance of its motor cars. The ITO disallowed a portion of the claim on the ground that the cars
were partly used by the managing agents (with partners) of the company for their private purposes. This information was communicated to the
officer assessing the partners of the managing agency firm. In their case the question was whether there was any perquisite as a result of the user of
the motor cars, belonging to the company, by them. It was held that the words ""benefit or perquisite obtained"" occurring in s. 2(6C)(iii) showed
that the benefit or perquisite must be one which had been agreed to be provided by the company and that the mere unauthorised advantage
derived from the company without its authority or knowledge could not be a benefit or perquisite obtained. In the course of the judgment, the
following passage occurs (p. 97).
The contention of the learned counsel for the revenue is that any benefit or perquisite obtained willy-nilly, whether authorised or unauthorised, will
attract the above section. We are not inclined to accept the above contention. In our view, the benefit or perquisite obtained should be by some
sort arrangement with the company so as to attract section 2(6C)(iii). If the submission that even unauthorised benefit would attract the said section
is accepted, it would mean that even an article or money of the company misappropriated or forcibly taken against the wishes of the company by a
director or other person referred to in that section will come within the scope of that section. The words ''benefit or perquisite obtained'' from a
company would take in, in our opinion, only such benefit or perquisite which the company had agreed to provide and which the person concerned
could claim as of right based on such agreement and that a mere advantage derived from the company without its authority or knowledge will not
amount to benefit or perquisite obtained. We are not in a position to agree with the contention of the revenue that the word ''obtained'' occurring in
the said section need not be agreement-oriented, that the word ''obtained'' merely meant ''taken'' and that if the directors are in a position to take a
benefit with a view to help themselves, even without the authority of the company or against its wishes, they will be governed by the above
provision, and that both authorised and unauthorised benefits taken or received are to be treated alike for the purpose of this section. If the
contention of the revenue is accepted, it will mean that an advantage taken by a director or other person without the authority of the company or
against the wishes of the company will constitute a benefit or perquisite obtained from the company by such director or other person. It there is an
unauthorised taking of an advantage or a benefit by a director from the company without its authority or knowledge, the company can always insist
on the restitution of such advantage or benefit taken by a director and enforce the same legally in a court of law. In such cases there is a definite
legal obligation to restore the advantage or benefit taken by a director without the authority of the company and it is not possible to hold that such
advantage or benefit can be brought to charge.
This decision was rendered by Ramanujam and Ramaswami JJ. A similar question came up for consideration before a Bench consisting of
Ramaswami J. and one of us in Commissioner of Income Tax Vs. C. Kulandaivelu Konar (Decd.) by L. Rs., . In that case the assessee who was
the managing director deposited various moneys and was also withdrawing moneys from an account in his name. For the year ending on 31st
March, 1963, there was an overdrawal to the extent of about Rs. 60,000. The company did not charge any interest on these overdrawings, though
it was paying interest on its borrowings. The ITO disallowed the interest-free advance to the director in the hands of the company. He added also
the relevant amount as a perquisite in the hands of the assessee who was a director. When the matter came on appeal to the Tribunal it set aside
the assessment and at the instance of the Commissioner the matter was brought to this court on reference. It was held that in order to bring a
benefit or advantage within the provisions of s. 17(2)(iii), it must have a legal origin and since any unauthorised advantage taken by an employee
without the authority of the employer would create a legal obligation to restore such advantage, it would not amount to a benefit or advantage
within the meaning of s. 17(2)(iii). In the course of the said judgment, after referring to the passage which has already been extracted above from
Commissioner of Income Tax Vs. A.R. Adaikappa Chettiar and Another, , Ramaswami J., who delivered the judgment and who was a party to
the previous decision, observed thus (p. 634) :
As one who was a party to that judgment, I may be permitted to point out that we were not concerned in that case whether a voluntary payment
by an employer to an employee would amount to a perquisite or not. We were concerned in that case with the unauthorised user of certain vehicles
by a director. Therefore, the use of the word ''only''in the beginning of the portion of the judgment cited above cannot be given too much emphasis.
But there could be no doubt that in order to bring a benefit or advantage within the provision of section 17(2)(iii), it must have a legal origin and
since any unauthorised advantage taken by an employee without the authority of the employer would create a legal obligation to restore such
advantage, it would not amount to a benefit or advantage within the meaning of section 17(2)(iii).
As a result of this clarification of this court of the principle laid down in Commissioner of Income Tax Vs. A.R. Adaikappa Chettiar and
Another, , the position now is that the decision in Commissioner of Income Tax Vs. A.R. Adaikappa Chettiar and Another, would apply only to
those cases where there is an unauthorised benefit enjoyed by a person coming within the scope of s. 2(6C)(iii) of the Indian I. T. Act, 1922, or its
counterpart of the I. T. Act, 1961. Even if the benefit has been conferred unilaterally without the aid of any agreement between the parties, in the
light of the decision is Kulandaivelu Konar''s case [1975] the parties, in the light of the decision is Commissioner of Income Tax Vs. C.
Kulandaivelu Konar (Decd.) by L. Rs., , the employee could be taxed on the perquisite under s. 17(2)(iii) and (iv) of the I. T. Act, 1961.
In Lakshmipat Singhania Vs. Commissioner of Income Tax, , the Allahabad High Court considered the same question in the context of s. 2 (6C)
(iii) of the Indian I. T. Act, 1922, and it was pointed out that it was not necessary that the benefit should have been received by the assessee under
an enforceable right. This decision also supports the view taken in Commissioner of Income Tax Vs. C. Kulandaivelu Konar (Decd.) by L. Rs., .
There was one disquieting feature following the decision in Commissioner of Income Tax Vs. A.R. Adaikappa Chettiar and Another, . The
readiness with which the assessee in Commissioner of Income Tax Vs. C. Kulandaivelu Konar (Decd.) by L. Rs., wanted to take the plea that an
unauthorised benefit is not income would clearly go to show that tax-evaders are likely to exploit the principle of the earlier decision to their
nefarious advantage. The question whether a person by unauthorisedly enjoying the benefits can try to exploit it to his advantage in his assessment
is a matter which would require further consideration on an appropriate occasion. It would be appropriate, in our opinion, at this stage to observe
that a person who takes the benefit from the company in an authorised or appropriate manner is put at a disadvantage of being taxed on the value
of the benefit, as contrasted with a person who enjoys the benefit in an unauthorised or unlawful manner, by enjoying immunity from being taxed,
and this, in our opinion, would cut at the very root of any equitable principle of taxation.
We had occasion to consider a similar question as is now before us in Commissioner of Income Tax Vs. P.R. Ramakrishnan, . We indicated in
that case the distinction between the approach to be made in the case of disallowance in the hands of the company and in the case of assessment in
the hands of the recipient of the benefit. We have pointed out that the two are independent provisions and that they did not dovetail into each other
so that the approach in each kind of case would be wholly different. Merely because there has been a disallowance in the hands of the company, it
was pointed out that it did not follow that the whole of it should be taken as the benefit in the hands of the recipient of the benefit. We have also
given illustrations to explain the view-point on this aspect. It is unnecessary to dilate on this point further. In view of the difference in approach
between the disallowance in the hands of the company and assessment in the hands of the recepient of the benefit, it would be necessary for the
authorities in every case to look at the question from the proper standpoint.
T. C. Nos. 865, 116, 124, 161, 552 to 554 of 1976, 68 to 70 of 1977 are all cases where the question framed is whether it has been rightly
held by the Tribunal that the free use of the company''s car by the director could not be a perquisite or benefit within the meaning of s. 2(24) of the
I. T. Act, 1961, and that, therefore, it cannot be assessed as the income of the assessee. On this point, in the light of the decision in Commissioner
of Income Tax Vs. P.R. Ramakrishnan, , it would follow that there could be an assessment on the assessee in principle with reference to the benefit
obtained by him. These assessments have been made on the HUF. The question that was sought to be raised before us was whether the family
could be taxed with reference to these benefits. That is a matter which will have to be considered in the light of the decision in Commissioner of
Income Tax Vs. P.R. Ramakrishnan, and the observations therein. With reference to the other cases, the point raised is : ""Whether it has been
rightly held by the Tribunal that the additions made relating to car expenses, travelling expenses and telephone charges in the reassessments for
each of the assessment years 1967-68, 1968-69 and 1969-70 were not perquisites under the provisions of s. 2(24)(iv) of the I. T. Act, 1961,
and, therefore, the amounts could not be assessed as the income of the Assessee ? "" In these cases, the Tribunal will have to go into the question
whether there has been any benefit obtained by the assessee. If a finding is reached with reference to them that they were perquisites, the matter
will have to be considered in the light of all the facts and in accordance with our decision in Commissioner of Income Tax Vs. P.R. Ramakrishnan,
and the observations made herein. The result is that the questions in T. C. Nos. 865, 116, 124, 161 of 1976 and 68 to 70 of 1977 are answered
in the negative and in favour of the revenue. The Tribunal will go into the question of quantum. As regards the other references the matter will be
considered by the Tribunal in the light of all the facts and, therefore, the references are returned unanswered. There will be no order as to costs in
all these tax cases.