COMMISSIONER OF INCOME TAX II Vs. G VENKATARAMAN

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Madras Bench, under section 256(1) of the Income-tax Act, 1961, has stated a case and referred the following questions of law, for the opinion of this court, arising out of its orders relating to the assessments for 1960-61 and 1961-62 of the assessee "1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the sum of Rs. 3, 21, 173 could not be treated as dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922 ?.2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of section 2(6C)(iii) of the Indian Income-tax Act, 1922, were not applicable in respect of the sums of Rs. 45, 000 and Rs. 63, 000 for the assessments for 1960-61 and 1961-62, respectively ?" *THE assessee is a Hindu undivided family represented by Shri G. Venkataraman, its karta. Prior to him, the elder brother of Shri G. Venkataraman, the late G. Rudrappan, was a director of Messrs. Vijayakumar Mills Ltd., a company in which the public not substantially interested.

(2.) THE family held substantial shares in the company. It was found that during the previous year relevant to the assessment year 1960-61, the late Rudrappan had drawn moneys to the extent of Rs. 5, 90, 705 from the company. When the company brought this to the notice of the karta, Shri G. Venkataraman, after the death of G. Rudrappan, by a letter dated November 19, 1960, the said Shri G. Venkataraman, by his letter dated November 28, 1960, accepted the liability of the estate to the extent of Rs. 4, 50, 000, after verification of accounts of Sri RudrappanTHE Income-tax Officer assessed this amount of Rs. 4, 50, 000 for the assessment year 1960-61 as dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922, as advance or loan paid to a shareholder and limiting it to the extent of the accumulated profits of the company, namely, Rs. 3, 21, 173. However, on an appeal preferred by the assessee, the Appellate Assistant Commissioner held that the amount in question was embezzled by the late G. Rudrappan without the knowledge of the company and hence it could not be treated as a loan or advance under the above provision. THE appeal preferred by the department before the Appellate Tribunal failed and the department prayed for a reference to this court and the said reference was made in T.C. No. 113 of 1967 on the file of this court, which was subsequently disposed of by this court and reported as Commissioner of Income-tax v.G. Venkataramanto which we shall make reference subsequentlyHowever, in the meanwhile, the Income-tax Officer reopened the assessments for 1960-61 and 1961-62 under section 147(b) of the Income-tax Act, 1961, and brought to tax sums of Rs. 45, 000 and Rs. 63, 000 as income under section 2(6C)(iii) of the Income-tax Act, 1922, in the two respective years.

(3.) THE assessee family has derived a benefit, viz., interest-free loan. What the company has paid the outsiders as interest is what the assessee would have normally paid had it been forced to borrow money in the open market. Hence, such interest paid by the company so as to enable the assessee to draw such a large amount free of interest is evidently taxable under section 2(6C)(iii)." *Thus, the very assumption of the Income-tax Officer for applying section 2(6C)(iii) is that the family obtained an interest-free loan from the company. Once the Appellate Assistant Commissioner and the Tribunal found that what the late Rudrappan obtained was not an interest-free loan from the company, but that he embezzled the funds of the company, the very basis for the invocation of section 2(6C)(iii) of the Indian Income-tax Act, 1922, by the Income-tax Officer disappeared and consequently the amount could not be taxed in the hands of the assessee. As a matter of fact, the reason given by the Appellate Assistant Commissioner for deleting these amounts is as follows:"THE question of saving interest on interest-free loans arises only when there is a loan or payment. In the present case, the sum of Rs. 4, 50, 000 is neither interest nor loan. It is a pure and simple embezzlement which act was illegally done by Sri G. Rudrappan when he was alive. Merely because the present karta, Sri G. Venkataraman, agreed to make good the sum of Rs. 4, 50, 000 embezzled by his brother for the benefit of the family, this cannot change the fact, viz., that the company had neither advanced nor paid the sum of Rs. 4, 50, 000 to the late Sri G. Rudrappan. THE question of computing benefit or perquisite under section 2(6C)(iii) arises only in cases of legal payments or bona fide loans advanced and not in case of embezzlements. I must hold that the H.U.F. did not derive any benefit on account of an interest-free loan or payment from the company within the meaning of section 2(6C)(iii) of the I.T. Act." *THErefore, once it is found that the sum of Rs. 4, 50, 000 was not a loan or advance obtained by the late G. Rudrappan from the company, but it constituted funds of the company embezzled by the said late Rudrappan, there was no question of the said late Rudrappan or the Hindu undivided family of which he was the karta deriving any benefit or advantage in the form of interest-free loan, as assumed by the Income-tax Officer so as to attract the applicability of section 2(6C)(iii) of the Indian Income-tax Act, 1922.Under these circumstances, we are of the opinion that the conclusion of the Tribunal affirming the order of the Appellate Assistant Commissioner is correct. We accordingly answer the second question also in the affirmative and in favour of the assessee.Since the assessee has substantially succeeded, it will be entitled to its costs of the reference. Counsel's fee is fixed at Rs. 250.