COMMISSIONER OF INCOME TAX Vs. RAMAKRISHNAN P R

JUDGEMENT

(1.) THE Commissioner of Income-tax has come under reference under Section 256(1) of the I.T. Act, 1961, on the following two questions :

(2.) THE assessee was the additional managing director of M/s. Jayalakshmi Mills Ltd. and M/s. Ramakrishna Industries Ltd. THE remuneration received by him as such additional managing director is being assessed in his hands and was similarly assessed for the assessment years 1967-68 to 1972-73. He was also a partner in the firm of managing agents which managed M/s. Madras Aluminum Company Ltd. His share income from the managing agency was included in the assessment of the HUF consisting of himself, his wife and children. THE assessee had the use, for personal purposes, of motor car and telephone belonging to the company. In the assessments of M/s. Jayalakshmi Mills Ltd., a portion of the expenses claimed by it on the maintenance of the motor cars was disallowed on the ground that one of its cars was being used for the personal purposes of one of the directors. Similarly, in the case of M/s. Ramakrishna Industries Ltd., a portion of the motor car expenses and a portion of the telephone expenses were disallowed. THE ITO had originally assessed the assessee. Subsequently, when it came to his knowledge that there was disallowance in the hands of the firm or companies which had spared the use of the motor car or the telephone, the ITO was of the opinion that the original assessment required to be reopened so as to assess the amounts disallowed in the hands of the company as the income or perquisite of the assessee. THE various amounts that were added for the relevant years are set out in the form of a table by the Tribunal. It is unnecessary to burden our judgment with the repetition of those figures. THE assessee appealed to the AAC. THE AAC found that neither the assessee nor his wife owned a motor car. He was, therefore, of the opinion that the question as to how much was chargeable as perquisite in the hands of the assessee would depend upon the extent of the benefit derived by the assessee. In other words, how much it would have cost the assessee to keep a car or a telephone on his own for his exclusive use or for the use of his family would alone be the criterion. THE AAC, therefore, considered that it would not not be proper to take into account the amount disallowed in the hands of the company as the perquisite. He determined the perquisite for the use of the motor car at Rs. 500 per month and for the telephone at Rs. 75 per month. This, according to him, would be the expenditure that the assessee would have incurred for the purpose of satisfying the needs of himself and his family with reference to transport and telephone. THE additions were accordingly restricted to the amounts so estimated for the several years. THE result was that a part of the amount added as income had to undergo modification correspondingly. THE department preferred appeals, to the Tribunal and its contention was that once it was found as a fact in the assessments of the companies that certain assets belonging to the company were used for the personal purposes of the director and that the benefit or amenity granted to the director in this respect was liable to be disallowed under Section 40(c), it followed as an automatic consequence that the amount so disallowed in the hands of the company was liable to be treated as perquisite in the hands of the concerned director. THE contention was to the effect that whetever was disallowed in the hands of the company should be correspondingly taken as the perquisite enjoyed by the assessee--neither more nor less. THE Tribunal held that the benefit enjoyed by the assessee could not exceed the total amount required to be spent by him for his personal purposes for conveyance and for telephone. THE order of the AAC was, therefore, upheld. It is this order of the Tribunal that has given rise to the present reference on the questions already set out. THEre is a decision of this court for the earlier year in the case of this very assessee. But the problem that required consideration turned on different lines.

(3.) WE are, however, concerned with the case of the director himself. In such a case, what is necessary to be looked into is the amount that he would have incurred as expenditure for himself and for his family. The purposes behind the two provisions are so wholly different that it is not possible to dovetail Section 40(c) into the consideration of the assessment of the director or the person having a substantial interest in the company. WE may make our idea clear by taking an example. Supposing the company had incurred an expenditure of a sum of Rs. 1,000 per month on the provision of a motor car for a director, part of that expenditure may have been incurred for the purpose of utilising the conveyance for the actual business needs of the company. In such a case, the ITO is to find out as to what would be the expenditure that the company would have incurred for its own purposes and what would be the expenditure that would have been incurred excessively or unreasonably beyond its legitimate needs. The part of the expenditure in excess of the legitimate needs would come in for consideration under Section 40(c). But when it comes to the assessment of the director himself, what has to be found out is what would be the expenditure that he would have incurred if he had himself maintained a motor car. If it is estimated that the maintenance of a motor car would cost him less than what the company has spent, then to the extent to which he would have incurred his own expenditure, he would be liable to be taxed. In other words, the test for applying Section 40(c) is not what is reasonable expenditure that he was likely to incur, but what is the unreasonable expenditure that has been incurred by the company. WE have already indicated that Section 2(24)(iv) falls into two parts. WE are, in the present case, considering only the second part of that provision. With reference to the first part, it may not be relevant to consider as to what he would have incurred as his own expenditure, but for the fact that the company incurred the expenditure on his behalf. In the context of the difference in approach pointed out above in applying the two provisions the revenue does not appear to be right in seeking to link the assessment of the director with the disallowance in the hands of the company. As the standards are different, it may even be conceivable that a director may be assessed on a larger figure than what has been disallowed in the hands of the company as the officer assessing the company may have been more liberal in applying Section 40(c) to the company, or he may not have dis-allowed at all anything under Section 40(c). His failure to apply Section 40(c) cannot rule out the assessment on the director, based on Section 2(24)(iv). It is not always that the ITO assessing the company is the same person who assesses the director. One may fail to refer to the other. Thus, though we would not exclude the assessment on the company applying Section 40(c) as irrelevant, we would not accept the stand of the revenue in this case to the effect that the director's assessment must be based on the disallowance in the hands of the company. The result is that the first question referred is answered in the affirmative and in favour of the assessee.