- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax v. S.P Jain
Factual and Procedural Background
These two references, made under section 66(1) of the Indian Income-tax Act at the instance of the Commissioner of Income-tax, Bihar and Orissa, relate to the assessment years 1951-52 and 1952-53. The assessee's accounting years correspond to 1 November 1949–31 October 1950 and 1 November 1950–31 October 1951.
The short question referred was whether benefits not convertible into money, received by the assessee as a shareholder of Ashok Marketing Ltd., were assessable as income chargeable under section 12 of the Income-tax Act, 1922. The assessee, who held the majority of shares, received benefits such as residence in a rent-free house and payment of charities at his behest. The Income-tax Officer treated these benefits as "constructive income" and added them to the assessee's assessed income.
On appeal the Appellate Assistant Commissioner held that the value of benefits not convertible into money could not be brought to tax as income in the hands of the assessee. The department appealed, and the Tribunal affirmed that view. Subsequently, the court considered the position in light of a later statutory amendment (discussed below) but noted the amendment came into force only from assessment year 1955-56, while the years in issue are prior to that amendment.
Legal Issues Presented
- Whether benefits not convertible into money received by the assessee as a shareholder of Ashok Marketing Ltd. are assessable as "income" chargeable under section 12 of the Income-tax Act, 1922 for the assessment years 1951-52 and 1952-53.
- Whether, under the definition of "income" as it stood prior to the 1955 amendment (section 2(6C) recast by section 3 of the Finance Act, 1955), such non-monetary benefits could be treated as "constructive income" and assessed to tax.
Arguments of the Parties
Commissioner / Department
- The Income-tax Officer treated the benefits as "constructive income" and added their value to the assessee's assessed income.
- Learned counsel for the Commissioner referred to the case Lady Miller v. Commissioners of Inland Revenue 1930 15 Tax Cas. 25, arguing by analogy that benefits conferred (such as free occupation and taxes paid) could be assessed to tax.
Assessee
- The Appellate Assistant Commissioner and the Tribunal held that the value of benefits not convertible into money cannot be brought to tax as income in the hands of the assessee; such non-monetary benefits lie outside the definition of "income" as it stood for the years in question.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Lady Miller v. Commissioners of Inland Revenue 1930 15 Tax Cas. 25. | The case held that a widow occupying a house rent-free under a trust, where trustees paid the tax, could be assessed in respect of the rent she should have paid and the tax paid by trustees; the benefit was enforceable, regular, certain, related to a definite source and convertible into money. | The court distinguished Lady Miller: unlike that case, the benefits in the instant case were not enforceable against the company, could be withdrawn at the company's option, and were not convertible into money. Thus Lady Miller did not support assessing those benefits as income for the years in question. |
Court's Reasoning and Analysis
The court noted that section 2(6C) of the Act was recast in 1955 (by section 3 of the Finance Act, 1955) to include within the meaning of "income" the value of any benefit or perquisite, whether convertible into money or not, obtained from a company by certain persons (directors or persons with substantial interest and concerned in management), effective from assessment year 1955-56.
Since the assessment years before the court (1951-52 and 1952-53) predated that amendment, the court considered the definition of "income" as it stood prior to 1955. The court concluded that, under the pre-amendment definition, benefits not convertible into money could not be included within "income" and therefore could not be assessed as such. The court considered the decision in Lady Miller relied upon by the Commissioner, but distinguished it on factual and legal grounds: in Lady Miller the benefit was enforceable, regular, certain, tied to a definite source and convertible into money, whereas in the present case the company could withdraw the benefits and they were not enforceable by the assessee.
The court emphasized that until Parliament expressly brought such benefits within the statutory definition of "income" (which it did by the 1955 amendment and fixed an effective date), such benefits remained outside the taxable scope. On this basis the court found the Tribunal's view to be correct.
Holding and Implications
Holding: The reference is disposed of accordingly; the question is answered in the negative. The court held that the value of benefits received by the assessee from Ashok Marketing Ltd., which were not convertible into money, did not constitute "income" chargeable under section 12 of the Income-tax Act, 1922 for the assessment years in question.
Implications: The direct effect is that the additions made by the Income-tax Officer treating the non-monetary benefits as constructive income were not sustainable for the assessment years 1951-52 and 1952-53. The court noted the later statutory amendment (effective from assessment year 1955-56) which would permit taxing such benefits thereafter, but the decision does not rely on or create a new extension of the law beyond the pre-amendment definition; no broader precedent beyond the resolution of these references is established by this opinion.
Administrative outcome: The reference was disposed of and the hearing fee for the two cases was fixed at a consolidated sum of Rs. 250 payable to the opposite party by the Commissioner of Income-tax.
1. These two references, under section 66(1) of the Indian Income-tax Act, at the instance of the Commissioner of Income-tax, Bihar and Orissa, relate to the assessment years 1951-52 and 1952-53. The corresponding accounting years of the assessee are the years beginning on November 1, 1949, and ending with October 31, 1950, and beginning on November 1, 1950, and ending with October 31, 1951, respectively. The short question referred is, whether the benefits not convertible into money received by the assessee as a shareholder of a company, Ashok Marketing Ltd., will be assessable during the two years as income chargeable under section 12 of the Income-tax Act, 1922. The assessee holds the majority of shares in that company and, as it appears from the order of the Income-tax Officer, he received benefits from the company, such as residence in a rent-free house, payment of charities at his behest. The Income-tax Officer treated these kinds of benefits as “constructive income” and added them to the assessed income of the assessee. On appeal by the assessee, the Appellate Assistant Commissioner held that the value of such benefits which are not convertible into money cannot be brought to tax as income in the hands of the assessee. The same view was taken in appeal by the department before the Tribunal.
2. There was an amendment, and section 2(6C) of the Act was recast in 1955 (see section 3 of the Finance Act, 1955). The amended provisions came into force from the assessment year 1955-56. That amendment included, within the meaning of income, the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by any other person who has a substantial interest in the company and who is concerned in the management of the business of that company being the beneficial owner of not less than 20% of the shares of the company.
3. According to this amendment, there cannot be any doubt that the nature of income which was added by the Income-tax Officer will be assessable income, but the years of assessment with which we are concerned were prior to the coming into effect of the amendment. Therefore, we have to consider whether, as the definition stood before the amendment in 1955, those benefits not convertible into money could be taken as “constructive income” as stated by the Income-tax Officer, and be assessed to tax. The answer to this question is bound to be in the negative, because the definition of “income”, as given in the Act, at the relevant time could not include such benefits. In our view, the opinion expressed by the Tribunal was correct.
4. Learned counsel appearing for the Commissioner referred us to a case in Lady Miller v. Commissioners of Inland Revenue 1930 15 Tax Cas. 25.. There, in the trust made by the testator, a provision was incorporated that his widow would occupy the house of the testator free of rent and tax. The trustees were paying the tax of the house while it was in the occupation of the widow. A question arose if the widow could be assessed to tax in respect of the rent that she should have paid for that house and also for the tax which was paid by the trustees. It was held that she was so liable. The case is distinguishable from the present one. There, a benefit was conferred upon the widow which could have been enforced in law. The benefit had a regularity, certainty and was related to a definite source. That (benefit) was also convertible into money. But, in the instant case, the assessee could not have enforced the alleged benefits against the company. Rather, the company could withdraw them at its option, at any time, if it liked. They were not convertible into money; the question framed is on that assumption. Until the value of the benefits and perquisites was brought within the definition of income, that remained outside the taxable area. While making the amendment, Parliament appointed the time from which that enlarged definition, for purposes of taxation, shall take effect. This lends further clarification to the meaning of the word “income” in the Act, before the amendment.
5. For all these reasons, we are of the view that the value of the benefits received by the assessee from the Ashok Marketing Ltd., which were not convertible into money, did not constitute “income” chargeable under section 12 of the Income-tax Act, 1922.
6. The reference is disposed of accordingly. The hearing fee for the two cases is fixed at a consolidated sum of Rs. 250 payable to the opposite party by the Commissioner of Income-tax.
7. Question answered in the negative.
Alert