Delhi High Court
Ravinder Singh vs The Commissioner Of Income-Tax, New ... on 22 March, 1993
Equivalent citations: [1994]205ITR353(DELHI)
Author: D.P. Wadhwa
Bench: D.P. Wadhwa
JUDGMENT D.P. Wadhwa, J.
(1) Statement of case in the both the reference applications is same and pertain to the assessment year 1976-77. Referable questions in each of these applications are as under:- I.T.R No. 298/92: (assessed Ravinder Singh-HUF) "WHETHER on the facts and in the circumstances of the case the Income- tax Appellate Tribunal was legally correct in upholding the applicability of the provisions of section 28(iv) of the Income-tax Act and sustaining the inclusion of the amount of Rs.24,885.00 to the income of the assessed ?"
I.T.R. No. 299/82: (assessed Joginder Singh-HUF) "WHETHER on the facts and in the circumstances of the case the income- lax Appellate Tribunal was legally correct in upholding the applicability of the provisions of section 28(iv) of the Income-lax Act and sustaining the inclusion of the amount ofRs.51,320.00 to the income of the assessed ?"
(2) It were the assesseds who sought reference of these questions on applications filed under section 256(1) of the Income-tax Act, 1961 (for short 'the Act'). The Income- tax Appellate Tribunal. Delhi Bench, New Delhi, sent in the statement of the case to this Court for its opinion on the aforesaid questions of law.
(3) At the out set we may note that for subsequent assessment years the assesseds succeeded in their appeals before the Appellate Tribunal and it was the Revenue which sought reference on the same questions, but the Appellate Tribunal declined its applications under section 256(1) of the Act as in its opinion no question of law arose for determination by this Court. For those subsequent assessment years the Revenue has filed applications under section 256(2) of the Act in this Court seeking a direction to the Appellate Tribunal to state a case and to refer to this Court the aforesaid question of law. The fate of those I.T.Cs. will depend upon the answers which we give in the present reference applications.
(4) To understand the rival contentions, facts in the case of only one assessed may be set out. The assesses-HUF (ITR 298/82) was a partner in a firm M/s. Dharam Singh Babek Singh ('the firm 'for short). It was a registered firm under the Act. The firm carried on business of financing purchase of automobiles on higher (hire?) purchase system, dealing in tyres and tubes, vehicles, sale and purchase of petrol and other allied products. During the course of assessment proceedings of the firm the Income-tax Officer (I.T.O.) found a debit balance of Rs.2,76,500.00 in the capital account of the assesses-HUF. The I.T.O. at the stage of draft assessment order came to a preliminary conclusion that the assesses-HUF utilised that amount of overdraw disclosed in its capital account of the firm and utilised the same without paying any interest to the firm. The I.T.O. was of the opinion, therefore, that the assessed derived the above said benefit by virtue of his being a partner of the firm and he, therefore, proposed application of provisions of section 28(iv) of the Act and held that this was certainly a benefit or perquisite and could arose only because the assesses-HUF was partner of the firm. The I.T.O. further held that considering the facts and circumstances of the assesses-HUF and taking into consideration the market rate of interest which fluctuated between 9% to 24% he arrived at a figure ofRs.24,885/ as the benefit (9% of Rs.2,76,500.00 )obtained by the assessed and included this amount as part of the income of the assesses-HUF under section 28(iv) of the Act. The assessment was completed and the assessment order was passed on 25 September 1979 under section 143(3)/144B of the Act. The amount of Rs. 24.885.00 was treated as business income of the assesses-HUF being the benefit obtained on the account of utilisation of the amount of the firm without paying interest.
(5) The assessed appealed. The Commissioner of Income-tax (Appeals) by his order dated 10 March 1980 held the provisions of section 28(iv) were attracted as the benefit of "non-interest-bearing funds" had been clearly availed of by the assessed to the extent of the debit balance in his account in the firm and whereas if there was no such debit balance, the benefit of the "non-interest-bearing funds" would have gone to the firm itself by way of substantial further income on investment of the same. The order of the I.T.O. was upheld. Further appeal was filed by the assessed before the Appellate Tribunal. The Tribunal referred to the assessment order of the firm for the assessment years 1974-75 and 1975-76 which were placed on record before it. The Tribunal found that during the previous year relevant to the assessment year in question a total credit ofRs.24,76,000.00 was shown as available to the firm on which no interest needed to have been paid. A sum of Rs.22,40,000.00 was stated to be total of the debit balances in the accounts of the partners including the assesseds and their relatives over which no interest was charged. The Tribunal agreed with the conclusion arrived at by the Commissioner of Income Tax (Appeals) who had held that the assessed had availed the benefit of such "non-interest-bearing funds" to the extent of debit balance in his account in the firm and so the provisions of section 28(iv) were attracted, and if there was no such debit balance the whole of the benefit of "non-interest- bearing funds" would have gone to the firm itself and the firm would have earned income over the same and thus the income of the firm would have been appreciated considerably. Referring to the assessment years of the firm for the two assessment years 1974-75 and 1975-76 the Tribunal said that I.T.O. had found that the firm used to pay interest at the rate of 12% to its creditors and used to charge from its debtors. Reference was made to the interest charged and interest paid by the firm. The I.T.O., it appeared, disallowed interest payment made by the firm under section 36(l)(iii) of the Act as claimed by the firm. The Tribunal, therefore, held that in view of I.T.O's findings in the case of the firm for the two assessment years aforementioned, it could not agree with the contention of the assessed that the overdraw in the account of the assessed in the firm represented interest- free credits. Even though the assessed was not an employee of the firm but was a partner, the Tribunal nevertheless held that in its view the benefit derived by the partner could be taken to be profit and gains of business under section 28(iv) of the Act. The appeal of the assessed was, therefore, dismissed by the Tribunal.
(6) We are told on an appeal filed by the firm the Tribunal deleted the disallowance made by the I.T.O. under section 36( l)(iii) of the Act. We do not appear to have on our record the order of the Tribunal in the case of the firm for the assessment year 1976- 77, but we do have on our record the order of the Tribunal on reference application of the firm for the assessment year 1977-78 where the Tribunal declined to state the case on the question as to whether on the facts and circumstances of the case the Tribunal was correct in law in holding that the interest payment of Rs.1,94,310.00 was not disallowable as for non-business purposes. We have also on our record order of this Court under section 256(2) of the Act refusing to call for any case on this question from the Tribunal. The whole basis for invoking the provisions of section 28(iv) in the case of the assessed would, therefore, appear to fall. In the subsequent years the Tribunal deleted the addition to the income of the assessed as benefit under section 28(iv) of the Act on account of debit balance in the firm on which no interest had been paid. The Tribunal also refused to slate the case on an application filed by the assessed under section 256(1) of the Act, and, as noted above, applications for all the subsequent assessment years under section 256(2) of the Act are pending in this Court.
(7) We may set out the relevant provisions of sections 28(iv) and36(l)(iii)ofthe Act as under :- ".The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession", - xx xx xx (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. xx xx xx "36.(l) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - xx xx xx" (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business and profession; Explanation: Recurring subscription paid periodically by shareholders or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed shall be deemed to be capital borrowed within the meaning of this clause; xx xx xx"
(8) It does appear to us that it was in view of the findings of the I.T.O. in the case of the firm that provisions of section 28(iv) were invoked in the ease of the assessed. The Tribunal in the case of the firm was of the view that there was no justification on the part of the I.T.O. for making any disallowance under section 36(l)(iii) as the non-interest- bearing funds available with the firm exceeded the non-interest-bearing advances which had been given by the firm to its partners. In this view of the matter the very basis on which the Tribunal in the present case decided against the assessed disappears. In all subsequent years the Tribunal found that non-interest-bearing funds available to the firm exceeded the borrowers made by its partners. The Tribunal, thus. held that the I.T.O. was not justified in making any addition to the income of the assessed under the provisions of section 28(iv) of the Act. Since the disallowance out of interest made by the I.T.O. under section 36(l)(iii)had been deleted by the Appellate Tribunal in the case of the firm, it is difficult to sec how in the facts and circumstances of the case the Appellate Tribunal was correct in upholding the applicability of section 28(iv) of the Act in the present case. It does appear to us that the order of the Tribunal in the case of the firm was not before it when it decided the case of the assessed. It is a known proposition that business carried on by a firm is.business carried on by the partners. Profits of the firm arc profits earned by all the partners in carrying on the business, [see Commissioner of Income-tax, Bihar v. Ramniklal Kothari ].
(9) Mr. Rajendra. learned counsel for the Revenue, said that it was immaterial if the Appellate Tribunal in the case of the firm did not agree with the I.T.O. on the applicability of section 36(I)(iii) of the Act and that we are only concerned with the applicability of section 28(iv) irrespective of the assessment in the case of the firm, and that under section 2(24) of the Act income would include the value of any benefit or perquisite taxable under clause (iv) of section 28. Mr. Rajendra also said that if the firm had not advanced lax free amounts to the partners the firm could have borrowed less interest carry ing loans. He referred to a decision of the Madhya Pradesh High Court in V.P. Warrier v. Commissioner of Income-tux, (1990) 181 I.T.R. 303, in this case the assessed was a partner in a partnership firm carrying on business and the assessed was allowed by the firm to the use of its residential premises, car and telephone. The I.T.O. valued these perquisites at Rs:15.000.00 and added the same to the income of the assessed under section 28(iv) of the Act. In appeal, the value of the perquisites were reduced to Rs.3,600.00 . The court held that on facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs.3,600.00 was includible in the income of the assessed under section 28(iv) of the Act. We do not think this judgment is quite relevant for our purposes as we shall presently see.
(10) In the present case the very basis of addition under section 28(iv) falls after the Tribunal in the case of the firm for the same assessment year deleted the disallowance made by the I.T.O. which he had made on the ground that while the firm had borrowed funds on interest, it had advanced monies to its partners without charging any interest. The Tribunal found in the case of the firm that non-interest-bearing funds available to the firm exceeded the borrowers made by the partners.
(11) Then there is another aspect of the matter. Section 28(iv) can be invoked only where the benefit or perquisite is other than the cash. Value of a thing would be the amount of money that it is worth. Valueless is what is worthless. In Installment Supply P. Ltd v. Commissioner of Income-lax, New Delhi, (1984) 149 I.T.R. 457, this Court examined the term "whether convertible into money or not" as appearing in section 40(a)(v) of the Act when the following question of law had been referred to it for decision for the assessment years 1969-70 and 1970-71:- "WHETHER,on the facts and in the circumstances and on a true interpretation of section 40(a)(v) of the Income-tax Act, 1961, reimbursement of the medical expenses to the managing director has been correctly restricted by the Tribunal to Rs. 12,000 for each of the assessment years 1969-70 and 1970-71 ?"
(12) This Court held that use of the words "whether convertible into money or not" goes to show that the term "benefit or amenity or perquisite" cannot relate to cash payments.
(13) In Commissioner of Income-tax, Gujarat-1 v. Alchemic Pvt. Ltd, (1981) 130 I.T.R. 169 (Gujarat), the term "benefit or perquisite" arising from business as appearing in section 28(iv) fell for consideration. The court held that if what was received either by way of benefit or perquisite was money, there was no question of considering the value of such monetary benefit or perquisite under clause (iv) of section 28. It held that it was only if the benefit or perquisite was not in cash or money that section 28(iv) would apply.
(14) We, therefore, answer the questions in favor of the assesses and against the revenue.