Ismail, J.@mdashThe Income Tax Appellate Tribunal, Madras Bench, u/s 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 u/s 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 ?
2. The assessee is a Hindu undivided family represented by Shri G. Ven-kataraman, its karta. Prior to him, the elder brother of Shri G. Venka-
tararnart, the late G. Rudrappan, was a director of Messrs. Vijayakumar Mills Ltd., a company in which the public are not substantially interested.
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 the accounts of Sri Rudrappan.
3. The Income Tax Officer assessed this amount of Rs. 4,50,000 for the assessment year 1960-61 as dividend u/s 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. Rudrappau 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 Vs. G. Venkataraman, , to which we shall make reference subsequently.
4. However, in the meanwhile, the Income Tax Officer reopened the assessments for 1960-61 and 1961-62 u/s 147(b) of the Income Tax Act,
1961, arid brought to tax sums of Rs. 45,000 and Rs. 63,000 as income u/s 2(6C)(iii) of the Income Tax Act, 1922, in the two respective years.
The resources of the company consisted of certain borrowed funds on interest. Out of the interest paid by the company on its borrowings, sums of
Rs. 45,000 and Rs. 63,000 were disallowed in the hands of the company on the ground that the Interest paid was on the loan borrowed to the
extent of Rs. 4,50,000 which was not used for the purpose of the company''s business, but was withdrawn by the director. At the same time the
Income Tax Officer assessed, the said two amounts in the respective years in the hands of the assessee. The reasoning for such assessment was
that the amounts disallowed in the hands of the company was income u/s 2(6C)(iii) in the hands of the assessee since the family had derived a
benefit, viz., interest-free loans, and that the assessee would have normally paid interest had it been forced to borrow money outside and hence a
part of the interest paid by the company on loans which was diverted to the family free of interest was taxable under that Section 2(6C)(iii). By the
same reassessment proceedings the Income Tax Officer also added the sum of Rs. 3,21,173 u/s 2(6A)(e) of the Income Tax Act, 1922, as the
department''s appeal was pending before the Tribunal at that stage. Against these reassessments, the assessee preferred an appeal to the Appellate
Assistant Commissioner. The Appellate Assistant Commissioner deleted the addition of Rs. 3,21,173 as he had done previously and also set aside
the assessments on the sums of Rs. 45,000 and Rs. 63,000, respectively, for the two years made by the Income Tax Officer u/s 2(6C)(iii) of the
Income Tax Act, 1922. The reasoning of the Appellate Assistant Commissioner was that there was no loan or payment by the company to the
assessee, but it was only an embezzlement by the late director and therefore there was no question of paying any interest and that the question of
computing benefit or perquisite u/s 2(6C)(iii) would arise only in the case of legal payment or bona fide loan advanced. The department preferred
an appeal to the Income Tax Appellate Tribunal and the Income Tax Appellate Tribunal dismissed the appeal. It is, thereafter, at the instance of the
department, the two questions mentioned above have been referred to this court for its opinion.
5. As we have pointed out already, the first question deals with the sum of Rs. 3,21,173. The same was the subject-matter of the original
assessment as well as reassessment. It is the original assessment that was brought to this court in T.C. No. 113 of 1967 and which was disposed
of by this court in Commissioner of Income Tax Vs. G. Venkataraman, , referred to already. This court held in that case that the sum of Rs.
3,21,173 was the amount criminally misappropriated by the director from the company and that therefore it did not represent any payment by way
of loan or advance by the company to the assessee. Consequently, the said question which was involved in that reference was answered in favour
of the assessee and against the department. Since it was the same amount which was included in the reassessment proceedings, the view of this
court in that decision will clearly govern the first question referred to us and, therefore, following that decision, we answer the first question in the
affirmative and in favour of the assessee.
6. That leaves out the second question mentioned already. For this purpose it is necessary to extract Section 2(6C)(iii) of the Indian Income Tax
Act, 1922, on which alone the Income Tax Officer relied and the same is :
2. (6C)(iii) ''income'' includes-
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 (that is to say, who is concerned in the management of the business of the company, being the
beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not
less than twenty per cent. of the voting power), and any sum paid by any such company in respect of any obligation which but for such payment
would have been payable by the director or other person aforesaid."" There are two aspects of the matter to be considered with reference to this
provision, viz., (1) in the first plaqe, the Section uses the expression, ""the value of any benefit or perquisite, whether convertible into money or not"".
From this language it is clear that the ""benefit or perquisite"" contemplated cannot be money itself. If it is money, the question of its value being taken
into account or the benefit or perquisite being converted into money will not arise. Secondly, the very same section makes a distinction between
benefit or perquisite '' on the one hand and ''any sum paid'' on the other. That itself will show that the benefit or perquisite contemplated by this
section should be other than money ; and (2) even assuming that money can be considered to be benefit or perquisite as contemplated by this
section, it should have been obtained from the company. The word ''obtained'' occurring in this section has been the subject matter of a decision by
this court in Commissioner of Income Tax Vs. A.R. Adaikappa Chettiar and Another, . Dealing with this question the Bench observed:
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 of 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 a 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. If 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.
Before a person could be said to have obtained a benefit or perquisite from a company, there should be some legal or equitable claim, even though
it be contingent or contested in nature. A mere receipt of money or property which one is obliged to return or repay to the rightful owner as in the
case of a loan or credit, cannot definitely be taken as a benefit or perquisite obtained from the company. The benefit or advantage which might
have been taken by a director or other person from a company without any claim of right has to be repaid or returned to the company if the
company discovers the unauthorised taking and seeks to enforce its restitution.
7. The above view of this court as to the meaning of the word ""obtained"" occurring in Section 2(6C)(iii) is binding on us and we do not see any
justification for taking a different view. If so, as far as the present case is concerned, since the finding of the Appellate Assistant Commissioner and
the Tribunal is that the amount in question was embezzled by the late Rudrappan, it cannot be said that the said amount was obtained by the said
late Rudrappan from the company. It will, therefore, follow that on the face of it, Section 2(6C)(iii) will have no application whatever to the facts of
the present case.
8. In addition to the finding that the amount in question was embezzled by the late Rudrappan from the company, the Bench of this court which had
occasion to consider the question earlier in Commissioner of Income Tax Vs. G. Venkataraman, , referred to already, referred to the finding of the
Tribunal that the amount was criminally misappropriated by the late Rudrappan and stated that the Bench was in agreement with that finding.
9. Under these circumstances, looked at from any point of view, so long as the finding that the amount was embezzled by the late Rudrappan
stands, as it has to stand, necessarily the question of late Rudrappan or the Hindu undivided family obtaining that amount as a benefit or perquisite
from the company so as to attract the applicability of Section 2(6C)(iii) of the Indian Income Tax Act, 1922, will not arise.
10. Independent of these considerations, there is also a very short answer to the contention of the department, having regard to the facts of the
present case. The reasoning given by the Income Tax Officer for assessing these two amounts, in his own words, are as follows :
The said sum is proposed to be added u/s 2(6C)(iii) of the Indian Income Tax Act, 1922. 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 u/s 2(6C)(iii).
11. 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 u/s 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.
12. Therefore, onte 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.
13. 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.
14. Since the assessee has substantially succeeded, it will be entitled to its costs of the reference. Counsel''s fee is fixed at Rs. 250.
