COMMISSIONER OF INCOME TAX vs. UK BOSE

ITA Nos.258, 546 & 942 of 2010 Page 1 of 18

* IN THE HIGH COURT OF DELHI AT NEW DELHI Date of decision: 30th November, 2012

+ ITA 258/2010

COMMISSIONER OF INCOME TAX ..... Appellant Through: Mr. Kamal Sawhney, Sr. Standing Counsel.

versus

UK BOSE

..... Respondent Through: Mr. Percy J. Pardiwalla, Sr. Advocate with Mr. Satyen Sethi and Mr. Arta Trana Panda, Advocates. + ITA 546/2010 + ITA 942/2010

COMMISSIONER OF INCOME TAX CENTRAL I NEW DELHI

..... Appellant Through: Mr. Kamal Sawhney, Sr. Standing Counsel.

versus

J B ROY

..... Respondent Through: Mr. Percy J. Pardiwalla, Sr. Advocate with Mr. Satyen Sethi and Mr. Arta Trana Panda, Advocates.

CORAM: MR. JUSTICE S. RAVINDRA BHAT

MR. JUSTICE R.V. EASWAR

R.V. EASWAR,J: (OPEN COURT)

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ITA Nos.258, 546 & 942 of 2010 Page 2 of 18

The common question of law which arises in all the three appeals by the revenue relates to the assessment of the perquisites in the hands of the respective assessees. In ITA No.942/2010 the substantial question of law is as under:-

“(i) Whether the Income Tax Appellate Tribunal was correct in law in deleting the addition of `7,37,025/- made by the AO on account of perquisites u/s 28(v) of the Act?

“(i) Whether the Income Tax Appellate Tribunal was correct in law in deleting the addition of `6,29,366/- made by the AO on account of perquisites u/s 28(v) of the Act?

“(i) Whether the ITAT was correct in law in deleting the addition made by the Assessing Officer on account of perquisite value in the hands of assessee?

ITA Nos.258, 546 & 942 of 2010 Page 3 of 18

Section 17 of the Act. He accordingly brought the aggregate amount of `2,94,843/- to tax as under:-

Credit Card expenses 6

86,363 Club Membership

20,000 Domestic Servant

24,000 Security guards

2,880 Chauffeur Driven car 10

90,000 Telephone/ cell expenses 11

50,000 Electricity Expenses 12

12,000 Conveyance

9,600

“In the present case we find that the additions in respect of perquisite value were towards electricity expenses, rent free 2012:DHC:7142-DB

ITA Nos.258, 546 & 942 of 2010 Page 4 of 18

accommodation, value of domestic servant, security guard, telephone at residence, chauffeur driven car, other amenities, club membership and in respect of foreign travel undertaken by the assessee. However, we find that all these additions were made without finding that the company has incurred such expenses by way of providing perquisite to the assessee and not incurred by the company in the course of carrying on business. The additions were made on estimate basis. Since the facts are identical in the case of the assessee for Assessment Year 1998-99, we do not find any infirmity in the order of the learned CIT (A).”

ITA Nos.258, 546 & 942 of 2010 Page 5 of 18

`2,11,500/- for domestic servants, `5,000/- for gas and water charges and `1,24,069/- for telephone expenses. The value of perquisites on account of security guards and gardener was assessed under Section 2(24)(iv) and the perquisites aggregating to `5,40,569/- was assessed under Section 28(v) since these were provided by M/s Sahara India Finance Corporation which was the assessee‟s employer.

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“(ii) Whether the Income Tax Appellate Tribunal was correct in law in allowing deduction of `3,84,000/- to the assessee under Section 10(13A) of the Act for the assessment year 2001-02?”

“8. The assessee has disclosed income from salary received from M/s. Sahara India Mass Communication amounting to `35,16,000/-. The assessee has claimed deduction u/s 10(13A) at `3,84,000/- on the basis of rent paid by him which has been debited from his salary directly.

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8.1 It is noted that the promoters (Sri Subrato Roy, the assessee and Sri O.P. Srivasata) have devised a system by which they are drawing salary from some concern, perquisite from another, etc. The whole system works in a fashion that their personal/ family needs are being taken care of by the various concerns without their showing the value as income (partly or wholly) and paying tax on it. It is evident that this privileged treatment is received by them by virtue of their overall position in the group and particular position in the respective firms/ companies in which they are partners/ directors. Here it is also to point out that last year his employer has given him a gross salary of `16,89,000/- but during the year under consideration the salary of the assessee has increased more than double without any special reason, or gain to company. This also proves that the assessee is enjoying the benefit of his position in the group and drawing the salary what he want. In view of the aforesaid, the income of `35,16,000/- disclosed by the assessee from salary is being treated as income within the meaning of section 2(24)(iv) and assessed under the head „income from other sources‟. The claim of exemption u/s 10(13A) is, accordingly, not being allowed.”

ITA Nos.258, 546 & 942 of 2010 Page 8 of 18

relationship between the M/s Sahara India Mass Communication and the assessee was not that of a master and servant. He has referred to some extraneous material to hold that the salary receipt should be assessed as income from other sources. Unless there is material to show that there was no employer-employee relationship, the proper head of income to be applied is that of “salary”. Since this is not the case of the assessing officer, we are of the view that the Tribunal was right in holding that the assessee was entitled to the exemption under Section 10(13A). In this view of the matter, we answer the second substantial question of law in these two appeals in the affirmative, in favour of the assessee and against the revenue.

(ii) Whether the ITAT was correct in law in deleting the addition of `10,12,529/- made by the assessing officer on account of interest paid by the assessee on loan taken for purchase of an exempted asset?”

We may notice the facts giving rise to the question. The assessee received interest of `17,87,426/- from Sahara India Commercial Corporation Ltd. (SICCL) against which it claimed deduction of `10,12,524/-, being interest paid to the same entity i.e. SICCL and declared the net interest of `7,74,897/- as his income. The income was shown under the head “income from other sources”. The assessing officer called upon the assessee to explain the claim for deduction of the interest. In response thereto the assessee wrote a letter on 11.10.2002 as follows:

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“During the year assessee has received interest from Sahara India Commercial Corporation Limited in respect of land sold to them against which the sales proceeds were received late and on the other hand has also paid interest on the loan obtained earlier for the purchase of the said land. The difference of the same has also been offered for the assessment in the revised return. The assessee was under wrong impression that since the sale of land was not taxable receipt in the hand of the assessee, it was presumed that the interest element also was not taxable and obtaining proper legal advise, the same is being offered for assessment…..”

“…..As regards interest payment to SICCL, the same is a fully allowable deduction as it directly relates to the interest received by the assessee on late remittance of the sale proceeds of lands. If the sale proceeds would have been received in time, the assessee would have paid off the loan taken for the purpose of investment, but there was late receipt of sale proceeds on which interest has been received by the assessee which is also offered for assessment and against the same interest paid on loan is claimed as a deduction as the transaction is interrelated with each other. Under the circumstances interest payment is allowable deduction in the hands of the assessee on the same footing on which interest received by the assessee is taxable…..”

It would appear that the interest liability had been capitalised towards the actual cost of the land. Therefore, the assessing officer sought clarification as to how the capitalised interest can be allowed to be adjusted against the interest received. The assessee by letter dated 10.2.2003 clarified the issue as follows:- 2012:DHC:7142-DB

ITA Nos.258, 546 & 942 of 2010 Page 10 of 18

“………No doubt, the interest which was payable on the loan for the purchase of the land has been capitalised the cost of the land because it was a capital asset in the hands of the assessee but your honour will appreciate that the interest which is being set off by the assessee is subsequent to the date of sale of the land.

We have already explained to your honour in our earlier written submission that the interest payment received from SICCL is on account of late remittance of the sale proceeds of land by them to the assessee. In turn, the assessee could square off his loan taken for the purchase of land at a later date and, therefore, the assessee had to pay interest also for the period subsequent form the date of sale till the date of actual payment.

On the date of sale of the land, the treatment of capitalising interest towards the capital asset has ended as the capital asset remains no more in existence.

What was due now was the sale proceeds against the land. If the sale proceeds would have been received immediately, the assessee would have paid off loan taken for the purchase of the investment to be paid by the assessee. But since the sale proceeds has been remitted to the assessee late and interest has been received by the assessee on such late remittance, the interest which has been paid by the assessee on the loan from the date of the sale till the date of repayment of the loan is an interrelated transaction with each other and, therefore, the interest which has been paid is fully allowable deduction in the hands of the assessee……”

ITA Nos.258, 546 & 942 of 2010 Page 11 of 18

(2001) 248 ITR 449 and held that the gross interest of `17,87,426/- was assessable to tax and the same was brought to charge under the head “income from other sources”.

ITA Nos.258, 546 & 942 of 2010 Page 12 of 18

“10. We have considered the rival submissions. The interest paid by the assessee was initially in respect of loan taken for purchase of agricultural land. Thus till the land was held by the assessee, the interest there on is not allowable as the same is in respect of agricultural land which is not a capital asset and no capital gain is chargeable in this respect. However, the interest payable after the land was sold cannot be considered as for acquisition of any capital asset. The same was in the nature of amount borrowed. Since the assessee did not receive the sale price of land sold, the assessee could not repay the debt. On the amount receivable from the person to whom the land was sold, the assessee had charged interest and offered the same for taxation. Thus the amount borrowed can now be attributed to the loan for financing the amount receivable. In such a situation there is a direct nexus between the amount borrowed and the amount advanced. In respect of amount advanced the assessee was to receive the interest. Such interest could not have been received, had the assessee not borrowed. Therefore, the interest payable on the borowal being in respect of amount advanced on which the interest is received. The assessee was rightly held to be eligible for deduction of such interest paid. Accordingly ground No.3 in appeals for Assessment Year 2000-01 and 2001-02 fails.”

ITA Nos.258, 546 & 942 of 2010 Page 13 of 18

giving rise to the interest receipt and the interest payment are different transactions having no commonality or connection.

ITA Nos.258, 546 & 942 of 2010 Page 14 of 18

received on the fixed deposit and the interest paid on the loan were sought to be adjusted against each other and only the net interest was offered for tax. The assessee did not put his case under Section 57(iii), but relied on the principle of mutual dealings and real income theory. The Supreme Court rejected the claim, holding as under:-

“It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is : does it make any difference that he took the loan from the same bank in which he had placed the fixed deposit. There is no difference in the eye of the law. The interest that the assessee received from the bank was income in his hands. It could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit placed by him in the bank.”

The judgment of the Supreme Court in Keshavji Ravji (Supra) is earlier in point of time and was also rendered by a Bench of equal strength i.e. three Judges. In Keshavji Ravji (supra) the provisions of Section 40(b) of the Act came up for consideration. Under this provision, any interest paid by the firm to its partner was to be disallowed and added back to the income of the firm. A question arose as to what should be the quantum of the interest to be disallowed, when the firm is both in receipt of interest from the partner on monies advanced to him and also pays interest to him. According to the Revenue, the receipt of interest from the partner had to be ignored and the amount paid by the firm to the partner had to be disallowed; whereas according to the assessee, both the amounts should be netted and only the excess interest paid, if any, over and above the interest received by the firm, could be 2012:DHC:7142-DB

ITA Nos.258, 546 & 942 of 2010 Page 15 of 18

disallowed. The view of the CBDT in Circular No.33D of 1965 was in accord with the view of the assessee. The Supreme Court was, inter alia, dealing with the argument of the assessee that the interest payable by the firm to the partner and by the partner to the firm is of the same nature and both being integral parts of a method adopted by the partners for adjusting the division of the profit, both payments partake of the same character and in that sense they should be set off against each other and only the net payment should be disallowed. The Supreme Court opined that this general principle, if found to be departed from under the Income Tax law either expressly or by necessary implication, cannot be given effect to; but if there is no statutory departure, the general principle operating under the general law determining the nature of the legal relationship between the parties can be applied in the interpretation of the provisions of the Act. The position was ultimately summed up as follows:-

“How do these principles operate on the present controversy? It appears to us that, if, in substance, the interest paid by the firm to a partner and the interest, in turn, received from the partner are mere expressions of the applications of the funds or profits of the partnership and which, having regard to the community of interest of the partners, are mere variations of the method of adjustment of the profits, there should be no impediment in treating them as part of the same transaction if, otherwise, in general law, they admit of being so treated. The provisions of section 40(b) do not exclude or prohibit such an approach. If, instead of the transactions being reflected in two separate or distinct accounts in the books of the partnership, they were in one account, the quantum of interest paid by the firm to the partner would, to the extent of the drawings of the partner, stand attenuated. The mere fact that the transactions are split into or spread over two or more accounts should not, by itself, make any 2012:DHC:7142-DB

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difference if, otherwise, the substance of the transaction is the same. One of the relevant tests would be to see whether the funds on which interest is paid or received partake of the same character.”

Having said so, the Supreme Court referred to the principle of „set off‟ statutorily recognized in bankruptcy proceedings under Section 46 of the Provincial Insolvency Act, 1920 and Section 529 of the Companies Act, 1956 which provides for “mutual credit” to avoid injustice which would otherwise be caused by compelling a creditor to pay the official assignee the full amount of debt due from him to the insolvent while the creditor would receive only a small dividend on the debt due from the insolvent to him under “pari passu” payment. The concept of set off was held applicable even under the Income Tax Law which identifies the firm as a distinct entity and unit of assessment, having regard to mutuality concept implicit in the dealings between the partners and the firm.

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without the expenditure incurred for earning the same being taken into account. There is also the overriding principle in tax law that it is not the gross receipt that falls to be assessed but it is only the net income, after all the expenditure to earn the income is deducted, that can be assessed to tax. Strictly speaking, in the present case it is not a question of any deduction being allowed from the interest receipt; it is really a question of adjusting or setting off both the interest received and the interest paid, since both have close link or nexus with each other. The Tribunal has recorded a finding that the agricultural land was sold by the assessee in the month of February, 1999 to SICCL. From the date of sale of the land till the remittance of the sale proceeds the assessee was to pay interest of `10,12,529/- on the loan which he had taken for purchase of the land. It is in respect of the same period that he was entitled to interest income of `17,18,426/- from SICCL. Had there been no delay by SICCL in the remittance of the sale proceeds, there would have been no interest liability. The right to receive the interest and the liability to pay interest arose in respect of the same period and out of the same event i.e. non-payment of the sale proceeds in time. The delay in payment of the sale proceeds and the delay in repayment of the borrowing are both intertwined; one gives rise to interest income and the other gives rise to interest liability. We are of the view that this affords sufficient nexus between the two so as to justify the applicability of the principle of netting.

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R.V.EASWAR, J

S. RAVINDRA BHAT, J NOVEMBER 30, 2012 Bisht

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