1972 (7) TMI 16 - HC - Income Tax

High Court rules unauthorized car use not a benefit. Partners' assessments can't reopen without managing agency firm's. Assessees awarded costs.

Commissioner of Income-Tax, Madras Versus AR Adaikappa Chettiar And Another.

The High Court upheld the Tribunal's decision, ruling against the revenue. It concluded that the unauthorized use of the company's cars by the assessees ... Assessee, a managing agent used company cars - Income-tax Officer, Coimbatore, who made the assessment on the company for the said years disallowed a portion of the company's claim on the ground that the cars were partly used by the managing agents of the company for their private purposes. – as it was found that the unauthorised use was by the assessees as managing agents and not as directors, the provisions of section 2(6C)(iii) cannot be applied. Issues Involved:1. Legality of reopening the original assessments of the assessees.2. Inclusion of disallowed car expenses as income of the assessees.3. Whether the amounts in question were benefits or perquisites obtained by the assessees from the company.4. Applicability of section 2(6C)(iii) of the Income-tax Act, 1922, and section 2(24)(iv) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Legality of Reopening the Original Assessments:The assessees contended that the reopening of their original assessments was not justified. The Income-tax Officer (ITO) had reopened the assessments under section 34(1)(b) of the Income-tax Act, 1922, and section 147 of the Income-tax Act, 1961, based on the disallowance of car expenses in the company's assessment. The Appellate Assistant Commissioner (AAC) upheld the reopening, and the Tribunal did not challenge the validity of the reassessment proceedings. However, the Tribunal questioned the legality of including the proportionate car expenses in the assessees' income.2. Inclusion of Disallowed Car Expenses as Income of the Assessees:The ITO disallowed a portion of the company's car expenses, claiming they were used privately by the managing agents. This disallowed amount was proportionately added to the income of the assessees, who were partners in the managing agency firm. The Tribunal found no evidence to assume equal use of the cars by all partners and held that the apportionment was not justified.3. Whether the Amounts in Question Were Benefits or Perquisites Obtained by the Assessees from the Company:The Tribunal considered whether the use of the cars by the assessees constituted a benefit or perquisite under section 2(6C)(iii) of the old Act and section 2(24)(iv) of the new Act. The Tribunal concluded that unauthorized use of the company's cars did not qualify as a benefit or perquisite because there was no arrangement with the company. The Tribunal further noted that the disallowance of car expenses in the company's assessment did not automatically imply a benefit or perquisite to the assessees.4. Applicability of Section 2(6C)(iii) of the Income-tax Act, 1922, and Section 2(24)(iv) of the Income-tax Act, 1961:The Tribunal observed that the assessees did not hold shares carrying 20% of the voting power and thus could not be categorized as persons with a substantial interest in the company under section 2(6C)(iii) of the old Act or section 2(24)(iv) of the new Act. The Tribunal also noted that the benefit, if any, was obtained in their capacity as managing agents, not as directors. The High Court agreed with the Tribunal's view that unauthorized use of the cars did not constitute a benefit or perquisite obtained from the company.Conclusion:The High Court upheld the Tribunal's decision, answering the common question in the affirmative and against the revenue. The Court concluded that the unauthorized use of the company's cars by the assessees did not constitute a benefit or perquisite under the relevant sections of the Income-tax Act. The reopening of the assessments of the partners without reopening the assessment of the managing agency firm was deemed illegal. The assessees were entitled to their costs of the reference.Final Judgment:Questions answered in the affirmative, and the assessees were awarded costs.