Commissioner of Income Tax vs Gautam Sarabhai

S.L. Talati, J.—This reference was heard along with IT Reference Nos. 170 of 1976 and 24 of 1977 and the facts have been elaborately dealt with the judgment in those cases. Hence, we need not refer to facts which gave rise to this reference. It is sufficient to state that so far as this reference is concerned, it pertains to the assessment years 1967-68, 1968-69 and 1969-70, the previous years being the financial years ended on 31-3-1967, 31-3-1968 and 31-3-1969, respectively.

In this case also, the ITO had come to the conclusion that Mr. Gautam Sarabhai was not the employee of the said company. He, therefore, came to the conclusion that the remuneration received by the assessee was taxable under the head ''Income from other sources''. The AAC, Ahmedabad, confirmed that decision and the matter was carried before the Tribunal. The Tribunal held that the assessee was an employee of Karamchand Premchand (P.) Ltd. It was, therefore, held that the remuneration received by the assessee in each year was taxable as income from salaries and not income from other sources. The assessee had made contributions to a recognised provident fund as the director of the said company and in view of his contributions made by him he claimed deduction u/s 80C of the income tax Act, 1961 (''the Act''), the company had also made contributions for and on behalf of the recognised provident fund as well as recognised superannuation fund. Interest on the accumulated balance of the provident fund was also credited to the assessee''s account. The ITO held that since the assessee was not the employee of the said company, he was not entitled to claim deductions u/s 80C. He further held that the contributions, as aforesaid, made to the provident fund by the said company and the interest paid on the accumulated balance of the provident fund was income of the assessee. He, therefore, included this income in the assessee''s total income for each of the years under the reference. In the appeals preferred by the assessee, the AAC confirmed the ITO''s order refusing to allow deduction u/s 80C. However, so far as the contributions made as aforesaid by the said company and the interest paid on the accumulated balance of the provident fund was concerned, the AAC held that the same could not be treated as the assessee''s income. He, therefore, deleted the addition made by the ITO on amount of such contributions and interest. The assessee preferred appeals to the Tribunal and the Tribunal held that, in view of its finding that the remuneration received by the assessee from the aforesaid company was assessable as ''income from salaries'', the assessee''s contribution to the provident fund would be includible in the hands of the assessee subject to rule 6(a) of Part A of the Fourth Schedule to the Act for the assessment years 1968-69 and 1969-70. Similarly, interest on contribution amounting to Rs. 3,807 for the assessment year 1969-70 was also held to be includible in the hands of the assessee subject to rule 6{b) of Part A of the Fourth Schedule to the Act. The Tribunal further held that since there was no income chargeable under the head ''Salaries'' for the assessment year 1967-68, the question of inclusion of the employer''s contribution in the hands of the assessee did not arise for that year.

So far as the employer''s contribution to the approved superannuation fund for the assessment years 1968-69 and 1969-70 were concern ed, the ITO was directed to reconsider the question of inclusion of the said contributions in the hands of the assessee, keeping in mind the finding that the income was chargeable under the head ''Income from salaries'' as also the relevant provisions governing the said contributions by the employers.

In regard to the claim for relief u/s 80C and the amounts of reimbursement and medical expenses, the Tribunal held that since the remuneration payable to the assessee was taxable as income from the salaries, the question which would fall for consideration was whether the reimbursement of medical expenses received by the assessee, as aforesaid, would be exempt in the light of the aforesaid instructions of the Central Board of Revenue (CBR). Since the authorities below had not considered the claim of the assessee in the light of the said instructions, the Tribunal held that in fairness the matter should be remitted to the ITO to re-examine the claim of the assessee in the light of the said instructions, which were binding on him. Consequently, the matter was restored to the file of the ITO so far as the aforesaid relief was concerned.

The assessee had also received Rs. 13,938, being the beneficiary under several discretionary trusts. The ITO and the AAC rejected the said claim made by the assessee. The Tribunal, following its decision in the case of Smt. Kamalini Khatau v. ITO [IT Appeal No. 1602 (Ahd.) of 1971-72 decided on 21-11-1974], held that the aforesaid amount of Rs. 13,938 was not includible in the hands of the assessee. Another item was that the ITO disallowed the interest to the extent of Rs. 4,043 on the ground that borrowed funds to the extent of Rs. 82,800 were utilised for the purchase of shares of Bag House (P.) Ltd. and no income had been earned on these shares. The AAC allowed the deduction of the said interest of Rs. 4,043. The Tribunal, following the decision of the Bombay High Court in Ormerods (India) Private Ltd. Vs. Commissioner of Income Tax, Bombay City, , confirmed the order of the AAC allowing the assessee''s claim with regard to the aforesaid interest of Rs. 4,043. The Commissioner submitted that opinion of this Court was necessary and the matter was referred to this Court by reference for giving opinion on the following points:

Whether, on the facts and in the circumstances of the case, the remuneration received by the assessee from Karamchand Premchand (P.) Ltd. and other three companies was assessable under the head ''Income from other sources'' or as ''Income from salaries''?

Whether, on the facts and in the circum stances of the case, the Tribunal was right in law in holding that since there was no income chargeable under the head ''Salaries'' for the assessment year in question (1967-68), the question of inclusion of the employer''s contribution to the recognised provident fund in the hands of the assessee did not arise?

Whether, on the facts and in the circum stances of the case, the assessee was entitled to relief u/s 80C of the income tax Act, 1961, in respect of his contribution to the recognised provident fund and the superannuation fund?

Whether, on the facts and in the circum stances of the case, the Tribunal was right in law in holding that the contribution by the Karamchand Premchand (P.) Ltd., a company of which the assessee was a director to the recognised superannuation fund was includible in the hands of the assessee, subject to rule 6(a) of Part A and rule 5 of the Part B of the Fourth Schedule to the income tax Act, 1961?

Whether, on the facts and in the circum stances of the case, the Tribunal was right in law in holding that the interest on the accumulated balance of the provident fund was includible in the hands of the assessee subject to rule 6(b) of Part A of the Fourth Schedule to the income tax Act, 1961?

Whether, on the facts and in the circum stances of the case, the reimbursement of medical expenses by Karamchand Premchand (P.) Ltd. to the assessee is not assessable in the hands of the assessee for the years under reference?

Whether, the Tribunal was right in law in holding that the amount of Rs. 13,938 received by the assessee from the several discretionary trusts as the beneficiary (in the assessment year 1969-70) was not assessable in the hands of the assessee?

Whether, on the facts and in the circum stances of the case, the Tribunal was right in confirming the decision of the Appellate Assistant Commissioner in allowing the assessee''s claim with regard to the interest amount of Rs. 4,043?

Whether, the ratio of the decision of the Bombay High Court in Ormerods (India) Private Ltd. Vs. Commissioner of Income Tax, Bombay City, is applicable on all facts to the facts of the case?

In view of our decision in IT Reference No. 170 of 1976, holding that Gautam Sarabhai was an employee of Karamchand Premchand (P.) Ltd., the first six points are required to be answered in favour of Gautam Sarabhai and against the revenue. We do so.

So far as point No. 7 is concerned, it was agreed at the Bar that this matter is concluded by the decision of The Commissioner of Income Tax, Gujarat, Ahmedabad Vs. Kamalini Khatau, . Under these circumstances so far as this point is concerned, it is also answered in favour of the assessee and against the revenue.

So far as point No. 8 is concerned, we may refer to a case of Ormerods (India) (P.) Ltd. (supra). Before actually referring to this case, we may here state that the assessee purchased shares of Bag House (P.) Ltd. and the company gave properties on rent at concessional rates to its employees and, therefore, did not earn any profit. For the purpose of purchasing shares, the assessee borrowed the amount and paid a sum of Rs. 4,043 as interest. The ITO thought that as the amount was invested in shares of a company from where dividend was not likely to come, the borrowing for the purpose of purchasing such shares and interest paid thereon, should not be allowable as deductions. The AAC, for good reasons, came to a different conclusion. Before the AAC, it was argued that there was no material on record for the ITO to come to such a conclusion about the limited company. Therefore, so far as the ITO was concerned, no material was placed in regard to Bag House (P.) Ltd. The fact remained that the master did purchase shares of that particular company. He did borrow money for the purpose and paid interest. Those were the admitted facts. Now that merely because Bag House (P.) Ltd. did not make profit, that cannot be suggestive of the situation that it would never make profit or that at the time of investment, the assessee had no intention to make profit out of his investment. Such a conclusion cannot be reached. This is precisely what was decided in the case of Ormerods (India) (P.) Ltd. (supra). It was held in that case as under:

...the word ''purpose'' in the expression ''expenditure incurred solely for the purpose of making or earning such income, profits or gain'' in section 12(2) of the income tax Act, did not mean motive for the transaction; much less could it mean the ulterior motive or the ultimate object of the purchase of the shares by the assessee; and therefore, the finding of the Tribunal that the purchase was made to serve the convenience of two others was no more than a finding as to the ulterior motive in purchasing the shares, whereas the purpose of the purchase was an entirely different matter. (p. 329)

The second case is the case of Commissioner of Income Tax, West Bengal-III Vs. Rajendra Prasad Moody, . In that case, it was observed as under:

The plain natural construction of the language of section 51(iii) of the income tax Act, 1961, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure, what section 51(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction: it does not say that the expenditure shall be deductible only if any income is made or earned.

Where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies: Held, accordingly, that the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction u/s 51(iii) of the income tax Act, 1961, in computing its income from dividend under the head ''Income from other sources''. (p. 519)

In view of the above decisions with which we agree, the opinion on Question No. 8 is also in favour of the assessee and against the revenue.

So far as point No. 9 is concerned, we only say that on the facts of this case, the ratio of the decision of the Bombay High Court in Ormerods (India) (P.) Ltd.''s case (supra) is applicable on all fours to the facts of this case. So the question is answered in the affirmative. As all the 9 points are answered as above, now the matter will go back to the Tribunal so that the Tribunal may be able to dispose of the matter in accordance with law.