Commissioner of Income Tax vs Prem Narain Agarwal (HUF)

Kapur, J.—The question referred to us in relation to the assessee, which is an HUF, relates to the assessment year 1962-63. The question is in the following terms: Whether, on the facts and in the circumstances of the case, any amount was includible in the assessee-family''s total income by reason of its having received rights shares of M/s. Koolaire P. Ltd.?

This question has arisen because the shares of the HUF were held in the name of Shri Prem Narain Aggarwal, as karta of an HUF, who also happened to be the managing director of M/s. Koolaire P. Ltd. The ITO had treated the amount of rights shares or bonus shares, which had come to the HUF from several companies, as being perquisites obtained by Shri Prem Narain Aggarwal within the meaning of section 2(24)(iv) of the income tax Act, 1961. That section states that when any benefit or perquisite, whether convertible into money or not, is obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, then that sum is to be treated as income. The definition also includes within its scope payment of any other amount which would normally have been paid by the director or other persons personally. The ITO treated the issue of bonus and rights shares as perquisites obtained by the karta of the assessee on behalf of the assessee and hence included a substantial sum in the income of the assessee. In other words, the karta happened to be a director or managing director of some companies, he also received bonus or right shares in respect of shares he was holding on behalf of the HUF. The receipt of these shares was treated as a perquisite. The value of the shares was added to the income. The addition was struck out by the AAC, which striking off was upheld by the Tribunal. It has led to the question being asked only with respect to the shares of M/s. Koolaire P. Ltd. for the year under consideration. 2. The answer to the referred question is provided by the fact that even in the personal assessment of a director or managing director, the rights or bonus shares received by him in respect of his own shares would not be a perquisite. As mentioned in the judgment of the Tribunal, the difference between rights shares and bonus shares and ordinary income has been pointed out in two decisions of the Supreme Court, namely, Miss Dhun Dadabhoy Kapadia Vs. Commissioner of Income Tax, Bombay, and Commissioner of Income Tax, Bihar Vs. Dalmia Investment Co. Ltd., . The bonus or rights shares are not received for nothing. In the case of a director or managing director his personal position qua the company in respect of his shares is no different from that of other shareholders of the company. All ordinary shareholders receiving rights or bonus shares are not treated as having received any income because they have got the rights or bonus shares. Similarly, a director or other person having substantial interest in the company who receives bonus or rights '' shares does not receive them because he is a director or managing director of the company or as a person having a substantial interest in the company, but because he is a shareholder, and, he is to be treated exactly like any other shareholder. If the "income" in question is not taxable in the hands of a director or managing director who happens to hold the shares in his own right, it would follow that the same rights or bonus shares cannot be taxed in the hands of the HUF, which the managing director or director may represent for the purposes of holding the shares. We would accordingly answer the question referred to us in the negative, but leave the parties to bear their own costs.