Commissioner of Income Tax vs Smt. Surekha P. Kothari

R. Jayasimha Babu, J.

The assessment year is 1985-86. The questions referred for our consideration are:

1.Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the foreign travel expenses incurred on behalf of

the assessee by the company in which her husband is the Managing Director cannot be assessed in the hands of the assessee u/s 2(24)(iv) of the

Income Tax Act?

2.Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the Commissioners order u/s 263

dated 27-3-1989 holding that the amount of Rs. 53,487 being the foreign travel expenses of the assessee met by M/s. Kothari Industrial

Corporation Ltd. cannot be treated as perquisite in the hands of assessee?

The assessee had accompanied her husband Mr. P. V. Kothari, who was the Managing Director of the company when he went to Europe and

U.S.A. between 27-4-1984 and 7-6-1984. The expenditure incurred on her travel was paid by the company, Kothari Industrial Corporation Ltd.,

of which her husband was the Managing Director. The assessee herself has no official connection with the company except the fact that she was

the wife of the Managing Director.

The Commissioner, exercising his revisional powers u/s 263 of the Act, directed the assessing officer, who had failed to assess this amount in the

hands of the assessee to assess the amount of benefit that the assessee had so received from the company u/s 2(24)(iv) of the Act. The

Commissioner made that order after holding that the company could not produce any material to substantiate that the business affairs of the

company were served in any manner by the assessee accompanying her husband on the foreign tour.

The Tribunal, to whom the assessee carried the matter in appeal, accepted the assessee''s plea that it was customary in corporate circles for

directors and senior executives to take their spouse along with them when they undertake foreign travel. There was no proof of such custom

produced before the Tribunal. As had been observed by the Commissioner, there is no material to show that the business affairs of the company

were in any way served by the assessee accompanying her husband who was the Managing Director of the Company.

This court in the case of CIT v. Sambandan Spg. Mills (P.) Ltd. (2003) 263 ITR 1151 has held that the travel expenditure of the wife of the

Managing Director as also that the Managing Director himself, both of whom had gone abroad for the medical treatment of the Managing Director,

was not allowable as business expenditure as the company had incurred that expenditure outside its contractual obligation to the Managing

Director.

This court had earlier, in the case of CIT v. Tiam House Service Ltd. (2000) 243 ITR 645 , disallowed similar expenditure.

In the two aforementioned decisions it was held that the payment that was made by the company was a gratuitous payment and could not be

regarded as one having been made out of commercial expediency.

The situation here is similar. The assessee received a gratuitous payment from the company of which her husband was the Managing Director.

The benefit so received, therefore, falls within the scope of section 2(24)(iv) of the Income Tax Act, which reads as under:-

(iv) the value of any benefit or perquisite, whether convertible into money or not, 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, 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.

Had the company not paid the expenses incurred on the assessee''s tour abroad with her husband the amount would have been paid by the

assessee herself or by her husband. It is not her case that her husband had met the expenses. The assessee having received a benefit from the

company which had no obligation to provide such a benefit to her but had done so gratuitously, the value of the benefit so received by the assessee

is required to be treated as part of her income.

Learned counsel for the assessee submitted that the revenue had accepted the order of Tribunal which had allowed this amount as deduction in

the assessment of the company. That, however, does not result in the revenue being prevented from assessing that amount as income in the hands

of the assessee, the revenue not having realized any tax on that amount from the company.

The questions referred to us are, therefore, answered in favour of the revenue and against the assessee.