India: An Analysis Of Section 2(24) (iv) Of The Income Tax Act, 1961

Introduction

Section 2(24) of the Income Tax Act, 1961, defines the term "Income" which is chargeable under the Income Tax Act. Under sub-clause (iv) of the section, it includes amongst others, 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.

By virtue of this clause of Section 2(24) of the Act, any kind of benefit/perquisite given by the company which enriches the pocket of the director/person having substantial interest in the company is included in his taxable income.

Scope and Applicability of Section 2(24) (iv)

Section 2(24) (iv) adumbrates the following two situations:

Case 1: 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

Case 2: 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.1

Case 1 is applicable on the situations when the benefit or perquisite is directly enjoyed by the individuals referred in the said clause; however, Case 2 refers to those situations when sum is paid by the company to a third person.2

The Bombay High Court in the case of CIT v. Shri Ramnath A. Porlar3, analyzing Section 2(24) (iv) of the Income Tax Act, 1961, speaking through Tulzapurkar J. (as he then was), made the following pertinent observations: "Section 2(24) (iv) of the Income-tax Act, 1961, merely defines the expression 'income'. The value of any benefit or perquisite received by any of the persons falling within the four categories mentioned therein would become the income of such person; in other words, if the benefit or perquisite is received by a director it will be the income of the director, if the benefit or perquisite is received by a person who is substantially interested in the company it will be the income of such person having substantial interest in the company; if the same is received by a relative of the director or if the same is received by a relative of such person having substantial interest in the company, it will be the income of the relative of the director or of such person having a substantial interest in the company. There is no warrant for treating the value of any benefit or perquisite received by the director's relative or the relative of a person having a substantial interest in the company as the income of the director or of such person having substantial interest in the company, unless there is some legal fiction or a deeming provision by which the value of such benefit or perquisite received by a relative of the director or by a relative of a person having a substantial interest in the company is to be regarded as the income of the director or of such person having a substantial interest in the company."

In short, Section 2(24)(iv) of the Act will normally come into play only when the company in which the directors or its relatives have taken advantage in respect of any obligation which the director and their relatives are expected to discharge.4

In Commissioner of Income-Tax vs S. Kannan5 , it was observed by the Hon'ble High Court that "in order that the aforesaid provision applies, it has to be shown that during the relevant accounting year the director had obtained from a company any benefit whether convertible into money or not. Once the assessee is in the tax net and the amount becomes his income as per section 2(24)(iv) he has to pay tax on it and thereafter it is his choice how he utilizes that money. He may gift these amounts to his mother and sisters out of love and affection. The taxing event being completed will not get whittled down on account of the fact that these amounts were ultimately utilized for the benefit of the mother and three sisters or that was the real intention of the author of the letter as submitted by learned counsel for the assesses."

Section 2(24) (iv) of the Act is applicable on the following assessees: Director6, person having substantial interest in the company7 or by a relative of such persons.8 In certain cases, if the benefit is indirectly received by the director through re-routing of the fund then the same is held to be taxable in the hands of the director.9

Meaning of Benefit/Perquisite under this Section

The dictionary meaning of the word 'benefit' is advantage or profit or anything contributing to improvement of condition. If a person derives any advantage, it can be said that he was benefited. If he gains something either monetarily or otherwise it can be said that he was benefited. If he is able to improve his condition, it can be said that he has benefited to that extent. Thus, the word 'benefit' implies an element of advantage, profit or gain. Moreover, the word 'benefit' occurs in a provision which treats the benefit given by a company as income of the person who can be said to have obtained it, with the result that it would become taxable in his hands.10

Further, the definition makes it manifest that it is enough that a director of a company receives a benefit from the company, and it is not essential to expressly say that the benefit was being conferred upon him to enable him to act as a director. At the same time, the words 'has a substantial interest in the company', in section 2(24)(iv ), qualify the words 'a person' and not the words 'a director', and as such, it is not necessary for the amount to be treated as a benefit within the meaning of section 2(24)( iv) that the director should have a substantial interest in the company. Even if the benefit received by the director of the company is of capital nature, it can also be brought under the term 'value of any benefit' as contemplated under section 2(24)( iv). The intention of the Legislature is to tax any benefit if it is received by a director, etc., irrespective of the fact whether the director is an employee-director or the benefit received was in the nature of capital, or whether there is any direct receipt in the transaction or whether there is any detriment to the company or not in the transaction.11

The term "Perquisite" has a known normal meaning, namely, a personal advantage, which would not apply to a mere reimbursement of necessary disbursements.12 Before a person could be said to have obtained a benefit or perquisite from a company, there should be some legal or equitable claim, even though it be contingent or contested in nature. A mere receipt of money or property which one is obliged to return or repay to the rightful owner as in the case of a loan or credit, cannot definitely be taken as a benefit or perquisite obtained from the company.13 In case of Commissioner of Income Tax vs. A.R. Adaikappa Chettiar and Ors.14 the Madras High Court made the following observations in this regard: "The words 'benefit or perquisite obtained' from a company would take in, in our opinion, only such benefit or perquisite which the company had agreed to provide and which the person concerned could claim as of right based on such agreement and that a mere advantage derived from the company without its authority or knowledge will not amount to a benefit or perquisite obtained."

General Principles Concerning Applicability of Section 2(24) (iv)

  • In order for this Section to apply, the persons referred therein shall have received benefit, in case there is no benefit received that situation is not covered within the meaning of that clause.15
  • All benefit received by the referred persons are taxable irrespective of whether these are of capital or revenue nature. In order to tax the benefit received by a director from the company, it is not necessary that the director should be an employee director. The service rendered by the director has no connection for taking any benefit derived by the director under Section 2(24) of the IT Act, 1961.16
  • Further, to understand whether the benefit/perquisite falls under the scope of Section 2(24)(iv), the same yardstick has to be applied as applied in the cases of Section 17(2)(iii) and Section 40A(5) of the Act.17
  • The provision is not intended to restrict the right of the company to advance security deposits to its directors or relatives against the valuable consideration i.e. for obtaining house property on rent18 or advance interest-free loans.19
  • The use of the words "whether convertible into money or not" clearly relates to a benefit other than cash payments.20
  • The onus lies upon the assessee to assert and prove that the benefit was given to him not under any enforceable right. Moreover, as we have already indicated above, no such requirement is contemplated by Section 2(6C) itself. It is in absolute terms. A director would be liable to assessment in respect of the value of any benefit or perquisite received by him from the company of which he is a director under all circumstances without exception.21
  • Value Assessment: Since such benefits/ perquisites are drawn by directors who are not drawing any salary, thus rules for valuing perquisites/benefits are of no use.22

Conclusion:

Section 2(24) (iv) of the Income-tax Act is a special piece of enactment, which covers benefits both of capital and revenue nature. This provision is intended to take care of passing of benefits by a company to its directors, who occupy the position of fiduciary relationship and hold an office of trust. The main object of this enactment is to prevent abuse/ misuse of official position by the directors of the company to their own advantage.

Footnotes

1. Commissioner of Income Tax Vs. Kamalini Gautam Sarabhai [1994] 208 ITR 139 (Guj.)

2. Diwan Rahul Nanda Vs. Deputy Commissioner of Income Tax, [2008] 25 SOT 454 (Mum) at para 14.

3. [1978] 112 ITR 436

4. DCIT Vs. Smt. Nisha Anil Jain [2015] 62 taxmann.com 161 ITAT Pune at para 12.

5. [1994] 210 ITR 585 KAR

6. Commissioner of Income Tax Vs. S. Varadarajan, [1996] 89 Taxman 457 (Mad.) in which the court held that the service rendered by the Director has no connection for taking any benefit derived by the Director under section 2(24)(iv).

7. Ashok W. Phansalkar Vs. Income-tax Officer, 12(2) (4), Mumbai [2010] 38 SOT 136 (Mum.).

8. Sudha Burman Vs. Commissioner of Income Tax, [2007] 160 TAXMAN 148 (DELHI) (Delhi High Court, DB). This was a case in which foreign trips of the wife of director funded by the Company were held to be income of the assessee-wife since the same was not in relation to business of the company.

9. Ravi Prakash Khema Vs . Commissioner of Income tax [2008] 167 Taxman 115 (Mad.) at para 13.

10. Supra, Note 1.

11. Supra, Note 1.

12. Owen Vs. Pook (1969) 74 ITR 147 (HL)

13. [1973 ]91 ITR 90 (Mad )

14. Id., At para 19.

15. Shah Rukh Khan Vs. Assistant Commissioner of Income-tax, Cen. Cir. 29, Mumbai [2017] 79 taxmann.com 227 (Mumbai - Trib.)

16. Commissioner of Income Tax Vs. S. Varadarajan, [1996] 89 Taxman 457 (Mad.) in this court has held that 'trucks' so purchases at the value less than FMV is a benefit.

17. Commissioner of Income-tax Vs. P.R.S. Oberoi [1990] 52 TAXMAN 267 (Cal.) at para 12.

18. Supra, Note 2.

19. Supra, Note 10.

20. Krishan Bans Bahadur Vs. The Commissioner of Income Tax [2008] 306 ITR 411 (Delhi)

21. Lakshmipat Singhania Vs. Commissioner of Income Tax [1974] 93 ITR 162 (All)

22. Income Tax Officer, Ward-36(1), Kolkata Vs. Raghu Nandan Modi [2017] 82 taxmann.com 208 (Kolkata - Trib.)

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