Commissioner of Income Tax v. S. Kannan — 1994 DIGILAW 70 (KAR)

JUDGMENT S.B. Majmudar, J.—This is a reference under section 256(1) of the Income Tax Act, 1961, at the instance of the Commissioner of Income Tax, Karnataka-I, Bangalore, seeking our opinion on the following two questions : Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in coming to the conclusion that the provision of section 2(24)(iv) of the Income Tax Act, 1961, only applies to cases where the value of benefit has actually been obtained by the assesses from the company and not in respect of the value of the benefit derived by the assesses's relatives from the company in which he is a director ?" 2. A few introductory facts leading to this reference deserve to be noted at the outset. 3. The assesses is an individual. The relevant assessment year is 1980-81. The accounting year ended on March 31, 1980. The assesses is a director of Messrs. Escannon Auto Parts (P.) Ltd. In the books of the private limited company in the account of the director (hereinafter referred to as "assesses" for the sake of convenience) there were four credit entries dated January 9, 1980. They read as under : Rs. 9-1-1980 by cash received 1,00,000 9-1-1980 by cash received 1,00,000 9-1-1980 by cash received 1,00,000 4. The Income Tax Officer felt that they should be treated as cash credits. He also noted that no promissory notes written nor interest tax was payable on these alleged loans taken by the assesses. That these amounts undoubtedly represented money kept by the assesses, he, therefore, made an addition of Rs. 4 lakhs towards the cash credits as discussed in his order. As the variation in the income made by the Income Tax Officer exceeded Rs. 1 lakh, the case was referred under section 144B, to the Inspecting Assistant Commissioner of Income Tax. The said officer issued a call-memo to the assesses giving him an opportunity to explain these entries in his favour in the books of account of the company. As the reasons for passing these book entries were not let known by representative of the assesses, the assesses was issued a letter dated June 2, 1983, calling upon him to show cause why section 2(24)(iv) of the Income Tax Act should not be invoked against him. 5. As the reasons for passing these book entries were not let known by representative of the assesses, the assesses was issued a letter dated June 2, 1983, calling upon him to show cause why section 2(24)(iv) of the Income Tax Act should not be invoked against him. 5. In response to that letter, on behalf of the assesses, his father, Sri K. Srinivasan, who was a senior Income Tax advocate of this court and was also at the relevant time standing counsel for the Income Tax Department for the High Court, addressed a letter dated June 17, 1983, to the Inspecting Assistant Commissioner of Income Tax, Range-V, Bangalore. We will refer to the relevant portions of the text of this letter at a subsequent stage of this judgment. In that letter, it was mentioned that the assesses had only agreed to orally transfer all his shares and to transfer the shares of his mother, his sisters and Mr. and Mrs. Bhuvaneswariah in the company to Messrs. Gautham Investments (P.) Ltd., for a total consideration of Rs. 20,75,000. Since the assesses wanted to get another extra sum of Rs. 4 lakhs from the purchaser over and above the sum of Rs. 20,75,000 as additional consideration he devised a method. He credited his account in the books of the company for Rs. 4 lakhs and debited his mother's and sisters' account with an aggregate of Rs. 4 lakhs and the debit balance in the ladies' account was subsequently written off and the effect was there was a credit balance of Rs. 3,45,000 in the account of the assesses as on April 30, 1980. According to the assesses, therefore, while entering into agreement with the purchaser on May 9, 1980, the purchaser company had to pay Sri Kannan (assesses) Rs. 3,45,000 over and above the consideration of Rs. 20,75,000 payable by the purchaser to Sri S. Kannan. It was submitted on behalf of the assesses that he did not derive any benefit whatsoever from the company and the company did not enter into the picture at all. It was contended by the assesses that no sum was paid by the company to the assesses's relatives. So far as payment to the assesses, S. Kannan, was concerned it was his own amount invested by Kannan and got back and, therefore, section 2(24)(iv) was wholly inapplicable. It was contended by the assesses that no sum was paid by the company to the assesses's relatives. So far as payment to the assesses, S. Kannan, was concerned it was his own amount invested by Kannan and got back and, therefore, section 2(24)(iv) was wholly inapplicable. The Inspecting Assistant Commissioner came to the conclusion from the aforesaid stand taken on behalf of the assesses by his father, K. Srinivasan, that it was clearly established that the assesses and other shareholders of the company on one part had entered into an agreement with Messrs. Gautham Investments (P.) Ltd. to transfer the entire shares for a total consideration of Rs. 20,75,000 and that on January 9, 1980, amounts were advanced from the company's coffers to the relatives of the assesses who are none other than shareholders. Therefore, it was clear that the funds of the company were appropriated by Sri S. Kannan (assesses), through the medium of his relatives or shareholders. Under the circumstances, the assesses could not deny the benefit that accrued to him directly or indirectly. Further, it was held that sums paid to the relatives of Kannan by the company could not have been credited in his account to the extent of Rs. 4 lakhs, but for the fact that the advances made by the company were written off. In the circumstances, section 2(24)(iv) was wholly applicable and, therefore, the amount of Rs. 4 lakhs was liable to be included as income of the assesses. 6. This order was challenged by the assesses, S. Kannan, before the Commissioner of Income Tax (Appeals)-II, Bangalore. The appellate authority after hearing the assesses and taking into consideration the stand taken by the assesses's father, K. Srinivasan, in his letter dated June 17, 1983, addressed to the Inspecting Assistant Commissioner held that the source for this amount is said to be the loans taken by the assesses's mother and sisters. On January 9, 1980, the company gave Rs. 1 lakh to Smt. Laxmi Srinivasan, mother, and this amount is said to have been given to the appellant on the same date and this was introduced in his account on the same date. Similar operation is repeated in respect of the three sisters of the appellant. That the appellant had the benefit of credit of Rs. 4 lakhs of the funds of the company routed through his mother and sisters. Similar operation is repeated in respect of the three sisters of the appellant. That the appellant had the benefit of credit of Rs. 4 lakhs of the funds of the company routed through his mother and sisters. Placing strong reliance on the contents of the letter of K. Srinivasan, the assesses's father, the appellate authority reached the finding that by this operation of taking loans through the medium of relatives the appellant-assesses has got benefit from the funds of the company to the extent of Rs. 4 lakhs and his account, after the introduction of the abovementioned accounts, showed a credit balance of Rs. 3,75,000. On the basis of this credit balance, the appellant was able to get Rs. 3,45,000 over and above the sale consideration of Rs. 20.75 lakhs from Messrs Gautham Investments (P.) Ltd. Following the ratio of the decision of the Madras High Court in the case of Commissioner of Income Tax Vs. L. Alagusundaram Chettiar, (1977) 109 ITR 508 Mad , it was held that the loans were given to the appellant's mother and sisters on January 9, 1980, by the company for the benefit of the appellant-assesses. Thus, the assesses had the benefit of funds of the company to the extent of Rs. 4 lakhs through the medium of his mother and sisters, and since the funds belonged to the company and the benefit to the appellant arose from these funds, the conclusion was that the appellant obtained the benefit from the company to the extent of Rs. 4 lakhs through the medium of his mother and sisters. Under these circumstances, section 2(24)(iv) will apply since the facts of the case show that the appellant obtained the benefit of Rs. 4,00,000 from the company in the form of loans through his mother and sisters which were written off on April 30, 1980. It was observed that it is not clear as to how the company decided to treat these items as irrecoverable and wrote it off in the books. These persons had means for payment and if really the appellant owed Rs. 3 lakhs to them, why should the company write off these items as irrecoverable ? It was ultimately found that considering all these transactions as a whole, the giving of loans of Rs. These persons had means for payment and if really the appellant owed Rs. 3 lakhs to them, why should the company write off these items as irrecoverable ? It was ultimately found that considering all these transactions as a whole, the giving of loans of Rs. 1 lakh each to the appellant's mother, and three sisters, they in turn giving money to the assesses, the assesses in turn introducing the same money in the books of the company on the same day and the subsequent write off of the amount due from the mother and the sisters of the assesses by the company, clearly established the intention that an arrangement was made so that the assesses will have the benefit of the company's funds to the extent of Rs. 4 lakhs. Under these circumstances, section 2(24)(iv) came into play and the amount of Rs. 4 lakhs became assessable in the hands of the assesses on that score. The appeal of the assesses was, therefore, dismissed. 7. The assesses carried the matter in the second appeal before the Income Tax Tribunal. The Tribunal took the view that even though the benefit of these loans was received by the relatives of the assesses, for application of section 2(24)(iv), this benefit cannot be said to have been received by the assesses-director himself. It was further held that even if the loans advanced by the company to the relatives of the assesses, mother and three sisters on January 9, 1980, were subsequently written off by the company on April 30, 1980, that benefit of writing off of loans accrued to the relatives and not to the appellant. Consequently, section 2(24)(iv) was not applicable. It was next held that looking to these transactions, it appeared that the assesses had earlier advanced a loan of Rs. 1 lakh to the company on January 3, 1980, and, subsequently, Rs. 4 lakhs were advanced by four separate loans by the company on January 9, 1980, and even though subsequently the appellant assesses might have brought back the monies by further loans to the company on January 9, 1980, by three separate loans of Rs. 1 lakh each, it cannot be said that the assesses has become richer by the said process, that his liability to pay back loans taken from his mother and sisters remained. 1 lakh each, it cannot be said that the assesses has become richer by the said process, that his liability to pay back loans taken from his mother and sisters remained. Consequently, it cannot be said that the assesses-director has got any benefit from the company. In that view of the matter, the Tribunal allowed the appeal of the assesses and held that deduction of this liability of Rs. 4 lakhs was required to be allowed to the assesses. 8. As noted earlier on the application of the Revenue the aforesaid two questions have been referred by the Tribunal for our opinion. 9. Rival contentions : 10. Mr. Dattu, learned standing counsel for the Revenue in reference, vehemently submitted that the Tribunal's finding is patently perverse and vitiated in law. It has completely ignored the clear stand taken by the assesses's father, Sri K. Srinivasan, in the letter dated June 17, 1983, written to the Inspecting Assistant Commissioner of Income Tax, Range-V. That Sri K. Srinivasan, the assesses's father, was standing counsel for the Revenue in the High Court and was a senior tax lawyer. This letter itself shows that a scheme was devised to knock off Rs. 4 lakhs more by transferring shares in the company to Messrs. Gautham Investments (P.) Ltd., and for that purpose, he utilised the company's funds and through the medium of the company's books of account a device which Mr. Dattu calls a colourable device was resorted to. Pursuant to the said device mere book entries were effected by the assesses-director of the private limited company. What he did was that first on January 3, 1980, he advanced a sum of Rs. 1 lakh to the company. That amount became part of the company's funds. Utilising this fund, under the scheme account entries were resorted to on January 9, 1980. On January 9, 1980, the following entries were effected in the company's books of account : (i) Rupees 1 lakh was advanced by the company to Smt. Laxmi Srinivasan, mother of the assesses; (ii) Immediately she in turn advanced Rs. 1 lakh to the assesses; (iii) The assesses again advanced Rs. 1 lakh on January 9, 1980, to the company; (iv) The company in turn advanced on the very same day Rs. 1 lakh to Mrs. Sai Prasanna, sister of the assesses; (v) The assesses's sister, Mrs. Sai Prasanna, in turn advanced Rs. 1 lakh to the assesses; (iii) The assesses again advanced Rs. 1 lakh on January 9, 1980, to the company; (iv) The company in turn advanced on the very same day Rs. 1 lakh to Mrs. Sai Prasanna, sister of the assesses; (v) The assesses's sister, Mrs. Sai Prasanna, in turn advanced Rs. 1 lakh to the assesses; (vi) The assesses on the same day advanced an amount of Rs. 1 lakh to the company; (vii) The company on the same day in turn advanced Rs. 1 lakh to Smt. Vijayalaxmi Raman, sister of the assesses; (viii) On the same day Smt. Vijayalaxmi Raman in turn advanced Rs. 1 lakh to the assesses; (ix) The assesses next again advanced Rs. 1 lakh to the company on the same date; (x) The company advanced in turn Rs. 1 lakh to Smt. Geetha Latha, another sister of the assesses; (xi) Smt. Geetha Latha on the same day advanced Rs. 1 lakh to the assesses. 11. All these transactions excepting the first transaction of advancing Rs. 1 lakh by the assesses to the company took place on the same day, i.e., on January 9, 1980. The company wrote off on April 30, 1980, debts due to it from the mother and the three sisters of the assesses. Mr. Dattu submitted that all these transactions were a mere camouflage and the company's amount was utilised to knock off Rs. 4 lakhs more from the purchaser of the shares and the assets of the company as clearly admitted by Mr. K. Srinivasan, the assesses's father, in his letter dated June 17, 1983. If that is so it must be held that by a colourable device the assesses's account in the books of the company got inflated by at least Rs. 3 lakhs on January 9, 1980. Thus, his original credit balance of Rs. 1 lakh as on January 3, 1980, in the books of account of the company swelled to the extent of Rs. 3 lakhs more. Thus, in any case, additional benefit of Rs. 3 lakhs on January 9, 1980. Thus, his original credit balance of Rs. 1 lakh as on January 3, 1980, in the books of account of the company swelled to the extent of Rs. 3 lakhs more. Thus, in any case, additional benefit of Rs. 3 lakhs was clearly received by the assesses from the company with an ulterior motive of knocking off more money from the purchaser of the company's shares and assets which actually later on happened, that the so-called loans advanced to the mother and sisters of the assesses by the company on January 9, 1980, was a ruse and pretext, that it was clearly a colourable device frowned upon by the Supreme Court in the case of McDowell and Co. Ltd. Vs. Commercial Tax Officer, AIR 1986 SC 649 and, therefore, the court should ignore it and look at the substance of the transactions. In this connection, Mr. Dattu submitted that this aspect of the matter clearly arises from the judgment of the Tribunal and has to be considered while opining on question No. 1. That when both the lower authorities, viz., the Inspecting Assistant Commissioner and the Commissioner of Income Tax (Appeals) had given their findings based on clear admissions contained in the letter of the assesses's father, Mr. K. Srinivasan, written on June 17, 1983, the Tribunal had completely ignored this letter and the material admissions contained therein which have a direct bearing on the applicability of the section 2(24)(iv) of the Act to the facts of the present case and, consequently, the finding reached by the Tribunal is patently perverse and vitiated in law. On question No. 2, placing reliance on a decision of the Delhi High Court in The Commissioner of Income Tax, Delhi Vs. Nar Hari Dalmia, New Delhi, (1971) 80 ITR 454 Delhi it was submitted that even if benefit is received by the assesses's relatives from the company it can be said to enure for the assesses-director himself and, therefore, section 2(24)(iv) can be applicable to the facts of this case even on that ground. 12. Learned counsel for the assesses on the other hand submitted that question No. 1 as framed is on the assumption that there were genuine loan transactions by the company on January 9, 1980, in favour of the assesses's mother and three sisters. 12. Learned counsel for the assesses on the other hand submitted that question No. 1 as framed is on the assumption that there were genuine loan transactions by the company on January 9, 1980, in favour of the assesses's mother and three sisters. That it was never argued before the Tribunal that all these were colourable devices and should be ignored. That such a contention cannot be permitted for the first time in this reference proceeding. That these transactions are genuine and that the assesses might have got loans from his mother and sisters on the same day amounting to Rs. 1 lakh each and might have re-lent the money to the company on the same date, but to that extent he was a creditor of the company and had not obtained any benefit from the company. Therefore, section 2(24)(iv) is out of the picture. Further, he submitted even if the letter of Shri K. Srinivasan on June 17, 1993, is kept in view, even then no admission is culled out from the said letter to indicate that the assesses had taken any benefit from the company on January 9, 1980, and that in fact the company was out of the picture as mentioned by Sri K. Srinivasan in that letter. The benefit of Rs. 4 lakhs was to be given to the mother and sisters of the assesses and not to the assesses at all. He was good enough to place the entire letter on the record of these proceedings for our consideration. He next contended that so far as the assesses was concerned he remained a debtor of his mother and three sisters and even if the loans given by the company to the mother and three sisters of the assesses on January 9, 1980, were squared off later on, the benefit thereof accrued to the concerned loans, viz., the mother and three sisters of the assesses, and no benefit accrued to the assesses. Therefore, also section 2(24)(iv) was out of the picture. He next contended that on a true construction of the provisions, benefit accrued to the assesses's relatives cannot ipso facto be treated as benefit accrued to the assesses. He submitted that the Delhi High Court in The Commissioner of Income Tax, Delhi Vs. Therefore, also section 2(24)(iv) was out of the picture. He next contended that on a true construction of the provisions, benefit accrued to the assesses's relatives cannot ipso facto be treated as benefit accrued to the assesses. He submitted that the Delhi High Court in The Commissioner of Income Tax, Delhi Vs. Nar Hari Dalmia, New Delhi, (1971) 80 ITR 454 Delhi had assumed that such benefit accrued to the assesses-director, and even otherwise in that case the entire amount was given to the director and, therefore, on the peculiar facts of that case, the decision was rendered against the assesses. On the other hand, he invited our attention to the decisions of the Bombay High Court in Commissioner of Income Tax, Bombay City-I Vs. Ramnath A. Podar, (1978) 112 ITR 436 Bom and Commissioner of Income Tax Vs. M.R. Ruia, (1988) 170 ITR 512 Bom as well as the decision of the Andhra Pradesh High Court in Addl. Commissioner of Income Tax Vs. P.R. Parthasarathy, (1979) 118 ITR 869 AP for submitting on question No. 2, that the benefit accrued to the assesses's relatives will not be treated to be income in the hands of the assesses by treating it to be a benefit accrued from the company to the assesses. He next submitted that in the case of McDowell and Co. Ltd. Vs. Commercial Tax Officer, AIR 1986 SC 649 Chinnappa Reddy J. wrongly assumed that the Westminster Doctrine was given a burial in the country of its origin. When in fact even in the later House of Lords decision in the case of Craven (Inspector of Taxes) v. White (Stephen); Same and White (Brain) and IRC and Bowater Property Developments Ltd., and Baylis (Inspector of Taxes) and Gregory (Conjoined Appeals) in [1990] 183 ITR 216, page 224, the doctrine was only explained. It was, therefore, contended by him that on the facts found by the Tribunal both the questions should be answered against the Revenue and in favour of the assesses. 13. We shall now take up for consideration the referred questions seriatim : Question No. 1 : For answering this question it is necessary to keep in view section 2(24)(iv) of the Income Tax Act. 14. 13. We shall now take up for consideration the referred questions seriatim : Question No. 1 : For answering this question it is necessary to keep in view section 2(24)(iv) of the Income Tax Act. 14. The said section defines income which is chargeable under the Income Tax Act to include amongst others : (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. 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. As the assesses was the director of the private limited company, the moot question would be whether in the relevant accounting year he had obtained any monetary benefit from the company or not. We are not concerned with any non-monetary benefit which is convertible into money on the facts of the present case. The Revenue contends that the assesses obtained monetary benefit of Rs. 4 lakhs on January 9, 1980, from the company. Of course, the Revenue also contends that the directors and mother and sisters who are his relatives have also obtained total benefit of Rs. 4 lakhs and that benefit ultimately rested in the pocket of the director and that benefit accrued to the director via his mother and three sisters who were mere conduit pipes through whom benefit flew to the director. It is also submitted by the Revenue that the benefit obtained by these relatives also can be brought home to the director by treating the same to be the benefit accrued to the director for the purpose of section 2(24)(iv) of the Act. Question No. 1 which has been referred for our opinion is widely worded to cover this controversy. However, the emphasis put by Mr. Question No. 1 which has been referred for our opinion is widely worded to cover this controversy. However, the emphasis put by Mr. Dattu, learned counsel for the Revenue, was to the effect that as a necessary aspect of this referred question is the further question whether all the transactions of so called loans on January 9, 1980, said to have been entered into by the company in favour of the assesses's mother and three sisters were a colourable device to get out of section 2(24)(iv) and the court should tear the veil and should not blink at these transactions and should come to the substance of these transactions and find out the real nature of these transactions. It is true that this aspect is not clearly highlighted before the Tribunal. However, when we turn to para 10 of the judgment of the Tribunal, we find that on behalf of the department it was submitted for the consideration of the Tribunal whether the money lent by the company to the relative of the director was, in fact, for the benefit of the assesses which was apparent from the fact that on the same day on which the relatives of the assesses received the money from the company, they lent it to the assesses. Relying on the Madras High Court decision in Commissioner of Income Tax Vs. L. Alagusundaram Chettiar, (1977) 109 ITR 508 Mad it was submitted that the loans given by the company were for the benefit of the assesses. It is true that in support of this contention an argument was not raised that it was a colourable device which is frowned upon by the Supreme Court in McDowell and Co. Ltd. Vs. Commercial Tax Officer, AIR 1986 SC 649 It is also true that in paragraph 11 of the judgment of the Tribunal, the Tribunal assumed that these loan transactions were genuine transactions. However, once the aforesaid contention was raised before the Tribunal touching upon the real nature of the transactions, whether they were a colourable device or not would certainly remain one aspect of this very submission for attracting section 2(24)(iv). It must, therefore, be held that this contention of Mr. Dattu, relying upon McDowell and Co. Ltd. Vs. Commercial Tax Officer, AIR 1986 SC 649 clearly flows from the submissions made before the Tribunal as noted in para 10 of the judgment. It must, therefore, be held that this contention of Mr. Dattu, relying upon McDowell and Co. Ltd. Vs. Commercial Tax Officer, AIR 1986 SC 649 clearly flows from the submissions made before the Tribunal as noted in para 10 of the judgment. It must be kept in view that both the lower authorities, viz., the Inspecting Assistant Commissioner and the Appellate Assistant Commissioner, had in terms held that these transactions were for the benefit of the director through the medium of relatives and for that both the lower authorities have placed strong reliance on the contents of the letter of the assesses's father, K. Srinivasan, dated June 17, 1983. Curiously enough the Tribunal has totally ignored the admissions contained in that letter. It must, therefore, be held that the submission of Mr. Dattu that the Tribunal has not given any effect to the law laid down by the Supreme Court in McDowell and Co. Ltd. Vs. Commercial Tax Officer, AIR 1986 SC 649 and has ignored material evidence by way of letter of Mr. K. Srinivasan dated June 17, 1983, and important admissions contained therein have to be accepted. 15. Once that is so, it necessarily follows that the contention canvassed before us in support of question No. 1 is an aspect of the same question and it arises out of the judgment of the Tribunal, especially in the light of its discussion contained in paras 10 and 11. It is now well settled by a series of decisions by the Supreme Court that on a mixed question of law and fact like the present one, namely, whether, on the facts on record, section 2(24)(iv) is attracted or not, if the Tribunal has arrived at a finding ignoring a material piece of evidence or if the finding is inconsistent with or contrary to the evidence on record, the said finding does not remain a finding on facts and binding in reference proceedings and the new aspect submitted for consideration based on material evidence ignored by the Tribunal, does raise a question of law which has to be considered by the High Court in reference proceedings. 16. We may usefully note a few decisions of the Supreme Court on this point. In the case of The Liquidators of Pursa Limited Vs. 16. We may usefully note a few decisions of the Supreme Court on this point. In the case of The Liquidators of Pursa Limited Vs. Commissioner of Income Tax, Bihar, AIR 1954 SC 253 the Supreme Court held that if the finding reached by the Tribunal is contrary to the evidence on the record, it raises a question of law for consideration of the High Court in reference proceedings. Similarly, in the case of G. Venkataswami Naidu and Co. Vs. The Commissioner of Income Tax, AIR 1959 SC 359 and in the case of Commissioner of Income Tax, Punjab Vs. Indian Woollen Textile Mills, AIR 1964 SC 735 the Supreme Court held that if the finding is reached by the Tribunal by ignoring material evidence, it does not remain binding on the High Court in reference proceedings. In the well known case of SREE MEENAKSHI MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX, MADRAS., (1957) 31 ITR 28 SC the Supreme Court in terms held that on a mixed question of law and fact it is open to the High Court to consider the question in the light of evidence on record. In the case of The Keshav Mills Co. Ltd. Vs. Commissioner of Income Tax, Bombay North, AIR 1965 SC 1636 the Supreme Court held that an aspect of the case which arises from the question referred by the Tribunal, can be argued in reference proceedings for the first time. We may refer to a later judgment of the Supreme Court in the case of CIT v. Biju Patnaih, wherein it has been in terms held that when a material aspect of the question was not considered by the Tribunal even though the question may be a question of fact, the said question becomes a question of law for the opinion of the High Court. In that case, the question was whether the assesses was the real owner of certain shares ostensibly standing in the names of others. While answering that question, the Tribunal had not considered the facts showing the financial capacity of the shareholders. The Supreme Court held that such a question was a question of law for decision under reference proceedings under section 256(2). The Supreme Court Bench, speaking through Sabyasachi Mukharji. While answering that question, the Tribunal had not considered the facts showing the financial capacity of the shareholders. The Supreme Court held that such a question was a question of law for decision under reference proceedings under section 256(2). The Supreme Court Bench, speaking through Sabyasachi Mukharji. J., held that the ignoring of the fact as to whose money was donated to the trust and by whom was ignorance of a vital fact influencing the decision. Therefore, the questions which arise on this aspect are questions of law. 17. We must, therefore, hold that the questions as to what is the real nature of the transactions which took place on accounting of entries in the company's books of account on January 9, 1980, and whether they were mere paper entries and were a device to circumvent the provisions of section 2(24)(iv) by the assesses, do represent an important aspect of question No. 1 referred for our consideration, and it cannot be said that this aspect is an entirely new aspect which does not arise from the judgment of the Tribunal or that even if assuming that it is a new aspect of question No. 1, it cannot be decided by us in reference proceedings while answering question No. 1, especially when very vital admissions contained in the letter of the assesses's father, Sri K. Srinivasan, who was the brain behind this scheme being an Income Tax expert were totally ignored by the Tribunal. We, therefore, overrule the objection of learned counsel for the assesses that this question should not be considered by us. We have heard learned counsel for the Revenue as well as learned counsel for the assesses on the real effect of the book entries of January 9, 1980. 18. Having given our anxious consideration to the rival contentions of learned counsel on this aspect we have reached the conclusion that the finding of the Tribunal that the amounts involved in these entries do not confer any benefit on the assesses is totally an illegal finding especially when viewed in the light of relevant evidence on the record which unfortunately the Tribunal totally ignored. 19. We shall now proceed to deal with this aspect from all its angles. 20. We have seen earlier that the assesses-director of the private limited company had invested Rs. 1 lakh on January 3, 1980. 19. We shall now proceed to deal with this aspect from all its angles. 20. We have seen earlier that the assesses-director of the private limited company had invested Rs. 1 lakh on January 3, 1980. He became a creditor of the company to the extent of Rs. 1 lakh on that day. There is no dispute between the parties on this aspect. The real dispute revolves round what happened on January 9, 1980, between the company, on the one hand, and the director-assesses, on the other. It is also not in dispute between the parties that on that day one of the sisters of the assesses was in Madras and another was in foreign country and still the entries in the books of account of the company show that Rs. 1 lakh each was advanced by the company as a loan to the assesses's mother and his three sisters meaning thereby Rs. 4 lakhs have purportedly gone out of the company's coffers in favour of these four loans. 21. Now, the question is what is the real nature of these transactions. It is not in dispute that the company did not take any security from any of them nor is it on record that these persons were in need of such loans from the company on that day. Not only that but it is clearly established from the record that they were not in such need because it is the assesses's own case, that the moment they received this money from the company, they passed it on to the director by further loans. It is easy to visualize that if the loans wanted this money for their own purpose they would not have simultaneously loaned them to the director. Even the assesses was not in need of money on that day and simultaneously and automatically he ploughed back these monies to the company and brought them back in the company's coffers. In this connection, no resolutions were passed by the company for giving loans of Rs. 1 lakh each to the director's mother and three sisters. No further resolutions were passed requiring loans of Rs. 3 lakhs from the director for the benefit of the company. It is also clear that if the company was in need of loans of Rs. 3 lakhs on January 9, 1980, it could not have lent this very amount to the concerned loans. No further resolutions were passed requiring loans of Rs. 3 lakhs from the director for the benefit of the company. It is also clear that if the company was in need of loans of Rs. 3 lakhs on January 9, 1980, it could not have lent this very amount to the concerned loans. All these transactions appear to have taken place instantaneously and simultaneously and the net effect was that the assesses's account in the company which was showing a credit balance of Rs. 1 lakh on January 3, 1980, swelled to Rs. 4 lakhs on January 9, 1980, because three credit entries of Rs. 1 lakh each in his favour were effected in the company's books of account. So, the assesses, who was the creditor for Rs. 1 lakh till January 3, 1980, became a creditor worth Rs. 4 lakhs by the three credit entries of Rs. 1 lakh, which are said to have been brought back from the original loans from the company, viz., his mother and three sisters. Can it be countenanced even for a moment that when the director of the private limited company artificially gets his credit account swelled from Rs. 1 lakh to Rs. 4 lakhs he derives no monetary benefit from these entries ? It is in this connection that we have to x-ray these entries and transactions as a whole and tear the veil and peep into the substance of the transactions. This is what precisely Chinnappa Reddy J., on behalf of the Constitution Bench of the Supreme Court in McDowell and Co. Ltd. Vs. Commercial Tax Officer, AIR 1986 SC 649 said. The main judgment was delivered by Ranganath Misra J., and Chinnappa Reddy J., agreed with the judgment and also delivered a separate judgment on behalf of the full court. He confined his decision to the points of tax avoidance. The following pertinent observations were made by Chinnappa Reddy J., with which the full court was in agreement (at page 160) : "We think that the time has come for us to depart from the Westminster principle as emphatically as the British courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare State like ours. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the country by the piling-up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community (as pointed out by Master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on the one side and the tax gatherer and his perhaps not so skilful advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it.' Last, but not the least, is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guileless, good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, 'Taxes are what we pay for a civilized society. I like to pay taxes. With them I buy civilization'. But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd., In re and Bengal Hotels Pvt. Limited, In re [1977] 47 Comp Cas 597, where the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay 1982 AC 300 , Burma Oil 1982 S T C30 (HL) and Dawson 1984 1 All ER 530 (HL), to expose the devices for what they really are and to refuse to give judicial benediction." 22. It is not possible to agree with learned counsel for the assesses that these observations cannot apply to the facts of the present case, as the real nature of the transaction as clearly indicated by the author of this transaction, Sri K. Srinivasan, father of the assesses, was to get more money from the purchaser of the company's shares and assets and that the real benefit went so far as this additional amount of Rs. 4 lakhs is concerned to the mother and sisters of the assesses and that this transaction was not meant as a camouflage for the director to get out of section 2(24)(iv). 23. On the contrary, it becomes clear that because of these entries showing the assesses's mother and sisters as loans and whose loans Subsequently were squared off the company's moneys were to be siphoned off for the benefit of the director and the director's credit account was to swell by Rs. 4 lakhs, so that when ultimately the purchaser purchased the assets and liabilities of the company the purchaser had to give the entire balance of the credit account of the director to the said assesses to square off that liability of the company. 4 lakhs, so that when ultimately the purchaser purchased the assets and liabilities of the company the purchaser had to give the entire balance of the credit account of the director to the said assesses to square off that liability of the company. This tax planning and colourable device was resorted to in such a way that if these entries are given their effect as they are and they are not x-rayed and not brushed aside as colourable transactions, section 2(24)(iv) which otherwise would be applied would remain un attracted to the facts of the case. Consequently, there is no escape from the conclusion that this device was a shrewd and colourable device resorted to by the director on the advice of his father, Sri K. Srinivasan, tax consultant and expert, with a view to get out of the tentacles of section 2(24)(iv). Whether the assesses might have passed this benefit to his mother or sisters is totally irrelevant. Once the assesses 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 utilises 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 utilised 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 Learned counsel for the assesses also was not on any stronger footing when he relied upon the later observations of Sabyasachi Mukharji J., in Commissioner of Wealth Tax, Gujarat-II, Ahmedabad Vs. Arvind Narottam (Individual), AIR 1988 SC 1824 wherein the learned judge referring to McDowell and Co. Ltd. Vs. Commercial Tax Officer, AIR 1986 SC 649 held that (at page 487) : "It is true that tax avoidance in an underdeveloped or developing economy should not be encouraged on practical as well as ideological grounds. One would wish, as noted by Reddy J., that one could get the enthusiasm of Justice Holmes that taxes are the price of civilization and one would like to pay that price to buy civilization. One would wish, as noted by Reddy J., that one could get the enthusiasm of Justice Holmes that taxes are the price of civilization and one would like to pay that price to buy civilization. But the question which many ordinary tax-payers very often, in a country of shortages with ostentatious consumption and deprivation for the large masses, ask is, does he with taxes buy civilization or does he facilitate the waste and ostentation of the few. Unless waste and ostentation in Government spending are avoided or eschewed, no amount of moral sermons would change people's attitude to tax avoidance." 24. That may be a view-point which the learned judge put forward but it did not in any way and could not affect the ratio of the decision of the Full Bench of the Supreme Court in McDowell and Co. Ltd. Vs. Commercial Tax Officer, AIR 1986 SC 649 25. It is now time for us to turn to the letter of Sri K. Srinivasan dated June 17, 1983, addressed to the Inspecting Assistant Commissioner of Income Tax, Range-V, Bangalore, referred to by both the lower authorities and which was completely ignored by the Tribunal. It is not in dispute between the parties that it was K. Srinivasan, senior standing counsel for the Income Tax Department in the High Court and an advocate and the father of the assesses, who was the author of the scheme and at his instance, his son, S. Kannan, the assesses-director, effected those disputed entries in the company's books of account on January 9, 1980. Let us see what the author has to say in connection with his scheme. The relevant excerpts from this letter read as under : "To : The Inspecting Assistant Commissioner of Income Tax, Range-V, Bangalore. Sir, Reg. - S. Kannan - Assessment year 1980-81 - F. No. 144B/R-V/ 82-83 - Your letter dated 2-6-1983. I am writing this letter to you not in my capacity as an advocate but in my capacity as Kannan's father. I am aware about the details of the transactions referred to by you in your letter under above reference and hence I will be able to satisfy you as to the reasons which prompted recording the entries on January 9, 1980, in the books of Escannon Auto Parts (P) Ltd. (hereinafter referred to as 'the company'). I am aware about the details of the transactions referred to by you in your letter under above reference and hence I will be able to satisfy you as to the reasons which prompted recording the entries on January 9, 1980, in the books of Escannon Auto Parts (P) Ltd. (hereinafter referred to as 'the company'). Sri S. Kannan had agreed orally to transfer all his shares in the company and to transfer the shares of his mother, his sisters and Mr and Mrs. Bhuvaneshwariah in the company to Gautham Investments (P) Ltd. (hereinafter referred to as 'the purchaser') for a total consideration of Rs. 20,75,000. But Kannan wanted to get another extra sum of Rs. 4 lakhs from the purchaser over and above the sum of Rs. 20,75,000 as additional consideration. But the purchaser did not want to pay any sum over Rs. 20.75 lakhs. In order to get the additional sum of Rs. 4 lakhs, he devised a method. He credited his account in the books of the company with Rs. 4 lakhs and debited his mother's account and his sisters' accounts with an aggregate sum of Rs. 4 lakhs and the debit balances in the ladies accounts were subsequently written off and the effect was that there was a credit balance of Rs. 3,45,000 in the account of S. Kannan as on April 30, 1980. Therefore, while entering into an agreement with the purchaser on May 9, 1980, the company had to pay Kannan Rs. 3.45 lakhs over and above the consideration of Rs. 20.75 lakhs payable by the purchaser to S. Kannan. So the purchaser paid Rs. 20.75 lakhs to Kannan on October 9, 1980, and the purchaser gave a bank guarantee to Kannan for Rs. 3.45 lakhs which was encashable on February 28, 1982. It may be noticed that the bank guarantee was not furnished by the company but by the purchaser. Except that the company's books were utilised for passing the entries, the company did not enter into the picture and the agreement to pay Rs. 3.45 lakhs was by the purchaser and not by the company. Thus by passing the said entries Kannan achieved the purpose and made the purchaser part with an additional sum of Rs. 3.45 lakhs. Except that the company's books were utilised for passing the entries, the company did not enter into the picture and the agreement to pay Rs. 3.45 lakhs was by the purchaser and not by the company. Thus by passing the said entries Kannan achieved the purpose and made the purchaser part with an additional sum of Rs. 3.45 lakhs. The shareholdings of the company were as under : S. Kannan 632 shares Lakshmi Srinivasan 112 shares Mythili Seshadri 64 shares Vijayalakshmi Raman 64 shares S. Sai Prasanna 64 shares S. Geetha Latha 64 shares P. Bhuvaneshwariah 100 shares Lakshmi Bhuvaneswariah 100 shares --------------- 1,200 shares --------------- The consideration of Rs. 20,75,000 was apportioned between the shareholders as under : (Rs.) S. Kannan 12,23,000 Lakshmi Srinivasan 1,68,000 Mythili Seshadri 96,000 Vijayalakshmi Raman 96,000 S. Sai Prasanna 96,000 R. Bhuvaneshwariah 1,50,000 Lakshmi Bhuvaneswariah 1,50,000 ---------------- 20,75,000 ---------------- It can be seen that the consideration for transfer of Kannan's shares is more when compared to the rate at which others transferred their shares. Hence Kannan wanted that the additional sum of Rs. 4 lakhs recovered from the purchaser must go to the benefit of his mother and sisters. That is why the ladies' accounts were debited and Kannan's account was credited and the ladies' accounts were written off and the credit was made out of borrowal from the ladies. The same object could have been achieved by debiting Kannan's account and crediting the ladies' accounts and writing off the debit in Kannan's account. But this method was not resorted to since the bank guarantee would be in the names of the ladies and in case the bank guarantee was not encashed on the due date the ladies would have to go to court which was found undesirable. Further, Kannan wanted that money for starting an industry and he wanted to pay the ladies later. But subsequently Kannan dropped that idea and went abroad for studies. I am afraid your conclusion that Kannan derived/obtained benefit from the company may not be correct. The company did not enter into the picture. The ladies advanced money to Kannan and Kannan invested the same in the company. How can it be said that Kannan derived benefit from the company ? The writing off was an independent transaction subsequent to the transaction in question. The company did not enter into the picture. The ladies advanced money to Kannan and Kannan invested the same in the company. How can it be said that Kannan derived benefit from the company ? The writing off was an independent transaction subsequent to the transaction in question. Further, as already stated, the purchaser of the shares and not the company had agreed to pay Kannan and had issued the bank guarantee. Similarly, your proposal to invoke section 2(24)(iv) may not be permissible. No sum was paid by the company to Kannan's relatives. No sum was payable by the company to Kannan's relatives. So far as payment to Kannan was concerned, it was the amount invested by Kannan and it was got back. Section 2(24)(iv) is wholly inapplicable." 26. As this letter itself shows the company's books were utilised for passing the entries and that the mother and sisters had not got any benefit of these entries nor they had received any money from the company. If that is so it is impossible to proceed on the basis that the entries dated January 9, 1980, giving loan of Rs. 1 lakh each to the mother and three sisters of the director were genuine entries and by these entries any money passed on to them. When this admission contained in the letter comes from the horse's mouth and from the author of this scheme, it has got to be held that on January 9, 1980, the company did not advance any loans in fact to the assesses's mother or three sisters. It is equally to be held that similarly the assesses also did not advance any further loans to the company by way of Rs. 3 lakhs on January 9, 1980, having collected them from the mother and sisters on January 9, 1980. These were mere paper transactions. If that is so, the company agreeing to write off the loans in favour of the mother and sisters later on would remain a mere device and part and parcel of the very scheme and nothing passed from the company to the mother and sisters of the assesses on January 9, 1980, nor did any money again pass from the director to the company on January 9, 1980. Therefore, in substance, there was no occasion for the company to write off these so called loans said to have been given to the mother and sisters of the director. All these were a smoke-screen. The real purpose was to knock off Rs. 4 lakhs of consideration from the purchaser in favour of the director as the letter itself shows and it is obvious that though the apparent consideration for the sale of the shares and assets of the company in favour of Gautham Investments (P) Ltd., was Rs. 20.75 lakhs, four more lakhs were knocked off by the seller by this device and that could be achieved only if the assesses-Kannan was shown to be a creditor of the company worth Rs. 4 lakhs instead of Rs. 3 lakhs, so that when the liabilities of the company were taken over by the purchaser Gautham Investments (P) Ltd., the purchaser will have to pay the apparent consideration of purchase of shares to the tune of Rs. 20.75 lakhs and also in addition discharge the liability of the company as debtor of the director to the tune of Rs. 4 lakhs as standing to his credit in the company's books of account. This purpose is achieved by ultimately getting a bank guarantee for this amount from the purchaser. It is for this purpose that this device was created by Sri K. Srinivasan, as clearly admitted by him. But in the process one intermediate link which became very relevant is by-passed by learned author of the scheme, K. Srinivasan, in his letter. He says by this scheme no benefit passed from the company to the director, S. Kannan. It is difficult to agree. By this device, Kannan's account with the company which had a credit balance of Rs. 1 lakh on January 3, 1980, swelled by Rs. 3 lakhs more by three credit entries of Rs. 1 lakh each on January 9, 1980, in his favour and it is this benefit flowing from entries in the company's books of account which got fructified ultimately by knocking off additional consideration from the purchaser, Gautham Investments (P) Ltd. But that was the ultimate benefit. The proximate and the initial benefit was given by the company to the director by artificially increasing his credit balance from Rs. 1 lakh to Rs. 4 lakhs, i.e., by Rs. The proximate and the initial benefit was given by the company to the director by artificially increasing his credit balance from Rs. 1 lakh to Rs. 4 lakhs, i.e., by Rs. 3 more lakhs, by making them available from the company's coffers to the director, though he has not brought a single pie on January 9, 1980, to the company's coffers which can be seen from the letter of Sri. K. Srinivasan. This benefit was not a mere paper benefit, as it ultimately resulted in enriching the pocket of the director as the purchaser had to honour these credit entries in favour of the director in his accounts in the company's books. It is this benefit directly flowing from the company to the assesses-director on January 9, 1980, that has to be brought to tax and is clearly covered by section 2(24)(iv). This conclusion can be reached if we x-ray the transactions and find out the real substance of the transaction and that becomes clearly discernible from what the author of the scheme has stated on the factual aspect in his letter extracted above. Therefore, both the lower authorities, viz., Inspecting Assistant Commissioner of Income Tax and Commissioner of Income Tax (Appeals), were perfectly justified in placing reliance on the letter of K. Srinivasan and in reaching the conclusion that the benefit flowing from these entries made to the credit of the director on January 9, 1980, was squarely covered by section 2(24)(iv) of the Act and that the sisters and mother of the assesses were conduit pipes or name-lenders through whom this benefit flowed from the company to the assesses-director. 27. Under these circumstances, the argument of learned counsel for the respondent that Kannan remained liable to return the loan amounts to his mother and sisters or that they had not squared off these amounts so far as Kannan was concerned or that the company's squaring off of the loan amounts payable by the mother and sisters gave no benefit to the director, would pale into insignificance. No such question would survive for consideration once we properly x-ray these transactions and visualise them in their correct perspective. No such question would survive for consideration once we properly x-ray these transactions and visualise them in their correct perspective. We fail to appreciate how the court can be told to keep its hands off and not to x-ray these colourable transactions on the specious plea that such an argument was not placed before the Tribunal as learned counsel for the assesses would like to have it. If these transactions are genuine and valid, then what he would submit would be right. If in fact loans were advanced to the tune of Rs. 1 lakh each to the assesses's mother and sisters by the company on January 9, 1980, then squaring off of these loans by the company would be a benefit accruing to them and not to the assesses and then the finding of the Tribunal would remain justified. But if the mother and sisters were mere name lenders, the entire argument would fall through, on the principle "mulo nastikutho shakha" (if there are no roots, how can there be branches ? ). Unfortunately, the Tribunal had completely ignored the letter written by Sri K. Srinivasan, the assesses's father, and the admissions contained therein. Consequently, the Tribunal has come to a lopsided unsustainable and unreal conclusion on the material evidence on record. When such dubious and colourable transactions are placed for consideration we cannot blink our eyes at the realities, we cannot ignore the admissions contained in the letter of the author of the scheme himself. We cannot be so gullible as to accept the genuineness of these smoke-screen entries, nor can we refuse to peep into the real nature of the transactions. In fact, persuading us not to undertake such an exercise and to accept such entries on their face value, would result in our failure to exercise our jurisdiction and to discharge our duty. The court is not so helpless as to raise its hands in despair and to allow such dubious transactions to go through unscathed under the microscope of judicial scrutiny. The finding reached by the Tribunal in this connection is totally uncalled for and unreasonable and such as no reasonable men could reach in the light of what came from the horse's mouth, viz., the author of this scheme, Sri Srinivasan. 28. The finding reached by the Tribunal in this connection is totally uncalled for and unreasonable and such as no reasonable men could reach in the light of what came from the horse's mouth, viz., the author of this scheme, Sri Srinivasan. 28. We must, therefore, hold that there was no question of the company giving any loans to the assesses's mother and sisters on January 9, 1980, nor was there any question of the assesses giving loan of Rs. 3 lakhs back to the company. But, in substance, the transaction was clearly conferring a monetary benefit of Rs. 3 lakhs given by the company to the director through this colourable device by utilising the names of the assesses's mother and sisters only with a view to see that his credit balance in the company gets artificially swelled by at least Rs. 3 lakhs reflected by three credit entries in his name in the books of account, effected on January 9, 1980. These are clearly monetary benefits and were in substance in the nature of gifts to the director by the company. In any case, these benefits would get covered by section 2(24)(iv). 29. To highlight his contention that the so-called benefit to an intermediary may on the facts of the case be, in substance, a benefit to the director from the company, Mr. Dattu invited our attention to the Madras High Court decision in the case of Commissioner of Income Tax Vs. L. Alagusundaram Chettiar, (1977) 109 ITR 508 Mad In that case, a Division Bench of the Madras High Court was considering a fact situation where the assesses was the managing director of the company in which one "K" was an employee. During the assessment year 1961-62, relevant to the year ending March 31, 1961, the company advanced to a business carried on by a Hindu undivided family of which "K" was the karta, a sum of Rs. 14,41,500 out of which the family advanced a sum of Rs. 7,81,000 to the assesses as a loan. The assesses paid interest at 8 1/2 per cent. on the loan advanced to him by the family while the family paid interest at 8 per cent. to the company on the amounts received by it. X-raying this transaction it was held that Rs. 7,81,000 to the assesses as a loan. The assesses paid interest at 8 1/2 per cent. on the loan advanced to him by the family while the family paid interest at 8 per cent. to the company on the amounts received by it. X-raying this transaction it was held that Rs. 7,81,500 were in substance a dividend received by the director from the company and that in the light of the fact situation, amounts which were lent to "K" by the company were in effect passed on by "K" to the assesses and therefore the loan advanced by the company to "K" was for the benefit of the assesses. 30. The learned advocate for the assesses was right when he submitted that the aforesaid decision of the Madras High Court was concerned with a loan advanced by the company to the director which would be covered by section 2(24)(iv) of the Income Tax Act. Still, however, the aforesaid decision clearly indicates that the court can x-ray the transaction and can find out who is the real beneficiary of the transaction. 31. Mr. Dattu also invited our attention to a decision of the Delhi High Court in the case of K.S. Malik Vs. Commissioner of Income Tax, (1980) 124 ITR 522 Delhi A Division Bench of the Delhi High Court, speaking through S. Ranganathan J., had to consider whether the amount written off by the company was a benefit or perquisite obtained from the company and could be assessed in the hands of the assesses as deemed income under section 2(24)(iv) of the Act of 1922 and the corresponding section 2(24)(iv) of the Act of 1961. Answering this question, it was held that in view of the express language of the provision a fiction is enacted in very sweeping terms resulting in cases of remission of debts also as deemed income of the assesses. It is true, as stated by the learned advocate for the assesses, that the Delhi High Court was concerned with a genuine case of squaring off of debts due from the directors by the company. However, on the facts in the present case, there was no loan advanced by the company to the mother and sisters of the assesses on January 9, 1980, and hence there was no question of squaring off of any such loans subsequently. However, on the facts in the present case, there was no loan advanced by the company to the mother and sisters of the assesses on January 9, 1980, and hence there was no question of squaring off of any such loans subsequently. All that was a camouflage and make-believe as we discussed earlier. Learned counsel for the assesses would have been right if the loan transactions were held to be genuine and not a colourable device and then if they were squared off by the company, the beneficiaries would have been these loans and not the director. But such a situation has not arisen, as seen earlier, on the facts of the present case. 32. It is true as submitted by learned counsel for the assesses that section 2(24)(iv) is an artificial section, but even though it is so, when the facts found in the case get covered by that section, we have to give effect to the deeming fiction as contained therein. We cannot turn a Nelson's eye to the real nature of the transaction and hold that deemed income mentioned in section 2(24)(iv) has not accrued to the concerned assesses on the present set of facts. 33. On question No. 1, therefore, it must be held that on January 9, 1980, by the effecting of three entries of Rs. 1 lakh each in the company's books of account in favour of the assesses, a net benefit of Rs. 3 lakhs accrued to the assesses as deemed income under section 2(24)(iv) of the Act. It is true that the question as referred for our opinion mentions Rs. 4 lakhs, but as the first credit entry on January 3, 1980, is not disputed to be a fictitious entry and is accepted as a genuine entry by the Revenue, we will be concerned with the legal effect of entries made on January 9, 1980, only. On that day as the record shows three more credit entries were effected in favour of the assesses-director in the company's books of account and they were of Rs. 1 lakh each and they are said to have been brought back by the assesses from the loan amounts said to have been advanced by the company to his mother, Smt. Lakshmi Srinivasan, and his two sisters, Smt. Sai Prasanna and Vijayalakshmi Raman. So far as one loan amount of Rs. 1 lakh each and they are said to have been brought back by the assesses from the loan amounts said to have been advanced by the company to his mother, Smt. Lakshmi Srinivasan, and his two sisters, Smt. Sai Prasanna and Vijayalakshmi Raman. So far as one loan amount of Rs. 1 lakh in favour of Smt. Geetha Lata is concerned, even though she is the third sister of the assesses, it is not shown that the fourth loan amount of Rs. 1 lakh was also brought back by the assesses in the coffers of the company nor is there any fourth credit entry for Rs. 1 lakh in favour of the assesses so far as the fourth loan amount given to Geetha Lata is concerned. Therefore, our answer to question No. 1 would be that the Tribunal was not right in law in deleting the addition of at least Rs. 3 lakhs by holding that the provisions of section 2(24)(iv) are not attracted. On the contrary it is held that the provisions of section 2(24)(iv) are attracted so far as Rs. 3 lakhs are concerned and not to the extent of Rs. 4 lakhs. Mr. Dattu, learned counsel for the Revenue, also did not seriously dispute this factual position. Accordingly, question No. 1 is answered in the negative to the extent of Rs. 3 lakhs in favour of the Revenue and against the assesses by answering that the Tribunal was not right in law in deleting the addition of Rs. 3 lakhs by holding that the provisions of section 2(24)(iv) of the Income Tax Act, 1961, are not attracted in this case. However, to the extent deletion of the addition of Rs. 1 lakh is concerned out of the total addition of Rs. 4 lakhs, our answer is in the affirmative, against the Revenue and in favour of the assesses. That takes us to the consideration of question No. 2. 34. Question No. 2 : So far as this question is concerned, it is in the alternative and it is based on the assumption that entries effected on January 9, 1980, concerning the loan transactions with the assesses's mother and three sisters in the company's books of account, purporting to be advances of Rs. 1 lakh to each one of them, were genuine. 1 lakh to each one of them, were genuine. If they were genuine loan transactions, naturally the beneficiaries would be the mother and sisters of the assesses. On the basis of that assumption, if we try to answer question No. 2 we have got to find out whether the benefit which these loans who are relatives of the director of the company got from the company could be equated as the benefit flowing to the director himself. On making the assumption for the purpose of answering this question that these transactions are genuine, it is obvious that on January 9, 1980, the loans were advanced by the company to the relatives of the director. By mere advancing of these loans no benefit accrued to the concerned loans. They would get benefit if at all only when on April 30, 1980, which will be in the next assessment year, these loans were squared off by the company in their favour. 35. As laid down by the Delhi High Court in K.S. Malik Vs. Commissioner of Income Tax, (1980) 124 ITR 522 Delhi the squaring off of loans by the company in favour of the director may amount to a benefit under section 2(24)(iv) of the Act. Even that benefit would be a benefit to the relatives and not to the assesses and that the benefit would accrue in the next assessment year and not in the relevant assessment year. 36. It is difficult to accept the extreme proposition canvassed by learned counsel for the Revenue on this question, namely, that a benefit accruing to the relatives of the director is deemed to be benefit accruing to the director as per section 2(24)(iv). On the express language of the said provision, it is not possible to countenance this submission. It has to be kept in view that section 2(24)(iv) is a definition section. It includes artificially in the concept of income further benefits as mentioned in various sub-clauses. On the express language of the said provision, it is not possible to countenance this submission. It has to be kept in view that section 2(24)(iv) is a definition section. It includes artificially in the concept of income further benefits as mentioned in various sub-clauses. So far as section 2(24)(iv) is concerned, the value of any benefit or perquisite, whether convertible into money or not, can be taxed in the hands of the recipient if the benefit flows from the company's coffers and goes either to (i) a director or (ii) to a person who is substantially interested in the company or (iii) to relatives of the director or (iv) to a relative of the person who has substantial interest in the company. Therefore, even assuming that any benefit flows from the company to the relative of the director, such benefit can be deemed as income in the hands of the recipient only, and it cannot be automatically treated as a benefit accruing to the director himself. There is no such further deeming fiction in section 2(24)(iv)In this connection we may refer to section 60 to section 64 of the Income Tax Act by way of illustrations, wherein the Legislature itself has created legal fictions by which incomes accruing to other persons can be added as income of the concerned assesses by artificially clubbing them to his income. No such clubbing by way of legal fiction is contemplated by section 2(24)(iv). Reliance placed by Mr. Dattu in this connection on the Delhi High Court decision in The Commissioner of Income Tax, Delhi Vs. Nar Hari Dalmia, New Delhi, (1971) 80 ITR 454 Delhi is of no avail. In that case, the company had resolved to meet the foreign travel expenses of the director and his wife. The entire money was handed over to the director who spent therefrom the travelling expenses of himself and his wife and, therefore, it was held that the entire amount was covered by section 2(24)(iv). Such is not the fact situation in the present case. Even that apart, the Delhi High Court has not considered the various sub-clauses of section 2(24)(iv) for coming to the aforesaid conclusion and it is the mere ipse dixit of the court. On the other hand, the judgments of the Bombay High Court are directly on the point. 37. Such is not the fact situation in the present case. Even that apart, the Delhi High Court has not considered the various sub-clauses of section 2(24)(iv) for coming to the aforesaid conclusion and it is the mere ipse dixit of the court. On the other hand, the judgments of the Bombay High Court are directly on the point. 37. The Bombay High Court in the case of Commissioner of Income Tax, Bombay City-I Vs. Ramnath A. Podar, (1978) 112 ITR 436 Bom analysing section 2(24)(iv) of the Income Tax Act, 1961, speaking through Tulzapurkar J. (as he then was), made the following pertinent observations (headnote) : "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." 38. In a later decision in the case of Commissioner of Income Tax Vs. In a later decision in the case of Commissioner of Income Tax Vs. M.R. Ruia, (1988) 170 ITR 512 Bom a Division Bench of the Bombay High Court consisting of Bharucha (as he then was) and Sugla JJ., took the very same view and observed that there is no warrant for treating the value of any benefit or perquisite received by the director's relative as the income of the director, 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 is to be regarded as the income of the director. 39. We respectfully concur with the aforesaid view of the Bombay High Court. 40. As a result of the aforesaid discussion, question No. 2 will have to be answered in the affirmative, in favour of the assesses and against the Revenue. 41. The reference is disposed of accordingly with no order as to costs.