1. This appeal by the assessee is directed against the order dated 9-5-1989 of the Commissioner of Wealth-tax (Appeals) V, Madras relating to the assessment year 1984-85.
2. The assessee is a private limited company. It owned house property bearing No. 22, Haddows Road, Madras. It is common ground that about 35% of the said property is used by the assessee-company as its office, the balance of about 65% being used as the residence of the company's Managing Director, Shri Chidambaram Chettiar. It is also a common ground that the Managing Director was paying to the company a rent of Rs. 24,000 per annum in respect of the property occupied by him.
3. The only issue that came up for consideration in the course of wealth-tax assessment proceedings for the assessment year 1984-85 (under the provisions of Section 40 of the Finance Act, 1983) was whether the portion of the aforesaid property occupied by the Managing Director is exigible to wealth-tax. The assessee's case before the Assessing Officer was that Shri Chidambaram Chettiar was an employee of the company; that he was not in receipt of any saliiry from the company; and that, therefore, no wealth-tax was leviable on the value of that portion of the property occupied by the Managing Director. The assessee's case in particular, was that salary paid by the company to the Managing Director was nil and, hence, it did not exceed Rs. 18,000 per annum and, consequently, the assesses was entitled to the benefit of exemption under Section 40(3)(vi) and the proviso thereto.
4. The Assessing Officer accepted the proposition that Shri Chidambaram Chettiar, Managing Director of the company, was an employee of the company. However, taking into account the fact that Shri Chidambaram Chettiar was receiving salary of Rs. 5,000 per month from one, M/s.
Indra Cotton Mills Ltd., the Assessing Officer concluded that the income under the head "salary" chargeable to tax in the hands of the said person exceeded the limit of Rs. 18,000 stipulated in the proviso to Section 40(3)(vi) and, hence, the exemption provided for in that Section is not available to the assessee. In this view of the matter, therefore, the Assessing Officer brought to tax a sum of Rs. 11,21,000, being the estimated value of that portion of the Haddows Road property occupied by Shri Chidambaram Chettiar.
5. The assessee took up the matter in appeal before the CWT(A), who declined to interfere in the matter. For two reasons, first, if regard be had to the salary of Rs. 60,000 per annum received by Shri Chidambaram Chettiar from M/s. Indra Cotton Mills Ltd., the proviso to Section 40(3)(vi) cannot avail the assessee. The second reason, which weighed with him, was, to quote him: "Moreover, the law is well settled that a director is not an employee and for the purpose of computing disallowance under the Income-tax Act, 1961 in respect of perquisites and benefits offered to the director, Section 40(c) and not Section 40A(5) would come into play. Thus this ground also, namely that the director is an employee of the company and the corollary claim for exemption of the property fails." It is in these circumstances that the assessee is now before us.
6. Shri K.R. Ramamani, the learned counsel for the assessee, took us through the facts and circumstances of the case and stated that the issue before us was a limited one. It is a matter of record that Shri Chidambaram Chettiar, the Managing Director of the assessee-company, did not draw any salary from the assessee-company. In other words, the salary drawn by him was less than Rs. 18,000. This would mean that the assessee satisfied the conditions laid down under the proviso to Section 40(3)(vi) of the Finance Act. According to Shri Ramamani, the fact that Shri Chidambaram Chettiar was in receipt of an annual salary of Rs. 60,000 from M/s. Indra Cotton Mills Ltd., which was brought to tax as such under the head "salaries" in the hands of the said person, is of no consequence. The scheme of Section 40(3) is clear and that was that the salary referred to in the proviso to Section 40(3)(vi) refers to the salary received by the employees of the company, which is assessed to wealth-tax under the said Section. The scheme of the Section does not any where suggest that the salary received by the employees of the assessee-company from any other source must also be taken into account for the purpose of determining whether the assessee is entitled to exemption under Section 40(3)(vi).
7. In view of the foregoing, therefore, contended Shri Ramamani, the assessee is entitled to succeed.
8. Shri K.L. Tilakchand, the learned Departmental Representative, strongly supported the impugned orders of the lower authorities.
9. We have looked into the facts of the case. We have considered the rival submissions. Certain specific queries from the Bench elicited the following information:- (i) The assessee - company has not provided any residential accommodation for any employee other than the Managing Director.
(ii) The Managing Director holds 25% of the shares of the assessee-company.
(iii) There is no separate contracts of employment between the assessee-company and the Managing Director.
(iv) The Memorandum and Articles of Association of the assessee-company governs matters relating to the appointment of Managing Director etc.
10. We may at this stage notice the relevant clauses of the Memorandum and Articles of Association of the assessee-company. Clause 19 states that the said Shri Chidambaram Chettiar shall be one of the first three directors of the company. Clause 20 stipulates that he shall be a director for his life and shall not be liable to retire by rotation or otherwise. Clause 21 stipulates that he shall be the Managing Director of the company from the date of incorporation of the company and shall continue to hold such office for his life unless he voluntarily resigns his office in writing. Clause 24 stipulates that the said Shri Chidambaram Chettiar shall not be removable from office as Managing Director and Director of the company on any ground, whatsoever, save and except his being convicted of a non-bailable offence in relation to the affairs of the company and his work as such Managing Director. He shall not be removable from his office as Managing Director except by a special resolution passed at a general meeting convened for the purpose and at which not less than 3/4th in value of the shareholders are present in person or by proxy. Clause 33 reads as under:- 33. Mr. A.K.A.CT.AL. Chidambaram Chettiar shall be Chairman of the Board of Directors and shall hold the said office so long as he is a Director. In addition to his vote as a Director and member he shall be entitled to a casting vote in the event of an equality of vote either at a meeting of the Board or at a general meeting. The Chairman shall ex-officio be the chairman of all general meetings.
11. The aforesaid clauses read as a whole leave no doubt in our mind that it would be a misnomer to regard Shri Chidambaram Chettiar as an employee of the assessee-company. The factum of Shri Chidambaram Chettiar's being a life-time director, a life-time managing director and a life-time chairman of the board of directors taken in conjunction with the further significant fact of his possessing a casting vote makes it difficult for us to hold that he is an employee of the company.
12. We may now turn to the provisions of Section 40(3) of the Finance Act, 1983. By the said Section the levy of wealth-tax on closely held companies was revived in a limited way from the assessment for the assessment year 1984-85 and onwards. The immediate provocation for the revival of wealth-tax on closely held companies, to quote from the budget speech of the Finance Minister, was : It has come to my notice that some persons have been trying to avoid personal wealth-tax liability by forming closely held companies to which they transfer many items of their wealth, particularly jewellery, bullion and real estate. As companies are not chargeable to wealth-tax and the value of the shares of such companies does not also reflect the real worth of the assets of the company, those who hold such unproductive assets in closely-held companies are able to successfully reduce their wealth-tax liability to a substantial extent. With a view to circumventing tax avoidance by such persons.
I propose to revive the levy of wealth-tax in a limited way in the case of closely-held companies. Accordingly, I am proposing the levy of wealth-tax in the case of closely-held companies at the rate of 2 per cent, on the net wealth represented by the value of specified assets, such as, jewellery, gold, bullion, buildings and lands owned by such companies. Buildings used by the company as factory, godown, warehouse, hotel or office for the purposes of its business or as residential accommodation for its low paid employees will be excluded from net wealth.
13. For the purpose of Section 40 of the Finance Act, 1983, the net wealth of a company will be the amount by which the aggregate value of all the specified assets, wherever located, belonging to the company on the valuation date is in excess of the aggregate value of all the debts owned by the company on the valuation date, which are secured on or which have been incurred in relation to the said assets. Building or land appurtenant thereto belonging to the company is one of the specified assets. However, building or part thereof used by the company as factory, godown, warehouse, hotel or office for the purposes of its business or as residential accommodation for its employees is left out of reckoning. As respects a building or part thereof, which is used by the assessee as residential accommodation for its employees, the proviso to Section 40(3)(vi) adds an important rider. This proviso reads as under:- Provided that each such employee is an employee whose income (exclusive of the value of all benefits or amenities not provided for by way of monetary payment) chargeable under the head 'Salaries' under the Income-tax Act does not exceed eighteen thousand rupees; 14. As we see it, the said proviso besides describing or defining the class of employees to whom the residential accommodation must be provided by the asscssee-company, also contains an important clue to the fact that before claiming the benefit of the exclusion provision of Section 40(3)(vi) the assessee must show that jt was providing residential accommodation to a Section of its employees and not to a single or solitary employee. The clue is to be found in the expression "each such employee", which has a distributive signification, occurring in the proviso. The scheme of Section 40(3)(vi) clearly contemplates a plurality of employees to whom the assessee-company provides residential accommodation in a building or buildings belonging to it.
The exclusion provisions of that Section do not clearly apply to a case where a building belonging to the assessee-company is given as residential accommodation to a single or solitary employee. After all, the rationale behind the Section is clear and that is to prevent the mischief of some persons trying to avoid personal wealth-tax liability by forming closely held companies to which they transfer many items of their wealth, particularly jewellery, bullion and real estate. The Section, therefore, needs to be construed by applying the "mischief rule" and so construed, the Section is applicable to a building or buildings belonging to a closely held company, which is used for providing residential accommodation to certain specified Sections of its employees.
15. In the case before us, we have already shown that Shri Chidambaram Chettiar, the Managing Director of the company, cannot be regarded as an employee of the company. The assessee's claim for excluding the value of that portion of the Haddows Road property, which is used by Shri Chidambaram Chettiar as his residence, will have to fail on this score alone. Even if we proceed on the hypothesis that the said Shri Chidambaram Chettiar is somehow regarded as an employee of the assessee-company, the assessee's case does not improve, because the company has admittedly no scheme for providing residential accommodation for its low paid employees. Therefore, the exclusion provisions contained in Section 40(3)(vi) cannot avail the assessee.
16. In view of the foregoing, therefore, we hold that the sum of Rs. 11,21,000 being the value of that portion of Haddows Road property used by the said Chidambaram Chettiar as his residence, was rightly brought to tax under Section 40 of the Finance Act 198.1 We, therefore, decline to interfere in the matter.