Cit Vs. Troilakya Chandra Bora - Court Judgment

Excerpt:
- - the 1961 act emphasis it clearly that the meaning of income would not restrict to the class of receipts mentioned in the definition but also includes in its ambit the meaning of all terms as generally understood. the tribunal took the view that the rally was not a race, it was predominantly a test of skill and endurance as well as of reliability of the vehicle, the rally was not a 'game' within the meaning of section 2(24)(ix) of the income tax act, 1961 and the receipt was casual in the nature and not an income receipt and, therefore, the amount was not taxable. 5. the judgment of the apex court clearly lays down that the 'income' has to be construed in its widest amplitude. p.p. naolekar, c.j. for the assessment year 1981-82 the assessee troilakya chandra bora, has submitted his return. the income tax officer has found that the assessee constructed a house property, the value of which was determined by the valuation officer of the department at rs. 5,92,803. construction of the said property was started on 252-1980 and completed on 31-3-1981, while ascertaining the source of investment during the course of assessment proceeding it came to the light that the assessee was an employee of m/s eastern tea brokers (p) ltd., guwahati, and has managed to embezzle cash of the said company. the income tax officer assessed the embezzled amount to rs. 3,53,220 as income of the assessee and that amount was subjected to tax. the assessee preferred appeal before the.....

Judgment:

P.P. Naolekar, C.J.

For the assessment year 1981-82 the assessee Troilakya Chandra Bora, has submitted his return. The Income Tax Officer has found that the assessee constructed a house property, the value of which was determined by the Valuation Officer of the department at Rs. 5,92,803. Construction of the said property was started on 252-1980 and completed on 31-3-1981, While ascertaining the source of investment during the course of assessment proceeding it came to the light that the assessee was an employee of M/s Eastern Tea Brokers (P) Ltd., Guwahati, and has managed to embezzle cash of the said Company. The Income Tax Officer assessed the embezzled amount to Rs. 3,53,220 as income of the assessee and that amount was subjected to tax. The assessee preferred appeal before the Commissioner (Appeals), Guwahati. The Appellate Authority held that the embezzled amount cannot be treated as taxable income in view of section 2(24) of the Income Tax Act, 1961 and has placed reliance on the previous decision rendered by the Tribunal in the assessee's case and the decision of the Madras High Court in the case of CIT v. A.R. Adaikappa Chettiar : [1973]91ITR90(Mad) . Against this order, the revenue preferred appeal before the Income Tax Appellate Tribunal, Guwahati. Before the Tribunal the respondent stated that at the relevant period the assessee was an employee of M/s Eastern Tea Brokers (P) Ltd. and he has embezzled an amount of Rs. 3,53,220 of the said firm. The amount embezzled has been utilised by the assessee for construction of house property and that the assessee had executed a pronote dated 12-10-1981 for a sum of Rs. 4,73,535.21 in respect of the amount embezzled by him to his employer. The Tribunal while dismissing, the appeal filed by the revenue held that all types of receipts cannot constitute income of an assessee. Capital receipts, loan receipts and receipts purely of windfall nature certainly does not constitute the income of the recipient. As the assessee acknowledged the liability in respect of the embezzled amount to his employer the said amount forms merely a liability payable at a future date by him and cannot constitute his income, inasmuch as, the embezzled amount cannot be considered to be the business or professional income of the assessee, as the assessee was not in the business or profession of embezzling money. The Tribunal also strongly relied upon the decision of the Madras High Court in A.R. Adaikappa Chettiar's case (supra).

2. Aggrieved by the said order of the Tribunal, the present appeal is preferred under section 260A of the Income Tax Act, 1961. The High Court posed for itself the following two questions for consideration :

'1. Whether, on the facts and in the circumstances of the case, Tribunal was justified and correct in law in upholding the order of the Commissioner (Appeals) whereby addition of the embezzled money to the income of the assessee under the head 'Income from other sources' was deleted ?

2. Whether, on the facts and in the circumstances of the case, the embezzled money in the hands of the assessee and utilised by the assessee is an income within the meaning of section 2(24), read with section 69A of the Income Tax Act, 1961 ?'

3. It is submitted by the learned counsel for the revenue that the amount received from any source legally or illegally shall constitute an income of a person, who receives it or takes it from his employer, unless it is specifically exempted from the income-tax. Merely because the assessee on a latter date executed a pro-note acknowledging his liability to repay the amount back would not change the character of the amount embezzled by him to be that of income. The amount embezzled by the assessee was invested in house property, and, therefore, it constitute income of the assessee. On the other hand, the submission of the counsel for the assessee is that, the embezzled amount is not an amount belonging to an assessee neither it has been received by the consent of his employer nor it was earned by the assessee, therefore, it cannot be construed as income of the assessee, more so, when the assessee undertook to return it back, it has to be construed the amount as loan. The embezzled amount, not being the amount belonging to the assessee, it cannot constitute taxable income and consequently no tax is liable to be paid on it as has been rightly held by the Appellate Authority and the Tribunal.

4. By the definition 'income' in section 2(24) includes certain class of receipts. The 1961 Act emphasis it clearly that the meaning of income would not restrict to the class of receipts mentioned in the definition but also includes in its ambit the meaning of all terms as generally understood. it is impossible to define exhaustively the meaning of income, it is, therefore, the Legislature purposely kept the definition of income as an inclusive definition. The Apex Court has an occasion to consider the scope and ambit of the word 'income' as defined under section 2(24) of the Income Tax Act in the matter of CIT v. G.R. Karthikeyan : [1993]201ITR866(SC) . In the said case the assessee, an individual, was having income from salary and business, participated in a car rally. The rally was restricted to private motor cars. The really was designed to test endurance driving and the reliability of the automobiles. The method of ascertaining the first prize was based on a system of penalty points for various violations. The competitor with the least penalty points was adjudged for the first prize winner. The assessee won the first prize and received Rs. 20,000 from Indian Oil Corporation and Rs. 2,000 from the Organisers of the rally. The question was whether the sum of Rs. 22,000 was taxable in the hands of the assessee. The Tribunal took the view that the rally was not a race, it was predominantly a test of skill and endurance as well as of reliability of the vehicle, the rally was not a 'game' within the meaning of section 2(24)(ix) of the Income Tax Act, 1961 and the receipt was casual in the nature and not an income receipt and, therefore, the amount was not taxable. The High Court upheld the decision of the Tribunal holding that the rally was not a race and that the receipt did not represent 'winnings' which had acquired the meaning of money won by gambling or betting, and that section 2(24)(ix) could not take in the amount received by the respondent in a race which involved skill in driving. On appeal to the Supreme Court, the Supreme Court has reversed the decision of the High Court and held that since the definition of 'income' in section 2(24) was inclusive, the purpose of the definition was not to limit the meaning of 'income' but to widen its net and the several clauses therein were not exhaustive of the meaning of income, even if a receipt did not fall within the ambit of any of those clauses, it might still be income if it partook of the nature of income. The natural and grammatical meaning of the word 'income' according to the Oxford Dictionary is that 'as thing that comes in'. The word 'income' is understood so as to include the capital gain. The expression of 'income' is of the widest amplitude and it includes not merely what is received or what comes in by exploiting the use of the property but also that which can be converted into income. The rally was a contest, if not a race and the respondent/assessee entered the contest or win it. What he got was a return for his skill and endurance. It was 'income' construed in its widest sense. Though it was casual in nature, it was nevertheless an income.

5. The judgment of the Apex Court clearly lays down that the 'income' has to be construed in its widest amplitude. The question before us - whether the amount embezzled can be construed to be an income when the amount was not received or taken by the assessee with the authority of his employer. In the instant case the assessee has accepted his liability to pay it back by executing a pro-note, at the same time, we cannot loss sight of the fact that the amount embezzled by the assessee had been utilized by him for construction of his house and it was only on the later stage he has executed a pro-note in favour of his employer for the embezzled amount. There is no dispute of the fact that the assessee has received the amount though illegally from his employer has utilized the same for the purpose of construction of his house.

6. The employee, i.e., the assessee, misappropriated the money belonging to the employer in fraud and in breach of his obligation to him and it cannot be said that he owes this money under an agreement. The amount embezzled cannot partake the character of a loan. The basic and fundamental characteristics of loan is the consent and knowledge of the lender at the time of advancement of money. It also incorporates the condition of repayment or promise to return back the amount taken by the borrower at the time the money is advanced. In the embezzlement, the money is taken by the person without consent or knowledge of the owner. There is no agreement to pay the money at the time the money is taken. The agent or the employee misappropriates the money belonging to his employer in fraud of him and in breach of his obligation to him and, therefore, it cannot be said that he owes this money under an agreement. It is a money which is withdrawn by the employee out of the employer's coffer without authority and in fraud of his employer and can in no sense be called as a loan advanced by the employer to be repaid by the employee. The money received or taken by the employee by embezzlement is not a money taken under an obligation to repay nor he has taken the money as a debt to be paid back on the subsequent dates. One who uses another property or money to secure gain a profit therefrom may, even though he did it wrongfully and holds it, is to be subjected to income-tax to that extent. Money embezzled is a gain to the embezzler and, therefore, falls within the wider definition of 'income' under the Income Tax Act.

7. The Appellate Tribunal has relied upon strongly for arriving at a conclusion that the embezzled amount is not an 'income' and, therefore, no tax can be levied on the basis of the judgment of the Madras High Court in the matter of A.R. Adaikappa Chettiar's case (supra). In that case the question for consideration was whether the amount in question was the benefits or perquisites obtained by the assessees from the company and whether the assessee came within the category of the persons described in section 2(6C)(iii) of the Indian Income Tax Act, 1922 or section 2(24)(iv) of the Income Tax Act, 1961? The assessees were the Managing Agents of Sri Venkatesa Mills Ltd. While assessing the Company the Income Tax Officer disallowed a portion of Company's claim for exemption from tax liability on the ground that the cars of the Company were partly used by the Managing Agents of the company for their private purposes. The Income Tax Officer later on issued notice to the assessees for treating the amount disallowed to the Company as the income of the assessees under section 2(6C)(iii) of the Income Tax Act, 1922 and section 2(24)(iv) of the Income Tax Act, 1961. While dealing with this question the court held that for the purpose of section 2(6C)(iii) of the Income Tax Act, 1922 and section 2(24)(iv) of the Income Tax Act, 1961 it is necessary that 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. The benefit or advantage which might have been taken by the Director or other person from a company without any claim of right has to be repaid or returned to the company if the company discovers the unauthorized taking and seeks to enforce its restitution. The necessary elements, therefore, for treating the benefit or perquisite obtained to be an income, it is necessary that the person who received the money has the authority to claim that benefit. Any advantage taken by the Director or other person from the Company without its authority or knowledge will not amount to a benefit or perquisite obtained from the Company. The observations made in the judgment and the decisions turned around the interpretation of section 2(6C)(iii) of the Income Tax Act, 1922 and section 2(24)(iv) of the Income Tax Act, 1961 cannot be taken to be an authority that any amount received illegally without the consent of the employer cannot be treated as "income' simply because the person is required to return it back under some forced circumstances in the subsequent years. The Income Tax Appellate Authority and the Tribunals, in our opinion were not right in holding that the embezzled amount is not an income of the assessee and, therefore, is not liable to be taxed. The amount received by the assessee in the assessment year in question being utilized by him in construction of the house property shall be the 'income' within the meaning of section 2(24) of the Income Tax Act, 1961 and is liable to be taxed.

8. For the reasons stated above the appeal is allowed and the orders of the appellate authority and the Tribunal dated 14-2-1992 and 29-8-2000 respectively are set aside and that of the order dated 30-3-1990 of the Income Tax Officer, Ward No. 11, Guwahati is restored. However, there shall be no order as to costs.