Commissioner of Income Tax vs Madhu Gupta

Hemant Gupta, J.—The following 9 appeals raise common question of law i.e. whether interest on the interest free loans obtained from the

Company in which either the assessee or his/her spouse was a Director, is a perquisite and an income of the assessee in terms of Section 2(24)(iv)

of the Income Tax Act, 1961 (for short the Act). The appeals are:

All the appeals are taken up together, as the questions of law in all these cases are identical. However, for the facility of reference, the facts and the

question of law are being taken up from ITA No. 95 of 2000. The question of law reads under:

Whether on the facts and in the circumstances of the case, which were clearly distinct from those in the preceding earlier year, the Tribunal was

right in deleting addition of Rs. 2,11,469 made by the AO by resorting to provisions of Section 2(24)(iv) of the Income Tax Act?

The assessee has availed interest free loan of Rs. 2,25,000 from M/s Varinder Agro Products Pvt. Ltd.; Rs. 7,82,000 from M/s Pashupati

Enterprises Pvt. Ltd.; and Rs. 10,07,000 from M/s Himalya Ayurvedic & Agro Research Centre Ltd. During the course of assessment

proceedings, the assessee was asked to explain as to why interest income on such interest free loan be not included to assessees income, as a

deemed benefit u/s 2(24)(iv) of the Act. The explanation of the assessee was not found to be satisfactory and the interest at the rate of 21% was

brought to tax on account of deemed benefit u/s 2(24)(iv) of the Act. Such order was affirmed by the Commissioner of Income Tax (Appeals).

But the Income Tax Appellate Tribunal (for short ""the Tribunal"") allowed the appeals by relying upon its earlier order passed in case of Varinder

Gupta in (IT Appeal No. 82 (Chandi.) of 1996 dt. on 09-12-1999) whereby interest on such interest free loans was not treated as deemed

income. In the aforesaid order, the reliance was placed on a judgment of Calcutta High Court reported as Commissioner of Income Tax Vs.

P.R.S. Oberoi,

Learned counsel for the assessee has argued that the revenue has not filed any further appeal against the order passed in Varinder Guptas case

(supra) relied upon by the Tribunal, therefore, the revenue cannot be permitted to dispute the findings recorded by the Tribunal. The learned

Counsel for the revenue submitted that as the tax effect was not substantial in the said case, therefore, appeal was not filed. Be as it may, we have

examined the question raised.

Before considering the arguments raised by the learned counsel for the parties, the provisions of law as it existed, relevant for the Assessment

Years in question reads as under:

In this Act, unless the context otherwise requires-

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""income"" includes-

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(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;

Learned counsel for the appellant has relied upon two judgments of Madras High Court reported as ADDITIONAL COMMISSIONER OF

Income Tax, MADRAS-I Vs. LATE A. K. LAKSHMI AND OTHERS., and Commissioner of Income Tax, Madras Vs. S.S.M. Lingappan, . In

A.K. Lakshmis case (supra), it was held that grant of amount by the Company for the personal use of its employees without charging interest is a

benefit granted by the Company. The Court held to the following effect:

We have no doubt that his section is not intended to restrict the discretion of the right of the company to advance amounts to its employees with or

without interest or at any specified rate of interest. But the question would still arise whether granting amounts of the company for the personal use

of its employees without charging interest would be the grant of any benefit. Our answer here must be in the affirmative. It is well known that it is

difficult, if not impossible, to borrow amounts for ones own use without having any liability to pay interest. Putting it positively, ordinarily borrowing

can be had only by incurring an obligation to pay interest. What would be the amount of interest will be, unless there are statutory provisions

governing the matter, a matter of agreement between the lender the borrower. But if either due to magnanimity or with a view to help an employee

any amounts are advanced by an employer to an employee without an obligation to pay any interest, we have no hesitation in that he gets the use of

the monies belonging to the company or any other employer without having any liability to pay interest

Such view was reiterated by the Madras High Court in its later judgment in S.S.M. Lingappans case (supra). Learned counsel for the appellant

has also relied upon a judgment of Delhi High Court reported as Commissioner of Income Tax Vs. Tara Singh, , wherein both the aforesaid

judgments of Madras High Court were relied upon.

In Varinder Guptas case (supra), the Tribunal has relied upon the judgment of Calcutta High Court in P.R.S. Oberois case (supra). The Calcutta

High Court was seized of the provisions of Sections 2(24)(iv), 17(2)(iii) and 40A(5) of the Act. The Court also considered the fact of amendment

in the Income Tax Act, 1961 by Taxation Laws (Amendment) Act, 1984 and its subsequent repeal by Finance Act, 1985. By the amending Act of

1984, it was provided that where the employer has advanced any loan to an employee for the purpose of building a house or purchasing a site or a

house and a site or for purchasing a motor car and either no interest is charged by the employer on the amount of such loan or interest is charged at

a rate lower than the rate of interest, which the Central Government may, having regard to the rate of interest charged by it from its employees on

loans for such purpose granted to them, such benefit will be regarded as ""perquisite"". But such amendment was repealed in the very next year. In

view of the said amendment, the Court held to the following effect:

The question therefore arises whether the enjoyment by the assessee of interest-free credit an be treated as a ""benefit or perquisite"" within the

meaning of section 2(24)(iv) of the income tax Act, 1961. The intention of the Legislature seems to be very clear that the expressions benefit

and/or ""perquisite"" did not include the enjoyment of loan or credit, free of interest or at a concessional rate. This aspect has been recognized by the

statute itself and to bring such items in the net of taxation, the law was amended by the Taxation Laws (Amendment) Act, 1984. By this

amendment, as already indicated, a new sub-clause (vi) was inserted in Section 17(2) and similarly another sub-clause (vi) was I was inserted in

clause (b) of Explanation 2 to Section 40A (5). The effect of these amendments, which were made effective from 1-4-1985 was to ensure

treatment and taxation in a case where an employee receives loan for certain prescribed purposes either free of interest or at a rate which was

lower than the specified rate. However, subsequently, the Finance act, 1985, omitted the aforesaid amendments made by the Taxation Laws

(Amendment) Act, 1984, with effect from the date of its insertion, namely, 1-4-1985 with a view to provide relief to salaried taxpayers. The very

fact that the statute had to be amended at the first instance to bring the said item within the purview of the expression ""perquisite"" and it later sought

to delete the same from the date of its insertion clearly shows that Parliament does not intend to treat interest-free loan or loan at a concessional

rate as any benefit or perquisite granted or provided by the lender-company to the director or employee, as the case may be.

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The question, however, remains as to whether non-charging of interest will also fall within the purview of section 2(24)(iv) of the Act. For the

purposes of applying section 2(24)(iv) of the Act, the same test as to what constitutes a benefit or a perquisite has to be applied. If the loan

granted to an employee or a director or a person who has a substantial interest in the company without charging any interest or at a substantial

interest in the company without charging any interest or at a concessional rate of interest does not constitute any benefit for the purposes of

Explanation 2(b)(iii) to section 40A (5) or section 17(2)(iii) of the Act, by the same yardstick, such loan cannot also be construed as benefit or a

perquisite for the purposes of Section 2(24)(iv) of the Act.

In that view of the matter, we have no hesitation in holding that section 2(24)(iv) cannot be pressed into service or on the facts and in the

circumstances of this case.

Learned counsel for the assessee pointed out that the judgments of Calcutta High Court as also of Madras High Court referred to by the

counsel for the Revenue have been considered by the Hon''ble Supreme Court in V.M. Salgaocar and Bros. Pvt. Ltd. Vs. Commissioner of

Income Tax, . The Hon''ble Supreme Court has approved the view of Calcutta High Court and also noticed that the judgments of Madras High

Court are prior to amendment carried out by the Taxation Laws (Amendment) Act, 1984 and consequent repeal by the Financial Act, 1985. Such

intervention makes the intention of the Legislature clear that had the existing provisions been sufficient to treat the benefit of interest free loan, as

deemed income, the same would not have been incorporated by way of amendment and subsequent repealed. In the aforesaid case, the assessee

was in appeal aggrieved against the judgment of Karnataka High Court, wherein reliance was placed upon judgments of Madras High Court, as

mentioned above. The Hon''ble Supreme Court has also quoted with approval, the passage from the judgment of P.R. S. Oberois case (supra).

It observed:

The amendment made by the 1984 Amending Act was both to Section 17(2) and Section 40A (5). In the impugned judgment reference in fact had

been made to inclusion of Sub-Clause (vi) in Clause (2) of Section 17. Moreover, the High Court in the impugned judgment did not consider the

amendments made by the Amending Act, 1984 on the ground "" it is difficult to see how this amendment can have any bearing upon the

interpretation of the then existing provisions of the Act."". We do not think this approach was also correct. An amending provision can certainly give

guidance to interpretation of the existing provisions. The judgments of the Madras High Court which were relied upon by the High Court in the

impugned judgment were for the period prior to the 1984 amendment and the Madras High Court had no occasion to consider the impact of the

amendments to section 17(2) and section 40A(5) of the Act.

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The High Court in the impugned judgment could not have brushed aside the consideration of the Amending Act, 1984 and its subsequent repeal by

the Finance Act 1985, by terming them of no consequence.

At this stage, we may notice that Section 17 falling in Chapter IV deals Computation of Income under the head salary. Section 17(2) defines

perquisite for the purposes of Sections 15 & 16 and for the purposes of Section 17, whereas Section 40A contemplates that the computation of

income under the head ""Profits and gains of business or profession"". Section 2(24)(iv) does not define the expression ""any benefit or perquisite"".

The perquisite has been defined in Section 17(2) and also were defined in Section 40A(5) prior to its omission by Direct Tax Laws (Amendment)

Act, 1987. The provisions of Section 40A(5) prior to its omission, deal with expenditure resulting directly or indirectly in the provision of any

perquisite whether convertible into money or not i.e. the converse of Section 2(24)(iv). Therefore, the interpretation in V.M. Salgaocar and Bros

Pvt. Ltd.s case (supra) interpreting Section 17(2) and effect of amendment in Section 40A(5) would be applicable to the expression benefit and

perquisite appearing in Section 2(24)(iv) as well as is observed by Calcutta High Court. The judgment of Calcutta High Court in P.R.S. Oberois

case (supra) considering the benefit of perquisite appearing in Section 2(24)(iv) of the Act, has been approved by the Hon''ble Supreme Court.

In view of the aforesaid judgments, we are of the opinion that interest on interest free loans advanced to the assessee by the Company cannot

be treated as deemed income in terms of Section 2(24)(iv) of the Act. Consequently, the present appeals are dismissed that is answering the

question of law in affirmative i.e. against the Revenue and in favour of the assessee.

In favour of assessee.