Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the interest free use of the company’s funds by the assessee- managing director, would not amount to benefit or amenity or perquisites within the meaning of s. 17(2)(iii) of the IT Act, 1961, and accordingly, in deleting the sum of Rs. 67,004, Rs. 86,148 for the asst. yrs. 1972-73 & 1973-74 ?

High Court Of Madras

CIT vs. T.P.S.H. Selva Saroja (Decd) By Lrs

Sections 2(22)(e), 17(2), 254(1)

Asst. Years 1972-73, 1973-74, 1974-75, 1976-77, 1979-80

N.V. Balasubramanian & Mrs. A. Subbulakshmy, JJ.

Tax Cases Nos. 744 & 745 of 1982, 879 of 1983 and 1184 & 1185 of 1984

17th April, 1998

Counsel Appeared

J. Jayaraman for C.V. Rajan, for the Revenue : V. Ramakrishnan, for the Assessee

JUDGMENT

N.V. BALASUBRAMANIAN, J. :

In all the above tax cases one T.P.S.H. Selva Saroja, Mukkudal (since deceased) was the respondent (hereinafter to be referred to as “the assessee”), and, on her death, her legal representatives were brought on record. The following questions of law have been referred to us for our consideration in various tax cases :

Tax Cases Nos. 744 and 745 of 1982 (asst. yrs. 1972-73 and 1973-74)

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the interest free use of the company’s funds by the assessee- managing director, would not amount to benefit or amenity or perquisites within the meaning of s. 17(2)(iii) of the IT Act, 1961, and accordingly, in deleting the sum of Rs. 67,004, Rs. 86,148 for the asst. yrs. 1972-73 & 1973-74 ?

Whether, on the materials on record, the Tribunal is correct in estimating the personal expenses of the assessee at Rs. 3 lakhs instead of Rs. 5,41,870 the utilisation of which attracted the application of s. 17(2)(iii) ?

Whether, the Tribunal is correct in holding that no amount will fall for assessment as benefit or amenity or perquisite under s. 17(2)(iii) as the principal amount will have to be assessed as deemed dividend under s. 2(22)(e) of the Act ?” Tax Case No. 879 of 1983 (asst. yr. 1974-75) “Whether the Tribunal is correct in holding that the interest free use of the company’s fund by the assessee-managing director, would not amount to benefit or amenity or perquisite within the meaning of s. 17(2)(iii) of the IT Act, and, accordingly, in deleting the sum of Rs. 64,359 from the assessment for the asst. yr. 1974-75 ?” Tax Cases Nos. 1184 and 1185 of 1984 (asst. yrs. 1976-77 and 1979-80) “Whether, on the facts and in the circumstances of the case, the ITO was not justified in assessing the perquisite arising out of the interest free advances made by the company to the assessee ?”

All the tax cases arise under the provisions of the IT Act, 1961 (hereinafter referred to as “the Act), for the asst. yrs. 1972-73, 1973-74, 1974-75, 1976-77 and 1979-80. Since the facts are common in all the tax cases, it is not necessary to set out the facts is each one of the cases, but it is sufficient to notice the facts in each one of the cases, but it is sufficient to notice the facts found in Tax Cases Nos. 744 and 745 of 1982 for the disposal of all the tax cases. The assessee, an individual, was the managing director of T.P. Sokkalal Ramsait Factory (P) Ltd., carrying on business of manufacturing and selling of beedies. On 11th Dec., 1969, a search was conducted, in the premises of the assessee as well as in the premises of the company and several records and documents were seized. One of the documents seized was the personal note book belonging to the managing director, seized at her residence containing the details indicating several credits and debits and the credits represented the receipts perhaps by way of income and the expenditure and the full details were not available. The ITO thought that the transactions indicated in the seized book represented suppressed credits and suppressed business income of the limited company. However, the company taking advantage of the Voluntary Disclosure of Income and Wealth Act, 1975, came forward with a disclosure of only the credits found in the personal note book seized and the company took into account the credits found and disclosed the same as part of its income. The company, however, has not claimed any deduction towards debits found in the note book, nor any deduction was allowed for the said debits. The ITO in the assessment of the assessee, held that the debits indicated in the personal note book represented the moneys of the company used by the assessee-managing director for her personal benefit and since no interest was paid or payable to the company by the assessee on those moneys, the ITO treated the amounts as if they were borrowed from the company and interest on such amounts was treated as perquisite to the assessee-managing director and the ITO also treated the assessee as an employee of the company as she was remunerated on monthly basis. It is unnecessary to notice the various amounts which were added as the value of perquisites in various assessment years, but the interest at rates ranging from 7 per cent to 9 per cent was determined and additions were made in the individual assessment of the assessee for the various assessment years which are the subject-matter in the present tax cases.

The assessee went in appeal before the AAC and the AAC went into the matter in detail and, according to him, the assessee was keeping the company’s books and in the absence of any specific finding that the moneys were taken by the assessee for her own benefit, the interest cannot be assessed in the hands of the assessee. According to the AAC, the moneys were kept in her custody and there was nothing to show that the assessee had obtained any loan on which the assessee was obliged to pay interest and the moneys kept by the assessee for the benefit of the company cannot be treated as moneys borrowed by the assessee. Further, according to the AAC no benefit or advantage was derived by the assessee by employment of these moneys and the concealed profits of the company were lying in the hands of the principal officer, i.e., the managing director. He also held that there is no question of taxing the value of perquisite under the provisions of s. 17(2) of the Act on persumptive basis in the hands of the assessee. The finding of the AAC is that the assessee had not derived any benefit or advantage as the moneys remained the properties of the company and the possession of the same never passed to the assessee from the company, and the company had not treated the assessee as a debtor, nor had the assessee taken a stand that she owned any money to the company. Accordingly, he held that there is no question of taxation of the perquisite in terms of s. 17(2) of the Act. In this view of the matter, he deleted the additions both for the asst. yrs. 1972-73 and 1973-74. The Revenue carried the matter on appeal before the Tribunal. The Tribunal noticed the assessment records for the asst. yrs. 1966-67 to 1975-76 and found that the basis of the additions was the seized book of the managing director and the Tribunal proceeded on the basis that it was not certain and it was also not clear that on the basis of the seized book how the extra business alleged to have been done outside the book could be regarded as pertaining to the company. The Tribunal referred to certain illustrations and made an observation that if the book belonged to one party, the natural presumption or inference that would be drawn would be that the said person did the business involved in the transactions noted in the book. The Tribunal also noticed that the ITO bifurcated the transactions in the book holding all the receipts as that of the company and the expenses as that of the individual assessee. Then the Tribunal noticed the voluntary disclosure made by the company and observed that after the payment of tax, some amounts might have been spent for the company’s business and other purposes. The Tribunal also noticed that the amount spent that could be fixed at about Rs. 5-1/2 lakhs. The

Tribunal also noticed that the company could not have earned such a large amount without incurring substantial expenditure and the company should be entitled to the benefit of the expenditure of the company. The Tribunal noticed the entries regarding the expenditure found in the book seized and found that the assessee could not have spent the entire expenditure for her personal benefit. The Tribunal, therefore, estimated that out of the available amount of Rs. 5,41,870 a sum of Rs. 3 lakhs could be allocated as expenses of the assessee towards her personal use and the balance as pertaining to the company. The Tribunal, therefore, observed that the assessee must be treated as having received the amount of Rs. 3 lakhs which was spent for her personal benefit and to the extent of the amount withdrawn from the company and utilised for own purposes, the amount should be treated as an advance not returned or actual dividend declared. The Tribunal noticed the records for the asst. yrs. 1966-67 to 1968-69 and held a sum of Rs. 17,630, Rs. 42,984 and Rs. 92,026 as amounts advanced to the assessee for the asst. yrs. 1966-67, 1967-68 and 1968-69 and the sum of Rs. 1,47,460 for the asst. yr. 1969-70 should be treated as dividends under s. 2(22)(e) of the Act. The Tribunal also gave a finding that for the asst. yr. 1969-70 as against a sum of Rs. 1,84,797 treated as dividends, only a sum of Rs. 1,47,460 should be treated as dividends. The Tribunal, therefore, came to the conclusion that when the advances taken by the assessee were treated as dividends under s. 2(22)(e) of the Act, there is no obligation on the part of the assessee to return the amounts statutorily and once the amounts were treated as dividends under s. 2(22) (e) of the Act, the natural corollary would be that the money belonged to the assessee as her own money and there was no question of her getting the money as loan without interest. In this view of the matter, the Tribunal held that the interest on the said amounts should not be treated as perquisite in the hands of the assessee and the value of the perquisite could not be added for any of the assessment years as it could not be stated that the assessee had used the moneys without payment of interest in the capacity of the managing director of the company. The above order of the Tribunal was followed by the Tribunal for all the subsequent assessment years and the questions of law set out earlier have been referred to us for our consideration.

4. Mr. Jayaraman, learned senior counsel for the Revenue, submitted that there are inconsistencies in the order of the Tribunal and there is no evidence to support any of the findings of the Tribunal. He strongly criticised the order of the Tribunal on the ground that the Tribunal failed to take note of certain aspects. He submitted that the Tribunal noticed that the company did not claim any debit found in the seized note book, but the company disclosed only the credits found in the seized note book, as its income. He also submitted that the company came forward with the voluntary disclosure of income found in the book seized under the Voluntary Disclosure Scheme and nothing prevented the company from claiming the expenditure shown on the debit side of the seized book. He also submitted that there is no basis for the Tribunal to come to the conclusion that even the income disclosed by the company was not the income of the company and the observation made by the Tribunal goes against the disclosure made by the company and the stand taken by the assessee that the amount belonged to the company. According to learned senior counsel, the Tribunal also failed to notice that the book seized belonged to the assessee and the expenditure should also be treated as her own expenditure unless there is some evidence to show that it represented business expenditure. It is an admitted fact, according to learned senior counsel, that the entire credits represented the undisclosed income of the company and the normal presumption is that the companywould have claimed expenditure out of its disclosed business income and it cannot be presumed that the business expenditure would be met by undisclosed income as it is always advantageous for the company to claim deduction of expenditure against the disclosed income to reduce the profits. The Tribunal, according to learned senior counsel, without any material, came to the conclusion that a portion of the expenditure would be the company’s expenditure. According to learned senior counsel, the Tribunal proceeded merely on the basis of assumption and there is no material to support any of its findings. He also submitted that the view of the Tribunal that once the amounts were assessed as dividend income, the interest income on the loan cannot be assessed under s. 17(2) of the Act is plainly erroneous in law. According to learned senior counsel, as per the provisions of s. 2(22)(e) of the Act, only for the limited purchase of making assessment, the payments made by the company that too to the extent of accumulated profits, are treated as dividend and the essence of the order of the Tribunal that the assessee/shareholder became the owner of the amounts advanced is erroneous in law. He relied upon the decisions of the Supreme Court in (i) CIT vs. C.P. Sarathy Mudaliar (1973) 83 ITR 170 (SC) : TC 41R.284, and (ii) Smt.

Tarulata Shyam vs. CIT 1977 CTR (SC) 275 : (1977) 108 ITR 345 (SC) : TC 41R.325 and submitted that the amount advanced to the assessee/shareholder is still a loan and the assessee/shareholder is bound to return the moneys to the company. He also referred to the decisions of this Court in (i) CIT vs. C. Kulandaivelu Konar (1975) 100 ITR 629 (Mad) : TC 58R.475, and (ii) Addl. CIT vs. Late A.K. Lakshmi 1978 CTR (Mad) 171 : (1978) 113 ITR 368 (Mad) : TC 58R.480 and submitted that it cannot be assumed that there was unauthorised drawings of moneys by the assessee from the company. According to the learned senior counsel, the stand of the assessee was that the assessee spent moneys on behalf of the company and while the company declared the amounts shown as credit in the books seized as its income at the time of voluntary disclosure, it cannot be stated that there was unauthorised use of the amounts by the assessee. He, therefore, submitted that from the above finding it is not possible to say under which capacity, she enjoyed the amounts. According to learned senior counsel it is not the case of the assessee that personal expenses were met from any other source apart from the source disclosed under the Voluntary Disclosure Scheme. Since she admitted that the income belonged to the company and there was withdrawal of moneys by the assessee from the money belonging to the company and when the stand of the assessee was that she was keeping the money and when the expenditure shown in the note book are stated to be the personal expenses of the assessee, she had the benefit of user of the money and the interest on the amounts advanced is liable to be assessed under the provisions of s. 17(2) of the Act. Learnedsenior counsel also submitted that the Tribunal was not justified in giving findings with reference to the assessment years which are not the subject-matters of appeal before it.

5. Mr. Ramakrishnan, learned counsel for the assessee, on the other hand, submitted that the assessee was holding the money for the company. He referred to the provisions of the Companies Act, 1956, and submitted that there was no resolution or authorisation in favour of the assessee permitting her to use the money and in the absence of any authorisation by the company, he submitted, even assuming that the money was spent by the assessee for her personal use, it must be taken that she was not authorised to use the money and on the basis of the decision of this Court in CIT vs. A.R. Adaikappa Chettiar (1973) 91 ITR 90 (Mad), he submitted, notional interest cannot be assessed in the hands of the assessee. He further submitted that the Department must prove that the benefits had been provided by the company and mere user of the money with the knowledge of the company would not render the assessee liable to be taxed under s. 17(2) of the Act. He also submitted that under provisions of s. 2(22)(e) of the Act, when an amount is treated as dividend and once it is taxed under the head “Other sources”, it is not permissible to tax the same amount as notional interest under some other provisions of the Act. He, therefore, submitted that the Tribunal has not rendered any finding with reference to the question whether the assessee had either authorised or unauthorised use of the company’s money and in the absence of such a finding, the Tribunal must be directed to consider the question whether the use of the money by the assessee was authorised or unauthorised by the company. He submitted that when the case put forward before the AAC on behalf of the assessee was that the provisions of s. 17(2) of the Act cannot be invoked, it was only on the basis that there was an unauthorised use of the funds by the assessee and, therefore, the provisions of s. 17(2) of the Act would not apply. He submitted that the findings of the Tribunal are findings of fact and this Court could not interfere with the findings of fact made by the Tribunal. Mr. Jayaraman, learned senior counsel, in his reply referred to s. 2(22)(e) of the Act and submitted that the set off of the notional dividend is permissible against the actual dividend and the same cannot be regarded as notional dividend for all purposes of the Act and in so far as the asst. yrs. 1972-73 and

1973-74 are concerned, no amount was assessed as dividend and unless the amount was assessed as dividend for any particular year, the question whether the same amount cannot be assessed under a different head would not arise and since the amounts were not assessed as dividend the issue raised by learned counsel for the assessee is of academic nature.We have carefully considered the submissions of learned counsel for the parties. We are of the view that the order of the Tribunal is based on its own imagination and assumption. The Tribunal initially proceeded on the basis that the income shown on the credit side should be treated as the income of the assessee and inferred that the assessee had earned the income in the transactions as the book seized admittedly belonged to the assessee. This assumption is plainly erroneous and goes against the disclosure made by the company under the Voluntary DisclosureScheme. The company has admitted in the declaration made under the Voluntary Disclosure of Income and Wealth Act,

1975, that all the credits shown in the seized book belonged to the company and offered the same for assessment as its income. There is no basis for the Tribunal to make the observation that the amounts represented by the credit entries belonged to the assessee. Nextly, the Tribunal noticed that the ITO had bifurcated the transactions in the book holding all the receipts to be that of the company and the expenditure as that of the individual assessee and gave a finding that the company itself did not claim under the Voluntary Disclosure Scheme any of theexpenditure which would mean that it did not correlate with the expenditure. But the fact remains that the company had not claimed any of the expenditure as its own in the petition filed under the Voluntary Disclosure Scheme. As rightly observed by learned senior counsel for the Revenue, the company filed the petition under the VoluntaryDisclosure Scheme after the account books were seized both from the company premises and the residential premises of the assessee and when the entire picture was clear and when all the materials came into the possession of the Department, the company came forward with the disclosure under the Voluntary Disclosure Scheme and it was not the case of the company at that point of time or at any later point of time that the expenses were incurred by or on behalf of the company and in the absence of any material or evidence or even claim by the company, the criticism made by the Tribunal that the ITO was not correct in deducting the entire expenses as that of the individual assessee is not justifiable at all. The Tribunal, no doubt, confirmed the finding of the ITO that the sum of Rs. 5,47,870 or Rs. 5 lakhs would be taken as the amount available against expenses after payment of tax. Since that part of order of the Tribunal is not questioned before us, we are not expressing any opinion on that part of the order of the Tribunal.

However, the Tribunal also came to the conclusion that while computing the income of the company, the company should have the benefit of expenses and a portion of the expenses should belong to the company. The Tribunal while arriving at the expenses of the company observed that the assessee could not have spent huge money for her personal expenses. The basis adopted by the Tribunal in determining the expenses of the company is not based on any material or evidence. We are of the view that the Tribunal has assumed certain facts in coming to the conclusion that a portion of the expenditure belonged to the company. As already observed, the company had not claimed in the disclosure petition that any part of the expenditure belonged to the company. Secondly, the basis adopted by the Tribunal that the assessee could not have spent so much of moneys towards her personal expenses is also not based on any material or evidence on record. The Tribunal seems to have bifurcated the expenditure by

50 per cent and rounded off the same to Rs. 3 lakhs so that that amount can be regarded as having been spent by the assessee towards her personal expenses. This view of the Tribunal, in our opinion, is neither sustainable nor justifiable when the company itself has neither claimed nor admitted any part of the expenditure as that of the company and the normal tendency of the company would have been to claim the entire expenditure against the disclosed income, and it cannot be stated or postulated that a portion of the business expenditure would have been claimed against the undisclosed income as the tendency would be to reduce the business income or the taxable income. Thirdly, when the book seized belonged to the assessee, the natural presumption is that the expenditure relates to the owner of the book unless there is evidence to show that in entirety or a part of it presents business expenditure of the company. Fourthly, the assessee has not even pleaded that there was an independent source of income which was not disclosed to meet her personal expenditure. The Tribunal, only on the basis of assumption that it would be difficult to imagine that she could have spent nearly Rs. 50,000 in a month, seems to have drawn its own conclusion and estimated that the sum of Rs. 3 lakhs could alone be allocated as expenses of the assessee towards her personal expenditure and the balance as having been that of the company. This view of the Tribunal, in our opinion, is not based on any material and it is not a reasonable one on the facts of the case.

The view of the Tribunal that the sum of Rs. 3 lakhs was withdrawn by the assessee from the company and utilised by the assessee for her personal expenses, and it could not be assessed as perquisite or benefit under s. 17(2) of the Act as the amount was assessed as dividend income is also not correct in law. The Tribunal was considering the asst. yrs. 1972-73 and 1973-74 and it has no jurisdiction to give any finding for the earlier asst. yr. 1969-70 that a sum of Rs. 1,84,797 could not be treated as dividend and only a sum of Rs. 1,47,460 could be treated as dividend. It is well-settled that the Tribunal is expected to give findings only with regard to the assessment year which is the subject-matter of appeal before it and it has no jurisdiction to give any finding with reference to other assessment years which are not the subject-matter of appeal, unless the finding is necessary or incidental as falling under the provisions of s. 150 of the Act. Therefore, the Tribunal exceeded in its jurisdiction in giving a finding for the asst. yr. 1969-70 or for even an earlier assessment year. Even assuming that the amount has been assessed under the provisions of s. 2 (22)(e) of the Act, the view of the Tribunal that the said dividend should be treated as belonging to the assessee and, therefore, there is no question of getting loan and further, no question of interest accrued on the said amount is also not correct in law. The Tribunal, in our opinion, clearly overlooked the provisions of s. 2(22)(e) of the Act. Sec. 2(22)(e) of the Act, inter alia, provides that a loan by a company to a director or a person who has substantial interest in the company is treated as a dividend to the extent of its accumulated profits, but the said section does not transform the character of the loan granted by thecompany in favour of a director or other persons as his own money. In other words the loan granted does not become the borrower’s own money and the borrower was still obliged to return the money and the character of the loan is not changed by mere treatment of the said loan as dividend in his hands for assessment purposes. As submitted by learned senior counsel for the Revenue, the IT Act is not concerned with the title to the money in dispute and only for the purpose of making assessment, the amount is treated as dividend in his hands. Some indications are also seen from the provisions of s. 2(22)(e) of the Act itself, and under the said provisions, it is open to set off the dividend paid by the company against the loan granted and treated as dividend and to the extent to which it is set off the assessee will not be taxed again. The intention of the legislature is clear that the loan does not become the income of the shareholder and if it is otherwise, then, the question of set off would not arise at all. Therefore, the view of the Tribunal that the deemed dividend under s. 2(22)(e) of the Act became the income of the shareholder is unsustainable in law.

The decision of the Supreme Court in the case of CIT vs. C.P. Sarathy Mudaliar (supra) supports our conclusion. In C.P. Sarathy Mudaliar’s case (supra) the Supreme Court was dealing with a case of a loan granted to an HUF and the question that arose before the apex Court was whether the loan could be treated as dividend income of the family or that of the registered shareholder and in that context, the Supreme Court made the followingobservations which are pertinent to the facts of the case : “Sec. 2(6A)(e) gives an artificial definition of ‘dividend’. It does not take in dividend actually declared or received. The dividend taken note of by that provision is a deemed dividend and not a real dividend. The loan granted to a shareholder has to be returned to the company. It does not become the income of the shareholder.” The above observation of the Supreme Court make it clear that the loan granted to the shareholder still retains the character of the loan and it has to be returned by the shareholder to the company and does not become the income of the shareholder or the property of the shareholder.

12. In Smt. Tarulata Shyam vs. CIT (supra), the Supreme Court dealt with a case of the loan advanced to the shareholder and the shareholder returned the money before the end of the accounting year and the question that arose before the Supreme Court was whether the loan or advance could be treated as dividend when the shareholder returned the money before the end of the accounting year. The Supreme Court held that even if the loan or advance ceased to be outstanding at the end of the previous year. It can still be deemed to be dividend if the other conditions are satisfied or complied with. The decisions of the Supreme Court, in our opinion, make it clear that what was advanced by the company to the shareholder was only a loan and it does not become the property of the shareholder and once the loan was advanced, it is liable to be treated as dividend to the extent of the accumulated profits provided other conditions prescribed under s. 2(22)(e) of the Act are satisfied. Therefore, we are of the view that the Tribunal has come to an erroneous conclusion in holding that the deemed dividend should be regarded as the property of the share holder and there is no question of treating the same amount as a loan by the company to the shareholder.

13. The next question that has to be considered is whether the notional interest on the loan can be treated as the income of the assessee under the provisions of s. 17(2) of the Act. In this context, it must be remembered that the Tribunal has given a finding that to the extent of Rs. 3 lakhs the amount was withdrawn by the assessee from the company and utilised by the assessee for her personal use. The Tribunal also observed that the amount is deemed to have been declared out of the amount already treated as dividend in her hand and that a sum of rupees three lakhs could be regarded as advance and treated as dividend in the hands of the assessee to the extent of profits available. The assessee has not challenged that part of the order of the Tribunal that to the extent of Rs. 3 lakhs, the amount was withdrawn by the assessee from the company and utilised for her personal purposes and that part of the order of the Tribunal has become final. We have already held that insofar as the balance of Rs. 2,41,870 is concerned, there is no material for the Tribunal to come to the conclusion that the expenses were that of the company. We have already held that the view of the Tribunal that there was no obligation on the part of the assessee to return the amount is not correct in law and we have also held that there is no provision under the Act to treat the advance as the property of the assessee. The Tribunal, therefore, has not considered the question whether the interest amount can be treated as perquisite for any assessment year in question. Since we are holding that the view of the Tribunal that the amount once taxed as dividend under s. 2(22)(e) of the Act is the property of the assessee is erroneous. It is necessary for the Tribunal to consider the question whether any interest accrued, though notional, on the amount said to have been advanced by the company to the assessee, can be regarded as perquisite or not.

14. Mr. Jayaraman, learned senior counsel for the Revenue, relied upon the decisions of this Court in CIT vs. C. Kulandaivelu Konar (supra) and Addl. CIT vs. Late A. K. Lakshmi (supra) and submitted that if due to magnanimity or with a view to help an employee, amounts were advanced by an employer to an employee without any obligation to pay any interest, the employee would be deriving a benefit in that he got the use of the moneys belonging to the company or any other employer without having any liability to pay interest. He, therefore, submitted that the stand of the assessee taken before the authorities clearly shows that the amount of the company was used by the assessee for the business of the company and, therefore, it implies that there was an authorisation by the company in favour of the assessee and it cannot be regarded as unauthorised user by the assessee of the company’s funds. On the other hand, learned counsel for the assessee, relied upon s. 292 of the Companies Act, 1956, and the decision of this Court in CIT vs. A.R. Adaikappa Chettiar (1973) 91 ITR 90 (Mad) : TC 38R.344 and submitted that this is a case where there was unauthorised user of the company’s funds by the assessee and, therefore, unauthorised use of the company’s funds by the assessee cannot be taken as benefit or perquisite. He also relied upon a decision of the Karnataka High Court in CIT vs. M.K. Vaidya (1995) 126 CTR (Kar) 420 : (1997) 224 ITR 186 (Kar) : TC 58R.496 and submitted that an interest free loan or a loan with concessional rate of interest by an employer to an employee cannot be regarded as perquisite.

15. We are not expressing our opinion on the question whether the amount advanced by the company to the assessee was authorised or unauthorised. We are of the view that it is for the Tribunal to find out the facts and give necessary finding on the question whether the amounts withdrawn were either authorised or unauthorised by the company in favour of the assessee. No doubt, it is true, that the assessee seems to have taken a stand before the Tribunal that, it would be incorrect to hold that the assessee was in need of money and appropriated or misappropriated the funds belonging to the company. However, whatever the stand of the assessee might have been before the Tribunal, the question that has to be decided on the facts of the case is whether there was a loan by the company in favour of the assessee and whether the loan was either authorised or non-authorised. Therefore, it is for the Tribunal to find out the facts and on the basis of such a finding the question whether the interest on the loan advanced by the company to the assessee can be regarded as perquisite or not, has to be decided in one way or the other. Therefore, we direct the Tribunal to decide the question whether the loan granted by the company in favour of the assessee is authorised or unauthorised. We have already noticed that the Tribunal has recorded a finding that a sum of Rs. 3 lakhs which was withdrawn by the assessee from the company and spent by the assessee for her own use could be treated as an advance. We also noticed that the assessee has not challenged that part of the order of the Tribunal, and that the finding regarding the advance to the extent of Rs. 3 lakhs has become final and only with reference to the balance of Rs. 2,41,870, the Tribunal has to decide the question whether there was any advance by the company to the assessee and with reference to the entire amount of Rs.

5,41,870 whether it was an authorised loan or unauthorised loan.

16. It is now necessary to consider the submission made by learned counsel for the assessee that if the amount had been treated as dividend for the purpose of income-tax, the same amount cannot be treated as perquisite on a loan under s. 17(2) of the Act. Mr. Ramakrishnan, learned counsel for the assessee, in support of his submission, relied upon a decision of the Supreme Court in H.C. Suman vs. Rehabilitation Ministry Employees Co-op. House Building Society Ltd. AIR 1991 SC 2160 and the relevant passage to which our attention was drawn reads as under: “As pointed out by Lord Asquith in East End Dwellings Co. Ltd. vs. Finsbury Borough Council (1952) AC 109, at p. 132, if you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have followed from or accompanied it and that when the statute says that you must imagine a certain state of affairs, it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.”

17. We are, however, not able to accept the contention of learned counsel for the assessee. We have already held that the provision of s. 2(22)(e) creates a legal fiction and treated the loan advanced by the company to the shareholder as dividend to the extent of accumulated profits of the company subject to fulfilment of other conditions, and the perquisite value under s. 17(2) of the Act would be the amount of interest or the benefit or amenity enjoyed by the employee/director for the use of the company’s funds. In our view, the distinction between these two aspects should be borne in mind. Sec. 2(22)(e) of the Act deals with the loan amount and whereas the provisions of s. 17(2) of the Act deals with interest on the user of the company’s funds by the employee. In other words the principle behind the provisions of s. 17(2) is that if the employee has the benefit of user of the company’s funds during the relevant accounting year, then to the extent of the accrual of interest on the loan advanced in favour of the assessee, the amount would be treated as perquisite in the hands of the employee. Therefore, both the concepts are entirely different. Secondly, a fair reading of cl. (iii) of s. 2(22)(e) also gives an indication that if any dividend has been paid by the employer and if it is set off against the deemed dividend to the extent to which it is set off, the amount paid as dividend is not treated as dividend. The above provision gives an indication that the deemed dividend is not a dividend for all purposes of the Act, but only for the purpose of making an assessment on the amount of loan advanced by the company in favour of the shareholder, to the extent of the accumulated profits of the company. Therefore, if the deemed dividend is also the dividend in the normal sense, the question of set off of the deemed dividend against the actual dividend would not arise at all. Therefore, we are of the view that it is incorrect to state that the amount is treated as dividend for all purposes of the Act. Thirdly, the question raised by learned counsel for the assessee is also academic, because during the asst. yrs.

1972-73 and 1973-74, no amount was assessed as deemed dividend under s. 2(22) (e) of the Act and only

perquisite on the interest of the loan was assessed under s. 17(2) of the Act. Since the amount had not been assessed under s. 2(22)(e) of the Act, the further question whether the interest cannot be regarded as perquisite does not arise, at least for the two asst. yrs. 1972-73 and 1973-74. Fourthly, though a legal fiction has been created by s. 2(22) of the Act, it is equally well settled that it would operate only within the field or the purpose for which the legal fiction is created. Applying the principle to the facts of the case, the legal fiction is limited only so that the loan advanced is deemed dividend and it cannot be extended further to preclude from the levy of interest that may arise or accrue on the loan granted in favour of the employee by the employer. We are, therefore, of the opinion that the contention of learned counsel for the assessee that the amount cannot be treated as perquisite under s. 17(2) of the Act, in view of the fact that the loan amount had been assessed under s. 2(22)(e) of the Act is unsustainable and is liable to be rejected. Accordingly, we answer the questions of law referred to us as under : Tax Cases Nos. 744 and 745 of 1982 : Tax Case No. 879 of 1983 : Question of law : It is returned unanswered with the direction given by us earlier. Tax Cases Nos. 1184 and 1185 of 1984 : Question law : It is returned unanswered subject to the direction given by us earlier. However, in the circumstances of the case, there will be no order as to costs.

First question : It is returned unanswered subject to the direction made by us earlier.

Second question : It is answered in the negative and in favour of the Revenue subject to the direction earlier given. Third question : It is answered in the negative and in favour of the Revenue.

[Citation : 244 ITR 671]

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