S.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in upholding the order of the CIT(A) who deleted the addition of Rs. 93,640 made by the ITO under s. 40A(5)?

Supreme Court Of India

V.M. Salgaocar & Bros. (P) Ltd. Etc. vs. Commissioner Of Income Tax Etc.

Sections 17(2), 40A(5), ART. 133, ART. 136

Asst. Year 1979-80, 1980-81, 1981-82

D.P. Wadhwa & Syed Shah Mohammed Quadri, JJ.

Civil Appeal No. 657 of 1994, Etc.

10th April, 2000

Counsel Appeared

G. Saramajan, Mukul Mudgal, Ms. Shobha, S.K. Mehta, Dhruv Mehta, Ranbir Chandra, K.C. Kaushik, Ms. Sushma Suri & S.K. Dwivedi, for the Appearing Parties

JUDGMENT

D.P. WADHWA, J. :

Civil Appeal No. 657 of 1994 is directed against the judgment, dt. 7th Feb., 1992, of the Division Bench of the Karnataka High Court [now reported as CIT vs. V.M. Salgaokar & Bros. (P) Ltd. (1992) 198 ITR 738 (Kar) : TC 18R.619] delivered on reference made to it by the Income-tax Appellate Tribunal (‘Tribunal’ for short) under s. 256(2) of the IT Act, 1961 (for short, the ‘Act’). Reference was at the instance of Revenue. Following questions arose for the determination of the High Court : “(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in deleting addition of Rs. 5,21,241 made by the ITO under s. 40A(5) and sustained by the CIT(A)? (2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that non-charging of interest on the debit balance in the running account of the directors would not constitute a perquisite?” High Court answered both the questions in negative and in favour of the Revenue. The assessee, a company, felt aggrieved and sought leave to appeal under Art. 136 of the Constitution which was granted. In this case for the asst. yr. 1979-80, the ITO had disallowed a sum of Rs. 5,21,241 being 15 per cent of the amount standing to the debit of the directors in the books of the assesseecompany by applying the provisions of s. 40A(5) and s. 17(2) of the Act. The ITO found that the assessee, which was a company, was borrowing large sums by paying interest @ 15 per cent per annum. This interest was claimed by the assessee as deductible expenditure. The ITO found that the directors of the assessee-company were drawing amount from the company without paying interest. He, therefore, held that when the company borrowed loans by paying 15 per cent interest and it advanced loans to its directors without any interest to the extent of the interest, the company could have charged, a benefit was granted to the directors and hence the said amount of interest on the amount advanced to the directors was not to be deducted as an expenditure in view of s. 40A(5). On appeal filed by the assessee, the CIT(A) upheld the orders of the ITO. Assessee took the matter further in appeal before the Tribunal which deleted the additions made by the ITO. Tribunal held that no evidence had been laid by the Revenue to show that borrowed funds were directly diverted for the benefit of the directors and non-chargeable interest on the debit balance in running account would not amount to providing perquisite. The Tribunal also observed that the Taxation Laws (Amendment) Act, 1984, for the first time provided that the difference in interest between the prescribed rate and that charged by an employer to the employee should be treated as perquisite. The stand of the Revenue was that as long as there was a benefit, whether direct or indirect, the provisions of s. 40A(5) were attracted. High Court in coming to its decision relied on two cases of the Madras High Court in CIT vs. C. Kulandaivelu Konar (1975) 110 ITR 629 (Mad) : TC 58R.475 and Addl. CIT vs. Late A.K. Lakshmi 1978 CTR (Mad) 171 : (1978) 113 ITR 368 (Mad) : TC 58R.480. Tribunal had also observed that non-charging of interest on the debit balance in running account of the directors would not constitute perquisite and that if such a general proposition is accepted, the disallowance under s. 40A(5) would be on par with the disallowance under s. 36(1)(iii) which provision provides for deduction to be allowed in respect of the amount of interest on capital borrowed for the purposes of the business or profession.

2. In Civil Appeal Nos. 4012-13 of 1998 it is the Revenue which is aggrieved. For the asst. yrs. 1980-81 and 1981-82 in the case of the respondent Sri Shivanand V. Salgaocar, a director of M/s. V.M. Salgaocar & Brothers (P) Ltd. following question of law was referred to the High Court by the Tribunal under s. 256(1) of the Act. “Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in upholding the action of AAC who held that non-charging of interest could not be regarded a being a perquisite in the hands of the employee-directors who were advanced interest-free loans by the company?” High Court answered the question so referred in the affirmative in favour of the assessee and against the Revenue with the following observations : “Counsel for the parties are agreed that the aforesaid question stands concluded against the Revenue and in favour of the assessee by a judgment of this Court in ITRC No. 4/92, decided on 1st Aug., 1977 (CIT vs. V.M. Salgaocar

& Bros. Ltd., Vascodagama, Goa). In the aforesaid case three questions had been referred to this Court for its opinion and question No. 1 of the said petition corresponds to the question referred in the present case. Their Lordships answered question No. 1 which corresponds to the question in the present case in the following terms :

‘So far as the first question is concerned, it needs to be stated that this Court in ITRC No. 20 of 1989 [reported as CIT vs. V.M. Salgaocar & Bros. (P) Ltd. (1992) 198 ITR 738 (Kar) ; TC 18R.619 now being impugned before us in Civil Appeal No. 657 of 1994] disposed of on 7th Feb., 1992 in respect of this very assessee, and (had) taken the view that deletion of a sum of Rs. 90,640 made by the ITO would be correct. But the matter has not rested there. Thereafter, two decisions have been rendered by this Court in P. Krishna Murthy vs. CIT & Anr. (1997) 126 CTR (Kar) 434 : (1998) 224 ITR 183 (Kar) : TC 58R.507 and CIT vs. M.K. Vaidya (1997) 126 CTR (Kar) 420 : (1997) 224 ITR 186 (Kar) : TC 58R.496, in which interest-free loan or loan at a concessional rate given to employee for building house is not a perquisite. Once it is held to be not a perquisite for purpose of s. 40A(5), it becomes clear that the deduction will have to be granted in favour of the assessee, because in an earlier occasion in ITRC No. 20/1989 this Court proceeded on the basis that it is a perquisite. We have no option but to following the later decision of this Court where the matter has been decided after considering the decision ITRC No. 20/1989. Therefore, following the said two decisions, we answer the question in the affirmative and against the Department’.” Leave to appeal was granted by this Court to the Revenue and this appeal was to be heard along with Civil Appeal No. 657 of 1994.

Assessee Shivanand V. Salgaocar was a director of M/s V.M. Salgaocar Brothers (P) Ltd. During the assessment years in question the company advanced certain sums to the assessee without charging any interest thereon. ITO held that non-charging of interest on the debit balance would amount to perquisite in the hands of the assessee within the meaning of s. 17(2) of the Act. He computed the value of the perquisite at the rate of 15% of the debit balance standing in the name of the assessee in the accounts of the company and brought the same to tax in the hands of the assessee. On appeal filed by the assessee, CIT(A) relying on the decision of the Tribunal in the case of the assessee himself for the earlier year held that non-charging of interest on the debit balance could not be regarded as perquisite in the hands of the assessee and deleted the addition made by the ITO. Revenue took the matter to the Tribunal in appeal, who upheld the order of the CIT(A) holding that no ground had been made out by the Revenue to depart from the view taken by the Tribunal earlier. On the reference made to the High Court by the Tribunal at the instance of the Revenue the same was dismissed by the order, dt. 12th Dec., 1997, which we have noted above. There are two matters which would be of relevance while considering these appeals and which we note : (1) For the asst. yr. 1980-81 in the case of the company itself the ITO found that there were debit balances in the accounts of three directors in the books of the company for which the company had not charged any interest from the directors. ITO calculated the interest at the rate of 15% on the debit balance of the directors and came to the conclusion that this amounted to perquisite. By applying the provisions of s. 40A(5) he disallowed the amount of interest so calculated. Company had advanced various sums to its sister concerns. The balance outstanding as on the last date of the accounting year was over Rs. 2.50 lakhs. Company raised borrowings on which it had paid interest. ITO disallowed the interest calculated at the rate of 15% per annum on this amount which was due from the sister concerns. This disallowance was made on the ground that the amount borrowed by the assessee-company on which it had paid interest part of which was not being used for the purposes of its own business. On appeal by the company CIT(A) deleted the additions made under s. 40A(5) as they stood at that relevant time could have no application unless the assessee had incurred an expenditure which had resulted in a benefit to the employee. In respect of the disallowance of interest on the amount advanced to sister concerns CIT(A) taking into consideration the fact that no finding had been given by the ITO that the amount borrowed had not been used for business purposes and considering that assessee had substantial funds on which it had not paid any interest deleted that addition as well. On appeal the Tribunal following its decision in the earlier years, rejected the appeal of the Revenue. Revenue then took the matter to the High Court on reference under s. 256(1) of the Act. Following three questions were referred to the High Court :

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in upholding the order of the CIT(A) who deleted the addition of Rs. 93,640 made by the ITO under s. 40A(5)?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in confirming the order of the CIT(A) who deleted the disallowance of Rs. 39,11,054 out of interest payment?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in upholding the order of the CIT(A) who held that the amount of Rs. 43,320 paid as compensation to agriculturist is allowable as revenue expenditure?”

High Court by order dt. 1st Aug., 1997, answered the first question in the affirmative in favour of the company relying on its two decisions in CIT vs. M.K. Vaidya (1997) 126 CTR (Kar) 420 : (1997) 224 ITR 186 (Kar) : TC 58R.496 and P. Krishna Murthy vs. CIT & Anr. (1997) 126 CTR (Kar) 434 : (1997) 224 ITR 183 (Kar) : TC 58R.507. Second and third questions were also answered in the affirmative in favour of the assessee holding that these questions were covered by its earlier decision in IJRC No. 24/1992. Still aggrieved Revenue came to this Court on appeal (CA No. 424 of 1999) on a certificate granted by the High Court under s. 261 of the Act. This Court by order, dt. 25th Jan., 1999, dismissed the appeal just stating “The appeal is dismissed”. (2) Secs. 17(2) and 40A of the Act were amended by the Taxation Laws (Amendment) Act, 1984. Sub-cl. (vi)1 of cl. (2) of s. 17 of the Act, as inserted by the said Amendment Act of 1984, provides that where the employer has advanced any loan to the 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, specify in this behalf by notification in the Official Gazette, an amount calculated on the following basis will be regarded as “perquisite” received by the employee and charged to tax accordingly— 1. (vi) where the employer has advanced any loan to the employee for the purposes 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, specify in this behalf by notification in the Official Gazette, an amount equal to,— (a) in a case where such loan is advanced without charging any interest, the interest calculated in the prescribed manner on such loan at the rate so specified; (b) in a case where such loan is advanced by charging interest at a rate lower than the rate so specified, the difference between the interest calculated in the prescribed manner on such loan at the rate so specified and the interest charged by the employer : (1) an employee of the Central Government or any State Government; or (2) an employee, not being an employee referred to in para (a) or para (b) of sub-clause (iii), whose income under the head ‘Salaries’, exclusive of the value of all benefits or amenities not provided for by way of monetary payment, does not exceed eighteen thousand rupees. Provided that this sub-clause shall not apply in the case of— 2. Amendment to Section 40A—In s. 40A of the IT Act, in sub-s. (5), in cl. (b) of Explanations— (a) in sub-cl. (iv), the word “and” shall be omitted; (b) in sub-cl. (v), for the words “an annuity”, the words “an annuity; and” shall be substituted; (c) after sub-cl. (v), the following sub-clause shall be inserted, namely.— “(vi) the amount treated as a perquisite under sub-cl. (vi) of cl. (2) of s. 17.” (a) in a case where such loan is advanced without charging any interest, the interest calculated in the prescribed manner on such loan at the rate so specified; (b) in a case where such loan is advanced by charging interest at a rate lower than the rate so specified, the difference between the rate of interest calculated in the prescribed manner on such loan at the rate so specified and the interest charged by the employer. An amendment on similar lines was also made in s. 40A2 of the said Act to provide that the amount of interest referred to in item (a) or item (b), as the case may be, of sub-cl. (vi) of s. 17(2) of the said Act, shall be regarded as perquisite provided by the assessee to his employee for the purposes of . 40A(5) of the said Act. These amendments were intended to take effect from 1st April, 1985. However, subsequently, the Finance Act, 1985, sought to omit both the aforesaid provisions with effect from the date of their insertion, namely, 1st April, 1985. Clause 20 of the Memorandum explaining the provisions of the Finance Bill, 1985, stated that, as a measure of relief to salaried taxpayers, the Bill seeks to omit the aforesaid provision with effect from the date of its proposed insertion, namely, 1st April, 1985. In consequence thereof, sub-cl. (vi) of cl. (b) in Expln. 2 to s. 40A(5) of the IT Act, which defines the term “perquisite” for the purposes of the said section to include the perquisite value represented by interest-free loans or loans at concessional rates of interest, was also deleted along with the deletion of sub-cl. (iv) of cl. (2) of s. 17 of the said Act. Thus cl. (vi) was to be in operation from 1st April, 1985. However, it was omitted by enacting the Finance Act, 1985. Thus it is omitted from the very date of its insertion, i.e., 1st April, 1985. CBDT issued circular incorporating the objectives sought to be achieved by omission of cl. (vi). It is Circular No. 421, dt. 12th June, 1985 [(1986) 50 CTR (St) 31]. Earlier CBDT had issued a Circular No. 387, dt. 16th Oct., 1984 [(1984) 43 CTR (TLT) 3] explaining the objectives in inserting new sub-cl. (vi) in s. 17(2). It may also be noted that after cl. (vi) was inserted in s. 17(2) by the Amendment Act, 1984, IT Rules were also amended by incorporating r. 3(a) to work out enacted cl. (vi). This r. 3(a) was also deleted after the omission of cl. (vi).

5. Different considerations apply when a special leave petition under Art. 136 of the Constitution is simply dismissed by saying ‘dismissed’ and an appeal provided under Art. 133 is dismissed also with the words ‘the appeal is dismissed’. In the former case it has been laid by this Court that when special leave petition is dismissed this Court does not comment on the correctness or otherwise of the order from which leave to appeal is sought. But what the Court means is that it does not consider it to be a fit case for exercise of its jurisdiction under Art. 136 of the Constitution. That certainly could not be so when appeal is dismissed though by a non-speaking order. Here the doctrine of merger applies. In that case, the Supreme Court upholds the decision of the High Court or of the Tribunal from which the appeal is provided under cl. (3) of Art. 133. This doctrine of merger does not apply in the case of dismissal of special leave petition under Art. 136. When appeal is dismissed order of the High Court is merged with that of the Supreme Court. We quote the following paragraph from the judgment of this Court in the case of Supreme Court Employees’ Welfare Association vs. Union of India & Anr. (1989) 4 SCC 187 : “22. It has been already noticed that the special leave petitions filed on behalf of the Union of India against the said judgments of the Delhi High Court were summarily dismissed by this Court. It is now a well settled principle of law that when a special leave petition is summarily dismissed under Art. 136 of the Constitution, by such dismissal this Court does not lay down any law, as envisaged by Art. 141 of the Constitution, as contended by the learned Attorney-General. In Indian Oil Corporation Ltd. vs. State of Bihar (1986) 4 SCC 146, it has been held by this Court that the dismissal of a special leave petition in limine by a non-speaking order does not justify any inference that, by necessary implication, the contentions raised in the special leave petition on the merits of the case have been rejected by the Supreme Court. It has been further held that the effect of a non-speaking order of dismissal of a special leave petition without anything more indicating the grounds or reasons of its dismissal must, by necessary implication, be taken to be that the Supreme Court had decided only that it was not a fit case where special leave petition should be granted. In Union of India vs. All India Services Pensioners’ Association (1988) 2 SCC 580 this Court has given reasons for dimissing the special leave petition. When such reasons are given, the decision becomes one which attracts Art. 141 of the Constitution which provides that the law declared by the Supreme Court shall be binding on all the Courts within the territory of India. It, therefore, follows that when no reason is given, but a special leave petition is dismissed simpliciter, it cannot be said that there has been a declaration of law by this Court under Art. 141 of the Constitution.” It was, therefore, contended that once this Court in Civil Appeal No. 424 of 1999 has dismissed the appeal it has upheld the order of the High Court in the case of asst. yr. 1980-81 and it cannot take a different view for the asst. yr. 1979-80. There appears to be subsistence (substance) in the submission of the assessee. There has been difference of opinion among the High Courts on the question if non-charging of interest could be considered as perquisite under s. 17(2) or s. 40A(5). We may refer to some of the judgments of the High Courts.

In the case of CIT vs. C. Kulandaivelu Konar (supra) the assessee who was the managing director deposited various moneys and was also withdrawing moneys from an account in his name. For the year ending on 31st March, 1963, there was an overdrawal to the extent of about Rs. 60,000. The company did not charge any interest on these overdrawings, though it was paying interest on its borrowings. The ITO disallowed the interest-free advance to the director in the hands of the company. He added also the relevant amount as a perquisite in the hands of the assessee who was a director. When the matter came on appeal to the Tribunal it set aside the assessment and at the instance of the CIT the matter was brought to this Court (the Madras High Court) on reference. It was held that in order to bring a benefit or advantage within the provisions of s. 17(2)(iii), it must have a legal origin and since any unauthorised advantage taken by an employee without the authority of the employer would create a legal obligation to restore such advantage, it would not amount to a benefit or advantage within the meaning of s. 17(2)(iii).

In Addl. CIT vs. Late A.K. Lakshmi & Ors. (supra) the decision before the High Court was if the Tribunal was right in holding that a particular sum was not includible in the hands of the assessee as perquisite under the provisions of s. 17(2) of the Act. The case related to the assessment to income-tax of a director of a company. The ITO considered the use of the amounts made available by the company free of any interest payable to the company as a benefit derived by the assessee without cost coming within the ambit of s. 17(2)(iii). The ITO had also relied on 17(2)(iv). The Tribunal considered both the aspects and came to the conclusion that neither s. 17(2)(iii), nor s. 17 (2)(iv) had any application and, therefore, held that the amounts in question for the relevant assessment years relating to the assessee could not be treated as a perquisite within the meaning of s. 17(2) of the Act. High Court referred to the definition of ‘perquisite’ as given in s. 17(2) and observed : “We are in agreement with what has been stated by the Tribunal that s. 17(2)(iv) has no application to any of these cases. The question is whether s. 17(2)(iii) will be attracted or not, and that turns on the further question whether the assessee can be said to have derived any benefit free of cost or at concessional rate. The further condition that is necessary for the application of this section is that this benefit must be derived by the persons mentioned in sub-cls. (a), (b) or (c). It is said that the sub-clause applicable is sub-cl. (a) which states that the benefit may be granted by a company to an employee who is a director thereof, and the assessees concerned were directors and it is not disputed before us that sub-cl. (a) would apply.” High Court then held : “The point to be considered is whether the receipt of the amounts by the assessee or the grant of the amounts by the company without any interest would be a receipt of any benefit without any cost. Here the question is whether the non-liability to pay any interest would be a benefit and whether what has been determined is the cost of that benefit. But this question again is not one free from difficulty, because in a way it is mingled with the further question whether the section intends to restrict the discretion of the right of the company or of any other employer to give monies to its or his employees by charging interest or by charging only nominal interest or even without charging interest. We have no doubt that this 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 one’s 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 and 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 coming to the conclusion that the employee would be deriving a benefit in that he gets the use of the monies belonging to the company or any other employer, without having any liability to pay interest. The cost of the benefit would depend upon what is fair, just and reasonable, as envisaged by r. 3(g) of the IT Rules.”

In CIT vs. S.S.M. Lingappan (1980) 18 CTR (Mad) 56 : (1981) 129 ITR 597 (Mad) : TC 38R.367 the question before the High Court was if the free use of the company’s car by the director was a perquisite or benefit within the meaning of s. 2(24) of the Act and assessable to income of the assessee. The assessee was an HUF. Karta of the HUF was the director of a company and had obtained the benefits in the shape of the use of the company’s assets, viz., motor car, telephone, etc. In the assessment of the company there was a disallowance of the expenditure relating to the above assets under s. 40(c) of the Act on the ground that the expenditure was excessive and unreasonable having regard to the legitimate business needs of the company. In the case of the assessee the ITO took into account the possible extent of the use of the company’s assets, viz., motor car, telephone, etc. and evaluated the benefits obtained by the assessee under s. 2(24)(iv) of the Act. Assessee contended that the amounts so evaluated could not be perquisites in the hands of the assessee. High Court referred to its earlier decision in the case of CIT vs. C. Kulandaivelu Konar (supra) and held that even if the benefit had been conferred on the director unilaterally without the aid of any agreement between the parties a benefit could be taxed as a perquisite under s. 17(2)(iii) and (iv).

In CIT vs. Vazir Sultan Tabacco Co. Ltd. (1988) 73 CTR (AP) 176 : (1988) 173 ITR 290 (AP) : TC 40R.234 one of the questions before the High Court was “Whether, on the facts and in the circumstances of the case, the difference between the concessional rate of interest and the prevailing market rate of interest on the loans advanced to the employees was not a perquisite under s. 40A(5)”. The assessee was a public limited company. In answer to the question the Court said: “So far as question is concerned, what is happening is that again with a view to keep its employees happy and satisfied, the assessee has been giving loans to them at a concessional rate of interest. The loans are given to employees to build their own houses. If they build the houses and live in them themselves, the rate of interest is 6% and if they let out the houses, the interest will be charged at 9% per annum. The Department says that the difference between the concessional rate of interest and the prevailing market rate of interest should be disallowed under s. 40A(5) of the Act. On this question too, the Tribunal, following its earlier decision, held in favour of the assessee. This question has to be answered with reference to the language employed in sub-s. (5) of s. 40A of the Act. In so far as it is relevant, the provision reads thus : ‘40A(5)(a) Where the assessee— (i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or (ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of cl. (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in cl. (c) shall not be allowed as a deduction. . . . . . .’

It would be evident from a perusal of sub-s. (5) that it contemplates disallowance of certain expenditure incurred by the assessee which it claims as a deduction. Certain ceilings are fixed in the case of such expenditure. The assessee’s contention is that it has not incurred any expenditure by giving the loans to its employees at a concessional rate of interest and, therefore, the said provision has no application. On the other hand, learned standing counsel for the Revenue says that if this money had not been lent to the employees at a concessional rate of interest, it would have earned interest at a higher rate had it been put in fixed deposit in a bank. But this argument involves importing a fiction into sub-s. (5) of s. 40A of the Act. We must assume that this money, if not lent to the employees, would have been put in a fixed deposit or would have been invested in some other profitable manner and then say that the difference amount should be disallowed. We do not think that the language of sub-s. (5) of s. 40A of the Act provides for or permit such a course. Sub-s. (5) applies where an assessee claims a certain deduction saying that he has spent that money in providing, directly or indirectly, either as salary to an employee or in the provision of perquisite to an employee. Only then do the ceilings prescribed in the said sub- section come into play. It is true that in some cases this facility may be abused. We know public corporations like banks lending money to their own employees at practically no interest, say for example, one or two per cent, interest per annum, whereas those very banks lend to people at rates of interest ranging from 13% to 19% per annum. But the remedy for that must lie elsewhere, either in the proper control of the public corporations or in the amendment of the IT Act, as the case may be. As the provision of law of s. 40A(5) of the Act now stands, it is not possible to answer the said question in the manner suggested by the Department. Accordingly, we answer question in the affirmative, i.e., in favour of the assessee and against the Revenue.”

11. In CIT vs. P.R.S. Oberoi (1990) 84 CTR (Cal) 191 : (1990) 183 ITR 103 (Cal) : TC 38R.357 the question before the Court was whether the Tribunal was justified in deleting certain amounts from the total income of the assessee on the ground that the provisions of s. 2(24)(iv) of the Act were not attracted. In this case the assessee was a director of the Hotel Oberoi, a private limited company. He was maintaining running account with the company. During the assessment years in question the ITO found that the assessee had overdrawn amounts over lakhs of rupees from his account in the company. ITO further found that the company did not charge any interest on the overdrawn amounts from the assessee. He therefore, held that the assessee got a benefit from the company in the shape of getting funds without any obligation to pay interest thereon and as the assessee was a director of the company he invoked the provisions of s. 2(24)(iv) of the Act and calculated certain sums as the value of the aforesaid benefit being interest calculated @ 12% per annum on the overdrawn amounts. ITO, therefore, taxed the aforesaid sums under the head “other sources”. Tribunal found that there was nothing to show that the company borrowed any money for making advance to the assessee and/or paid any interest on the overdrawn amount which, but for such payment, would have been paid by the assessee. The Tribunal also found that there was arrangement between the assessee and the said company not to charge interest on either side in terms of resolution of the Board

of Directors and that in the past the assessee has substantial credit balances with the company on which the company never paid interest to the assessee. It was, therefore, held by the High Court that the interest free loans obtained by the assessee from the company were not benefits or perquisites within the meaning of s. 2(24)(iv) of the Act. High Court noticed the amendments made by the 1984 Amendment by insertion of sub-cl. (vi) in s. 17 (2) and its omission by the Finance Act, 1985. Sec. 2(24)(iv), which has been invoked in this case also used the expression “the value of any benefit or perquisite” which corresponds to the expression “the value of any benefit or amenity” appearing in the definition of “perquisite” as contained in s. 17(2)(iii). Sec. 40A(5), Expln. 2(b) also seeks to include within the expression “perquisite” the value of any benefit or amenity granted or provided free of cost or at a concessional rate to the employee by the assessee. High Court, therefore, said that the grant of loan without charging any interest could not be considered as a benefit or a perquisite within the meaning of s. 2(24)(iv) of the Act.

In Indian Oxygen Ltd. vs. CIT (1995) 123 CTR (Cal) 224 : (1994) 210 ITR 274 (Cal) : TC S18.2003 following its earlier decision in CIT vs. P.R.S. Oberoi (supra) it was held that the grant of interest-free loans by the assessee to its employees did not amount to perquisite, benefit or amenity whether for the purposes of s. 17(2) and/or s. 40A(5) of the Act. The question before the Court was whether notional interest calculated on interest-free loans granted by the assesseecompany to its employee could be taken as perquisites for the purposes of disallowance under s. 40A(5) of the Act. High Court said that the section was admittedly applicable only where the assessee incurred expenditure which resulted directly or indirectly in the payment of any salary or in the provisions of any perquisite (whether convertible into money or not) to its employees. It was nobody’s case that in providing interest-free loans by the assessee to its employees any expenditure had been incurred by the assessee-company.

High Court in its judgment, which was impugned in Civil Appeal No. 424 of 1999 had relied upon the decision of its own High Court in the case of CIT vs. M.K. Vaidya (supra) and P. Krishna Murthy vs. CIT & Anr. (supra). In the case of M.K. Vaidya High Court sought to distinguish the judgment now impugned before us in Civil Appeal No. 657 of 1994 [CIT vs. V.M. Salgaocar & Bros. (P) Ltd. (supra)] stating that that decision had no bearing on the facts of the case before it because the Bench was concerned with ss. 36 and 40A(5) of the Act and it was a case where having borrowed large sums of moneys by paying interest at the rate of 15% per annum a part was obviously drawn by the directors without compensating the assessee-company, without paying any interest and the Bench in that case was not concerned with s. 17(2). High Court then said : “On the facts of the said case, where the company borrowed large sums of money by paying interest at 15 per cent and claiming it to be deductible expenditure, it will be too much of a generosity to say that the company could at the same time advance to its directors monies without collecting any interest from them. The observations of the Bench while construing s. 40A(5) in the said case were in the context of the facts of the said case.”

14. We are of the view that distinction was not correctly drawn. Amendment made by the 1984 Amending Act was both to s. 17(2) and s. 40A(5). In the impugned judgment reference in fact had been made to inclusion of sub- cl. (vi) in cl. (2) of s. 17. Moreover, 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 s. 17(2) and s. 40A(5) of the Act.

15. In CIT vs. M.K. Vaidya (supra), the question before the High Court was : “Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in rejecting the Revenue’s ground that the difference in interest rate between Government loans and that on the loan obtained by the assessee should be treated as perquisite?” High Court answered the question in affirmative in favour of the assessee. High Court said that it was never intended to treat the interest-free loan advance for house building purposes as a “perquisite” under s. 17(2)(iii). In this case the assessee was an employee of the company which advanced him certain amounts as loan free of interest for the purpose of house building. In the course of assessment proceedings of the assessee, the AO held that the interest-free loan was a benefit which should be valued as a “perquisite” under s. 17(2). Revenue contended that the interest-free loan was a benefit which should be treated as a perquisite under s. 17(2)(iii) and for the purpose of computation, r. 3(2) was attracted and the principle underlying cl. (vi) as inserted in s. 17(2) by the Taxation Laws (Amendment) Act, 1984, could be looked at for the purpose. Sec. 17(2)(iii) reads as under :

” ‘perquisite’ includes—. . . . . . . . (iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases— (a) by a company to an employee who is a director thereof; (b) by a company to an employee being a person who has a substantial interest in the company; (c) by any employer (including a company) to an employee to whom the provisions of paras (a) and (b) of this sub-clause do not apply and whose income under the head ‘Salaries’, (whether due from or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way or monetary payment, exceeds eighteen thousand rupees.” While cls. (a) and (b) cover the special cases of those employed by a company, cl. (c) covers all categories of employees (Governmental and non-Governmental), including other categories of company employees, provided their salaried income is above Rs. 18,000. There is no income limit to attract the persons covered by cls (a) and (b).

In the case of cl. (c), those whose annual income under the head “Salaries” (as stated therein) is below Rs. 18,000 are not covered. High Court after referring to cl. (vi) as inserted in s. 17(2) by the 1984 Amendment Act, its omission by the Finance Act, 1985, and the two circulars of the CBDT, said that two inferences are inevitable : (1) In the year 1984, while enacting the Taxation Laws (Amendment) Act, 1984, Parliament thought that s. 17(2)(iii) did not cover the cases of loans granted to employees for house building purposes. (2) Clause (vi), which was inserted, was omitted again to grant tax relief to the salaried taxpayers. In other words, salaried taxpayers were not to be burdened with the tax by including the value of the interest-free loan or loan at a concessional rate of interest granted for house building purposes, to an employee, by his employer.

16. In P. Krishna Murthy vs. CIT & Anr. (supra), the assessee challenged refusal of the Assessing Authority to grant him exemption from computing taxable income of a certain amount being given as interest subsidy. The company of which the assessee was an employee reimbursed the assessee the interest paid on loan taken by him for building purposes. High Court following its earlier decision in M.K. Vaidya’s case (supra) held that the order of the assessing authority insofar as it related to the inclusion of interest subsidy amount as taxable income of the assessee was wrong and the High Court set aside the same. High Court noticed that the Division bench in the earlier case had held the legislature never intended to treat the interest as “perquisite” under s. 17(2)(iii) of the Act.

17. We quote with approval the following passage from the judgment of the Calcutta High Court in P.R.S. Oberoi’s case (supra) : “It would, therefore, appear that if the loan granted to an employee without charging any interest or by charging interest at a concessional rate amounted to a benefit for the purposes of s. 17(2) (iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment) Act, 1984, the new sub- cl. (vi) in s. 17(2) of the Act. The omission of the said clause by the Finance Act, 1985, with effect from the date of its insertion, namely, 1st April, 1985, was also made with a view to give relief to salaried taxpayers. Similarly, it would appear that there was no need for Parliament to initially amend s. 40A(5) to provide that the amount of interest referred to in item (a) or item (b), as the case may be, in sub-cl. (vi) in s. 17(2) of the IT Act shall be regarded as a “perquisite” provided by the employer to his employee and, thereafter, to omit the aforesaid provision with effect from the date of its insertion by the Finance Act, 1985. It would also appear that, without a specific provision which was sought to be introduced by sub-cl. (vi) in s. 17 (2) of the Act and also sub-cl. (vi) of Expln. 2(b) to s. 40A(5) of the Act, the grant of loan to the employee without charging any interest did not amount to any perquisite or benefit for the purposes of s. 17(2) and/or s. 40A(5) of the Act.

The intention of the legislature seems to be very clear that the expression ‘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 recognised 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-cl. (vi) was inserted in s. 17(2) and, similarly, another sub-cl. (vi) was inserted in cl. (b) of Expln. 2 to s. 40A(5). The effect of these amendments, which were made effective from 1st April, 1985, was to ensure treatment and taxation as perquisite of the value of an amount calculated on a particular basis in the 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, 1st April, 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. If the loan granted to an employee without charging any interest or by charging interest at a concessional rate amounts to a benefit for the purposes of s. 17(2)(iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment) Act, 1984, the new sub-cl. (vi) in s. 17(2) of the Act. The subsequent omission of the said sub- clause by the Finance Act of 1985 with effect from the date of its proposed insertion was also made with a view to give relief to salaried taxpayers. It is to be noticed that Expln. 2(b) to s. 40A(5) of the Act defines a perquisite to mean, inter alia, any benefit or amenity granted or provided free of cost or at a concessional rate to the employee by the assessee. If the loan granted to an employee being a director or a person who has a substantial interest in the company or a relative of a director without charging of interest or at a concessional rate of interest constituted any benefit or amenity within the meaning of s. 40A(5), Expln. 2(b)(iii), there was no need for Parliament to introduce the amendment in Expln. 2(b) of s. 40A(5) of the Act by introducing sub-s. (vi). Sub-cl. (vi) which was introduced in Expln. 2(b) of s. 40A(5) of the Act included within the meaning of the expression ‘perquisite’ the amount treated as perquisite under s. 17(2)(vi) which also was introduced by the same Taxation Laws (Amendment) Act, 1984. In other words, a loan granted to an employee who is a director or who has a substantial interest in the company without charging any interest or at a concessional rate of interest did not amount to a benefit or amenity falling within cl. (b)(iii) of Expln. 2 to s. 40 (5) of the Act. The amendment and the immediate deletion thereof manifest clearly the intention of Parliament. It is, therefore, evident that, without a specific provision which was sought to be introduced by sub-cl. (vi) in s. 17(2) of the Act and also the sub-cl. (vi) of Expln. 2(b) to s. 40A(5) of the Act, the grant of loan to the employee without charging any interest does not amount to any benefit for the purposes of s. 17(2) of the Act. The omission of sub-cl. (vi) in s. 17(2) and also sub- cl. (vi) of Expln. 2(b) to s. 40A(5) of the Act from the date of its proposed insertion also was to give relief to salaried taxpayers so that granting of loan to an employee without charging any interest would not be treated as benefit for the purposes of s. 17(2) of the Act. Sec. 17(2) of the Act, by an inclusive definition, sought to include loan given by an employer to its employee for purchase of a building or a site or a site with building or for purchase of a motor car without charging any interest or at a concessional rate, as perquisite. The word ‘includes’ is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. It is a cardinal rule of interpretation that if, by an inclusive definition, the meaning of the word is to be enlarged, it would receive a strict interpretation. It is also a cardinal rule of construction of a fiscal statute that, even if two views are possible, the view which is favourable to the assessee must be accepted while construing the provisions of a taxing statute. For the reasons aforesaid, the non-charging of interest on the amount overdrawn in the relevant year cannot be treated as a benefit for the purposes of s. 17(2)(iii) of the Act.”

18. Taxation Laws (Amendment) Act, 1984, which amended ss. 17(2) and 40A(5) by inserting cl. (vi) in both the sections and its subsequent repeal by the Finance Act, 1985, is significant. By the 1984 (Amendment) Act, Parliament wanted to carve out a particular exception from otherwise exclusionary clauses for the purpose of computation of income-tax. This provided a clear direction to interpret the provisions of ss. 17(2) and 40A(5) before insertion of cl. (vi). The circulars of CBDT also provides as to how Revenue itself understood the effect of the amendments and what was the law before the Amending Act,1984, 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. High Court of Karnataka in the case of CIT vs. M.K. Vaidya (supra) and the Calcutta High Court in the case of P. Krishna Murthy vs. CIT & Anr. (supra) have correctly understood and applied the provisions of the Amendment Act, 1984, and that of Finance Act, 1985, while interpreting the provisions of ss. 17(2) and 40A(5) of the Act. As noted above, the Tribunal in CA No. 657 of 1994 held that there was no evidence presented by the Revenue to show that the borrowed funds were directly diverted for the benefit of the directors. This finding of the Tribunal did not find favour with the High Court which said that it would be well-nigh impossible to expect proof from the Revenue that the monies that were advanced to directors were monies that were borrowed monies. High Court said that ordinarily the funds borrowed by a company would fall within the hotchpot and intermingle with its own funds. High Court appears to have gone beyond the finding of the Tribunal which was not permissible. In the later cases, Karnataka High Court itself relied on the provisions of the Amendment Act, 1984, and its repeal by the Finance Act, 1985, to interpret the provisions of ss. 17(2) and 40A(5). Distinguishing features which the High Court in the case of CIT vs. M.K.

Vaidya (supra) pointed with reference to the impugned judgment [(1992) 198 ITR 738 (Kar) : TC 18R.619 (supra)] appear to us to be rather obscure. Interpretation of law has to be uniform. Thus having regard to the dismissal of the appeal of the Revenue in Civil Appeal No. 424 of 1999 and state of law as interpreted by us, particularly, keeping in view the amendment by the Taxation Laws (Amendment) Act, 1984, and its repeal by the Finance Act, 1985, and the circulars of the CBDT we answer the questions in affirmative, i.e., in favour of the assessee.

Accordingly Civil Appeal No. 657 of 1994 is allowed and Civil Appeal Nos. 4012-13 of 1998 dismissed. There shall, however, be no order as to costs.

[Citation : 243 ITR 383]

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