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2025 (5) TMI 2029 - AT - Income TaxAddition as deemed perquisite u/s. 2(24)(iv) - benefit or perquisite from the company - Interest on loan paid by the company to the Director - Assessee (Director) to the company taken loan from the bank and given to the company - HELD THAT - On conjoint reading of sec. 2(24)(iv) sec. 17(2) of the Act we find that the AO erred in making the addition for the simple reason that he was under the mistaken assumption of fact that the company-employer (M/s. KTVPL) has made the payment to discharge the obligation of the assessee with IOB. However he erred in not noticing that the assessee had given loan to M/s. KTVPL which loan-amount had been periodically re-paid i.e. the principal amount along with the interest to the assessee and not to the IOB. Once the payments are made by M/s. KTVPL to the assessee what the assessee does with that amount is not of any concern of M/s. KTVPL. In other words it is not the case of the AO that M/s. KTVPL (employer) has discharged the obligation of the assessee with IOB by making payments of the borrowed amount of Rs. 50 Crs plus interest to the IOB and closed the loan. Thus the amount can t be termed as perquisite. And we note from perusal of the books of the assessee that the assessee still owes Rs. 94, 64, 375/- to M/s. KTVPL and therefore the question of adding Rs. 94, 64, 375/- as perquisite in the hands of the assessee which is loan given by M/s. KTVPL (employer) can t be brought u/s. 2(24)(iv) - Appeal filed by the assessee is allowed.
The core legal questions considered in this appeal revolve around the applicability of Section 2(24)(iv) of the Income Tax Act, 1961, which defines deemed income to include the value of any benefit or perquisite obtained from a company by a director or person having substantial interest, and whether the addition of Rs. 94,64,375/- as a deemed perquisite on account of interest payments credited by the company to the assessee-director's account was justified. Specifically, the issues are:
1. Whether the amount of Rs. 94,64,375/- credited by the company to the assessee's account as interest on a loan advanced by the assessee to the company can be treated as a perquisite under Section 2(24)(iv) of the Act. 2. Whether the company's payment of interest to the assessee can be construed as discharging any obligation of the assessee, thereby attracting tax as a perquisite under Section 17(2)(iv) and Section 2(24)(iv). 3. The relevance of the assessee's directorship but absence of shareholding (i.e., no substantial interest) in the company in determining the applicability of Section 2(24)(iv). 4. The legal effect of the Taxation Laws (Amendment) Act, 1984 and its subsequent repeal by the Finance Act, 1985, particularly concerning the treatment of interest-free or concessional loans as perquisites. Issue-wise Detailed Analysis Issue 1 & 2: Whether the amount credited as interest on loan advanced by the assessee to the company is a perquisite under Section 2(24)(iv) and 17(2)(iv) The relevant statutory provisions are Section 2(24)(iv), which includes within income the value of any benefit or perquisite obtained from a company by a director or person with substantial interest, and Section 17(2)(iv), which defines perquisite to include any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee. The Assessing Officer (AO) made an addition of Rs. 94,64,375/- on the basis that the company credited this amount as interest payable to the assessee on the loan advanced by him, deducted tax at source (TDS) on this interest, and that this amount was not offered as income by the assessee. The AO considered this as a deemed perquisite under Section 2(24)(iv), reasoning that the company had effectively discharged the assessee's obligation to the Indian Overseas Bank (IOB) by paying the interest on his behalf. The assessee contended that he had no substantial interest in the company (no shareholding), that the amount credited was genuine interest on a loan advanced by him to the company, and that the company had not discharged any obligation of the assessee but had repaid the loan along with interest to him, who then repaid the bank. Therefore, this amount could not be treated as a perquisite or benefit. The Tribunal examined the facts and noted that the assessee had taken a loan of Rs. 50 Crores from IOB and advanced the same to the company. The company repaid the loan and interest to the assessee, who in turn repaid the bank. The amount of Rs. 94,64,375/- represented interest credited by the company to the assessee's account and was shown as a debit balance of the assessee in the company's books. The Tribunal observed that the company had not discharged any obligation of the assessee; rather, the assessee himself owed the amount to the company, as reflected in the balance sheet. The Tribunal relied heavily on the Supreme Court decision in V.M. Salgaocar & Bros. (P) Ltd. v. CIT, which approved a Calcutta High Court judgment holding that interest-free or concessional loans given to employees/directors do not amount to perquisites unless specific provisions exist. The Court emphasized that the legislative history, including the insertion and subsequent repeal of clause (vi) in Section 17(2) and Explanation 2(b) to Section 40A(5), demonstrated Parliament's intention not to treat interest-free or concessional loans as perquisites unless expressly provided. The Court further held that non-charging or concessional charging of interest does not constitute a benefit or perquisite under the Act. Applying this principle, the Tribunal held that the amount credited as interest was not a perquisite because it was genuine interest paid on a loan advanced by the assessee to the company, and the company had not discharged any obligation of the assessee. The payment was a commercial transaction and not a benefit or perquisite. Issue 3: Impact of the assessee's directorship but absence of substantial interest Section 2(24)(iv) applies to benefits or perquisites obtained by a director or a person with substantial interest in the company. The Tribunal noted that the assessee was a director but did not hold any shares in the company and hence had no substantial interest. This fact weakened the Revenue's case for invoking Section 2(24)(iv) since the provision contemplates taxation of benefits or perquisites received by directors or persons with substantial interest. The Tribunal observed that the AO failed to consider this crucial fact and proceeded on the assumption that the assessee was a person with substantial interest. The absence of shareholding was material since the provision's applicability depends on such status. Issue 4: Legislative history and interpretation of Section 17(2) and Section 2(24)(iv) The Tribunal extensively discussed the Taxation Laws (Amendment) Act, 1984, which had introduced clause (vi) in Section 17(2) and Explanation 2(b) to Section 40A(5), aimed at taxing the value of interest-free or concessional loans as perquisites. However, this amendment was repealed by the Finance Act, 1985, restoring the earlier position that such loans do not constitute perquisites unless specifically provided. The Tribunal underscored that the legislative intent was to exclude interest-free or concessional loans from the definition of perquisites unless Parliament expressly provided otherwise. The circulars issued by the CBDT and judicial precedents, including decisions of the Karnataka and Calcutta High Courts, supported this interpretation. The Tribunal criticized the AO and the lower authorities for ignoring this legislative history and judicial pronouncements, which clearly favored the assessee's position. Application of Law to Facts and Treatment of Competing Arguments The AO and the CIT(A) treated the credited interest amount as a perquisite, relying on the fact that the company had deducted TDS on the interest paid and that the assessee had claimed credit for the TDS. They considered the amount as a benefit or advantage obtained from the company. The Tribunal distinguished this by emphasizing the commercial reality that the assessee had advanced a loan to the company, which was repaid with interest. The interest credited was a return on the loan, not a benefit or perquisite. The fact that the assessee had to repay the bank himself and that the company had not discharged any obligation of the assessee was determinative. Further, the Tribunal noted that the assessee's loan balance was still outstanding in the company's books, showing that the amount was not a benefit but a liability owed by the assessee to the company. The Tribunal also rejected the Revenue's argument that the payment of interest by the company amounted to discharging the assessee's obligation, clarifying that the company's payment to the assessee was not payment to the bank and hence did not discharge the assessee's debt. Conclusions The Tribunal concluded that the addition of Rs. 94,64,375/- as a deemed perquisite under Section 2(24)(iv) was unwarranted. The interest credited by the company was genuine interest on a loan advanced by the assessee, and the company had not discharged any obligation of the assessee. The legislative history and judicial precedents firmly supported this view. The Tribunal allowed the appeal, directing the deletion of the addition. Significant Holdings The Tribunal preserved the following crucial legal reasoning verbatim from the Supreme Court and High Court decisions: "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... However, subsequently, the Finance Act, 1985, omitted the aforesaid amendments... 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... 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." "It is 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 section 17(2)(iii) of the Act." "Once the payments are made by M/s. KTVPL to the assessee, what the assessee does with that amount is not of any concern of M/s. KTVPL. In other words, it is not the case of the AO that M/s. KTVPL (employer) has discharged the obligation of the assessee with IOB by making payments of the borrowed amount of Rs. 50 Crs plus interest to the IOB and closed the loan. Thus, the amount of Rs. 94,64,375/- can't be termed as perquisite." The core principles established are:
Final determinations on each issue: 1. The Rs. 94,64,375/- credited as interest was not a perquisite under Section 2(24)(iv). 2. The company did not discharge any obligation of the assessee; hence, Section 17(2)(iv) is not attracted. 3. The assessee's status as director without substantial interest negates the applicability of Section 2(24)(iv). 4. Legislative history and judicial precedents support exclusion of such interest payments from perquisite income. Accordingly, the addition was deleted and the appeal allowed.
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