TMI Blog2000 (4) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... S.K. Dwivedi, Advocates, Counsel appearing for the parties: The judgment of the court was delivered by D. P. WADHWA J.--- Civil Appeal No. 657 of 1994 is directed against the judgment dated February 7, 1992, of the Division Bench of the Karnataka High Court (now reported as [1992] 198 ITR 738), delivered on a reference made to it by the Income-tax Appellate Tribunal (the "Appellate Tribunal" for short) under section 256(2) of the Income-tax Act, 1961 (for short "the Act"). The reference was at the instance of the Revenue. The following questions arose for the determination of the High Court : "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in deleting addition of Rs. 5,21,241 made by the Income-tax Officer under section 40A(5) and sustained by the Commissioner of Income-tax (Appeals). (2) Whether, on the facts and in the circumstances of the case, the Appellate 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." The High Court answered both the questions in the negative and in favour of the Revenue. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs would not constitute a perquisite and that if such a general proposition is accepted, the disallowance under section 40A(5) would be on par with the disallowance under section 36(1)(iii) which provision provides for deduction to be allowed in respect of the amount of interest on capital borrowed for the purpose of the business or profession. In Civil Appeals Nos. 4012-13 of 1998 it is the Revenue which is aggrieved. For the assessment years 1980-81 and 1981-82 in the case of the respondent, Sri Shivanand V. Salgaocar, a director of V. M. Salgaocar and Brothers Pvt. Ltd., the following question of law was referred to the High Court by the Appellate Tribunal under section 256(1) of the Act : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the action of the Appellate Assistant Commissioner who held that non-charging of interest could not be regarded as being a perquisite in the hands of the employee-directors who were advanced interest-free loans by the company." The High Court answered the question so referred in the affirmative, in favour of the assessee and against the Revenue with the following observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. He computed the value of the perquisite at the rate of 15 per cent. 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 bands of the assessee. On appeal filed by the assessee, the Commissioner of Income-tax (Appeals) relying on the decision of the Appellate 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 a perquisite in the hands of the assessee and deleted the addition made by the Income-tax Officer. The Revenue took the matter to the Appellate Tribunal in appeal who upheld the order of the Commissioner of Income-tax (Appeals) holding that no ground had been made out by the Revenue to depart from the view taken by the Appellate Tribunal earlier. On the reference made to the High Court by the Appellate Tribunal at the instance of the Revenue the same was dismissed by order dated December 12, 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 assessment year 1980-81 in the case of the company itself th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome tax (Appeals) 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 Appellate Tribunal is right in law in upholding the order of the Commissioner of Income-tax (Appeals) who held that the amount of Rs. 43,320 paid as compensation to agriculturist is allowable as revenue expenditure." The High Court by order dated August 1, 1997, answered the first question in the affirmative in favour of the company relying on its two decisions in CIT v. M. K. Vaidya [1997] 224 ITR 186 (Kar) (Appex.) and P. Krishna Murthy v. CIT [1997] 224 ITR 183 (Kar). The 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 I. T. R. C. No. 24 of 1992. Still aggrieved the Revenue came to this court on appeal (C. A. No. 424 of 1999), on a certificate granted by the High Court under section 261 of the Act. This court by order dated January 25, 1999, dismissed the appeal just stating "the appeal is dismissed". (2) Sections 17(2) and 40A of the Act were amended by the Taxation Laws (Amendment) Act, 1984. Sub-clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (2) of section 17 of the said Act. Thus clause (vi) was to be in operation from April 1, 1985. However, it was omitted by enacting the Finance Act, 1985. Thus, it is omitted from the very date of its insertion, i.e., April 1, 1985, The Central Board of Direct Taxes (CBDT) issued a circular incorporating the objectives sought to be achieved by omission of clause (vi). It is Circular No. 421, dated June 12, 1985. Earlier the Central Board of Direct Taxes had issued a Circular No. 397, dated October 16, 1984, explaining the objectives in inserting new sub-clause (vi) in section 17(2). It may also be noted that after clause (vi) was inserted in section 17(2) by the Amendment Act, 1984, the Incometax Rules were also amended by incorporating rule 3A to work out enacted clause (vi). This rule 3A was also deleted after the omission of clause (vi). Different considerations apply when a special leave petition under article 136 of the Constitution is simply dismissed by saying "dismissed", and an appeal provided under article 133 is dismissed also with the words "the appeal is dismissed". In the former case it has been laid down by this court that when a special leave petition is dismiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecomes one which attracts article 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 article 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 the assessment year 1980-81 and it cannot take a different view for the assessment year 1979-80. There appears to be 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 section 17(2) or section 40A(5). We may refer to some of the judgments of the High Courts. In the case of CIT v. C. Kulandaivelu Konar [1975] 100 ITR 629 (Mad) 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 March 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication of this section is that this benefit must be derived by the persons mentioned in sub-clauses (a), (b) or (c). It is said that the sub-clause applicable is sub-clause (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-clause (a) would apply." The High Court 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 a 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court referred to its earlier decision in the case of CIT v. C. Kulanadaivelu Konar [1975] 100 ITR 629, and held that even if a benefit had been conferred on the director unilaterally without the aid of any agreement between the parties the benefit could be taxed as a perquisite under section 17(2)(iii) and (iv). In CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 173 ITR 290 (AP), one of the questions before the High Court was (page 292) "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 section 40A(5)". The assessee was a public limited company. In answer to the question the court said : "So far as question No. 5 is concerned, what is happening is that again with a view to keep its employees happy and satisfied, the assessee has been given 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 per cent. and if they' let out the houses, the interest will be charged at 9 per c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 per cent. to 19 per cent. per annum. But the remedy for that must lie elsewhere, either in the proper control of the public corporation or in the amendment of the Income-tax Act, as the case may be. As the provision of law of section 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." In CIT v. P. R. S. Oberoi [1990] 183 ITR 103 (Cal), the question before the court was whether the Appellate Tribunal was justified in deleting certain amounts from the total income of the assessee on the ground that the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The High Court therefore, said that the grant of loan without charging any interest could not be considered as a benefit or perquisite within the meaning of section 2(24)(iv) of the said Act. In Indian Oxygen Ltd. v. CIT (1994] 210 ITR 274 (Cal), following its earlier decision in CIT v. P. R. S, Oberoi [1990] 183 ITR 103, 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 section 17(2) and/or section 40A(5) of the Act. The question before the court was whether notional interest calculated on interest-free loans granted by the assessee-company to its employee could be taken as perquisites for the purposes of disallowance under section 40A(5) of the Act. The 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 provision 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. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K. Vaidya [1997] 224 ITR 186 (Kar) (Appex.), the question before the High Court was (page 188) "whether, on the facts and in the circumstances of the case, the Appellate 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 ?" The High Court answered the question in the affirmative in favour of the assessee. The High Court said that it was never intended to treat the interest-free loan advance for house building purposes as a " perquisite" under section 17(2)(iii). In this case the assessee was In 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 Assessing Officer held that the interest free loan was a benefit which should be valued as a "perquisite" under section 17(2). The Revenue contended that the interest-free loan was a benefit which should be treated as a perquisite under section 17(2)(iii) and for the purpose of computation, rule 3(g) was attracted and the principle underlying clause (vi) as inserted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see the interest paid on loan taken by him for building purposes. The High Court following its earlier decision in M. K. Vaidya's case [1997] 224 ITR 186, held that the order of the assessing authority in so far as it related to the inclusion of interest subsidy amount as taxable income of the asses see was wrong and the High Court set aside the same. The High Court noticed that the Division Bench in the earlier case had held that the Legislature never intended to treat the interest as "perquisite" under section 17(2)(iii) of the Act. We quote with approval the following passage from the judgment of the Calcutta High Court in P. R. S. Oberoi's case [1990] 183 ITR 103, 106, 107 109 : "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 section 17(2)(iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment) Act, 1984, the new sub-clause (vi) in section 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, April 1, 1985, was also made wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted 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 section 17(2)(iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment) Act, 1984, the new sub-clause (vi) in section 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 Explanation 2(b) to section 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 section 40A(5), Explanation 2(b)(iii), there was no need for Parliament to introduce the amendment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit for the purposes of section 17(2)(iii) of the Act." The Taxation Laws Amendment Act, 1984, which amended sections 17(2) and 40A(5) by inserting clause (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 sections 17(2) and 40A(5) before insertion of clause (vi). The circulars of the Central Board of Direct Taxes also provide as to how the Revenue itself understood the effect of the amendments and what was the law before the Amending Act, 1984. The High Court in the impugned judgment could not have brushed aside the consideration of the Amending Act, 1984, and its subsequent repeal by the Finance Act, 1985, by terming them of no consequence. The High Court of Karnataka in the case of CIT v. M. K. Vaidya [ 1997] 224 ITR 186 (Appex.) and the Karnataka High Court in the case of P. Krishna Murty v. CIT [1997] 224 ITR 183, have correctly understood and applied the provisions of the Amendment Act, 1984, and those of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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