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TMI Blog1984 (2) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1977-78, he had withdrawn Rs. 1,00,388, for the assessment year 1978-79, Rs. 60,548 and for the assessment year 1979-80, Rs. 3,35,839. It is an admitted position that no interest had been charged thereon. The ITO was of the opinion that under those circumstances the assessee had enjoyed a perquisite. He computed the interest which he would have otherwise had to pay on these advances and treated such estimated interest as perquisites. The amount added was Rs. 12,047 for the assessment year 1977-78, Rs. 7,266 for the assessment year 1978-79 and Rs. 23,305 for the assessment year 1979-80. 3. On appeal, the AAC, following the decision of the Madras High Court in the case of Addl. CIT v. A.K Lakshmi [1978] 113 ITR 368, gave a finding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondingly in the hands of the assessee. He then distinguished the Madras High Court decision in the case of A.K. Lakshmi and pointed out that therein the company had borrowed funds. Since that fact was not available in the assessee's case, the ratio of the Madras High Court decision will not be applicable. He further submitted that in this respect no distinction could be drawn between a director and an employee. Both have to be treated on the same par as far as perquisites are concerned. He then pointed out to a Board Circular according to which, there would be no perquisites on interest-free loans. He submitted that all perquisites need not be brought to tax. What would be brought to tax are given in the Income-tax Rules, 1962 (' the Rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that this was a case of the assessee getting something free of cost and, therefore, it would amount to a perquisite. 5. We have considered the facts of the case. We are of the opinion that the amount is properly added by the ITO. The provisions we are concerned with are of section 17(2)(iii) of the Income-tax Act, 1961 (' the Act '), which read as follows : " (2) " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween an employer and an employee for services rendered by the latter and a contract between them on a collateral matter. The first is the contract which is causa causans and all receipts therefrom are taxable. The second is merely a collateral contract. It is not a payment for services although between the two parties there is also a subsisting relation of employer and employee. That subsisting relation is not enough to bring any incidental gain to the employee to tax. Any such gain may become income only if the circumstances of the contract warrant it. It is this distinction which is apparent between items (a) and (c). Under item (c) the benefit must be the benefit from a contract of service. That is because of the expression ' employer ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground that therein the company had borrowed funds which were in turn passed on to the directors, whereas in the case before us the company had ample funds of its own. The finding quoted above did not at all arise from the fact that the company had borrowed funds. The Madras High Court decision is applicable both for borrowed funds as well as the company's own funds. As far as the director is concerned, it is immaterial whether the funds belonged to the company or borrowed from a third party. As far as he is concerned, he enjoys a perquisite insofar as he is not called upon to pay any interest thereon. 8. We may, however, dispose of a small point raised by Shri Anjani Kumar that the fact that the company had its own funds was not before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owable in section 37 is curtailed to some extent. Now, if no expenditure is incurred to be allowed under section 37, then naturally there is no question of curtailing that expenditure under section 40(a)(v). It is precisely on this point that the Allahabad High Court has pointed out that before section 40(a)(v) is attracted, the company should have incurred an expenditure or should have granted an allowance in respect of any of its assets for the use by its employees. The High Court found that the company had allowed its employees free residence in the quarters and in doing so had incurred no expenditure at all. Therefore, it would be seen that there was nothing to be allowed under section 37 itself and so the ceiling under section 40(a)(v) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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