TMI Blog2000 (3) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... loans of Rs. 2,00,000 from M/s. Varinder Agro Pvt. Ltd. (hereinafter referred to as VAPL) and Rs. 1,75,000 from Pashupati Enterprises Ltd. (hereinafter referred to as PEL). The Assessing Officer observed that both the companies were on paper only and had share capital of Rs. 100 each. These companies had not carried out any business. He noted that Shri N.K. Vohra and Shri Rakesh Gupta were the Directors in VAPL. Shri N.K Vohra is an employee of VACL, where the assessee is Managing Director. Shri Rakesh Gupta is also related to the assessee and is also an employee of VACL for the last 8 to 9 years. Both the companies took interest free loans from M/s. VACL which were advanced to the assessee and his other relatives. During the course of assessment proceedings, the Assessing Officer recorded the statement of Shri N.K Vohra, Director of VAPL on 18-1-1995. When asked to explain the purpose for which loans were given to the assessee, his parents, his wife and minor son, Shri Vohra could not explain the same. However, he added that M/s. VACL had given loan to VAPL for purposes of carrying out construction work. However, the Assessing Officer noted that the company had no experience in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He, therefore, estimated the interest @ 21 per cent on the interest free loan and added the same under section 2(24)(iv) of the Act. 5. Shri Varinder Gupta is a director in M/s. Himalayan Ayurvedic Agro Research Centre Ltd. While completing the assessment for the assessment year 1996-97 the Assessing Officer noted that the assessee had received interest free loan of Rs. 1,75,000 from M/s. Himalayan Ayurvedic Agro Research Centre Ltd. The Assessing Officer noted that benefit in the form of interest free loan had been derived by the Director of the company which is liable to tax under section 2(24)(iv) of the Act. Accordingly he estimated the interest @ 21 per cent on loan of Rs. 1,75,000 and included an amount of Rs. 36,750 in the income of the assessee. 6. Aggrieved by the orders of the Assessing Officer, the above referred assessees filed appeals before the first appellate authority. The CIT(A) confirmed the orders of t he Assessing Officer by holding that interest estimated by the Assessing Officer was a benefit derived by the Managing Director, Directors and their relations and the same constituted benefit under section 2(24)(iv) of the Act. While arriving at such a fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout any security and advanced the same to the Managing Director and his relatives without charging any interest. He submitted that these companies were only a ruse for passing on the benefits to the Managing Director and his relatives. These were colourable devices. He also submitted that the Assessing Officer is empowered to pierce the corporate veil to see the true character of the transactions. He further submitted that colourable device for tax evasion cannot be encouraged. In this regard, he relied on the following judgments: (i) CIT v. Shekhawati Rajputana Trading Co. (P.) Ltd. [1999] 236 ITR 950 (Cal.). (ii) CIT v. Poulose Mathen (P.) Ltd. [1999] 236 ITR 416 4 (Ker.). (iii) McDowell Co.'s (iv) Kartikeya V Sarabhai v. CIT [1985] 156 ITR 509 (SC). He submitted that in view of the ratio laid down in the above-mentioned judgments, the transactions routed through the two companies should be treated as collusive transactions, Considering the fact that both the companies existed on papers and had not carried on any business except receiving the loans from VACL and passing these on to Managing Director and his relations, the transactions of loans should be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, pleaded that the additions made by the Assessing Officer and confirmed by the CIT(A) in all these cases should be deleted. 11. We have carefully considered the rival submissions and examined the facts, evidence and material on record. We have also perused the earlier decision of the Tribunal referred to by the ld. Counsel for the assessee. We have also referred to the various judgments relied on by the ld. D.R. It is now clear that the Assessing Officer has made additions in terms of provisions of section 2(24)(iv) of the Act. Section 2(24)(iv) is reproduced below: "2. In this Act, unless the context otherwise requires ** ** ** (24) 'income' includes ** ** ** (iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid." Now the only issue that needs to be considered is whether interest free advances given to Shri Rajind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes of Explanation 2(b)(iii) to section 40A(5) or section 17(2)(iii) of the Act, by the same yardstick, such loan cannot also be construed as a benefit or perquisite for the purposes of section 2(24)(iv) of the Act.' It may be seen from the above that the Hon'ble Calcutta High Court has held that advancing of interest free loans or giving loans on concessional rates to the Director or hi s relatives of the company does not constitute a 'benefit' or 'perquisite'. While arriving at such a finding the Hon'ble High Court has taken note of the amendment brought about by the Taxation Laws (Amendment) Act, 1984 to provisions of sections 17(2)(vi) and 45A(5). Besides, the Calcutta High Court had noted the fact that there was nothing on record to show that the company had borrowed any money for making advances to the assessee and/or paid any interest on the overdrawn amount which, but for such payment, would have been paid by the assessee. In the absence of these facts, the Calcutta High Court had held that interest free advances given to the assessee did not constitute a gift. 12. While relying on the judgment of the Calcutta High Court, the Tribunal also took note of the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the point of colourable device by which loans were taken from VACL by the two companies on paper and given to the Managing Director and his relations without charging any interest. There cannot be any dispute to the fact that the transactions were routed through those two companies only with a view to wriggle out the provisions of section 2(24)(iv) of the Act. The facts brought on record clearly show that both the Directors, of the companies have subscribed share capital of Rs. 100 each and were employees of M/s. VACL. Neither the purpose for which they had obtained interest free loans and advanced to the Managing Director and his relations nor the facts that these transactions were made during the course of their business have been established. Having said so, the issue that needs to be considered is whether interest free loans given to the Managing Director and his relations amountde to a benefit or perquisite derived by the assessees particularly when there is no finding recorded by the authorities below that the companies had borrowed amounts on interest. But for payment of interest by those companies, interest would have been payable by the Managing Director and his relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the company, constituted a benefit under section 2(24)(iv) of the Act. The High Court held that there was remission of liability in favour of the Director and the same constituted a perquisite under section 2(24)(iv). In these cases, there is no remission of the liability. (iv) The next case relied on by the ld. D.R. is C Kulandaivelu Konar's case. The issue before the Madras High Court was whether interest free loan given by a company to Managing Director amounted to a 'benefit' when the company was paying interest on its borrowings. In the light of these facts, the Hon'ble High Court held that interest referable to the amounts borrowed by the Managing Director constituted a benefit because the company was paying interest on the amounts borrowed. In the present cases, there is no finding recorded by the Assessing Officer that the companies were paying interest on their borrowings. (v) In A.K. Lakshmi's case the Managing Director had overdrawn the amounts on which no interest was paid. The company was paying interest on its borrowings. In the light of these facts, the Hon'ble Madras High Court had held that interest referable to amounts overdrawn by Managing Director was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we find that there is only one case ie., Tara Singh which is slightly in favour of the Revenue. The judgment in this case is very brief and it has not spelt out the complete facts of the case. However, it is noted that the Hon'ble Delhi High Court has upheld the contention of the Revenue by relying on the judgment of the Madras High Court in the case of A.K. Lakshmi and Madras High Court in the case of S.S.N. Lingappan . The facts relating to both the cases discussed above clearly show that both the cases are distinguishable from the facts of the present cases, inasmuch as, in A.K. Lakshmi's case there was a clear finding of fact that company was paying interest on the amounts borrowed and it did not charge interest in respect of the amounts advanced to Director. No such finding exists in the present appeals. In the case of S.S.N. Lingappan the issue was providing facility of free user of car and telephone and not interest free loan. It is not clear from the facts of Tara Singh's case whether the company was paying interest on the amounts borrowed which were given to the Director. Besides, the judgment of the Delhi High Court has not referred to the decision of the Calcutta High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he form of rent free accommodation, free electricity and telephone. The assessee had offered an amount of Rs. 48,000 to cover the value of perquisite on all counts. The Assessing Officer noted that for purposes of computing the perquisite value of free electricity, the same was to be taken at 6.25 per cent of the salary of the assessee. The salary has been defined under Explanation I to rule 3. As per this rule, the salary of the assessee worked out to Rs. 10,01,665 and @ 6.25 per cent thereof perquisite value worked out to Rs. 62,600. The Assessing Officer also added an amount of Rs. 3,580 being 20 per cent of the residential telephone expenses of Rs. 17,921. The assessee himself had offered an amount of Rs. 12,000 on account of free electricity. Aggrieved by the order of the Assessing Officer, the assessee took the matter in appeal before the first appellate authority. It was argued before the CIT(A) that accommodation provided to the assessee Was partly used for office purpose. The CIT(A) confirmed the perquisite value made on account of free use of electricity by relying on the relevant provisions of the Act. He also confirmed the perquisite value of residential telephone estim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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