2001 (4) TMI 70 - HC - Income Tax

Notice under Income-tax Act for interest-free loan deemed invalid as it doesn't constitute income.

The court held that the notice issued under section 148 of the Income-tax Act for the assessment year 1966-67 was invalid as the benefit of an ... Reassessment, Condition Precedent Issues:Challenge to notice issued under section 148 for assessment year 1966-67 based on jurisdictional error and conditions for issuance of notice not fulfilled.Analysis:The petitioner challenged a notice issued under section 148 of the Income-tax Act for the assessment year 1966-67, arguing that the respondent lacked jurisdiction unless specific conditions were met. The petitioner contended that the benefit of interest-free loan cannot be considered income under section 2(24) of the Act, citing relevant case law. The Division Bench and the Supreme Court judgments supported this argument, emphasizing that non-charging of interest on a loan does not constitute a benefit or income. The petitioner asserted that both conditions essential for issuing a notice were not satisfied, relying on precedents like Calcutta Discount Co. Ltd. v. ITO and Indian Oil Corporation v. ITO.The respondent, represented by Mr. Agarwal, argued that the benefit derived from an interest-free loan should be considered income under section 2(24)(iv) as it falls within the definition of income. The respondent distinguished previous judgments by stating that they pertained to salaried employees, whereas the petitioner was not a salaried employee and obtained the loan without paying interest. Mr. Agarwal maintained that the impugned notice was valid and well-founded, lacking jurisdictional error.The court analyzed the issue to determine the sustainability of the impugned notice based on disclosed reasons. It emphasized the necessity of fulfilling conditions before exercising power under section 148, requiring a reason to believe in income escapement. The court reiterated that income must exist before escapement can be considered, and the benefit of interest exemption did not qualify as income under section 2(24)(iv). Referring to the Division Bench's interpretation and the Supreme Court's approval, the court concluded that the benefit in question did not constitute income, thus negating the possibility of income escapement and rendering the notice invalid.In the final ruling, the court held that the authority lacked sufficient grounds to believe the petitioner had evaded income, setting aside the notice. The judgment emphasized the general applicability of the Division Bench's interpretation, not limited to salaried employees. The writ petition succeeded, and no costs were awarded in the case.