Interest-free director loans fall outside Section 40(c) disallowance; interest apportionment for perquisite valuation rejected.

Interest-free advances to a director were treated as outside the scope of disallowance under Section 40(c) and Section 40A(5) of the Income-tax Act, 1961, because binding precedent had already held that such a loan does not amount to a taxable perquisite for that purpose. On that footing, the proposed method of valuing the alleged perquisite by attributing and apportioning interest in proportion to the company's borrowed funds was rejected. The issue was answered against the Revenue and in favour of the assessee.

---

---

Issues: Whether, for disallowance under Section 40(c) of the Income-tax Act, 1961, the value of the perquisite arising to a director on account of interest attributable to an interest-free amount advanced to him is to be determined by allocating the interest in proportion to the borrowed funds of the assessee company as against the total funds.

Analysis: The issue was held to be covered by binding precedent which had already determined that the grant of an interest-free loan to an employee or director did not fall within the ambit of disallowance under Section 40(c) or Section 40A(5) of the Income-tax Act, 1961. On that basis, the suggested method of attributing and apportioning interest for valuation of the alleged perquisite was not accepted.

Conclusion: The question was answered against the Revenue and in favour of the assessee.

---