Court rules interest-free advances to directors as perquisites under Income-tax Act

Additional Commissioner Of Income-Tax, Madras-I Versus Late AK Lakshmi And Others (By Lr)

Additional Commissioner Of Income-Tax, Madras-I Versus Late AK Lakshmi And Others (By Lr) - [1978] 113 ITR 368, 1978 CTR 171 Issues Involved:
1. Inclusion of sums as perquisites u/s 17(2) of the Income-tax Act, 1961.
2. Applicability of sections 17(2)(iii) and 17(2)(iv) of the Income-tax Act, 1961.

Summary:

Issue 1: Inclusion of sums as perquisites u/s 17(2) of the Income-tax Act, 1961

The primary issue in these tax references is whether certain sums should be included as perquisites in the hands of the assessees u/s 17(2) of the Income-tax Act, 1961. The sums in question pertain to interest-free advances made by Midland Theatres Private Ltd. to its directors, which the Income-tax Officer considered as benefits derived by the assessees without cost, thus falling within the ambit of section 17(2)(iii) of the Act.

Issue 2: Applicability of sections 17(2)(iii) and 17(2)(iv) of the Income-tax Act, 1961

The Tribunal concluded that neither section 17(2)(iii) nor section 17(2)(iv) applied to these cases, and thus, the amounts could not be treated as perquisites. However, the court disagreed with the Tribunal's view, stating that the non-liability to pay interest on the advances constituted a benefit to the directors. The court emphasized that ordinarily, borrowing money incurs an obligation to pay interest, and receiving interest-free advances from the company indeed provided a benefit to the directors.

The court referred to the case of Commissioner of Income-tax v. C. Kulandaivelu Konar [1975] 100 ITR 629 (Mad), which held that the use of company funds without an obligation to pay interest amounts to a benefit granted by the company without cost, attracting section 17(2)(iii) of the Act.

The court also noted that the cost of the benefit should be determined by what is fair, just, and reasonable, as envisaged by rule 3(g) of the Income-tax Rules. In these cases, the benefit was calculated by applying a 10% interest rate on the average outstanding advances during the year, which was not contested as unreasonable or unfair.

Conclusion:

The court answered all the questions in the negative, in favor of the department and against the assessees. The sums in question were deemed to be benefits that accrued to the assessees without cost, thus falling under the definition of "perquisite" u/s 17(2) of the Income-tax Act, 1961, specifically under section 17(2)(iii)(a). The department was awarded costs from the three sets of assessees, with a single set of counsel's fee fixed at Rs. 250.