2000 (4) TMI 2 - SC - Income Tax

s.40A(5) cannot be stretched to disallow amounts for non-charging interest on directors' running-account debit balances

VM Salgaocar And Bros. Pvt. Ltd. Versus Commissioner of Income-Tax

SC held for the assessee, ruling that s.40A(5) does not permit disallowance by treating non-charging of interest on directors' running-account debit ... Taxability of interest-free loans to directors - addition under Section 40A(5) - Whether, the Appellate Tribunal is right in law in holding that non-charging of interest on the debit balance in the running account of the directors would not constitute a perquisite.' - The stand of the Revenue was that as long as there was a benefit whether direct or indirect, the provisions of section 40A(5) were attracted. The Appellate Tribunal had also observed that non-charging of interest on the debit balance in the running account of the directors would not constitute a perquisite and that if such a general proposition is accepted, the disallowance under section 40A(5) would be on par with the disallowance under section 36(1)(iii) which provision provides for deduction to be allowed in respect of the amount of interest on capital borrowed for the purpose of the business or profession. HELD THAT:- We do not think that the language of sub-section (5) of section 40A of the Act provides for or permits such a course. Sub-section (5) applies where an assessee claims a certain deduction saying that he has spent that money in providing, directly or indirectly either as salary to an employee or in the provision of perquisite to an employee. Only then do the ceilings prescribed in the said sub-section come into play. It is true that in some cases this facility may be abused, We know public corporations like banks lending money to their own employees at practically no interest, say for example, one or two per cent. interest per annum, whereas those very banks lend to people at rates of interest ranging from 13 per cent. to 19 per cent. per annum. But the remedy for that must lie elsewhere, either in the proper control of the public corporation or in the amendment of the Income-tax Act, as the case may be. As the provision of law of section 40A(5) of the Act now stands, it is not possible to answer the said question in the manner suggested by the Department. Accordingly, we answer question in the affirmative, i.e., in favour of the assessee and against the Revenue. In the case of clause (c), those whose annual income under the head 'Salaries' (as stated therein) is below Rs. 18,000 are not covered. The High Court after referring to clause (vi) as inserted in section 17(2) by the 1984 Amendment Act, its omission by the Finance Act, 1985, and the two circulars of the Central Board of Direct Taxes said that two inferences are inevitable: (1) In the year 1984, while enacting the Taxation Laws (Amendment) Act, 1984, Parliament thought that section 17(2)(iii) did not cover the cases of loans granted to employees for house building purposes ; (2) Clause (vi), which was inserted, was omitted again to grant tax relief to the salaried taxpayers. In other words, salaried taxpayers were not to be burdened with the tax, by including the value of the interest-free loan or loan at a concessional rate of interest granted for house building purposes, to an employee, by his employer. The Taxation Laws Amendment Act, 1984, which amended sections 17(2) and 40A(5) by inserting clause (vi) in both the sections and its subsequent repeal by the Finance Act, 1985, is significant. By the 1984 Amendment Act, Parliament wanted to carve out a particular exception from otherwise exclusionary clauses for the purpose of computation of income-tax. This provided a clear direction to interpret the provisions of sections 17(2) and 40A(5) before insertion of clause (vi). The circulars of the Central Board of Direct Taxes also provide as to how the Revenue itself understood the effect of the amendments and what was the law before the Amending Act, 1984. The High Court in the impugned judgment could not have brushed aside the consideration of the Amending Act, 1984, and its subsequent repeal by the Finance Act, 1985, by terming them of no consequence. Thus having regard to the dismissal of the appeal of the Revenue in Civil Appeal No. 424 of 1999 and the state of law as interpreted by us, particularly, keeping in view the amendment by the Taxation Laws (Amendment) Act, 1984, and its repeal by the Finance Act, 1985, and the circulars of the Central Board of Direct Taxes, we answer the questions in the affirmative, i.e., in favour of the assessee. Issues Involved:1. Deletion of addition under Section 40A(5) of the Income-tax Act, 1961.2. Non-charging of interest on the debit balance in the running account of the directors as a perquisite.3. Interpretation of Sections 17(2) and 40A(5) of the Income-tax Act, 1961, in light of the amendments by the Taxation Laws (Amendment) Act, 1984, and its subsequent repeal by the Finance Act, 1985.4. Doctrine of merger and its application in the context of Supreme Court dismissals.Issue-wise Detailed Analysis:1. Deletion of Addition under Section 40A(5):The Income-tax Officer disallowed a sum of Rs. 5,21,241 under Section 40A(5) and Section 17(2) of the Act, arguing that the company borrowed large sums at 15% interest and advanced loans to directors without charging interest, thus benefiting the directors. The Appellate Tribunal deleted the addition, holding that no evidence showed borrowed funds were directly diverted for the directors' benefit. The High Court reversed this, but the Supreme Court found the Tribunal's findings valid, emphasizing that the High Court went beyond permissible limits in its assessment.2. Non-charging of Interest as a Perquisite:The High Court initially held that non-charging of interest on directors' debit balances constituted a perquisite. However, the Supreme Court referenced multiple judgments, including CIT v. C. Kulandaivelu Konar and CIT v. P. R. S. Oberoi, which concluded that interest-free loans or loans at concessional rates did not amount to perquisites under Section 17(2) or Section 40A(5). The Supreme Court noted the 1984 amendment introducing sub-clause (vi) to Section 17(2) and its subsequent repeal in 1985, indicating legislative intent not to treat such loans as perquisites.3. Interpretation of Sections 17(2) and 40A(5):The Supreme Court emphasized the significance of the 1984 amendment and its repeal in 1985. The amendment aimed to include interest-free or concessional loans as perquisites but was repealed to provide relief to salaried taxpayers. The Court relied on the Central Board of Direct Taxes (CBDT) circulars, which clarified that the omission of the amendment was to relieve taxpayers from such inclusions. The Court concluded that without specific provisions, such loans could not be treated as perquisites.4. Doctrine of Merger:The Supreme Court discussed the doctrine of merger, stating that when an appeal is dismissed, the High Court's order merges with the Supreme Court's order. This doctrine did not apply to special leave petitions dismissed under Article 136. The Court highlighted that the dismissal of the Revenue's appeal in Civil Appeal No. 424 of 1999 upheld the High Court's decision for the assessment year 1980-81, implying a consistent interpretation for the assessment year 1979-80.Conclusion:The Supreme Court allowed Civil Appeal No. 657 of 1994, favoring the assessee, and dismissed Civil Appeals Nos. 4012-13 of 1998, also favoring the assessee. The judgment underscored the legislative intent behind the amendments and repeals, clarifying that interest-free or concessional loans do not constitute perquisites under the relevant sections of the Income-tax Act, 1961. The Court's interpretation aimed at uniformity and consistency in applying the law.