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Facts
The assessee, a Director of M/s. Kalaignar TV Pvt. Ltd. (KTVPL), obtained a loan of Rs. 50 Crores from Indian Overseas Bank (IOB) and advanced it to KTVPL. KTVPL repaid the loan with interest to the assessee, deducting TDS. The Assessing Officer (AO) treated an amount of Rs. 94,64,375/- as a deemed perquisite under Section 2(24)(iv) of the Income Tax Act, 1961.
Held
The Tribunal held that the amount of Rs. 94,64,375/- could not be termed as a perquisite. The court referred to various judicial precedents, including the Supreme Court's decision in V.M. Salgaocar & Bros. (P) Ltd., which established that interest-free loans granted to employees or directors do not necessarily amount to a perquisite, especially after amendments to the Income Tax Act. The Tribunal noted that the assessee still owed this amount to KTVPL, and the repayment by KTVPL to the assessee was a loan repayment, not a discharge of the assessee's obligation to IOB.
Key Issues
Whether the amount of Rs. 94,64,375/-, representing loan repayments from a company to its director (assessee), could be treated as a deemed perquisite under Section 2(24)(iv) of the Income Tax Act, 1961.
Sections Cited
2(24)(iv), 17(2)(iii), 17(2)(vi), 40A(5)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI S.R.RAGHUNATHA
आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in short "the Ld.CIT(A)”), Delhi, dated 23.03.2024 for the Assessment Year (hereinafter in short "AY”) 2010-11.
The main grievance of the assessee is against the action of the Ld.CIT(A) upholding the action of the AO making addition of (AY 2010-11) Mr. Sharad Kumar :: 2 ::
Rs.94,64,375/- as deemed perquisite u/s.2(24)(iv) of the Income Tax Act, 1961 (hereinafter in short "the Act”).
The brief facts are that the assessee is an individual and Director of a company known as M/s. Kalaignar TV Pvt. Ltd. (hereinafter in short ‘M/s. KTVPL’). The assessee filed its return of income for AY 2010-11 on 24.07.2010 declaring income of Rs.55,79,570/-. Later, the case was selected for scrutiny. The AO noted that the assessee had obtained a loan of Rs.50 Crs. from the Indian Overseas Bank (hereinafter in short ‘IOB’) and advanced the same as loan to M/s. KTVPL. According to the AO, the loan along with the interest was re-paid by M/s. KTVPL to the assessee, who in turn re-paid the loan along with interest to the IOB. The AO further noted that M/s. KTVPL while making payment of interest to the assessee (on the loan amount given to it by the assessee), had duly deducted tax at source on 31.03.2009 to the tune of Rs.87,16,742/- and TDS of Rs.7,47,633/- on 07.09.2009 [total Rs.94,64,375/-]. The AO further noted that M/s. KTVPL had given an additional amount of Rs.94,64,375/- to the assessee and also noted that the assessee had claimed credit of TDS amounting to Rs.87,16,742/- in the AY 2009-10 and also claimed credit of TDS of Rs.7,47,633/- for AY 2010-11. Thus, the AO was of the opinion that the assessee had received excess amount of Rs.94,64,375/- from M/s. KTVPL, which amount assessee didn’t offer as income in the relevant assessment year. Therefore, the assessee was (AY 2010-11) Mr. Sharad Kumar :: 3 ::
asked to show cause ‘as to why’ provisions of Sec.2(24)(iv) of the Act shouldn’t be invoked to such an amount of Rs.94,64,375/-, (which was received by the assessee from M/s. KTVPL). Pursuant thereto, assessee inter alia, submitted that Sec.2(24)(iv) of the Act was not applicable in the facts of the case, since he didn’t had any substantial interest in the company (no shareholding in the company M/s. KTVPL) as well as the fact that the assessee didn’t get any benefit or perquisites from M/s. KTVPL; and that it was a loan re-paid by M/s. KTVPL along with interest and therefore, it can’t be treated as a benefit or perquisite from the company.
The AO didn’t agree and added Rs.94,64,375/- u/s.2(24)(iv) of the Act.
Aggrieved, the assessee preferred an appeal before the Ld.CIT(A)
who was pleased to confirm the same by observing as under:
As observed from the facts of the case, the appellant himself has categorized the extra amount received from M/s. Kalaignar TV Pvt. Ltd. as benefit or advantage. It is also observed that the appellant is a director in M/s. Kalaignar TV Pvt. Ltd. and the above benefit had been obtained by him from the above company. On one hand, the appellant claimed credit for TDS made by the company and on the other hand, he received the extra amount from the company in the guise of interest payment to the Bank, which has already been discharged by the company to the appellant. In view of these facts in hand and also the findings given by the AO. In view of the above facts, I am of the considered view that the AO has rightly made addition of Rs.94,64,375/- to the total income of the appellant u/s 2(24)(iv) of the Income tax Act, 1961. Accordingly, addition of Rs.94,64,375/- is confirmed and the grounds of appeal of the appellant are dismissed.
Aggrieved, the assessee is in appeal before this Tribunal.
We have heard both the parties and perused the material available on record. We note that the assessee is a Director of M/s. KTVPL, but he (AY 2010-11) Mr. Sharad Kumar :: 4 ::
didn’t had any shareholding in the said company; and that the assessee on 01.03.2008 (AY 2009-10) had obtained loan of Rs.50 Crs. from M/s.
IOB and in-turn advanced the same to M/s. KTVPL on the same date i.e. in earlier AY 2009-10. The loan along with interest was re-paid by M/s.
KTVPL to the assessee in regular intervals from 08.04.2008 onwards to 31.03.2009 (i.e. AY 2009-10) and thereafter, from 27.04.2009 onwards to 17.08.2009 (i.e. AY 2010-11) who in-turn had re-paid the loan obtained from M/s. IOB along with interest as shown below:
Date Amount Received Date Repayment to from KTV in Rs IOB 27.04.2009 4,12,83,258/- 28.04.2009 4,12,83,258/- 18.07.2009 50,00,00,000/- 18.07.2009 50,00,00,000/- 12.08.2009 3,50,00,000/- 12.08.2009 3,50,00,000/- 17.08.2009 1,95,05,232/- 17.08.2009 1,95,05,232/-
And it was brought to our notice that the sum of Rs.7,69,35,057/- was debited by M/s. IOB as interest for loans advanced during the period from 01.04.2008 to 31.03.2009. And M/s. KTVPL provided the same amount as interest payable to the assessee in their books and deducted a sum of Rs.87,16,742/- at source @ 11.33% on 24.04.2009 and has shown the said amount as debit balance of the assessee. Since Rs.1,88,53,433/- was debited by IOB towards interest on loans for the year ending 31.03.2010, M/s. KTVPL provided the same amount as interest payable to the assessee in their books and deducted a sum of Rs.7,47,633/- at source @ 11.33% on 17.08.2009 and has shown the said amount as debit balance of the assessee. Thus, M/s. KTVPL has shown Rs.87,16,742/- plus Rs.7,47,633/- (Rs.94,64,375/-) as the debit (AY 2010-11) Mr. Sharad Kumar :: 5 ::
balance of the assessee. Further, the Ld.AR drew our attention to letter dated 02.05.2014 filed by M/s. KTVPL which confirms the fact that Rs.94,64,375/- is due and payable by the assessee and that the said amount was outstanding in their books (M/s. KTVPL) which letter is found placed at Page No.3 of the Paper Book. From perusal of the relevant financials of M/s. KTVPL which was filed before us and especially on perusal of the balance-sheet as on 31.03.2010, we note that under the Schedule–10, i.e., loans & advances Rs.94,64,375/- is shown as loan given to the assessee/Director (refer to Page No.8 of Paper Book). Thus, loan amount of Rs.94,64,375/- is the loan outstanding to M/s. KTVPL from Shri Sharad Kumar (assessee). Thus, in the light of the aforesaid factual matrix, we find that no benefit or perquisites have accrued to the assessee. And for such a proposition, we rely on the decision of the Hon’ble Supreme Court in the case of V.M. Salgaocar & Bros. (P) Ltd. Etc. v. CIT Etc. reported in [2000] 243 ITR 383 (SC), wherein, the Hon’ble Supreme Court approved the following passage from the judgment of the Hon’ble Calcutta High Court in P.R.S. Oberoi’s case reported in [1990] 183 ITR 103 (Cal.) in the context whether non-charging of interest by a company on advances/loan given to its employee-director would attract tax being perquisite and the Hon’ble Calcutta High Court observed as under:
"It would, therefore, appear that if the loan granted to an employee without charging any interest or by charging interest at a concessional rate (AY 2010-11) Mr. Sharad Kumar :: 6 :: amounted to a benefit for the purposes of section 17(2)(iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment) Act, 1984, the new sub-clause (vi) in Section 17(2) of the Act. The omission of the said clause by the Finance Act, 1985 with effect from the date of its insertion, namely, April 1, 1985, was also made with a view to give relief to salaried taxpayers. Similarly, it would appear that there was no need for Parliament to initially amend Section 40A(5) to provide that the amount of interest referred to in item (a) or item (b), as the case may be, in sub-clause (vi) in Section 17(2) of the Income-tax Act shall be regarded as a "perquisite" provided by the employer to his employee and, thereafter, to omit the aforesaid provision with effect from the date of its insertion by the Finance Act, 1985. It would also appear that, without a specific provision which was sought to be introduced by sub-clause (vi) in section 17(2) of the Act and also sub-clause (vi) of Explanation 2((b) to Section 40A(5) of the Act, the grant of loan to the employee without charging any interest did not amount to any perquisite or benefit for the purposes of section 17(2) and/or section 40A(5) of the Act.
The intention of the Legislature seems to be very clear that the expression "benefit" and/or "perquisite" did not include the enjoyment of loan or credit, free of interest or at a concessional rate. This aspect has been recognised by the statute itself and to bring such items in the net of taxation, the law was amended by the Taxation Laws (Amendment) Act, 1984. By this amendment, as already indicated, a new sub-clause (vi) was inserted in Section 17(2) and, similarly, another sub-clause (vi) was inserted in clause (b) of Explanation 2 to Section 40A(5). The effect of these amendments, which were made effective from April 1, 1985, was to ensure treatment and taxation as perquisite of the value of an amount calculated on a particular basis in a case where an employee receives loan for certain prescribed purposes either free of interest or at a rate which was lower than the specified rate. However, subsequently, the Finance Act, 1985, omitted the aforesaid amendments made by the Taxation Laws (Amendment) Act, 1984, with effect from the date of its insertion, namely, April 1, 1985, with a view to provide relief to salaried taxpayers. The very fact that the statute had to be amended at the first instance to bring the said item within the purview of the expression "perquisite" and it later sought to delete the same from the date of its insertion clearly shows that Parliament does not intend to treat interest-free loan or loan at a concessional rate as any benefit or perquisite granted or provided by the lender-company to the director or employee, as the case may be.
If the loan granted to an employee without charging any interest or by charging interest at a concessional rate amounts to a benefit for the purposes of Section 17(2)(iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment Act, 1984, the new sub- clause (vi) in Section 17(2) of the Act. The subsequent omission of the said sub-clause by the Finance Act of 1985 with effect from the date of its proposed insertion was also made with a view to give relief to salaried tax- payers. It is to be noticed that Explanation 2(b) to section 40A(5) of the Act defines a perquisite to mean, inter alia, any benefit or amenity granted or provided free of cost or at a concessional rate to the employee by the assessee. If the loan granted to an employee being a director or a person who has a substantial interest in the company or a relative of a director without charging or interest or at a concessional rate of interest constituted any benefit or amenity within the meaning of Section 40A(5), (AY 2010-11) Mr. Sharad Kumar :: 7 ::
Explanation 2(b)(iii), there was no need for Parliament to introduce the amendment in Explanation 2(b) of Section 40A(5) of Act by introducing sub- clause (vi). Sub-clause (vi) which was introduced in Explanation 2(b) of section 40A(5) of the Act included within the meaning of the expression "perquisite" the amount treated as perquisite under Section 17(2)(vi) which also was introduced by the same Taxation Laws (Amendment) Act, 1984. In other words, a loan granted to an employee who is a director or who has a substantial interest in the company without charging any interest or at a concessional rate of interest did not amount to a benefit or amenity falling within clause (b)(iii) of Explanation 2 to section 40A(5) of the Act. The amendment and the immediate deletion thereof manifest clearly the intention of Parliament.
It is, therefore, evident that, without a specific provision which was sought to be introduced by sub-clause (vi) in Section 17(2) of the Act and also the sub-clause (vi) of Explanation 2(b) to Section 40A(5) of the Act, the grant of loan to the employee without charging any interest does not amount to any benefit for the purposes of Section 17(2) of the Act. The omission of sub-clause (vi) in Section 17(2) and also sub-clause (vi) of Explanation 2(b) to Section 40A(5) of the Act from the date of its proposed insertion also was to give relief to salaried taxpayers so that granting of loan to an employee without charging any interest would not be treated as benefit for the purposes of Section 17(2) of the Act.
Section 17(2) of the Act, by an inclusive definition, sought to include loans given by an employer to its employee for purchase of a building or a site or a site with building or for purchase of a motor car without charging any interest or at a concessional rate, as perquisite. The word "includes" is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute, it is a cardinal rule of interpretation that if, by an inclusive definition, the meaning of the word is to be enlarged, it would receive a strict interpretation. It is also cardinal rule a construction of a fiscal statute that, even if two views are possible, the view which is favourable to the assessee must be accepted while construing the provisions of a taxing statute. For the reasons aforesaid, the non-charging of interest on the amount overdrawn in the relevant year cannot be treated as a benefit for the purposes of section 17(2)(iii) of the Act."
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 CBDT were also provided as to how Revenue itself understood the effect of the amendments and what was the law before the Amending Act, 1984. 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. High Court of Karnataka in the case of Commissioner of Income Tax v. M.K. Vaidya, (1997) 224 ITR 186 and the Calcutta High Court in the case of P. Krishna Murthy v. Commissioner of Income Tax & Anr., (1997) 224 ITR 183 have correctly understood and applied the provisions of the Amendment Act, 1984 and that of Finance Act, 1985 while interpreting the provisions of (AY 2010-11) Mr. Sharad Kumar :: 8 ::
Section 17(2) and 40A(5) of the Act. As noted above, the Appellate Tribunal in CA No. 657 of 1994 held that there was no evidence presented by the Revenue to show that the borrowed funds were directly diverted for the benefit of the Directors. This finding of the Appellate Tribunal did not find favour with the High Court which said that it would be well-nigh impossible to expect proof from the Revenue that the monies that were advanced to directors were monies that were borrowed monies. High Court said that ordinarily the funds borrowed by a company would fall within the hotchpot and intermingle with its own funds. High Court appears to have gone beyond the finding of the Appellate Tribunal which was not permissible. In the later cases, Karnataka High Court itself relied on the provisions of the Amendment Act, 1984 and its repeal by the Finance Act, 4985 to interpret the provisions of Sections 17(2) and 40A(5). Distinguishing features which the High Court in the case of Commissioner of Income Tax v. M.K. Vaidya, (1997) 224 ITR 186 pointed out with reference to the impugned judgment (1992) 198 ITR 738 appear to us to be rather obscure. Interpretation of law has to be uniform.
Thus having regard to the dismissal of the appeal of the revenue in Civil Appeal No. 424 of 1999 and 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 CBDT we answer the questions in affirmative, i.e., in favour of the assessee.
Accordingly Civil Appeal No. 657 of 1994 is allowed and Civil Appeal Nos. 4012-13 of 1998 dismissed. There shall, however, be no order as to costs.
Therefore, in the light of the aforesaid decision of the Hon’ble Calcutta High Court, which was approved by Hon’ble Supreme Court, we are of the opinion that interest-free loan given by the company (M/s.
KTVPL) to assessee/employee couldn’t be termed as a perquisite in the hands of the employee-Director [who was advanced interest free loans by the company (M/s. KTVPL) as noted supra to the tune of Rs.94,64,375/-].
In this context, it would be gainful to take note of the decision of the Hon’ble Supreme Court in the case of V.M. Salgaocar & Bros. (P) Ltd. Etc. v. CIT Etc. (supra), wherein, the Revenue challenged the action of the Hon’ble High Court/Tribunal holding that non-charging of interest couldn’t be regarded as a perquisite in the hands of the employees–Director who was advanced interest free loans by the company. In this case, for AY (AY 2010-11) Mr. Sharad Kumar :: 9 ::
1981-82, the ITO noted that the company (in which that assessee was employee/director) advanced certain sums to the assessee without charging any interest thereon. The ITO held that non-charging of interest on the debit balance would amounts to a perquisite in the hands of the assessee within the meaning of sec.17(2) of the Act. The ITO held in that case that the value of perquisite @15% of the debit balance standing in the name of the assessee in the accounts of the company needs to be brought to tax in hands of the assessee. On appeal, the Ld.CIT(A) held that non-charging of interest on the debit balance couldn’t be regarded as a perquisite in the hands of the assessee and deleted the addition made by the ITO. The Revenue took the matter before the Tribunal in appeal which upheld the order of the Ld.CIT(A) and the Hon’ble High Court upheld the same which was challenged before the Hon’ble Supreme Court and their Lordships held that non-charging of interest on the amount overdrawn in the relevant year can’t be treated as a benefit for the purpose of sec.17(2)(iii) of the Act by holding as under:
Section 17(2) of the Act, by an inclusive definition, sought to include loans given by an employer to its employee for purchase of a building or a site or a site with building or for purchase of a motor car without charging any interest or at a concessional rate, as perquisite. The word "includes" is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute, it is a cardinal rule of interpretation that if, by an inclusive definition, the meaning of the word is to be enlarged, it would receive a strict interpretation. It is also cardinal rule a construction of a fiscal statute that, even if two views are possible, the view which is favourable to the assessee must be accepted while construing the provisions of a taxing statute. For the reasons aforesaid, the non-charging of interest on the amount overdrawn in the relevant year cannot be treated as a benefit for the purposes of section 17(2)(iii) of the Act."
(AY 2010-11) Mr. Sharad Kumar :: 10 ::
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 CBDT were also provided as to how Revenue itself understood the effect of the amendments and what was the law before the Amending Act, 1984. 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. High Court of Karnataka in the case of Commissioner of Income Tax v. M.K. Vaidya, (1997) 224 ITR 186 and the Calcutta High Court in the case of P. Krishna Murthy v. Commissioner of Income Tax & Anr., (1997) 224 ITR 183 have correctly understood and applied the provisions of the Amendment Act, 1984 and that of Finance Act, 1985 while interpreting the provisions of Section 17(2) and 40A(5) of the Act. As noted above, the Appellate Tribunal in CA No. 657 of 1994 held that there was no evidence presented by the Revenue to show that the borrowed funds were directly diverted for the benefit of the Directors. This finding of the Appellate Tribunal did not find favour with the High Court which said that it would be well-nigh impossible to expect proof from the Revenue that the monies that were advanced to directors were monies that were borrowed monies. High Court said that ordinarily the funds borrowed by a company would fall within the hotchpot and intermingle with its own funds. High Court appears to have gone beyond the finding of the Appellate Tribunal which was not permissible. In the later cases, Karnataka High Court itself relied on the provisions of the Amendment Act, 1984 and its repeal by the Finance Act, 4985 to interpret the provisions of Sections 17(2) and 40A(5). Distinguishing features which the High Court in the case of Commissioner of Income Tax v. M.K. Vaidya, (1997) 224 ITR 186 pointed out with reference to the impugned judgment (1992) 198 ITR 738 appear to us to be rather obscure. Interpretation of law has to be uniform.
Thus having regard to the dismissal of the appeal of the revenue in Civil Appeal No. 424 of 1999 and state of law as interpreted by us, particularly, keeping in view the amendment by the Taxation Laws (Amend-ment) Act, 1984 and its repeal by the Finance Act, 1985 and the circulars of the CBDT we answer the questions in affirmative, i.e., in favour of the assessee.
Accordingly Civil Appeal No. 657 of 1994 is allowed and Civil Appeal Nos. 4012-13 of 1998 dismissed. There shall, however, be no order as to costs.
Coming back to the case in hand, the AO has made the addition of Rs.94,64,375/- as value of benefit or perquisite u/s.2(24)(iv) of the Act.
Therefore, definition of perquisite needs to be looked into which is given u/s.17(2)(iv) of the Act which reads as under:
Sec.17(2) "perquisite" includes - (AY 2010-11) Mr. Sharad Kumar :: 11 :: (i) ….. (ii) ….. (iii) ……
(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee;
Sec.2(24)(iv) defines ‘income’ which includes:
i) ….. ii) ….. iii) …. 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 ;
On conjoint reading of sec.2(24)(iv) & sec.17(2) of the Act, we find that the AO erred in making the addition for the simple reason that he was under the mistaken assumption of fact that the company-employer (M/s. KTVPL) has made the payment of Rs.94,64,375/- to discharge the obligation of the assessee with IOB. However, he erred in not noticing that the assessee had given loan of Rs.50 Crs. to M/s. KTVPL, which loan- amount had been periodically re-paid i.e., the principal amount along with the interest to the assessee and not to the IOB. Once, the payments are made by M/s. KTVPL to the assessee, what the assessee does with that amount is not of any concern of M/s. KTVPL. In other words, it is not the case of the AO that M/s. KTVPL (employer) has discharged the obligation of the assessee with IOB by making payments of the borrowed amount of (AY 2010-11) Mr. Sharad Kumar :: 12 :: Rs.50 Crs plus interest to the IOB and closed the loan. Thus, the amount of Rs.94,64,375/- can’t be termed as perquisite. And we note from perusal of the books of the assessee that the assessee still owes Rs.94,64,375/- to M/s. KTVPL and therefore, the question of adding Rs.94,64,375/- as perquisite in the hands of the assessee which is loan given by M/s. KTVPL (employer) can’t be brought u/s.2(24)(iv) of the Act. In the light of the discussion, the assesse succeeds, and the AO is directed to delete the addition of Rs.94,64,375/-.
In the result, appeal filed by the assessee is allowed.
Order pronounced on the 18th day of September, 2024, in Chennai.