Bishan Lal, Accountant Member -
(1.) THIS appeal filed by the revenue is directed against the order dated 2-12-1980, Appeal No. 192/1979-80, of the Commissioner (Appeals) VIII, New Delhi.
(2.) The assessee, an individual, is the Managing Director of Pure Drinks (New Delhi) (P.) Ltd. ('Pure Drinks'). The resolution of the board of directors of the aforesaid company in their meeting held on 15-6-1974 reads as under :
On the proposal of S. Daljit Singh, it was unanimously resolved that S. Charanjit Singh, Director of the Company, be and is hereby appointed the Managing Director of the Company with effect from 1st July, 1974. His remuneration be and is hereby fixed at Rs. 4,500 per month.
Further resolved that he be made a member of the Employees Provident Fund and Gratuity Scheme and the employer's contribution ... be given to him as per rules of the company.
The previous year for the assessment year 1976-77 ended on 31-3-1976. The balance sheet of Pure Drinks as on 3MO-1975 disclosed a sum of Rs. 45,66,214.31 due from directors and companies under the same management (as per Schedule 'C' annexed). Schedule 'C' disclosed that as on 31-10-1975 a sum of Rs. 9,95,917.75 was due by the assessee to the aforesaid company and similarly a sum of Rs. 6,34,732.28 was due by S. Daljit Singh, brother of the assessee and the whole-time director-chairman of the said company. The assessee had more than one account in the books of the aforesaid company as per details given below :
Though the assessee's account stood overdrawn to the extent of Rs. 10,16,039, as indicated above, the said company did not charge any interest though the profit and loss account and balance sheet of the said company showed that for the year ending 31-10-1975 it paid interest and bank charges to the extent of Rs. 9,13,369. During the course of the assessment proceedings the ITO required the assessee to show cause why interest on the aforesaid loan granted by the aforesaid company should not be treated as a perquisite within the meaning of Section 17(2) of the Income-tax Act, 1961 ('the Act'). The assessee objected to the proposal of the ITO and in a letter dated 12-3-1979 the assessee stated as under :
You have required us to furnish the reasons as to why the advance raised by S. Charanjit Singh from Pure Drinks (New Delhi) (P.) Ltd. be not treated as 'perquisite' as defined within the meaning of Section 17(2)(iv) of the Income-tax Act, 1961.
In this connection, we beg to submit that Section 17(1) defines 'salary'; Section 17(2) defines 'perquisites' and Section 17(3) defines 'profits in lieu of salary'. The three definitions are 'inclusive' and not 'exhaustive'. Section 17(2), Sub-clause (iv) defines 'perquisites' as any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the employee-assessee. The value of the benefit or amenity will be included in the total income only if it is actually granted or provided to the employee. In cases, where the employee waives the benefit due to him under the contract of service, the value of the benefit not enjoyed will not be included in the total income.
As per the copy of account of S. Charanjit Singh as appearing in the books of Pure Drinks (New Delhi) (P.) Ltd., you will kindly observe that there is an opening debit balance to the extent of Rs. 9,70,348.65 and the closing balance at debit is Rs. 10,16,039.75. Thus, from the copy of account you will kindy observe that the excess debit during the year to the extent of Rs. 45,691.10 is mainly due to the income-tax payments made by him.
The company, Pure Drinks (New Delhi) (P.) Ltd., had not charged any interest from S. Charanjit Singh because of the reason that amounts advanced to S. Charanjit Singh are out of the company's own earnings and there is no law which says that interest-free loans cannot be advanced to an employee-director of the company. The system of paying interest on the borrowings and charging interest on advances made is not followed by the companies even on inter-company transactions and as such, the question of treating the interest not charged as 'perquisite' under Section 17(2) of the Act in the hands of the assessee does not arise. We may also submit for your kind consideration that on the day when the above-referred payments were made by the company on behalf of S. Charanjit Singh, there were cash balances on hand to the extent of more than Rs. 3 lakhs. The company has a common pool in the form of daily cash collections and the bank balances and it is not possible to bifurcate as to which money has been passed on to the director free of interest.
Under the circumstances explained above, the provisions of Section 17(2) of the Income-tax Act cannot be made applicable in this case.
Before the ITO it was also submitted that the aforesaid company had general reserves and surplus amounting to Rs. 1,41,15,702 and as such the amount advanced to the assessee was out of the company's own earnings and there was no law which prohibited interest-free loans being advanced to an employee-director of the company. It was also argued that the system of paying interest on borrowings and charging interest on advances made was not followed by the company even in respect of inter-company transactions. The ITO considered these arguments very carefully but he did not accept the assessee's submissions. He observed that it was not necessary that the benefit or amenity should be specifically expressed in the contract of employment. As long as any benefit or amenity could be shown to have emanated from the employer-company and passed on to the employee-assessee, the same shall be covered within the provisions of Section 17(2). He also observed that, at any rate, the assessee had not established that the interest-free advances received by him had nothing to do with his (assessee's) employment. The ITO observed that even though the assessee was a small shareholder in the aforesaid company but at the same time he was the managing director thereof. He observed that though there was no law stating that interest-free loans could not be advanced to an employee-director of the company but all the same, he held that on the facts of this case, the benefit/amenity in the shape of interest-free loans was a perquisite within the meaning of Section 17(2). In his draft assessment, the ITO worked out the addition to be made at Rs. 1,22,320.
The assessee filed objections which along with the draft assessment order were forwarded to the IAC. Before the IAC, the assessee relied on the judgments of the Madras High Court in CIT v. A.R. Adaikappa Chettiar  91 ITR. 90 and CIT v. G. Venkataraman  111 ITR 444. The submission made was that as the assessee did not have any right to receive an interest-free loan from the said company, no amount could he taxed as a perquisite in the hands of the assessee. It was also submitted that against the figure of Rs 1,22,320 suggested by the ITO, the actual figure would be Rs. 1,19,158. The IAC held that the aforesaid two judgments of the Madras High Court were not applicable to the facts of the present case. He held that the interest-free loan was a perquisite within the meaning of Section 11(2)(iii)(d). He accepted the assessee's contention that the addition to be made should be limited to Rs. 1,19,158. The ITO, accordingly, completed the assessment on 30-6-1979 and made the addition of Rs. 1,19,158 as a perquisite under Section 11(2)(iii).
(3.) AGGRIEVED by this order, the assessee filed an appeal to the Commissioner (Appeals). It was first pointed out that initially, the ITO wanted to invoke the provisions of Section 2(22)(e) of the Act, but after considering the assessee's reply, the proposed action, to bring to tax the debit balance in the account of the assessee in the books of the aforesaid company as dividend under Section 2(22)(e), was dropped by the ITO himself. It was then submitted that the grant of interest-free loan to the assessee by the aforesaid company would not be covered by the provisions of Section 17(2)(iv). It was further submitted that the provisions of Section 17(2)(iii) were also not. applicable in the case of the assessee because Pure Drinks had not entered into any undertaking to grant advances free of interest by virtue of the contract of the assessee's employment with the said company as a director. According to the learned counsel for the assessee, in the absence of a contract between the said company and the assessee for the grant of interest-free loans, no amount could be said to have been advanced, granted or provided by the company to the assessee and no amount, therefore, could be taxed as a perquisite in his hands. The use of the words "...granted or provided free of cost or at concessional rate" occurring in Section 17(2)(iii) was emphasised and it was argued that the granting or providing of a facility had to be a deliberate act on the part of the company. It was submitted that if a director utilised his position in a company to secure certain advantages by way of drawal of funds free of interest as had happened in this case, it could not be said that the company had actually granted or provided free of interest the funds that such a director may have drawn from the company. It was thus argued that the question of any perquisite in the hands of the assessee, in respect of the interest-free advances drawn by him from the company, could not arise. Reliance was placed on the judgments in Venkataraman (supra) and Adaikappa Chettiar (supra). In the alternative, it was argued that the company had sufficient internal resources, over and above its borrowed funds, out of which the advances in question could be said to have been drawn by the assessee and in these circumstances, the said company could not be said to have foregone the recovery of any sum which it might have paid, in its own turn, by way of interest to its own creditors and the non-recovery of such hypothetical interest could not constitute a perquisite in the hands of the assessee.
For this reason also, it was argued, the question of assessing any amount by way of perquisite in the hands of the assessee could not arise. The learned Commissioner (Appeals) considered the assessee's submissions. He first observed that the provisions of Section 17(2)(iv) would not be applicable to the case of the assessee. He then held that in view of the aforesaid two judgments of the Madras High Court, the provisions of Section 17(2)(iv) would also not be applicable. He observed that the ratio of the two aforesaid judgments of the Madras High Court would be equally applicable in construing the provisions of Section 17(2)(iii) as well as the provisions of Section 2(24)(iv). He thus held that the addition of Rs. 1,19,158 made by the ITO on account of perquisite was without any justification. He, accordingly, deleted the addition of Rs. 1,19,158 and allowed the assessee's appeal.;