- (1.) Civil Appeal No. 657 of 1994 is directed against the judgment dated February 7, 1992 of the Division Bench of the Karnataka High Court now reported as (1992) 198 ITR 738 delivered on Reference made to it by the Income-tax Appellate Tribunal ('Appellate Tribunal' for short) under Section 256(2) of the Income-tax, 1961 (for short, the 'Act'). Reference was at the instance of Revenue. Following questions arose for the determination of the High Court: (1) Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in law in deleting addition of Rs. 5,21,241 made by the Income-tax Officer under Section 40-A(5) and sustained by the Commissioner of Income-tax (Appeals) (2) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that non-charging of interest on the debt balance in the running account of the directors would not constitute a perquisite High Court answered both the questions in negative and in favour of the Revenue. The assessee, a Company, felt aggrieved and sought leave to appeal under Article 136 of the Constitution which was granted. In this case for the assessment year 1979-80, the Income-tax Officer had disallowed a sum of Rs. 5,21,241/- being 15 per cent of the amount standing to the debit of the directors in the books of the assessee company by applying the provisions of Section 40-A(5) and Section 17(2) of the Act. The Income-tax Officer found that the assessee, which was a company, was borrowing large sums by paying interest @ 15 per cent per annum. This interest was claimed by the assessee as deductible expenditure. Income-tax Officer found that the directors of the assessee company were drawing amount from the company without paying interest. He, therefore, held that when the company borrowed loans by paying 15 per cent interest and it advanced loans to its directors without any interest, to the extent of the interest, the company could have charged, a benefit was granted to the directors and hence the said amount of interest on the amount advanced to the directors was not to be deducted as an expenditure in view of Section 40-A(5). On appeal filed by the assessee the Commissioner of 'Income-tax (Appeals) upheld the orders of the Income-tax Officer. Assessee took the matter further in appeal before the Appellate Tribunal which deleted the additions made by this Income-tax Officer. Appellant Tribunal held that no evidence had been laid by the Revenue to show that borrowed funds were directly diverted for the benefit of the directors and non-chargeable interest on the debit balance in running account would not amount to providing perquisite. The Appellate Tribunal also observed that the Taxation Laws (Amendment) Act, 1984 for the first time provided that the difference in interest between the prescribed rate and that charged by an employer to the employee should be treated as perquisite. The stand of the Revenue was that as long as there was a benefit whether direct or indirect the provisions of Section 40-A(5) were attracted. High Court in coming to its decision relied on two cases of the Madras High Court in Commissioner of Income-tax v. C. Kulandaivelu Konar, (1975) 100 ITR 629 : (1977 Tax LR 460) and Addl. Commissioner of Income-tax v. A.K. Lakshmi, (1978) 113 ITR 368 : (1978 Tax LR 765). Appellate Tribunal had also observed that non-charging of interest on the debit balance in running account of the directors would not constitute perquisite and that if such a general proposition is accepted, the disallowance under Section 40-A(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 purposes of the business or profession.
(2.) In Civil Appeals Nos. 4012-13 of 1998 it is the revenue which is aggrieved. For the Assessment Years 1980-81 and 1981-82 in the case of the respondent Sri Shivanand V. Salgaocar, a director of M/s. V.M. Salgaocar and Brothers Pvt. Ltd. following question of law was referred to the High Court by the Appellate Tribunal under Section 258(1) of the Act :- "Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the action of the A.A.C. who held that non-charging of interest could not be regarded as being a perquisite in the hands of the employee directors who were advanced interest-free loans by the company -
(3.) High Court answered the question so referred in the affirmative in favour of the assessee and against the revenue with the following observations:- "Counsel for the parties are agreed that the aforesaid question stands concluded against the revenue and in favour of the assessee by a judgment of this Court in I.T.R.C. No. 4/92 decided on 1st August, 1977 (C.I.T. v. M/s. V.M. Salgaocar and Bros. Ltd., Vasco Da Gama, Goa). In the aforesaid case three questions had been referred to this Court for its opinion and question No. 1 of the said petition corresponds to the question referred in the present case. Their Lordships answered question No. 1 which corresponds to the question in the present case in the following terms: "So far as the first question is concerned, it needs to be stated that this Court in I.T.R. No. 20 of 1989 (Reported as Commissioner of Income-tax v. V.M. Salgaocar and Brothers Pvt. Ltd., (1992) 198 ITR 738) now being impugned before us in Civil Appeal No. 657 of 1994) disposed of on 7th February, 1992 in respect of this very assessee, and taken the view that deletion of a sum of Rs. 90,640/- made by the Income-tax Officer would be correct. But the matter has not rested there. Thereafter, two decisions have been rendered by this Court in P. Krishna Murthy v. CIT, (1997) 224 ITR 183 and CIT v. M.K. Vaidya, (1997) 224 ITR 186 in which interest free loan or loan at a concessional rate given to employee for building house is not a perquisite. Once it is held to be not a perquisite for purpose of Section 40-A(5) it becomes clear that the deduction will have to be granted in favour of the assessee, because in an earlier occasion in ITRC No. 20/1989 this Court proceeded on the basis that it is a perquisite. We have no option but to following the later decision of this Court where the matter has been decided after considering the decision in ITRC No. 20/1989. Therefore, following the said two decisions, we answer the question in the affirmative and against the department.";