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Petitioner: V.M. SALGOCAR & BROS. (PVT.) LTD and others VS Respondent: COMMISSIONER OF JUDGMENT
Court Name: Supreme Court of India Judge(s): D. P. Wadhwa, Syed Shah Mohammad Quadri Title:V.M. SALGOCAR & BROS. (PVT.) LTD and others vs COMMISSIONER OF
JUDGMENT
Reported As: 2001 PTD 946 Result: Order accordingly Judgment JUDGMENT D.P. WADHWA, J.---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 a reference made to it by the Income-tax Appellate Tribunal (the "Appellate Tribunal" for short) under section 256(2) of the Income Tax Act, 1961 (for short "the Act"). The reference was at the instance of the Revenue. The following questions arose for the determination of the High Court (page 739): "(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 40A(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 debit balance in the running account of the directors would not constitute a perquisite?" The High Court answered both the questions in the 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 40A(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 at 15 per cent. Per annum. This interest was claimed by the assessee as deductible expenditure. The Income-tax Officer found that the
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directors of the assessee-company were drawing amounts 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 aiount of interest, on the amount advanced to the directors was not to be deducted as an expenditure in view of section 40A(5). On appeal filed by the assessee, the Commissioner of Income-tax (Appeals) upheld the orders of the Income-tax Officer. The assessee took the matter further in appeal before the Appellate Tribunal which deleted the additions made by the Income-tax Officer. The Appellate Tribunal held that no evidence had been led by the Revenue to show that the borrowed funds were directly diverted for the, benefit of the directors and non-chargeable interest on the debit balance in the running account would not amount to providing a 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 40A(5) were attracted. The High Court in coming to its decision relied on two cases of the Madras High Court in CIT v. C. Kulandaivelu Konar (1975) 100 ITR 629 and Addl. CIT v. Late A.K. Lakshmi (1978) 113 ITR 368. 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. 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 V.M. Salgaocar & Brothers (Pvt.) Ltd., the following question of law was referred to the High Court by the Appellate Tribunal under section 256(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 Appellate Assistant Commissioner 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?" The 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 ITRC No.4 of 1992 decided on 1st August, 1997 (CIT v. V.M. Salgaocar & Bros. Ltd., Vasacada 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 CIT v. V.M. Salgaocar & 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, had 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 (Appex), in which interest free loan or loan at a concessional rate given to an employee for building house is not a perquisite. Once it is held to be not a perquisite for the purpose of section 40A(5), it becomes clear that the deduction will have to be granted in favour of the assessee,
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because itt an earlier occasion in I.T.R.C. No.20 of 1989 this Court proceeded on the basis that it is a perquisite. We have no option but to follow the later decision of this Court where the matter has been decided after considering the decision in I.T.R.C. No.20 of 1989. Therefore, following the said two decisions, we answer the question in the affirmative and against the Department' ." Leave to appeal was granted by this Court to the Revenue and this appeal was to be heard along with Civil Appeal No.657 of 1994. The assessee, Shivanand V. Salgaocar, was a. Director of V.M. Salgaocar Brothers (Pvt.) Ltd. During the assessm ent years in question, the company advanced certain sums to the assessee without charging any interest thereon. The Income-tax Officer held that non-charging of interest on the debit balance would amount to a perquisite in the hands of the assessee within the meaning of section 17(2) of the Act. He computed the value of the perquisite at the rate of 15 per cent. Of the debit balance standing in the name of the assessee in the accounts of the company and brought the same to tax in the hands of the assessee. On appeal filed by the assessee, the Commissioner of Income-tax (Appeals) relying on the decision of the Appellate Tribunal in the case of the assessee himself for the earlier year held that non-charging of interest on the debit balance could not be regarded as a perquisite in the hands of the assessee and deleted the addition made by the Income-tax Officer. The Revenue took the matter to the Appellate Tribunal in appeal who upheld the order of the Commissioner of Income-tax (Appeals) holding that no ground had been iade out by the Revenue to depart from the view taken by the Appellate Tribunal earlier. On the reference made to the High Court by the Appellate Tribunal at the instance of the Revenue the same was dismissed by order, dated December 12, 1997, which we have noted above. There are two matters which would be of relevance while considering these appeals and which we note: (1) For the assessm ent year 1980-81 in the case of the company itself the Income-tax Officer found that there were debit balances in the accounts of three directors in the books of the company for which the company had not charged any interest from the directors. The Income-tax Officer calculated the interest at the rate of 15 per cent. On the debit balance of the directors and came to the conclusion that this amounted to a perquisite. By applying the provisions of section 40A(5) he disallowed the amount of interest so calculated. The company had advanced various sums to its sister concerns. The balance outstanding as on the last date of the accounting year was over Rs.2.50 lakhs. The company raised borrowings on which it had paid interest. The Income-tax Officer disallowed the interest calculated at the rate of 15 per cent. Per annum on this amount which was due from the sister concerns. This disallowance was made on the ground that the amount borrowed by the assesseecompany on which it had paid interest part of which was not being used for the purposes of its own business. On appeal by the company, the Commissioner of Income-tax (Appeals) deleted the additions made under section 40A(5) as they stood at that relevant time could have no application unless the assessee had incurred an expenditure which had resulted in a benefit to the employee. In respect of the disallowance of interest on the amount advanced to sister concerns the Commissioner of Income-tax (Appeals) taking into consideration the fact that no finding had been given by the Income-tax Officer that the amount borrowed had not been used for business purposes and considering that the assessee had substantial funds on which it had not paid any interest deleted that addition as well. On appeal the Appellate Tribunal following its decision in the earlier years, rejected the appeal of the Revenue. Then Revenue took the matter to the High Court on a reference under section 256(1) of the Act. The following three questions were referred to the High Court: "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law, in upholding the order of the Commissioner of Income-tax (Appeals) who deleted the addition of Rs.93,640 made by the Income-tax Officer under section 40A(5)?
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(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in confirming the order of the Commissioner of Income-tax (Appeals) who deleted the disallowance of Rs.39,11,054 out of interest payment? (3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner of Income-tax (Appeals) who held that the amount of Rs.43,320 paid as compensation to agriculture is allowable as Revenue expenditure?" The High Court by order, dated August 1, 1997, answered the first question in the affirmative in favour of the company relying on its two decisions in CIT v. M.K. Vaidya (1997) 224 ITR 186 (Kar.) (Appex.) and P. Krishna Murthy v. CIT (1997) 224 ITR 183 (Kar.). The second and third questions were also answered in the affirmative in favour of the assessee holding that these questions were covered by its earlier decision in I.T.R.C. No.24 of 1992. Still aggrieved the Revenue came to this Court on appeal (C.A. No.424 of 1999), on a certificate granted by the High Court under section 261 of the Act. This Court by order, dated January 25, 1999, dismissed the appeal just stating "the appeal is dismissed". (2) Sections 17(2) and 40A of the Act were amended by the Taxation Laws (Amendment) Act, 1984. Sub-clause (vi)1 of clause (2) of (1) "(vi) where the employer has advanced any loan to the employee for the purpose of building a house or purchasing a site or a house and a site or for purchasing a motor car, and either no interest is charged by the employer on the amount of such loan or interest is charged at a rate lower than the rate of interest which the Central Government may, having regard to the rate of interest charged by it from its employees on loans for such purpose granted to them. Specify in this behalf by notification in the Official Gazette, an amount equal to,--- (a) in a case where such loan is advanced without charging any interest, the interest calculated in the prescribed manner on such loan at the rate so specified; (b) in a case where such loan is advanced by charging interest at a rate lower than the rate so specified, the difference between the interest calculated in the prescribed manner on such loan at the rate so specified and the interest charged by the employer: Provided that this sub-clause shall not apply in the case of-- (1) an employee of the Central Government or any State Government; or (2) ad employee, not being an employee rfferred to in paragraph (a) or paragraph (b) of sub- clause (iii), whose income under the head "Salaries", exclusive of the value of all benefits or amenities not provided for by way of monetary payment, does not exceed eighteen thousand rupees." section 17 of the Act, as inserted by the said Amendment Act of 1984, provides that where the employer has advanced any loan to the employee for the purpose of building a house or purchasing a site or a house and a site or for purchasing a motor car, and either no interest is charged by the employer on the amount of such loan or interest is charged at a rate lower than the rate of interest which the Central Government may, having regard to the rate of interest charged by it from its employees on loans for such purpose granted to them, specify in this behalf by notification in the Official Gazette, an amount calculated on the following basis will be regarded as "perquisite" received by the employee and charged to tax accordingly-- (a) in a case where such loan is advanced without charging any interest, the interest calculated in the prescribed manner on such loan at the rate so specified; (b) in a case where such loan is advanced by charging interest at a rate lower than the rate so specified, the difference between the rate of interest calculated in the prescribed manner on such loan at the rate so specified and the interest charged by the employer. An amendment on similar lines was also made in section 40A2 of the said Act to provide that the amount of interest referred to in item (a) or item (b), as the case may be, of sub-clause (vi) of
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section 17(2) of the said Act, shall be regarded as perquisite provided by the assessee to his employee for the purposes of section 40A(5) of the said Act. These amendments were intended to take effect from April 1, 1985. However, subsequently, the Finance Act, 1985, sought to omit both the aforesaid provisions with effect from the date of their insertion,.Narnely. April 1, 1985. Clause 20 of the Memorandum explaining the provisions of the Finance Bill, 1985 (see (1985) 152 ITR 91. 162), stated that as a measure of relief to salaried taxpayers, the Bill seeks to omit the aforesaid provision with effect from the date of its proposed insertion, namely, April 1, 1985. In consequence thereof, sub-clause (vi) of clause (b) in Explanation 2 to section 40A(5) of the Income-tax (2) Amendment to section 40A.---Iq section 40A of the Income-tax Act, in subsec- tion (5) in clause (b) of Explanation 2,--- (a) in sub-clause (iv), the word "and" shall be omitted; (b) in sub-clause (v), for the words "an annuity", the words "an annuity; and" shall be substituted; (c) after sub-clause (v), the following sub-clause shall be inserted, namely:---"(vi) the, amount treated as a perquisite under sub-clause (vi) of clause (2) of section 17". Act, which defines the term "perquisite" for the purposes of the said section to include the perquisite value represented by interest-free loans or loans at concessional rates of interest, was also deleted alongwith the deletion of sub-clause (vi) of clause (2) of section 17 of the said Act. Thus clause (vi) was to be in operation from April 1, 1985. However, it was omitted by enacting the Finance Act, 1985. Thus, it is omitted from the very date of its insertion, i.e., April 1, 1985. The Central Board of Direct Taxes (CBDT) issued a circular incorporating the objectives sought to be achieved by omission of clause (vi). It is Circular No.421, dated June 12, 1985 (see (1985) 156 ITR (St.) 130). Earlier the Central Board of Direct Taxes had issued a Circular No.397, dated October 16, 1984 (see, (1985) 152 ITR (St.) 29), explaining the objectives in inserting new sub-clause (vi) in section 17(2). It may also be noted that after clause (vi) was inserted in section 17(2) by the Amendment Act, 1984, the Income-tax Rules were also amended by incorporating rule 3A to work out enacted clause (vi). This rule 3A was also deleted after the omission of clause (vi). Different considerations apply when a special leave petition under Article 136 of the Constitution is simply dismissed by saying "dismissed", and an appeal provided under Article 133 is dismissed also with the words "the appeal is dismissed". In the former case it has been laid down by this Court that when a special leave petition is dismissed this Court does not comment on the correctness or otherwise of the order from which leave to appeal is sought. But what the Court means is that it does not consider it to be a fit case for exercise of its jurisdiction under Article 136 of the Constitution. That certainly could not be so when an appeal is dismissed though by a non- speaking order. Here the doctrine of merger applies. In that case, the Supreie Court upholds the decision of the High Court or of the Tribunal from which the appeal is provided under clause (3) of Article 133. This doctrine of merger does not apply in the case of dismissal of a special leave petition under Article 136. When an appeal is dismissed the order of the High Court is merged with that of the Supreme Court. We quote the following paragraph froi the judgment of this Court in the case of Supreme Court Employees' Welfare Association v. Union of India, AIR 1990 SC 334; (1989) 4 SCC 187 (at page 344 of AIR 1990 SC); "22. It has been already noticed that the special leave petitions filed on behalf of the Union of India against the said judgments of the Delhi High Court were summarily dismissed by this Court. It is now a well-settled principle of law that when a special leave petition is summarily dismissed under Article 136 of the Constitution, by such dismissal this Court does not lay down any law, as envisaged by Article 141 of the Constitution, as contended by the learned Attorney-General. In Indian Oil Corporation Ltd. v. State of Bihar (1987) 167 ITR 897; (1986) 4 SCC 146; AIR 1986 SC 1780, it has been held by this Court that the dismissal of a special leave petition in limine by a non- speaking order does not justify any inference that by necessary implication, the contentions raised
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in the special leave petition on the merits of the case have been rejected by the Supreme Court. It has been further held that the effect of a non-speaking order of dismissal of a special leave petition without anything more indicating the grounds or reasons of its dismissal must, by necessary implication, be taken to be that the Supreme Court had decided only that it was not a fit case where special leave should be granted. In Union of India v. All India Services Pensioners' Association (1988) 2 SCC 580; AIR 1988 SC 501, this Court has given reasons for dismissing the special leave petition. When such reasons are given, the decision becomes one which attracts Article 141 of the Constitution which provides that the law declared by the Supreme Court shall be binding on all the Courts within the territory of India. It, therefore, follows that when no reason is given, but a special leave petition is dismissed simpliciter, it cannot be said that there has been a declaration of law by this Court under Article 141 of the Constitution." It was, therefore, contended that .Once this Court in Civil Appeal N,o.424 of 1999, has dismissed the appeal it has upheld the order of the High Court in the case of the assessment year 1980-81 and it cannot take a different view for the assessment year 1979-80. There appears to be substance in the submission of the assessee. There has been difference of opinion among the High Courts on the question, if non-changing of interest could be considered as perquisite under section 17(2) or section 40A(5). We may refer to some of the judgments of the High Courts. In the case of CIT v. C. Kulandaivelu Konar (1975) 100 ITR 629 (Mad.) the assessee who was the managing director deposited various moneys and was also withdrawing moneys from an account in his name. For the year ending on March 31, 1963, there was an overdrawal to the extent of about Rs.60,000. The company did not charge any interest on these overdrawings, though it was paying interest on its borrowings. The Incoie-tax Officer disallowed the interest-free advance to the director in the hands of the company. He added also the relevant amount as a perquisite in the hands of the assessee who was a director. When the matter came on appeal to the Tribunal it set aside the assessm ent and at the instance of the Commissioner the matter was brought to the Court on reference. It was held that in order to bring a benefit or advantage within the provisions of section 17(2)(iii), it must have a legal origin and since any unauthorised advantage taken by an employee without the authority of the employer would create a legal obligation to restore such advantage it would not amount to a benefit or advantage within the meaning of section 17(2)(iii). In Addl. CIT v. Late A.K. Lakshmi (1978) 113 ITR 368 (Mad.), the question before the High Court was if the Appellate Tribunal was right in holding that a particular sum was not includible in the hands of the assessee as perquisite under the provisions of section 17(2) of the Act. The case related to the assessm ent to income-tax of a director of a company. The Income-tax Officer considered the use of the amounts made available by the company free of any interest payable to the company as a benefit derived by the assessee without cost coming within the, ambit of section 17(2)(iii). The Income-tax Officer had also relied on section 17(2)(iv). The Appellate Tribunal considered both the aspects and came to the conclusion that neither section 17(2)(iii) nor section 17(2)(iv) had any application and, therefore held that amounts in question for the relevant assessment years relating to the assessee could not be treated as a perquisite within the meaning of section 17(2) of the Act. The High Court referred to the definition of "perquisite" as given in section 11(2) and observed (page 372): "We are in agreement with what has been stated by the Tribunal that section 17(2)(iv) has no application to any of these cases. The question is whether section 17(2)(iii) will be attracted or not, and that turns on the further question whether the assessee can be said to have derived any benefit free of cost or at concessional rate. The further condition that is necessary for the application of this section is that this benefit must be derived by the persons mentioned in sub- clause (a), (b) or (c). It is said that the sub-clause applicable is sub-clauses (a) which states that
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the benefit may be granted by a company to an employee who is a director thereof, and ,the assessees concerned were directors and it is not disputed before us that sub-clause (a) would apply." The High Court held (page 375): "The point to be considered is whether the receipt of the amounts by the assessee or the grant of the amounts by the company without any interest would be a receipt of any benefit without any costs. Here the question is whether the non-liability to pay any interest would be a benefit and whether what has been determined is the cost of that benefit. But this question again is not one free from difficulty, because in a way it is mingled with the further question whether the section intends to restrict the discretion of the right of a company or of any other employer to give monies to its or his employees by charging interest or by charging only nominal interest or even without charging interest. We have no doubt that this section is not intended to restrict the discretion of the right of the compaity to advance amounts to its employees with or without interest or at…
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