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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: M.K. VAIDYA
Court Name: karnataka High Court Judge(s): K. Shivashankar Bhat, R. Ramakrishna Title: COMMISSIONER OF INCOME-TAX vs M.K. VAIDYA Case No.: I.T.R.C. Nos. 161 and 162 of 1987 Date of Judgment:1992-06-11 Reported As: 1998 PTD 1558 Result: Order accordingly
JUDGMENT
JUDGMENT ' K SHIVASHANKAR BRAT, J.---In respect of the assessment years 1978-79 and 1980-81, the following question has been referred under section 256(2) of the Income-tax Act, 1961 ("the Act", for short): "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in rejecting the Revenue's ground that the difference in interest rate between Government loans and that on the loan obtained by the assessee should be treated as perquisite?" ' The assessee was an employee of the company called "MICO". The company advanced him certain amounts as loan free of interest for the purpose of house building. That this was the policy adopted by the company and several employees had obtained such loans is not a matter in dispute. In the course of the assessment of the assessee, the assessing authority held that the interest-free loan was a benefit which should be valued as a perquisite. ' The statement of the case actually does not indicate the basic question which was raised by the assessee before the assessing authority as well as before the Appellate Commissioner to the effect that the interest-free loan cannot be valued as a "perquisite" under section 17(2). However, both learned counsel admitted before the Court that this question does arise and that is how the matter was fought out throughout and referred to the assessment order and the order of the Appellate Commissioner. ; It was contended on behalf of the Revenue that the interest-free loan is a benefit which should be treated as a "perquisite" under section 17(2)(iii) and for the purpose of computation rule 3(g) is attracted' and that the principle underlying clause (vi) inserted in section 17(2) by the Taxation Laws (Amendment) Act, 1984, could be looked at for this purpose. ' Section 17(2)(iii) reads--- "'perquisite' includes---
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(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases--- (a) by a company to an employee who is a director thereof; (b) by a company to an employee being a person who has a substantial interest in the company; (c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of its sub-clause do not apply and whose income under the head 'salaries', whether due from or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds twenty-four thousand rupees." ' While clauses (a) and (b) coder the special cases of those employed by a company. Clause (c) covers all categories of employees (Governmental and non-Governmental), including other categories of company employees). Provided their salaried income is above Rs,18,000. There is no income limit to attract the persons covered by clauses (a) and (b). ' 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. ' It is also clear that in case the interest-free loan or loan at a concessional rate of interest is a benefit, it would be a perquisite falling under clause (iii) of section 17(2). It can be valued under rule 3 of the Income-tax Rules, 1962. There is also no doubt that, if any particular set of employees is to be brought out of this net of taxation, normally Parliament would enact an exception or proviso to this clause, or by inserting an appropriate rule in the Rules, the benefit of non-inclusion can be extended, as was done by the Rules, immediately on the insertion of clause (vi). However, if already clause (iii) covered the subject of interest-free loan or loan given at a concessional rate of interest (for house building purposes), it was an unnecessary exercise for Parliament to insert clause (vi)) to section 17(2), at the time of enacting the Taxation Laws (Amendment) Act, 1984. ' In the Notes on Clauses appended to the Bill leading to the Taxation Laws (Amendment) Act, 1984, it was stated, regarding clause (7), thus, (see) (1984) 149 ITR (St.) 41): "Clause (7) seeks to amend section 17 of this Income-tax Act which defines the term 'salary', 'perquisite' and 'profit in lieu of salary' ." ' Thereafter, as to sub-clause (vi), it was stated (see (1984) 149 ITR (St.) 42): "Sub-clause (ii)(c) seeks to insert a new sub-clause (vi) in clause (2) of section 17 to provide that where the employer has advanced any loan to an employee for 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 such loan or interest is charged at a rate which is lower than the rate of interest which the Central Government may specify in this behalf by notification in the Official Gazette, an amount calculated on the following basis shall 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 amount of interest (calculated in the prescribed manner) on such loan at the rate so notified; (b) in a case where such loan is advanced by charging interest at a rate which is lower than the rate so notified, the amount of the difference between the interest (calculated in the prescribed manner) on such loan at the rate so notified and the interest charged by the employer. ' In notifying the rate of interest for the purposes of this provision, the Central Government shall have regard to the rate of interest charged by it from its employees on loans for similar purposes granted to them. ' The proposed new provision will not apply to employees of the Central Government or any State Government or an employee (not being a director of a company or a person who has a substantial interest in the company) 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 Rs,18,000." ' Section 17(2)(vi), as inserted by the above amendment, reads:
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"(vi) where the employer has advanced any loan to the employee for the purposes 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 the 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) an employee, not being an employee referred 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." ' The main part of clause (vi) brings in house building loans within the concept of "perquisite". However, certain kinds of employees are not to be brought into this net. ' A comparison of clauses (iii) and (vi) shows that the persons to be covered at substantially the same under both these clauses, and the purpose of the exception made for the benefit of Governmental employees could also have been achieved by a suitable amendment of clause (iii) itself. It is also clear that, in case the subject of the house building loans granted to an employee is a perquisite, because it is a benefit or an amenity falling under clause (iii), it was unnecessary to enact clause (vi) in the year 1984. ' Clause (vi) was to be in operation from April 1, 1985, however, it was omitted while enacting the Finance Act, 1985. Clause 20 of the Memorandum explaining the provisions of the Finance Bill, 1985, states that, as a measure of relief to salaried taxpayers, the Bill, seeks to omit clause (vi) from section 17(2) with effect from the date of its insertion (i,e, 1st April, 1985). ' The Central Board of Direct Taxes issued circulars incorporating those objectives sought to be achieved by the omission of clause (vi), in Circular No,421, dated June 12, 1985 (see (1985) 156 1TR (St.) 130). Paragraph 13.1 of this circular reads (at page 139) Discontinuance of the provision for taxation of perquisites represented by interest-free loans or loans concessional rate of interest to employees. ' 13.1 Under sub-clause (vi) of clause (2) of section 17 of the Income-tax Act, inserted by the Taxation Laws (Amendment) Act, 1984, where the employer has advanced any loan to an employee for 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 such loan or interest is charged at a rate which is lower than the rate of interest which the Central Government may specify in this behalf by notification in the Official Gazette, an amount calculated on the following basis is regarded as perquisite received by the employee and charged to tax accordingly: (i) in a case where such loan is advanced without charging any interest, the amount of interest on such loan at the rate notified; (ii) in a case where such loan is advanced by charging interest at a rate which is lower than the notified rate, the amount of the difference between the interest on such loan at the rate notified and the interest charged by the employer. 13.2 The provisions does not apply to employees of the Central Government or any State Governments or an employee (not being a director of a company or a person who has a
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substantial interest in the company) whose income under the head ' Salaries' (exclusive of all benefits and amenities not provided for by way of monetary payment) does not exceed Rs, 18,000. 13.3 As a measure of relief to salaried taxpayers, the Finance Act has omitted the aforesaid provision with effect from the date of its insertion, namely, 1st April, 1985. In consequence thereof, sub-clause (vi) of clause (b) in Explanation 2 to section 40-A(5) of the Income-tax 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, has also been deleted." ' The above circular has to be read in contrast to the Circular No,397, dated October 16, 1984, issued on the enactment of the Taxation Laws (Amendment) Act, 1984, paragraph 4.1 of this circular reads (see (1985) 152 ITR (St.) 30): "Section 17(2). Taxation of perquisite represented by interest-free loans or loans at concessional rates of interest to employees.---4.1 Employers often grant loans free of interest or on concessional terms to their employees for various purposes, e.g., house building, purchase of a conveyance, etc. The provision of a loan to an employee free of interest or at an unduly concessional rate of interest confers benefit which should be assessable as perquisite. 4.2 The Amending Act has inserted a new sub-clause (vi) in clause (2) of section 17 of the Act to provide that where the employer has advanced any loan to an employee for 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 such loan or interest is charged at a rate which is lower than the rate of interest which the Central Government may specify in this behalf by notification in the Official Gazette, an amount calculated on the following basis shall 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 amount of interest (calculated in the prescribed manner) on such loans at the rate notified; (b) in a case where such loan is advanced by charging interest at a rate which is lower than the rate so notified, the amount of difference between the interest (calculated in the prescribed manner) on such loan at the rate so notified and the interest charged by the employer. 4.3 In notifying the rate of interest for the purposes of this provision, the Central Government shall have regard to the rate of interest charged by it from its employees on loans for similar purposes granted to them. 4.4. The new provision will not apply to employees of the Central Government or any State Government or an employee (not being a director of a company or a person who has a substantial interest in the company) whose income under the head 'salaries', exclusive of all benefits or amenities not provided for by way of monetary payment, does not exceed Rs,18,000. Thus, employees drawing cash remuneration up to Rs,24,000 per annum will be exempted from the purview of this provision, because, after deduction of standard deduction, the income in such cases under the head 'Salaries', will not exceed Rs,18,000. 4.5, The new provision takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessm ent year 1985-86 and subsequent years. (section 7(ii) of the Amending Act)." ' It may be noted here, for the sake of completing the narration of historical facts, that after clause (vi) was inserted in section 17(2) by the Amendment Act of 1984, the Central Board of Direct Taxes amended the Income-tax Rules by incorporating rule 3-A to work out the enacted clause (vi); however, the said rule 3-A also was deleted after the omission of clause (vi). ' From the above, at least 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
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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 Central Board of Direct Taxes which is empowered under section 119 to issue instructions to other income-tax authorities (who are its subordinates), did not instruct them or clarify that notwithstanding the deletion of clause (vi), the subject of house building loans would be covered by clause (iii). In fact, the relevant part of Circular No,421 (see (1985) 156 ITR (St.) 130), dated June 12, 1985 (already quoted by us) would convey the meaning that these loans are not to be included in the concept of "perquisite" under section 17(2), as a measure of relief to salaried taxpayers. The clear intention of the Central Board of Direct Taxes behind this circular issued by it will have to be respected and implemented by the income-tax authorities. ' The legislative history of a fiscal statute could be traced and considered to understand its scope; for example, this proposition was applied by the Supreme Court to consider the scope of rule 19-A and the contents of section 80-J in Lochia Machines Ltd. v. Union of India (1985) 152 ITR 308. The Courts are permitted to travel beyond the words used in a statute, to find out the purpose for which a particular provision is enacted; for this purpose even the speech of the Finance Minister, while introducing the particular fiscal legislation could be looked into (vide K.P. Varghese v. ITO (1981) 131 ITR 597 (SC). While stating this principle, the Supreme Court further observed (at page 608): "This is in accord with the recent trend in juristic thought not only in Western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible." (Emphasis supplied). ' In the same decision, the circular issued by the Central Board of Direct Taxes was also referred to understand the scope and object of the particular section of the Act involved therein. The circulars issued by the Central Board of Direct Taxes were not only binding on the Tax Department, but were also in the nature of contemporaneity exposition furnishing legitimate aid in the construction of the section. If so, there can be no doubt about the purpose behind enacting clause (vi) in the year 1984 and its subsequent deletion by the Finance Act, 1985. The clear implication is that, but for enacting clause (vi), the grant of a loan to an employee for house building purposes was not hitherto covered by section 17(2), in spite of its clause (iii) and, therefore, clause (vi) had to be inserted by the Amendment Act of 1984. ' Section 17(2) purports to include certain benefits and amenities in the term "perquisite". There is no exhaustive definition of the term "perquisite" for the purposes of section 17. Therefore, unless the provision refers to a particular subject clearly to be included in the meaning of the word "perquisite", Courts would hesitate to attribute a wider meaning to the said word. Even though there is no equity in taxation and equitable considerations are outside fiscal legislations, 'still, if reasonably two meanings are attributable to a word used in the fiscal law, the meaning which is more beneficial to the taxpayers will be applied, specially it is so, when the State itself at one point of time clearly acted as if the wider meaning was not attributable without adding further words. ' The valuation of the perquisite is to be as per the rules. There is a specific rule covering the calculation of the alleged benefit resulting from the interest-free loans or from the loans bearing a low rate of interest. In such a situation, if it is a perquisite, it has to be valued under rule 3(g), where under the Income-tax Officer shall determine its value on such basis and in such amount as he considers "fair and reasonable". In the case of loans, it is not possible to clearly identify the normal rate of interest and the exercise of the power to determine the value which the authority considers fair and reasonable, itself is likely to lead to different and divergent results. The rate of interest varies from subject to subject. The banks are required to charge a low rate of interest on agricultural loans even as between industries and traders, distinctions are made in this regard. There is no uniform rate of interest charged on house building loans advanced to employees by
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public sector undertakings. Though a loan without interest is rare and a facility to obtain a loan without paying any interest could be considered as a beneficial facility in its larger sense, having regard to the inherent difficulty involved in working out the value of the benefit, Parliament must have thought it unwise to rope in the subject of house building loans to the employees, while taxing perquisites. It is also likely that the need to encourage house building activities, in this country, where there is acute shortage of houses, would have influenced the law-making authorities in this regard. It is difficult to assume that the normal rate of interest chargeable on a house building loan is the rate of interest charged by the Central Government, to its employees ; the only source of authority for such an assumption is clause (vi) enacted in the year, 1984. ' Now it is necessary to deal with the decisions cited before us by learned counsel. In CIT v. C. Kulandaivelu Konar (1975) 100 ITR 629 (Mad.), the assessee was the managing director of a company. He had the benefit of depositing and withdrawing monies for his personal purposes, from the company. In his account, a debit balance of certain sums were found for the assessment year 1963-64. No interest was charged on this amount by the company. Interest on this was estimated and it was added as a perquisite in the hands of the assessee for the purpose of assessing the tax. The Madras High Court accepted the Revenue's contention that the benefit of the interest-free drawings from the company was a benefit falling under section 17(2)(iii). Several English and Indian decisions were referred to. By the High Court and it was held that the concept of a perquisite was quite wide and the benefit which accrued to the assessee by the non-levy of interest by the company was a perquisite as defined in section 17(2)(iii). At page 635, the Bench held: "In the normal circumstances, the company is not expected to allow its funds to be given to anybody for use without any obligation to pay interest. The company in this case allowed the assessee to withdraw the money, but without any obligation to pay interest. To the extent it allowed the assessees to use the funds of the company without any obligation to pay interest thereon, the company should certainly be deemed to have granted a benefit to the assessee. ' It was next contended by learned counsel for the assessee that, in order to attract the provisions of section 17(2), the benefit granted or provided should arise directly out of the relationship of employer and employee. In other words, it was the contention of learned counsel that there is a relationship of debtor and creditor between the assessee and the company and the benefit, if at all, was derived by him only as a debtor and not by virtue of his being an employee of that company. It is true that the company had given such an interest-free loan to a debtor; but, in cases where in addition to the debtor and creditor relationship there exists a relationship of employer and employee and such employee is a director of the employer, the provisions of section 17(2)(iii) would be directly attracted. It is by reason of the fact of his being an employee deriving such a benefit, that the provision direct it to be included in the salary income of such an employee. Normally, a company is not expected to allow its funds to be utilized by its employee for his personal benefit. In cases where the company permits an employee to utilize its funds for his own benefit, it shall be deemed to have given a personal benefit to such employee. The relationship of employer and employee, in such circumstances, is the primary reason for grant of such benefit to the employee. We have, therefore, no doubt that the benefit was not derived by the employee de hors his status as an employee." ' The further discussion at page 636 shows that the Bench considered that every advantage or privilege granted to an employee as an incident of service by a company is a perquisite and the same could be valued by resorting to rule 3(g) of the Rules. ' A similar question again came up before another Bench of the Madras High Court in Additional CIT v. A.K. 'Lakshmi (1978) 113 ITR 368. The Bench pointed out that, ordinarily, a borrowing can be had only by incurring a liability to pay interest and it is difficult if not impossible to borrow amounts for
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one's use without having any liability for payment of interest, the amount of interest being a matter of agreement between the lender and the borrower. Therefore, if for any reason whatsoever, amounts are advanced by an employer to an employee without any obligation to pay any interest, the employee would be deriving a benefit in that he gets the use of the monies belonging to the employer without any liability to pay interest thereon and this benefit could be valued by resort to rule 3(g) read with section 17(2)(iii). ' CIT v. Vazir Sultan Tobacco Co. Ltd. (1988) 173 ITR 290 is a decision of the Andhra Pradesh High Court, cited by Sri Sarangan. During the assessment years 1972-73 and 1973-74, one of the questions referred to the High Court was (at page 292): "Whether, on the facts and in the circumstances of the case, the difference between the concessional rate of interest and the prevailing market rate of interest on loans advanced to the employees was not a perquisite under section 40-A(5)?" ' The Revenue sought to include the notional value of the concessional rate of interest in the income of the company under section 40-A(5). As per section 40-A(5), inter alia, any expenditure incurred by the assessee which results in the provision of any perquisite to an employee,…
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