1992 (2) TMI 52 - HC - Income Tax

Summary

Issues Involved:
The judgment involves the interpretation of section 40A(5) of the Income-tax Act, 1961 regarding the deletion of an addition made by the Income-tax Officer under section 40A(5) and the determination of whether non-charging of interest on the debit balance in the running account of directors constitutes a perquisite.

Issue 1: Deletion of Addition under Section 40A(5):
The case concerned a limited company for the assessment year 1979-80, where the Income-tax Officer disallowed a sum of Rs. 5,21,241 claimed as a deduction under section 36 of the Income-tax Act, being fifteen per cent. of the amounts standing to the debit of its directors, as interest was not charged on these amounts. The Commissioner of Income-tax (Appeals) upheld this disallowance. However, the Income-tax Appellate Tribunal deleted the addition, stating that no evidence was presented to show that the funds borrowed by the company directly benefited the directors. The Tribunal referred to an amendment in the Taxation Laws (Amendment) Act, 1984, and concluded that the non-charging of interest could not be considered a perquisite. The High Court agreed with the Tribunal's decision, emphasizing that the company had not made the directors liable to pay interest on the debit balances, thus the addition was deleted.

Issue 2: Non-Charging of Interest as Perquisite:
The Revenue argued that by granting interest-free advances to its directors, the company provided them with benefits and perquisites, resulting in an expenditure that should reduce the deduction of interest paid on borrowings. Citing precedents, the Revenue contended that interest-free advances should be treated as benefits conferred upon the directors. The High Court concurred with this view, stating that the company's provision of interest-free advances to directors constituted a benefit, even if the company had independent funds to make such advances. The Court rejected the argument that no deduction claim was made for the advances given to directors, as the company sought a deduction for the interest paid on borrowings. Consequently, the High Court upheld the disallowance of the deduction related to the interest paid on advances to directors, considering it as expenditure incurred on providing perquisites.

Conclusion:
The High Court answered both questions in the negative and in favor of the Revenue, affirming the disallowance of the deduction for interest paid on advances to directors. No costs were awarded in the judgment.