2000 (3) TMI 173 - AT - Income Tax

Summary

Issues Involved:
1. Whether the interest-free loans given to the Managing Director and his relatives constituted a benefit or perquisite under section 2(24)(iv) of the Income-tax Act.
2. Confirmation of addition in respect of perquisite value of free electricity and telephone.

Detailed Analysis:

1. Interest-Free Loans as Benefit or Perquisite:

The primary issue in all the appeals was whether the interest-free loans given to the Managing Director and his relatives constituted a benefit or perquisite under section 2(24)(iv) of the Income-tax Act. The facts revealed that the assessees had received interest-free loans from various companies, which were alleged to be mere conduits for passing on benefits to the Managing Director and his relatives. The Assessing Officer (AO) added the estimated interest on these loans to the income of the assessees, treating it as a benefit under section 2(24)(iv).

The CIT(A) upheld the AO's decision, relying on the Supreme Court's judgment in McDowell & Co. v. CTO, which emphasized that tax evasion through colorable devices should not be encouraged. The CIT(A) held that the transactions were covered by section 2(24)(iv) and constituted a benefit derived by the Managing Director, Director, and their relations.

The Tribunal, however, referred to its earlier decision in the case of Shri Varinder Gupta for the assessment year 1991-92, where it had deleted similar additions. The Tribunal relied on the Calcutta High Court's judgment in the case of P.R.S. Oberoi, which held that interest-free loans or loans at concessional rates do not constitute a 'benefit' or 'perquisite' under section 2(24)(iv). The Tribunal noted that there was no finding by the AO that the companies had borrowed funds on interest, which were then advanced to the Directors and their relatives. Therefore, the Tribunal concluded that the interest-free loans did not constitute a benefit or perquisite and allowed the appeals.

2. Perquisite Value of Free Electricity and Telephone:

In the case of Shri Rajinder Gupta for the assessment year 1996-97, an additional issue was the confirmation of addition of Rs. 54,180 in respect of the perquisite value of free electricity and telephone. The AO had computed the perquisite value of free electricity at 6.25% of the salary, as defined under Explanation I to rule 3, and added 20% of the residential telephone expenses. The CIT(A) confirmed the AO's computation.

The Tribunal, however, noted that for computing the free supply of electricity for household consumption, salary should be defined as per Appendix 2 of the Income-tax Rules, which includes basic pay, D.A. (if terms of contract or employment so provide), and commission. The Tribunal directed the AO to recompute the perquisite value based on Appendix 2 and restrict the addition accordingly, thereby partly allowing the appeal.

Conclusion:

The appeals in the cases of S/Shri Rajinder Gupta for the assessment year 1992-93, Nohar Chand Gupta, Varinder Gupta, and Smt. Madhu Gupta were allowed, as the interest-free loans were not considered a benefit or perquisite under section 2(24)(iv). The appeal in the case of Rajinder Gupta for the assessment year 1996-97 was partly allowed, with a direction to recompute the perquisite value of free electricity based on the correct definition of salary.