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TMI Blog1982 (7) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... 1975disclosed a sum of Rs. 45,66,214.31 due from directors and companies under the same management (as per Schedule 'C' annexed). Schedule 'C' disclosed that as on 31-10-1975 a sum of Rs. 9,95,917.75 was due by the assessee to the aforesaid company and similarly a sum of Rs. 6,34,732.28 was due by S. Daljit Singh, brother of the assessee and the whole-time director-chairman of the said company. The assessee had more than one account in the books of the aforesaid company as per details given below : Rs. P. Plant No. I---Account No. I ... Dr. 2,864.50 Plant No. II---Account No. II ... Dr. 5,93,926.00 Plant No. III---Account No. III ... Dr. 4,46,254.25 ---------------------- 10,43,044.75 Plant No. II---Account No. I ... Cr. 27,005.50 ---------------------- Balance 10,16,039.25 ---------------------- Though the assessee's account stood overdrawn to the extent of Rs. 10,16,039, as indicated above, the said company did not charge any interest though the profit and loss account and balance sheet of the said company showed that for the year ending31-10-1975it paid interest and bank charges to the extent of Rs. 9,13,369. During the course of the assessment proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our kind consideration that on the day when the above referred payments were made by the company on behalf of S. Charanjit Singh, there were cash balances on hand to the extent of more than Rs. 3 lakhs. The company has a common pool in the form of daily cash collections and the bank balances and it is not possible to bifurcate as to which money has been passed on to the director free of interest. Under the circumstances explained above, the provisions of section 17(2) of the Income-tax Act cannot be made applicable in this case." Before the ITO it was also submitted that the aforesaid company had general reserves and surplus amounting to Rs. 1,41,15,702 and as such the amount advanced to the assessee was out of the company's own earnings and there was no law which prohibited interest-free loans being advanced to an employee-director of the company. It was also argued that the system of paying interest on borrowings and charging interest on advances made was not followed by the company even in respect of inter-company transactions. The ITO considered these arguments very carefully but he did not accept the assessee's submissions. He observed that it was not necessary that the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the aforesaid company as dividend under section 2(22)(e), was dropped by the ITO himself. It was then submitted that the grant of interest-free loan to the assessee by the aforesaid company would not be covered by the provisions of section 17(2)(iv). It was further submitted that the provisions of section 17(2)(iii) were also not applicable in the case of the assessee because Pure Drinks had not entered into any undertaking to grant advances free of interest by virtue of the contract of the assessee's employment with the said company as a director. According to the learned counsel for the assessee, in the absence of a contract between the said company and the assessee for the grant of interest-free loans, no amount could be said to have been advanced, granted or provided by the company to the assessee and no amount, therefore, could be taxed as a perquisite in his hands. The use of the words "...granted or provided free of cost or at concessional rate" occurring in section 17(2)(iii) was emphasised and it was argued that the granting or providing of a facility had to be a deliberate act on the part of the company. It was submitted that if a director utilised his position in a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able benefit and this benefit or amenity was definitely taxable as perquisite within the meaning of that term under section 17(2)(iii)(a). He pointed out that it was not controverted by the assessee that he was an employee-director of Pure Drinks. He explained that though in the case of the said company no disallowance had been made out of the payment of interest on the ground that a part of the funds of the company had been allowed to be used interest-free by the director but all the same the grant of interest-free loan was a perquisite taxable under section 17(2)(iii). According to the learned departmental representative, the Commissioner (Appeals) erred in following the aforesaid judgments of the Madras High Court and in holding that the provisions of section 17(2)(iii) were not applicable to this case. He went a step further and submitted that the amount in question was taxable even under section 2(24)(iv). He sought permission to raise the following additional ground of appeal: "That alternatively the additions made by the ITO may be sustained under section 2(24)(iv) of the Income-tax Act, 1961." In support of his submission that the aforesaid additional ground of appeal s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. He submitted that if the said amount could not be taxed either under section 17(2) or under section 28(iv), then it could not be taxed under any other provisions of the Act. He relied on the arguments in the case of CIT v. Smt. T.P. Sidhwa [1982] 133 ITR 840 (Bom.). He referred to the judgment in CIT v. L.W. Russel [1964] 53 ITR 91 (SC), for the submission that section 17 itself would not be applicable to the facts of this case. He pointed out that in Adaikappa the Madras High Court had followed the judgment in L.W. Russel. He also referred to the judgment in G. Venkataraman. He submitted that in the absence of a specific provision in section 17 treating interest-free loan as a perquisite, there was no benefit on the facts and circumstances of the case and the assessee could not be taxed on a vague and ambiguous concept of benefit. He also referred to The Law and Practice of Income-tax by Kanga Palkhivala, 7th edition, Vol. II, page 486, wherein under rule 3 the method of calculation of perquisite is given. In the said rule, it is stated that for the purpose of computing the income chargeable under the head 'Salaries' the value of the perquisites (not provided for by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of this case. 11. The further question that is required to be considered is whether the benefit or amenity in the shape of interest-free loan granted by the aforesaid company to the assessee can be considered to be a perquisite under section 17(2)(iii). In holding that the benefit or amenity in the shape of interest-free loan granted by the aforesaid company to the assessee did not amount to a perquisite under section 17(2)(iii), the Commissioner (Appeals) has referred to the two judgments of the Madras High Court in Adaikappa and G. Venkataraman. In the case of Adaikappa, the question for consideration by the High Court was whether the unauthorised use of certain vehicles by a director could be considered to be a benefit or perquisite obtained by the assessee from the company and whether such amounts were taxable either under section 2(6C)(iii) of the 1922 Act [corresponding to section 2(24)(iv)]. This judgment was specifically referred to by the Madras High Court in C. Kulandaivelu and after referring to this judgment it was, inter alia, held that in cases where the company permits an employee to utilise its funds for his own benefit, it shall be deemed to have given a pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleted the addition of Rs. 3,21,173, as had been done in the appeal against the original assessment order, and also set aside the assessments on Rs. 45,000 and Rs. 63,000 in the view that there was no loan or payment by the company but there was only an embezzlement by the late director and the question of paying interest and computing the benefit or perquisite will arise only in the case of legal payment or bona fide loan advanced. The Tribunal also agreed with this view. On a reference to the High Court at the instance of the department, it was first held that the benefit or perquisite contemplated in section 2(6C)(iii) cannot be money itself as (i) if it is money, the question of its value being taken into account or the benefit or perquisite being converted into money will not arise, and (ii) the same section makes a distinction between 'benefit or perquisite' on the one hand and 'any sum paid' on the other indicating that the 'benefit or perquisite' contemplated by the section is other than money. It was also held that even assuming that money can be considered to be benefit or perquisite as contemplated by that section, it should have been obtained from the company but, in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned counsel for the assessee had submitted that the provisions of section 17(2)(iii) can only be applied if the loan to the assessee was an authorised loan by the aforesaid company. No resolution of the company as such, authorising any loan to the assessee, has been placed before US. The fact, however, remains that the assessee being a managing director has been in a position to obtain a substantial loan from the aforesaid company. We have, therefore, to proceed on the basis that loan to the assessee was not unauthorised. Such a basis was adopted by the Madras High Court in Kulandaivelu. 13. The learned counsel for the assessee had also submitted that Pure Drinks had reserve surplus as on 31-10-1975 to the extent of Rs. 1,52,20,483 and the loans to the directors, namely, S. Daljit Singh and S. Charanjit Singh, could be considered to have been advanced out of the reserves. No evidence has been led to establish any nexus between the sum of Rs. 1,52,20,483 available under the head 'Reserve and Surplus' and advances made to the directors. The reserve and surplus include a sum of Rs. 10,54,152 on account of development rebate reserve and we doubt whether any part of this amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause the ground raised is purely a legal ground. We may also state that the Commissioner (Appeals) himself has referred to the provisions of section 2(24)(iv) in paragraph 16.1 of his order, wherein he has held that the ratio of the two Madras High Court judgments in Adaikappa and G. Vankataraman would be applicable in construing the provisions of section 17(2)(iii) read with section 2(24)(iv) as also section 2(6C)(iii) of the 1922 Act. We have already held that the benefit or interest-free loan received by the assessee from the aforesaid company in which he is a director, is a perquisite under section 17(2)(iii). Section 17(2) is specifically mentioned in the inclusive definition of the term 'income' under section 2(24)(iii). Thus, the perquisite is taxable as income under section 2(24)(iii). After holding that the perquisite in the shape of interest-free loan from the company in which the assessee is a director is taxable under section 17(2) which is mentioned in section 2(24)(iii), we cannot say that the same amount would be taxable as income under section 2(24)(iv) also. The head of income includible as income under section 2(24)(iv) may be different from the head of income in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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