# V.M. SALGAOCAR AND BROS. PVT. LTD. ETC. ETC v. COMMISSIONER OF INCOME TAX ETC

- **Citation:** [2000] 2 S.C.R. 1169
- **Court:** Supreme Court of India
- **Decided:** 2000-04-10
- **Case number:** Civil Appeal No. 657 of 1994
- **Bench:** D.P. Wadhwaand S.S. Mohammed Quadri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/v-m-salgaocar-and-bros-pvt-ltd-etc-etc-v-commissioner-of-income-tax-etc-17220
- **Pages:** 25

## Headnote

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Income Tax Act 1961-Sections 17(2), 40A(5)-Amounts drawn from
company by directors and employees-Interest ·not charged by companyCompany borrowing monies on payments of interest-Whether Revenue can
object to the allowance of expenditure to the extent of interest not charged
C
on the directors-Held, No, in the absence of any proof that the amounts were
diverled for the benefit of the directors.
Income Tax Appellate Tribunal-Whether High Courl can go beyond the
finding of Held, No.
Interpretation of Statutes-Taxation Laws (Amendment) Act, I984Amendment to Section 17(2) and 40A( 5)-Introduced with effect from I .4. I 985Later on omitted with effect from the date of insenion-Held, cannot be brushed
aside while interpreting the parlicular provisions-Constitution of IndiaArticle I 33-Appeal by cenificate dismissed in limine-Held, it merges with the
order of the High Court or Tribunal from which the appeal was provided.
In the assessment year 1979-80, the Income Tax Officer disallowed a
sum equal to 15 % of the amount standing to the debit of the Directors in
the books of the Assessee Company, under Sections 40-A(5) and 17(2) of
the Income Tax Act, 1961. The Income Tax Officer observed that the
assessee which was a company borrowed monies by paying interest @ 15 %
p.a. and claimed the interest as deductible expenditure. He held that since
the Directors of the Assessee Company were drawing monies from the
company without paying any interest, an amount equal to the interest that
could have been charged was not to be allowed as a deduction in view of
Section 40-A(5). On appeal by the Assessee Company, the CIT (Appeals)
upheld the order of the Income Tax Officer. On appeal by the Assessee
before the Appellate Tribunal, it was held that no evidence had been led by
the Revenue to show that borrowed funds were directly diverted for the
benefit of the Directors, and that the non-charging of interest on the debit
balance in running account of the Directors would not constitute perquil l 69
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[2000] 2 S.C.R.
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site. The 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.
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On a reference, the High Court relying on the Judgment of Madras
High Court, held in favour of the Revenue and against the Assessee Company.
During the assessment years 1980-81 and 1981-82 in the case of
assessment of a Director of the Company, the Income Tax Officer held that
non-charging of interest on the debit balance would amount to perquisite
within the meaning of Section 17(2) of the Act 1961. On appeal by the
assessee, the CIT (Appeals) relying on the decision in the case of AssesseeDirector for the earlier year held that it could not be treated as a perquisite. On appeal by Revenue before the Tribunal, the order of CIT (Appeals) was upheld holding that no ground had been made out by the
Revenue to depart from the view taken earlier. The reference before the
High Court at the instance of the Revenue was dismissed based on the
Judgments rendered in two different cases.
In appeal to this Court the Assessee-Appellant contended that, in the
case of the Company for the assessment year 1980-81 the decision of the
CIT (Appeals) holding that the non-charging of interest will not amount to
a perquisite has been approved by this Court and the Appeals have been
dismissed after admission, that a different view cannot be taken in respect
of the same Company for the assessment year 1979-80.
Allowing the Appeals by assessee and dismissing the appeals filed by
Revenue this Court
HELD : 1. 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

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V.M. SALGAOCAR AND BROS. PVT. LTD. ETC. ETC.
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v.
COMMISSIONER OF INCOME TAX ETC.
APRIL 10, 2000
[D.P. WADHWAAND S.S. MOHAMMED QUADRI, JJ.]
B
Income Tax Act 1961-Sections 17(2), 40A(5)-Amounts drawn from
company by directors and employees-Interest ·not charged by companyCompany borrowing monies on payments of interest-Whether Revenue can
object to the allowance of expenditure to the extent of interest not charged
C
on the directors-Held, No, in the absence of any proof that the amounts were
diverled for the benefit of the directors.
Income Tax Appellate Tribunal-Whether High Courl can go beyond the
finding of Held, No.
Interpretation of Statutes-Taxation Laws (Amendment) Act, I984Amendment to Section 17(2) and 40A( 5)-Introduced with effect from I .4. I 985Later on omitted with effect from the date of insenion-Held, cannot be brushed
aside while interpreting the parlicular provisions-Constitution of IndiaArticle I 33-Appeal by cenificate dismissed in limine-Held, it merges with the
order of the High Court or Tribunal from which the appeal was provided.
In the assessment year 1979-80, the Income Tax Officer disallowed a
sum equal to 15 % of the amount standing to the debit of the Directors in
the books of the Assessee Company, under Sections 40-A(5) and 17(2) of
the Income Tax Act, 1961. The Income Tax Officer observed that the
assessee which was a company borrowed monies by paying interest @ 15 %
p.a. and claimed the interest as deductible expenditure. He held that since
the Directors of the Assessee Company were drawing monies from the
company without paying any interest, an amount equal to the interest that
could have been charged was not to be allowed as a deduction in view of
Section 40-A(5). On appeal by the Assessee Company, the CIT (Appeals)
upheld the order of the Income Tax Officer. On appeal by the Assessee
before the Appellate Tribunal, it was held that no evidence had been led by
the Revenue to show that borrowed funds were directly diverted for the
benefit of the Directors, and that the non-charging of interest on the debit
balance in running account of the Directors would not constitute perquil l 69
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[2000] 2 S.C.R.
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site. The 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.
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On a reference, the High Court relying on the Judgment of Madras
High Court, held in favour of the Revenue and against the Assessee Company.
During the assessment years 1980-81 and 1981-82 in the case of
assessment of a Director of the Company, the Income Tax Officer held that
non-charging of interest on the debit balance would amount to perquisite
within the meaning of Section 17(2) of the Act 1961. On appeal by the
assessee, the CIT (Appeals) relying on the decision in the case of AssesseeDirector for the earlier year held that it could not be treated as a perquisite. On appeal by Revenue before the Tribunal, the order of CIT (Appeals) was upheld holding that no ground had been made out by the
Revenue to depart from the view taken earlier. The reference before the
High Court at the instance of the Revenue was dismissed based on the
Judgments rendered in two different cases.
In appeal to this Court the Assessee-Appellant contended that, in the
case of the Company for the assessment year 1980-81 the decision of the
CIT (Appeals) holding that the non-charging of interest will not amount to
a perquisite has been approved by this Court and the Appeals have been
dismissed after admission, that a different view cannot be taken in respect
of the same Company for the assessment year 1979-80.
Allowing the Appeals by assessee and dismissing the appeals filed by
Revenue this Court
HELD : 1. 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
by this Court that when 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
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V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.I.T.
1171
Constitution. That certainly could not be so when appeal is dismissed
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though by a non speaking order. Here the doctrine of merger applies. In
that case, the Supreme 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
special leave petition under Article 136. When appeal is dismissed, order of
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the High Court is merged with that of the Supreme Court. The contention
of the assessee that once this Court has dismissed the appeal for the
assessment year 1980-81, it cannot take a different view for assessment
year 1979-80 is upheld. (1179-F; 1180-A-B]
Supreme Court Employees Welfare Association v. UO/ and Another,
c
(1989) 4 sec 187, relied on.
2.1. Taxation Laws Amendment Act, 1984 which amended Sections
17(2) and 4A(5) by inserting clause (vi) in both the sections and its subsequent repeal by the Finance Act, 1985 is significant. By the 1984 Amendment Act, Parliament wanted to carve out a particular exception from
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otherwise exclusionary clauses for the purpose of computation of income
tax. This provided a clear direction to interpret the provisions of Sections
17(2) and 40A(5) before insertion of clause (vi). The circulars of CBDT
also provides as to how Revenue itself understood the effect of the amendments and what was the law before the Amending Act, 1984. High Court in
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the impugned Judgment could not have brushed aside the consideration of
the Amending Act, 1984 and its subsequent repeal by the Finance Act,
1985 by terming them of no consequence. (1192-D-E]
2.2. The distinction made by the High Court in the case of H.K.
Vaidya as regards the assessee's case was not correct. Amendment made
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by the 1984 Amending Act was both to Section 17(2) and Section 40A(5).
In the impugned Judgment reference in fact had been made to inclusion of
sub-clause (vi) in clause (2) of Section 17. The approach of the High Court
...
in not considering the amendments made by the Amending Act, 1984 on
the ground that it has no bearing on the interpretation of the then existing
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provisions of the Act, is not correct. An amending provision can certainly
give guidance to interpretation of the existing provisions. The•Judgments
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of the Madras High Court, which were relied upon by the High Court in
the impugned Judgment were for the period prior to the 1984 amendment
and the Madras High Court had no occasion to consider the impact of t_he
amendments to section 17(2) and Section 40A(5) of the Act. The Karnataka
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SUPREME COURT REPORTS
[2000] 2 S.CR.
High Court itself relied on the provisions of the Amendment Act, 1984 and
its repeal by the Finance Act, 1985 to interpret the provisions of Sections
17(2) and 40A(5). Distinguishing features which the High Court in the case
of M.K. Vaidya pointed with reference to the impugned Judgment (1992)
198 ITR 738 appear to be rather obscure. Interpretation of law has to be
uniform. [1187-F-G; 1192-F; 1193-B]
CIT v. M.K. Vaidya, (1997) 224 ITR 186 and P. K,-ishnamwthy v. CIT &
Am:, (1997) 224ITR183, referred to.
3. It is not permissible for the High Court to go beyond the approved
finding of the Appellate Tribunal that there was no evidence presented by
the Revenue to show that the borrowed funds were directly diverted for
the benefit of the Directors. The finding of the High Court that it would be
well nigh impossible to except proof from the Revenue that the monies that
were advanced to Directors were borrowed monies and that ordinarily the
funds borrowed by a Company would fall within the hotchpot and intermingle with its own funds are incorrect. [1192-H; 1193-A]
4. Having regard to the dismissal of the earlier appeal of the revenue
and state of law as interpreted by ·the Court particularly keeping in view
the amendment by the Taxation Laws (Amendment) Act, 1984 and its
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repeal by the Finance Act, 1985 and the circulars of the CBDT the questions are decided in favour of the assessee. [1193-C]
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CIT v. Kulandaivelu Konar; (1975) 100 ITR 629; CIT v. S.S.M.
Lingappan, (1981) 129 ITR 597 (Mad.); CIT v. Vazi,- Sultan Tobbaco Co.
Ltd., (1988) 173 ITR 290 AP andindian Oxygen Ltd. v. CIT, (1994) 210 ITR
274, referred to.
CITv. P.R.S. Oberai, (1990) 183ITR103, approved.
Addi. Commr. of Income Tax v. Late A.K. Lakshmi, (1978) 113 ITR 368,
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distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 657 of 1994
Etc.
From the Judgment and Order dated 7 .2.92 of the Karnataka High
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Court in l.T.R.C. No. 20 of 19'89.
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V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.l.T. [D.P. WADHWA, J.]
1173
G. Saramajan, Mukul Mudgal, Ms. Shobha, S.K. Mehta, Dhruv Mehta,
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Ranbir Chandra, K.C. Kausbik, Ms. Sushma Suri and S.K. Dwivedi for the
appearing parties.
The Judgment of the Court was delivered by
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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 Reference
made to it by the Income Tax Appellate Tribunal ("Appellate Tribunal" for
short) under Section 256(2) of the Income Tax Act, 1961 (for short, the c
'Act'). Reference was at the instance of Revenue. Following questions arose
for the determinatlon of the High Court :
(1) Whether on the facts and in the circumstances of the case, the
Appellate Tribw1al is right in law in deleting addition of Rs. 5,21,241
made by the Income Tax Officer under section 40A(5) and sustained
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by the Commissioner of Income tax (Appeals)?
(2) Whether on the facts and in the circumstances of the case, the
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Appellate Tribunal is right in law in holding that non-charging of
interest on the debit balance in the running account of the directors
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would not constitute a perquisite?"
High Court answered both the questions in 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
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assessment year 1979-80, the Income-tax Officer had disallowed a sum of Rs.
5,21,241 being 15% 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 AcL The Income-tax Officer found that the
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assessee, which was a company, was bonowing large sums by paying interest
@ 15 per cent per annum. This interest was claimed by the assessee as
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deductible expenditure. Income-tax Officer found that the directors of the
assessee company were drawing amount from the company without paying
interesL He. therefore. held that when the company bonowed 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
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SUPREME COURT REPORTS
(2000] 2 S.C.R.
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granted to the directors and hence the said amount 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. Assessee
took the matter further in appeal before the Appellate Tribunal which deleted
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the additions made by the Income-tax Officer. Appellant Tribunal held that
no evidence had been laid by the Revenue to show that borrowed funds were
directly diverted for the benefit of the directors and non-chargeable Interest
on the debit balance in running account would not amount to providing
perquisite. The Appellate Tribunal also observed that the Taxation Laws
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(Amendment) Act, 1984 for the first time provided that tlie 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. High Court in coming to its decision relied on
two cases of the Madras High Court in Commissioner of Income Tax v. C.
Kulandaivelu Konar, (1975) 100 ITR 629 and Addl. Commissioner of Income
Tax v. Late A.K. Lakshmi, (1978) 113 ITR 368. Appellate Tribunal had also
observed that non-charging of interest on the debit balance in running account
of the directors would not constitute 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(l)(iii) which provision provides
for deduction to be allowed in respect of the amount of interest on capital
borrowed for the purposes of the business or profession.
In Civil Appeal 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 Mis. V.M. Salgaocar &
Brothers Pvt. Ltd. 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 circUQlstances of the case, the
Appellate Tribunal is right in law in upholding the action of the
A.A.C. 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?"
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High Court answered the question so refeR"ed in the aftirrnative in
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V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.l.T. [D.P. WADHWA, J.]
1175
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 11RC No. 4/92 decided on 1st August,
1977 (C.l.T. v. Mis. V.M. Salgaocar & Bms. Ltd., Vascoda 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 l.T.R. No. 20of1989 (Reported as Commissioner of
lncome-Taxv. V.M SalgaocarandBrothers Pvt. Ltd, (1992) 198
I1R 738), now being impugned before us in Civil Appeal No.
657of1994) disposed of on 7th February, 1992 in respect of this
very assessee, and 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. K1ishna Murthy v. CIT & Another,
(224I1R183) and C/Tv. M.K. Vaidya, (224 I1R 186) in which
interest free loan or loan at a concessional rate given to employee
for building house is not a perquisite. Once it is held to be not a
perquisite for purpose of Section 40-A(S), it becomes clear that
the deduction will have to be granted in favour of the assessee,
because in an earlier occasion in 11RC No. 20/1989 this Court
proceeded on the basis that it is a perquisite. We have no option
but to following the later decision of this Court where the matter
has been decided after considering the decision in ITRC No. 20/
1989. Therefore, following the said two decisions, we answer the
question in the affmnative 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.
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Assessee Shivanand V. Salgaocar was a director of Mis V.M. Salgaocar
Brothers Pvt. Ltd. During the assessment years in question the company
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SUPREME COURT REPORTS
[2000] 2 S.C.R.
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advanced certain sums to the assessee without charging any interest thereon.
Income-tax Officer held that non-charging of interest on the debit balance
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would amount to 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% of the debit balance standing in the name of the assessee in the
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accounts of the company and brought the same to tax in the hands of the
assessee. On appeal filed by the assessee, Commissioner of Income Tax
(Appeals) relying on the decisions 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 perquisite in the hands of the
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assessee and deleted the addition made by the Income-tax Officer. 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
made out by the revenue to depa1t 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 Assessment 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. Income-tax Officer calculated tb,e
interest at the rate of 15% on the debit balance of the directors and came
to the conclusion that this amounted to perquisite. By applying the provisions
of Section 40A(5) be disallowed the amount of interest so calculated.
Company had advanced various sums to its sister concerns. The balance
outstanding as on the last date of the accountancy year was over Rs. 250
lakhs. Company raised borrowings on which it had paid interest. Income-tax
Officer disallowed the interest calculated at the rate of 15% per annum on
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this amount which was due from the sister concerns. This disallowance was
made on the ground that the amount borrowed by the assessee company 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 Commisfiloner of Income
Tax (Appeals) deleted the additions made under Section 40A(5) as they stood
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at that relevant time could have no application uni~ the assessee had
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V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.l.T. [D.P, WADHWA, J.]
1177
incurred an expenditure which had resulted in a benefit to the employee. In
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respect of the disallowance of interest' on the amount advanced to sister
concerns 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 atid considering
that assessee had substantial funds on which it had not paid any interest
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deleted that addition as well. On appeal the Appellate Tribunal following its
decision in the earlier years, rejected the appeal of the revenue. Revenue then
took the matter to the High Court on reference under Section 256(1) of the
Act. 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 (Appeals) who deleted the addition of Rs.
93, 640 made by the Income-tax Officer under Section
40A(5)?
(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 CIT (Appeals) who deleted the disallowance of Rs.
39,11,054 out of interest payment?
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(3)
Whether on the facts and in the circumstances of the case, the
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Appellate Tribunal is right in law in upholding the order of
the CIT (Appeals) who held that the amount of Rs. 43,320
prud as compensation to agriculturist is allowable as revenue
expenditure?"
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
Commissioner of Income Tax v. M.K. Vaidya, (1997) 224 ITR 186 and P.
Krishna Murthy v. Commissioner of Income Tax and Am:, (1997) 224 ITR
183. Second and third questions were also answered in the affirmative in
favour of the assessee holding that these questions were covered by its earlier
decisions in IJRC No. 24/92.
Still aggrieved 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
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SUPREME COURT REPORTS
[2000] 2 S.C.R.
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"The appeal is dismissed".
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(2) Sections 17(2) and 40A of the Act were amended by the Taxation
Laws (Amendment) Act, 1984. Sub-clause (vi)' of clause (2) of 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 in 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 prescribed manner on such loan at the rate so specified and the
interest charged by the employer.
An amendment on surular 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
l. (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 a case were 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 -
(l) 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.
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V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.l.T. [D.P. WADHWA, J.]
1179
(b), as the case may be, of sub-clause (vi) of 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, namely, April 1, 1985. Clause 20 of the
Memorandum explaining the provisions of the Finance Bill, 1985, stated that,
as a measure of relief to salaried taxpayers, the Bill seeks to omit the aforesaid
provisions with effect from the date of its proposed insertion, namely, April
I, 1985. In consequence thereof, sub-clause (vi) of clause (b) in Explanation
2 to section 40A(5) of the Income-tax ~ct, 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 along with 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. Central
Board of Direct Taxes (CBDT) issued Circular incorporating the objectives
sought to be achieved by omission of clause (vi). It is Circular No. 421 dated
June 12, 1985. Earlier CBDT had issued a Circular No 387 dated October
16, 1984 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, Income Tax Rules were also amended by
incorporating Rule 3(a) to work out enacted clause (vi). This Rule 3(a) 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 by this Comt that
when 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.
Amendment to Section 40-A - In Section 40-A of Income tax Act, in sub-section (5), in clause
(b) of Explanations -
(a)
in sub-clause (iv), the word "and" shall be omiued;
(b)
in sub-clause (v), for the words "an annuity", the words "an annuity; and" shall be
s11bstit11ted;
(c)
after sub-clause (v), the following sub-clause shall be inserted, namely -
A
B
c
D
E
F
G
"(vi) the amount treated as a perquiSite under sub-clause (vi) of clause (2) of Section 17."
H
1180
SUPREME COURT REPORTS
(2000] 2 S.C.R.
A
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 appeal is dismissed though by a non speaking
order. Here the doctrine of merger applies. In that case, the Supreme Court
upholds the decision of the High Court or of the Tribunal from which the
B
appeal is provided under clause (3) of Article 133. This doctrine of merger
does not apply in the case of dismissal of special leave petition under Article
136. When appeal is dismissed order of the High Court is .merged with that
of the Supreme Court. We quote the following paragraph from the judgment
of this Court in the case of Supreme Court Employee's Welfare Association
v. Union of India and Another, (1989] 4 SCC 187 :
c
"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
D
is summarily dismissed under Article 136 of the Constitution, by
such dismissal this Cowt does not lay down any law, as envisaged
by Article 141 of the Constitution, as contended by the learn~
Attorney-General. In Indian Oil Corporation Ltd. v. State of Bihar,
(1986] 4 SCC 146, it has been held by this Couit that the dismissal
of a special leave petition ih limine by a non-speaking order does not
E
justify any inference that, by necessary implication, the contentions
raised 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
F
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 petition should be granted. in Union of India v. All India
Services Pensioners' Association, (1988] 2 SCC 580 this Court has
given reasons for dismissing the special leave petition. When such
reasons are given, the decision becomes one which attracts Article
G·
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
r
H
of th.:: Constitution."
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V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.I.T. [D.P. WADHWA, J.]
1181
It was, therefore, contended that once this Court in Civil Appeal No.
A
424 of 1999 has dismissed the appeal it has upheld the order of the High
Court in the case of Assessment Year 1980-81 and it cannot take a different
view for the Assessment Year 1979-80. There appears to be subsistence in the
submission of the assessee.
There has been difference of opinion among the High Courts on the
question if non-charging 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 31st March, 1963, there was an overdrawal to the extent of about
B
c
Rs. 60,000. The company did not charge any interest on these overdrawings,
though it was paying interest on its borrowings. The Income-tax Officer
disallowed the interest-free advance to the director in the hands of the
D
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 assessment and at the instance of the Commissioner
the matter was brought to this 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 creat 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 Additional Commissioner of Income Tax v. Late A.K. Lakshmi and
Others, (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 assessment 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 the amounts in question for the relevant
E
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1182
SUPREME COURT REPORTS
[2000] 2 S.C.R.
A
assessment years relating to the assessee could not be treated as a perquisite
within the meaning of Section 17(2) of the Act. High Court referred to the
definition of 'perquisite' as given in Section 17(2) and observed :
B
c
D
E
F
G
H
"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 derivl!d 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 person mentioned in subclauses (a), (b) or (c). It is said that the sub-clause applicable is subclause (a) which states that 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 subclause (a) would apply."
High Court then held :
"The point to be considered is whether the receipt of the amounts by
the assessee or tl1e grant of the amounts by the company without any
interest would be a receipt of any benefit without any cost. Here the
·question is whether the non-liability to pay any interest wo_uld 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 discreti9n of the right of the company to advance amounts to its
employees with or without interest or at any specified rate of interest.
But the question would still arise whether granting amounts of the
company for the personal use of its employees without charging
interest would be the grant of any benefit. Our answer here must be
in the affirmative. It is well known that it is difficult, if not impossible,
to borrow amounts for one's own use without having any liability to
pay interest. Putting it positively, ordinarily borrowing can be had
only by incurring an obligation to pay interest. What would be the
amount of interest will be unless there are statutory provisions
-
..
V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.l.T. [D.P. WADHWA, J.]
1183
governing the matter, a matter of agreement between the lender and
the borrower. But, if either due to magnanimity or with a view to help
an employee any amounts are advanced by an employer to an
employee without an obligation to pay any interest, we have no
hesitation in coming to the conclusion that the employee would be
deriving a benefit in that he gets the use of the monies belonging to
the company or any other employer, without having any liability to
pay interest. The cost of the benefit would depend upon what is fair,
just and reasonable, as envisaged by rule 3(g) of the income-tax
Rules."
In CIT v. S.S.M Lingappan, (1981) 129 I1R 597 (Mad.) the question
before the High Court was if the free use of the company's car by the director
was a perquisite or benefit within the meaning of Section 2(24) of the Act
and assessable to income of the assessee. The assessee was a HUF. Karta of
the HUF was the director of a company and had obtained the benefits in the
shape of the use of the company's assets, viz., motor car, telephone, etc. In
the assessment of the company there was a disallowance of the expenditure
relating to the above assets under Section 40(c) of the Act on the ground that
the expenditure was excessive and unreasonable having regard to the legitimate business needs of the company. In the case of the assessee the Incometax Officer took into account the possible extent of the use of the company's
assets, viz., motor car, telephone, etc. and evaluated the benefits obtained by
the assessee under Section 2(24)(iv) of the Act. Assessee contended that the
amounts so evaluated could not be perquisites in the hands of the assessee.
High Court referred to its earlier decision in the case of CITv. C. Kulandaivelu
Konar, (1975) 100 I1R 629 and held that even if a benefit had been conferred
on the director unilaterally without the aid of any agreement between the
parties a benefit could be taxed as a perquisite under Section 17(2)(iii) and
(iv).
In CIT v. Vazir Sultan Tobacco Co. Ltd., (1988) 173 ITR 290 (AP) one
of the questions before the High Court was "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 the loans advanced to the
employees was not a perquisite under section 40A(5)". The assessee was a
public limited company. In answer to the question the Court said :
"So far as question is concerned, what is happening is that again
with a view to keep its employees happy and satisfied, the assessee
A
B
c
D
E
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1184
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B
c
D
E
F
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SUPREME COURT REPORTS
[2000] 2 S.C.R.
has· been given loans to them at concessional rate of interest. Tlie
loans ru;e given to employees to build their own houses. If they build
the houses and live in them themselves, the rate of interest is 6% and
·if they let out the houses, the interest will be charged at 9% per
an:num. The Department says that the . difference between the
concession~ rate of interest and the prevailing market rate of interest
should be ,disallowed under section 40A(5) of the Act. On this
question too, the Tribunal, following its earlier decision, held in
favour of the assessee. This question has to be answered with
reference to the language employed in sub-section (5) of Section 40A
of the Act. lq so far as it is relevant, the provision reads thus :
"40A(5)(a) Where the assessee -
(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former
employee, or
(ii) incurs any expenditure which results directly or indi-
' rectly in the provision of any perquisite (whether convertible
into money or not) to an: employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect
of any assets of the assessee used by an employee either wholly
or partly for his own purposes or benefit.
then, subject to the provisions of clause (b), so much of
such expenditure or allowance as is in excess of the limit specified in respect thereof in clause ( c) shall not be allowed as a
deduction .... "
It would be evident from a perusal of sub-section (5) that it
·contemplates disallowance of certain expenditure incurred by the
assessee which it claims as a deduction. Certain ceilings are fixed in
the. case of the such expenditure'. The assessee' s contention is that it
has not incurred any expenditure by giving the loans to its employees
at a concessional rate of interest and, therefore, the said provision has
no application. On the other hand, learned standing counsel· for the
Revenue says that if this money had not been lent to the employees
at a concessional rate of interest, it would have earned interest at a
•
--· ••
..
-
.
... :'''
V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.l.T. [D.P. WADHWA, J.]
1185
higher rate had it been put in fixed deposit in a bank. But, this
argument involves importing a fiction into sub-section (5) of section
40A of the Act.