Income Tax Appellate Tribunal - Mumbai
Asstt. Cit vs Ramesh O. Mehra on 18 July, 2007
ORDER
D.K. Srivastava, Accountant Member
1. The appeal filed by the Department is directed against the order of the Commissioner (Appeals) on the following grounds:
On the facts and in the circumstances of the case and in law, the learnedCommissioner (Appeals) has erred in deleting the additions made by the assessing officerin the block assessment in relation to assessment years 1996-97, 1997-98& 1998-99 on account of perquisite value of interest on interest-free loanreceived by the assessee from his employer disregarding the f act that thetransaction of the assessee's employer having advanced an interest-freeloan to the assessee for purchase of flat was discovered only as a resultof the search conducted in this case.
2. The assessee, an individual, was working as Vice-President (Production) with M/s. Pearl Engineering Polymers Ltd. (PEPL), Mumbai since 1-12-1995. He was earlier working with Pearl Polymers Ltd., a company, which promoted PEPL. Search and seizure operation under Section 132 of the Income Tax Act was carried out at the residential premises of the assessee on 6/7-11-1997 during the course of which certain documents in the form of loose papers and diaries inventorized in Annexure A to the Panchnama dated 6/7-11-1997 were seized. One of the seized papers is conveyance/ purchase deed showing the purchase of flat by the assessee. Materials available on record indicate that M/s. Pearl Polymers Ltd., the promoter company of M/s. PEPL had given interest-free loan of Rs. 30 lakhs to the assessee. The assessee was not employed with Pearl Polymers Ltd. at the time when the said company gave the loan though he was earlier employed by the said company. Out of Rs. 30 lakhs of interest-free loan received from M/s. Pearl Polymers Ltd., the assessee used Rs. 20 lakhs for purchase of house property from M/s. Cidi Designs Pvt. Ltd. The property so purchased by the assessee was let out to M/s. Pearl Polymers Ltd. without charging any rent. Remaining sum of Rs. 10 lakhs was given to M/s. Ratnesh Enterprises on which the assessee charged interest of Rs. 1,33,500 for assessment year 1998-99. The assessing officer took note of the aforesaid factual matrix of the Case and held as under:
However as per the provisions of Section 17(2)(iii)(c) of the Income-tax Act the benefits derived by the assessee out of the interest-free loan is a perquisites in the hands of the assessee. In other words, the interest-free loan is a benefit or amenity granted to the assessee. Non-charging of interest by his employer is a soit of perquisite the value of which is taxable under Section 17 of the Income Tax Act. The normal rate of interest charged by the banks is about 12 per cent. Accordingly, the perquisite on account of interest is worked out and taxed in the hands of assessee on the basis of reduced balance outstanding against the assesyee. For assessment year 1996-97 the interest on the above loan after deducting Rs. 4,50,000 refunded by the assessee to the company works out to Rs. 1,60,000 for assessment year 1997-98 Rs. 2,50,250 and assessment year 1998-99 (up to 7-11-1999). As this fact ie. interest-free loan granted by the assessee's employer is not disclosed to the department either by the employer or the assessee the interest worked out above is treated as undisclosed income of the assessee for assessment years 1996-97 to 1997-98.
3. In view of the foregoing the assessing officer has brought a sum of "Rs. 23,500, Rs. 2,50,250 and Rs. 1,59,250 being perquisite value of interest on interest-free loan received by the assessee from M/s. Pearl Polymers to the charge of income-tax for assessment years 1996-97, 1997-98 and 1998-99.
4. On appeal, the learned Commissioner (Appeals) has deleted the aforesaid addition on five main grounds. First ground is that tax can be levied on actual income and not on notional income. He has held the perquisite value of interest-free loan received by the assessee as calculated by the assessing officer as notional income. Second ground is that the valuation of perquisite relating to interest-free loan is a matter of opinion and hence cannot be considered in block assessment. Third ground is that there is no provision in the Income Tax Act under which notional interest on the loan received from the employer can be calculated and addition made. Fourth ground is that the assessee was not the employee of M/s. Pearl Polymers Ltd. Fifth ground is that the provision for taxing interest income on such loans on notional basis has been introduced by Finance Act, 2001 by inserting Section 17(2)( vt) in the Income Tax Act and hence the said provision could not be applied to the years under appeal.
5. Aggrieved by the aforesaid order of the Commissioner (Appeals), the department is no win appeal before this Tribunal. In support of appeal, the learned departmental Representative submitted that the purchase deed showing utilization of interest-free loan given by M/s. Pearl Polymers Ltd. was recovered and seized during the course of search operation. It was on the basis of the aforesaid seizure that post search enquiries were carried out. She submitted that the basic document was recovered and seized at the time ofsearch and hence the impugned addition was rightly made by the assessing officer in the block assessment of the assessee. Her second submission was that Pearl Polymers was the promoter company of PEPL and also that the assessee was employed with M/s. Pearl Polymer Co. prior to his taking up the job with PEPL. According to her, the assessing officer was right in taking into account the aforesaid f act and in valuing the perquisite arising out of the interest-free loan given by Pearl Polymers Ltd. She further submitted that the Commissioner (Appeals) himself has confirmed addition of interest income of Rs. 1,33,500 relating to Rs. 10 lakhs advanced to M/s. Ratnesh Enterprises in his order for assessment year 2000-01 and hence the Commissioner (Appeals) was not justified in deleting the impugned interest.
6. In reply, the learned Authorized Representative for the assessee supported the order of the Commissioner (Appeals) and reiterated the submissions made before him. According to him the impugned addition was not possible in block assessment. He further argued that interest-free loan did not come from the present employer but from the former employer and hence the perquisite arising out of interest-free loan given by the former employer was not taxable in the hands of the assessee. He further submitted that rate of notional interest was a matter of debate and hence was outside the scope of block assessment.
7. We have heard the parties. Section 15(fe) of the Income Tax Act provides that any salary paid or allowed to an assessee in the previous year by or on behalf of an employer or a former employer shall be charged to tax. In the case before us, Pearl Polymers Ltd. is a promoter company of PEPL in which the assessee was employed during the year under appeal. The assessee was earlier employed with Pearl Polymers Ltd. Both the aforesaid companies are inter-connected and managed by the same set of persons. It is not the form of the transaction but the substance of transaction, which is decisive. The mere fact that the assessee could obtain the loan from the promoter-company, which employed him earlier, instead of the employ-ing company promoted by the said promoter-company, would not alter the position. It is as good as the assessee has obtained the interest-free loan from his employer.
8. It is during the course of search that the purchase deed was seized after which post search enquiries were made. Neither the interest received from Ratnesh Enterprises nor the value of perquisite arising out of interest-free loan taken by the assessee from his employer was ever disclosed to the department. The fact that it was recorded in the accounts maintained by the assessee with the bank would not mean that the transaction or the income flowing from the said transaction was disclosed to the department. Anything, which is not disclosed to the department, cannot be said to f all in the category of income or transaction disclosed to the department. Non-disclosure of transaction or income arising there from to the department cannot, by any stretch of logic, be construed to mean disclosure of transaction or income flowing from such transaction to the department. The assessee has placed no material before us to show that the impugned transaction or the income flowing there from was ever disclosed to the department. In fact the factual position is that it is the department, which seized purchase deed on the basis of which it could locate the impugned transactions and income arising there from, like, interest on the advances given to M/s. Ratnesh Enterprises. Definition of "undisclosed income" in Section 158B(fc) is inclusive one and is therefore wider in its reach. In the case of inclusive definition, what is included therein has to be necessarily considered in addition to the norm al meaning of the word. Therefore meaning of the word in the inclusive definition cannot be restricted to what is included therein. Each and every income from a transaction, which has not been disclosed by the assessee in his return of income filed with the department, can be assessed as undis-closed income. In the case before us, the department has seized purchase deed in the course of search and thereafter carried out the post-search inquiries. It cannot therefore be said that the present addition is bereft of any seized material.
9. Section 17(2) contains inclusive definition of "perquisite". It is well-settled that the word in respect of which "includes" is used bears both its extended statutory meaning and also its ordinary, popular and natural sense. Loan of Rs. 30 lakhs received from the employer is interest-free which means that it has a cost in the form of interest, which the employer has decided not to charge. It does not mean that such a loan has no cost or value in terms of interest. If the assessee had raised this loan from the open market, he would have had to pay interest. Likewise, the employer would also have received interest on the loan if it had given the same in the market. Let us assume a situation where the employer agrees to give interest-free loan of Rs. 50 crores to his employer and in lieu thereof does not pay any salary to him and also another situation where the same employer decides to give him salary of Rs. 1 crore annually without giving any such interest-free loan. In the first case, the employer is not paying any salary in lieu of interest-free loan of Rs. 50 crores. If the argument of the assessee is accepted, he will not have to pay any tax on the perquisite value of interest-free loan in the first case and thus évade payment of tax while he would have, in the second case, to pay tax on the salary income though the actual benefit that he is getting is far less in the second case if the rate of interest is assumed to be the current bank rate. It is in order to remove such anomaly, that the law taxes both, ie., the salary as well as perquisites and for the same reasons provides inclusive definition of "perquisite" to take care of such absurdities. The benefit flowing from interest-free loan is tangibly real and not notional as held by the learned Commissioner (Appeals). Its computation however is based on well-recognized principles. The assessee was given interest-free loan of Rs. 30 lakhs out of which Rs. 20 lakhs was utilized for buying a flat and Rs. 10 lakhs for giving as advance to M/s. Ratnesh Enterprises. If the assessee had not received the impugned interest-free loan, it would have been obliged to incur interest expenditure on obtaining similar loan from elsewhere on interest. The assessing officer has rightly held and treated the benefit of interest-free loan as perquisite and accordingly, valued the same under Section 17(2) of the Income Tax Act. The assessing officer has given adequate reasons for valuation of perquisite, which we consider to be quite reasonable. His order is therefore restored.
10. Appeal filed by the department is allowed.