Calcutta High Court
Mohan Singh Oberoi And Prithvi Raj Singh ... vs Income Tax Officer And Ors. [Alongwith ... on 10 August, 2007
Equivalent citations: (2007)213TTJ(CAL)484
Author: Ashim Kumar Banerjee
Bench: Ashim Kumar Banerjee
JUDGMENT Ashim Kumar Banerjee, J.
1. Is a loan given by a company to its director without any interest taxable under the provisions of the IT Act, 1961 (hereinafter referred to as the "said Act of 1961") ?
2. These two appeals involve the above moot question to be answered by us in this judgment.
3. The facts of the two appeals are identical. Hence, we are disposing of both appeals by this common judgment.
Facts of the case
4. The appellants in both the appeals are assessed to income-tax for the relevant assessment year. After the assessment was complete notice under Section 148 was issued for reopening the assessment on the ground that they derived benefit out of interest-free loan granted by two companies. It was alleged that the assessee, Ishran Devi Oberoi obtained benefit of the loan granted to her husband Shri Mohan Singh Oberoi by two companies, namely, M/s Hotels 1938 Limited and M/s Northern India Caterers (P) Ltd. free of interest. According to the Revenue, since the concerned assessee obtained benefit of such loan through her husband free from interest such benefit should be treated as income and should have been reflected in return. Having not shown such income in the tax return the assessee escaped assessment of such income. Hence, the assessments for the relevant years were liable to be reopened. Challenging such notice the writ petition was filed by Ishran Devi Oberoi. During the pendency of the proceeding, Ishran Devi Oberoi died leaving her surviving her heirs and legal representatives under her will. The appellant in F.M.A. No. 1720 of 1997 was the executor to her estate. The appellant Prithivi Raj Singh Oberoi in Appeal No. 2909 of 2002 was also a director of the above named companies. He was also served identical notice on similar charge.
Altogether four writ petitions were heard by the learned Single Judge in respect of different assessment years, His Lordship disposed of the writ petitions by the common judgment and order dt. 30th July, 1991, impugned in these appeals. It" was contended on behalf of the appellants that at the time of original assessment all relevant queries made by the ITO were duly replied to and upon consideration of all relevant documents produced before the ITO the assessments were finalised. Hence, there was no occasion for the Revenue to issue the impugned notice. The learned Judge, however, did not go into such controversy. His Lordship was of the opinion that by the impugned notice the Revenue wanted to reopen the assessment which would cause no prejudice to the appellants, as such the writ petitions were dismissed by discharging the rule issued earlier. Being aggrieved by and dissatisfied with the judgment and order of the learned Single Judge the above appeals were filed by the respective appellants.
Contention of the appellants
5. Dr. Debi Prasad Pal, learned senior counsel appearing for the appellants, contended that the loan given by any company to its director free of interest even if held as a "benefit" could not be translated into the income which would be available for the assessment. Dr. Pal also contended that the issue was resolved by the Division Bench of this Court in the case of CIT v. P.R.S. Oberai . The said decision was noted with approval by the apex Court in a later decision in the case of V.M. Salgaocar & Bros. (P) Ltd. v. CIT . Dr. Pal further contended that in respect of the appellant in F.M.A. No. 1720 of 1997 for another assessment year, the learned Single Judge of this Court, relying on the decision in the case of CIT v. P.R.S. Oberoi (supra) and V.M. Salgaocai & Bros. (P) Ltd. v. CIT (supra) allowed the writ petition by the judgment and order reported in Ishran Devi Oberai v. ITO .
6. Dr. Pal in support of his contention also relied upon the decisions in the cases of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. and Lily Thomas v. Union of India .
Contention of the Revenue
7. Mr. Deepak Kumar Shome, learned senior counsel appearing for the Revenue, on the other hand, contended that the facts involved in CIT v. P.R.S. Oberoi (supra) and V.M. Salgaocar & Bros. (P) Ltd. v. CIT (supra) were totally different than that of the present appeals. Mr. Shome further submitted that the reason for reopening the assessment was detailed in the affidavit-in-opposition filed by the Revenue before the learned Single Judge. No affidavit-in-reply was filed to confront such allegation. Hence, the contentions of the Revenue as stated in the affidavit-in-opposition were deemed to have been admitted by the assessee. The learned Judge was right in dismissing the writ petition by observing that no prejudice had been caused to the assessee by issuance of such notice.
Law on the subject
8. In the case reported in CIT v. P.R.S. Oberoi (supra), the Division Bench observed that the director had a running account with the company. Sometimes he also lent and advanced diverse sums to the company without any interest. It was not the case of the Revenue that benefit was derived by the director or his wife through him from a loan which was given by the company for which the company had to pay interest and thereby obtained benefit of deduction of tax. Their Lordships also noted the fact that by amending the provisions of Sections 17(2) and 40A, the Revenue wanted to include loan given by any employer to its employees for purchase of house or motor car within the mischief of "perquisite". Such amendment was withdrawn within one year. The objects and reasons for the subsequent amendment would depict that there was no need for Parliament to initially amend Section 40A(5) to provide that the amount of loan in Section 17(2) would be regarded as a perquisite. The Division Bench held that interest-free credit enjoyed by the assessee obtained from a company could not be included in the expression "benefit" and/or "perquisite" in view of the subsequent amendment brought by the Finance Act, 1985. In this regard, the relevant observations of the Division Bench are quoted below:
We have considered the rival contentions. The interest-free credit enjoyed by the assessee during the two previous years under consideration is sought to be valued and included in his total income under Section 2(24)(iv) of the said Act. Clause (24) of Section 2 gives an inclusive definition of 'income'. Under Sub-clause (iv) thereof, the value of any benefit or perquisite, whether convertible into money or not, obtained from a company, either by a director or by a person who has a substantial interest in the company, or by their relatives, is treated as income. The question, therefore, arises whether the enjoyment by the assessee of interest-free credit can be treated as a 'benefit or perquisite' within the meaning of Section 2(24)(iv) of the IT Act, 1961. The intention of the legislature seems to be very clear that the expressions 'benefit' and/or 'perquisite' did not include the enjoyment of loan or credit, free of interest or at a concessional rate. This aspect has been recognised by the statute itself and to bring such items in the net of taxation, the law was amended by the Taxation Laws (Amendment) Act, 1984. By this amendment, as already indicated, a new Sub-clause (vi) was inserted in Section 17(2) and, similarly, another Sub-clause (vi) was inserted in Clause (b) of Expln. 2 to Section 40A(5). The effect of these amendments, which were made effective from 1st April, 1985, was to ensure treatment and taxation as perquisite of the value of an amount calculated on a particular basis in a case where an employee receives loan for certain prescribed purposes either free of interest or at a rate which was lower than the specified rate. However, subsequently, the Finance Act, 1985, omitted the aforesaid amendments made by the Taxation Laws (Amendment) Act, 1984, with effect from the date of its insertion, namely, 1st April, 1985, with a view to provide relief to salaried taxpayers. The very fact that the statute had to be amended at the first instance to bring the said item within the purview of the expression 'perquisite' and it later sought to delete the same from the date of its insertion clearly shows that Parliament does not intend to treat interest-free loan or loan at a concessional rate as any benefit or perquisite granted or provided by the lender-company to the director or employee, as the case may be.
If the loan granted to an employee without charging any interest or by charging interest at a concessional rate amounts to a benefit for the purposes of Section 17(2)(iii) of the Act, there was no need for Parliament to introduce, by the Taxation Laws (Amendment) Act, 1984, the new Sub-clause (vi) in Section 17(2) of the Act. The subsequent omission of the said sub-clause by the Finance Act of 1985 with effect from the date of its proposed insertion was also made with a view to give relief to salaried taxpayers. It is to be noticed that Expln. 2(b) to Section 40A(5) of the Act defines a perquisite to mean, inter alia, any benefit or amenity granted or provided free of cost or at a concessional rate to the employee by the assessee. If the loan granted to an employee being a director or a person who has a substantial interest in the company or a relative of a director without charging of interest or at a concessional rate of interest constituted any benefit or amenity within the meaning of Section 40A(5), Expln. 2(b)(iii), there was no need for Parliament to introduce the amendment in Expln. 2(b) to Section 40A(5) of the Act by introducing Sub-clause (vi). Sub-clause (vi) which was introduced in Expln. 2(b) to Section 40A(5) of the Act included within the meaning of the expression 'perquisite' the amount treated as perquisite under Section 17(2)(vi) which also was introduced by the same Taxation Laws (Amendment) Act, 1984. In other words, a loan granted to an employee who is a director or who has a substantial interest in the company without charging any interest or at a concessional rate of interest did not amount to benefit or amenity falling within Clause (b)(iii) of Expln. 2 to Section 40A(5) of the Act. The amendment and the immediate deletion thereof manifest clearly the intention of Parliament.
It is, therefore, evident that, without a specific provision which was sought to be introduced by Sub-clause (vi) in Section 17(2) of the Act and also Sub-clause (vi) of Expln. 2(b) to Section 40A(5) of the Act, the grant of loan to the employee without charging any interest does not amount to any benefit for the purposes of Section 17(2) of the Act. The omission of Sub-clause (vi) in Section 17(2) and also Sub-clause (vi) of Expln. 2(b) to Section 40A(5) of the Act from the date of its proposed insertion also was to give relief to salaried taxpayers so that granting of loan to an employee without charging any interest would not be treated as benefit for the purposes of Section 17(2) of the Act.
Section 17(2) of the Act, by an inclusive definition, sought to include loans given by an employer to its employee for purchase of a building or site or a site with building or for purchase of a motor car without charging any interest or at a concessional rate, as perquisite. The word 'includes' is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. It is a cardinal rule of interpretation that if, by an inclusive definition, the meaning of the word is to be enlarged, it would receive a strict interpretation. It is also a cardinal rule of construction of a fiscal statute that, even if two views are possible, the view which is favourable to the assessee must be accepted while construing the provisions of a taxing statute. For the reasons aforesaid, the non-charging of interest on the amount overdrawn in the relevant year cannot be treated as a benefit for the purposes of Section 17(2)(iii) of the Act.
The question, however, remains as to whether the non-charging of interest will also fall within the purview of Section 2(24)(iv) of the Act. For the purposes of applying Section 2(24)(iv) of the Act, the same test as to what constitutes a benefit or a perquisite has to be applied.
If the loan granted to an employee or a director or a person who has a substantial interest in the. company without charging any interest or at a concessional rate of interest does not constitute any benefit for the purposes of Expln. 2(b)(iii) to Section 40A(5) or Section 17(2)(iii) of the Act, by the same yardstick, such loan cannot also be construed as benefit or a perquisite for the purposes of Section 2(24)(iv) of the Act.
In that view of the matter, we have no hesitation in holding that Section 2(24)(iv) cannot be pressed into service on the facts and in the circumstances of this case. Furthermore, even the findings of fact recorded by the Tribunal go to support the case of the assessee. The Tribunal has clearly recorded that there was nothing on record to show that Oberoi Hotels (India) (P) Ltd., the company, borrowed any money for making advances to the assessee and/or paid any interest on the overdrawn amount which, but for such payment, would have been paid by the assessee. In the absence of any finding that the company has paid any interest on the overdrawn amount which, but for such payment, would have been paid by the assessee, the amount cannot be treated as a benefit within the meaning of Section 2(24)(iv) of the Act.
The Tribunal has also recorded a finding of fact that there was a clear arrangement between the assessee and the said company not to charge interest on either side in terms of a resolution of the board of directors and that in the past, the assessee had substantial credit balances with the company on which the company never paid any interest to the assessee. In this background too, it cannot be said that the assessee derived any benefit by not paying any interest on the overdrawn amount in the two years under consideration. Where the company borrows funds on interest for the specific purpose of providing loans to its directors but does not charge, interest from them, or where the financial condition of the company is such that utilisation of the funds of the. company by its directors in the form of loan without payment of interest to the company will be detrimental to the interest of the company, in such cases, grant of interest-free loan to the directors may be regarded as a benefit provided by the company to its directors.
9. In the case of V.M. Salgaocai (supra), the Supreme Court quoted with approval the relevant observations of the Division Bench in P.R.S. Oberai (supra). The Supreme Court, put emphasis on the finding of the Tribunal that no evidence was produced by the Revenue to show that the borrowed funds were directly diverted for the benefit of the directors. According to the Supreme Court, the High Court was pot correct to go beyond such finding and the appeal of the assessee was accordingly allowed.
10. Following the aforesaid two decisions being P.RS. Oberoi (supra) and V.M. Salgaocai (supra), the learned Single Judge in Ishran Devi Oberai (supra), held that the benefit enjoyed by the petitioner by way of exemption from payment of interest of loan could not be termed to be an "income" under Section 2(24)(iv) and as such notice issued under Section 148 was not valid.
Our view
11. Under Section 2(24)(iv), "income" includes the value of any benefit or perquisite whether convertible into money or not, obtained from a company either by a director or a person, having substantial interest in the company or relative of a director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person. The aforesaid notices had been issued presumably to rope in the assessee under Section 2(24)(iv). The Division Bench held that the interest-free loan could not be said to be "income". Such finding was noted with approval by the Supreme Court. We do not find any scope of disagreement on that score. Hence, the impugned notices are liable to be quashed and set aside.
Order
12. Following the decisions in P.R.S. Oberoi (supra) so affirmed in V.M. Salgaocar (supra) and reiterated in Ishran Devi Oberai (supra), we allow the appeals and set aside the judgment and order of the learned Single Judge. The notices issued under Section 148 of the said Act of 1961 are quashed and set aside.
The appeals are disposed of accordingly without any order as to costs.
Tapas Kumar Giri, J.
13. I agree.