Facts

Assessee company had advanced interest free loans to its employee directors where the Revenue was alleging use of interest bearing borrowed funds for giving the loan. According to the Revenue, this resulted in a taxable perquisite in the hands of the director under section 17(2) of the Income-tax Act and also invoked the then section 40A(5) of the said Act enabling disallowance of remunerationpaid to the employees in excess of the specified limits. The said proceedings related to AY 1979-80 wherein the AO’s stand had been confirmed by the High Court. Subsequent thereto, since in the cases of P. Krishna Murthy v. CIT (1997) 224 ITR 183 and CIT v.M. K.  Vaidya  (1997) 224 ITR 186 a  view was taken  that no benefit or perquisite arises, the reference application for AY 1980-81 was decided in favour of the Assessee by the High Court. Appeal filed by the Revenue from the said order based on a certificate grantedby the High Court under section 261 of the Act had been dismissed stating “the appeal is dismissed”. The relevant proceedings before the Supreme Court related to AY 1979-80.

 

Issue I

Whether granting of an interest free loan or a loan at concessional rate of interest would give rise to benefit or perquisite in the hands of the employee.

 

Views I

Court has referred to the fact that sections 17(2) and 40A were amended by the Taxation Laws (Amendment) Act, 1984 with effect from 01.04.1985 to  include the difference in the rate of interest as a benefit or  perquisite based on  the  rate of interest as notified by the Central Government to be  charged by it from      its employees on similar loans. This amendment was omitted by the Finance Act, 1985 with effect from 01.04.1985. Therefore, it stood omitted from the  date on which it was to  become effective. Referring to  this legislative history,  the Court has held that an amending provision can certainly give guidance for interpretation of an existing provision and concluded that subsequent omission     of the amendment brought in to make the benefit or perquisite arising from an interest free loan or loan given at a  concessional rate of  interest would show  that the Parliament never intended the same to beotherwise treated as a taxable

 

 

benefit or perquisite. At another place, the cardinal rule of construction of a fiscal statute has been emphasized that, even if two views are possible, the view which favours the assessee must be accepted. With respect to section 40A(5), the Court has also approved the conclusion reached by the Andhra Pradesh High Court in CIT v. Vazir Sultan Tobacco  Co. Ltd (1998) 173 ITR 290(AP) (HC) and  the Calcutta High Court in CIT v. P.  R. S. Oberoi (1990) 183 ITR 103 (Cal) (HC)  and Indian Oxygen Ltd. v. CIT (1994) 210 ITR 274 (Cal) (HC) that disallowance could be made of an expenditure incurred by the assessee which it claims as a deduction and no deduction of expenditure had been claimed by the employer in this regard. It has also rejected Revenue’s submission that if the money was not  lent to the employee it would have been placed on a fixed deposit or invested in some other profitable manner as importing a fiction into the section which cannot   be permitted.

 

Held I

Granting of a interest free loan or a loan at concessional rate of interest by an employer to its employee does not result is a taxable benefit or perquisite unless specifically so provided.

 

Issue II

In what circumstances the High Court Order will merge with that of the Supreme Court.

 

Views II

Referring to the distinction between a special leave petition under article 136 of   the Constitution and an appeal provided in article 133 thereof, the Court has held that when a special leave petition is dismissed the Court does not comment on    the correctness or otherwise of the order from which leave to appeal is sought.       It means that the Court does not consider it to be a fit case for exercise ofjurisdiction. Whereas, when an appeal under article 133 is dismissed, though by     a non speaking order, the doctrine of merger applies. In such a case the Supreme Court upholds the decision of the High Court or Tribunal from which the appeal arose. Based thereon, the Court has held that dismissal of the appeal for    AY 1980-81 should be binding on them, in  the  present proceedings relating to AY1979-80.

 

Held II

Doctrine or merger would apply to dismissal of an appeal filed before the Supreme Court under article 133 of the Constitution but not to a simplicitor

 

 

dismissal of a special leave petition filed under article 136 thereof. (AY. 1979-80) (CA Nos. 657 of 1994 and 4012-13 of 1998 dt. 10-4-2000)

Editorial: For the principle on doctrine of merger, reference may also be made to

Kunhayammed & Others v. State of Kerala 245 ITR 360 (SC) and Principal CIT v.Maruti Suzuki India Ltd. 416 ITR 613. It also requires consideration, whether this judgment could be relied upon as a precedent for non-chargeability of savings in costs as income.

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– Mahatma Gandhi