Holding

In the absence of proof that the borrowed funds were diverted for the directors’ benefit, the interest not charged cannot be treated as a perquisite, and the High Court cannot overrule the Appellate Tribunal’s finding.

Summary

The Supreme Court examined whether interest not charged by a company on loans advanced to its directors could be treated as a perquisite under Sections 17(2) and 40A(5) of the Income‑Tax Act. The Income‑Tax Officer had disallowed a sum equal to 15% of the directors' debit balances, but the Appellate Tribunal held that no evidence showed the borrowed funds were diverted for the directors' benefit, and therefore the amount could not be treated as a perquisite. The High Court later attempted to go beyond the Tribunal’s finding, but the Supreme Court held that it could not do so and must respect the Tribunal’s finding. The Court also considered the Taxation Laws (Amendment) Act, 1984 and its repeal by the Finance Act, 1985, holding that the amendment must be given effect in interpreting the provisions and cannot be brushed aside. Finally, the Court clarified the doctrine of merger applicable when an appeal under Article 133 is dismissed, distinguishing it from a dismissal under Article 136. The appeals of the assessee were allowed and the revenue’s appeals dismissed.

Issues considered

Whether the Appellate Tribunal was correct in deleting the addition under Section 40A(5) for interest not charged on loans to directors.
Whether non‑charging of interest on directors' loans constitutes a perquisite under Sections 17(2) and 40A(5).
Whether the High Court could go beyond the Tribunal’s finding that no evidence showed the funds were diverted for the directors’ benefit.
How the Taxation Laws (Amendment) Act, 1984 and its repeal by the Finance Act, 1985 should be interpreted in relation to Sections 17(2) and 40A(5).
Effect of dismissal of appeals under Article 133 versus Article 136 – doctrine of merger.

Legislation cited

Constitution of Indias. Article 133, s. Article 136, s. Article 141
Income Tax Act, 1961s. 17(2), s. 40A(5)

Subjects

interest‑free loanperquisiteSection 17(2)Section 40A(5)Taxation Laws Amendment Act 1984Finance Act 1985doctrine of mergerArticle 133Article 136Income‑Tax deductiondirectors' loans

Judgment

V.M. SALGAOCAR AND BROS. PVT. LTD. ETC. ETC. A
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 company-
Company 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.
D
Interpretation of Statutes-Taxation Laws (Amendment) Act, I984-
Amendment to Section 17(2) and 40A( 5)-Introduced with effect from I .4. I 985-
Later on omitted with effect from the date of insenion-Held, cannot be brushed
aside while interpreting the parlicular provisions-Constitution of India-
Article 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. E

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 %
F
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) G
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 perqui-
H
l l 69
1170 SUPREME COURT REPORTS [2000] 2 S.C.R.
A 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.

On a reference, the High Court relying on the Judgment of Madras
B
High Court, held in favour of the Revenue and against the Assessee Com-
pany.

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
c 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 Assessee-
-
Director for the earlier year held that it could not be treated as a perqui-
site. On appeal by Revenue before the Tribunal, the order of CIT (Ap-
D peals) 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
E 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.
F
Allowing the Appeals by assessee and dismissing the appeals filed by
Revenue this Court

G
HELD : 1. Different considerations apply when a special leave peti-
tion 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
H to be a fit case for exercise of its jurisdiction under Article 136 of the
V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.I.T. 1171
Constitution. That certainly could not be so when appeal is dismissed A
~
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
B
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 subse-
quent repeal by the Finance Act, 1985 is significant. By the 1984 Amend-
ment Act, Parliament wanted to carve out a particular exception from D
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 amend-
ments and what was the law before the Amending Act, 1984. High Court in
E
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 F
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
G
provisions of the Act, is not correct. An amending provision can certainly
give guidance to interpretation of the existing provisions. The•Judgments
,..-
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 H
1172 SUPREME COURT REPORTS [2000] 2 S.CR.
A 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]
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
c 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 inter-
D mingle 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

E
the amendment by the Taxation Laws (Amendment) Act, 1984 and its
repeal by the Finance Act, 1985 and the circulars of the CBDT the ques-
tions are decided in favour of the assessee. [1193-C]
-
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
F 274, referred to.

CITv. P.R.S. Oberai, (1990) 183ITR103, approved.

Addi. Commr. ofIncome Tax v. Late A.K. Lakshmi, (1978) 113 ITR 368,
G distinguished.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 657 of 1994
Etc.

From the Judgment and Order dated 7 .2.92 of the Karnataka High
H Court in l.T.R.C. No. 20 of 19'89.
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, A
~
Ranbir Chandra, K.C. Kausbik, Ms. Sushma Suri and S.K. Dwivedi for the
appearing parties.

The Judgment of the Court was delivered by
B
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
'Act'). Reference was at the instance of Revenue. Following questions arose
c
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 D
by the Commissioner of Income tax (Appeals)?

(2) Whether on the facts and in the circumstances of the case, the
Appellate Tribunal is right in law in holding that non-charging of
~
interest on the debit balance in the running account of the directors E
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
assessment year 1979-80, the Income-tax Officer had disallowed asum of Rs.
F
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
~
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 G
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 H
1174 SUPREME COURT REPORTS (2000] 2 S.C.R.
A 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
B 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
(Amendment) Act, 1984 for the first time provided that tlie difference in
c 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.
D 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
E 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
F
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
G 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?"

H High Court answered the question so refeR"ed in the aftirrnative in
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 observ- A
. ations:

"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,
B
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 : c
"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. D
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 E
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 F
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." G
"
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.

Assessee Shivanand V. Salgaocar was a director of Mis V.M. Salgaocar
Brothers Pvt. Ltd. During the assessment years in question the company H
1176 SUPREME COURT REPORTS [2000] 2 S.C.R.
A advanced certain sums to the assessee without charging any interest thereon.
Income-tax Officer held that non-charging of interest on the debit balance _ ._
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 -
B 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
assessee and deleted the addition made by the Income-tax Officer. Revenue
c 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
D 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
E
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
F 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
G 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
H at that relevant time could have no application uni~ the assessee had
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 A
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 B
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, c
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)?
D
(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?

(3) Whether on the facts and in the circumstances of the case, the E
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?"
F
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 G
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 H
1178 SUPREME COURT REPORTS [2000] 2 S.C.R.
A "The appeal is dismissed".

(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
B 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

c
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
D 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.
E
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
F 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
G 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

H
(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.
--
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, A
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
B
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 "perqui-
site" for the purposes of the said section to include the perquisite value c
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
D
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 E
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
F
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 G
(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 -
"(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
appeal is provided under clause (3) of Article 133. This doctrine of merger
B
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
is summarily dismissed under Article 136 of the Constitution, by
D 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
dismissal must, by necessary implication, be taken to be that the
F Supreme Court had decided only that it was not a fit case where
special leave petition should be granted. in Union ofIndia 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

of th.:: Constitution."
H
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 B
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
c
ending on 31st March, 1963, there was an overdrawal to the extent of about
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
E
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 F
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
G
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 H
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 :

"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
B 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 sub-
c clauses (a), (b) or (c). It is said that the sub-clause applicable is sub-
clause (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 sub-
-
clause (a) would apply."

D 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
E 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
F 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
G 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
H 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.]
governing the matter, a matter of agreement between the lender and
1183

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
A

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
B
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 c
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 D
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 legiti-
mate business needs of the company. In the case of the assessee the Income-
tax 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 E
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
F
(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 G
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 H
1184 SUPREME COURT REPORTS [2000] 2 S.C.R.
A 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
B
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 :
c
"40A(5)(a) Where the assessee -

(i) incurs any expenditure which results directly or indi-
rectly in the payment of any salary to an employee or a former
employee, or
D
(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 indi-
rectly any expenditure or is entitled to any allowance in respect
E 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 speci-
F fied 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
H 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 afiction into sub-section (5) of section
A

40A of the Act. We must assume that this money, if not lent to the
employees, would have been put in a fixed deposit or would have
been invested in some other profitable manner and then say that the
difference amount should be disallowed. We do not think that the B
language of sub-section (5) of Section 40A of the Act provides for
or permits such a course. Sub-section (5) applies where an assessee
claims a certain deduction saying that he has spent that money in
providing, directly or indirectly, either as salary to an employee or in
the provision of perquisite to an employee. Only then do the ceilings
prescribed in the said sub-section come into play. It is true that in c
some cases this facility may be abused. We know public corporations
like banks lending money to their own employees at practically no
interest, say for example, one or two per cent, interest per annum,
whereas those very banks lend to people at rates of interest ranging
from 13% to 19% per annum. But the remedy for that must lie D
elsewhere, either in the proper control of the public corporations or
in the amendment of the Income-tax Act, as the case may be. As
the provision of law of section 40A(5) of the Act now stands, it is
. not possib.le to answer the said question in the manner suggested by
the Department. Accordingly, we answer question in the affirmative, E
i.e., in favour of the assessee and against the Revenue."

In C/Tv. P.R.S. Oberoi, (1990) 183 ITR 103 (Cal.) the question before
the court was whether the Appellate Tribunal was justified in deleting certain
amounts from the total income of the assessee on the ground that the

- provisions of Section 2(24)(iv) of the Act were not attracted. In this case the
assessee was a director of the Hotel Oberoi, a private limited company. He
F

was maintaining running account with the company. During the assessment
years in question the Income-tax Officer found that the assessee had over-
. ...:'''
drawn amounts over lakhs of rupees from his· account in the company.
Income-tax Officer further found that the company did not charge any interest G
on the overdrawn amounts from the assessee. He, therefore, held that the
assessee got a benefit from the company in the shape of getting funds without
any obligation to pay interest thereon and as the assessee was a director of
the company he invoked the provisions of Section 2(24)(iv) of the Act and
calculated certain sums as the value of the aforesaid benefit being interest H
1186 SUPREME COURT REPORTS [2000] 2 S.C.R.
A calculated @ 12% per annum on .the overdrawn amounts. Income-tax Officer,
therefore, taxed the aforesaid sums under the head "other sources". Appellate
·--
Tribunal found that there was nothing to show that the company borrowed
any money for making advance to the assessee and/or paid any interest on
the overdrawn amount which, but for such payment, would have been paid
by the assessee. The Tribunal also found that there was arrangement between
B
the assessee and the said company not to charge interest on either side in
terms of 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 interest to the assessee. It was therefore, held by the High Court
t11at the interest free loans obtained by the assessee from the company were
c not benefits or perquisites within the meaning of Section 2(24)(iv) of fue Act.
High Court noticed t11e amendments made by fue 1984 Amendment by
insertion of sub-clause (vi) in Section 17(2) and its omission by fue Finance
Act, 1985. Section 2(24)(iv), which has been invoked in this case also used
the expression "the value of any benefit or perquisite" which corresponds to
D t11e expression "the value of any benefit or amenity" appearing in t11e
definition of "perquisite" as contained in Section 17(2)(iii). Section 40A(5),
Explanation 2(b) also seeks to include within the expression "perquisite" the
value of any benefit or amenity granted or provided free of cost or at a
concessional rate to t11e employee by the assessee. High Court, fuerefore, said
E that fue grant of loan without charging any interest could not be considered
as a benefit or a perquisite within the meaning of Section 2(24)(iv) of the Act.

In Indian Oxygen Ltd. v. CIT, (1994) 210 ITR 274 (Cal.) following its
earlier decision in C!Tv. P.R.S. Oberoi, (1990) 183 ITR 103 it was held that
fue grant of interest-free loans by the assessee to its employees did not amount
F to perquisite, benefit or amenity whet11er for the purposes of Section 17(2)
and/or Section 40A(5) of fue Act. The question before fue court was whether
notional interest calculated on interest-free loans granted by the assessee
-
company to its employee could be taken as perquisites for the purposes of
disallowance under Section 40A(5) of the Act. High Court said that the
G Section was admittedly applicable only where the assessee incurred expendi-
ture which resulted directly or .indirectly in the payment of any salary or in
tlle provisions of any perquisite (whetller convertible into money or not) to
its employees. It was nobody's case tllat in providing interest-free loans by
tlie assessee to its employees any expenditure bad been incurred by tlie
H assessee-company.
V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.I.T. [D.P. WADHWA, J.] 1187
High Court in its judgment, which was impugned in Civil Appeal No. A
424 of 1999 had relied upon the decision of its own High Court in the case
of Commissioner of Income Tax v. M.K. Vaidya, (1997) 224 ITR 186 (Kar.)
and in P. Krishna Murthy v. Commissioner of Income Tax & Am:, (1997) 224
ITR 183 (Kar.). In the case of M.K Vaidya High Court sought to distinguish
the judgment now impugned before us in Civil Appeal No. 657 of 1994 B
(Commissioner of Income Tax v. V.M. Salgaocar and Brothers Pvt. Ltd.,
(1992) 198 ITR 738 stating that that decision had no bearing on the facts of
the case before it because the Bench was concerned with Sections 36 and
40A(5) of the Act and it was a case where having borrowed large sums of
moneys by paying interest at the rate of 15% per annum a part was obviously
drawn by the directors without compensating the assessee-company, without C
paying any interest and the Bench in that case was not concerned with Section
17(2). High Court then said :

"On the facts of the said case, where the company borrowed large
sums of money by paying interest at 15 per cent and claiming it to
be deductible expenditure, it will be too much of a generosity to say D
that the company could at the same time advance to its directors
monies without collecting any interest from them. The observations
of the Bench whi!e construing section 40A(5) in the said case were
in the context of the facts of the said case."
E
We are of the view that distinction was not correctly drawn. Amend-
ment made 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. Moreover, High Court
in the impugned judgment did not consider the amendments made by the
Amending Act, 1984 on the ground "it is difficult to see how this amendment F
can have any bearing upon the interpretation on the then existing provisions
of the Act". We do not think this approach was also correct. An amending
provision can certainly give guidance to interpretation of the existing
provisions. The judgments of the Madras High Court, which were relied
upon by the High Court in the impugned judgment were for the period prior G
to the 1984 amendment and the Madras High Court had no occasion to
consider the impact of the amendments to Section 17(2) and Section 40A(5)
of the Act.

In Commissioner of Income Tax v. M.K Vaidya,(1991) 224 ITR 188,
the question before the High Court was : "Whether on the facts and in the H
1188 SUPREME COURT REPORTS (2000] 2 S.C.R.
A circumstances of the case, the Appellate Tribunal is right in law in rejecting
the Revenue's ground that the difference in interest rate between Government
loans and that on the loan obtained by the assessee should be treated as
perquisite?" High Court answered the question in affirmative in favour of the
assessee. High Court said that it was never intended to treat the interest free
......
loan advance for house building purposes as a "perquisite" under Section
B
17(2)(iii). In this case the assessee was an employee of the company which
advanced him certain amounts as loan free of interest for the purpose of house
building. In the course of assessment proceedings of the assessee, the
Assessing Officer held that the interest free loan was a benefit which should
be valued as a "perquisite" under Section 17(2). Revenue contended that the
c interest free loan was a benefit which should be treated as a perquisite under
Section 17(2)(iii) and for the purpose of computation, Rule 3(2) was attracted
and the principle underlying clause (vi) as inserted in Section 17(2) by the
Taxation Laws Amendment Act, 1984 could be looked at for the purpose.
Section 17(2)(iii) reads as under :
D " 'perquisite' includes -

(iii) the value of any benefit or amenity granted or provided free of
cost or at concessional rate in any of the following cases -

E (a) by a company to an employee who is a director thereof;

.(b) by a company to an employee being a person who has a
substantial interest in the company;

(c) by any empfoyer (including a company) to an employee to
F whom the provisions of paragraphs (a) and (b) of this sub-clause
do not apply and whose income under the head 'Salaries',
(whether due from or paid or allowed by, one or more employ-
ers), exclusive of the value of all benefits or amenities not
provided for by way of monetary payment, exceeds eighteen
thousand rupees."
'G
While clauses (a) and (b) cover the special cases of those employed by
a company, clause (c) covers all categories of employees (Governmental and
non-Governmental), including other categories of company employees, pro-
vided their salaried income is above Rs. 18,000. There is no income limit to
H attract the persons covered by clauses (a) and (b).
V.M. SALGAOCAR AND BROS. PVT. LTD. v. C.I.T. [D.P. WADHWA, J.] 1189
In the case of clause (c), those whose annual income under the head A
----...: "Salaries" (as stated therein) is below Rs. 18,000 are not covered. High Court
after referring to clause (vi) as inserted in Section 17(2) by the 1984
Amendment Act, its omission by the Finance Act, 1985 and the two circulars
of the CBDT, said that two inferences are inevitable : (1) In the year 1984,
while enacting the Taxation Laws (Amendment) Act, 1984, Parliament thought
B
that section 17(2)(iii) did not cover the cases of loans granted to employees
for house building purposes. (2) Clause (vi), which was inserted, was omitted
·.again to grant tax relief to the salaried taxpayers. In other words, salaried
taxpayers were not to be burdened with the tax by including the value of the
interest free loan or loan at a concessional rate of interest granted for house
building purposes, to an employee, by his employer. c
In P. Krishna Murthy v. Commissioner ofIncome Tax & Am; (1997) 224
ITR 183 (Kar.) the assessee challenged refusal of the Assessing Authority to
grant him exemption from computing taxation income of a certain amount
being given as interest subsidy. The company of which the assessee was an
employee reimbursed the assessee the interest paid on loan taken by him for D
building purposes. High Court following its earlier decision in M.K. Vaidya's
case (1997) 224 ITR 186 held that the order of the Assessing Authority
insofar as it related to the inclusion of interest subsidy amount as taxable
income of the assessee was wrong and the High Court set aside the same.
--...., High Court noticed that the Division Bench in the earlier case had held that E
the legislature never intended to treat the interest as "perquisite" under
Section 17(2)(iii) of the Act.

We quote with approval the following passage from the judgment of the
Calcutta High Court in P.R.S. Oberoi's case (183 ITR 103) :
F
"It would, therefore, appear that if the loan granted to an employee
without charging any interest or by charging interest at a concessional
rate amounted to a benefit for the pUipOses 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 omission of the said clause by the Finance Act,
G
1985 with effect from the date of its insertion, namely, April l, 1985,
' _, was also made with a view to give relief to salaried taxpayers.
Similarly, it would appear that there was no need for Parliament to
--,-
initially amend Section 40A(5) to provide that the amount of interest
referred to in item (a) or item (b), as the case may be, in sub-clause H
1190 SUPREME COURT REPORTS [2000) 2 S.C.R.
A (vi) in Section 17(2) of the Income-tax Act shall be regarded as a
"perquisite" provided by the employer to his employee and, thereaf-
-;;--...
ter, to omit the aforesaid provision with effect from the date of its

B
insertion by the Finance Act, 1985. It would also appear 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 Explanation
2((b) to Section 40A(5) of the Act, the grant of loan to the employee
-
without charging any interest did not amount to any perql,li.site or
benefit for the purposes of section 17(2) and/or section 40A(5) of the
Act

c The intention of the Legislature seems to be very clear that the _..,______
expression "benefit" and/or "perquisite" did not include the enjoy-
ment 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
D (Amendment) Act, 1984. By this amendment, as already indicated, a
new sub-clause (vi) was inrersted in Section 17(2) and, similarly,
another sub-clause (vi) was inserted in clause (b) of Explanation 2 to
Section 40A(5). The effect of these amendments, which were made
effective from April 1, 1985, was to ensure treatment and taxation as
perquisite of the value of an amount calculated on a particular basis
E
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, April 1,
F 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 ~

G 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. ,
r-
If the loan granted to an employee without charging any interest
'---.--
or by charging interest at a concessional rate amounts to a benefit for
H
V.M. SALGAOCAR AND BROS. PVT. LT:J. v. C.I.T. [D.P. WADHWA, J.] 1191

- the purposes of Section 17(2)(iii) of the Act, there was no need for
Parliament to introduce, by the Taxation Laws (Amendment Act,
A

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 tax-payers. It is to be noticed
B
that Explanation 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 or interest or at a concessional rate of interest constituted any c
benefit or amenity within the meaning of Section 40A(5), Explanation
2(b)(iii), there was no need for Parliament to introduce the amend-
ment in Explanation 2(b) of Section 40A(5) of Act by introducing
sub-clause (vi). Sub-clause (vi) which was introduced in Explanation
2(b) of section 40A(5) of the Act included within the meaning of the D
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 grarited 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 E
interest did not amount to a benefit or amenity falling within clause
(b)(iii) of Explanation 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 F
was sought to be introduced by sub-clause (vi) in Section 17(2) of
the Act and also the sub-clause (vi) of Explanation 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 G
'\
also sub-clause (vi) of Explanation 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. H
1192 SUPREME COURT REPORTS [2000] 2 S.C.R.
A 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 a 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
B
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 cardinal rule a construction of a fiscal statute that, even if two
views are possible, the view which is favourable to the assessee
c 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."

Taxation Laws Amendment Act, 1984 which amended Sections 17(2)
D and 40A(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 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
E 40A(5) before insertion of clause (vi). The circulars of CBDT were also
provided as to how Revenue itself understood the effect of the amendments
and what was the law before the Amending Act, 1984. High Court in the
impugned judgment could not have brushed aside the consideration of th~
Amending Act, 1984 and its subsequent repeal by the Finance Act, 1985 by
terming them of 0:0 consequence. High Court of Karnataka in the case of
F
Commissioner of Income Tax v. M.K. Vaidya, (1997) 224 ITR 186 and the
Calcutta High Court in the case of P. Kris/ma Murthy v. Commissioner of
Income Tax & Am:, (1997) 224 ITR 183 have correctly understood and
applied the provisions of the Amendment Act, 1984 and that of Finance Act,
19.85 while interpreting the provisions of Section 17(2) and 40A(5) of the Act.
G As noted above, the Appellate Tribunal in CA No. 657 of 1994 held that there
was no evidence presented by the Revenue to show that the borrowed funds
were directly diverted for the benefit of the Directors. This finding of the
Appellate Tribunal did not find favour with the High Court which said that
it would be well-nigh impossible to expect proof from the Revenue that the
monies that were advanced to directors were monies that were borrowed
H
V.M. SALGAOCAR AND BROS. PVT. L.TD. v. C.I.T. [D.P. WADHWA, J.] 1193
monies. High Court said that ordinarily the funds borrowed by a company A
would fall within the hotchpot and intermingle with its own funds. High Court
appears to have gone beyond the finding gf the Appellate Tribunal which was
not permissible. In the later cases, Karnataka High Court itself relied on the
provisions pf the Ainendment Act, 1984 and its repeal by the Finance Act,
.1985 tointerpret the provisions of Sections 17(2) and 40A(5). Distinguishing
B
features which the High Court in the case of Commissioner of Income Tax v.
M.K. Vaidya, (1997) 224 ITR 186 pointed out with reference to the impugned
judgment (1992) 198 ITR 738 appear to us to be rather obscure. Interpretation
of law has to be uniform.

Thus having regard to the dismissal of the appeal of the revenue in c
Civil Appeal No. 424 of 1999 and state of law as interpreted by us,
particularly, keeping in view the amendment by the-Taxation Laws (Amend-
ment) Act, 1984 and its repeal by the Finance Act, 1985 and the circulars of
the CBDT we answer the questions in affirmative, i.e., in favour of the
assessee.
D
Accordingly Civil Appeal No. 657of1994 is allowed and Civil Appeal
Nos. 4012-13 of 1998 dismissed. There shall, however, be no order as to
costs.

V.M. C.A. No. 657/94 allowed and
C.A. Nos. 4012-13/98 dismissed. E