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2000(3) Supreme 442
SUPREME COURT OF INDIA
(From Karnataka High Court)
D.P. Wadhwa & S.S. Mohammed Quadri, JJ.
V.M. Salgaocar & Bros. Pvt. Ltd. etc. -Appellant
versus
Commissioner of Income Tax etc. -Respondent
Civil Appeal No. 657 of 1994
With
Civil Appeal Nos. 4012-13 of 1998
Decided on 10-4-2000
Counsel for the Parties :
For the Appearing Parties : G. Saramajan, Mukul Mudgal, Ms. Shobha, S.K. Mehta, Dhruv Mehta, Ranbir Chandra, K.C. Kaushik, Ms. Sushma Suri, S.K. Dwivedi, Advocates.
Different considerations apply when a special leave petition under Article 136 of the Constitution is simply dismissed by saying dismissed and an appeal provided under Article 133 is dismissed also with the words the appeal is dismissed . In the former case it has been laid by this Court that when special leave petition is dismissed this Court does not comment on the correctness or otherwise of the order from which leave to appeal is sought. But what the court means is that it does not consider it to be a fit case for exercise of its jurisdiction under Article 136 of the 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 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. (Para 8)
(ii) Income Tax Act, 1961-Section 40A(5) read with Section 17(2)-Business disallowance-Perquisite or benefits etc. to employees and Directors-Assessment year 1979-80-Directors withdrew money from Company-Company did not charge interest on debit balance-Company borrowed money at 15 interest-ITO made addition of amount relateable to interest on debit balance of Directors-Tribunal finding that there was no evidence to show borrowed funds were diverted for benefit of Directors deleted addition-High Court, however held that ITO was correct in his decision-Held, in the light of amendment to Sections 40A(5) and 17(2) in 1984 and subsequent repeal of Section 40A(5) in 1985 Tribunal was correct in deleting addition.
The Income-tax Officer had disallowed a sum of Rs.5,21,241/- being 15 per cent of the amount standing to the debit of the directors in the books of the assessee company by applying the provisions of Section 4DA(5) and Section 17(2) of the Act. The Income-tax Officer found that the assessee, which was a company, was borrowing large sums by paying interest @ 15 per cent per annum. This interest was claimed by the assessee as deductible expenditure, Income-tax Officer found that the directors of the assessee company were drawing amount from the company without paying interest. He, therefore, held that when the company borrowed 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 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 the additions made by the Income-tax Officer. Appellate 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 the difference in interest between the prescribed rate and that charged by an employer to the employee should be treated as perquisite. The stand of the Revenue was that as long as there was a benefit whether direct or indirect the provisions of Section 40A(5) were attracted. The High Court, however, upheld the stand of the Revenue.
Held : Taxation Laws Amendment Act, 1984 which amended Sections 17(2) 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 40A(5) before insertion of clause (vi). The circulars of CBDT were also provides as to how Revenue itself understood the effect of the amendments and what was the law before the Amending Act, 1984. High Court in 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. The provisions of the Amendment Act, 1984 and that of Finance Act, 1985 while interpreting the provisions of Section 17(2) and 40A(5) of the Act. 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 monies. High Court said that ordinarily the funds borrowed by a company would fall within the hotchpot and intermingle with its own funds. High Court appears to have gone beyond the finding of the Appellate Tribunal which was not permissible. Therefore, 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 would not constitute a perquisite and Tribunal is right in law in deleting addition of Rs. 5,21,241 made by the Income Tax Officer under Section 40A(5). (Para 24)
JUDGMENT
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 ITR738) delivered on Reference made to it by the Income Tax Appellate Tribunal ( Appellate Tribunal for short) under Section 256(2) of the Income Tax, 1961 (for short, the Act ) Reference was at the instance of Revenue. Following questions arose for the determination of the High Court :
(1) Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in law in deleting addition of Rs.5,21,241 made by the Income Tax Officer under Section 40A(5) and sustained 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 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-taxOfficer had disallowed a sum of Rs. 5,21,241/- being 15 per cent of the amount standing to the debit of the directors in the books of the assessee company by applying the provisions of Section 4DA(5) and Section 17(2) of the Act. The Income-tax Officer found that the assessee, which was a company, was borrowing large sums by paying interest @ 15 per cent per annum. This interest was claimed by the assessee as deductible expenditure, Income-tax Officer found that the directors of the assessee company were drawing amount from the company without paying interest. He, therefore, held that when the company borrowed 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 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 the additions made by the Income-tax Officer. Appellate 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 the difference in interest between the prescribed rate and that charged by an employer to the employee should be treated as perquisite. The stand of the Revenue was that as long as there was a benefit whether direct or indirect the provisions of Section 40A(5) were attracted. High Court in coming to its decision relied on two cases of the Madras High Court in Commissioner of Income Tax v. C. Kulandaivelu Konar1 and Addl. Commissioner of Income Tax v. Late A.K. Lakshmi2. Appellate Tribunal had also observed that non-charging of interest on the debit balance in running account of the directors would not constitute perquisite and that if such a general proposition is accepted, the disallowance under Section 40A(5) would be on par with the disallowance under Section 36(1)(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.
2. In Civil Appeal Nos. 4012-13 of 1998 it is the revenue which is aggrieved. For the Assessment Years 1980-81 and 1981-82 in the case of the respondent Sri Shivanand V. Salgaocar, a director of M/s.
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