Non-charging of interest on the debit balances in the running accounts did not constitute a perquisite under section 40A(5) of the Income Tax Act.

S.P. Bharucha, C.J.—This is a reference under section 256(2) of the Income Tax Act, 1961, made at the instance of the Revenue. The following questions arise for determination :

"(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 ?"

2. The assessee is a limited company. The assessment year with which we are concerned is the assessment year 1979-80. The assessee had borrowed moneys and was paying interest thereon at the rate of fifteen per cent. per annum. The amount of the interest that was paid was claimed as deduction in the computation of the assessee's income under section 36 of the Income Tax Act, 1961. The Income Tax Officer disallowed there from the sum of Rs. 5,21,241, being fifteen per cent. of the aggregate of the amount standing to the debit of its directors in its books, because the directors had not been made liable by the company to pay interest on such amounts. The Income Tax Officer held that the directors had thereby obtained a benefit and a perquisite. The assessment order was upheld by the Commissioner of Income Tax (Appeals), The assessee appealed to the Income Tax Appellate Tribunal said that the Revenue had not led any evidence to show that the funds borrowed by the assessee were directly diverted for the benefit of the directors. It therefore, found it difficult to hold that the non-charging of interest on the debit balances in the running accounts of the directors with the assessee were perquisites to the directors. The Tribunal also referred to an amendments brought about by the Taxation Laws (Amendment) Act, 1984, and held :

"... In fact, the amendment brought by the Taxation Laws (Amendment) Act, 1984, specifically directs that 'perquisite' is to be calculated on the difference in interest rate between the actual borrowing and that levied by the Government on the advance to its employees. This itself shows that but for the provision such charging of interest at differential rates cannot be considered as a perquisite. Having regard to these facts, we delete the addition of Rs. 5,21,241 made by the Income Tax Officer and sustained by the Commissioner (Appeals)."

3. Section 40A applies, not withstanding anything to the contrary contained in any other provision of the Act, to the computation of income under the head "Profits and gains of business or profession". The relevant sub-section thereof is sub-section (5) (a) (ii). The provision, so far as it is relevant for our purpose, would read thus : Where the assessee incurs any expenditure which results, directly or indirectly, in the provision of any perquisite (whether convertible into money or not) to an employee, then so much of such expenditure as is in excess of the limit specified in respect of clause (c) of sub-section (5) shall not be allowed as a deduction. For the purposes of sub-section (5), "perquisite" is defined in Explanation 2(b) (iii) to mean any benefit or amenity granted or provided free of cost or at concessional rate to the employees by the assessee.

4. It was submitted on behalf of the Revenue that, in granting to its directors advances upon which no interest had been charged, the assessee had granted to the directors benefits and, therefore, perquisite. To the extent of the interest paid on the sum of the aggregate of such perquisite, it had incurred a expenditure. The deduction of the interest paid by the assessee on borrowings would have to stand reduced by the amount of such expenditure by reason of the provisions aforementioned

5. Counsel for the Revenue drew our attention to the judgment o