Income Tax Act, 1961, Section 2(24)(iv)

Income---Benefit or perquisite under section 2(24)(iv)---Notional interest on loan taken by assessee from a company in which he was serving as director

Conclusion: Non-charging of interest on loan amount advanced by lending company to its director, i.e., the assessee, did not constitute a perquisite as director was neither an employee in the lending company nor any interest expenditure was there in its profit and loss account.

Assessee being a director in M/s. M Ltd. had taken interest free loan from the said company. AO held that had an interest at the rate of 15 per cent, been charged, then assessee would be required to pay a sum of Rs. 47 lakhs. By not charging interest from the assessee, the company had extended undue benefits which had to be construed as perquisite in the hands of assessee under section 2(24)(iv). Held: AO had not brought on record that the assessee  was an employee in the lending  company. Even no remuneration or salary in the capacity of the director had been drawn by the assessee. Being director, he could not be held to be an employee of the lending company. Moreover he was not having substantial interest in the lending company. AO had also not brought anything on record to say that the aforesaid companies have paid any sum of money which was by way of obligation payable by the assessee. There was no fresh loan taken during the year under consideration but it was the loans taken in the preceding years. No interest was charged in earlier year nor any perquisite value was assessed. Moreover, lending the company did not have any interest expenditure in its profit and loss account therefore, there was no obligation of the assessee in respect of any interest was paid by the lending company on behalf of assessee. Hence, non-charging of interest on the loan amount did not constitute a perquisite.

Decision: In assessee’s favour.

 

IN THE ITAT, AHMEDABAD 'A' BENCH

RAJPAL YADAV, J.M. & AMARJIT SINGH, A.M.

Dy. CIT v. Shekhar G. Patel

ITA No. 2314/Ahd/2016

C.O. No. 164/Ahd/2016

A.Y. 2008-09

21 February, 2019

Department by: S.K. Deo, Senior Departmental Representative

Assessee by: Nupur Shah, Authorised Representative

ORDER

Rajpal Yadav, J.M.

The Revenue is in appeal before the Tribunal against the order of the learned Commissioner (Appeals)-2, Ahmedabad dated 22-6-2016 passed for the assessment year 2008-09. On receipt of the notice on the Revenue's appeal, the asses­see has also filed cross-objection bearing No. 164/Ahd/2016.

2. In the first ground of appeal, the Revenue has pleaded that the learned Commissioner (Appeals) has erred in quashing reassess­ment order passed under section 143(3) read with section 147 of the Income Tax Act, 1961.

3. Brief facts of the case are that the assessee has filed his return of income on 27-3-2010 declaring a total income at Rs. 49,53,850. An assessment order was passed under section 143(3) on 23-12-2010. The learned assessing officer did not make any addition to the income declared by the assessee and accepted declared income. The assessee was a director in a company named Ganesh Housing Corporation Ltd. ("GHCL" for short). Records of Ganesh Housing Corporation Ltd. were subject to audit survey and examined by the Revenue Department. The Revenue authorities found that Ganesh Housing Corporation Ltd. has disallowed a sum of Rs. 80,38,101. In the computation of total income, it made reference to the audit report and observed this amount relates to personal expenditure, hence, it was construed that the expenditure incurred on personal needs of the director ought to have been shown by the director as perquisite in the return. According to the assessing officer,, the assessee failed to recognize that expenditure as his income which has escaped assessment. Therefore, he recorded reasons and reopened the assessment. The reasons recorded by the assessing officer has been reproduced by the learned Commissioner (Appeals), which reads as under :--

"Reasons for invoking the provisions of section 147 of the Income Tax Act

1. The assessee is one of the directors in Ganesh Housing Corpo­ration Limited. The return of income was filed on 27-3-2010 declaring a total income of Rs. 49,53,850. The assessment of the assessee was completed under section 143(3) on 23-12-2011. determining total income at Rs. 49,53,850.

During the course of verification of records of the Ganesh Housing Corporation Limited, it has been noticed that Ganesh Housing Corporation Limited has disallowed a sum of Rs. 80,38,101 in the computation of total income. In annexure 6 of the tax audit report the details of expenditure of personal nature have been given which includes expenditure on telephone, electricity, motor car usage, foreign travelling and other expenses on behalf of the directors etc. The auditor of the Ganesh Housing Corporation Limited has disal­lowed such expenses since it was treated expenditure of personal nature. It was also certified that such expenditures were for the benefit of directors.

As per the section 2(24) (iv) the value of any benefit of 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 a relative of the 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 aforesaid.

In view of the above provision, the sum paid by the company on behalf of the director should have been reflected as income in the hands of the director. In the case of Shri Shekhar G. Patel, an amount of Rs. 26,79,366 being one-third of the amount of Rs. 80,38,101 have to be included in the income of the assessee which has been escaped from the assessment in the hands of the director Shri Shekhar G. Patel.

2. Further Shri Shekhar G. Patel has taken interest-free loans from Umnesh Complex (P) Ltd. and Mihika Buildcon (P) Ltd. in which he is one of the directors. The non-levy of interest by Umnesh Complex (P) Ltd. and Mihika Buildcon (P) Ltd. on the sums advanced to Mr. Shekhar G. Patel is a benefit enjoyed by Shri Shek­ har G. Patel by virtue of being a director. Hence, as per the provisions of section 2(24)(iv), the value of such benefits is to be added in the income of the Shri Shekhar G. Patel. As per the records, average of the benefit enjoyed by Shri Shekhar G. Patel as loan comes to Rs. 3,18,49,700 on which interest at 15 per cent, comes to Rs. 47,77,455. Thus an income of Rs. 47,77,455 has escaped assessment in the hands of Shri Shekhar G. Patel.

3. On going through the sale deeds submitted by Shri Shekhar G. , Patel, is seen that the provisions of section 50C has not been complied with. Mr. Shekhar G. Patel has sold non-agriculture land (50 per cent, share) situated at Shilaj Village for Rs. 15,00,000. The stamp duty paid thereon is Rs. 89,500. By applying jantry rate at 4.9 per cent, on stamp duty paid, the cost of the property works out to be Rs. 18,26,530. Therefore, there is under valuation of property to the extent of Rs. 3,26,530. Since Shri Shekhar G. Patel had 1/2 share in the property, under assessment comes to Rs. 1,63,265 in the hands of Shri Shekhar G. Patel.

4. Similarly a property situated at Shilaj Village, Block No. 737 was sold at Rs. 15,00,000. Shri Shekhar G. Patel had 173 share in the said property. The stamp duty paid thereon is Rs. 87,200. By applying jantri rate at 4.9 per cent, on stamp duty, the cost of property should have been Rs. 17,79,590, so there is undervaluation of property of Rs. 2,79,590 under section 50C of the Act. Since Shri Shekhar G. Patel has 173 share in the property under assessment comes to Rs. 93,195.

In view of the above, I have reason to believe that income of Rs. 77,13,281 (Rs. 26,79,366 + Rs. 47,77,455 + Rs. 1,63,265 + Rs. 93,195) has escaped assessment for the assessment year 2008-09 and there­fore, I am of the opinion that this a fit case for assessment by invoking the provisions of section 147 of the Income Tax Act, 1961."

4. Dissatisfied with this reopening, the assessee carried the matter in appeal before the learned Commissioner (Appeals). The learned Commissioner (Appeals) has made a detailed analysis of the reasons recorded by the assessing officer vis-a-vis infor­mation available to him. According to the learned Commissioner (Appeals) the assessment has been reopened after the expiry of four years from the end of the relevant assessment year, and therefore, the proviso appended to section 147 would come in the way of the assessing officer for reopening of the assessment, unless it is established that income has escaped assessment on account of failure of the assessee to disclose all material facts fully and truly. In the opinion of the learned Commissioner (Appeals), the assessing officer failed to refer to any material which can be alleged that the assessee failed to disclose fully and truly, and accordingly, the learned Commissioner (Appeals) has quashed the reassessment order.

5. Before us, while impugning the order of the learned Commissioner (Appeals), the learned Departmental Representative contended that Ganesh Housing Corporation Ltd. in its audit report has itself made disallowance of Rs. 80,38,101. If this expenditure were of personal in nature, then perquisite value of this expenditure ought to have been disclosed by the assessee. He failed to disclose this, therefore, this proviso will not come in the way of the assessing officer because the assessee failed to disclose the material facts fully and truly. He further observed that the assessee has also obtained interest-free loans from Umnesh Complex (P) Ltd, and Mihika Buildcon (P) Ltd. If interest at the rate of 15 per cent, is being calculated on those loans, then the benefit in terms of notional inter­est would come to Rs. 47,77,455 which has a perquisite value in the hands of the assessee and it should have been shown as his income.

6. On the other hand, the learned counsel for the assessee relied upon the order of the learned Commissioner (Appeals). She pointed out that the assessing officer nowhere applied his mind and made analysis of the nature of the expenditure and whether any personal element would involve in this expenditure. There can be different reasons for the company to make a disallowance, out of its claim on expenditure. In the opinion of the management, certain expenditure were not for the purpose of business and the company wants to pay taxes on this count, that would not become automatic as perquisite in the hands of the asses­see.

7. We have duly considered the rival contentions and gone through the record carefully. There is no dispute that the original assessment was made under section 143(3) of the Act. There is also no dispute that four years has lapsed from the end of the assessment year. The question is, whether the proviso appended to section 147 puts an embargo in the power of the assessing officer for reopening of an assessment order, where a scrutiny assessment has been made and four years has expired, which would come to the rescue of the assessee or not ? On the other hand, the view of the Revenue is that there was no disclosure of material facts fully and truly, therefore, the proviso will not come in way of the assessing officer. On the other hand, the stand of the assessee is that the assessing officer failed to analysis the nature of expenditure, and therefore, there is no live link between formation of opinion showing escapement of income vis-a-vis information available with the learned assessing officer. Let us take into consideration bifurcation of those expenditure. These have been reproduced by the learned Commissioner (Appeals). They read as under :--

(a)

Advertisement expenses

: Rs. 46,29,768

(b)

Printing and stationery

: Rs. 18,00,000

(c)

Books and magazines

: Rs. 2,50,000

(d)

Being one-fifth of Rs. 67,91,665

: Rs. 13,58,333

8. A perusal of the above would indicate that there cannot be any benefit of personal nature in advertisement expenditure. Similarly, printing and stationery expenses were related to the company. Out of the above expenditure, how it could be construed that element of personal nature is involved, and its perquisite value in the hands of the director. The assessing officer has not analysed details of these expenditure while forming a belief that income has escaped assessment. Taking into consideration nature of expenditure, we are of the view that there was no specific expenditure which can be termed as incurred exclusively for the personal needs of the directors. If company wants to pay taxes, that is its discretion, but for that a completed assessment of the director after four years cannot be reopened.

9. Other reason which has been assigned by the assessing officer is availment of loans from two companies without paying interest. We find that the assessee was having shareholding of nine per cent, and 4.3 per cent, in the aforesaid two companies, viz., Umnesh Complex (P) Ltd. and Mihika Buildcon (P) Ltd. He was not having substantial interest in these companies. It was brought to the notice of the learned Commissioner (Appeals) that the assessee has not obtained any loan from Mihika Build-con (P) Ltd. during this year. It was opening balance. It was also contended that non-charging of interest on the debit balance in the running account of the directors would not constitute a perquisite. The judgment of the Hon'ble Supreme Court in the case of V. M. Salgaocar and Bros. (P) Ltd. v. CIT (2000) (2000) 243 ITR 383 (SC) : 2000 TaxPub(DT) 1336 (SC) was pressed into service. Again, though the learned assessing officer has to form a prima facie belief only but has not analysed any of these details while forming a belief that income has escaped assessment, more particularly, when he is levelling allegations that it was escaped on account of non-disclosure of facts fully and truly. To our mind, the assessing officer has not demonstrated this aspect in the reasons recorded by him. Therefore, we are of the view that the learned Commissioner (Appeals) has rightly quashed the reassess­ment order. We do not find any merit in this ground of appeal. It is dismissed.

10. In ground No. 2, the Revenue has pleaded that the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 26,79,366. As observed earlier, the assessee is a director in Ganesh Housing Corporation Ltd. The Ganesh Housing Corporation Ltd. has disallowed a sum of Rs. 80,38,101. According to the assessing officer, one-third of this amount, i.e., of Rs. 26,79,366 has a perquisite value in the hands of the assessee, which ought to have been shown by him as income. The learned Commissioner (Appeals) has considered this aspect and noticed the break-up of this expenditure. Thereafter observed that, this is not an expenditure which can be termed as personal in nature. The finding recorded by the learned Commissioner (Appeals) reads as under :--

"I have carefully considered the facts of the case, the reassessment order and the written submission of the appellant. The assessing officer has made the addition of Rs. 26,79,366 being one-third of the amount of Rs. 80,38,101 in respect of the total expenditures disal­lowed in the case of M/s. Ganesh Housing Corporation Ltd. in which the appellant was one of the directors. This addition has been made by the assessing officer as a perquisite as per section 2(24) (iv) being the value of benefit or perquisite obtained by the appellant from the aforesaid company as income. The assessing officer observed that in the case of M/s. Ganesh Housing Corporation in which the assessee was a director, has disallowed certain sums which were observed to be of personal in nature by the tax auditors and as a consequence the said amounts were to be assessed in the hands of the directors.

4.4. On the other side, the appellant has submitted that in the case of Ganesh Housing Corporation Ltd. a total of expenditure of Rs. 80,38,101 was disallowed in the computation of income of which details are noted as under :--

(a) Advertisement expenses

--Rs. 46,29,768

(b) Printing and stationery

--Rs. 18,00,000

(c) Books and magazines

--Rs. 2,50,000

(d) Being one-fifth of Rs. 67,91,665

--Rs. 13,58,333

(which includes motor car expenses, mobile phone expenses, electricity expenses, security service charges and director foreign travel).

4.5. The appellant submitted that irrespective of the treatment any expenditure gets in the books of account of the company the same cannot be taken as a base for proposing the same to be taxed in the hands of the individual only for the reason that he was a director in the said company, further stretching it on the ground that the expense was incurred to benefit the director and being personal in nature.

4.6. As per the definition of the income under section 2(24)(iv), the value of any benefit of perquisite is to be added to the income of the director for which the original obligation to pay for the same was that of the director in his individual capacity. But in the present case paying for advertisement expenses or printing and stationery expenses or books and magazines was never been an obligation of the appellant in his individual capacity. When the obligation in the individual capacity of the appellant itself did not arise, there is no question of making any addition of the said amount to the individuals income. There was no benefit monetarily or non-monetarily that can be measured/valued in monetary terms that have arisen to the appel­lant from incurring such expenses.

4.7. The appellant further submitted that the advertisement expenses of Rs. 46,29,768 was incurred by the company Ganesh Housing Corporation Ltd. for advertisement in various periodicals for felicitation function of the then chairman of the company Shri Govindbhai C. Patel. Likewise the printing and stationery expenses of Rs. 18 lakhs was incurred towards publication of a book namely 'Sheshthi' in the form of a biography on the life and achievement of the then chairman of the company Shri Govindbhai C. Patel. Both the above expenditures were in no way related to the personal benefits of the appellant. It was also submitted that the books and magazine expenses of Rs. 2,50,000 was incurred for printing and publishing of the book 'Gujarat Goories-Power People 50' which contained a write up of the director of the company, i.e., appellant which is again no way related to the personal benefits of the appellant.

4.8. The company namely M/s. Ganesh Housing Corporation Ltd. being a public limited company it has got credit recognition, increase in good will, good faith and trust of the general public at large due to publishing of the book. Further in respect of addition made on account of various expenditures from motor car, mobile phone, electricity expenses, security service charge and directors foreign travel that it was not possible to determine the expenses used for personal purposes therefore in annexure-6 to tax audit report of Ganesh Hous­ing Corporation the auditors have made the observations in this regard. So it was a view of the tax auditor that some portion of the expenditure was for personal purpose of the directors but there was no evidence to justify the auditors view to be true. It was submitted that all these expenses were incurred for the purpose of business of the company in which the appellant was a director. Also submitted that these expenses were not incurred tor personal benefit of the directors. The above expenditures were duly authorised through resolution passed in the meeting of the board of directors of Ganesh Housing Corporation Ltd.

4.9. Even under the head of income from profits and gains of busi­ness a proportion of various expenditures like motor car for partners/ employees were disallowed assuming the same for personal use but they are not added to the income under the head of salaries and made taxable in the hands of the employees or partners of the company. By making once in the hands of the company namely Ganesh Housing Corporation Ltd. and thereafter once again in the hands of the directors is nothing but the double taxation of the same amount which is unwarranted as per the provisions of law. This was a revenue neutral exercise and all are assessed to tax in the maximum marginal rate.

4.10 Having considered the facts and the submissions, it is noticed from the copy of the bill of advertisement expenses that Ganesh Housing Corporation has incurred the expenditure of Rs. 46,29,768 towards advertisement in the Gujarat Samachar, Sandesh, Divya Bhaskar, Times of India in respect of the chairman of the said company namely Shri Govind C. Patel. This advertisement has been made in respect of Shri Govind C, Patel due to the Gujarat Gaurav and Advertorial Advertisement, and hence, the appellant did not have any connection with the aforesaid expenditure and he did not avail any personal benefit out of such advertisement. Moreover M/s. Ganesh Housing Corporation would be benefited from such adver­tisements therefore in no case the same can be taken as income being perquisite as per the provisions of section 2(24) (iv) and thus no addi­tion in the hands of the appellant is called for.

4.11 Similarly the expenditure of Rs. 18 lakhs have been made in respect of the printing and stationery for the booklet in the name of 'Shreshthi' from which also the appellant did not get any personal benefits as it was also in respect of Shri Govind C Patel. The ultimate beneficiary of this expenditure was M/s. Ganesh Housing Corpora­tion Ltd.

4.12. Further with regard to the expenditure of Rs. 2,50,000 incurred by Ganesh Housing Corporation in respect of the book and multimedia disk in the name of Gujarat Glorius Power People 50 and also the beneficiary was M/s. Ganesh Housing Corporation Ltd. and not the appellant since no personal benefit has been obtained nor it was the obligation of the appellant to make the payment thereof which was paid by Ganesh Housing Corporation.

4.13. In view of the aforesaid discussion, the expenditures made in respect of above heads are in no way personally benefited to the appellant and therefore the same cannot be treated as perquisites as income and hence the addition made by the assessing officer is liable for deletion."

11. With the assistance of the learned representatives, we have gone through the record carefully. The learned Commissioner (Appeals) has made a detailed analysis of all the expenditure, and there­after recorded a finding that there is no personal element involved in all these expenditure. They cannot be considered as perquisite in the hands of the director. After going through well reasoned order of the learned Commissioner (Appeals), we do not find any error on this issue. It is upheld.

12. In the next ground of appeal, the grievance of the Revenue is that the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 47,77,455.

13. Brief facts of the case are that the assessee has alleged to have taken loan of Rs. 3,18,49,700 from Umnesh Complex (P) Ltd. and Mihika Buildcon (P) Ltd. According to the assessing officer, had an interest at the rate of 15 per cent, been charged, then the assessee would be required to pay a sum of Rs. 47,77,455. By not charging interest from the assessee, companies have extended undue benefits which is to be construed as perquisite in the hands of the assessee under section 2(24) (iv) of the Act. Accordingly, the learned assessing officer made addition of the above amount. Dissatisfied with the addition, the assessee carried the matter in appeal before the learned Commissioner (Appeals). The learned Commissioner (Appeals) has deleted the addition by observing as under :--

"5.3. Decision

I have carefully considered the facts of the case, the reassessment order and the written submission of the appellant. Without prejudice to the above that the reopening and reassessment is not tenable in the eyes of law since the appellant has raised the grounds on the merits of the issue however the same became academic in nature, however, on the merits the same are decided as under.

5.4 The assessing officer has made the addition of Rs. 47,77,455 as interest on the loan taken from the companies in view of the provisions of section 2(24)(iv) of the Income Tax Act. It has been noticed that the appellant has taken the interest-free loans from Umnesh Complex (P) Ltd. and Mihika Buildcon (P) Ltd. on which no interest has been paid by the appellant. The appellant was one of the directors of the aforesaid company. The assessing officer observed that it was certainly a benefit and convertible into money. If the loan has been taken from any other entity, interest would have been payable by the appellant. Therefore, the benefit enjoyed by the appellant as interest on the loans taken from the company is considered as income in the hands of the appellant.

5.5 On the other side the appellant has submitted that he was not an employee and not drawing any remuneration or salary from the aforesaid two companies from whom loans have been taken, there­fore, he was not an employee of the above companies and hence perquisite value cannot be taxed in the hands of the appellant. It was also submitted that the appellant was not having any substantial interest in the aforesaid companies. The appellant had nine per cent, and 4.37 per cent, shareholding in the aforesaid companies namely Umnesh Complex (P) Ltd. and Mihika Buildcon (P) Ltd. respec­tively. Since the appellant had not obtained any benefit or perquisite in the capacity of the employees on the aforesaid companies therefore no income can be taxed in the hands of the appellant more so when a company has not paid any sum of money which is by way obligation payable by the appellant. It has also been submitted that no loan has been taken in the year under consideration from Mihika Buildcon (P) Ltd. but the same was the opening balance which remained as closing balance at the end of the year. In support of this, it has relied upon catena of judgments which have been reproduced in the preceding paras of this order.

5.6 Having considered the facts and the submissions, it is noticed that the assessing officer has not brought on record that the appel­lant was an employee in the aforesaid companies from whom the loans have been taken. Even no remuneration or salary in the capac­ity of the director has been drawn by the appellant from the aforesaid two companies. Being the director he cannot be held to be an employee of the companies from whom he has availed of the loans. Moreover he was not having substantial interest in the aforesaid companies. The assessing officer has also not brought anything on record to say that the aforesaid companies have paid any sum of money which is by way of obligation payable by the appellant. In the case of Mihika Buildcon (P) Ltd. there was no fresh loans taken during the year under consideration but those were the loans taken in the preceding years. It has also been noticed that both the companies did not have any interest expenditure in their profit and loss account therefore there was no obligation of the appellant in respect of any interest paid by these companies on behalf of the appellant.

5.7. In view of the above, respectfully following the judgments of various Hon'ble courts relied upon by the appellant, there is no case to treat the income as perquisite in the hands of the appellant and therefore addition made by the assessing officer is deleted. Thus, the related grounds of appeal raised by the appellant are allowed."

14. As observed by the learned Commissioner (Appeals) that there is no fresh loan taken by the assessee from Umrtesh Complex (P) Ltd., and Mihika Buildcon (P) Ltd. It is an opening balance. No interest was charged in earlier years nor any perquisite value was assessed. Similarly, the learned Commissioner (Appeals) has observed that if the directors have running account with the company, then non-charging of interest on the debit balance would not constitute a perquisite. The learned Commissioner (Appeals) has made reference to a large number of decisions while taking note of the assessee's submissions at page Nos. 39 to 41 of the impugned order. After going through the finding of the learned Commissioner (Appeals) we do not find any error in the order of the learned Commissioner (Appeals) on this issue. This ground of appeal is rejected.

15. As far as the cross-objection of the assessee are concerned, it is merely in support of the order of the learned Commissioner (Appeals), and no specific grievance has been pleaded in the cross-objec­tion, hence, the cross-objection is not maintainable.

16. In the result, the appeal of the Revenue and the cross-objection of the assessee, both are dismissed.