CHANDIGARH BENCH SURINDER CHAND INCOME TAX OFFICER v. BANTA August 21, 1984 JUDGMENT Order per shri ram rattan, accountant member: above eight appeals by Revenue are directed against two sets of orders of CIT(A), AAC relating to asst. yrs. 1971-72 to 1974-75. Since issues involved in all eight appeal are identical, same have been consolidated for sake of convenience and are being disposed of by common order. common grounds of appeal for all assessment years read as under: On facts and in circumstance of case, CIT(A) has erred in holding that interest-free loan granted by Vicks Products Inc. is not benefit in hands of assessee within meaning of s. 2(24)(iv) of IT Act, 1961. CIT(A) has further erred in ignoring fact that Vicks Products Inc. is holding company of Richardson Hindustan Co. and, thus, assessee s case is covered under provisions of s. 2(24)(iv) of IT Act, 1961. Tribunal is also requested to adjudicate on point whether benefit arising out of interest-free loan is perquisite within meaning of s. 17(2)(iii) of IT Act, 1961 as this point remains to be decided vide Tribunal s order in IT Appeal Nos. 928 to 931 (Chd) of 1975-76 dt. 31st March, 1977. It is prayed that order of CIT(A) be set aside and that of ITO restored. facts briefly stated are like this. assessee, Shri Surinder Chand Banta (the assessee), is employee of Vicks Products Inc. (VPI) and derives income from salary and dividends. VPI in India is branch of Vicks Products Inc. New York, USA, VPI, USA is stated to be hundred per cent subsidiary of Richardson Marral Inc., New York (RMI). In 1963, RMI obtained permission from Government of India to form new company under name and style of Richardson Hindustan Co. Ltd. (RHL), with share capital of Rs. 15 lakhs divided into five lakh shares of face value of Rs. 10 per share. Government of India allowed RMI to take 50 per cent of total shareholding in new company RHL, remaining 45 per cent shareholding was required to be offered to Indian public. RMI was registered on 29th July, 1964. In first issue of 200 shares, 110 shares were subscribed by RMI. remaining 90 shares were subscribed by promoters of company including Shri Surinder Chand Banta (the assessee) to whom 20 shares were issued. According to assessee s letter dt. 27th Sept., 1974 filed before AAC in connection with appeal for asst. yr. 1971-72 at time of flotation of company in year 1964, it was agreed between Shri Surinder Chand Banta and promoters-signatories to memorandum of articles of association which included RMI, Shri Surinder Chand Banta shall be managing director of company (RHL) and would acquire 10 per cent share of company. RMI were issued 2,74,890 shares on 28th Oct,. 1965 making their shareholding as 55 per cent. Subsequently, remaining shares were offered to public in August 1965 through prospectus. Shri Surinder Chand Banta, it appears did not have adequate funds to buy 10 per cent shares of company in accordance with agreement between him and promoters at time of flotation of company in year 1964. He, therefore, entered into agreement with VPI to honour his commitment given at time of flotation of RHL in year 1964 to secure 10 per cent share. In terms of above agreement, VPI granted interest-free loan of Rs. 5 lakhs on 10th August, 1966 to assessee. According to agreement, loan was granted for equity shares of Rs. 10 per share of RHL, Bombay. On receipt of above loan of Rs. 5 lakhs, assessee purchased said 50,000 equity shares. During course of assessment proceedings for asst. yr. 1971-72 assessee was required by ITO to explain why value of benefit of interest-free loan should not be taxed under s. 17(2)(iii) of IT Act, 1961 ( Act ) as perquisite in his hands. ITO after considering submissions made on behalf of assessee held that benefit of interest-fee loan granted by VPI to assessee was perquisite within meaning of s. 17(2)(iii) and, therefore, its value was includible in income of assessee. For asst. yrs. 1971-72 to 1974-75 he included value of perquisites on account of interest free loans as under: Assessment year Value Rs. -72 ,150 -43 ,680 -74 ,000 -75 ,320 Aggrieved by above orders of ITO, assessee filed appeal before AAC who held that no income by way of perquisite accrued to assessee as result of grant of interest-free loan and that requirements of s. 17(2(iii) were not satisfied. He, therefore, deleted additions for all four assessment years. revenue filed appal against above order of AAC deleting additions before Tribunal. At time of hearing of appeals before Tribunal, Departmental representative took following identical additional ground of appeal in each of four years: "That in any case amount represented benefit obtained by assessee from VPI and liable to tax as income within meaning of s. 2(24(iv) of IT Act, 1961 and learned AAC has erred in deleting addition of that sum." On basis of above additional ground taken by Revenue it was emphasised in alternative that value of benefit was assessable in hands of assessee under s. 2(24)(iv) of Act. This was objected to on behalf of assessee. However, Tribunal overruled objection by assessee and admitted additional ground of appeal by Revenue for all above assessment years by its order dt. 31st March, 1977 in IT Appeal Nos. 928 to 931 of 1975-76. Having admitted above additional ground of appeal, Tribunal considered it necessary to have decision of AAC on this point for finally and completely adjudicating points at issue in appeals. Then in para 8 of its order Tribunal set aside order of AAC and restored to his file for fresh decision on additional ground of appeal admitted by it and disposal of appeals in light thereof. In pursuance of above order by Tribunal, CIT(A) with whom jurisdiction vested then held that benefit byway of interest-free loan could not be taxed as perquisite in hands of assessee within meaning of s. 2(24)(iv), r/w s. 2(32) and 2(41). operative part of order of CIT(A) rejecting additional ground raised by Revenue reads as under: "3. In pursuance of above directions of Tribunal, Chandigarh Bench, Chandigarh, hearing of these appeals was fixed when Shri P.C. Mehra, Chartered Accountant appeared on behalf of appellant. Shri Mehra contended that provisions of s. 2(24)(iv) do not apply in case of appellant since provisions only apply to director of company or person who has substantial interest in company or by relative of director or such person. It was contended by Shri Mehra that appellant Shri S.C. Banta was neither director nor was relative of any director or any person having substantial interest in company. It was contended that Shri Banta did not have any shares in Vicks Products Inc. nor was related to any director or person having substantial interest in terms of definition contained in s. 2(32) and 2(41) of IT Act, 1961. These contentions of Shri Mehra have great deal of force and I, therefore, hold that interest-free loan granted by Vicks Products Inc. is not benefit in hands of appellant with meaning of s. 2(24)(iv) of IT Act, 1961." learned counsel for assessee also pleaded before CIT(A) that he should adjudicate upon other point as to whether benefit arising out of interest-free loan was perquisite within meaning of s. 17(2)(iii) as this issue had not been adjudicated upon by Tribunal because appeals were restored to file of AAC on additional ground. CIT(A) declined to adjudicate as to whether value of benefit of interest-free loan was perquisite within meaning of s. 17(2)(iii) which could be included in income of assessee. According to him, directions of Tribunal were limited with regard to additional ground only regarding taxability of value of benefit of interest-free loan as perquisite with meaning of s. 2(24)(iv). effect of order of CIT(A) is that Tribunal has now to consider both issue, i.e., perquisite within meaning of s. 2(24)(iv) and s. 17(2)(iii). For purpose of s. 2(24)(iv), impugned order of CIT(A) has to be considered while in relation to assessability under s. 17(2)(iii) decision of AAC has to be kept in view. We shall first deal with issue as to whether value of interest- free loan is perquisite within meaning of s. 2(24)(iv) and includible in income of assessee. This section reads as under: "In this act, unless context otherwise requires, ** ** ** (24) income includes ** ** ** (iv) value of any benefit or perquisite, whether convertible into money or not, obtained from company either by director or by person who has substantial interest in company, or by relative of 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 director or other person aforesaid;" reference to above provisions will show that following conditions should be fulfilled before value of any benefit or perquisite can be included in income of assessee: recipient of benefit should be either (i) director, or (ii) person who has substantial interest in company, or (iii) relative of director or person who has substantial interest in company. sum is paid by company in respect of any obligation which but for such payment would have been payable by director or by person who has substantial interest in company. In case before us, CIT(A) has recorded finding that assessee was neither director nor person holding substantial interest nor relative of director or of such other person. revenue has not brought any evidence to show that he was one of above categories of persons. That being position, we are of opinion that provisions of s. 2(24)(iv) are not attracted in this case. There is no material before us to record finding with regard to second condition. At any rate, finding to second condition will not be academic so long as first condition is not fulfilled. contention by learned Departmental representative that assessee was sole representative of American company in India which floated RHL and, therefore, was covered under s. 2(24)(iv) in our opinion, deserves to be rejected. We have already said earlier that Revenue has miserably failed to bring any evidence on record to establish that assessee was one of four categories of persons listed in s. 2(24)(iv). At time of hearing of appeal before us, even designation of assessee with VPI was not either to Departmental representative or learned counsel for assessee. In such circumstance, we have no hesitation in confirming conclusion arrived at by learned CIT(A). We have now to consider as to whether value of benefit of interest- free loan was assessable as perquisite in hands of assessee within meaning of s. 17(2)(iii). Before considering this issue it may be recalled that this issue does not arise out of impugned order of CIT(A). We have said earlier that this issue arises out of order of AAC which came before Tribunal in first round of appeals in IT Appeal Nos. 928 to 931 of 1975-76. These appeals having already been disposed of by Tribunal vide its order dt. 31st March, 1977, same were recalled by us and heard together with these appeals. issue with regard to taxability of perquisite within meaning of s. 17(2)(iii) will, therefore, be covered by IT Appeal Nos. 928 to 931 of 1975-76. According to ITO, assessee was employee of VPI drawing salary of Rs. 36,000 per annum. According to him, therefore, value of benefit in shape of interest-free loan was assessable as perquisite within meaning of s. 17(2)(iii). AAC relying upon decision of Supreme Court in case of CIT vs. L.W. Russel (1964) 53 ITR 91, held that value of benefit of interest-free loan was not taxable as perquisite with meaning of s. 17(2)(iii). revenue is aggrieved against these findings of learned AAC. Shri R.K. Bali, learned Departmental representative, contended that same were taxable under s. 17(2)(iii). For this proposition he relied upon decisions of Madras High Court in case of CIT vs. C. Kulandaivelu Konar (1975) 100 ITR 629 and Addl. CIT vs. A..K. Lakshmi (1978) CTR (Mad) 171: (1978) 113 ITR 368 and also decision of Chancery Division in Wilkins (Inspector of Taxes) vs. Rogerson (1961) 42 ITR 643. learned counsel for assessee, on other hand, distinguished decision of Madras High Court in case of C. Kulandaivelu Konar (supra). In support of his contention that value of interest-free loan is not perquisite within meaning of s. 17(2)(iii), he relied upon decision of House of Lords in hochstrasser vs. Mayes (1961) 42 ITR 457 and in case of L. W. Russel (supra). We have carefully considered rival submissions and have also gone through decisions relied upon by rival parties. Their Lordships of Supreme Court in case of L.W. Russel (supra), have held that expression "perquisites which are allowed to him by or are due to him, whether paid or not, from or are paid by or on behalf of, .... company" in s. 7(1) of Indian IT Act, 1922, applied only to such sums in regard to which there was obligation on part of employer to any and vested right on part of employee to claim. It, therefore, follows from above decision that there should be privity of contract between employer and employee as result of which employee is entitled and acquires vested right in interest-free loan. No such evidence has been brought on record on behalf of Revenue. Any such benefit given by employer to his assessee which does not flow out of terms and conditions of service 17(2)(iii). At best, it may be ex gratia benefit not connected with terms and conditions of employment of assessee. In such circumstances, we have no hesitation in sustaining order of learned AAC in deleting addition for all four assessment years made by ITO taking resort to provisions of s. 17(2)(iii). In result, all eight appeals by Revenue, are dismissed. *** INCOME TAX OFFICER v. SURINDER CHAND BANTA