S.P. Bharucha, C.J.

1. 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 assessees 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 of the Madras High Court in CIT v. C. Kulandaivelu Konar where the assessee was the managing directors of a company. He withdrew moneys out of a account maintained by him with the company for his personal expenses. The company did not charge any interest on his over drawings on that account, but it used to pay interest on its borrowings. The Income Tax Officer disallowed in the companys hands the amount of interest referable to the amounts withdrawn by and standing to the debit of the assessee and added that amount as a perquisite in the hands of the assessee, bringing the same to tax. The Appellate Assistant Commissioner reduced the amount but, for the rest, confirmed the assessment. The Tribunal set aside the assessment. In the reference to the High Court at the instance of the Revenue, it was held that, in cases where a company allotted its funds to its directors to be used without any obligation to pay any interest thereon, the company should be deemed to have granted a benefit to the director. Following this judgment, the Madras High Court in Addl. CIT v. A. K. Lakshmi took the same view.

6. We are in respectful agreement with this view. We cannot accept the submission that on benefit was conferred upon the assessees directors by reason of what were, in effect, interest-free advances made to them and it does not appear to us relevant in the context that the assessee may have had funds independent of borrowed funds from which it could have made such advances. It is difficult to appreciate the argument on behalf of the assessee that it had not made any claim for deduction in respect of the advances it had given to the directors. It is clear that it had sought in the process of computation of its income under the head "profits and gains from business" the deduction of the amount of interest it had paid on its borrowings. To the extent that such interest was relatable to the aggregate of the amounts advanced to the directors, the deduction was disallowed and, in our view, rightly so

7. The Tribunal took the view that no evidence had been led by the Revenue to show that the borrowed funds were directly diverted for the benefit of the directors and, for that reason, set aside the order of adding back the sum of Rs. 5,21,241 made by the Income Tax Officer and sustained by the Commissioner of Income Tax (Appeals). Ordinarily, the funds borrowed by a company would fall within the hotchpot and intermingle with its own funds It would, therefore, be well-nigh impossible to excepts proof that the moneys that were advanced to the directors were moneys that were borrowed moneys. The assessee had found it necessary to borrow moneys. It had been required to pay interest thereon It had let its directors maintain debits in their accounts and charged them no interest. These facts are sufficient to hold that the directors were given perquisites for which the assessee incurred expenditure and that expenditure is not allowable by reason of the aforementioned provisions.

8. The Tribunal relied upon the amendment to the Act made by the Taxation Laws (Amendment) Act, 1984, viz., the inclusion of sub-clause (vi) in clause (2) of section 17, in these words :

"(vi) where the employer has advanced any loan to the employees for the purposes of building a house on purchasing a site or a house and a site or for the purchasing a motor car, and either no interest is charged by the employer on the amount of such loan or interest is charged 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 a notification in the Official Gazette, an amount equal to, -

(a) in case where such loan is advanced by charging 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 loan at the rate so specified and the interest charged by the employer".

9. It is difficult to see how this amendment can have any bearing upon the interpretation of the then existing provisions of the Act.

10. In the result, the question are answered thus :

(1) In the negative and in favour of the Revenue.

(2) In the negative and in favour of the Revenue.

11. There shall be no order as to costs.