Case: V. M. SALGAOCAR &amp; BROS. LTD., ETC Vs. COMMISSIONER OF INCOME TAX, ETC

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 yearax Officer had disallowed a sum of Rs. 5,21,241being 15 percent of the amount standing to the debit of the directors in the books of the assessee company by applying the provisions of Section 40A(5) and Section 17(2) of the Act. TheOfficer found that thewhich was awas borrowing large sums by paying interest @ 15 per centannum. This interest was claimed by the assessee as deductible expenditure.r found that thedirectors 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 thethe company could have charged a benefit was granted to the directors and hence the said amount of interest on the amount advanceto 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 theOfficer. Assessee took the matter further in appeal before the Appellate Tribunal which deleted the additions made by the. Appellant 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 andt on the debit balance in running account would not amount to providingCourt in coming to its decision relied on two cases of the Madras High Court in Commissioner of Income Tax v. C. Kulandaivelu KonarCommissioner of Income Tax v. Late A.K. Lakshmi>2. In Civil Appeal Nos.of 1998 it is the revenue which is aggrieved.eal was granted by this Court to the revenue and this appeal was to be heard along withAppeal No. 657 of 1994.

Reasoning:
There appears to be subsistence in the submission of the assessee.There has been difference of opinion among the High Courts on the question ifof interest could be considered as perquisite under Section 17(2) or Section 40A(5). We may refer to some of the judgments of the High Courts.High Court in its judgment, which was impugned in Civil Appealof 1999 had relied upon the decision of its own High Court in the case of Commissioner of Income Tax v. M.K. Vaidya224 ITR 186 and in P. Krishna Murthy v. Commissioner of Income TaxIn the case of M.K. Vaidya High Court sought to distinguish the judgment now impugned before us in Civil Appeal No. 657 of 1994 (Commissioner of Income Tax v. V.M. Salgaocar and Brothers Pvt. Ltd.stating that that decision had no bearing on the facts of the case before it because the Bench was concerned with Section 36 and 40A(5) of the Actit was a case where having borrowed large sums of moneys by paying interest at the rate of 15% per annum a part was obviously drawn by the directors without compensating thewithout paying any interest and the Bench in that case was not concerned with Section 17(2). High Court then saidthe facts of the saidwhere the company borrowed large sums of money by paying interest at 15cent and claiming it to be deductible expenditure, it will be too much of a generosity to say that the company could at the same time advance to its directors monies without collecting any interest from them. The observations of the Bench while construing40A(5) in the said case were in the context ofWe are of the view that distinction was not correctly drawn. Amendment made by the 1984 Amending Act was both to Section 17(2) and Section 40A(5). In the impugned judgment reference in fact had been made tose (vi) in(2) of Section 17. Moreover, High Court in the impugned judgment did not consider the amendments made by the Amending Act, 1984 on the ground "it is difficult to see how this amendment can have any bearing upon the interpretation of the then existing provisions of the Act". We do not think this approach was also correct. An amending provision can certainly give guidance tointerpretation of the existing provisions. The judgments of the Madras High Court, which were relied upon by the High Court in the impugned judgment were for the period priorthe 1984 amendment and the Madras High Court had no occasion to consider the impact of the amendmentsof Section 17(2) andSection 40A(5) of the Act.Taxation Laws Amendment Act, 1984 which amended Sections 17(2) and 40A(5) by insertingoth theand 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.provided a clear direction to interpret the provisions of Section17(2) and 40A(5) before insertion of(vi). The circulars of CBDTs to how Revenue itself understood the effect of the amendmentand 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,by terming them of no consequence. Highof Karnataka in the case of Commissioner of Income Tax v. M.K. Vaidyaand the Calcutta High Court in the case of P. Krishna Murthy v. Commissioner of Income Tax7) 224 ITRhave correctly understood and applied the provisions of the Amendment Act, 1984 and thatof Finance Act, 1985 while interpreting the provisionsof Section 17(2) and40A(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 beimpossible to expect proof from the Revenue that the monies that were advance to directors were monies that were borrowed monies. High Court said that ordinarily the funds borrowed by a company would fall within the hotchpotand intermingle with its own funds. High Court appears to have gone beyond the finding of the Appellate Tribunal which was not permissible. In the later cases, Karnataka High Court itself relied on the provisions of the Amendment Act, 1984 and its repeal by the Finance1985 to interpret the provisions of Section17(2) and 40A(5). Distinguishing features which the High Court in the case of Commissioner of Income Tax v. M.K. Vaidyapointed with reference to the impugned judgment198 ITR 738 appear to us to be rather obscure. Interpretation of law has to be uniform.Thus having regard to the dismissal of the appeal of the revenue in Civil Appeal No. 424 of 1999 and state of law as interpreted by us, particularly, keeping in view the amendment by the Taxation Laws (Amendment) Act, 1984 and its repeal by the Finance Act, 1985 and the circulars of the CBDT we answer the questionin affirmative, i.e., in favour of the assessee.