Income-tax---

----Salary---Perquisite---Interest subsidy granted for loans for building houses---Not a perquisite---Indian Income-tax Act, 1961, S. 17---C.B.D.T. Circular No. 421, dated 12-6-1985.

Where a company reimbursed its employees the interest paid on loans taken for building houses:

Held, that the interest subsidy was not taxable in the hands of the employees in view of deletion of sub-clause (vi) of section 17(2) of the Income Tax Act, 1961, by the Finance Act, 1985, and also by virtue of the Central Board of Direct Taxes Circular No. 421, dated June 12, 1985.

CIT v. M. K. Vaidya (1997) 224 ITR 186 (Kar.) fol.

R. B. Guttal for Petitioner.

S. V. Seshachala for H. L. Dattu for Respondents.

JUDGMENT

S. B. MAJMUDAR, C.J.---In this writ petition, the petitioner-assessee has brought in challenge the refusal of the assessing authority to grant him exemption from computing taxable income of an amount of Rs.3,556 being interest subsidy. The assessing authority took the view that as a welfare measure, the company reimbursed the interest paid in excess of the Central Government Employees House Building Advance Rates and the interest reimbursed is assessable to tax under section 17(2)(iv) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), since the assessee would have paid even if the employer had not reimbursed it: It was further held that the Chairman, Central Board of Direct Taxes, has clarified that the interest subsidy is not taxable when the employer borrows money and in turn advances it to its employees. It was also further held that since the assessee directly borrowed loan from the H.D.F.C., his, claim for exemption could not be considered and the interest subsidy reimbursed is assessable under the head "Salary"; and, therefore, Rs.3,556 was added to the returned income for computation of tax. The assessee moved the matter before the revisional authority, who in exercise of the power under section 89(1) of the Act (sic), dismissed the revision by holding that there was no reason to interfere with the order under revision. That is why the assessee is before us.

The contention canvassed by learned counsel for the petitioner- assessee that the interest subsidy is not liable to tax, is fully covered by a decision of this court in CIT v. M. K. Vaidya (1997) 224 ITR 186-- I.T.R.C.Nos.161 and 162 of 1987, decided on June 11, 1992, by a Division Bench consisting of K. Shivashankar Bhat and R. Ramakrishna, JJ. The Division Bench has held that the Legislature never intended to treat the interest as perquisite under section 17(2)(iii) of the Act. The referred question was considered and answered by the Division Bench in the affirmative, in favour of the assessee and against the Revenue.

Apart from the aforesaid Division Bench decision, there is Central Board of Direct Taxes Circular No.421, dated June 12, 1985, which is found in (see (1985) 156 ITR 130, 139). Paragraphs 13.1 and 13.3. of the said circular are relevant for our present purpose. They read as under:

" 13.1. Under sub-clause (vi) of clause (2) of section 17 of the Income-tax Act, inserted by the Taxation Laws (Amendment) Act, 1984, where the employer has advanced any loan to an employee for building a house or purchasing a site or a house and a site or for purchasing a motor car, and either no interest is charged by the employer on such loan or interest is charged at a rate which is lower than the rate of interest which the Central Government may specify in this behalf by notification in the Official Gazette, an amount calculated on the following basis is regarded as perquisite received by the employee and charged to tax accordingly:--

(i) in a case where such loan is advanced without charging any interest, the amount of interest on such loan at the rate notified;

(ii) in a case where such loan is advanced by charging interest, at a rate which is lower than the notified rate, the amount of the difference between the interest on such loan at the rate notified and the interest charged by the employer . . . . .

13.3. As a measure of relief to salaried taxpayers, the Finance Act has omitted the aforesaid provision with effect from the date of its insertion, namely. 1st April, 1985. In consequence thereof, sub -clause (vi) of clause (b) in Explanation 2 to section 40-A(5) of the Income-tax Act, which defines the term ' perquisite' for the purposes of the said section to include the perquisite value represented by interest-free loans or loans at concessional rates of interest, has also been deleted. [Sections 6(b) and 12(a) of the Finance Act.]"

It becomes obvious by reading this circular that even the Central Board of Direct Taxes clearly opined that once sub-clause (vi) of clause (b) in Explanation 2 to section 40-A(5) of the Act, was deleted, the said action can be said to have been taken as a measure of relief to salaried taxpayers. Consequently, the interest-free loan or loans could not be treated as perquisites in their hands. It cannot be disputed that for the assessment year 1991-92, the said Central Board of Direct Taxes circular was holding the field.

For all these reasons, this writ petition is allowed, the orders of the revisional authority (Annexure "C") and the assessing authority (Annexure "A") in so far as they relate to inclusion of interest subsidy of Rs.3,556 as taxable income of the assessee, are set aside and the said amount shall stand deleted from the taxable income of the assessee. The assessment shall be redone by the assessing authority excluding the said interest subsidy. No costs.

M.B.A./1409/FCOrder accordingly.