For old years, was an interest-free loan from my employer taxable as a perquisite?
No - but only for years before the charge was specifically provided for. The Supreme Court held that granting an interest-free or concessional loan to an employee does not result in a taxable benefit or perquisite 'unless specifically so provided', reading the 1984 insertion and 1985 omission as Parliament declining to tax it.
Decided by the Supreme Court (Supreme Court of India - D.P. Wadhwa and S.S. Mohammed Quadri, JJ.) on 2000-04-10, reported as [2000] 110 Taxman 67 (SC)/[2000] 243 ITR 383 (SC)/[2000] 160 CTR 225 (SC); Civil Appeal No. 657 of 1994 and Civil Appeal Nos. 4012-13 of 1998. It bears on section 17(2), section 40A(5) of the Income Tax Act 1961, in Salary & Perquisites matters.
The perquisite holding is now of historical use only, because the charge has since been specifically provided for. Two other holdings still earn the case its place. On s.40A(5), the Court refused to accept the fiction that interest-free funds would otherwise have earned a return, since a disallowance presupposes a deduction actually claimed and nothing had been claimed. On procedure, it held that the doctrine of merger applies to appeals dismissed under Article 133 but not to special leave petitions dismissed under Article 136 - an argument that comes up whenever the department says a dismissed SLP has merged a High Court order.
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Two sets of appeals were heard together. In Civil Appeal No. 657 of 1994 the company was the appellant. For assessment year 1979-80 the Income-tax Officer found that it was borrowing large sums at 15 per cent while its directors drew money from it without paying interest, and disallowed Rs 5,21,241 - 15 per cent of the debit balances standing in the directors' accounts - under s.40A(5) read with s.17(2). The Commissioner (Appeals) upheld him. The Tribunal deleted the addition, holding there was no evidence that borrowed funds had been diverted to the directors and that non-charging of interest on a running-account debit balance was not a perquisite. On a reference at the revenue's instance the Karnataka High Court reversed the Tribunal ([1992] 198 ITR 738). In Civil Appeal Nos. 4012-13 of 1998 the revenue was the appellant, in the case of Shivanand V. Salgaocar, a director of the company, for assessment years 1980-81 and 1981-82: the Officer had valued the non-charging of interest on his debit balance at 15 per cent and taxed it as a perquisite under s.17(2), the Commissioner (Appeals) and the Tribunal had deleted it, and the High Court had answered the reference in his favour. A third strand mattered: for assessment year 1980-81 in the company's own case the High Court had decided against the revenue, and this Court had dismissed the revenue's appeal on certificate, Civil Appeal No. 424 of 1999, on 25 January 1999 with the words 'The appeal is dismissed'.
Civil Appeal No. 657 of 1994 was allowed and Civil Appeal Nos. 4012-13 of 1998 were dismissed; the referred questions were answered in favour of the assessee. Non-charging of interest on the debit balances in the directors' running accounts was not a perquisite under s.17(2), and could not found a disallowance under s.40A(5). On the merger point the Court drew the distinction it needed for its own earlier order: where this Court dismisses an appeal, even by a non-speaking order, it upholds the decision below and the doctrine of merger applies; where it simply dismisses a special leave petition under Article 136 it says only that the case is not a fit one for the exercise of that jurisdiction, and there is no merger. Because the revenue's appeal for assessment year 1980-81 had been dismissed as an appeal, that order stood in its way.
The Court's route runs through the legislative history. The Taxation Laws (Amendment) Act 1984 inserted sub-clause (vi) in s.17(2), and a matching sub-clause (vi) in clause (b) of Explanation 2 to s.40A(5), to treat the interest forgone on an interest-free or concessional employer loan as a perquisite with effect from 1 April 1985. The Finance Act 1985 omitted both from the very date of their insertion, as relief to salaried taxpayers, and rule 3(a), made to work the new provision, went with them. The Court treated that sequence, together with CBDT Circulars No. 387 of 16 October 1984 and No. 421 of 12 June 1985, as showing how the revenue itself understood the law before 1984: Parliament had had to carve out an exception, which means the exception was not there already. It surveyed the conflicting High Court authority and quoted with approval the Calcutta High Court's reasoning in P.R.S. Oberoi, and held that the Karnataka High Court in M.K. Vaidya and P. Krishna Murthy had correctly applied the 1984 and 1985 changes while the judgment under appeal had brushed them aside. It added a second criticism of the judgment under appeal: the Tribunal had found as a fact that the revenue led no evidence that borrowed funds went to the directors, and the High Court, in saying such proof would be well-nigh impossible because borrowed and own funds intermingle, had gone beyond that finding, which was not permissible. Separately, the Court held itself bound by the dismissal of the revenue's appeal in Civil Appeal No. 424 of 1999, an appeal and not a special leave petition, so that the High Court's order for assessment year 1980-81 had merged in this Court's order.
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. This provided a clear direction to interpret the provisions of Sections 17(2) and 40A(5) before insertion of clause (vi).
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Handle my notice → Ask a CA on WhatsAppNo - but only for years before the charge was specifically provided for. The Supreme Court held that granting an interest-free or concessional loan to an employee does not result in a taxable benefit or perquisite 'unless specifically so provided', reading the 1984 insertion and 1985 omission as Parliament declining to tax it. This was decided by the Supreme Court (Supreme Court of India - D.P. Wadhwa and S.S. Mohammed Quadri, JJ.) and bears on section 17(2), section 40A(5) of the Income Tax Act 1961. It is reported as [2000] 110 Taxman 67 (SC)/[2000] 243 ITR 383 (SC)/[2000] 160 CTR 225 (SC); Civil Appeal No. 657 of 1994 and Civil Appeal Nos. 4012-13 of 1998. The perquisite holding is now of historical use only, because the charge has since been specifically provided for. Two other holdings still earn the case its place. On s.40A(5), the Court refused to accept the fiction that interest-free funds would otherwise have earned a return, since a disallowance presupposes a deduction actually claimed and nothing had been claimed. On procedure, it held that the doctrine of merger applies to appeals dismissed under Article 133 but not to special leave petitions dismissed under Article 136 - an argument that comes up whenever the department says a dismissed SLP has merged a High Court order. If it applies to you, the first step is this: Use the perquisite holding only for assessment years before Rule 3(7)(i) applied, and check that cut-off before you file.
Two sets of appeals were heard together. In Civil Appeal No. 657 of 1994 the company was the appellant. For assessment year 1979-80 the Income-tax Officer found that it was borrowing large sums at 15 per cent while its directors drew money from it without paying interest, and disallowed Rs 5,21,241 - 15 per cent of the debit balances standing in the directors' accounts - under s.40A(5) read with s.17(2). The Commissioner (Appeals) upheld him. The Tribunal deleted the addition, holding there was no evidence that borrowed funds had been diverted to the directors and that non-charging of interest on a running-account debit balance was not a perquisite. On a reference at the revenue's instance the Karnataka High Court reversed the Tribunal ([1992] 198 ITR 738). In Civil Appeal Nos. 4012-13 of 1998 the revenue was the appellant, in the case of Shivanand V. Salgaocar, a director of the company, for assessment years 1980-81 and 1981-82: the Officer had valued the non-charging of interest on his debit balance at 15 per cent and taxed it as a perquisite under s.17(2), the Commissioner (Appeals) and the Tribunal had deleted it, and the High Court had answered the reference in his favour. A third strand mattered: for assessment year 1980-81 in the company's own case the High Court had decided against the revenue, and this Court had dismissed the revenue's appeal on certificate, Civil Appeal No. 424 of 1999, on 25 January 1999 with the words 'The appeal is dismissed'. The matter was decided on 2000-04-10 by the Supreme Court (Supreme Court of India - D.P. Wadhwa and S.S. Mohammed Quadri, JJ.). On those facts the Supreme Court held as follows. Civil Appeal No. 657 of 1994 was allowed and Civil Appeal Nos. 4012-13 of 1998 were dismissed; the referred questions were answered in favour of the assessee. Non-charging of interest on the debit balances in the directors' running accounts was not a perquisite under s.17(2), and could not found a disallowance under s.40A(5). On the merger point the Court drew the distinction it needed for its own earlier order: where this Court dismisses an appeal, even by a non-speaking order, it upholds the decision below and the doctrine of merger applies; where it simply dismisses a special leave petition under Article 136 it says only that the case is not a fit one for the exercise of that jurisdiction, and there is no merger. Because the revenue's appeal for assessment year 1980-81 had been dismissed as an appeal, that order stood in its way.
The Court's route runs through the legislative history. The Taxation Laws (Amendment) Act 1984 inserted sub-clause (vi) in s.17(2), and a matching sub-clause (vi) in clause (b) of Explanation 2 to s.40A(5), to treat the interest forgone on an interest-free or concessional employer loan as a perquisite with effect from 1 April 1985. The Finance Act 1985 omitted both from the very date of their insertion, as relief to salaried taxpayers, and rule 3(a), made to work the new provision, went with them. The Court treated that sequence, together with CBDT Circulars No. 387 of 16 October 1984 and No. 421 of 12 June 1985, as showing how the revenue itself understood the law before 1984: Parliament had had to carve out an exception, which means the exception was not there already. It surveyed the conflicting High Court authority and quoted with approval the Calcutta High Court's reasoning in P.R.S. Oberoi, and held that the Karnataka High Court in M.K. Vaidya and P. Krishna Murthy had correctly applied the 1984 and 1985 changes while the judgment under appeal had brushed them aside. It added a second criticism of the judgment under appeal: the Tribunal had found as a fact that the revenue led no evidence that borrowed funds went to the directors, and the High Court, in saying such proof would be well-nigh impossible because borrowed and own funds intermingle, had gone beyond that finding, which was not permissible. Separately, the Court held itself bound by the dismissal of the revenue's appeal in Civil Appeal No. 424 of 1999, an appeal and not a special leave petition, so that the High Court's order for assessment year 1980-81 had merged in this Court's order. In the words reproduced by the source cited on this page: "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. This provided a clear direction to interpret the provisions of Sections 17(2) and 40A(5) before insertion of clause (vi)."
It was decided by the Supreme Court on 2000-04-10 and is reported as [2000] 110 Taxman 67 (SC)/[2000] 243 ITR 383 (SC)/[2000] 160 CTR 225 (SC); Civil Appeal No. 657 of 1994 and Civil Appeal Nos. 4012-13 of 1998. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 17(2), section 40A(5), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Civil Appeal No. 657 of 1994 was allowed and Civil Appeal Nos. 4012-13 of 1998 were dismissed; the referred questions were answered in favour of the assessee. Non-charging of interest on the debit balances in the directors' running accounts was not a perquisite under s.17(2), and could not found a disallowance under s.40A(5). On the merger point the Court drew the distinction it needed for its own earlier order: where this Court dismisses an appeal, even by a non-speaking order, it upholds the decision below and the doctrine of merger applies; where it simply dismisses a special leave petition under Article 136 it says only that the case is not a fit one for the exercise of that jurisdiction, and there is no merger. Because the revenue's appeal for assessment year 1980-81 had been dismissed as an appeal, that order stood in its way. It arises in Salary & Perquisites matters, on section 17(2), section 40A(5) of the Income Tax Act 1961, and was decided by Supreme Court of India - D.P. Wadhwa and S.S. Mohammed Quadri, JJ.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Cite the s.40A(5) reasoning where an officer disallows on a notional footing although no deduction was ever claimed. Cite the merger holding where the department argues that the dismissal of an SLP has merged the High Court order into a Supreme Court decision.
Superseded by amendment. The holding was expressly conditional — no perquisite 'unless specifically so provided'. It has since been specifically provided for: s.17(2)(viii) read with Rule 3(7)(i) now values interest-free and concessional employer loans as a perquisite, and the Supreme Court upheld that machinery in All India Bank Officers' Confederation v. Regional Manager, Central Bank of India (2024) 464 ITR 286 (SC), holding such loans to be taxable fringe benefits. Salgaocar therefore survives only for years before the rule applied, and for its merger/s.40A(5) holdings. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Superseded by amendment on the perquisite point, and be precise about what moved. Nothing overruled the reasoning; the statute changed. The Court's route was that Parliament had to insert sub-clause (vi) in s.17(2) and in Explanation 2(b) to s.40A(5) in 1984 to tax the interest forgone on an employer loan, and omitted both in 1985 from the date of insertion - so before that there was no charge. Section 17(2)(viii) read with Rule 3(7)(i) now specifically provides for it, machinery upheld by the Supreme Court in All India Bank Officers' Confederation v. Regional Manager, Central Bank of India (2024) 464 ITR 286 (SC), which holds such loans to be taxable fringe benefits. The case therefore survives only for years before that rule applied, and for its s.40A(5) and merger holdings. On merger it has been approved by a three-Judge Bench: Kunhayammed v. State of Kerala [2000] 113 Taxman 470 (SC)/[2000] 245 ITR 360 (SC), 19 July 2000, holds there is no merger where a special leave petition is dismissed by a non-speaking order. The judgment approves the Karnataka High Court in CIT v. M.K. Vaidya [1997] 224 ITR 186 and P. Krishna Murthy v. CIT [1997] 224 ITR 183, and quotes with approval the Calcutta High Court in P.R.S. Oberoi; it disapproves the reasoning of the Karnataka High Court judgment under appeal, [1992] 198 ITR 738. It was not possible to establish from this judgment the date Rule 3(7)(i) was introduced, so the precise first year from which the perquisite point ceased to apply is still unverified - establish it yourself before relying on a particular assessment year. The date on which Rule 3(7)(i) was introduced is not established here, so the precise cut-off year from which this decision ceased to apply to concessional loans remains unconfirmed. Two limits on how far the decision travels: the Court decided the perquisite question on the 1984 insertion and 1985 omission of sub-clause (vi), so the reasoning is spent once a specific charging provision exists; and its criticism of the High Court for going behind the Tribunal's finding that no borrowed funds were traced to the directors is a fact-specific point, not a rule that such tracing can never be done. In the report the Court's own passage relied on for the quotation sits at the end of the block numbered 17, after a long extract from the Calcutta High Court; paragraph numbering may differ in other renderings. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Civil Appeal No. 657 of 1994 was allowed and Civil Appeal Nos. 4012-13 of 1998 were dismissed; the referred questions were answered in favour of the assessee. Non-charging of interest on the debit balances in the directors' running accounts was not a perquisite under s.17(2), and could not found a disallowance under s.40A(5). On the merger point the Court drew the distinction it needed for its own earlier order: where this Court dismisses an appeal, even by a non-speaking order, it upholds the decision below and the doctrine of merger applies; where it simply dismisses a special leave petition under Article 136 it says only that the case is not a fit one for the exercise of that jurisdiction, and there is no merger. Because the revenue's appeal for assessment year 1980-81 had been dismissed as an appeal, that order stood in its way.
TaxSphere, “V.M. Salgaocar & Bros P Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/vm-salgaocar-v-cit-interest-free-employer-loan/ (validity last checked 2026-08-25)
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