The Supreme Court in the case of V.M. Salgaocar and Bros. Pvt. Ltd. Vs. Commissioner of Income-tax (243ITR383) held that non-charging of interest could not be regarded as being a perquisite in the hands of the employee-directors who were advanced interest-free loans by the company. For the first time it is the Calcutta High Court in the case of Ishran Devi Oberoi v. ITO (250ITR362) applied this rule in the context of a person who was not a salaried employee.
In this case the assessing officer attempted to tax the benefit in regard to interest free loan u/s 2(24) (iv) and for this purpose issued a reassessment notice u/s 148 of the Income tax Act, 1961. Terming as invalid such notice the Calcutta High Court held that if there is no income the question of escapement for the purposes of section 148 does not arise. Following the Supreme Court ruling as per above the High Court held that benefit enjoyed by the assessee by way of exemption of payment of interest cannot be termed to be an income in any sense.
Going a step further the Court held that the rule of exemption laid down by the Supreme Court has general application in all cases of assessee and not just employees.
Effective 01.10.2001 such benefit is made taxable in particular in the case of salaried personnel. However in case of non salaried personnel other than a director, a substantial shareholder or in the case of a relative of such persons this benefit may not be taxable provided that the amount is advanced out of internal accruals or interest free borrowings.