Introduction:

The Mumbai bench of Income Tax Appellate Tribunal (hereinafter referred as ‘ITAT’) vide order[1] dated May 16, 2018, has held that the benefit received by way of interest free loan from employer shall be taxable and treated as perquisite in the hands of employees.

Facts:

  1. The assessee was employed with Teej Impex Pvt. Ltd. and was drawing a salary income of INR 24 lakhs per annum.
  2. The assessee had obtained interest free unsecured loan from the employer.
  3. The employer deducted tax at source on salary paid to the assessee.
  4. The Assessing Officer (hereinafter referred as ‘AO’) observed that since the assessee obtained benefit by way of interest free unsecured loan, the same is chargeable to tax as perquisite under Section 17 (2) (iii) (c) of the Income Tax Act, 1961.
  5. The AO determined the value of perquisite by invoking Rule 3 (7) (i) of the Income Tax Rules, 1962.
  6. The AO estimated 15% interest on such loan and made additions to the total income of assessee for assessment year 2011-12.
  7. The assessee appealed before the Ld. CIT (A) being aggrieved by the assessment order.
  8. The Ld. CIT (A) observed that although the AO was right in determining value of perquisite in respect of interest free unsecured loan however, failed to follow Rule 3 (7) (i) while determining the quantum of perquisite.
  9. The assessee has filed the appeal against the order dated January 29, 2016 of the Ld. CIT (A).

ITAT’s decision:

  1. The AO was right in determining the value of perquisite in respect of interest free unsecured loan.
  2. ITAT upheld the findings of Ld. CIT (A) and dismissed the appeal filed by the assessee.
  3. The AO has determined value of perquisite as per the provisions of Section 17 (2) (iii) (c), however, erred while calculating the value of perquisite as he has adopted ad hoc 15% on outstanding loan.

Value of perquisite:

A perquisite value is based on the rate charged by SBI on April 1 of the financial year in which the employee received the loan according to IT Act rules.

Key takeaways:

  1. The employer is liable to treat an interest-free loan as a taxable perquisite.
  2. TDS is to be deducted from salary including the value of perquisite.

The value of perquisite has to be determined as per the provisions of Income Tax Act and not on ad hoc basis.