The objective of such concessional loans may be to reward staff or simply one of the ways their remuneration is structured. An object that may not be openly stated could also be to retain the employee with the company since if he were to leave, he would have to repay at one stroke the whole of the loan. The question is whether this concession on account of interest is taxable as perquisite in the hands of the employee. The tax law very broadly states that "the value of any benefit or amenity granted or provided free of cost or at concessional rate" shall be taxed as perquisite in the hands of the employee.

Note that theissue has many facets and only one of them is considered here. The question that is considered here is the tax treatment of the concession in the hands of the employee. There is also, however, the question of deductibility of interest paid by the company on moneys borrowed by the company for giving such loans.

An allied question is also the tax treatment of the interest, if any, paid by the employee on such loans. However, as stated earlier, only the tax treatment in the hands of the employee is considered here.

On first impression, at least, the employee is clearly getting a benefit. Had he taken the loan from a bank or other institution, he would have had to pay interest. As far as the company is concerned, it also could have lent the amount to a third party on interest. It is also likely that the company itself may be paying interest on moneys borrowed from which the interest-free or concessional loan was given to the employee.

Courts have however not been unanimous on deciding this issue.Interestingly, in the year 1984, a provision was introduced in the tax law specifically stating that concession on account of interest on loan granted to employees would be taxable as perquisites. For reasons not on record, this provision was withdrawn before it could even come into effect.

It is this fact that some courts have been using to hold that concession on account of interest is not taxable as perquisites. The argument is that if the law had intended that such concession is taxable, there was no need to include a separate and special provision taxing it. Hence, on this line of argument, which, it is respectfully submitted, more technical than substantive, the Calcutta and the Karnataka high courts (in CIT vs PRS Oberoi (1990) 183 ITR 103 (Cal) an CIT vs MK Vaidya (1996) 224 ITR 186 (Kar) respectively) have held that such concession cannot be taxed as perquisite.

On the other hand, the Madras high court (in CIT vs C Kulandaivelu Konar (1975) 100 ITR 629 (Mad) and Addl CIT vs AK Lakshmi (1978) 113ITR 368 (Mad)) has consistently held, it is respectfully submitted, more substantive ground, that such concession should be taxed as perquisites.

The argument clearly is that the employee receives a benefit on account of the concessional interest and it should be taxable. The court has stated: "In the normal circumstances, the company is not expected to allow its funds to be given to anybody for use without any obligation to pay interest.

The company in this case allowed the assessee to withdraw the money, but without any obligation to pay interest. To the extent it allowed the assessees to use the funds of the company without any obligation to pay interest thereon, the company should certainly be deemed to have granted a benefit to the assessee."

Clearly, a legislative amendment is urgently needed to put this issue beyond any controversy. Without this, thousands of employees and even the employer companies may face tax, interest, penalty and prosecution if a view is taken that such concession should betaxed.

However, the story does not end here and there are certain peculiar consequences of this issue. For this, let us raise certain questions. Will the tax treatment differ if the company is itself paying interest on moneys borrowed by it from which the loan was given? Or will it be different if the money is given out of own funds? Looking at from a different angle, will the company be disallowed a deduction on the interest paid by it to the outsider lender in respect of the loan taken from him and granted to the employee?

There is yet another paradox. If the employee is taxed in respect of the concessional interest, is there not a double taxation? This is because the lender is also taxed in respect of the interest received by him. What, however, is missing is another deduction in the hands of the employee or the employer. Till the law as suitably amended, companies would have to be careful in structuring such loans so that even if the employee is taxed, that is no double taxation. Till that time, theemployees may be living on borrowed time.

The author is a Mumbai-based chartered accountant