Interest-free loans extended by an employer are taxable in the hands of an employee as a perquisite, the Income Tax Appellate Tribunal (ITAT) has said.

However, the valuation of the taxable benefit or perquisite, which forms part of the salary income of the employee, cannot be done in an ad-hoc manner and has to be computed as per the prescribed formula under the Income Tax Act, the tribunal said. In this case, Neha Saraf had obtained an interest-free loan from her employer, Teej Impex, a private company.

During the assessment for the financial year 2010-11, her argument that no employer-employee relationship existed fell through because the company had deducted tax at source, or TDS, on the salary of Rs 24 lakh paid to her.

Thus, the I-T officer assessing her case estimated 15% interest on the loan and added Rs 43.8 lakh to her income as a perquisite value of the interest-free loan.

In the next stage of appeal, the commissioner of I-T (appeals) held that the I-T officer had rightly treated the value of interest-free loan as a taxable perquisite in the hands of the employee. However, he noted that the valuation cannot be done in an ad-hoc manner.

According to I-T Act rules, 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.

The commissioner (appeals) reworked the valuation and arrived at a lower perquisite value of Rs 20.65 lakh. The commissioner (appeals) also rejected Saraf ’s contention that as interest on the loan given to her had already been disallowed in the hands of the company, it cannot be treated as a perquisite in her hands. Unhappy with the outcome, Saraf filed an appeal with the ITAT. However, in its order dated May 16, the ITAT upheld the order of the commissioner (appeals). #casansaar (Source - Times of India)