2012 (9) TMI 761 - AT - Income Tax

University Employees Not State Govt Employees for Income Tax Purposes: ITAT Decision

The ITAT allowed the appeals, ruling that the university employees cannot be classified as State Government employees and were not in default under ... Assessee in default u/s 201 and 201 (1A) – accommodation provided by university to its employees against license fees – Revenue contended deduction of TDS on the value of perquisite of the rent free accommodation as per the procedure provided in Rule 3 of the Income-tax Rules, 1962 - Held that:- On reading the findings of the ITAT in the case of Financial Officer, Maharishi Dayanand University, Rohtak (2007 (12) TMI 247 - ITAT DELHI-I), which covers issue in favor of assesse, along with the finding of the AO in the light of the law propounded by the Supreme Court in case of Arun Kumar Vs. Union of India(2006 (9) TMI 115 - SUPREME COURT ) upholding validity of the Rule 3, it gets revealed that AO has nowhere held in the impugned order that any concession was given by the employer to its employees and they have provided the accommodation on a concessional rates. AO straightway applied Rule 3 without first establishing the case that the appellants have provided any concession in the shape of accommodation to its employees. Assessees cannot be treated in default without factually establishing that they have extended any concession to their employees. Revenue authorities have also not looked into the dispute with this angle. In view of the above discussion, it is held that assesse is not in default u/s 201(1) and 201(1A) - Decided in favor of assessee Issues Involved:1. Whether the university employees should be treated as State Government employees for the purposes of TDS on perquisites.2. Whether the university provided accommodations to its employees at concessional rates, thereby creating a perquisite.3. The applicability of Rule 3 of the Income-tax Rules, 1962, in determining the value of perquisites.4. Validity of the demand raised under sections 201(1) and 201(1A) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Classification of University Employees:The appellants argued that the university employees should be classified as State Government employees and not under the category of 'others.' They contended that the university is established under an Act of Parliament, receives 100% budgetary support from the State Government, and follows State Government rules regarding financial and service matters. The first appellate authority, however, did not concur, stating that the term 'state' under Article 12 of the Constitution of India pertains to fundamental rights and has no relevance to tax matters. The university is an autonomous body, and its employees cannot be treated as State Government employees.2. Concessional Accommodation:The Assessing Officer formed an opinion that the university provided accommodation to its employees for which it charged license fees but did not deduct TDS on the value of perquisite of the rent-free accommodation as per Rule 3 of the Income-tax Rules, 1962. The appellants contended that there was no concession in rent and that similar issues had been resolved in favor of the assessees in past ITAT decisions. However, the CIT(A) did not agree, stating that the assessee failed to provide complete texts of the relevant ITAT orders.3. Applicability of Rule 3:The Assessing Officer applied Rule 3 to compute the perquisite value, determining that 7.5% of the salary should be treated as the perquisite value of the accommodation provided by the employer. The appellants argued that the rule prior to the 2001 amendment, which considered fair rental value, should apply. The ITAT noted that the old rule required establishing that the accommodation was provided at a concessional rate before determining the perquisite value. The Supreme Court's decision in Arun Kumar v. Union of India was cited, emphasizing that the existence of a 'concession' is a jurisdictional fact that must be established before applying Rule 3.4. Validity of Demand under Sections 201(1) and 201(1A):The Assessing Officer raised demands under sections 201(1) and 201(1A) for non-deduction of TDS on the perquisite value of the accommodation. The ITAT found that the Assessing Officer did not establish that the university provided accommodation at concessional rates, which is a prerequisite for applying Rule 3. The ITAT held that the assessees could not be treated as defaulters without establishing that they extended any concession to their employees. Consequently, the ITAT quashed the orders passed under sections 201(1) and 201(1A).Conclusion:The ITAT allowed the appeals, holding that the assessees were not in default under sections 201(1) and 201(1A) of the Income-tax Act, 1961. The decision emphasized the necessity of establishing a concession in rent before applying Rule 3 and highlighted the distinction between State Government employees and employees of autonomous bodies like the university. The decision was pronounced in the open court on 27.07.2012.