1983 (9) TMI 34 - HC - Income Tax

Taxability of rent-free accommodation as perquisite clarified by High Court decision

The High Court held that the rent-free accommodation provided by the employer to the individual assessee constituted a taxable perquisite under the Income ... Perquisite, Salary Issues:Interpretation of provisions of sections 15 and 17 of the Income Tax Act, 1961 regarding the taxability of rent-free accommodation provided by an employer as a perquisite in the case of an individual assessee.Analysis:The judgment delivered by the High Court of Delhi pertained to a reference under section 256(1) of the Income Tax Act, 1961, involving the taxability of rent-free accommodation provided to an individual assessee by the employer. The primary question raised was whether the perquisite of rent-free accommodation should be included in the total income of the assessee under the head 'Salary' even if the assessee did not utilize the accommodation during the previous year. The assessee, a managing director of a company, received various perquisites including a rent-free house, car, telephone, and other amenities from the employer. The Income Tax Officer (ITO) estimated the value of these perquisites and included it as income of the assessee. The Appellate Authority Commissioner (AAC) reduced the addition, but the Income Tax Appellate Tribunal deleted the entire addition based on the interpretation of the provisions of the Act.The Tribunal analyzed the meaning of the term 'provided' in section 17 of the Act and distinguished it from the term 'due.' It concluded that for a perquisite to be taxed, the employee must derive benefit from it, and if the employee is unable to utilize the accommodation provided, the notional income does not come into being. The Tribunal emphasized that the legal fiction of taxing a perquisite must align with the actual benefit received by the employee. The Tribunal's decision was based on the principle that income tax is a levy on actual income, and if income does not result, there cannot be a tax liability.The High Court further examined sections 15 and 17 of the Act, which define the scope of 'Salary' and 'perquisite,' respectively. It noted that the Act includes the value of rent-free accommodation provided by the employer as a perquisite in the definition of 'Salary.' The Court emphasized that unless the assessee forgoes or waives the right to the rent-free accommodation before the income accrues, the notional income must be brought to tax. Citing judicial precedents, the Court highlighted that the voluntary forgoing of salary or other income before it accrues may prevent its taxation, but in this case, as the assessee had not waived the accommodation, the perquisite had to be taxed.Referring to previous cases, the Court reiterated that the principle of accrual governs the taxation of income, and if the right to receive income has not been waived before accrual, it remains taxable. Therefore, as the assessee had not forgone the rent-free accommodation provided by the employer, the perquisite had to be included in the total income of the assessee. The Court answered the reference in favor of the Revenue and against the assessee, highlighting the importance of the timing of forgoing rights to perquisites in determining tax liability.In conclusion, the judgment provides a detailed analysis of the interpretation of statutory provisions, legal principles, and judicial precedents regarding the taxability of perquisites such as rent-free accommodation under the Income Tax Act, emphasizing the significance of actual benefit derived by the employee and the timing of forgoing rights in determining tax liability.