2016 (5) TMI 935 - HC - Income Tax

Constitutionality of Income Tax Act Sections Upheld: Rule on Valuing Fringe Benefits Valid

The court upheld the constitutionality of Section 17(2)(viii) of the Income Tax Act, 1961, and Rule 3(7)(i) of the Income Tax Rules, 1962. It found that ... Section 17(2)(iii) or 17(2) (vi) or Rule 3(7)(i) of the Income Tax Rules or both challenged - by taking the rate of interest charged by the State Bank of India as the base for determining whether the interest free or concessional loan offered by a bank to its own employee as a perquisite or not, the Rule has taken away the right of the employees to contest an important jurisdictional fact namely whether what is granted to them is a concession, amenity or benefit ? - Held that:- Section 17(2)(ii) did not make the provision of any and every residential accommodation as a perquisite. It made only a concession in the matter of rent as a perquisite. Therefore, there was a need for adjudication. On the contrary, the Parliament made any fringe benefit or amenity as prescribed by the Rule Making Authority, as a perquisite, leaving no scope for any adjudication. The method of valuation is prescribed by Rule 3(7)(i). Therefore, the decision in Arunkumar [2006 (9) TMI 115 - SUPREME Court] has no bearing upon the constitutional validity of Section 17(2)(viii) or Rule 3(7)(i). Apart from the fact that the first ground of attack is legally untenable, it also defies logic. By contending that the question about the interest free or concessional loan granted to them is a jurisdictional fact and that the same should be allowed to be adjudicated individually before the Assessing Officers, the petitioners have taken a stand that the arbitrary exercise of power by the Law Enforcing Authorities is acceptable to them, but the prescription of a standard formula by the Executive for avoiding arbitrariness and for ensuring uniformity is not acceptable to them. This is why their contention is unacceptable to us. Rule is violative of Article 14 - Held that:- If the employees of different banks, who are before us, are in enjoyment of an interest free or concessional loan, paying different rates of interest such as 6%, 7% or 8%, what is sought to be included in their salaries under Rule 3(7)(i), is only the difference between the rate of interest charged by the State Bank of India in respect of loans for the same purpose and the interest actually charged by their employer. Therefore, Rule 3(7)(i) does not even make a classification between different categories of employees or between employees of different banks. The petitioners cannot compare themselves with the employees of the State Bank of India, to contend that there is discrimination. If at all, it is the employee of the State Bank of India, who can perhaps raise an argument that they are suffering a handicap in the form of a higher rate of tax. This will be clear from the example that we have given in paragraphs 32 and 33. If the State Bank of India charges interest at 10% per annum on the loans advanced to its employees and another bank charges 7% per annum on the loans advanced to its employees, then the employees of the State Bank of India end up paying more in the form of interest than their counterparts in other banks. The employees of other banks end up paying income tax at the rate of 10 - 30% on the differential interest of 3% (between the SBI rate and the rate charged by their employer). Therefore, the attack on the basis of Article 14 is completely meaningless. Whether Rule works out a great hardship to the employees ? - Held that:- This argument completely lacks merit. A common man, either in business or in profession or in any employment other than in the banking sector, pays a higher rate of interest on the loan taken by him from a bank. But, by virtue of being an employee of the bank, if such employee receives an interest free or a concessional loan, then he is in enjoyment of a privilege. It is that privilege, which is sought to be taxed under Rule 3(7)(i). If converted into monetary terms, what is taxed at the hands of the employee, at the maximum, is about 30% of that privilege, which he enjoys as an extra benefit on account of being an employee of the bank. In other words, Rule 3(7)(i) causes a dent in the value of the privilege given to an employee by an employer, perhaps to the maximum extent of about 30%. This can never be considered as a hardship. Therefore, the third ground of challenge is also liable to be rejected. Rule 3(7)(i) is vitiated in as much as it tends to overrule the judgment of the Supreme Court in Arunkumar [2006 (9) TMI 115 - SUPREME Court]- Held that:- e completely fail to understand as to how Rule 3(7)(i) can be said to have been brought into force with a view to overreach the judgment of the Supreme Court in Arunkumar. The judgment of the Supreme Court in Arunkumar was delivered on 15.9.2006. The decision arose out of a challenge to the validity of Rule 3 of the Income Tax Rules, 1962 and Section 17(2)(ii) of the Income Tax Act, 1961. The original cases were actually filed by the employees of Tata Iron and Steel Company Limited before the High Court of Jharkhand, challenging a Notification bearing No.S.O.940(E) dated 25.9.2001. By this Notification, Rule 3 of the Income Tax Rules stood amended. What is now under challenge is Clause (i) of Sub-Rule (7) of Rule 3 that was incorporated with effect from 1.4.2004 under the Income Tax (First Amendment) Rules, 2004. But, the decision in Arunkumar, as we have pointed out earlier, was rendered on 15.9.2006, much after the Rule came into force. Therefore, the contention that the Rule was inserted to overreach the decision in Arunkumar defies chronology of events. Hence, the fourth ground of attack to the impugned provisions is also liable to be rejected. If salary is taxable and some perquisite or benefit forms part of a package, the same should also be taxed. Therefore, we are of the considered view that the challenge to Section 17(2)(viii) as well as Rule 3(7)(i) has to fail. Issues Involved:1. Constitutionality of Section 17(2)(viii) of the Income Tax Act, 1961.2. Constitutionality of Rule 3(7)(i) of the Income Tax Rules, 1962.3. Violation of Article 14 of the Constitution of India.4. Hardship caused by Rule 3(7)(i).5. Alleged overruling of the Supreme Court judgment in Arunkumar Vs. Union of India.Issue-wise Detailed Analysis:1. Constitutionality of Section 17(2)(viii) of the Income Tax Act, 1961:The petitioners challenged Section 17(2)(viii) which includes the value of any other fringe benefit or amenity as prescribed by the government as a perquisite. The court observed that the Parliament has left it to the Government to prescribe what constitutes a fringe benefit or amenity. The method of valuation of perquisites is prescribed under Rule 3 of the Income Tax Rules, 1962. The court found no constitutional infirmity in Section 17(2)(viii) as it provides a clear mandate for the inclusion of fringe benefits or amenities as perquisites.2. Constitutionality of Rule 3(7)(i) of the Income Tax Rules, 1962:The petitioners argued that Rule 3(7)(i) is ultra vires Section 17(2)(viii) as it deprives employees of their right to contest whether what was granted to them was a concession or benefit. The court rejected this argument, stating that Rule 3(7)(i) provides a definite method for valuing the fringe benefit, thus eliminating the need for individual adjudication by Assessing Officers. The court held that the rule is valid and does not violate the principles laid down in Arunkumar Vs. Union of India.3. Violation of Article 14 of the Constitution of India:The petitioners contended that Rule 3(7)(i) violates Article 14 by treating unequals as equals, as it pegs the rate of interest charged by individual banks to the rate of interest offered by the State Bank of India. The court found that the rule does not treat unequals as equals but rather provides a uniform method for valuing the perquisite of concessional loans. The court reasoned that the impact of Rule 3(7)(i) varies depending on the rate of interest charged by different banks and the income bracket of the employees, thus not violating Article 14.4. Hardship caused by Rule 3(7)(i):The petitioners argued that the rule causes hardship to employees as it taxes the privilege of concessional loans. The court dismissed this argument, stating that the rule merely taxes a privilege enjoyed by bank employees, which is a reasonable measure. The court held that the rule does not cause undue hardship and is a valid exercise of the government's power to tax perquisites.5. Alleged overruling of the Supreme Court judgment in Arunkumar Vs. Union of India:The petitioners claimed that Rule 3(7)(i) overrules the Supreme Court judgment in Arunkumar. The court clarified that the judgment in Arunkumar dealt with Section 17(2)(ii) and not Section 17(2)(viii). The court held that Rule 3(7)(i) was not intended to overrule the judgment in Arunkumar and was validly introduced to prescribe the method of valuation for fringe benefits under Section 17(2)(viii).Conclusion:The court dismissed all the writ petitions, holding that Section 17(2)(viii) and Rule 3(7)(i) are constitutionally valid and do not violate Article 14. The court found that the rule does not cause undue hardship and does not overrule the Supreme Court judgment in Arunkumar. Consequently, all connected pending miscellaneous petitions were also dismissed with no order as to costs.