2006 (9) TMI 115 - SC - Income Tax

Income Tax Rule 3 upheld for computing rental accommodation perquisites under Section 17(2) - reasonable classification confirmed

Arun Kumar And Others Versus Union of India And Others

The SC upheld the validity of Rule 3 of the Income-tax Rules, 1962, as amended in 2001, which prescribes methods for computing valuation of perquisites ... Validity of rule 3 of the Income-tax Rules, 1962, as amended by the Income-tax (Twenty-second) Amendment Rules, 2001, which amended the method of computing the valuation of perquisites u/s 17(2) - matter of rental accommodation provided by employers to their employees - Consistency of amended Rule 3 with the parent Act (Income-tax Act, 1961) - expression 'perquisite' - Doctrine of 'reading down' - HELD THAT:- It is no doubt true that article 14 guarantees equality before the law and confers equal protection of the laws. It is also true that it prohibits the State from denying persons or classes of persons equal treatment provided they are equals and are similarly situated. But, it is equally well established that article 14 seeks to prevent or prohibit a person or class of persons from being singled out from others situated similarly. If two persons or two classes are not similarly situated or circumstanced, they cannot be treated similarly. To put it differently, article 14 prohibits dissimilar treatment to similarly situated persons, but does not prohibit classification of persons not similarly situated, provided such classification is based on intelligible differentia and is otherwise legal, valid and permissible. In our opinion, the distinction sought to be made by the rule making authority between employees of the Central Government as well as the State Governments and other employees i.e., employees of companies, corporations and other undertakings is reasonable classification based on intelligible differentia. It has also rational nexus to the object sought to be achieved. Rule 3 takes into account service conditions of employees of Government vis-a-vis employees of corporations, companies and other undertakings and prescribes the method of calculating the value of all perquisites. Such a provision, in our considered opinion, cannot be held ultra vires article 14 of the Constitution. Even under the Constitution, such a distinction has been upheld in several cases by this court. Article 311 of the Constitution confers certain benefits which are not available to employees of corporations, companies and other undertakings. It was contended on behalf of those employees that such corporations, companies and undertakings were covered by the definition 'State' within the meaning of article 12 of the Constitution and they also must be granted all the benefits which had been granted to employees of the Government. The contention was, however, negatived by this court holding that application of Part XIV of the Constitution would be limited to services under the Union and the States and not to other employees (vide Dr. S.L. Agarwal v. General Manager, Hindustan Steel Ltd. [1969 (12) TMI 109 - SUPREME COURT], Ajit Kumar Nag v. General Manager (PJ), Indian Oil Corporation Ltd. [2005 (9) TMI 619 - SUPREME COURT]. We, therefore, see no substance in the argument that the impugned provision differentiating employees of Government and employees of companies, corporations and other undertakings is arbitrary and objectionable. Thus, we hold that though rule 3 of the rules cannot be held arbitrary, discriminatory or ultra vires article 14 of the Constitution nor inconsistent with the parent Act (section 17(2)(ii)), it is in the nature of a 'machinery provision' and applies only to the cases of 'concession' in the matter of rent respecting any accommodation provided by an employer to his employees. Whether or not Parliament could have in the exercise of legislative power created a 'deeming fiction' as to concession in the matter of rent in certain circumstances (for which we express no final opinion), no such deeming provision is found in the Act. It is, therefore, open to the assessee to contend that there is no 'concession' in the matter of accommodation provided by the employer to the employees and the case is not covered by section 17(2)(ii) of the Act. Hence, Civil Appeal is partly allowed to the extent indicated above. Issues Involved:1. Validity of Rule 3 of the Income-tax Rules, 1962, as amended by the Income-tax (Twenty-second) Amendment Rules, 2001.2. Consistency of amended Rule 3 with the parent Act (Income-tax Act, 1961).3. Whether amended Rule 3 is ultra vires Article 14 of the Constitution.4. Classification of employees and its reasonableness.5. Interpretation of 'concession' under Section 17(2)(ii) of the Income-tax Act, 1961.6. Applicability of the doctrine of 'reading down' to Rule 3.Detailed Analysis:1. Validity of Rule 3 of the Income-tax Rules, 1962:The appellants challenged the validity of Rule 3, amended in 2001, arguing it conferred arbitrary powers on the Revenue and was inconsistent with the Income-tax Act. The court examined the rationale for the amendment, which aimed to simplify and rationalize the procedure for determining the perquisite value, and upheld the validity of Rule 3.2. Consistency of Amended Rule 3 with the Parent Act:The appellants argued that Rule 3, as amended, was inconsistent with Section 17(2) of the Income-tax Act, 1961. The court held that Rule 3 is in the nature of a 'machinery provision' and applies to cases of 'concession' in the matter of rent respecting any accommodation provided by an employer to his employees. It was found to be consistent with the parent Act.3. Whether Amended Rule 3 is Ultra Vires Article 14 of the Constitution:The appellants contended that the amended Rule 3 was ultra vires Article 14 of the Constitution as it was arbitrary and discriminatory. The court observed that the classification between cities with populations of less than four lakhs and more than four lakhs was reasonable and rational. The court found that the rule did not suffer from the vice of arbitrariness and upheld its validity.4. Classification of Employees and Its Reasonableness:The court examined the distinction made between Government employees and other employees. It was argued that such classification was artificial and irrational. The court, however, held that the classification was based on intelligible differentia and had a rational nexus to the object sought to be achieved. The benefits and service conditions of Government employees were considered different from those of employees of corporations, companies, and other undertakings. Hence, the classification was upheld as reasonable.5. Interpretation of 'Concession' Under Section 17(2)(ii) of the Income-tax Act, 1961:The court emphasized that 'concession' is a jurisdictional fact under Section 17(2)(ii). It must be established that there is a concession in the matter of rent before Rule 3 can be applied. The court noted that the amended Rule 3 did not provide a 'deeming clause' to automatically consider rent below a certain percentage of salary as a concession. Therefore, it is open to the assessee to contend that there is no concession, and the case does not fall under Section 17(2)(ii).6. Applicability of the Doctrine of 'Reading Down' to Rule 3:The appellants argued for the application of the doctrine of 'reading down' to save Rule 3 from being arbitrary and unreasonable. The court, however, held that the rule was clear and unambiguous, and there was no need to read down the provision. The court stated that the rule-making authority's intention was not to provide an opportunity to the assessee to prove the absence of concession.Conclusion:The Supreme Court upheld the validity of the amended Rule 3 of the Income-tax Rules, 1962, finding it consistent with the parent Act and not ultra vires Article 14 of the Constitution. The court recognized the classification of employees as reasonable and based on intelligible differentia. It also clarified that 'concession' is a jurisdictional fact under Section 17(2)(ii), and the assessee has the right to contest the existence of such a concession. The doctrine of 'reading down' was deemed unnecessary for Rule 3. The appeal was partly allowed to the extent indicated, and the transferred cases were disposed of accordingly.