Court dismisses petition challenging tax deduction on employer-provided accommodation. Rule 3 mandates tax deduction based on salary percentages.

The court dismissed the writ petition challenging the tax deduction at source on accommodation provided by the employer. It held that the respondents were legally bound to deduct tax as per the amended Rule 3 of the Income-tax Rules, which specifies percentages of salary for valuing accommodation. The court found no merit in the petitioners' argument that the accommodation was not a taxable perquisite, as the rules now determine the value of perquisites provided by the employer based on specific criteria.

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Issues:
- Whether tax deduction at source is applicable on rent respecting accommodation provided by the employer to the employees.
- Whether the clarification issued regarding the tax treatment of accommodation provided by the employer is valid under the Income-tax Act, 1961.
- Whether the amended Rule 3 of the Income-tax Rules justifies the tax deduction at source on the accommodation provided by the employer.

Analysis:
The writ petition was filed by two associations seeking a declaration that there was no liability to deduct tax at source under section 192 of the Income-tax Act, 1961, regarding the rent of accommodation provided by the employer. The petitioners argued that the accommodation provided was not a taxable perquisite when they were government servants but became one after the creation of Bharat Sanchar Nigam Ltd. (BSNL). They challenged a clarification and note issued by the first respondent, which led to tax deduction at source by treating the difference between a percentage of salary and standard rent as a perquisite. The petitioners contended that this was contradictory to previous court rulings.

The respondents countered by stating that as per the Income-tax Act, a person responsible for paying salaries is required to deduct income tax, including on perquisites like rent-free accommodation. They highlighted the amendment in Rule 3 of the Income-tax Rules, which now determines the value of perquisites provided by the employer. The amended rule specifies different percentages of salary to be considered for valuing accommodation based on various factors like city population and ownership of the accommodation.

The court analyzed the two sets of rules and concluded that the fair rent was relevant in the earlier rules but not in the amended rules. It noted that the amended Rule 3 provides specific percentages of salary to be considered for valuing accommodation based on different scenarios. Since there was no challenge to the amended rule, the court held that the respondents were legally bound to deduct tax as per the rule. Therefore, the court dismissed the writ petition, stating that there was no merit in challenging the tax deduction at source on accommodation provided by the employer.

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