TaxTMI 
TaxTMI 
2003 (7) TMI 29
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....e rule-framing authority be quashed and declared ultra vires the Constitution. (iii) The assessing authorities constituted under the Income-tax Act to permanently refrain from enforcement of the Notification No. S. O. 940(E), dated September 25, 2001. (iv) Any other appropriate order or direction which this court deems just and proper may kindly be issued. From the perusal of the above reliefs claimed by the petitioners in the context of the impugned Notification dated September 25, 2001, it is apparent that these reliefs relate to computation of taxable income of the members of the respective petitioners-associations who are in employment with M/s. Aditya Cement and M/s. Birla White Cement, respectively, under the head "Income from salaries", which is to be computed in accordance with the provisions of the Income-tax Act, 1961 (for short "the Act"). More particularly, the contentions relate to valuation of the perquisites, which form part of salaries, according to the rules framed for that purpose. Contentions: The grievance of the petitioners is with reference to the insertion of sub-clause (vi) in section 17(2) with effect from April 1, 2002, by the Finance Act, 2001, and ....
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....le computing the total taxable income for the assessment year 2001-2002 has been altered by giving effect to the amended rules retrospectively, with effect from April 1, 2001. This retrospectivity, according to learned counsel, is not only contrary to law relating to assessment of income for any particular assessment year, but results in violation of article 14 of the Constitution as it is unreasonable and also discriminatory. In this connection, it has been urged that in the application of rules, the two persons who are not similarly situated are treated at par and two persons who are similarly situated may not be treated at par, which results in violation of article 14 substantively. For example rule 3 provides a strait-jacket formula of valuing perquisite relating to rent free house accommodation provided by an employer at a fixed percentage of salary without reference to the geographical situation of the accommodation results in two wholly differently valued house accommodation to be valued at par, so conversely when two employees drawing different pay are allotted free accommodation of the same size, quality and at the same site, lend themselves paying different tax, because ....
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....loyer advances interest-free loan or loan at concessional rate to any employee for the purpose of building a house or purchasing a site or a house and a site or for purchase of a motor car, the value of such benefit be included in the income of such employee by valuing the advantage so received with reference to the rate of interest notified by the Central Government in that regard. However, the employees of the Central Government and the State Government were exempted from the rigour of this provision so also person drawing cash emolument less than Rs. 18,000 per annum were kept out of its operation. This new sub-clause (vi), however, did not come in operation at all as it was omitted by Act No. 32 of 1985 retrospectively with effect from April 1, 1985. Vide the impugned notification, rule 3 prescribing the method and mode of determining the monetary value of specified perquisites not received in cash has been substituted with a new mode and method of determining the monetary value of specified perquisites. Scheme under the parent Act to tax "income from salaries" In order to appreciate the contentions and the effect of amendments, it would be apposite to notice the scheme of t....
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....tion from salaries. Details of these provisions need not detain us for the present purpose. Section 17 which is relevant for the present purpose defines "salary", "perquisite" and "profits in lieu of salary". Section 17 of the Act reads as under: "17. For the purposes of sections 15 and 16 and of this section,- (1) 'salary' includes- (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; (va) any payment received by an employee in respect of any period of leave not availed of by him; (vi) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; and (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) or rule 11 of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; (2) 'perquisite' includes- (i) the value of rent free accommod....
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....lue of any other fringe benefit or amenity as may be prescribed (inserted by Finance Act, 2001, with effect from April 1, 2002)." From the aforesaid, two things are very obvious. Firstly, that the total income chargeable to tax had to be assessed for any assessment year. The income is one which is earned, accrued or received by the assessee during the previous year relevant to the assessment year for which income is to be ssessed to tax. The concept is that the total income earned during the year is determined at the end of the period. It is required to be computed in accordance with the provisions of the Act. The scheme of computing income under the various provisions of the Act has to be viewed wholesomely and not with isolated vision. Another thing which is obvious from the provisions referred to above is that computation of income under the head "Income from salaries" is not confined to payment of periodical cash payment but is to be understood in its wider sense to include the valuation of any perquisite or profit in lieu of salary which he enjoys by dint of his employment under section 2(24)(iii) read with section 17(2) and (3) of the Act. In the world of employment, emolum....
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.... above fixed income, salary or wages. Also called perk [perq]". By way of illustration it has enumerated, use of a servant, a servant's customary right to claim used or discarded items, any bonus or fringe benefits granted to an employee as free use of company car. This is by no means exhaustive to encompass all that comes within the purview of the term perquisite in its ordinary sense, as an incidental or additional emolument, benefit, amenity or advantage attached to office. By envisaging an inclusive definition of the term perquisite in the context of income from salary this generic meaning of perquisite is adopted by the Legislature. The word "perquisite" in juridical expression has also received the connotation which gives expression "salary" a broad spectrum coverage. Merriam-Webster's Dictionary of Law describes fringe benefits as "an employment benefit (as a pension, a paid holiday, or health insurance) granted by an employer that has a monetary value but that does not affect basic wage rates". According to Black's Law Dictionary, "perquisites" have been defined to mean: "Emoluments, fringe benefits, or other incidental profits or benefits attaching to an office or pos....
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....quisite attached with employment in three broad categories that may be within the sphere of the expression "perquisites" and form part of the taxable income under the head "Salary". However, one thing which as a common characteristic appears from the provision is that in order that such benefit, amenity or payment may be termed a perquisite, it must be in pursuance of a right conferred on or option given to the employee to receive such benefit or advantage from his employer. Unless such advantage or benefit flows from the status of the person working as an employee a matter of right or at his option to be exercised as an employee it cannot be termed a perquisite. The employee must have a vested right to claim the advantage or benefit whether in cash or in kind, in order to fall within the purview of perquisite as part of salaries taxable under the Income-tax Act. Reference in this regard may be made to CIT v. L.W. Russel [1964] 53 ITR 91 (SC) which explains the distinction between personal expenditure in an insurance policy taken by the employee and reimbursement by the employer on the one hand and such insurance policy taken by the employer in order to meet the contingency of pay....
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....her it was due to him or not. The expression' due' followed by the qualifying clause 'whether paid or not' shows that there shall be an obligation on the part of the employer to pay that amount and a right on the employer to claim the same. The expression 'allowed', it is said is of a wider connotation and any credit made in the employer's account is covered thereby. The word' allowed' was introduced in the section by the Finance Act of 1955. The said expression in the legal terminology is equivalent to 'fixed, taken into account, set apart, granted.' It takes in perquisites given in cash or in kind or in money or money's worth and also amenities which are not convertible into money. It implies that a right is conferred on the employee in respect of those perquisites. One cannot be said to allow a perquisite to an employee if the employee has no right to the same." We may notice that what was compositely expressed in section 7 of the 1922 Act, has been compendiously made part of the scheme of sections 15 and 17 of the Income-tax Act, 1961. Section 15 of the Act of 1961 makes salaries due from an employer whether paid or not, or salary paid or allowed to him by the employer though ....
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....s substantial interest in the company within the meaning of clause (32) of section 2 and in respect of other employees who are in receipt of cash emoluments includible in salary, excluding the value of all benefits or amenities, exceeding Rs. 50,000. This limit has been increased from time to time. Sub-clause (iv) of clause (2) includes in its terms all sums paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee-employee. By way of illustration we may notice that within the purview of this provision, the advantage to an assessee flowing from overdrawing of sums in addition to the salary on which no interest is charged or interest is charged at a concessional rate, was held to be perquisite within the meaning of section 17(2)(iii) in CIT v. C. Kulandaivelu Konar [1975] 100 ITR 629 (Mad). This was so held even without any provision like sub-clause (vi) as was inserted for the first time vide the Taxation Laws (Amendment) Act of 1984 (Act No. 67 of 1984) with effect from April 1, 1985, which was never brought into operation as the same was omitted vide Act No. 32 of 1985 with effect from April 1, 1985. Likewise, where the ....
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....ges flowing because of such employment with the employer constitute part of remuneration or emoluments in constituting the wage structure in general, which part of it and the extent to which such emoluments are taxed or are kept out of tax ken is part of the fiscal policy projected in fiscal statutes. As per Davis-Bacon Wage Survey life insurance premium, health insurance premium, pension, vacation, holidays, sick leave and all other bona fide fringe benefits constitute part of wage. However, payments required by federal, State or local law are not fringe benefit. Such payments required to fund social security, unemployment compensation and workers' compensation programmes, as required by law, do not count as fringe benefits. Common fringe benefits which are named therein are category either company provided car, educational assistance programmes, employee discounts, employee stockpurchase plans, employer provided travel, free parking, group term life insurance, interest free or bargain-rate loans, meals and lodging, medical and dental care, no-additional-cost services, out placement services, retirement plans, retirement planning services, stock bonuses and bargain purchases, tra....
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.... benefits are to be included in the taxable income, how they are to be valued, and to what extent they are to be excluded from the purview of taxation is a matter of legislative policy and details. Viewed in that light, the definition of perquisites being an inclusive definition and not exhaustive, the insertion of sub-clause (vi) by the Finance Act, 2001, to include "the value of any other fringe benefits or amenity as may be prescribed" is not a deviation from the basic concept of perquisite as part of salary. The insertion of sub-clause (vi) is by way of abundant caution and not by way of any expansion of the definition. No legal fiction has been created to bring within the purview of perquisite something which otherwise does not come within the purview of the expression perquisites. Where a particular advantage or benefit received by any person as an employee or as a member of the employee's family/household to be assessed under the Income-tax Act will have to be determined; firstly, on the basis of general principle and then it is to be valued and to be determined in accordance with the rules, if any, prescribing for its valuation else it is to be valued as per current market....
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.... Interest-free loan or loan at concessional rate of interest. (ii) The value of travelling, touring, accommodation and any other expenses paid for or borne or reimbursed by the employer for any holiday availed of by the employee or any member of his household, other than concession or assistance referred to in rule 2B, is to be determined under this rule; (iii) The value of free meals provided to the employee by the employer. Proviso 2 exempts from inclusion the value of free meals to the extent provided thereunder. (iv) The value of any gift, or voucher, or token in lieu of which such gift may be received by the employee or by a member of his household on ceremonial occasions or otherwise. However, the value of such gifts, voucher or token, if in aggregate, is below Rs. 5,000, the value of such perquisites is to be taken nil. (v) Deals with the amount of expenses including membership fees and annual fees incurred by the employee or any member of his household, which is charged to a credit card (including any add-on-card), provided by the employer or otherwise, paid for or reimbursed by the employer as reduced by the amount, if any, paid by or received from such employee. Howe....
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....n the basis of cost to the employer under an arm's length transaction as reduced by the employee's contribution, if any. However, nothing contained in this sub-rule shall apply to the expenses on telephones including a mobile phone actually incurred on behalf of the employee by the employer. This clearly shows that neither the parent legislation nor its delegate has ventured to exhaustively list the perquisites and fringe benefits. The enumeration of the aforesaid list of provisions providing for value of different kind of benefits or advantages received by an employee or any member of his household from the employer clearly indicates that neither the definition nor the rule making authority has deviated from the basic concept of perquisites as part of salary as per the term known generally in the oral parlance and in the context of tax law statutes. Whether insertion of sub-clause (vi) in section 17(2) amounts to abdication of essential legislation function by Central Legislature There is no challenge to the legislative competence of Parliament to provide for taxing perquisites as part of income from salary, nor is there any contention against the ordinary sense in which the....
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....ate authorities for specific cases or classes of cases. In Tata Iron and Steel Co. Ltd. v. Workmen of Tata Iron and Steel Co. Ltd., AIR 1972 SC 1917, it was held as under: "The legal position as regards the limitation of this power is, however, no longer in doubt. The delegation of legislative power is permissible only when the legislative policy and principle are adequately laid down and the delegate is only empowered to carry out the subsidiary policy within the guidelines laid down by the Legislature. The Legislature, it must be borne in mind, cannot abdicate its authority and cannot pass on to some other body the obligation and the responsibility imposed on it by the Constitution. It can only utilise other bodies or authorities for the purpose of working out the details within the essential principles laid down by it In each case, therefore, it has to be seen if there is delegation of the essential legislative function or if it is merely a case in which some authority or body other than the Legislature is empowered to work out the subsidiary and ancillary details within the essential guidelines, policy and principles, laid down by the legislative wing of the Government." The....
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.... and mode of determining the money value of perquisites, viz., any personal advantage, fringe benefit or reimbursement expense otherwise the responsibility of the employee to incur, has been left to be gone into by the rule making authority. This is primarily to achieve more practicable uniformity in the process of valuing perquisite received by avoiding imbalanced variation in valuation of perquisite in the hands of like income group employees with the proverbial chancellors' foot depending upon who the decider is. No legislative function has been bestowed on the rule making authority to make a substantive provision to bring something to tax, which is not envisaged under the parent Act under the head "Income from salaries" by inserting the impugned provision. It is in the nature of clarification and making it more obvious to remove doubts, if any, about the fact that fringe benefits which an employee receives from his employer by way of a personal advantage because of his status as an employee and have nexus with the employer-employee relationship to be included in the wholesome expression "perquisite" and the valuation of different kinds of fringe benefits, which cannot be doubt....
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....ordinate legislation Coming to the challenge to the vires of notification dated September 25, 2001, with particular reference to rule 3 as has been substituted by the aforesaid notification with effect from April 1, 2001. Before examining the issue in the light of the contentions raised by learned counsel for the petitioner, we may notice the limits of judicial review of delegated legislation. The delegated legislation is open to judicial review by the courts particularly on two grounds. Firstly, whether it violates any of the provision of the Constitution and, secondly, whether it violates any of the provisions of the enabling Act and whether violation of the enabling Act requires consideration of both (i) cases of violation of substantive provisions of the enabling Act as well as, (ii) cases of violation of mandatory procedure prescribed for bringing into existence such delegated legislation has been made. The Supreme Court in Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India [1986] 159 ITR 856; [1985] 1 SCC 641 detailed the consideration of judicial review of the subordinate legislation. The court pointed out that a subordinate legislation may be questioned on th....
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....espect of declaring rule 3 with effect from April 1, 2001, being beyond the enabling provision of the parent Act also cannot be countenanced in view of our conclusion aforesaid. In fact, nothing has been included in making provision for valuing the perquisite in terms of section 17(2) with particular reference to section 17(2)(vi), which otherwise would not have fallen within the term perquisite, as it is known to the legal world. In this connection, we may also notice the well recognized principle that though the power to tax is a legislative power to be exercised by the parent Legislature, ample latitude has been given to the Legislature to delegate the power to work out the details of the tax laws in these implementation. In Pandit Banarsi Das Bhanot v. State of Madhya Pradesh [1958] 9 STC 388, speaking for the court, T.L. Venkatarama Aiyar, J., held as under: "Now, the authorities are clear that it is not unconstitutional for the Legislature to leave it to the executive to determine details relating to the working of taxation laws, such as the selection of persons on whom the tax is to be laid, the rates at which it is to be charged in respect of different classes of goods, ....
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.... ITR 767 (SC) on which there was no contrary opinion in considering the impact of section 7(2) of the Wealth-tax Act as it provided for valuation of assets owned or possessed by the assessee on the date of valuation. Justice Shah had observed as under: "Section 7(2) merely provides machinery in certain special cases for valuation of assets, and it is from the aggregate valuation of assets that the net wealth chargeable to tax may be ascertained...This is an artificial rule adopted with a view to avoid investigation of a mass of evidence which it would be difficult to secure or, if secured, may require prolonged investigation." The court also referred to its decision in Murarilal Mahabir Prasad v. B.R. Vad [1976] 37 STC 77, 111 (SC) laying down that the provision which prescribes for machinery for computation of tax and not being a charge, is to be construed as a machinery provision and said: "We are concerned in this case to determine not whether a particular turnover can be brought to sales tax but whether if the turnover was liable to be charged to sales tax, the firm can be assessed to tax after its dissolution. In other words, we are concerned with a provision which prescrib....
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....ssessee is likely to incur in securing that advantage and to enquire into the price which it was likely to pay for getting those amenities or benefits. Applying the test approved by the Supreme Court in Kesoram Industries and Cotton Mills Ltd. [1966] 59 ITR 767 and Murarilal Mahabir Prasad [1976] 37 STC 77 (SC) approved by a later decision of the Supreme Court in Sharvan Kumar Swarup and Sons' case [1994] 210 ITR 886, it can be said that rule 3 of the rules of 1962 is part of the machinery provisions in aid of quantification of taxable income for making the proper levy and does not affect the substantive provision. The methods of valuing different perquisites specified under the rules have been devised with a view to avoid investigation of a mass of evidence varying in nature and to reach as far as practicable a uniform result vis-a-vis income of the assessee under the head "Salaries" by applying the prescribed mode of valuation of perquisites under rule 3. It is a well known method of valuing perquisites, the cost at which the benefit is received by an assessee, so also to value the payment in the hands of the recipient of such benefit at a fixed percentage of the salary received....
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....dation free or at concessional rate is primarily a device to sustain the uniformity of perquisites relating to house accommodation at comparatively lower level than actual rent rates prevailing in the market by prescribing the percentage of salary as the basis of its valuation. In most cases where instead of providing the employer's own or leased accommodation to its employees the house rent allowance is also given on the basis of percentage of salary (in its narrower sense) on the premise that so much of his income, a wage earner is likely to spend on getting a house accommodation commensurate with his income. We have already noticed that artificial method of valuing perquisite under rule 3 as its object, to maintain the uniformity in the matter of taxability of the class of fixed income group, viz., the salaried people with reasonable amount of flexibility. Its comparison with actual market rent of the house, cannot be made. In the absence of any artificial mode of valuing, monetary value of perquisites could also have been assessed on the basis of assessment of market rent for the accommodation provided to the concerned employee. In that event for each different type of houses s....
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....nder the Act expressly exists. It is also the contention of learned counsel for the petitioner and it is a well known principle that income chargeable to tax is to be assessed for the assessment year and therefore the law which governs the chargeability to tax and computing the income is the law which is in force as on 1st April at the time of commencement of the assessment year concerned ordinarily. Sub-clause (iv) to clause (2) of section 17 has been inserted with effect from April 1, 2002. Thus, sub-clause (vi) is applicable to income earned during the year ending on March 31, 2002. This previous year extends from April 1, 2001, to March 31, 2002. For computing the income earned during April 1, 2001, to March 31, 2002, fringe benefits valued as prescribed were to be included. Thus, providing for machinery provision for quantifying income, which is taxable as per law on April 1, 2002, cannot be said to be violative of any well-settled principle of computing the income of the previous year 2001-2002 as per substantive law prevailing on April 1, 2002, by applying existing machinery provision. In the present context we have noticed that the insertion of sub-clause (vi) in clause ....