TaxTMI 
TaxTMI 
2025 (1) TMI 1126
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...., Mr Chinmay Apte, in WP/506/1996, WP/1350/2008 and WP/1347/2008. For the Respondent No. 4 in WP/506/1996: Mr Shreyas Thakur, i/b. M. S. Bodhanwalla & Co.,. For the Petitioners: Ms Ashna Shah, i/b. Mr Sean Wassoodew, in WP/825/2006 and WP/438/2008. For the Petitioner in WP/928/1994: Mr Sagar Amrut Rane, i/b. Raju Z. Moray,. For the Respondent: Mr Suresh Kumar, No.3 in WP/825/2006, for Respondent Nos.1 to 3 in WP/438/2008 and for Respondents in WP/1350/2008. For the Respondents: Mr P. C. Chottaray, in WP/1347/2008. For the Respondent No. 4 in WP/438/2008: Mr Aditya V. Tayade, i/b. Mr Piyush N. Shah,. For the Respondent: Mr Vishal Talsania, a/w Mr Netaji Gawade i/b. M/s. Sanjay Udeshi & Co., No. 4 in WP/928/1994 and WP/825/2006. JUDGMENT (PER MS SONAK J):- 1. Heard learned counsel for the parties. 2. Learned counsel for the parties agree that a common judgment and order can dispose of these Petitions because substantially common issues of law and fact arise. Learned counsel agree that Writ Petition No. 825 of 2006 may be treated as the lead Petition. 3. The Petitioners are Associations/Federations of the officers of nationalised banks. They purport....
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....gnant and destructive of the main body of Section 17 (2) (ii), which provides that a "perquisite" includes the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer. They submitted that by introducing a legal fiction and dispensing with the requirement of determining whether any concession was being granted to the employees, Section 17 (2) (ii) was rendered otiose. 8. Learned counsel for the Petitioners, without prejudice to the above contentions, contended that the legislature, by granting retrospectivity to the impugned amendments had acted with manifest arbitrariness. They submitted that there was no ambiguity in Section 17 (2) (ii) of the IT Act as interpreted by the Hon'ble Supreme Court in the case of Arun Kumar (supra). They submitted that in the absence of any ambiguity, it was not open to the legislature to introduce any Explanations and, by such Explanations, to create a legal fiction and bring about substantive and substantial changes regarding the taxability of perquisites. They submitted that the impugned amendments are neither clarificatory nor declaratory. Therefore, relying on Union of India and others....
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....ating a legal fiction. This is arbitrary, discriminatory, unconstitutional, null and void; 13. Learned counsel for the Petitioners submitted that the impugned amendments distinguish between accommodations in metropolitan and non-metropolitan areas, but no distinction is made between urban and suburban areas. Without appreciating such fundamental distinctions, illogical, arbitrary and unreasonable criteria have been adopted to determine the value of the alleged concession and tax the employees. This is arbitrary, unreasonable, unconstitutional, null and void. 14. Learned counsel for the Petitioners submitted that the impugned amendments interfere with the staff regulations and the settlements between the banks and their employees. This is arbitrary and violative of Article 14 of the Constitution. 15. Mr. K. P. Anil Kumar submitted that the impugned amendment promoted double taxation. He argued that officers transferred from their hometowns usually rent out their accommodations. The rent they receive is taxed as income from house property. Because of the impugned amendments, such employees are forced to pay tax on the value of alleged concessions regarding rent provided by t....
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....submitted that there is a presumption of constitutionality, and the legislature should be allowed substantial flexibility and latitude regarding fiscal legislation. They submitted that nothing was wrong in creating a legal fiction or giving any limited retrospective effect to the impugned amendments. They submitted that the impugned amendments relate to the machinery for collecting or measuring such tax. Therefore, there was nothing wrong in construing such provisions retrospectively. In any event, they pointed out that the legislature had explicitly granted the impugned amendments a limited retrospective effect in the present case. They submitted that a legislature was competent to do so. 22. Learned counsel for the Respondents submitted that the impugned amendments ought not to be struck down based on illustrations or examples given by the Petitioners. They pointed out several instances where banks provided accommodations to their employees in prime locations by charging rents representing only a fraction of the standard or the market rents. Accordingly, they submitted that any minor crudities or imperfections should not be the factors in judging the validity of fiscal legisla....
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....f an employee participating in a recognised provident fund, etc. 29. Section 17 (2) before its amendment by the Finance Act, 2007 read as follows: - "Perquisite" includes: - (i) the value of rent-free accommodation provided to the assessee by his employer. (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer. 30. Section 11 of the Finance Act, 2007 introduced amendments in Section 17 of the IT Act. Accordingly, for the convenience of reference, we transcribe Section 11 of the Finance Act, 2007: - "11. In section 17 of the Income-tax Act,- (a) in clause (I), in sub-clause (viii), for the words "Central Government", the words "Central Government or any other employer" shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2004; (b) in clause (2),- (A) after sub-clause (ii),- (i) the following Explanations shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2002, namely:- 'Explanation I.-For the purposes of this sub-clause, concessio....
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....in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from, or payable by, the assessee; (d) in a case where the accommodation is provided by the employer in a hotel (except where the assessee is provided such accommodation for a period not exceeding in aggregate fifteen days on his transfer from one place to another), the value of the accommodation determined at the rate of twenty-four per cent of salary paid or payable for the previous year or the actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided, exceeds the rent recoverable from, or payable by, the assessee. Explanation 2.-For the purposes of this sub-clause, value of furniture and fixtures shall be ten per cent per annum of the cost of furniture (including television sets, radio sets, refrigerators, other household appliances, airconditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, the actual hire charges payable for the same as reduced by any charges paid or payable for the sam....
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.... census; and (iii) seven and one-half per cent of salary in any other place.'; (B) in sub-clause (iii), the proviso shall be omitted with effect from the 1st day of April, 2008." 31. As noted above, the petitioners have challenged Section 11 of the Finance Act, 2007, or, more precisely, Section 11 (b) of the Finance Act, 2007, to the extent that it amends Section 17 (2) of the IT Act. 32. Before the impugned amendments, section 17 (2) (ii) did not contain any deeming provision regarding the value of concession in the matter of rent respecting any accommodation provided to the assessee by his employer. Section 17 (2) (ii) also did not provide for the machinery or the measure for computing the value of the concession. However, Rule 3 of the IT Rules, 1962, provided for such machinery and measure. 33. The Hon'ble Supreme Court, in the case of Arun Kumar (supra), upheld the constitutional validity of Rule 3 (1) of the IT Rules. Still, it held that 'receiving a concession' was a jurisdictional fact for the purposes of Section 17 (2) (ii), and therefore, the AOs had first to decide whether, in fact, any bank employee was in receipt of any concession in the matt....
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....h the Finance Act, 2007, introduced the impugned amendments in Section 17 (2) (ii) of the IT Act. 36. The impugned amendments created a legal fiction based on which it could now be presumed that the employees allotted bank-owned accommodation are deemed to have received a concession in the matter of rent respecting such accommodation. The impugned amendments broadly measure the value of such concession as the difference between the specified percentage of the employee's salary and the rent recoverable or payable by such employees. A limited retrospective effect was also given to the impugned amendments, as otherwise, it would be almost impossible for the Revenue to determine in every individual case whether any concession was at all granted and the value of such concession. 37. The impugned amendments thus created a deeming fiction that once it was established that an employee was paying rent of less than 10% of his salary in cities having a population of four lakhs or 7.5% in other cities, it should be deemed to be a concession within the meaning of Section 17 (2) (ii) of the IT Act and such employees must be deemed to receive 'concession' in the form of 'perquisites' in....
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.... Aluminum Co. and others (supra). 41. Paragraph 56 (8) of Indian Aluminum Co. and others (supra) reads as follows: - "56 (8). In exercising legislative power, the legislature by mere declaration, without anything more, cannot directly overrule, revise or override a judicial decision. It can render judicial decision ineffective by enacting valid law on the topic within its legislative field fundamentally altering or changing its character retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court, if those conditions had existed at the time of declaring the law as invalid. It is also empowered to give effect to retrospective legislation with a deeming date or with effect from a particular date. The legislature can change the character of the tax or duty from impermissible to permissible tax but the tax or levy should answer such character and the legislature is competent to recover the invalid tax validating such a tax on removing the invalid base for recovery from the subject or render the recovery from the State ineffectual. It is competent for the legislature to enact the law with retrospective effe....
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....ould be pre-empted. 45. Arun Kumar (supra) had otherwise upheld the validity of Rule 3 (1) of the IT Rules after rejecting the challenges based on Article 14 or the challenges based on the rule travelling beyond the import of the parent Act. However, Arun Kumar (supra) had referred to the decision of the Division Bench of the Madhya Pradesh High Court in Officers' Association, Bhilai Steel Plant (supra) in which the Division Bench had also noted that there was no deeming clause in the definition of "perquisite" contained in Section 17 (2) that once it was established that an employee was paying rent of less than 10% of his salary, it must be deemed that he was receiving a concession in the matter of rent and further "no such deeming clause can be inferred from r.3." The Division Bench went on to observe: "Indeed, if r.3 were to be so construed, it will go beyond the rule making power conferred by s.295 (2) and would become invalid." 46. Possibly, to ward off the challenge that Rule 3, if amended by introducing a deeming clause, might go beyond the rule-making power conferred by Section 295 (2) of the IT Act, the legislature chose to amend Section 17 (2) (ii) and introduced....
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...., no such right would have arisen. Thus, the interest in the retroactive curing of such a defect in the administrative of government outweighs the individual's interest in benefiting from the defect... The Court has been extremely reluctant to override the legislative judgment as to the necessity for retrospective taxation, not only because of the paramount governmental interest in obtaining adequate revenues, but also because taxes are not in the nature of a penalty or a contractual obligation but rather a means of apportioning the costs of government among those who benefit from it." 50. The above passage was quoted with approval by the Constitution Bench of this Court in the case of Assistant Commissioner of Urban Land Tax and others vs. The Buckingham & Carnatic Co. Ltd, ETC (1970) 1 SCR 268. 51. Even paragraph 56 (8) of Indian Aluminum Co. and others (supra), after holding that the legislature cannot, by a mere declaration, without anything more, directly overrule, revise or override a judicial decision, has held that the legislature can render a judicial decision ineffective by enacting valid law on the topic within its legislative field fundamentally altering or changi....
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....lify as "income" and would not be taxed. The Petitioners argued that by doing away with this distinction, the legislature had overruled judicial precedents without bothering to remove or alter the basis of such judicial pronouncement. Therefore, it was contended that this was a case of impermissible judicial override. 55. A Coordinate Bench of this Court rejected the above contentions, which were quite similar to those now raised on behalf of the Petitioners, by referring to the decision of the Hon'ble Supreme Court in the case of M/s. Hindustan Gum and Chemicals Ltd. vs. State of Haryana and others (1985) 4 SCC 124. Here, the Court held that it was permissible for a competent legislature to overcome the effect of a decision of a Court setting aside the imposition of tax by passing suitable legislation, amending the relevant provisions of the statute concerned with retrospective effect, thus taking away the basis on which the decision of the Court had been rendered and by enacting appropriate provision validating the levy and collection of tax made before the decision in question was rendered. 56. Incidentally, one of the arguments in Serum Institute of India (P.) Ltd. (supra....
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....to tax it. The Coordinate Bench held that the legislature was very competent to do this, and there was no question of any destruction of the main body of the Act involved. 61. It is very well settled that the legislature is quite competent to create a legal fiction, in other words, to enact a deeming provision to assume the existence of a fact that may not really exist, provided the declaration of non-existent facts as existing does not offend the constitution. (see J.K. Cotton Spinning and Weaving Mills Ltd. & another vs. Union Of India & others AIR 1988 SC 191). In interpreting a provision creating a legal fiction, the court is to ascertain for what purpose the fiction is created. After ascertaining this, the court is to assume all those facts and consequences which are incidental or inevitable corollaries to the giving effect to the fiction. 62. In CIT, Bombay vs. Bombay Trust Corporation AIR 1930 PC 54, the Privy Council, in interpreting a fiction created by the Indian Income-tax Act, 1922, which by section 43 provided that under certain circumstances, an agent shall for all the purposes of this Act, be deemed to be such agent of a non-resident person and which by section....
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....aramount, and mere use of a label cannot control or deflect such intention. 67. An Explanation, even though it may not have been made retrospective in its operation, can have an effect even for the period prior to its insertion as it clarifies the provision of the section as existing [CIT vs Doraiswami Chetty (P) Ltd. (1990) 183 ITR 559 SC]. To the same effect are the observations in R. M. Krishnaswamy Naidu & Sons and others vs. The State of Madras (1965) 16 STC 671 (MAD) where it was held that an 'Explanation' merely elucidates the meaning of a provision and, when inserted as a subsequent amendment, can be considered retrospective in scope. 68. Therefore, the impugned amendments and the explanations introduced thereby cannot be struck down either because the legislature was incompetent to create a legal fiction, because such an explanation was unnecessary, because it destroyed the principal section, or because they were otherwise unconstitutional, ultra-vires, or null and void. RETROSPECTIVITY ARGUMENT 69. The following argument concerns the retrospectivity of the impugned amendments. The basic contention was that the impugned amendments were neither clarificatory nor....
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....rt ruled that the amendment could not be construed retrospectively. Therefore, based on Martin Lottery Agencies Limited (supra), we cannot find any fault with the impugned amendments being given a limited retrospectivity. 73. In Additional Commissioner of Income Tax vs. Bharat V Patel (2018) 15 SCC 670, the Hon'ble Supreme Court was considering a challenge to the amendments to Section 17 (2) of the IT Act by which certain benefits transferred by the employer to the employees were sought to be brought within the ambit of the tax net. One of the issues involved was whether the amendment was retrospective or would only apply prospectively. The revenue contended that the amendment was clarificatory and, hence, retrospective. The assessee claimed that the amendment was substantive and, therefore, prospective in nature. 74. The Hon'ble Supreme Court, upon examining the rival contentions, concluded that the Respondent got the Stock Appreciation Rights (SARs) and eventually received an amount on account of its redemption before 1 April 2000. On that date, the amendment of the Finance Act, 1999 came into force. Therefore, the Hon'ble Supreme Court concluded: "In the absence of any exp....
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.... made by the Courts while interpreting the provisions of a taxing statute between charging provisions which imposed the charge to tax and machinery provisions which provide the machinery for quantification of the tax and levying, and collection of tax so imposed. While charging provisions are construed strictly, machinery sections are generally not subject to rigorous construction. The Courts are expected to construe the machinery sections in such a manner that the charge to tax is not defeated. 79. In Aditya Cement Staff Club vs Union of India & Ors. 2002 SCC OnLine Raj 937, the Court explained that perquisites had been considered substantively to be forming part of the salary, and the value of different perquisites had to be included in the computation of total taxable income under the head 'income from salaries'. Once it is determined that the particular advantage, benefit or amenity received forms part of perquisite as defined under Section 17 (2) of the IT Act, the question of its quantification falls within the machinery provision for quantification of proper tax liability of the taxpayer, which can be left to be determined according to well-known principles of valuing a p....
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....od of concession, keeping in view the concept of "fair rental value". The amended rule, however, did away with the idea of fair rental value. The only method adopted was to calculate the rent based on the population of the city in question. Therefore, the Court held that there was no necessity to grant the assessee an opportunity to satisfy the Assessing Officer that the rent sought to be recovered from the employee was not a concession and that it was the fair rent, the reasonable rent, the market rent or the standard rent. The Court explicitly held that the criteria adopted by the Rule-making authority in treating cities with populations of less than four lakhs and more than four lakhs could not be said to be arbitrary and unreasonable. The fixation of rent based on the city's population cannot be interfered with in exercising the power of judicial review. 85. Besides, when it comes to challenges to the constitutional validity of fiscal legislation, we must bear in mind and apply certain well-settled principles. The first is the presumption in favour of the statute's constitutionality and that the burden is upon the Petitioners who attack the statute to show that there....
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....adoption of remedy are not always possible. The legislative judgment is essentially a prophecy based on meagre and un-interpreted references. Therefore, every legislation, particularly in economic matters, is essentially empiric and is based on experimentation or what one may call the trial-and-error method, and therefore, it cannot provide for all possible situations or anticipate all possible abuses. (See RK Garg etc.). 89. There may be crudities and inequities in complicated experimental economic legislation, but it cannot be struck down as invalid on that account alone. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture vs. Central Reig Refining Company (1950) 94 L. Ed. 381 be converted into tribunals to relieve such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. 90. Indeed, however great the ca....
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....etermining the classes of individuals or entities that are subject to or exempt from taxation, if there is a rational basis for such a classification. 93. No precise or set formulae, doctrinaire tests, or precise scientific principles of exclusion or inclusion are to be applied. The test to be used could be of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience. The Courts have permitted the legislatures to exercise vast discretion in classifying items for tax purposes so long as it refrains from clear and hostile discrimination against particular persons or classes. In examining the allegations of hostile, discriminatory treatment, what is looked into is not its phraseology but the actual effect of its provisions. One must look beyond the classification and to the purposes of the law. Classifications based on differences in the value of articles or the economic superiority of the persons of incidence are well recognised. 94. A reasonable classification includes all who are similarly situated and none who are not. Further, differentia must have a rational nexus with the object sought to be achieved by the....
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....est Bengal (1991) 2 SCC 154 the Hon'ble Supreme Court has held that "Perfect equality in taxation has been said time and again, to be impossible and unattainable. Approximation to it is all that can be had. Under any system of taxation, however, wisely and carefully framed, a disproportionate share of the public burdens would be thrown on certain kinds of property, because they are visible and tangible, while others are of a nature to elude vigilance. It is only where statutes are passed which impose taxes on false and unjust principle, or operate to produce gross inequality, so that they cannot be deemed in any just sense proportional in their effect on those who are to bear the public charges that courts can interpose and arrest the course of legislation by declaring such enactments void." "Perfectly equal taxation", it has been said, "will remain an unattainable good as long as laws and Government and man are imperfect." "Perfect uniformity and perfect equality of taxation", in all aspects in which the human mind can view it, is a baseless dream". 98. Thus, applying the above principles to the case at hand, the contentions relating to the classification between government ser....
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....t of goods, and therefore, there was a violation of Article 14 of the Constitution. Rejecting this contention, the Court explained that just as in taxes upon income or upon transfers at death, so also in imposts upon business, the little man, because of inferior capacity to pay, should bear a lighter load of taxes relatively as well as absolutely, than is borne by the big one. The flat rate is less efficient than the graded one as an instrument of social justice. The large dealer occupies a position of economic superiority because of his greater volume of business. And, to make his tax heavier, both absolutely and relatively, is not arbitrary discrimination but an attempt to proportion the payment to capacity to pay and thus to arrive at a more genuine equality. The Court held that the economic wisdom of tax is within the exclusive province of the legislature. The only question for the Court to consider is whether there is rationality in the legislature's belief that the capacity to pay the tax increases, by and large, with a rise in receipts. For this, the Hon'ble Supreme Court followed the dissenting opinions of Justice Cardozo, Justice Brandeis and Justice Stone in Stewart D....
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....lature has created a legal fiction, and further rational criteria are provided for measuring and levying the tax. Such a provision introduces certainty and clarity. Due to such a provision, there is tax efficiency, which is, in the long run, beneficial to both the taxpayer and the tax authorities. Therefore, the impugned amendments cannot be declared ultra-vires, irrational or unconstitutional. 105. After referring to the decisions in Union of India vs. Bombay Tyre International Ltd (1984) 1 SCC 467, para 14 and CCE vs. Grasim Industries Ltd. (2018) 7 SCC 233 the Court held that there ought to be a "nexus" between the nature of tax and the measure of tax. However, the measure cannot be controlled by the rigours of the nature of tax. The nexus between the measure and levy of tax need not be "direct and immediate". The nexus must be "reasonable" and have some relationship with the nature of levy. The reasonability of the nexus will largely depend upon the nature of the tax and the means available to the legislature to designate the measure of the tax. Since the levy measure is a matter of legislative policy and convenience, the reasonability of the nexus between the measure and ta....
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....at sense, checked unnecessary litigation. 108. The Court held that the impugned rule provided consistency, clarity and certainty. Where there is certainty and clarity, there is tax efficiency, which benefits the taxpayers and the tax authorities. These are all hallmarks of good tax litigation. Therefore, based on a uniform approach yet premised on a bare determining principle aligning with the constitutional values, the impugned rule could not be struck down as ultra-vires or unconstitutional. 109. The Court also noted that fiscal or tax measures laws enjoy greater latitude than other statutes when it comes to a uniform approach. The legislature should be allowed some flexibility in such matters, and courts would be more inclined to make judicial deference to legislative wisdom. Commercial and tax legislation tend to be highly sensitive and complex as they deal with multiple problems and are contingent. Courts do not interfere with legislation which prevents possibilities of abuse and promotes certainty. The Court noted that the complex problem had been solved using a straitjacket formula, which merited judicial acceptance. To hold otherwise would meet multiple problems/issue....
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....re with the said provisions or strike down such provisions as being ultra-vires or unconstitutional. 112. For all the above reasons we see not much force in the challenges to the impugned amendments on the grounds of any breach of Article 14 of the Constitution or any other constitutional provisions. BANK'S SUBMISSION 113. Now, regarding the contention raised by Mr Talsania on behalf of the banks, it is true that on account of the interim reliefs granted, some of the banks may not have been able to make any deductions of the tax at source. 114. At this stage, it is too premature to decide whether the banks could be held to be "assesses in default" or made liable to pay any taxes on behalf of the employees. Therefore, we do not wish to make any observations on this issue. However, we clarify that if and when such issues arise, all parties' contentions regarding this issue are kept open. Such issues should be dealt with in accordance with law by all concerned. 115. The revenue authorities must consider that this Court had interdicted tax deductions at source through interim orders that operated during the pendency of some of these Petitions. The tax authorities mus....