2004 (3) TMI 24 - HC - Income Tax

Present writ petitions were filed challenging the validity of section 17(2)(vi) - petitioners seek for a declaration that section 17(2)(vi) of the Income-tax Act as inserted by the Finance Act 2001, is illegal and violative of articles 19(1)(g) and 246 of the Constitution of India, and a declaration that rule 3 of the Income-tax Rules, 1962, as substituted by the Income-tax (22nd Amendment) Rules, 2001 by the second respondent under its Notification No. 940(E), dated September 25, 2001, as illegal and unconstitutional being hit by the vice of excessive delegation of power besides being ultra vires the rule making power of the second respondent and to stay the operation of the aforesaid provisions

Issues Involved:
1. Validity of Section 17(2)(vi) of the Income-tax Act.
2. Validity of Rule 3 of the Income-tax Rules, 1962.
3. Alleged discrimination between Central/State Government employees and public/private sector employees.
4. Classification and valuation of perquisites, including interest-free or concessional loans.
5. Procedural requirements for maintaining records of journeys for official purposes.
6. Allegations of double taxation.

Detailed Analysis:

1. Validity of Section 17(2)(vi) of the Income-tax Act:
The petitioners challenged Section 17(2)(vi) of the Income-tax Act, asserting it was illegal and violated Articles 19(1)(g) and 246 of the Constitution of India. They argued it involved excessive delegation of legislative power to the executive. The court found that the term "fringe benefit" or "amenity" has a specific understanding in both daily and commercial use, and the delegation to the Central Board of Direct Taxes (CBDT) to prescribe these was within permissible limits. The court upheld the validity of Section 17(2)(vi), agreeing with the Karnataka High Court and other High Courts that there was no excessive delegation or violation of constitutional provisions.

2. Validity of Rule 3 of the Income-tax Rules, 1962:
The petitioners contended that Rule 3, which provides for the valuation of various types of fringe benefits or amenities, was arbitrary, unreasonable, and discriminatory. They argued it discriminated between Central/State Government employees and public/private sector employees. The court held that the classification was rational and based on intelligible differentia, having a rational nexus with the object sought to be achieved. The court found no merit in the contention that Rule 3 was violative of Article 14 of the Constitution.

3. Alleged Discrimination:
The petitioners argued that the amendment to Rule 3 discriminated between Central/State Government employees and public/private sector employees. The court held that the differentiation was rational and based on the distinct classes of employees, their work, responsibilities, and service conditions. The court concluded that the classification was not discriminatory and was permissible under Article 14 of the Constitution.

4. Classification and Valuation of Perquisites:
The petitioners contended that interest-free or concessional loans provided by employers should not be treated as perquisites. The court rejected this argument, stating that such loans result in a benefit to the employee, reducing their financial liability, and thus qualify as perquisites. However, the court directed that the rate of interest prescribed (10% for house building allowance and conveyance allowance, and 13% for other loans) should be reconsidered by the CBDT in light of prevailing market rates, as the petitioners provided evidence that these rates were arbitrary.

5. Procedural Requirements:
The petitioners argued that the requirement for employees to maintain detailed records of journeys undertaken for official purposes was impractical and cumbersome. The court found no merit in this contention, stating that inconvenience or difficulty in maintaining records is not a ground to nullify the validity of the rule.

6. Allegations of Double Taxation:
The petitioners contended that taxing the emoluments paid to a servant made available to the employee by the employer amounted to double taxation. The court found no merit in this argument, stating that there was no double taxation in the present case as income tax is charged on the income earned by the employee, and no specific pleadings were provided to support the claim of double taxation.

Conclusion:
The court dismissed the writ petitions, upholding the validity of Section 17(2)(vi) of the Income-tax Act and Rule 3 of the Income-tax Rules, 1962. The court directed the CBDT to reconsider the prescribed interest rates for determining the value of perquisites in light of prevailing market rates. The court also ordered that the amount deposited by the employer as per the interim direction be paid over to the Income-tax Department within three weeks.

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