2003 (9) TMI 52 - HC - Income Tax

Petitioner is challenging the validity of notification dated September 25 2001 by which rule 3 of the Income-tax Rules 1962 was substituted by the Income-tax (22nd Amendment) Rules 2001 issued by the CBDT. - Petitioner is also challenging the validity of section 17(2)(vi) as inserted by the Finance Act 2001 on the ground that it has delegated essential legislative powers and that it is violative of articles 19(1) and 246 of the Constitution. - the provisions of section 17(2)(vi) of the Income-tax Act as inserted by the Finance Act 2001 as well as rule 3 of the Income-tax Rules framed in pursuance of section 17(2)(vi) by the Board are legal and valid - the writ petition is liable to be dismissed

Summary

Issues Involved:
1. Validity of the notification dated September 25, 2001, substituting rule 3 of the Income-tax Rules, 1962.
2. Validity of section 17(2)(vi) of the Income-tax Act, 1961, as inserted by the Finance Act, 2001.
3. Alleged excessive delegation of legislative powers.
4. Alleged violation of articles 19(1) and 246 of the Constitution.
5. Classification of employees for valuation of perquisites.
6. Treatment of interest-free loans or loans at concessional rates as perquisites.

Detailed Analysis:

1. Validity of the Notification Dated September 25, 2001:
The petitioner challenged the notification dated September 25, 2001, which substituted rule 3 of the Income-tax Rules, 1962, by the Income-tax (22nd Amendment) Rules, 2001. The court noted that rule 3 was framed under section 295 of the Income-tax Act, which confers power on the Central Board of Direct Taxes (CBDT) to make rules. The new rule 3 classified employees into two categories for the purposes of valuation of perquisites of rent-free accommodation: Central and State Government employees, and others. The court upheld the validity of the notification, stating that the classification was reasonable and not arbitrary.

2. Validity of Section 17(2)(vi) of the Income-tax Act, 1961:
The petitioner also challenged the validity of section 17(2)(vi) of the Income-tax Act, 1961, as inserted by the Finance Act, 2001. This section included "the value of any other fringe benefit or amenity as may be prescribed" in the definition of perquisites. The court held that section 17(2)(vi) was not invalid or unconstitutional on the ground of excessive delegation. It emphasized that the rule made under this section had to be laid before Parliament, thereby retaining legislative control over the rules framed by the executive.

3. Alleged Excessive Delegation of Legislative Powers:
The petitioner argued that section 17(2)(vi) involved excessive delegation of legislative powers. The court rejected this argument, citing Supreme Court precedents that upheld the validity of provisions where rules made under the Act were subject to parliamentary scrutiny. The court referred to cases such as Lohia Machines Ltd. v. Union of India and D.S. Garewal v. State of Punjab to support its conclusion that the delegation was not excessive.

4. Alleged Violation of Articles 19(1) and 246 of the Constitution:
The petitioner contended that section 17(2)(vi) violated articles 19(1) and 246 of the Constitution. The court found no merit in this argument, stating that the classification of employees for the purpose of valuing perquisites was reasonable and based on distinct differences in the nature of work, responsibility, and service conditions between government employees and employees of public and private sector undertakings.

5. Classification of Employees for Valuation of Perquisites:
The court examined the classification of employees into two categories for the purpose of valuing perquisites of rent-free accommodation. It held that the classification was reasonable and based on distinct differences in the nature of work, responsibility, and service conditions. The court cited the Supreme Court's observation in Hoechst Pharmaceuticals Ltd. v. State of Bihar, emphasizing that the court must defer to legislative judgment on economic regulations and related matters.

6. Treatment of Interest-Free Loans or Loans at Concessional Rates as Perquisites:
The court addressed the issue of treating interest-free loans or loans at concessional rates as perquisites. It held that such loans resulted in a benefit to the employee by relieving them of the liability to pay interest, thereby reducing their financial burden. The court concluded that this benefit could be considered a "fringe benefit" or an "amenity" and thus fell within the definition of perquisites under section 17(2)(vi). The court also noted that the earlier decision in V.M. Salgaocar and Bros. (P.) Ltd. v. CIT was not applicable in light of the specific provision of section 17(2)(vi) read with rule 3 of the Rules.

Conclusion:
The court dismissed the writ petition, upholding the validity of section 17(2)(vi) of the Income-tax Act, 1961, as inserted by the Finance Act, 2001, and rule 3 of the Income-tax Rules, 1962, as substituted by the notification dated September 25, 2001. The court emphasized the need for judicial restraint in matters of economic regulation and taxation, allowing the legislature to correct its own mistakes wherever possible. The interim order was vacated.