1998 (2) TMI 58 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of Rule 3(a)(iii) of the Income-tax Rules, 1962.
2. Applicability of Rule 3(a)(iii) when the accommodation is hired by the employer.
3. Determination of the value of perquisites for rent-free accommodation.

Summary:

1. Interpretation of Rule 3(a)(iii) of the Income-tax Rules, 1962:
The court examined the interpretation of Rule 3(a)(iii) of the Income-tax Rules, 1962, which deals with the valuation of perquisites for rent-free residential accommodation. The rule specifies that the value of such accommodation shall ordinarily be a sum equal to 10% of the salary due to the assessee. However, if the fair rental value exceeds 20% of the salary, the value of the perquisite should be increased accordingly.

2. Applicability of Rule 3(a)(iii) when the accommodation is hired by the employer:
The Tribunal had previously held that Rule 3(a)(iii) is directory and does not apply when the accommodation is hired by the employer. The Tribunal determined the perquisite value based on the actual rent paid by the employer, which was Rs. 6,000. The Revenue challenged this view, arguing that Rule 3 should be applied irrespective of whether the accommodation is owned or hired by the employer.

3. Determination of the value of perquisites for rent-free accommodation:
The court held that Rule 3(a)(iii) is mandatory and should be applied in all cases, whether the accommodation is owned or hired by the employer. The expression "ordinarily" in the rule does not make it directory but indicates that the value of the perquisite cannot be less than 10% of the salary. The court emphasized that the statutory method of valuation must be followed, and any hardship resulting from its application cannot prevent its operation.

The court concluded that the Tribunal's view was erroneous and directed the Tribunal to determine the fair rental value of the accommodation in accordance with Explanation 2 to Rule 3(a)(iii), considering all relevant factors, including municipal valuation and previous determinations.

Conclusion:
The question of law was answered in favor of the Revenue, affirming that Rule 3(a)(iii) applies to both owned and hired accommodations provided by the employer. The Tribunal was instructed to reassess the fair rental value per the statutory provisions.