2011 (7) TMI 569 - HC - Income Tax

Disallowance of Provision under Rule 3 (5) of Income-tax Rules 1962 - Deduction of tax at source - Assessee submitted that in terms of proviso to rule 3(5) of the 1962 Rules the value of the perquisite relating to free educational facility provided to the wards of the employees/staff of the school had to be on the basis of value of such facility in a comparable case and if it exceeded Rs. 1000 per month per child then the amount of Rs. 1000 per month per child had to be reduced from the perquisite value and tax deducted at source on the remaining amount if any - The cost of education for determining the value of free/concessional educational facility was also challenged - Held that - The AO while adjudicating the issue against the assessee had specifically held that the tuition fee in the case of the students of the assessee school was more than Rs. 1000 per month as the assessee had deducted tax at source from the salary of the employees including valuation of perquisite after reducing Rs. 12000 per annum per child. Once the value of the perquisite exceeded Rs. 1000 per mensem Rule 3(5) of 1962 Rules applied and proviso thereto had no applicability - The Tribunal had remanded the matter to the AO for recomputation of cost/value of perquisite to an employee by providing an opportunity to the assessee to point out any difference in the valuation as made by the Assessing Officer and the CIT(A) - No error or perversity could be pointed out in the approach of the Tribunal - The appeals filed by the revenue and the assessee stand disposed of.

Issues Involved:
1. Interpretation of Rule 3(5) of the Income-tax Rules, 1962.
2. Valuation of free/concessional educational facilities provided to employees' wards.
3. Applicability of the proviso to Rule 3(5) regarding the Rs. 1,000 per month per child exemption.
4. Method of calculating perquisites and short deduction of tax.
5. Liability under sections 201(1) and 201(1A) of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Interpretation of Rule 3(5) of the Income-tax Rules, 1962:
The core issue revolves around the correct interpretation of Rule 3(5) of the 1962 Rules. The rule outlines how to determine the value of free or concessional educational facilities provided to employees' wards. It specifies that the valuation should be based on the actual expenditure incurred by the employer or the cost of similar education in a nearby locality if the educational institution is maintained by the employer. The proviso to Rule 3(5) states that if the cost of education does not exceed Rs. 1,000 per month per child, the rule is not applicable.

2. Valuation of Free/Concessional Educational Facilities:
The Assessing Officer found that the assessee provided free/concessional educational facilities to the wards of its employees but incorrectly allowed a deduction of Rs. 1,000 per month per child from the taxable perquisite value. The CIT(A) recalculated the average monthly cost of education per student and directed the Assessing Officer to use this value for determining the short deduction of tax. The Tribunal upheld the CIT(A)'s method, emphasizing that both direct and indirect expenses should be considered in the valuation.

3. Applicability of the Proviso to Rule 3(5):
The assessee argued that the Rs. 1,000 per month per child deduction should be applied even if the perquisite value exceeded Rs. 1,000. However, the court clarified that the proviso to Rule 3(5) only exempts the perquisite from being taxed if the value does not exceed Rs. 1,000 per month per child. If the value exceeds this amount, the entire perquisite value is taxable without any reduction.

4. Method of Calculating Perquisites and Short Deduction of Tax:
The Tribunal remanded the matter to the Assessing Officer to recompute the perquisite value, allowing the assessee to point out any discrepancies in the valuation. The court upheld this approach, noting that the Tribunal's method of considering both direct and indirect expenses for determining the cost per child was appropriate.

5. Liability Under Sections 201(1) and 201(1A) of the Income-tax Act, 1961:
The court referred to the Supreme Court's judgment in CIT v. Eli Lilly & Co. (India) (P.) Ltd., which clarified that interest under section 201(1A) is compensatory for withholding tax and is mandatory. The assessee was found to have short deducted tax at source, making it liable under sections 201(1) and 201(1A) of the Act.

Conclusion:
The court concluded that the assessee had indeed short deducted tax at source and was liable for the shortfall and interest. The Tribunal's approach to valuing the perquisite by including both direct and indirect costs was upheld, and the matter was remanded to the Assessing Officer for recomputation. The appeals filed by both the revenue and the assessee were disposed of accordingly.

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