2012 (8) TMI 646 - HC - Income Tax

Perquisite value of rent free accommodation - Expenditure on repair of building - inclusion of amount spent by the employer under clauses (iii) & (iv) of Sub-Section 2 of Section 17 by AO - Held that - A careful reading of the Lease Deed nowhere suggests that the assessee had agreed to an obligation to renovate the expenses. As that of the original sum of Rs. 50.51 lakhs, Rs. 10 lakhs was spent towards furniture, the AO took that into consideration while working out the value of furnished residence, for the purpose of calculating the tax liability - The perquisite value of rent free accommodation under Section 17(2)(i) had been declared by the appellant in return of his income which was assessed, thus the reference to Section 17(2)(i) was unwarranted because the assessee was under no obligation to incur the expenses on repairs and renovation or modification of rent free accommodation The express provision of Rule 3 of the Valuation Rules elaborates various contingencies in relation to the perquisite of rent free accommodation, rules out the intention of Parliament to treat expense in relation to improvement, repairs or renovations, as falling within the meaning of perquisite - thus, as regards Section 17 (2) (iv), the argument on behalf of the revenue that repairs and renovation expenses constituted an obligation of the employee/assessee, which was borne by his employer, is meritless - if the AO had returned a finding that the premises were to be valued at market value (of the rental), in case it increased as a result of the renovations, the only prescribed mode was to apply the method indicated by Rule 3 (a) (iii) of the Valuation Rules and not have included the entire expenses, and spread it over a period of five years, for the purpose of saying that the whole of such expense constituted a perquisite - in favour of assessee.

Issues Involved:
1. Whether the amount spent by the employer towards the repair of building would be covered by clauses (iii) & (iv) of Sub-Section 2 of Section 17 of the Income Tax Act, 1961.

Detailed Analysis:

1. Assessing Officer's Determination:
The Assessing Officer (AO) observed that the employer incurred expenses of Rs. 50 lakhs towards repair and renovations of the residential accommodation occupied by the assessee, who was the President and CEO of M/s GE International Operations Corp. Inc. The AO held that these expenses were a perquisite under Section 17(2)(iv) of the Income Tax Act, 1961, as they were incurred to suit the requirements of the employee and not related to the performance of his duties. The AO rejected the contention that perquisite value should be calculated based on Rule 3 of the Income Tax Rules, concluding that the expenses would have been otherwise payable by the assessee.

2. Appellate Commissioner's Reasoning:
The Appellate Commissioner upheld the AO's decision, stating that if the renovation is person-specific, it benefits only that individual. The lease was in the name of the appellant, not the employer company. The Commissioner noted that the appellant was paying a high rent and should have asked the owner to carry out normal repairs. The definition of perquisite was deemed wide enough to include any benefits granted by the employer. The Commissioner concluded that the perquisite resulting from the employer's expenditure had to be taxed in the year it was incurred.

3. Tribunal's View:
The Tribunal agreed with the lower authorities, stating that the repairs and renovations constituted a taxable perquisite in the hands of the employee. The Tribunal noted that the lease was executed in favor of the assessee, who was the lessee, and that the payment made towards renovation was primarily the assessee's obligation discharged by the employer.

4. Contentions of the Appellant:
The appellant argued that the Tribunal erred in upholding the Revenue's contention that the expenditure was a perquisite. The appellant contended that the perquisite value of rent-free accommodation under Section 17(2)(i) had been declared and assessed. The reference to Section 17(2)(iv) was unwarranted as the assessee was under no obligation to incur the expenses on repairs and renovation. The appellant relied on the Service Contract and lease deed clauses to support the argument that the employer was responsible for providing furnished accommodation and maintaining it.

5. Revenue's Argument:
The Revenue argued that the appeal lacked merit and the findings of the ITAT and lower authorities should be affirmed. The Revenue contended that the assessee had undertaken the obligation of hiring accommodation and renovating it, which was discharged by the employer, thus falling within the mischief of Section 17(2)(iv). The Revenue relied on clauses in the lease deed showing that the lessee could not carry out alterations without the lessor's consent and that the obligation to renovate was the assessee's.

6. Legal Precedents and Analysis:
The judgment referred to the Karnataka High Court's decision in CIT v. Motor Industries Co. Limited, which emphasized that not all amounts spent on buildings can be treated as repairs. The Supreme Court's interpretation of perquisites in Commissioner of Income-tax v. L. W. Russel was also considered, defining perquisites as non-cash benefits given by an employer to employees in addition to cash salary or wages.

7. Rule 3 of the Income Tax Rules:
The court analyzed Rule 3 of the Income Tax Rules, which provides the method for valuing rent-free residential accommodation. The court noted that the AO did not follow the prescribed method for calculating the fair market value after renovation.

8. Conclusion:
The court concluded that the express provision of Rule 3 rules out the intention of Parliament to treat expenses related to improvement, repairs, or renovations as perquisites. The court found that the obligation to renovate the premises was not on the assessee as per the lease deed. Therefore, Section 17(2)(iv) could not be applied. The AO should have followed the method indicated by Rule 3(a)(iii) for calculating the fair rent after renovation.

Judgment:
The appeal was allowed, and the impugned order of the Tribunal was set aside. The cost of repairs and renovation was deleted from the taxable income of the assessee.

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