2018 (6) TMI 162 - AT - Income Tax

Valuing perquisites of the accommodation, provided to employees of the assessee society - Taxability - whether the employees of assessee-society are employees of Central Government or not? - bonafide belief - Held that - Once the employees of the society are treated as employees of the Central Government for the purpose of evaluating perquisites of rent free accommodation, rules prescribed under clause (i) or clause (ii) of table 1 of rule 3 are to be adopted - in the present case we hold that the employees of the society cannot be equated with the employees of the Central Government - also no factual foundation is laid as to how the assessee has entertained a bona fide belief that its employees can be treated as Central Government employees - therefore, no relief can be granted based on bald assertion without any actual foundation - appeal of assessee is dismissed.

Summary

Issues Involved:
1. Whether the employees of the assessee-society should be treated as Central Government employees for the purpose of valuing perquisites of rent-free residential accommodation.
2. Whether the assessee can be treated as an 'assessee in default' for not deducting tax at source on the perquisite value of the accommodation.
3. Whether the assessee had a bona fide belief that its employees were Central Government employees, affecting its obligation to deduct tax at source.

Detailed Analysis:

Issue 1: Treatment of Employees as Central Government Employees
The main issue revolves around whether the employees of the assessee-society, an autonomous institution under the Indian Council of Agricultural Research (ICAR), should be treated as Central Government employees for the purpose of valuing perquisites of rent-free residential accommodation. The assessee contended that it falls under the definition of 'State' as per Article 12 of the Constitution of India and its employees should be treated as Central Government employees. The TDS officer, however, did not accept this contention and held that the employees of the assessee-society cannot be treated as Central Government employees. Consequently, the TDS officer applied clause (ii) of Rule 3 of the Income Tax Rules, which pertains to employees other than those of the Central and State Government.

The Tribunal referenced a similar case, Central Food Technological Research Institute vs. ITO, where it was held that employees of a corporation fully controlled by the Central Government cannot be equated with Central Government employees, despite the corporation being an instrumentality of the State under Article 12. The Tribunal upheld the TDS officer's application of clause (ii) of Rule 3, dismissing the appeal on this ground.

Issue 2: Assessee in Default for Non-Deduction of Tax
The assessee was treated as 'assessee in default' under Section 201(1) of the Income-tax Act for failing to deduct tax at source on the perquisite value of the accommodation provided to its employees. The Tribunal noted that the assessee's argument, based on the Supreme Court decision in P.K. Ramachandra Iyer's case, that ICAR is an instrumentality of the State and its employees should be treated as Central Government employees, was not sufficient to overturn the TDS officer's decision. The Tribunal emphasized that the employees of the society cannot be equated with Central Government employees for the purpose of valuing perquisites, thereby upholding the TDS officer's action.

Issue 3: Bona Fide Belief and Obligation to Deduct Tax at Source
The assessee argued that it had a bona fide belief that its employees were Central Government employees, and thus, it was not obligated to deduct tax at source on the perquisite value. The Tribunal examined whether the assessee had made a bona fide estimate of the salary by valuing the perquisites as if the employees were Central Government employees. The Tribunal referred to previous decisions, including those of the Andhra Pradesh High Court and the Madhya Pradesh High Court, which held that an employer's obligation is to make a bona fide estimate of the salary. However, the Tribunal found that there was no factual foundation laid by the assessee to support the claim of a bona fide belief. Therefore, the argument of bona fide belief was dismissed, and the assessee's obligation to deduct tax at source was upheld.

Conclusion:
The Tribunal dismissed the appeals filed by the assessee, upholding the TDS officer's decision to treat the assessee as 'assessee in default' for not deducting tax at source on the perquisite value of the accommodation provided to its employees. The Tribunal confirmed that the employees of the assessee-society cannot be treated as Central Government employees for the purpose of valuing perquisites, and the assessee's claim of a bona fide belief was not substantiated with sufficient factual foundation.