2021 (7) TMI 110 - HC - Income Tax

TDS on accommodation provided by the petitioner to its employees - computation of rent for the purpose of computing perquisites at the time of deducting of tax at source - petitioner is an educational institution constituted under the National Institutes of Technology, Science, Education and Research Act, 2007 and is engaged in imparting higher education in engineering, technology, management, science, arts etc. and also encourages research in such fields - petitioner receives 100% assistance from the central government and has been declared as an institution of national importance - HELD THAT - The employee bears full license fees fixed by the employer government, there would be no question of any perquisite. Whereas in cases falling under sl.No.2 of the table, there are detailed provisions how such accommodation should be valued and any amount charged from the employee which falls short of such valuation, would be treated as perquisite on which tax would be deducted at source by the employer and deposited with the Income Tax Authority. The Income Tax Officer in the impugned order had observed that the petitioner NIT is not the state within the meaning of Article 12 of the Constitution, which does not appear to be quite correct - even if the NIT would be treated as state within the meaning of Article 12, it cannot escape the liability to deduct tax at source on the differential valuation of the rent as assessed under sub-rule(1) of Rule 3 and that collected from the employee concerned by way of license fee. Writ petitioner, however, submitted that under mistaken belief the petitioner had taken into account full value of the computation of rent for the purpose of computing perquisites at the time of deducting of tax at source, ignoring that component which the employee was anyway paying by way of license fees under the Rules. This is a factual aspect into which we cannot go into in the present writ petition. The respondents had not demanded any quantified amount so that we can direct the department to correct the error, if any. If the petitioner had made an error in computation, it is either by the petitioner to approach the authority for rectification if time is available or for the concerned employees to seek refund of excess deduction of taxes from the salaries.

Summary

Issues Involved:
Challenge to order by Income Tax Officer regarding tax deduction at source for accommodation provided by educational institution.

Analysis:
1. Background and Facts:
The petitioner, an educational institution, challenged an order by the Income Tax Officer (TDS) regarding the tax liability of accommodation provided to its employees. The institution argued that it falls under the definition of "state" within Article 12 of the Constitution and, therefore, should not be liable to deduct tax at source for the accommodation provided.

2. Interpretation of Legal Provisions:
The key legal provisions in question were Section 17 of the Income Tax Act, 1961, and Rule 3(1) of the Income Tax Rules, 1962. Section 17 defines the term "perquisite," including rent-free accommodation provided by the employer. Rule 3(1) pertains to the valuation of perquisites, specifically for residential accommodation provided by the employer.

3. Application of Rules to the Case:
The Income Tax Officer contended that the institution did not qualify as a state under Article 12, hence not exempt from tax deduction. The Officer referred to the distinction in Rule 3(1) between accommodation provided by the Central or State government (Sl.No.1) and by other employers (Sl.No.2). The Officer concluded that the institution fell under Sl.No.2, making it liable for tax deduction.

4. Judicial Analysis and Decision:
The court analyzed the arguments presented by both parties. While acknowledging the institution's status as an educational body receiving government assistance, the court emphasized the specific provisions of Rule 3(1) regarding valuation of perquisites for accommodation. The court noted that even if the institution could be considered a state under Article 12, it would still be liable for tax deduction based on the differential valuation of rent.

5. Conclusion and Dismissal:
The court dismissed the petition, stating that the institution's error in computation of rent for tax deduction purposes should be rectified through appropriate channels. The court highlighted that the respondents had not quantified the amount in question, suggesting that rectification or refund processes should be pursued by the institution or affected employees.

In summary, the judgment upheld the Income Tax Officer's decision regarding tax deduction at source for accommodation provided by the educational institution, emphasizing the application of specific legal provisions and the need for accurate computation of perquisites.