2006 (9) TMI 115 - SC - Income Tax

Validity of rule 3 of the Income-tax Rules, 1962, as amended by the Income-tax (Twenty-second) Amendment Rules, 2001, which amended the method of computing the valuation of perquisites u/s 17(2) - According to the appellants, amended rule 3 is inconsistent with the parent Act and also ultra vires article 14 of the Constitution - that though rule 3 of the rules cannot be held arbitrary, discriminatory

Issues Involved:
1. Validity of Rule 3 of the Income-tax Rules, 1962, as amended by the Income-tax (Twenty-second) Amendment Rules, 2001.
2. Consistency of amended Rule 3 with the parent Act (Income-tax Act, 1961).
3. Whether amended Rule 3 is ultra vires Article 14 of the Constitution.
4. Classification of employees and its reasonableness.
5. Interpretation of "concession" under Section 17(2)(ii) of the Income-tax Act, 1961.
6. Applicability of the doctrine of "reading down" to Rule 3.

Detailed Analysis:

1. Validity of Rule 3 of the Income-tax Rules, 1962:
The appellants challenged the validity of Rule 3, amended in 2001, arguing it conferred arbitrary powers on the Revenue and was inconsistent with the Income-tax Act. The court examined the rationale for the amendment, which aimed to simplify and rationalize the procedure for determining the perquisite value, and upheld the validity of Rule 3.

2. Consistency of Amended Rule 3 with the Parent Act:
The appellants argued that Rule 3, as amended, was inconsistent with Section 17(2) of the Income-tax Act, 1961. The court held that Rule 3 is in the nature of a "machinery provision" and applies to cases of "concession" in the matter of rent respecting any accommodation provided by an employer to his employees. It was found to be consistent with the parent Act.

3. Whether Amended Rule 3 is Ultra Vires Article 14 of the Constitution:
The appellants contended that the amended Rule 3 was ultra vires Article 14 of the Constitution as it was arbitrary and discriminatory. The court observed that the classification between cities with populations of less than four lakhs and more than four lakhs was reasonable and rational. The court found that the rule did not suffer from the vice of arbitrariness and upheld its validity.

4. Classification of Employees and Its Reasonableness:
The court examined the distinction made between Government employees and other employees. It was argued that such classification was artificial and irrational. The court, however, held that the classification was based on intelligible differentia and had a rational nexus to the object sought to be achieved. The benefits and service conditions of Government employees were considered different from those of employees of corporations, companies, and other undertakings. Hence, the classification was upheld as reasonable.

5. Interpretation of "Concession" Under Section 17(2)(ii) of the Income-tax Act, 1961:
The court emphasized that "concession" is a jurisdictional fact under Section 17(2)(ii). It must be established that there is a concession in the matter of rent before Rule 3 can be applied. The court noted that the amended Rule 3 did not provide a "deeming clause" to automatically consider rent below a certain percentage of salary as a concession. Therefore, it is open to the assessee to contend that there is no concession, and the case does not fall under Section 17(2)(ii).

6. Applicability of the Doctrine of "Reading Down" to Rule 3:
The appellants argued for the application of the doctrine of "reading down" to save Rule 3 from being arbitrary and unreasonable. The court, however, held that the rule was clear and unambiguous, and there was no need to read down the provision. The court stated that the rule-making authority's intention was not to provide an opportunity to the assessee to prove the absence of concession.

Conclusion:
The Supreme Court upheld the validity of the amended Rule 3 of the Income-tax Rules, 1962, finding it consistent with the parent Act and not ultra vires Article 14 of the Constitution. The court recognized the classification of employees as reasonable and based on intelligible differentia. It also clarified that "concession" is a jurisdictional fact under Section 17(2)(ii), and the assessee has the right to contest the existence of such a concession. The doctrine of "reading down" was deemed unnecessary for Rule 3. The appeal was partly allowed to the extent indicated, and the transferred cases were disposed of accordingly.

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