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2024 (5) TMI 450 - SC - Income TaxSalary income - Taxability of fringe benefits or amenities provided to employees - benefit enjoyed by bank employees from interest-free loans or loans at a concessional rate - what is included and taxed as perquisite value of interest - vires of Section 17(2)(viii) of the Income Tax Act, 1961 challanged - Whether free or concessional loans is to be treated as other fringe benefit or amenity for the purpose of Section 17(2)(viii) and, therefore, taxable as a perquisite ? - method of valuation of the interest-free/concessional loan for the purposes of taxation Does Section 17(2)(viii) and/or Rule 3(7)(i) lead to a delegation of the essential legislative function to the CBDT? - HELD THAT - The subordinate authority s power under Section 17(2)(viii), to prescribe any other fringe benefit or amenity as perquisite is not boundless. It is demarcated by the language of Section 17 of the Act. Anything made taxable by the rule-making authority under Section 17(2)(viii) should be a perquisite in the form of fringe benefits or amenity . In our opinion, the provision clearly reflects the legislative policy and gives express guidance to the rule-making authority. The enactment of subordinate legislation for levying tax on interest free/concessional loans as a fringe benefit is within the rulemaking power under Section 17(2)(viii) of the Act. Section 17(2)(viii) itself, and the enactment of Rule 3(7)(i) is not a case of excessive delegation and falls within the parameters of permissible delegation. Section 17(2) clearly delineates the legislative policy and lays down standards for the rule-making authority. Accordingly, Rule 3(7)(i) is intra vires Section 17(2)(viii) of the Act. Section 17(2)(viii) does not lead to an excessive delegation of the essential legislative function . Is Rule 3(7)(i) arbitrary and violative of Article 14 of the Constitution insofar as it treats the PLR of SBI as the benchmark? - Rule 3(7)(i) posits SBI s rate of interest, that is the PLR, as the benchmark to determine the value of benefit to the assessee in comparison to the rate of interest charged by other individual banks. The fixation of SBI s rate of interest as the benchmark is neither an arbitrary nor unequal exercise of power. The rule-making authority has not treated unequal as equals. The benefit enjoyed by bank employees from interest-free loans or loans at a concessional rate is a unique benefit/advantage enjoyed by them. It is in the nature of a perquisite , and hence is liable to taxation. By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation. Rule 3(7)(i) ensures consistency in application, provides clarity for both the assessee and the revenue department, and provides certainty as to the amount to be taxed. When there is certainty and clarity, there is tax efficiency which is beneficial to both the tax payer and the tax authorities. These are all hallmarks of good tax legislation. Rule 3(7)(i) is based on an uniform approach and yet premised on a fair determining principle which aligns with constitutional values. A complex problem has been solved through a straitjacket formula, meriting judicial acceptance. To hold otherwise, would lead to multiple problems/issues and override the legislative wisdom. The universal test in the present case is pragmatic, fair and just. Therefore, Rule 3(7) is held to be intra vires Article 14 of the Constitution of India. We, accordingly, dismiss the appeals and uphold the impugned judgments of the High Courts of Madras and Madhya Pradesh.
Issues Involved:
1. Excessive and unguided delegation of essential legislative function to the Central Board of Direct Taxes (CBDT) under Section 17(2)(viii) of the Income Tax Act, 1961 and Rule 3(7)(i) of the Income Tax Rules, 1962. 2. Arbitrariness and violation of Article 14 of the Constitution by treating the Prime Lending Rate (PLR) of the State Bank of India (SBI) as the benchmark in Rule 3(7)(i). Detailed Analysis: I. Excessive and Unguided Delegation of Essential Legislative Function: 1. Legislative Framework and Delegation: - Section 17(2)(viii) of the Income Tax Act is a residuary clause that includes 'any other fringe benefit or amenity' as taxable perquisites, allowing subordinate rule-making authority to prescribe such benefits. - Rule 3(7)(i) of the Income Tax Rules specifies that interest-free or concessional loan benefits provided by banks to their employees are taxable as perquisites if the interest charged is lesser than the PLR of SBI. 2. Legislative Policy and Standards: - The Court held that the legislature must retain essential legislative functions, which means determining legislative policy and formulating it as a binding rule of conduct. - Once the legislature declares the policy and lays down standards, it can delegate the remainder of the task to subordinate legislation. 3. Guidance and Limits: - Section 17(2) provides an inclusive definition of 'perquisites' with specific categories and a residuary clause under Section 17(2)(viii) to include any other fringe benefits. - The Court found that the provision reflects legislative policy and gives express guidance to the rule-making authority, ensuring that anything taxable under Section 17(2)(viii) should be a 'perquisite' in the form of 'fringe benefits or amenity'. 4. Judicial Precedents: - The judgment references several landmark cases, including Municipal Corporation of Delhi v. Birla Cotton, Spinning and Weaving Mills, Delhi, and Another, which upheld the delegation of legislative functions as long as the primary legislation provided clear policy and standards. - The Court also cited cases like In Re.: The Delhi Laws Act 1912 and Raj Narain Singh v. Chairman, Patna Administration Committee, which emphasized that delegation should not modify essential features or legislative policy. 5. Conclusion: - The Court concluded that Section 17(2)(viii) and Rule 3(7)(i) do not lead to excessive delegation of essential legislative functions. The legislative policy and standards are clearly delineated, and Rule 3(7)(i) is intra vires Section 17(2)(viii) of the Act. II. Arbitrariness and Violation of Article 14 of the Constitution: 1. Benchmarking with SBI's PLR: - Rule 3(7)(i) uses SBI's PLR as the benchmark to determine the value of the benefit from interest-free or concessional loans provided by banks to their employees. - The Court held that using SBI's PLR as the benchmark is neither arbitrary nor unequal. SBI, being the largest bank in the country, significantly influences interest rates charged by other banks. 2. Rationale and Uniformity: - The rule prevents unnecessary litigation by providing a clear and consistent benchmark for computing the perquisite value, ensuring clarity for both the assessee and the revenue department. - The Court emphasized that uniform approaches in fiscal or tax measures enjoy greater latitude, and the legislative wisdom in choosing SBI's PLR as the benchmark should be given judicial deference. 3. Judicial Precedents: - The judgment referenced cases like Govt. of A.P. v. P. Laxmi Devi and Swiss Ribbons (P) Ltd. v. Union of India, which supported legislative flexibility in commercial and tax legislations. - The Court highlighted that complex problems in tax legislation are often solved through straightforward formulas, meriting judicial acceptance. 4. Conclusion: - The Court found that Rule 3(7)(i) is not arbitrary or irrational and aligns with constitutional values. It ensures tax efficiency, clarity, and consistency, and is thus intra vires Article 14 of the Constitution of India. Final Decision: - The appeals were dismissed, and the judgments of the High Courts of Madras and Madhya Pradesh were upheld. No order as to costs.
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