2025 (1) TMI 1126 - HC - Income Tax

Scope of amendments and the Explanations in Section 17 (2) (ii) of the IT Act - whether retrospective application of the amendments is permissible and constitutional? - definition of perquisite contained in Section 17 (2) of the IT Act - HELD THAT - By introducing the impugned amendments the legislature apart from addressing the lacuna and shortcomings pointed out in the Court decisions has provided consistency clarity and uncertainty. These factors promote good tax governance. In fiscal matters or tax measure laws it is well settled that the legislature enjoys far greater latitude than what may be permitted in non-fiscal legislation. For all the above reasons we see no force in the contention that the impugned amendments constitute an instance of impermissible judicial override or that the legislature has overruled the judicial precedents in Arun Kumar 2006 (9) TMI 115 - SUPREME COURT or Officers Association Bhilai Steel Plant 1980 (10) TMI 6 - MADHYA PRADESH HIGH COURT From 1 April 2006 the impugned amendment provides that a concession in the matter of rent shall be deemed provided at the specified rate by an employer to his employee by providing unfurnished employer-owned accommodation. The value of such concession in terms of Explanation 4 would be 15% of the salary in cities having a population exceeding twenty-five lakhs as per 2001 census; 10% of salary in cities having a population exceeding ten lakhs but not exceeding twenty-five lakhs as per 2001 census; and 7.5% of salary in any other place less the rent recoverable from or payable by the employee. Thus if for the period between 2002 to 2006 an employer were to have provided to his employee unfurnished employer-owned accommodation in a city having a population exceeding four lakhs as per the 1991 census and such employee had a monthly salary of Rs.1 lakh and was paying a monthly rent of Rs. 5, 000/- towards such accommodation then the value of the concession for the purposes of Section 17 (2) (ii) had to be determined as the difference between 10% of such employee s salary i.e. Rs. 10, 000/- and the rental of Rs. 5, 000/- which such employee was payable to the employer. This means that the value of the concession would be computed at Rs.5, 000/- the amount on which such an employee would be liable to pay tax. Arguments about the scope of explanations and legal fiction - The arguments about the impugned amendments being inconsistent repugnant and destructive of the main body of Section 17 (2) (ii) of the IT Act carry no force and cannot be accepted as discussed earlier the legislature creating legal fiction is a permissible legislative exercise. If such exercise is shown not to offend any constitutional provisions there is no scope to interfere with such an exercise. The following argument about the necessity of introducing an explanation without demonstrating that there was any ambiguity in Section 17 (2) (ii) of the IT Act also cannot be accepted. The purposes of introducing or adding an explanation to a Section can be manifold. The legislature has broad discretion in such matters. The impugned amendments and the explanations introduced thereby cannot be struck down either because the legislature was incompetent to create a legal fiction because such an explanation was unnecessary because it destroyed the principal section or because they were otherwise unconstitutional ultra-vires or null and void. Retrospectivity of the impugned amendments - In the present case however we need not explore whether the Explanations inserted by the impugned amendments are clarificatory. This is because the issue of construction and determining retrospectivity arises when a legislature is either silent or ambiguous. Here the legislature has expressly provided a limited retrospective operation. There is nothing inherently wrong in providing for such a retrospective operation. Therefore merely because a limited retrospectivity is granted to the impugned amendments we cannot hold that the impugned amendments violate Article 14 of the Constitution or otherwise ultra-vires the constitutional provisions. For all the above reasons we find no force in the challenge based on the retrospectivity of the impugned amendments. Amendments violating Article 14 of the Constitution of India - We see not much force in the challenges to the impugned amendments on the grounds of any breach of Article 14 of the Constitution or any other constitutional provisions. Bank Submission - As it is too premature to decide whether the banks could be held to be assesses in default or made liable to pay any taxes on behalf of the employees. Therefore we do not wish to make any observations on this issue. However we clarify that if and when such issues arise all parties contentions regarding this issue are kept open. Such issues should be dealt with in accordance with law by all concerned. Revenue authorities must consider that this Court had interdicted tax deductions at source through interim orders that operated during the pendency of some of these Petitions. The tax authorities must also consider the plight of the banks vis-a-vis its employees most of whom must have retired by now. In any event for the present since such issues are yet to arise we make no further observations on such matters leaving all contentions of parties open.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment addresses several core legal questions:

• Whether the impugned amendments to Section 17(2) of the Income Tax Act, 1961, by the Finance Act, 2007, constitute an impermissible judicial override of the Supreme Court's decision in Arun Kumar vs. Union of India.
• Whether the amendments are inconsistent, repugnant, or destructive of the main body of Section 17(2)(ii) of the IT Act.
• Whether the retrospective application of the amendments is permissible and constitutional.
• Whether the amendments violate Article 14 of the Constitution by being arbitrary or discriminatory.
• Whether the amendments interfere with bank staff regulations and settlements.
• Whether the amendments result in double taxation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Impermissible Judicial Override

• Legal Framework and Precedents: The petitioners argued that the amendments were introduced to nullify the Supreme Court's decision in Arun Kumar, which required assessing officers to determine if a concession in rent was actually provided. They cited Indian Aluminum Co. to support their contention of impermissible judicial override.
• Court's Interpretation and Reasoning: The court held that the amendments addressed the lacuna identified in Arun Kumar by introducing a legal fiction to simplify the determination of concessions in rent. This was a permissible legislative exercise, not an impermissible judicial override.
• Conclusions: The court rejected the argument of impermissible judicial override, stating that the legislature acted within its competence to address the issues flagged by the Supreme Court.

Issue 2: Consistency with Section 17(2)(ii)

• Legal Framework and Precedents: The petitioners contended that the amendments were inconsistent with the main body of Section 17(2)(ii), which defines "perquisite" as including rent concessions.
• Court's Interpretation and Reasoning: The court noted that the legislature is competent to create legal fictions and that such fictions do not destroy the main section if they do not offend constitutional provisions.
• Conclusions: The court found no inconsistency or destruction of the main body of Section 17(2)(ii) due to the amendments.

Issue 3: Retrospective Application

• Legal Framework and Precedents: The petitioners argued that the amendments introduced a new liability and should not have retrospective effect. They cited Martin Lottery Agencies to support their contention.
• Court's Interpretation and Reasoning: The court distinguished the present case from Martin Lottery Agencies, noting that the legislature had explicitly provided for limited retrospective effect. The court held that machinery provisions, being procedural, could be applied retrospectively.
• Conclusions: The court upheld the retrospective application of the amendments, finding no constitutional violation.

Issue 4: Violation of Article 14

• Legal Framework and Precedents: The petitioners claimed the amendments were arbitrary and discriminatory, violating Article 14. They argued that the amendments unfairly distinguished between different classes of employees and linked rent concessions to salaries.
• Court's Interpretation and Reasoning: The court referred to Arun Kumar and other precedents, emphasizing the presumption of constitutionality in fiscal legislation. It found the classification based on salary and city population reasonable and within legislative discretion.
• Conclusions: The court rejected the Article 14 challenge, affirming the amendments' constitutionality.

Issue 5: Interference with Staff Regulations

• Legal Framework and Precedents: The petitioners argued that the amendments interfered with bank staff regulations and settlements.
• Court's Interpretation and Reasoning: The court did not find any specific reasoning addressing this issue in detail, as it was subsumed under the broader constitutional challenges.
• Conclusions: The court implicitly rejected this argument by upholding the amendments' validity.

Issue 6: Double Taxation

• Legal Framework and Precedents: The petitioners contended that the amendments resulted in double taxation for employees renting out their properties while being taxed on rent concessions.
• Court's Interpretation and Reasoning: The court did not specifically address this argument, focusing instead on the broader constitutional challenges and the legislative competence to enact the amendments.
• Conclusions: The court's dismissal of the petitions suggests a rejection of the double taxation argument.

3. SIGNIFICANT HOLDINGS

• Crucial Legal Reasoning: "The above exercise by a competent legislature addressing the lacuna or the shortcomings pointed out by the Courts can hardly be regarded as an instance of impermissible judicial override."
• Core Principles Established: The legislature can enact amendments with retrospective effect to address judicially identified lacunae, provided it does not offend constitutional provisions.
• Final Determinations: The court upheld the constitutional validity of the amendments, dismissed the petitions, and vacated interim reliefs.