Validity of subordinate provision like I.T. Rules: The universal tests pragmatic, fair and just satisfied therefore Rule for valuation of perquisites by way of interest free or concessional loan has been held valid and intra virse the Constitution and Income Tax Act and within powers of Rule Making Authority (CBDT)

[DEVKUMAR KOTHARI]

Rule 3 (7) is intra virse Article 14 of the Constitution of India and Section 17 of Income-tax Act 1961.

2024 (5) TMI 450 - SUPREME COURT - ALL INDIA BANK OFFICERS’ CONFEDERATION VERSUS THE REGIONAL MANAGER, CENTRAL BANK OF INDIA, AND OTHERS

Relevant provisions:

Article 14 of the Constitution of India ( in short COI ) relating to equality before law.

Section 17 of Income-tax Act 1961 (in short –ITA)

S.17(2) (vii) of ITA and Rule 3(7)(i) of IT Rules.

From the Constitution of India:

Article 14. Equality before law.—

The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

The Rule was challenged on one of ground that it creates inequality due to adopting uniform formulae and making basis of single rate of interest based on PLR of SBI. Instead of different rates which might be charged in different cases and by different banks. For this reason exact perquisites may not be considered in case of assessee working in different banks or different organisations.

Relevant and corresponding provisions of Income Tax Act and Rules as stands at present are as follows:

"Salary", "perquisite" and "profits in lieu of salary" defined.

17. For the purposes of sections 15 and 16 and of this section,-

(1) "salary" includes- xxx

(2) "perquisite" includes-

(viii) the value of any other fringe benefit or amenity as may be prescribed:]

Observations of author:

This provision is made prescribing general guidance that there should be fringe benefit or amenity which are not mentioned in S.17 specifically but are provided by employers resulting into benefit or concession etc. which can be considered a fringe benefit or amenity.

The rule for valuation of perquisites Rule 3(7)(i):

Valuation of perquisites.

[3. For the purpose of computing the income chargeable under the head Salaries, the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub-rules, namely:-

xxxx

(7) In terms of provisions contained in sub-clause (viii) of clause 2 of Section 17, the following other benefits or amenities and value thereof shall be determined in the manner provided hereunder:

(i) The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, constituted under the State Bank of India Act, 1955 (23 of 1955), as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by the interest, if any, actually paid by him or any such member of his household:

Provided that no value would be charged if such loans are made available for medical treatment in respect of diseases specified in rule 3A of these Rules or where the amount of loans are petty not exceeding in the aggregate twenty thousand rupees:

Provided further that where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

These provisions are on the same line as the Supreme Court considered them. Some changes have taken place about loan for some medical treatment and petty loans. However, provision about taxable perquisites are on the same line. Therefore, the law laid down by the Supreme Court apply to the present provisions also. Therefore, Rules as stands today are also valid.

Guidelines derived from provisions:

Supreme Court noted that Rule making authority derives guidelines and limitations from the provisions of the Act. AS per provisions of Act vide S. 17 (2) (viii) it should be any fringe benefit or amenity. Therefore, rule making powers are guided and rules made is within such guidelines.

Basis:

On the issue of providing rates of interest charged by State Bank of India (Prime Lending Rate), the Supreme Court observed and held that a uniform basis is to make working and computations etc. uniformly and that the basis is justified. If uniform basis is not provided it may open several other problems.

Uniform approach:

A uniform approach is desired to make provisions uniformly applicable. In fiscal and tax matters uniform approach enjoys greater latitude than other statutes. This is because Commercial and tax legislations tend to be highly sensitive and complex as they deal with multiple problems and are contingent. The rule prevents possibilities of abuse and promotes certainty.

The rule is not iniquitous, draconian or harsh on the taxpayers. A complex problem has been solved through a straitjacket formula, which found judicial acceptance.

The Court also expressed that 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) was held to be intra vires Article 14 of the Constitution of India.

Conclusion:

Element of interest saved in an interest free loan or concessional loan granted by employer to employees is a fringe benefit and perquisite. Amount of interest subsidized by employer in a loan is thus a taxable perquisite and it has to be computed as per the Rule.

Some medical treatment loans and petty loans are out of taxable preview. Therefore, concession of interest in such loans is not taxable as perquisite because of specific exemption provided, In absence of such exemption the concession of interest in such loans would also be taxable.

It may be noted that loan itself is repayable, and therefore amount of loan itself is not a perquisite.