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2016 (5) TMI 935 - MADRAS HIGH COURT

2016 (5) TMI 935 - MADRAS HIGH COURT - [2016] 385 ITR 114 - Section 17(2)(iii) or 17(2) (vi) or Rule 3(7)(i) of the Income Tax Rules or both challenged - by taking the rate of interest charged by the State Bank of India as the base for determining whether the interest free or concessional loan offered by a bank to its own employee as a perquisite or not, the Rule has taken away the right of the employees to contest an important jurisdictional fact namely whether what is granted to them is a conc .....

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sion in Arunkumar [2006 (9) TMI 115 - SUPREME Court] has no bearing upon the constitutional validity of Section 17(2)(viii) or Rule 3(7)(i). - Apart from the fact that the first ground of attack is legally untenable, it also defies logic. By contending that the question about the interest free or concessional loan granted to them is a jurisdictional fact and that the same should be allowed to be adjudicated individually before the Assessing Officers, the petitioners have taken a stand that t .....

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8%, what is sought to be included in their salaries under Rule 3(7)(i), is only the difference between the rate of interest charged by the State Bank of India in respect of loans for the same purpose and the interest actually charged by their employer. Therefore, Rule 3(7)(i) does not even make a classification between different categories of employees or between employees of different banks. - The petitioners cannot compare themselves with the employees of the State Bank of India, to conte .....

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end up paying more in the form of interest than their counterparts in other banks. The employees of other banks end up paying income tax at the rate of 10 - 30% on the differential interest of 3% (between the SBI rate and the rate charged by their employer). Therefore, the attack on the basis of Article 14 is completely meaningless. - Whether Rule works out a great hardship to the employees ? - Held that:- This argument completely lacks merit. A common man, either in business or in professi .....

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extra benefit on account of being an employee of the bank. In other words, Rule 3(7)(i) causes a dent in the value of the privilege given to an employee by an employer, perhaps to the maximum extent of about 30%. This can never be considered as a hardship. Therefore, the third ground of challenge is also liable to be rejected. - Rule 3(7)(i) is vitiated in as much as it tends to overrule the judgment of the Supreme Court in Arunkumar [2006 (9) TMI 115 - SUPREME Court]- Held that:- e complet .....

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of Jharkhand, challenging a Notification bearing No.S.O.940(E) dated 25.9.2001. By this Notification, Rule 3 of the Income Tax Rules stood amended. What is now under challenge is Clause (i) of Sub-Rule (7) of Rule 3 that was incorporated with effect from 1.4.2004 under the Income Tax (First Amendment) Rules, 2004. But, the decision in Arunkumar, as we have pointed out earlier, was rendered on 15.9.2006, much after the Rule came into force. Therefore, the contention that the Rule was inserted to .....

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of 2012, 9264 of 2014 and 8466, 9495 and 9551 of 2015 and all connected pending MPs - Dated:- 20-4-2016 - V. Ramasubramanian And M. V. Muralidaran, JJ. Lakshmi Vilas Bank Officers Association Catholic Syrian Bank OfficersAssociation Dhanalakshmi Bank Officers Organisation Federal Bank Officers Association South Indian Bank Officers Association, The Catholic Syrian Bank Officers Association The Federal Bank Staff Union The South Indian Bank Executive Welfare Society All India Vijaya Bank Officer .....

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heard M/s.Srinath Sridevan, Jayesh B.Dolia and N.G.R. Prasad, learned counsel appearing for the writ petitioners, Mr.T.Pramod Kumar Chopda and Mr.J.Narayanasamy, learned Standing Counsel for the Income Tax Department and the learned counsel appearing for the banks. 3. Chapter IV of the Income Tax Act, 1961 contains various provisions from Sections 14 to 59, indicating the method of computation, of total income under various heads such as salaries, income from house property, profits and gains o .....

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uded as profits in lieu of salary. The items includible under the head salary are indicated in Sub-Section (1), the items includible as perquisite are indicated in Sub-Section (2) and the items includible as "profits in lieu of salary" are indicated in Sub-Section (3). 6. Prior to 1.4.2010, Sub-Section (2) of Section 17 contained only 6 items that were included as perquisites. Those 6 items, in simple terms, could be stated as follows:- (i) the value of rent free accommodation provided .....

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recognized provident fund or accrued superannuation fund etc., and (vi) the value of any other fringe benefit or amenity (excluding the fringe benefits chargeable to tax under Chapter XII-H) as may be prescribed. 7. But, by the amendment under Finance (No.2) Act, 2009, three items under Clauses (vi), (vii) and (viii) were substituted for the existing Clause (vi). In other words, after the amendment with effect from 1.4.2010, there are eight items included as perquisites under Sub-Section (2) of .....

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Chapter XII-H found within brackets in Section 17(2)(vi) before its amendment. Otherwise, what was Section 17(2)(vi) before 1.4.2010 has actually become Section 17(2)(viii) after 1.4.2010, without the words that appeared in brackets. 9. Interestingly, many of the writ petitioners did not even notice the amendment that Section 17(2) had undergone, under Finance (No.2) Act, 2009 and hence, the prayer made by some of them in their writ petitions, is to declare Section 17(2)(vi) as unconstitutional .....

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efore, we shall now see what this Rule is. 11. Section 17(2)(viii) does not quantify a fringe benefit or amenity. The Parliament has left it to the Government to prescribe what a fringe benefit or amenity would be. This is clear from the expression "as may be prescribed" used in Section 17(2)(viii). 12. Therefore, Rule 3 of the Income Tax Rules, 1962 prescribes the method of valuation of perquisites, for the purpose of Section 17(2)(viii). Incidentally, Rule 3 has undergone sweeping ch .....

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h the value of any benefit such as gas, electrical energy or water provided free of charge for the house hold consumption of the assesse, Clause (e) dealt with the value of the benefit resulting from the provision of free educational facilities for the member of the house-holder of the assessee, Clause (f) dealt with the value of any benefit or amenity resulting from the provision of journey free of cost or at concessional rates and Clause (g) dealt with any other benefit or amenity not included .....

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isions contained in Sub-Clause (vi) of Sub-Section (2) of Section 17, the following other fringe benefits or amenities are hereby prescribed and the 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 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 .....

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in the aggregate ₹ 20,000: Provided 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." 14. Clause (i) of Sub-Rule (7) of Rule 3 underwent an amendment with effect from 1.4.2004 under Income Tax (First Amendment) Rules, 2004. With effect from 1.4.2004, Rule 3(7)(i) reads as follows:- "(7) In te .....

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ll be determined as the sum equal to the simple interest computed at the rate charged per annum by 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. However, no value would be charged if such loans are made available for medical treatment in respect of disease .....

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lable to an employee or a member of household, was included as one of the items of perquisites only with effect from 1.4.2001. (ii) For a full period of 3 years from 1.4.2001 to 1.4.2004, a particular method of valuation was adopted in Rule 3(7)(i). But, the method of valuation was changed under Rule 3(7)(i) with effect from 1.4.2004. 16. The petitioners herein did not choose to challenge the method of valuation adopted from 1.4.2001 to 1.4.2004. But, they have chosen to challenge the method of .....

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termining whether the grant of interest free or concessional loan to an employee is a perquisite or not, the Rule Making Authority has deprived the individual employees of their rights to contest a jurisdictional fact namely that what was granted to them was not a concession or benefit or amenity. Therefore, the Rule is ultra vires Section 17(2)(viii), which survived the test of constitutionality only on the ground that it still provided a room for the Assessing Officers to test a jurisdictional .....

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tested and (iv) Rule 3(7)(i) is vitiated in as much as it tends to overrule the judgment of the Supreme Court in Arunkumar Vs Union of India. FIRST GROUND OF CHALLENGE : 18. The first ground of challenge is that by taking the rate of interest charged by the State Bank of India as the base for determining whether the interest free or concessional loan offered by a bank to its own employee as a perquisite or not, the Rule has taken away the right of the employees to contest an important jurisdicti .....

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ns in the township of Jamshedpur, approached the Jharkhand High Court, challenging the validity of Rule 3 of the Income Tax Rules, as amended by the Notification of the Central Board of Direct Taxes dated 25.9.2001. By the said amendment, the method of computing the value of a perquisite in the form of rental accommodation, granted by an employer to his employee, was changed. The case of the employees was that Section 17(2)(ii) would get attracted only when there was a concession in the matter o .....

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ccommodation provided. Mr.Salve submitted that the rule will apply and the liability to deduct tax will arise only if 'concession' is shown in the matter of rent respecting any accommodation and it is "perquisite" under the Act, the authority must come to the conclusion that Section 17(2)(ii) is attracted. Absence of any provision enabling the assessee to show to the Assessing Officer that it was not a 'concession' and, therefore, 'perquisite' within the meaning .....

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case, with a rule that could be identified with Section 17(2)(ii). Under Section 17(2)(ii), it was only 'a concession' in the matter of rent that was made a 'perquisite'. Therefore, the Supreme Court had to read down the expression 'perquisite', to mean only a concession in the matter of rent and not the very grant of a residential accommodation to an employee. This can be appreciated from the observations contained in paragraphs 71 and 73. Paragraphs 71 and 73 read as fo .....

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d to the employee by his employer would be "perquisite". Nevertheless it must be a "concession" in the matter of rent respecting any accommodation provided by the employer to his employee. ....... 73. It is, therefore, clear that before Section 17(2)(ii) can be invoked or pressed into service and before calculation of concession as per Rule 3 is made, the authority exercising power must come to a positive conclusion that it is a concession. 'Concession', in our judgme .....

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ority has to decide the question whether there was concession or not. 22. Therefore, even while holding Rule 3 to be intra vires, valid and not inconsistent with the provisions of Section 17(2)(ii), the Supreme Court held in Arunkumar that it is open to the assessee to contend before the Assessing Officer that there was no concession in the matter of accommodation provided by the employer. After holding so, the Supreme Court gave an indication in paragraph 99 as to how one can deal with the situ .....

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power created a 'deeming fiction' as to concession in the matter of rent in certain circumstances (for which we express no final opinion), no such deeming provision is found in the Act. It is, therefore, open to the assessee to contend that there is no 'concession' in the matter of accommodation provided by the employer to the employees and the case is not covered by Section 17(2)(ii) of the Act." 23. In the light of what the Supreme Court pointed out in paragraphs 54, 71, 7 .....

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f the same being read down by the Supreme Court, with a leverage to the employees to establish before the Assessing Officers that what was received by them was not a concession. Since Rule 3(7)(i) does not give scope for any such adjudication upon a jurisdictional fact, the same, according to learned counsel, is ultra vires. 24. But, we are unable to accept the above submission. In Arunkumar, the Supreme Court was concerned with Rule 3 with particular reference to Section 17(2)(ii). As we have p .....

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). Under Section 17(2)(viii), the Parliament has left it to the wisdom of the Rule Making Authority, to prescribe the value of any other fringe benefit or amenity, as a perquisite. Section 17(2)(viii) does not use any expression similar to the expression 'concession' as used in Section 17(2)(ii). The only sine qua non for the invocation of Section 17(2)(viii) is the existence of a fringe benefit or amenity. Even if the existence of a fringe benefit or amenity is taken to be a jurisdictio .....

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27. Section 17(2)(ii) did not make the provision of any and every residential accommodation as a perquisite. It made only a concession in the matter of rent as a perquisite. Therefore, there was a need for adjudication. On the contrary, the Parliament made any fringe benefit or amenity as prescribed by the Rule Making Authority, as a perquisite, leaving no scope for any adjudication. The method of valuation is prescribed by Rule 3(7)(i). Therefore, the decision in Arunkumar has no bearing upon .....

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le to them, but the prescription of a standard formula by the Executive for avoiding arbitrariness and for ensuring uniformity is not acceptable to them. This is why their contention is unacceptable to us. SECOND GROUND OF CHALLENGE : 29. The second ground of challenge is that the Rule is violative of Article 14, since it seeks to treat unequals as equals, by pegging the rate of interest charged by the individual banks on the loans advanced to their employees, with the rate of interest offered b .....

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e formula for computation of base rate as provided in the Master Circular shows that the base rate would depend upon (i) Statutory Liquidity Ratio (ii) Cash Reserve Ratio (iii) Net Profit of the Bank and (iv) Net Worth of the Bank. The Master Circular excludes from the purview of application of the base rate, the loans granted to the employees of banks. Therefore, it is contended on the basis of the decisions of the Supreme Court in K.T.Moopil Nair Vs. State of Kerala [1961 (3) SCR 552] and Ashi .....

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lat rate of ₹ 2/- per acre, on all lands, irrespective of the nature and quality of the land. Therefore, the Supreme Court held (i) that a classification of persons or properties into different categories, which are subjected to different rates of taxation with reference to income of property, will not be vulnerable to attack on the basis of Article 14 (ii) that if different kinds of properties are subjected to different rates of taxation, but on a rational basis, the same would not be vio .....

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a housing loan granted to its employee is 10%. If the rate of interest charged by Indian Bank for a similar loan is 8%, the difference between the two, namely 2% is treated by Rule 3(7)(i) as a perquisite, to be included as part of the salary at the hands of the Indian Bank employee. The consequence of such inclusion would be that the tax payable by the Indian Bank employee would go up by 10 - 30% of that difference namely 2%, depending upon the bracket of income, to which, the employee belongs .....

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pending upon the income bracket, to which, he belongs and the rate of interest, at which, he is granted a loan by his employer. Hence, the vice sought to be removed in K.T.Moopil Nair is not present in this case. 35. In so far as Ashirwad Films is concerned, what was challenged before the Supreme Court was a Notification issued by the Government of Andhra Pradesh levying different rates of entertainment tax upon the films made in different languages. The time honoured tests of (i) the existence .....

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to apply a uniform rate for different categories of persons irrespective of the huge difference in their pay pockets. Therefore, we are surprised as to how a ground of attack on the basis of Article 14 is raised. 37. If the employees of different banks, who are before us, are in enjoyment of an interest free or concessional loan, paying different rates of interest such as 6%, 7% or 8%, what is sought to be included in their salaries under Rule 3(7)(i), is only the difference between the rate of .....

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gument that they are suffering a handicap in the form of a higher rate of tax. This will be clear from the example that we have given in paragraphs 32 and 33. If the State Bank of India charges interest at 10% per annum on the loans advanced to its employees and another bank charges 7% per annum on the loans advanced to its employees, then the employees of the State Bank of India end up paying more in the form of interest than their counterparts in other banks. The employees of other banks end u .....

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n profession or in any employment other than in the banking sector, pays a higher rate of interest on the loan taken by him from a bank. But, by virtue of being an employee of the bank, if such employee receives an interest free or a concessional loan, then he is in enjoyment of a privilege. It is that privilege, which is sought to be taxed under Rule 3(7)(i). If converted into monetary terms, what is taxed at the hands of the employee, at the maximum, is about 30% of that privilege, which he en .....

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Court in Arunkumar. 42. It is the contention of Mr.Srinath Sridevan, learned counsel for the petitioners that the Legislature cannot annul the judgment of a court. In support of this contention, the learned counsel places reliance upon the decisions of the Supreme Court in State of Tamil Nadu Vs. State of Kerala [AIR 2014 SC 2407] and S.T.Sadiq Vs. State of Kerala [2015 (4) SCC 400]. 43. But, we completely fail to understand as to how Rule 3(7)(i) can be said to have been brought into force with .....

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cation, Rule 3 of the Income Tax Rules stood amended. 44. As we have indicated in paragraph 12 above, Rule 3 has undergone sweeping changes within a period of three years. Prior to 1.4.2001, Rule 3 merely contained Clauses (a) to (g). With effect from 1.4.2001, a new Rule 3 was substituted under the Income Tax (22nd Amendment) Rules, 2001. Under this amendment, which came into effect from 1.4.2001, seven Sub-Rules were inserted under Rule 3 with each Sub-Rule again being sub-divided into several .....

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out earlier, was rendered on 15.9.2006, much after the Rule came into force. Therefore, the contention that the Rule was inserted to overreach the decision in Arunkumar defies chronology of events. Hence, the fourth ground of attack to the impugned provisions is also liable to be rejected. 46. Placing reliance upon the decision of the Supreme Court in V.M. Salgoacar Vs. CIT [(2000) 160 CTR 225], it was contended by both Mr. Srinath Sridevan and Mr.N.G.R.Prasad, learned counsel appearing for the .....

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