TMI Blog2016 (5) TMI 935X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the arbitrary exercise of power by the Law Enforcing Authorities is acceptable 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. Rule is violative of Article 14 - Held that:- 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 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 bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.9.2006. The decision arose out of a challenge to the validity of Rule 3 of the Income Tax Rules, 1962 and Section 17(2)(ii) of the Income Tax Act, 1961. The original cases were actually filed by the employees of Tata Iron and Steel Company Limited before the High Court 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 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. If salary is taxable and some perquisite or benefit forms part of a package, the same should also be taxed. Therefore, we are of the considered view that the challenge to Section 17(2)(viii) as well as Rule 3(7)(i) has to fail. - Writ Petition Nos.7869 and 10050 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion (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 by the employer of the assessee; (ii) the value of any concession in the matter of rent respecting any accommodation provided by the employer; (iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in cases indicated in the Section; (iv) any sum provided by the employer in respect of any obligation, which, but for such payment, would have been payable by the assessee; (v) any sum payable by the employer whether directly or through a fund other than a 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-Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided by the employer for use by the assessee exclusively for his private or personal purposes, Clause (d) dealt with 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 in the other clauses. (II) Under the Income Tax (Twenty Second Amendment) Rules 2001, the entire Rule 3 was substituted by a new Rule 3, consisting of 7 Sub-Rules with each Sub-Rule again sub-divided into several clauses with provisos. These amended Rules came into effect from 1.4.2001. 13. Clause (i) of Sub-Rule (7) of Rule 3 of the Income Tax Rules, 1962, inserted with effect from 1.4.2001 under the Income Tax (Twenty Second Amendment) Rules, 2001, read as follows:- (7) In terms of provisions contained in Sub-Clause (vi) of Sub-Section (2) of Section 17, the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 ₹ 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. 15. Therefore, two things will be clear. They are (i) The value of an interest free loan or a concessional loan made available 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 valuation prescribed in Rule 3(7)(i) introduced with effect from 1.4.2004 and that too, only in the year 2008, 2010 and 2011. Keeping this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wnship 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 of rent and that the condition precedent for the exercise of the power under Section 17(2) was the existence of a perquisite. Dealing with the said contention, it was observed by the Supreme Court in paragraph 54 of the decision in Arunkumar as follows : The grievance of the appellants is that the amended Rule 3 does not provide for giving an opportunity to the assessee to convince the Assessing Officer that no concession was shown by the employer to the employee in respect of accommodation 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risdictional fact is a sine qua non for the exercise of the power and that whether something is a concession or not under Section 17(2)(ii), is a jurisdictional fact. The Court also held that the method of fixation of amount is a fact in issue or adjudicatory fact and that if the assessee contends that there is no concession, the Authority 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 situation, as follows : For the foregoing reasons, we hold that though Rule 3 of the Rules cannot be held arbitrary, discriminatory or ultra vires Article The Constitution nor inconsistent with the parent Act [Section 17(2)(ii)], it is in the nature of 'machinery-provision' and applies only to the cases of 'concession' in the matter of rent r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;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 jurisdictional fact, the Rule Making Authority, by prescribing the exact method of valuation of the fringe benefit, did not leave any fact in issue requiring adjudication by the Assessing Officer. 26. In other words, instead of leaving it to the individual wisdom (or the lack of it) of the Assessing Officers to find out whether something is a concession or not under Section 17(2)(ii), the Rule Making Authority prescribed under Rule 3(7)(i) a definite indicia for finding out the value of the fringe benefit. 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). Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in K.T.Moopil Nair. But, what was under challenge before the Supreme Court in K.T.Moopil Nair was, the validity of imposition of a land tax at a flat 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 violative of Article 14 and (iii) that if the same class of property similarly situated is subjected to an incidence of taxation, which results in inequality, the law may be struck down as creating an inequality amongst the holders of the same kind of property. 32. But in the case on hand, neither Section 17(2)(viii) nor Rule 3(7)(i) seek to treat unequals as equals. This can be seen by taking a hypothetical situation. Let us take for instance that the interest charged by the State Bank of India on a housing loan granted to its em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 38. The petitioners cannot compare themselves with the employees of the State Bank of India, to contend that there is discrimination. If at all, it is the employee of the State Bank of India, who can perhaps raise an argument 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 up paying income tax at the rate of 10 - 30% on the differential interest of 3% (between the SBI rate and the rate c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Notification, 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 Clauses with Provisos. These amended Rules, which came into effect from 1.4.2001, have already been extracted in paragraph 13 above. Thereafter, Sub-Rule (7) of Rule 3 underwent a further amendment under the Income Tax (First Amendment) Rules, 2004 with effect from 1.4.2004. 45. 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 overreach the decision in Arunkumar defies chronology o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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