TMI Blog1998 (4) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... informed the Chief Commissioner of Income-tax, Hyderabad, that where the employer directly bears a part of the interest burden of the employees by reimbursing a portion of the interest payable by the employee in respect of building loans, such reimbursement is taxable as income from "salaries" under section 17(2)(iii) of the Income-tax Act. This was forwarded to the Deputy Commissioner of Income-tax of each zone and circulated to the company. This writ petition challenges that letter by claiming that the interest on reimbursement is not a perquisite and prays for a declaration that the said letter is illegal and ultra vires the provisions of the Income-tax Act. Writ Petition No. 26797 of 1997 has been filed by the trade union of the workers of Bharat Heavy Electricals Limited. It is stated that an order under section 201 was passed on March 21, 1995, against the company for the assessment years 1989-90 to 1993-94 raising a demand of Rs. 1,61,16,601 with penalty of Rs. 72,94,881. Consequently, the company issued a circular on July 5, 1995, intimating the employees that the interest subsidy will be treated as a perquisite for deducting the tax at source. It is stated that a simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1996-97 for the same relief. Writ Petition No. 20647 of 1997 has been filed by the ECIL Officers Association for the assessment years 1996-97 and 1997-98 for the same relief. Writ Petition No. 24932 of 1997 has been filed by the Association of the Officers employed by Mishra Dhatu Nigam Limited (for short "MIDHANI") (a Government of India undertaking). It is stated that on March 24, 1995, an order under section 201 of the Act was passed against the company for the assessment year 1993-94. Consequently, the company issued a circular on September 24, 1997, proposing to take into account the interest subsidy for deducting the tax at source. Hence, this writ petition has been filed for a direction not to do so. Writ Petition No. 288 of 1998 has been filed by the Employees Association of Bharat Dynamics Limited, a Government of India undertaking. It is pointed out that for the assessment year, in the case of ECIL, the Commissioner of Income-tax had accepted that the interest subsidy is not a perquisite and yet for the subsequent years the Department was treating it as a perquisite. Consequently, this writ petition also prays for the same relief. Arguments for the petitioner.---L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me under the head 'Salaries', (where due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds twenty-four thousand rupees. Explanation.---For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause; (iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee;" (Rest of the sub-clauses are not relevant for this case.) Sub-section (3) defines profits in lieu of salary. "(3) 'profits in lieu of salary' include--- (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto, (ii) any payment (other than any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest charged and the notified rate where the loan is given at a rate less than the notified rate prescribed for Central Government House Building Advance. This generated an adverse reaction from the salaried class as it amounted to taking back by way of tax what is given as a welfare measure. Consequently, even before the amendment could take effect, the Finance Act, 1985, withdrew the said amendment. This was explained by the Memorandum Explaining the Provisions of the Finance Act, 1985, by Circular No. 421, dated June 12, 1985. In spite of this legislative history, an attempt was made to tax the interest subsidy and the Calcutta High Court in CIT v. Oberoi (P. R. S.) [1990] 183 ITR 103, clearly held that such interest subsidy cannot be taxed. Later, the Central Board of Direct Taxes issued Circular No. 701, dated March 23, 1995 consolidating the list of the exemptions available to the employees, but remained silent about this, leaving the field officers to again attempt the taxation of interest subsidy as perquisite. The matter came up once again before the Karnataka High Court in the case of P. Krishna Murthy v. CIT [1997] 224 ITR 183. The Karnataka High Court referred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services, payable at regular intervals; the periodical compensation due to men in official and other situations; an annual or periodical payment for services, a stipulated periodical recompense; a stipend; wages; hire; an allowance. A fixed sum paid to a person for his services, yearly, half yearly, or quarterly; stipend; wages; annual or periodical wages or pay; hire; fixed regular wages, as by the year, quarter, or month. Salary is strictly an agreed compensation for service payable at regular intervals." Hence, the common understanding is that it is a periodical payment and does not include other special payments even though they may be from an employer to an employee and also because of that relationship. It is only with a view to bringing in such other payments into the scope of that word "salary" that it is defined to include perquisites and profits in lieu of salary. Thus, the context itself shows that the meaning of the word "salary" is confined to what in the popular parlance is the monthly payment for service rendered and cannot include interest subsidy. Is interest subsidy a perquisite under section 17(2)(iv)?---Learned senior standing counsel for the Revenue sough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rector as conferring a benefit on him. This decision followed the case of CIT v. A. R. Adaikappa Chettiar [1973] 91 ITR 90 (Mad) where the advantage taken by the director in view of his position was treated as a benefit or perquisite obtained. The same view was expressed by the Madras High Court in Addl. CIT v. Late A. K. Lakshmi [1978] 113 ITR 368. These cases refer to certain benefits enjoyed by the position held by the assessee and do not relate to cash payments by the employer. On the contrary, in respect of actual cash payments, such as reimbursement of medical expenses, this court held in CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 173 ITR 290 that it cannot be treated as a perquisite. The Special Leave Petitions Nos. SLP (Civil) Nos. 14760 and 16796 of 1991 were dismissed by the Supreme Court. Again, in CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 (AP), as well as CIT v. Andhra Bank Limited---R.C. No. 5 of 1979, dated August 7, 1989, and CIT v. Coromandel Fertilizers---I. T. C. No. 8 of 1994, dated December 24, 1984, this court held that cash payments to employees cannot be treated as a perquisite because there is no question of convertibility into money where cash is paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouse rent allowance is not a terminal benefit, and, therefore, it would otherwise fall within the ambit of definition of profits in lieu of salary. That observation was, however, made for the purpose of treating leave encashment as "profits in lieu of salary", to understand the scope of that expression. We notice that (reference to) clause (13A) was introduced in section 17(3) simultaneously with its introduction in section 10. Obviously, the draftsman wanted to ensure that if it is not otherwise exempt under section 10, it would be taxable under section 16, for which, instead of inserting in section 17(1), it has been inserted in section 17(3). Such a mistaken insertion for the purpose of exclusion, cannot, in our considered opinion, change the meaning of the expression "profits in lieu of salary". Salary itself has been defined in Black's Law Dictionary "as a reward or recompense for services performed. In a more limited sense, a fixed periodical compensation paid for services rendered. A stated compensation paid periodically as by the year, month, or other fixed period, in contrast to wages which are normally based on an hourly rate". It is obvious that interest subsidy is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r undertakings has been examined in great detail by the Board as well as by various other organisations and for a variety of reasons, the view that has emerged is that there is no reason or justification to distinguish or discriminate between public and private sector in the matter of direct taxation. Wherever an employer has advanced any loan to its employee for the purpose of building a house or purchase of a house or site, the question of taxing any "subsidy" by way of lower interest charged than that at which the employer itself might have taken loans from financial institutions like HDFC, does not arise. In this connection, I would draw your attention to sub-clause (vi) of clause (2) of section 17 which was inserted by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985, but was subsequently deleted by the Finance Act, 1985, with effect from the same date. If any Assessing Officer has actually treated such a differential as a perquisite or taxable income he is clearly in error. If this is happening on a large scale, the Board will also consider issuing suitable instructions in this regard." (emphasis supplied) It is very strange that the Revenue should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or such certificates as each employee has to make such individual application. The burden is now placed on the employer to decide whether a particular amount paid is taxable or not and in view of the attitude of the Department with reference to section 201, the employer is bound to decide the issues against the employees. In this case itself, we could see that having failed in the appeal against the order under section 201, the employer indicated the intention to deduct the tax at source thus deciding the issue against the person liable to pay the tax. The remedy suggested by the Revenue that after deduction, the employee should file a return and seek refund would again involve thousands of appeals and long delay in granting refund by which a section of the salaried class will be deprived of a portion of the salary due to them for a considerable time without any recompense. The scheme of deduction of tax at source is intended to be of benefit to the taxpayer as well, apart from regularly collecting the tax painlessly. But such a scheme cannot be abused by collecting more than the tax leviable and driving the assessees to wait indefinitely for refunds. C. Inconsistent claims.---It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o evolve the interest subsidy scheme. The relevant documents have been filed along with the writ petitions. Nothing prevented the respondents from calling for the information from the employer who is another respondent in the case. Apart from failing to gather the correct information, the Department has not filed any counter affidavit in this case though the writ petitions have been pending from 1995. This objection is an after-thought and cannot be entertained. Cause of action absent.---The Revenue contended that there is no cause of action at all as there was no question of jurisdiction and hence the writ petitions are not maintainable. This is also an argument which is to be stated only to be rejected. When an action is taken by the employer ostensibly for administering a statute adverse to a person at the instance of the Department a cause of action certainly arises to dispute the same. F. Joint petition not maintainable.---It was contended that a joint writ petition cannot be filed. This is contrary to the decision of this court in the case of M. Krishna Murthy v. CIT [1985] 152 ITR 163. G. Writ by trade union not maintainable.---The Revenue also submitted that a trade u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Central Government. Section 201 provides that if the person so obliged to deduct, does not deduct or, after deducting fails to pay the tax, he shall be deemed to be an assessee in default and liable to penalty under section 221 as well as penal interest under section 201(1A). Section 203 provides for the issue of a certificate for tax deducted which is to be given credit and section 205 bars direct demand on the assessee in respect of the tax so deducted. Section 207 provides for advance payment of tax. The advance tax is calculated as the tax payable on the total income computed on the total estimated income of the previous year computed in accordance with the provisions of the Act reduced by the amount of the income-tax which is deductible at source. Such advance tax is payable in three instalments under section 211. Section 234B provides for interest on defaults in payment of advance tax and section 234C for interest for deferment of advance tax at the rate of 1 1/2 per cent per month. If we look at these sections, it will be apparent that an assessee has to calculate his advance tax and pay it in time taking into account the tax deducted at source. If less tax is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is not as required by or under the Act, there is a default. But the fact is that this expression "as required by or under this Act" grammatically refers only to the duty to pay the tax that is deducted and cannot refer to the duty to deduct the tax. Since this is a penal section, it has to be strictly construed and it cannot be assumed that there is a duty to deduct the tax strictly in accordance with the computation under the Act and if there is any shortfall due to any difference of opinion as to the taxability of any item the employer can be declared to be an assessee in default. A reference to the provisions of section 192 clarifies this issue further : "S. 192. Salary.---(1) Any person responsible for paying any income chargeable under the head 'Salaries' shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year." (emphasis supplied) Therefore, the deduction of tax at source is not on any adjudicated figure, but on an estimated figure of salary in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 197. Some employees may be able to get it in time, some may not be able to get it. Some Income-tax Officers may grant certificates and some as in the present case deny certificates under some misunderstanding about the scope of the section or the taxability of the amount in question. It must be remembered that the deduction of tax at source in respect of salary is done every month by averaging the tax that is payable for the entire year. This exercise is guided by a circular of the Central Board of Direct Taxes issued every year. The circulars of the relevant period do not contain any information about treatment of the interest subsidy as a perquisite. The Central Board of Direct Taxes is well aware of the fact that public sector undertakings have been granting the interest subsidy under the directions of the Government of India as could be seen from the letter of the Chairman, Central Board of Direct Taxes dated July 13, 1990. It is unfortunate that the circulars do not give specific instructions about excluding interest subsidy in computing the salary income liable for deduction of tax at source. It is quite significant that these circulars do not contain any warni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has no means to dispute the adjudication as to his liability to be taxed which is a sine qua non for the deduction of tax at source. The postponement of such adjudication to the time of assessment after filing a return involves considerable delay and loss of compensation for the amount due to the payee but withheld if it turns out to be wrongful. If taxes were not deducted at source, the Revenue would be, of course, put in a disadvantageous position of having to take separate steps to collect the same. Perhaps, a better solution would be to shift the stage of deduction to the hands of the payee. For instance, all payments can be made to a declared bank account of the payee where 10 per cent. of the balance can be frozen until the assessment is made and an amount equal to the tax determined then transferred to the Department by the bank. Such a scheme would benefit the taxpayer and the Revenue as well as the employers. As far as the taxpayer is concerned, the money will be in his account earning interest until a correct adjudication is made as to the liability and he does not have to lose it and seek refund. As far as the Revenue is concerned, there will be a guaranteed security f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly a list of decisions of the High Courts accepted by the Department so that the field officers may not rake up the subject again involving the Department in needless litigation. We are told that such a system has now been abandoned. Our own reference to the Judis Computer data bank indicates that no appeal is pending in the Supreme Court with reference to the interest subsidy. It is unfortunate that the Revenue should instruct the senior standing counsel to argue this matter in spite of having accepted the decision of the High Courts and in spite of the Chairman of the Central Board of Direct Taxes having issued a letter assuring action against officers acting to the contrary. In this context, we may refer to the decision of the Supreme Court in the case of Oil and Natural Gas Commission [1991] 4 JT 158; 61 ELT 3, where it was held that disputes between the Government and Government undertakings should not be taken to court. The Revenue would have been well advised to sort out this matter by a discussion with the undertakings. As it appears that such a discussion had taken place and the Chairman, Central Board of Direct Taxes, had given an assurance in this regard on July 13, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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