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TMI Blog2025 (1) TMI 1126X X X X Extracts X X X X X X X X Extracts X X X X ..... 47/2008. For the Respondent No. 4 in WP/506/1996: Mr Shreyas Thakur, i/b. M. S. Bodhanwalla & Co.,. For the Petitioners: Ms Ashna Shah, i/b. Mr Sean Wassoodew, in WP/825/2006 and WP/438/2008. For the Petitioner in WP/928/1994: Mr Sagar Amrut Rane, i/b. Raju Z. Moray,. For the Respondent: Mr Suresh Kumar, No.3 in WP/825/2006, for Respondent Nos.1 to 3 in WP/438/2008 and for Respondents in WP/1350/2008. For the Respondents: Mr P. C. Chottaray, in WP/1347/2008. For the Respondent No. 4 in WP/438/2008: Mr Aditya V. Tayade, i/b. Mr Piyush N. Shah,. For the Respondent: Mr Vishal Talsania, a/w Mr Netaji Gawade i/b. M/s. Sanjay Udeshi & Co., No. 4 in WP/928/1994 and WP/825/2006. JUDGMENT (PER MS SONAK J):- 1. Heard learned counsel for the parties. 2. Learned counsel for the parties agree that a common judgment and order can dispose of these Petitions because substantially common issues of law and fact arise. Learned counsel agree that Writ Petition No. 825 of 2006 may be treated as the lead Petition. 3. The Petitioners are Associations/Federations of the officers of nationalised banks. They purport to represent the bank officers. In some of the Petitions, there was a prayer for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isite" includes the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer. They submitted that by introducing a legal fiction and dispensing with the requirement of determining whether any concession was being granted to the employees, Section 17 (2) (ii) was rendered otiose. 8. Learned counsel for the Petitioners, without prejudice to the above contentions, contended that the legislature, by granting retrospectivity to the impugned amendments had acted with manifest arbitrariness. They submitted that there was no ambiguity in Section 17 (2) (ii) of the IT Act as interpreted by the Hon'ble Supreme Court in the case of Arun Kumar (supra). They submitted that in the absence of any ambiguity, it was not open to the legislature to introduce any Explanations and, by such Explanations, to create a legal fiction and bring about substantive and substantial changes regarding the taxability of perquisites. They submitted that the impugned amendments are neither clarificatory nor declaratory. Therefore, relying on Union of India and others vs. Martin Lottery Agencies Limited (2009) 12 SCC 209, they contended that the impugned amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel for the Petitioners submitted that the impugned amendments distinguish between accommodations in metropolitan and non-metropolitan areas, but no distinction is made between urban and suburban areas. Without appreciating such fundamental distinctions, illogical, arbitrary and unreasonable criteria have been adopted to determine the value of the alleged concession and tax the employees. This is arbitrary, unreasonable, unconstitutional, null and void. 14. Learned counsel for the Petitioners submitted that the impugned amendments interfere with the staff regulations and the settlements between the banks and their employees. This is arbitrary and violative of Article 14 of the Constitution. 15. Mr. K. P. Anil Kumar submitted that the impugned amendment promoted double taxation. He argued that officers transferred from their hometowns usually rent out their accommodations. The rent they receive is taxed as income from house property. Because of the impugned amendments, such employees are forced to pay tax on the value of alleged concessions regarding rent provided by the banks. He submitted that such double taxation is ultra-vires the IT Act and, in any event, violates Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and latitude regarding fiscal legislation. They submitted that nothing was wrong in creating a legal fiction or giving any limited retrospective effect to the impugned amendments. They submitted that the impugned amendments relate to the machinery for collecting or measuring such tax. Therefore, there was nothing wrong in construing such provisions retrospectively. In any event, they pointed out that the legislature had explicitly granted the impugned amendments a limited retrospective effect in the present case. They submitted that a legislature was competent to do so. 22. Learned counsel for the Respondents submitted that the impugned amendments ought not to be struck down based on illustrations or examples given by the Petitioners. They pointed out several instances where banks provided accommodations to their employees in prime locations by charging rents representing only a fraction of the standard or the market rents. Accordingly, they submitted that any minor crudities or imperfections should not be the factors in judging the validity of fiscal legislation. 23. For all the above reasons, learned counsel for the Respondents submitted that these petitions be dismissed and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows: - "Perquisite" includes: - (i) the value of rent-free accommodation provided to the assessee by his employer. (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer. 30. Section 11 of the Finance Act, 2007 introduced amendments in Section 17 of the IT Act. Accordingly, for the convenience of reference, we transcribe Section 11 of the Finance Act, 2007: - "11. In section 17 of the Income-tax Act,- (a) in clause (I), in sub-clause (viii), for the words "Central Government", the words "Central Government or any other employer" shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2004; (b) in clause (2),- (A) after sub-clause (ii),- (i) the following Explanations shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2002, namely:- 'Explanation I.-For the purposes of this sub-clause, concession in the matter of rent shall be deemed to have been provided if,- (a) in a case where an unfurnished accommodation is provided by any employer other than the Central Government or any State Government an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tel (except where the assessee is provided such accommodation for a period not exceeding in aggregate fifteen days on his transfer from one place to another), the value of the accommodation determined at the rate of twenty-four per cent of salary paid or payable for the previous year or the actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided, exceeds the rent recoverable from, or payable by, the assessee. Explanation 2.-For the purposes of this sub-clause, value of furniture and fixtures shall be ten per cent per annum of the cost of furniture (including television sets, radio sets, refrigerators, other household appliances, airconditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, the actual hire charges payable for the same as reduced by any charges paid or payable for the same by the assessee during the previous year. Explanation 3.-For the purposes of this sub-clause, "salary" includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called, from one or more employers, as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 17 (2) of the IT Act. 32. Before the impugned amendments, section 17 (2) (ii) did not contain any deeming provision regarding the value of concession in the matter of rent respecting any accommodation provided to the assessee by his employer. Section 17 (2) (ii) also did not provide for the machinery or the measure for computing the value of the concession. However, Rule 3 of the IT Rules, 1962, provided for such machinery and measure. 33. The Hon'ble Supreme Court, in the case of Arun Kumar (supra), upheld the constitutional validity of Rule 3 (1) of the IT Rules. Still, it held that 'receiving a concession' was a jurisdictional fact for the purposes of Section 17 (2) (ii), and therefore, the AOs had first to decide whether, in fact, any bank employee was in receipt of any concession in the matter of rent and only if the AOs were to determine that the assessee had received such concession, could the AOs proceed to calculate/determine the tax liability under Rule 3 (1) of the IT Rules. 34. In paragraphs 86 and 99 of Arun Kumar (supra), the Hon'ble Supreme Court made the following observations:- "86. There is yet another aspect of the matter which is important and having a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as the difference between the specified percentage of the employee's salary and the rent recoverable or payable by such employees. A limited retrospective effect was also given to the impugned amendments, as otherwise, it would be almost impossible for the Revenue to determine in every individual case whether any concession was at all granted and the value of such concession. 37. The impugned amendments thus created a deeming fiction that once it was established that an employee was paying rent of less than 10% of his salary in cities having a population of four lakhs or 7.5% in other cities, it should be deemed to be a concession within the meaning of Section 17 (2) (ii) of the IT Act and such employees must be deemed to receive 'concession' in the form of 'perquisites' in the payment of rent. This provision was given a retrospective effect from 1st April 2002 because otherwise, it would be almost impossible or disproportionately cumbersome for the revenue to compute whether an employee was indeed in receipt of any concession in the matter of rent respecting any accommodation provided by his employer. This was in the context of the observations in Arun Kumar (supra) that re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g or changing its character retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court, if those conditions had existed at the time of declaring the law as invalid. It is also empowered to give effect to retrospective legislation with a deeming date or with effect from a particular date. The legislature can change the character of the tax or duty from impermissible to permissible tax but the tax or levy should answer such character and the legislature is competent to recover the invalid tax validating such a tax on removing the invalid base for recovery from the subject or render the recovery from the State ineffectual. It is competent for the legislature to enact the law with retrospective effect and authorise its agencies to levy and collect the tax on that basis, make the imposition of levy collected and recovery of the tax made valid, notwithstanding the declaration by the court or the direction given for recovery thereof." 42. In Arun Kumar (supra), the challenge was to Rule 3 (1) of the IT Rules, which was the machinery provision for determining the value of concession in the matter of rent respecting any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch had also noted that there was no deeming clause in the definition of "perquisite" contained in Section 17 (2) that once it was established that an employee was paying rent of less than 10% of his salary, it must be deemed that he was receiving a concession in the matter of rent and further "no such deeming clause can be inferred from r.3." The Division Bench went on to observe: "Indeed, if r.3 were to be so construed, it will go beyond the rule making power conferred by s.295 (2) and would become invalid." 46. Possibly, to ward off the challenge that Rule 3, if amended by introducing a deeming clause, might go beyond the rule-making power conferred by Section 295 (2) of the IT Act, the legislature chose to amend Section 17 (2) (ii) and introduced a legal fiction therein. Since the primary legislation is amended, the challenge to the rules travelling beyond the Act would also stand addressed. 47. 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. By introducing the impugned amendments, the legislature has neither overruled the decisions in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of a penalty or a contractual obligation but rather a means of apportioning the costs of government among those who benefit from it." 50. The above passage was quoted with approval by the Constitution Bench of this Court in the case of Assistant Commissioner of Urban Land Tax and others vs. The Buckingham & Carnatic Co. Ltd, ETC (1970) 1 SCR 268. 51. Even paragraph 56 (8) of Indian Aluminum Co. and others (supra), after holding that the legislature cannot, by a mere declaration, without anything more, directly overrule, revise or override a judicial decision, has held that the legislature can render a judicial decision ineffective by enacting valid law on the topic within its legislative field fundamentally altering or changing its character retrospectively. The changed or altered conditions should be such that the Court would not have rendered the previous decision, if those conditions had existed at the time of declaring the law invalid. The legislature is competent to enact the law with retrospective effect and authorise its agencies to levy and collect tax on that basis, make the imposition of the levy collected and the recovery of the tax made valid, notwithstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, by referring to the decision of the Hon'ble Supreme Court in the case of M/s. Hindustan Gum and Chemicals Ltd. vs. State of Haryana and others (1985) 4 SCC 124. Here, the Court held that it was permissible for a competent legislature to overcome the effect of a decision of a Court setting aside the imposition of tax by passing suitable legislation, amending the relevant provisions of the statute concerned with retrospective effect, thus taking away the basis on which the decision of the Court had been rendered and by enacting appropriate provision validating the levy and collection of tax made before the decision in question was rendered. 56. Incidentally, one of the arguments in Serum Institute of India (P.) Ltd. (supra) was that the legislature could have removed the lacuna pointed out in judicial precedents only by providing an "Explanation" to the section and not by introducing an independent sub-clause. This argument was rejected. In the present case, however, the legislature has addressed the lacuna or shortcomings by providing a series of explanations. Since the Act is amended, the argument about Rule 3 (1) of the IT Rules travelling beyond the parent Act also no longer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Cotton Spinning and Weaving Mills Ltd. & another vs. Union Of India & others AIR 1988 SC 191). In interpreting a provision creating a legal fiction, the court is to ascertain for what purpose the fiction is created. After ascertaining this, the court is to assume all those facts and consequences which are incidental or inevitable corollaries to the giving effect to the fiction. 62. In CIT, Bombay vs. Bombay Trust Corporation AIR 1930 PC 54, the Privy Council, in interpreting a fiction created by the Indian Income-tax Act, 1922, which by section 43 provided that under certain circumstances, an agent shall for all the purposes of this Act, be deemed to be such agent of a non-resident person and which by section 42 further provided that such agent shall be deemed to be, for all the purposes of this Act, the assessee, held that such agent was an assessee for all the purposes of the Act and hence chargeable to income-tax, assesseee being defined by section 2 (2) as the person by whom income-tax is payable. Viscount Dunedin, in that connection, observed:- "Now when a person is `deemed to be' something the only meaning possible is that whereas he is not in reality that something the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 'Explanation' merely elucidates the meaning of a provision and, when inserted as a subsequent amendment, can be considered retrospective in scope. 68. Therefore, 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 ARGUMENT 69. The following argument concerns the retrospectivity of the impugned amendments. The basic contention was that the impugned amendments were neither clarificatory nor declaratory. They introduced a new and substantive liability, so giving such amendments a retrospective effect is an impermissible legislative exercise. In any event, it was contended that giving such retrospectively renders the impugned amendments ultra-vires of Article 14 of the Constitution. Strong reliance was placed on Martin Lottery Agencies Limited (supra). 70. In Martin Lottery Agencies Limited (supra) the explanation appended to sub-clause (ii) of Section 65(19) of the Goods and Services Tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ambit of the tax net. One of the issues involved was whether the amendment was retrospective or would only apply prospectively. The revenue contended that the amendment was clarificatory and, hence, retrospective. The assessee claimed that the amendment was substantive and, therefore, prospective in nature. 74. The Hon'ble Supreme Court, upon examining the rival contentions, concluded that the Respondent got the Stock Appreciation Rights (SARs) and eventually received an amount on account of its redemption before 1 April 2000. On that date, the amendment of the Finance Act, 1999 came into force. Therefore, the Hon'ble Supreme Court concluded: "In the absence of any express statutory provision regarding the applicability of such amendment from retrospective effect, we do not find any force in the argument of the revenue that such amendment came into force retrospectively. It is well established rule of interpretation that taxing provisions shall be construed strictly so that no person who is otherwise not liable to pay tax, be made liable to pay tax." 75. As noted earlier, the legislature has made express provisions about retrospectivity in the present case. Therefore, relying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Club vs Union of India & Ors. 2002 SCC OnLine Raj 937, the Court explained that perquisites had been considered substantively to be forming part of the salary, and the value of different perquisites had to be included in the computation of total taxable income under the head 'income from salaries'. Once it is determined that the particular advantage, benefit or amenity received forms part of perquisite as defined under Section 17 (2) of the IT Act, the question of its quantification falls within the machinery provision for quantification of proper tax liability of the taxpayer, which can be left to be determined according to well-known principles of valuing a particular advantage to the assessee when he receives it with reference to the cost which the assessee is likely to incur in securing that advantage and to enquire into the price which it was likely to pay for getting those amenities or benefits. The Court held that the cost at which the benefit is received by an assessee so also the value of the payment in the hands of the recipient of such a benefit on a fixed percentage of salary received by him to avoid the determination at different variable factors, which may result in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explicitly held that the criteria adopted by the Rule-making authority in treating cities with populations of less than four lakhs and more than four lakhs could not be said to be arbitrary and unreasonable. The fixation of rent based on the city's population cannot be interfered with in exercising the power of judicial review. 85. Besides, when it comes to challenges to the constitutional validity of fiscal legislation, we must bear in mind and apply certain well-settled principles. The first is the presumption in favour of the statute's constitutionality and that the burden is upon the Petitioners who attack the statute to show that there has been a clear transgression of the constitutional principles. This Rule assumes that the legislature understands and correctly appreciates the needs of its people, its laws are directed to problems made manifest by experience and its discrimination is based on adequate grounds. The presumption of constitutionality is so strong that to sustain it, the Court may consider matters of common knowledge, matters of common report, and the history of the times. It may assume every state of fact that can be conceived existed at the time of leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id on that account alone. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture vs. Central Reig Refining Company (1950) 94 L. Ed. 381 be converted into tribunals to relieve such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. 90. Indeed, however great the care bestowed on its framing may be, it is difficult to conceive of legislation that is incapable of being abused by perverted human ingenuity. The Court must, therefore, adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of a pragmatic approach, which must gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rains from clear and hostile discrimination against particular persons or classes. In examining the allegations of hostile, discriminatory treatment, what is looked into is not its phraseology but the actual effect of its provisions. One must look beyond the classification and to the purposes of the law. Classifications based on differences in the value of articles or the economic superiority of the persons of incidence are well recognised. 94. A reasonable classification includes all who are similarly situated and none who are not. Further, differentia must have a rational nexus with the object sought to be achieved by the law. A taxing statute is not, per se, a restriction of freedom under article 19(1)(g). In its effectuation, the tax policy might, of course, cause some hardship in some individual cases. But that is inevitable, so long as law represents a process of abstraction from the generality of cases and reflects the highest common factor. Then again, the mere excessiveness of a tax or even the circumstance that its imposition might tend towards the diminution of the earnings or profits of the persons of incidence does not, per se, and without more, constitute a violation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quality, so that they cannot be deemed in any just sense proportional in their effect on those who are to bear the public charges that courts can interpose and arrest the course of legislation by declaring such enactments void." "Perfectly equal taxation", it has been said, "will remain an unattainable good as long as laws and Government and man are imperfect." "Perfect uniformity and perfect equality of taxation", in all aspects in which the human mind can view it, is a baseless dream". 98. Thus, applying the above principles to the case at hand, the contentions relating to the classification between government servants and others, urban and non-urban areas, or the arguments based on the alleged lack of nexus between salaries of the employees and the computation of concession in matters of rents for accommodation provided by the employer, would not pass muster. Even the instances cited by the Petitioners could, at the highest, be regarded as some crudities or inequities. Based on the same, there is no scope to interfere with economic or fiscal legislation. The learned Counsel for the Respondents also referred to instances where bank employees are provided accommodation in areas w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke his tax heavier, both absolutely and relatively, is not arbitrary discrimination but an attempt to proportion the payment to capacity to pay and thus to arrive at a more genuine equality. The Court held that the economic wisdom of tax is within the exclusive province of the legislature. The only question for the Court to consider is whether there is rationality in the legislature's belief that the capacity to pay the tax increases, by and large, with a rise in receipts. For this, the Hon'ble Supreme Court followed the dissenting opinions of Justice Cardozo, Justice Brandeis and Justice Stone in Stewart Dry Goods Co. V. Lewis 294 US 550. 102. The Court held that the capacity of a dealer, in particular circumstances, to pay tax is not an irrelevant factor in determining the tax rate, and one index of capacity is the quantum of turnover. The argument that a dealer beyond a certain limit is obliged to pay higher tax when others bear less tax, and it is consequently discriminatory, really misses the point, namely that former kind of dealers are in a position of economic superiority because of their volume of business and form a class by themselves. They cannot be treated as on p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here ought to be a "nexus" between the nature of tax and the measure of tax. However, the measure cannot be controlled by the rigours of the nature of tax. The nexus between the measure and levy of tax need not be "direct and immediate". The nexus must be "reasonable" and have some relationship with the nature of levy. The reasonability of the nexus will largely depend upon the nature of the tax and the means available to the legislature to designate the measure of the tax. Since the levy measure is a matter of legislative policy and convenience, the reasonability of the nexus between the measure and tax must be determined by the courts on a case-to-case basis. While doing so, the Court will bear in mind the fundamental principle that the legislature possesses broad discretion in matters of fiscal levies. (See Express Hotels (P) Ltd. vs. State of Gujarat (1989) 2 SCC 677, Para 25). 106. The impugned amendments introduce a legal fiction subject to fulfilling certain conditions. These conditions determine the existence and measure of the concession in the matter of renting employer-owned accommodation allotted to employees. The necessity of the AO undertaking the disproportionately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutes when it comes to a uniform approach. The legislature should be allowed some flexibility in such matters, and courts would be more inclined to make judicial deference to legislative wisdom. Commercial and tax legislation tend to be highly sensitive and complex as they deal with multiple problems and are contingent. Courts do not interfere with legislation which prevents possibilities of abuse and promotes certainty. The Court noted that the complex problem had been solved using a straitjacket formula, which merited judicial acceptance. To hold otherwise would meet multiple problems/issues and override legislative wisdom. The Court accepted the universal test by introducing the impugned rule and observed that this test was pragmatic, fair and just. 110. There is yet another aspect that bears consideration in these matters. As noticed earlier, the value of concession in rents respecting accommodation provided by an employer to an employee was always included in the definition of perquisite, and the value of such concession was taxable. Just like Rule 3 (1) of the IT Rules, the impugned amendments only provide the machinery for assessing and recovering such tax. Contrary to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether 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. 115. The 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. CONCLUSION 116. For the above reasons, we dismiss these Petitions and vacate the interim reliefs granted. There shall be no costs order. 117. All pending Notice of Motions are disposed of. 118. All concerned to act on an authenticated copy of this order. (Jitendra Jain, J) (M. S. Sonak, J) After pronouncement: 119. At this stage, learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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