Andhra Pradesh H.C : Whether the grant of house building advances at a rate of interest below the market rate is a perquisite had been debated and the view of the Government itself was that the statutory provisions did not treat it as a perquisite

High Court Of Andhra Pradesh

P.V. Rajagopal & Ors. vs. Union Of India & Ors.

Sections 15, 17(2)(iii), 17(2)(iv), 17(3), 192, 201

Asst. Year 1989-90, 1990-91, 1991-92, 1992-93, 1993-94, 1995-96, 1996-97, 1997-98

S.V. Maruthi & T.N.C. Rangarajan, JJ.

Writ Petn. Nos. 27084 & 27328 of 1995, 8217, 24932, 20647, 21832, 26797 & 35660 of 1997 & 288 of 1998

21st April, 1998

Counsel Appeared

M. Suryanarayana Murthy, A.V. Krishna Koundinya, V. Srinivas, L. Ravichander, G. Vidhyasagar & P. Sriraghuram, for the Petitioners : S.R. Ashok, for the Respondents

JUDGMENT

T.N.C. RANGARAJAN, J. :

This batch of writ petitions relates to the question of deduction of tax at source with reference to the income chargeable under the head “Salaries”.

2. Pleadings.—Writ Petn. No. 27084 of 1995 has been filed by the Officers of the Research and Development Division of Bharat Heavy Electricals Ltd. (a Government of India undertaking). They obtained house building advance from the HDFC, LIC and other financial institutions in respect of which monthly instalments are deducted from their salary. The difference between the rate of interest charged by the financial institutions and the rate of interest at which the house building loans are generally sanctioned by the company was reimbursed to the petitioners. On 23rd March, 1995, the CBDT informed the Chief CIT, 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 s. 17(2)(iii) of the IT Act. This was forwarded to the Dy. CIT 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 IT Act. Writ Petn. No. 26797 of 1997 has been filed by the trade union of the workers of Bharat Heavy Electricals Ltd. It is stated that an order under s. 201 was passed on 21st March, 1995, against the company for the asst. yrs. 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 5th July, 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 similar order for earlier years was set aside in revision and yet the IT Department was persisting and for that reason it is prayed that there should be a direction not to treat the interest subsidy as a perquisite while deducting the tax at source. Writ Petition No. 35660 of 1997 has been filed by the Executive Association of BHEL for the same relief. Writ Petn. No. 27328 of 1995 has been filed by the Electronics Corporation of India Ltd. Officers Association. It is stated that for the asst. yr. 1990-91, the ITO treated the interest subsidy as a perquisite and passed an order under s. 201 for the asst. yr. 1990-91 treating the ECIL as an assessee-in-default for not treating the interest subsidy as perquisite for deduction of tax at source. ECIL filed a revision to the CIT under s. 264 which was allowed on 20th March, 1992, and that order became final. It is also stated that in the case of Hindustan Aeronautics Ltd., the Karnataka High Court allowed Writ Petn. No. 8726 of 1993 on 13th Jan., 1994—P. Krishna Murthy vs. CIT (1995) 126 CTR (Kar) 434 : (1997) 224 ITR 183 (Kar) : TC 58R.507 holding that interest subsidy is not a perquisite and consequently the CIT, Bangalore, issued a letter dt. 24th Feb., 1995, to the Hindustan Aeronauticals Ltd., stating that interest subsidy need not be treated as perquisite while deducting the tax at source in respect of salaries. A similar letter was issued by the ITO, Ward-4, TDS, Hyderabad, to HAL, Hyderabad. But for the asst. yrs. 1991-92 to 1993-94 an order under s. 201 was passed by the ITO, Ward-5(7), Hyderabad, in respect of ECIL raising a demand for Rs. 35,64,652 and penalty of Rs. 10,02,108. The appeal was rejected by the CIT(A). Consequently, the ECIL informed the employees that the tax will be deducted at source on interest subsidy inasmuch as further proceedings by ECIL against the appellate order were getting delayed. In this situation, this writ petition has been filed for a direction not to treat the interest subsidy as perquisite while deducting the tax at source. Writ Petition No. 8217 of 1997 has been filed in respect of the asst. yr. 1995-96. Writ Petition No. 21832 of 1997 has been filed by the trade union of the ECIL employees for the asst. yrs. 1995-96 and 1996-97 for the same relief. Writ Petition No. 20647 of 1997 has been filed by the ECIL Officers Association for the asst. yrs. 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 Ltd. (for short “MIDHANI”) (a Government of India undertaking). It is stated that on 24th March, 1995, an order under s. 201 of the Act was passed against the company for the asst. yr. 1993-94. Consequently, the company issued a circular on 24th Sept., 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 Ltd., a Government of India undertaking. It is pointed out that for the assessment year, in the case of ECIL, the CIT 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.

3. Arguments for the petitioner.—Learned counsel for the petitioners submitted that the interest subsidy is not a perquisite as held by the Karnataka High Court in the case of P. Krishna Murthy vs. CIT (supra), and consequently in the case of Employees of Bharat Electronics Ltd. such interest subsidy was not treated as a perquisite for deduction of tax at source. It is stated that the position is the same in respect of HAL also. Secondly, it was submitted that it is discriminatory on the part of the Department to treat such interest subsidy as perquisite in the cases of identically placed assessees, and even employees of the same company working in different States. Thirdly, it was submitted that there was no machinery for adjudicating this issue at the time of deduction of tax at source whereby the petitioners, who were the employees and who were ultimately to bear the burden, were driven into expensive and unnecessary litigation for getting the relief to which they were entitled. It was submitted that in these circumstances, there should be a declaration that the interest subsidy should not be treated as a perquisite for deduction of tax at source. Arguments for the Revenue.—Learned standing counsel for the Revenue vehemently opposed this claim of the petitioners. He took us through the relevant provisions of the Act and stated that the interest subsidy will be a perquisite and that the decision relied on by the petitioners requires reconsideration. In order to appreciate this argument, we have to go into the history of the legislation in this regard. Statutory provisions.—Sec. 15 charges salaries to income-tax. Sec. 17 defines salary as including any fees, commission, perquisites or profits in lieu of, or in addition to, any salary or wages. Sub-s. (2) defines perquisites to include the listed items : “(2) ‘perquisite’ includes— (i) the value of rent-free accommodation provided to the assessee by his employer ; . . . . (iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases— (a) by a company to an employee who is a director thereof ; (b) by a company to an employee being a person who has a substantial interest in the company ; (c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income 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-s. (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 payment referred to in cl. (10), cl. (10A), c

(10B), cl. (11), cl. (12), cl. (13) or cl. (13A) of s. 10, due to or received by an assessee from an employer or a former employer or from a provident or other fund (not being an approved superannuation fund), to the extent to which it does not consist of contributions by the assessee, or interest on such contributions.” The fact situation.— The facts in respect of which these provisions are to be applied arises from a welfare measure by the Central Government for providing funds for acquisition of houses by its employees. As far as the Central Government employees are concerned, house building loans are sanctioned by the Government at a concessional rate. As far as the public sector undertakings owned by the Government are concerned, similar schemes were in vogue. It was found that the public enterprises had to use the available funds in their own enterprises and their internal resources were not large enough to meet the needs of the employees for housing loans. At the same time, financial institutions were also granting loans for building houses but at a rate which was higher than the rate at which the Government was granting house building advances. The Ministry of Industry considered this situation and by letter No. 2/37/85/BPE (WC), dt. 12th Nov., 1986, decided that the public enterprises should adopt a scheme of interest subsidy to pay the difference between the rate of interest charged by specialised agencies and the rate of interest charged by the Central Government under the House Building Advance Rules. Consequently, large public sector undertakings framed their own rules providing for granting subsidy to the employees who had taken loans from other financial institutions instead of being granted loans by the public sector undertaking itself.

The legal position.—The question whether the grant of house building advances at a rate of interest below the market rate is a perquisite had been debated and the view of the Government itself was that the statutory provisions did not treat it as a perquisite. Consequently, the Taxation Laws (Amendment) Act, 1984, introduced an amendment w.e.f 1st April, 1985, inserting sub-cl. (vi) to include as a perquisite, the amount of interest where the loan is given interest free and the amount of difference between the interest 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, dt. 12th June, 1985. In spite of this legislative history, an attempt was made to tax the interest subsidy and the Calcutta High Court in CIT vs. P.R.S. Oberoi (1990) 84 CTR (Cal) 191 : (1990) 183 ITR 103 (Cal) : TC 38R.357, clearly held that such interest subsidy cannot be taxed. Later, the CBDT issued Circular No. 701, dt. 23rd March, 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 vs. CIT (supra). The Karnataka High Court referred to the circular of the CBDT explaining the introduction and withdrawal of sub-cl. (vi) in s. 17(2) as well as its own decision in CIT vs. M.K. Vaidya (1995) 126 CTR (Kar) 420 : (1997) 224 ITR 186 (Kar) : TC 58R.496 and held that such subsidy cannot be taxed. Following that decision, circulars have been issued by the Chief CIT’s at Karnataka and Hyderabad to HAL not to treat the interest subsidy as perquisite while deducting the tax at source. But in respect of other similarly placed employees of public sector undertakings, action has been taken under s. 201 against the employers for failing to treat the interest subsidy as perquisite while deducting the tax at source. In the case of ECIL a revision has been allowed by the CIT whereas in the case of BHEL, an appeal was dismissed by the CIT(A) and it is stated that a second appeal was also dismissed by the Tribunal.

8. Is interest subsidy part of “salary” as such.—The Revenue argued that the word “salary” being defined in an inclusive manner, any amount paid by the employer falls within its scope, whatever its character. He referred to various dictionaries to support this contention. The word “salary” as such is not defined in the Act. Words in a statute dealing with the matters relating to the general public are presumed to be used in their popular sense. The Supreme Court observed in State of Orissa vs. Titaghur Mills Co. Ltd. AIR 1985 SC 1293 : “The dictionary meaning of a word cannot be looked at where that word is statutorily defined or judicially interpreted. But when there is no such definition or interpretation, the Court may take the aid of dictionaries to ascertain the meaning of a word in common parlance, bearing in mind that a word is used in different senses according to its context and the dictionary gives all the meanings of a word and the Court has, therefore, to select a particular meaning which is relevant to the context in which it has to interpret th

We find that the word “Salary” according to Chambers’ Dictionary is : “A periodical payment (usually at longer intervals than a week), for services rendered.” According to Ramanatha Aiyar it is : “Salary is a periodical allowance made as compensation to a person, for his official or professional services or for his regular work; an agreed compensation for 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 s. 17(2)(iv) ?—Learned senior standing counsel for the Revenue sought to make a distinction between cases where loans are given by the employer free of interest or at a lower rate of interest, and cases where the difference between interest paid by the employee to a financial institution and the rate of interest chargeable in respect of the Central Government House Building Loan are reimbursed to the employee. He submitted that the cases cited by the petitioners did not relate to such reimbursement which alone can be called a subsidy directly paid in cash by the employer to the employee. According to him, this subsidy was never meant to be included in sub-cl. (vi) which was introduced and withdrawn from s. 17(2) and, therefore, the legislative history pertaining to the abortive sub-clause will not cover this issue. He submitted that it would fall under sub-cl. (iii) of s. 17(2) as the value of any benefit or amenity granted to the employee if not under sub-cl. (iv) as any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee. However, it is well understood that cl. (iv) relates to the payment by the employer to a third party in respect of an obligation undertaken by the employee such as club subscription and not payments to the employee direct. The Revenue, therefore, did not press that point further.

Is interest subsidy a benefit within s. 17(2)(iii) ?—It was then submitted that the interest subsidy would fall under sub-cl. (iii) as the value of the benefit or amenity granted to the employee. According to him, since the definition of perquisite was an inclusive definition, we can go to the meaning of the word “perquisite” itself to cover such interest subsidy. He cited the decision of the House of Lords in Owen vs. Pook (Inspector of Taxes) (1969) 74 ITR 147 (HL) : TC 58R.245 for the proposition that a reimbursement of an expenditure is a perquisite if it involves a personal advantage. In that case a doctor, who was on call, was reimbursed travelling expenses to make the visits on duty. The House of Lords held that reimbursement of that expenditure may amount to perquisite but for the fact that that expenditure was incurred as part of his duty. The second case cited is the decision of the Madras High Court in CIT vs. C. Kulandaivelu Konar (1975) 100 ITR 629 (Mad) : TC 58R.475, where the unauthorised use of funds of the company was treated as a perquisite of a director as conferring a benefit on him. This decision followed the case of CIT vs. A.R. Adaikappa Chettiar (1973) 91 ITR 90 (Mad) : TC 38R.344 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 vs. Late A.K. Lakshmi 1978 CTR (Mad) 171 : (1978) 113 ITR 368 (Mad) : TC 58R.480. 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 vs. Vazir Sultan Tobacco Co. Ltd. (1988) 173 CTR (AP) 176 : (1988) 173 ITR 290 (AP) : TC 18R.591 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 [(1992) 193 ITR (St.) 27]. Again, in CIT vs. Warner Hindustan Ltd. (1984) 145 ITR 24 (AP), as well as CIT vs. Andhra Bank Limited—R.C. No. 5 of 1979, dt. 7th Aug., 1989, and CIT vs. Coromandel Fertilizers—I.T.C. No. 8 of 1994, dt. 24th Dec., 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. Special Leave Petitions Nos. SLP (Civil) No. 12383 of 1983, 11655-11655A of 1985 and 3483 of 1988 were dismissed. It may be noted that under s. 40(a)(v) any expenditure incurred by a company for provision of a perquisite to an employee, was subject to a ceiling whether convertible into money or not. It is in that context, that these decisions were rendered and the Supreme Court also took the same view in CIT vs. Indian Engineering & Commercial Corporation (P) Ltd. (1993) 112 CTR (SC) 56 : (1993) 201 ITR 723 (SC) : TC 18R.587. Sub-cl. (iii)(c) also refers to all benefits or amenities

not provided by way of monetary payments as the items to be excluded for the purpose of ascertaining the minimum salary that employee must get before they can be valued and added as a perquisite. Thus, the scheme of the Act did not envisage the addition of cash payment as a perquisite in the nature of a benefit or amenity.

11. Is interest subsidy a profit in lieu of salary ?—The Revenue then sought to bring the interest subsidy within the expression of “profits in lieu of salary” in s. 17(3). In this context, he cited Hochstrasser vs. Mayes (1961) 42 ITR

457 (HL) : TC 58R.491 where the employee was compensated for the loss incurred by selling his house to his company on transferring him to another factory. The House of Lords held that though the fact that the employment was the causa sine qua non, it was not the causa causans of the payment, and, therefore, the compensation was taxable. The context, however, is the provisions of s. 156(2) of the IT Act, 1952, in England where the tax is charged on the profits and gains arising from any office or employment. But the present context is quite different as can be seen by a plain reading of s. 17(3) itself. This provision was intended only to apply to all terminal benefits, the idea being that the employers should not camouflage salary or profits in lieu of salary, as terminal benefits. The items mentioned are, therefore, items which are paid on the termination of employment and they are exempted to the extent that they actually relate to the terminal benefits and, therefore, capital receipts.

The Revenue submitted that this view of the section was not shared by this Court in the case of M. Krishna Murthy vs. CIT (1985) 152 ITR 163 (AP) : TC 58R.333 where it was pointed out that the house rent allowance exempted under s. 10(13A) is mentioned in this section and such house 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 s. 17(3) simultaneously with its introduction in s. 10. Obviously, the draftsman wanted to ensure that if it is not otherwise exempt under s. 10, it would be taxable under s. 16, for which, instead of inserting in s. 17(1), it has been inserted in s. 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 reward or a periodical payment for services rendered. Nor is it paid in lieu of salary. We are, therefore, convinced that the interest subsidy which was given as a welfare measure to treat the employees of public sector undertakings on par with the Central Government servants was never intended to be taxed.

12. Is interest subsidy a perquisite as such ?—It was then argued that interest subsidy may be a perquisite as commonly understood without reference to the sub-clauses of s. 17(2) just as in the case of salary, the definition of “perquisite” in s. 17(2) is an inclusive definition. It is, therefore, necessary to ascertain the popular meaning of that word. Chambers’ Dictionary gives the meaning as : “A casual profit anything left over that a servant or other has by custom a right to keep : a tip expected upon some occasions.” Ramanatha Aiyar gives the meaning as : “Perquisites : ‘Perquisites means emolument, fee or profit attache to the office or position or an addition to salary or wages.” Therefore, one possible view is that interest subsidy is a perquisite because the employee gets it only because of his employment as incidental to his service conditions. But, the same benefit given indirectly has not been treated as a perquisite by the Revenue. If the employer takes a loan at a higher rate and advances it to the employee at a lower rate of interest, the difference is admittedly not treated as a perquisite. But where the loan is taken by the employee and the difference is reimbursed to the employee, it is sought to be treated as a perquisite. The Revenue submitted that the form makes a difference to the substance. But on the facts of the present case the benefit to the employee is the same whether given directly or indirectly. So when it is not taken as a perquisite in the first situation, it has to be considered in the same way in the second situation as otherwise it will be discriminatory. Even if two views are possible the one in favour of the taxpayer has to be adopted as charging provisions have to be construed strictly.

13. Declaration by Chairman, CBDT.—This position had been made clear by the Chairman of the Central Board of Direct Taxes by his letter dt. 13th July, 1990, to the Chairman of the Standing Conference of Public Enterprises in the following words : “The question of taxation of public sector 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 matterof 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 cl. (2) of s. 17 which was inserted by the Taxation Laws (Amendment) Act, 1984, w.e.f. 1st April, 1985, but was subsequently deleted by the Finance Act, 1985, with effect from the same date. If any AO 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, Italicised in print, supplied] It is very strange that the Revenue should persist in contesting the issue in spite of such an unequivocal declaration.

14. A. Technical objections of the Revenue.—A. maintainability.—Finding that there is no merit in the case of the Revenue and no justification for the action taken by the Department, learned senior standing counsel raised various technical objections. He submitted that the Writ Petition No. 27084 of 1995 has been filed against an inter-Departmental correspondence to which the petitioner could not have any access and since it is neither an order nor a statutory notice, the question of challenging the same cannot arise. We find that the said letter was the basis of the action taken by the employer to the detriment of the employees. The employers are coerced to deduct the tax at source by the penal action under s. 201. In the present case, unfortunately, even though such demands have been cancelled in one year, similar demands have been upheld by the CIT(A) and the Tribunal in the subsequent years. The petitioners have also placed before us individual letters sent to the employees merely raising the demand without any assessment. Such chaotic functioning of the Department works havoc on the salaried class which forms part of captive taxpayers. In this situation, if the writ petition cannot be entertained to direct the Department to give proper guidance to the employers, the actual taxpayers will be left without any speedy or effective remedy. B. Writ not a proper remedy.—It was then submitted that since it is the individual employees who are liable to tax, the proper remedy for them is to file a return and get a refund after adjudicating the issue whether the interest subsidy is taxable or not. He submitted that by filing the writ petition, the Revenue is denied the opportunity of properly adjudicating the issue after verifying the facts such as whether there is a scheme in the company for giving interest subsidy and the terms thereof. This is actually the crux of the case, namely, that the person, who is ultimately liable to pay the tax, is not given an opportunity to contest the liability before the tax is levied by deduction of tax at source. The alternative remedy can be an application for certificate under s. 197. But this will involve a great burden on the ITO if thousands of employees were to make applications for 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 s. 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 s. 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 was submitted that in some of the returns filed by the employees, the entire amount paid as interest to the financial institutions has been claimed as a deduction under s. 24 which cannot be justified if the interest subsidy is not to be treated as a perquisite. Learned counsel for the petitioners denied this. Even if, in certain cases, the individual employees have made such a claim by mistake or otherwise, we do not think that a claim that the subsidy received is deductible under s. 24, will make it a perquisite under s. 17. Learned senior standing counsel also pointed to the Regulations of ECIL where in para. 10.11 it was stated that : “the amount of interest subsidy paid by the company becomes part of the income of the individual employee and he/she is liable for income-tax.” He submitted that this proved that both the employer and employee considered it as part of taxable salary. The question of taxability cannot be decided with reference to the assessee’s approach. The Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) : TC 16R.668 observed : “Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights . . .” Hence, this objection is also without any merit.

17. D. Plea not supported by evidence.—Learned senior standing counsel submitted that the schemes of several companies paying the interest subsidy was not available and even if a plea is taken, unless evidence is also put in the affidavit, it cannot be adjudicated. He relied on the decision of the Supreme Court in Bharat Singh vs. State of Haryana AIR 1988 SC 2181. In that case, the Supreme Court pointed out that if a point which is ostensibly a point of law is required to be substantiated by facts, the petitioner must plead and prove such facts which must appear from the writ petition and the Court need not entertain that point if either the pleading or the evidence is not given. Though it is a salutary principle, we are of the view that it has no application to the facts of the present case. The respondent here is the Central Government represented by its officers and the petitioners have pleaded that they are employees of Central Government undertakings governed by a notification issued by the Industries Ministry advising the undertakings to 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.

18. E. 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.

19. 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 vs. CIT (supra).

20. G. Writ by trade union not maintainable.—The Revenue also submitted that a trade union cannot file a writ petition relating to tax matters of a member of the union. It was argued that it is none of the business of the trade union to interfere in the income-tax matters of the workers as the trade union was concerned only with the dispute between the workers and the management. This argument ignores the fact that this is really a dispute between the workmen and the management initiated by the Department. The management would not have been averse to treating the interest subsidy as not a perquisite but for the insistence of the Department that it should be treated as a perquisite. The deduction of tax at source reduced the take-home pay, and hence, affects the workmen with reference to their service conditions. The objects of a trade union is to protect the interests of the workmen. If the action of the employer at the behest of the third party adversely affects the workmen, a trade union is certainly entitled to intervene. Sec. 15 of the Trade Unions Act enables the trade union to spend its funds for the prosecution of any legal proceeding for the purpose of securing or protecting any rights arising out of the relations of any member of the union with any employer. Here the employer is acting as the agent of the Revenue and is also an instrumentality of the State and the alleged violation of the IT Act certainly involves the service conditions of the employees. We are convinced that the trade unions are entitled and justified in filing the writ petitions.

21. H. Loopholes cannot be plugged by Court.—Learned senior standing counsel submitted that if there was a lacuna in the Act with reference to adjudication of a perquisite at the time of the deduction of tax at source, it will not grant jurisdiction to the Court to interfere. In order to see whether there is any such lacuna, we have to consider the scheme of the IT Act with reference to the deduction of tax at source. The collection and recovery of tax is governed by Chapter XVII of the IT Act by way of deduction of tax at source and advance payment. Secs. 192 to 194, 194A, 194B, 194BB, 194C, 194D, 194E, 194EE, 194F, 194G, 194H, 194-I, 194J, 194K, 196A, 196B, 196C and 196D provide for deduction of tax at source in respect of various kinds of income. Sec. 200 imposes a duty on the person deducting the tax to pay it within the prescribed time to the credit of the Central Government. Sec. 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 s. 221 as well as penal interest under s. 201(1A). Sec. 203 provides for the issue of a certificate for tax deducted which is to be given credit and s. 205 bars direct demand on the assessee in respect of the tax so deducted. Sec. 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 s. 211. Sec. 234B provides for interest on defaults in payment of advance tax and s. 234C for interest for deferment of advance tax atthe 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 deducted at source, he will have to pay more advance tax as otherwise, he will be liable to pay interest for deferment of advance tax inasmuch as advance tax is determined after reducing the tax deductible at source. The person who deducts the tax at source will be liable only if he fails to remit the tax after deducting the same. The Department appears to be under a misapprehension that where there is a shortfall in the deduction of tax at source, the employer can be treated to be an assessee-in-default and charged with penalty and interest. We may now read the provisions of s. 201 : “Sec. 201. Consequences of failure to deduct or pay.—(1) If any such person and in the cases referred to in s. 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee-in-default in respect of the tax : Provided that no penalty shall be charged under s. 221 from such person, principal officer or company unless the AO is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax. (1A) Without prejudice to the provisions of sub-s. (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. (2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount of simple interest thereon referred to in sub-s. (1A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-s. (1).” This section has two limbs, one is where the employer does not deduct tax and the second where after deducting tax, the employer fails to remit it to the Government. There is nothing in this section to treat the employer as the defaulter where there is a shortfall in the deduction. The Department assumes that where the deduction 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 s. 192 clarifies this issue further : “Sec. 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, Italicised in print, supplied] Therefore, the deduction of tax at source is not on any adjudicated figure, but on an estimated figure of salary income. Generally, there would be no need to make an estimate except where there may be some changes during the course of the year with reference to the salary payable. But a case of disputed liability could also fall within this estimate. Unfortunately, the section or the rules do not spell out the manner in which this estimate has to be made and it is assumed by one and all that it is the employer who has to decide the salary income that should be subject to deduction of tax at source. This assumption has led to all kinds of queries by distracted salary earners, as a casual glance at any tax advice columns of newspapers and magazines will reveal. The real position, however, is that it is for the employee to inform the employer about the estimated salary income that is liable for deduction at source. This can be gathered from the fact that sub-s. (2B) provides that where the employee is in receipt of other income, he may send to the employer, a verified statement to take that also into account for deduction of tax at source. There is no reason why such a verified statement should not be given for the purpose of reducing the salary income liable for deduction of tax at source. In doing so, the employee will be taking a great responsibility because if the income is otherwise taxable, he will be liable to pay larger advance tax and for default or deferment, such advance tax will be liable to pay interest under ss. 234B and 234C. A reference to other sections. such as s.

197A indicates a common pattern of allowing the assessee to determine the liability for deduction of tax at source. Under s. 197A, no tax is to be deducted at source if the assessee gives a declaration in writing that his estimated total income will not be liable to tax. This stands to reason because it is the assessee who has to declare his taxable income and not the employer or the payer.

22. The alternate remedy is for an assessee to apply to the ITO for a certificate under s. 197 that the amount presumably is not subject to deduction of tax at source or should be subject to deduction at a lower rate. This section may work well in the case of unusual or extraordinary payments. But in the case of an interest subsidy payable to thousands of employees it would be meaningless to suggest that each employee should approach the ITO for a certificate under s. 197. Some employees may be able to get it in time, some may not be able to get it. Some ITOs 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 CBDT issued every year. The circulars of the relevant period do not contain any information about treatment of the interest subsidy as a perquisite. The CBDT 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, CBDT dt. 13th July, 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 warning about short deduction or action under s. 201 though they specifically mention the need to revise the amounts of deduction in case of pay revision as well as the action under s. 201 for failure to deduct any tax or pay the deducted tax in time. This indicates that the Revenue is very well aware of the position that s. 201 does not apply to a case of deduction of tax at a lesser amount. Moreover, the circulars advise the drawing and disbursing authority to satisfy itself that the computation of taxable salary income is in order with reference to deductions available to the employee. This does not convert him into an ITO or an adjudicating authority as many erroneously believe. All that it means is that the assessee must declare his claim so that with reference to s. 201, proviso, he can say that he had good and sufficient reasons not to deduct tax at source in respect of any income to avoid imposition of penalty. It is to be noted that the deduction is in respect of income computed under the head “Salary” and not in respect of each component of it. Any difference of opinion about the computation has to be resolved by the employee at the risk of his paying interest under ss. 234B and 234C and not by the employer as s. 201 cannot be utilised to compel any such adjudication by him. Yet a misunderstanding of the provisions by the field officers and reluctance of the CBDT to clarify the matter has led to a situation where the employers have to carry on litigation in several High Courts or transfer the unnecessary burden to the employees who can hardly bear them. In our considered opinion, the action taken under s. 201 was wholly illegal and not authorised by the statute. It amounted to an unreasonable coercion which has to be resisted only by invoking the extraordinary jurisdiction of this Court. There is thus no loophole which requires to be plugged. Perhaps, a better solution may be evolved. In this background, the contention of learned senior standing counsel for the Revenue that there is an alternate remedy by way of assessment procedure is unacceptable.

23. A possible solution.—It would have been really marvellous if the Department could have taken this as an occasion to reform the system on this question. The problem has arisen because the tax is deducted by the employer and the payee 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 for the payment of tax until adjudication takes place. The employers can also be relieved of the unpaid burden of acting as the agent of the Government for collecting tax at source. It may not (now) be realised that it involves a lot of paper work and manpower and the risk of being penalised on the one hand and the risk to the Government and the employees of being defrauded by unscrupulous employers deducting tax and not remitting the same. It will also have the added advantage of encouraging the banking habit and the frozen funds will be available to the banks for lubricating the economy. Such a scheme can be evolved even on a pilot basis and operated by the CBDT itself by invoking provisions of s. 197(2A) without even the need for legislation and later extended to all kinds of other income. It would then relieve the uninitiated such as house owners from liability such as s. 194-I and also widen the tax net by gathering data relating to total receipts in the hands of each recipient. Learned senior standing counsel submitted relying on the decision in R. K. Garg vs. Union of India (1981) 25 CTR (SC) 406 : (1982) 133 ITR 239 (SC) : TC 71R.506, that even though there is an unintended disadvantage to the taxpayer in the present system it is for Parliament to intervene and not for the Court. That is the reason why we are making this suggestion for Government to do some lateral thinking and solve the problem by legislation or otherwise.

24. Attitude of the Department to this litigation.—Learned senior standing counsel argued this case vehemently and it should, therefore, be presumed that he has been instructed to do so. Advocates who are designated as senior counsel have a duty to the Court higher than the duty to the client in the sense that they are expected to assist the Court in laying down the correct law even if it affects the interest of the client. They are also expected to advise the clients to follow the correct law and not to contest the matters where they are concluded by precedents so that needless litigation is avoided and Courts are not burdened. In the present case, there are three decisions of the High Court against the Revenue and it has not been shown that any of them have been taken to the Supreme Court. When we sought information about it, we were told that such information is not available. There was a practice in the Department to publish Departmentally 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 CBDT 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 vs. Collector of Central Excise (1992) 104 CTR (SC) 31 : (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, CBDT, had given an assurance in this regard on 13th July, 1990. In spite of that, the Department had proceeded to instruct the employers on 23rd March, 1995, to treat the interest subsidy as a perquisite for deducting the tax at source. The comprehensive Circular No. 701 relating to tax deduction at source subsequently issued on 23rd March, 1995, being silent on this point, we have to appreciate senior standing counsel for actually performing a public service by forcefully bringing out the internal contradiction between the letter of the Chairman, dt. 13th July, 1990, given in conformity with the directions of the Supreme Court, and the impugned letter of the CBDT, dt. 23rd March, 1995.

25. Directions.—In the circumstances, there shall be a direction to the respondents not to treat the interest subsidy as a perquisite while deducting the tax at source in respect of income under the head “Salaries” under s. 192 of the IT Act. The first respondent-finance secretary is directed to place this judgment before the Union Finance Minister so that he is apprised of the need for reform in the area of “deduction of tax at source”.

The writ petitions are allowed with costs of Rs. 1,000 each.

[Citation : 233 ITR 678]

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