High Court Of Kerala
K. Rajendran Pillai & Ors. vs. Union Of India & Ors.
Sections 17(2)(iv), 192, Rule 3(7)
C.N. Ramachandran Nair, J.
OP No. 190 of 2001
12th June, 2006
Counsel Appeared
Satheesan & K.K. Gopinathan Nair, for the Petitioners : K. Praveen Kumar, P.K.R. Menon, George K. George, U.K. Ramakrishnan, E.K. Madhavan, P.V. Lohithakshan, V. Krishna Menon, Smt. Vijayamma & Smt. Uma Gopinath, for the Respondents
JUDGMENT
C.N. Ramachandran Nair, J. :
Petitioners who are employees of the third respondent company have filed this O.P. for direction to the third respondent not to deduct income-tax on interest subsidy being part of the interest paid by the third respondent to various financing agencies from whom petitioners have availed loan for construction of house.
2. The case of the petitioners is that interest subsidy granted to the petitioners by the third respondent for the house building loans availed by the petitioners from various financial institutions is not perquisite coming under s. 17(2) of the IT Act, 1961 hereinafter called the ‘Act’ for the purpose of deduction under s. 192 of the Act. Petitioners are relying on the decision of the Karnataka High Court reported in CIT vs. M.K. Vaidya (1995) 126 CTR (Kar) 420 : (1997) 224 ITR 186 (Kar) and the decision of the Andhra Pradesh High Court in P.V. Rajagopal vs. Union of India (1999) 151 CTR (AP) 442 : (1998) 233 ITR 678 (AP) for the proposition that interest subsidy granted by the employer is not perquisite to be subjected to deduction of tax at source on salary. Standing counsel appearing for the IT Department contended that in the above two decisions, the Courts have considered only the interest subsidy paid by the employer to the employee directly and those are not cases where the employer has made payment of part of interest liability for the loan availed by the employee, as in this case, and therefore according to him, meeting of part of interest liability by the third respondent to the financial institution is a perquisite fairly falling under s. 17(2)(iv) of the Act. Counsel appearing for the third respondent furnished the scheme of subsidy given to the petitioners and others which shows that interest subsidy is provided by the company at slab rates whereunder payment of interest on house building loan availed by the employee in excess of the rate prescribed by the company is directly met by the company by making payment to the financial institutions wherefrom the employee has availed loan. In other words, third respondent is directly paying to the lending institutions part of the interest for the house building loan availed by the petitioners and similar employees under the scheme.
3. On going through the above two decisions I find both the High Courts of Karnataka and Andhra Pradesh were dealing with situation of interest concession given by the employer to the employee for the loan advanced by the employer. In both the cases, the Courts have referred to s. 17(2)(vi) introduced by Finance Act, 1984 w.e.f. 1st April, 1985 and its later deletion by Finance Act, 1985 retrospectively to neutralize the provision as originally introduced. By introducing cl. (vi) to s. 17 (2) Parliament made it clear that interest concession given by the employer to employees for the loan advanced forms a perquisite. In view of this specific inclusion of interest incentive as a perquisite under cl. (vi) the High Courts of Karnataka and Andhra Pradesh took the view that s. 17 (2)(iii) does not cover interest incentive. In other words, interest concession granted by the employer to employee would not have been perquisite, but for the inclusion of cl. (vi) to s. 17(2) which was later deleted with effect from the date on which it was introduced. Even though the Karnataka High Court has not considered the scope of cl. (iv) of s. 17(2), the Andhra Pradesh High Court has considered it and held that interest concession given by the employer to employee is not an alternative obligation of the employer to discharge, on failure by the employee, and so much so, is not a perquisite within the meaning of cl. (iv) of s. 17(2) of the Act. Even though I am in agreement with both the above decisions, I am of the view that in this particular case payment of interest subsidy by the third respondent company directly to the financial institution from which petitioners and other employees availed house building loan is a perquisite falling under cl. (iv) of s. 17(2) of the Act, because under the terms of the loan, as admitted in this case, the financial institution can directly claim the interest subsidy from the third respondent, if default is committed by the petitioners and similar borrowers who are employees of the third respondent. In view of the undertaking of obligation by the third respondent to discharge the interest liability to the extent of interest subsidy granted to the employee which is an obligation otherwise dischargeable by the employees, it is a perquisite under cl. (iv) of s. 17(2) of the Act. Therefore, irrespective of introduction and deletion of cl. (vi) of s. 17(2) the proposal of the third respondent to deduct tax at source on the interest subsidy in the given case is perfectly correct and the argument of the standing counsel for the Department in this regard is upheld. However, I find it would be discriminatory and violative of Art. 14 of the Constitution of India to permit deduction of tax at source on interest subsidy borne by the employer in the form of direct payment to the financial institution which grants loan to the employees, while granting exemption of interest subsidy or interest incentive given by the employer directly to the employee. In both the cases, the incentive is one and the same that is interest concession granted by the employer to the employee. I am of the view that if a perquisite directly paid by the employer to the employee is not to be taxed, then it should not be taxed merely because payment is made directly by the employer on behalf of the employee to the financial institution by applying s. 17(2)(iv) of the Act. The above two decisions rendered by the Karnataka and Andhra Pradesh High Courts appear to have been accepted by the Department inasmuch as they do not seem to have filed any SLPs. It is also evident from the valuation clause, cl. (7), introduced in r. 3 of the IT Rules, 1962 prescribed under new cl. (vi) of s. 17(2), introduced by Finance Act, 2001 w.e.f. 1st April, 2002, that Government proposes to introduce tax on interest incentive only from asst. yr. 2002-03 onwards. It appears the validity of rule on valuation was challenged in various High Courts, but without success. This Court has in the decision reported in Cochin Refineries Officers Association vs. Union of India (2004) 192 CTR (Ker) 1 also upheld the validity of the rule. This O.P. was filed in 2001 and ever since there was stay against deduction of tax on the interest subsidy borne by the company on the loans availed by the petitioners from financial institutions. Even though I have upheld the proposal of the company to deduct tax on interest subsidy as perquisite under s. 17(2)(iv) of the Act, I feel in order to avoid discrimination, interest subsidy of this nature has to be treated outside the scope of s. 17(2)(iv) of the Act until 2002-03 and petitioners should be held to be eligible for exemption from tax on interest subsidy paid by the company for the period in question.
4. In the circumstances, O.P. is allowed leaving freedom to the third respondent to proceed for recovery of tax on interest subsidy paid directly or indirectly w.e.f. 1st April, 2002 following s. 17 (2)(iv) of the Act and r. 3(7) of the Rules.
[Citation : 292 ITR 277]
