High Court Of Madras
Bhel Executives/Officers Association & Ors. vs. DCIT & ORS.
Sections 17(2), 295(2)(c), RULE 3
R. Jayasimha Babu & P.K. Misra, JJ.
Writ Petn. Nos. 1868, 2984 to 2987, 3335, 3796, 4161, 4705, 4749, 5222, 6554, 7071, 7962, 8673, 8702, 9025, 9175, 9190, 9315, 9316, 9325, 9326, 9382, 9535, 10153, 10199, 10474, 10706, 11000, 11236, 11460 & 35770 of 2002 and 7394 & 7435 of 2003
30th April, 2003
Counsel Appeared
P.P.S. Janardhana Raja for M/s. Subbaraya Aiyar, V. Kathiravan, Satish Parasaran, P. Subbiah for M/s Row and Reddy, T. Mohan for M/s McGaw Law Firm, G. Mohana Rangan, G. Ethirajulu, K.M. Ramesh, V.S. Nataraj, V. Balasubramanian, A. Rahul, L.M. Praghasam, B. Pugalendhi, C.R. Chandrasekar, M. Kamalanatha & M/s Aiyar and Dolia, for the Petitioners : M. Jegadeesan, P. Rathina Durai, P. Sukumar, K. Ravindranath, B.T. Seshadri, V.S. Jayakumar, M.S. Krishnan for M/s Sarvabhauman Associates, J. Madanagopal Rao, N.A.K. Sharma, Rangarajan, M. Sekar, R.S. Jeevarathinam, J. Naresh Kumar, S. Jayaraman, Sampathkumar, M. Sathyanarayanan, P. Chandrasekaran, P. Sreenivasalu, S. Radhakrishnan, N. Rajendran, S. Sethuraman, T.C.A. Srinivasan, Murthy & Mrs. Pushya Sitaraman, for the Respondents
JUDGMENT
R. Jayasimha Babu, J. :
The petitioners challenge the constitutional validity of the amendment made to r. 3 of the IT Rules, 1962, under the Notification No. S.O. 940(E), dt. 25th Sept., 2001 [(2001) 170 CTR (St) 64], w.e.f. 1st April, 2001. By a later Circular No. 15, dt. 12th Dec., 2001 [(2002) 172 CTR (St) 65], option was given to the employees governed by that amended rule to compute the value of perquisites under the old rule for the period from 1st April, 2001 to 30th Sept., 2001. The petitioners are mainly unions or associations comprising of employees who are in public sector undertakings. In their perception the amendment effected to r. 3 has resulted in their being deprived of recognition of their distinct status, distinct in contrast to the employees of the Government and of the private sector, and further they being burdened with additional liability to tax. The amended rule in their view is violative of Art. 14. Rule 3 of the IT Rules, 1962, deals with the valuation of perquisites. Before proceeding further, we may record here that in the counter-affidavit filed by the CIT (Judicial) in these matters, it has been stated that “…….in respect of employees drawing salary up to Rs. 1 lakh no perquisite value will be taken for computing the taxable income.” “Perquisites” is defined in an inclusive way in s. 17(2) of the IT Act. “Perquisites” as defined therein forms part of “salary”, which is defined in s. 17(1), sub-cl. (iv) of which refers, inter alia, to “perquisites”. “Perquisites” referred to in s. 17(2) are the value of rent-free accommodation provided to the assessee by the employer; the value of any concession in the matter of rent respecting any accommodation provided to the assessee by the employer; the value of any amenity or benefit granted or provided free of cost or at a concessional rate; any sum paid by the employer in respect of any obligation which, but for the payment, would have been payable by the assessee; and any sum payable by the employer, subject to certain exceptions, to effect an assurance on the life of the assessee or to effect a contract for an annuity.
5. “Salaries” is one of the heads of income referred to in s. 14, which, inter alia, provides that “all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income : A. Salaries; C. Income from house property; D. Profits and gains of business or profession; E. Capital gains; F. Income from other sources.
6. Perquisites being part of salaries have always been taxable before and after the amendment to r. 3. Only the mode of valuation of some of the perquisites has undergone change after the amendment.
7. The IT Act itself does not set out the manner in which the perquisites are to be valued. That is dealt with by the rule making authority, namely, the CBDT, subject to the control of the Central Government. The Board may, by virtue of power conferred on it by s. 295(1), by a notification in the Gazette of India, make rules for the whole or part of India for carrying out the purposes of the Act. Sec. 295(2)(c) specifically refers to perquisites. “295. (2) In particular and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters : …….. (c) the determination of the value of any perquisite chargeable to tax under this Act in such manner and on such basis as appears to the Board to be proper and reasonable;” The rules made by the Board as also certain notifications are required to be placed before Parliament as required by s. 296. In case Parliament decides that the rules should not have been made or issued, the same shall not thereafter have effect and in case Parliament makes any modification it will have effect only in that modified form; “…… so however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule or notification.” The power conferred on the Board to make rules is, therefore, a delegated legislative power. The Board itself is an expert body comprising of persons who have experience of decades in direct tax administration. While making rules the scheme and purpose of the Act are to be their guide. The rule-making authority is, in addition required, while making the rules for determining the value of perquisites, to proceed on a basis which “appears to the Board to be proper and reasonable”. Their judgment with regard to the manner and basis of valuation of perquisites by framing and from time to time amending the statutory rules, is not to be lightly interfered with. Salaried employees are classified in r. 3 as amended, into those in the service of Government and other employees. The elimination of public sector employees as a separate class does not in any way offend Art.
14. Salaried employees who are not in the service of the Government form a class, all of whom have the common characteristic of not being employed under the Government, while those in Government service form a distinct class of being employees of the Government, whether, State or Central, whose salaries and other conditions of service are distinct, when compared to those who are not in Government service. It has been held by the Supreme Court in more than one case that the State has a wide discretion with regard to persons or objects to be taxed, the point of levy as also the quantum thereof. The deletion of public sector employees as separate class has apparently been effected in the context of the shrinking role of the public sector and the increased emphasis on private enterprise in the present era of globalisation. The valuation of perquisites under r. 3 has been made on a notional basis with a view to ensure uniformity and to avoid needless, time-consuming and expensive litigation. The provision that existed in unamended r. 3 for taking into consideration fair rent while computing the value of rent- free accommodation in the case of public sector employees, has been deleted, thus, placing all public sector employees on par with all other employees not employed in the Government. The deletion of that special provision does not in any way violate Art. 14 as those employees have no special right to be treated as a special class.
The notional rent is taken as 10 per cent of the salary less rent actually paid by the employee, in cities with population of more than 4 lakhs, and 7.5 per cent of the salary less the rent actually paid in cities with population of 4 lakhs or below. The distinction made among cities based on the size of the population is in no way arbitrary. The lower percentage of salary taken as notional value of accommodation, in cities with less than 4 lakhs population is rational, as the cost of housing in the smaller cities tends to be less when compared to the cost of housing in bigger cities. The choice of the figure of 4 lakhs is a matter of discretion of the rule-making authority and so long as the discretion is not shown to be whimsical or grossly arbitrary, the choice made by that authority is to be accepted. The grievance of the petitioners with regard to the rate of interest fixed in r. 3 for the purpose of computing the value of perquisites by way of interest-free loan or loans at concessional rates of interest, for acquiring houses and for conveyance at 10 per cent and at 13 per cent for other loans reduced by the interest, if any, actually paid by the employees, also cannot be said to be so arbitrary as to warrant interference. It is always open to the employees not to avail of the loan from the employer, if the employees are of the view that the percentage of the interest fixed under this rule is excessive and that they can avail of loans elsewhere at a lower rate of interest. One of the indirect consequences of interest rates fixed in the amended rules, would be to dissuade employers from setting apart substantial funds to be made available to their employees by way of loan, as the funds of any organisation are meant to be primarily used for purposes for which the organisation is established. The fixation of interest rates at this level would also make salaried employees look elsewhere for loans, as in a competitive financial market, it may be possible for them to secure loans at a lesser rate of interest. As of now, interest rates have fallen to a level where housing loans are available from many financial institutions at a rate below 9 per cent. As the object of taxation is not merely to raise revenue for the Government, but also to shape economic policy, the Courts would be very slow to invalidate tax legislation—whether primary or delegated. Even if the rate of 13 per cent as the notional interest on loans for purposes other than housing and conveyance is capable of being regarded as excessive, the Court would desist from striking down that rule solely on that ground. One other minor point raised by the petitioners is that the exemption from taxation of the value of the rent-free accommodation where such accommodation is located in remote area, is vague. The relevant part of the rule is quite clear. Remote area has been spelt out in sufficient detail as a mining site, an on-shore oil exploration site, or site for project execution or an accommodation provided in an off-shore site or site of similar nature. Counsel for the Revenue brought to our notice the decisions rendered by the High Court of Karnataka and of the Jharkhand High Court in the cases of BHEL Employees’ Association vs. Union of India (2003) 180 CTR (Kar) 412 : (2003) 261 ITR 15 (Kar) and Tata Workers’ Union vs. Union of India (2002) 176 CTR (Jharkhand) 325 : (2002) 256 ITR 725 (Jharkhand), wherein the validity of the amendment to r. 3 had been considered and the amendment upheld. We agree with what has been stated therein. We do not find any merit in these petitions. The petitions are dismissed. Consequently, connected WPMPs are also dismissed.
[Citation : 269 ITR 390]
