Rule 3

Valuation of perquisites

The statutory background

3.1 The computation of income under the head ‘Salaries’ is required to be made under sections 15 to 17 of the Act. For this purpose, section 17(1)(iv) of the Act states inter alia that ‘salary’ includes ‘perquisites’. The term ‘perquisite’ is given an inclusive definition in section 17(2) of the Act, and the items relevant for the purposes of rule 3 are as follows :

 

u

Provision of rent-free accommodation to an employee by his employer.

 

u

Any concession in the matter of rent respecting any accommodation provided to the employee by his employer.

 

u

 Any benefit or amenity granted or provided free of cost or at concessional rate to ‘specified employees’ only.

Under section 295(2)(c) of the Act, the Board is empowered to frame rules for the determination of the value of any perquisite chargeable to tax under the Act in such manner and on such basis as appears to the Board to be proper and reasonable. Under these powers, the Board has prescribed rule 3 for the valuation of the aforesaid perquisites.

3.1-1 Rule is mandatory - When the statute provides for a uniform method of valuation of the perquisite, the statutory method should be adopted, and all the authorities functioning under the Act including the Tribunal are bound by the rules. It is not permissible to ignore or refuse to apply rule 3 on the ground that it is only directory - CIT v. K.S. Sundaram [1999] 105 Taxman 317 (Mad.).

3.1-2 The specified employees - The ‘specified employees’ referred to above, covers the following employees :

 

u

A director of a company who is also an employee of that company.

 

u

An employee of a company who has 20 per cent or more of voting power in that company.

 

u

Any other employee whose salary for the year, without taking into account any non-monetary benefits, deductions, and non-taxable portion of allowances, exceeds Rs. 24,000. This ceiling will apply to the aggregate salary in cases where salary is received from more than one employer.

What is a ‘perquisite’

3.2 Since the term ‘perquisite’ is given only an inclusive definition in the Act, its meaning in the broad sense will have to be understood. The term ‘perquisite’ generally signifies any benefit or amenity provided to an employee by his employer, either directly or indirectly, and either in cash or in kind, in addition to salary and wages.

3.2-1 Legal origin is necessary - A benefit or amenity can be granted by an employer to his employee either as ex gratia or under the terms of the contract of employment. In modern days, in the interest of ensuring smooth employer-employee relationship, such benefits or amenities are generally spelt out clearly in the contract of employment itself. At any rate, for tax purposes, it has by now becomes almost settled law that the benefit or amenity must have a legal origin, and cannot take within its ambit any unauthorised advantage availed by the employee. In the case of CIT v. C. Kulandaivelu Konar [1975] 100 ITR 629 (Mad.), the Court observed :

“. . . But there could be no doubt that in order to bring a benefit or advantage within the provision of section 17(2)(iii), it must have a legal origin and since any unauthorised advantage taken by an employee without the authority of the employer would create a legal obligation to restore such advantage, it would not amount to a benefit or advantage within the meaning of section 17(2)(iii) . . . .” (p. 634)

A similar view was earlier taken by the same High Court in the case of CIT v. A.R. Adaikappa Chettiar [1973] 91 ITR 90 (Mad.). The Court observed :

“. . . in our view, the benefit or perquisite obtained should be by some sort of arrangement with the company so as to attract section 2(6C)(iii) [of the 1922 Act] - If the submission that even unauthorised benefit would attract the said section is accepted, it would mean that even an article or money of the company misappropriated or forcibly taken against the wishes of the company by a director or other person referred to in that section will come within the scope of that section. The words ‘benefit or perquisite obtained’ from a company would take in, in our opinion, only such benefit or perquisite which the company had agreed to provide and which the person concerned could claim as of right based on such agreement and that a mere advantage derived from the company without its authority or knowledge will not amount to a benefit or perquisite obtained. We are not in a position to agree with the contention of the revenue that the word ‘obtained’ occurring in the said section need not be agreement-oriented, that the word ‘obtained’ merely meant ‘taken’ and that if the directors are in a position to take a benefit with a view to help themselves, even without the authority of the company or against its wishes, they will be governed by the above provision, and that both authorised and unauthorised benefits taken or received are to be treated alike for the purpose of this section. If the contention of the revenue is accepted, it will mean that an advantage taken by a director or other person without the authority of the company or against the wishes of the company will constitute a benefit or perquisite obtained from the company by such director or other person. If there is an unauthorised taking of an advantage or a benefit by a director from the company without its authority or knowledge, the company can always insist on the restitution of such advantage or benefit taken by a director and enforce the same legally in a court of law. In such cases there is a definite legal obligation to restore the advantage or benefit taken by a director without the authority of the company and it is not possible to hold that such advantage or benefit can be brought to charge.

Before a person could be said to have obtained a benefit or perquisite from a company, there should be some legal or equitable claim, even though it be contingent or contested in nature. A mere receipt of money or property which one is obliged to return or repay to the rightful owner as in the case of a loan or credit, cannot definitely be taken as a benefit or perquisite obtained from the company. The benefit or advantage which might have been taken by a director or other person from a company without any claim of right has to be repaid or returned to the company if the company discovers the unauthorised taking and seeks to enforce its restitution.” (pp. 97-98)

The aforesaid views were reiterated in the cases of M.M. Metha v. CIT [1979] 117 ITR 362 (Cal.)/CIT v. S.S.M. Lingappan [1981] 129 ITR 597 (Mad.)/CIT v. Late Jawaharlal Nagpal [1988] 171 ITR 136 (MP)/CIT v. Piara Singh [1997] 95 Taxman 587 (P&H).

3.2-2 Employee must have a vested right - One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein - CIT v. L.W. Russel [1964] 53 ITR 91 (SC).

3.2-3 Reimbursement of expenses not covered - The normal meaning of the word ‘perquisites’ denotes something that benefits a man by going ‘into his own pocket’, and will hence not cover reimbursement of actual expenses. It has a known normal meaning, namely, a personal advantage, which would not apply to a mere reimbursement of necessary disbursements - Owen v. Pook (Inspector of Taxes) [1969] 74 ITR 147 (HL). At any rate, rule 3, as its very opening sentence makes it clear, applies only to non-monetary payments made by an employer to his employee.

An overview of rule 3

3.3 Rule 3 first deals with the mode of valuation of the following specific perquisites :

 

u

Provision of rent-free residential accommodation - Clause (a).

 

u

Provision of accommodation at concessional rent - Clause (b)

 

u

Provision of free services of sweeper/gardener/watchman - Clause (ba)

 

u

Provision of conveyance (car, etc.) - Clause (c).

 

u

Provision of supply of gas/electricity/water - Clause (d)

 

u

Provision of free educational facilities - Clause (e)

 

u

Provision of free transport facilities - Clause (f).

Thereafter, there is a residual clause (g) which covers perquisites other than those specified above.

3.3-1 Non-taxable perquisites - Under executive instructions, the following items are not taxable as perquisites in the case of all employees, and hence no attempt need be made to value them under the residuary clause mentioned above :

 

u

Provision of lunch or dinner at subsidised rate.

 

u

Provision of refreshments during office hours in the office premises.

 

u

Refreshment during working hours provided outside the place of work (only an amount up to Rs. 35 per day will not be treated as perquisite provided the amount is paid by the employer directly to the caterer, restaurant, eating place, canteen, etc.)—Circular No. 706, dated 26-6-1995, as modified by Circular No. 727, dated 27-10-1995 [Annex 3.12].

 

u

Provision of recreational facilities for the employees as a group.

 

u

Provision of free or concessional transport in his own fleet by a transport operator to his employees and their families.

 

u

Provision of free passes and privilege passes by the railways/airlines to its employees - Circular No. 41, dated 27-10-1966. [Annex 3.9].

 

u

Amount spent on training of employees or expenses incurred on employee for his attending a training course or refresher course in management.

 

u

Free supply of rations to armed force personnel.

 

u

Concessional sale of goods manufactured by employer to employees.

 

u

Perquisites by Government to its employees working abroad.

 

u

Payment of annual premium by employer on personal accident policy effected by him for his employee.

 

u

Rent-free accommodation/conveyance facilities to Judges.

 

u

Sum payable by employer to pension or deferred annuity scheme.

 

u

Employer’s contribution to staff group pension scheme.

 

u

Sum payable to approved superannuation fund or Deposit Linked Insurance Fund established under Coal Mines Provident Fund or Employees Provident Fund.

 

u

Reimbursement of actual travelling expenses incurred by employee for business purposes.

 

u

Free holiday trips to non-specified employees.

 

3.3-2 CBDT’s general instructions - Rule 3, as totally recast, was notified on 28-2-1974. At that time, the CBDT issued general instructions in Circular No. 130, dated 16-3-1974, an extract of which is given in Annex 3.1.

Rent free accommodation

3.4 This perquisite is taxable in cases of all employees (specified or non-specified) clause (a) lays down the method of valuation of perquisite on account of provision of rent-free accommodation by the employer to the employee. The application of this clause is not restricted to cases where the accommodation is owned by the employer. It applies and must be applied even to cases where the employer takes accommodation on rent and then provides it to the employee on rent-free basis - CIT v.K.S. Sundaram [1999] 105 Taxman 317 (Mad.).

3.4-1 Necessity for employer-employee relationship - The provision of rent-free accommodation must be based on employer-employee relationship, and must also have arisen as a result of the posting of an employee at a particular place of duty. In CIT v. D.S. Blackwood [1989] 178 ITR 470 (Cal.), the assessee, an engineer, was an employee of a U.K. firm. The said concern was entrusted with the work under an agreement with the West Bengal State Electricity Board for erection of gas turbines at Kasba (Calcutta), Siliguri and Haldia. In connection with the aforesaid work, the U.K. firm deputed the assessee-engineer to India, from time to time, to supervise the erection work. While staying in India the assessee was provided with rent-free accommodation. The ITO was of the opinion that the rent-free accommodation provided by the foreign company was in the nature  of a perquisite. The High Court, however, held that the rent-free accommodation was provided by the foreign company to the assessee necessarily for the discharge of his official duty for which he was sent to India. Therefore, the assessee was not occupying the rent-free accommodation by virtue of his posting as an employee of the foreign company in Calcutta. Thus, the accommodation so provided was not perquisite.

In CIT v. Lakshmipati Singhania [1973] 92 ITR 598 (All.), the assessee was appointed as financial adviser of the company not under any contract but by means of a Board’s resolution containing no terms and conditions under which he had to work and the assessee was allowed rent-free accommodation. The Court held that the assessee was not a servant of the company, and hence, the value of rent-free accommodation was not assessable under the head ‘Salaries’.

3.4-2 Physical occupation is not necessary - The valuation of the perquisite must be made for the entire period during which the accommodation has been placed at the disposal of the employee, without making any exclusion towards periods of leave or official tours during which the employee has not physically occupied the building - CBDT Instruction No. 1146, dated 27-1-1978 [Annex 3.6]. Similarly, where an employee has been provided with rent-free accommodation by his employer, but the employee has neither used the accommodation as his residence nor has forgone or waived the right to enjoy the benefit, it was held that there would nevertheless be a taxable perquisite. In the case of CIT v. Bawa Singh Chauhan [1984] 150 ITR 8 (Delhi), the Court observed :

“A combined reading of sections 15 and 17 is that the salary would include amongst other things perquisites. Clause (2) of section 17 gives a further inclusive definition of perquisite as including the value of rent-free accommodation provided to the assessee by his employer. By this legal fiction, the salary is made to include the value of rent-free accommodation provided to the assessee by his employer. This would bring to charge as a perquisite the value of rent-free accommodation. On facts it is found that the rent-free accommodation was provided to the assessee by his employer. The only question is that the assessee had not utilised the rent-free accommodation provided to him. The statute has used the word ‘provided’ which means making it available for the use of the assessee. There may be circumstances under which the employee may not make use of the rent-free accommodation provided to the assessee. In our opinion, unless the assessee forgoes his right of the provision of rent-free accommodation provided to the assessee by his employer or waives his right before the income accrues, the notional income has to be brought to charge as a perquisite equivalent to the value of rent-free accommodation.” (p. 10)

3.4-3 When the employer is  a foreign employer - Where the services of a medical officer in the employment of a State Government was sponsored by the Government for employment under a foreign Government, and the foreign employer provided him with rent-free accommodation during his stay abroad, the value of the perquisite is taxable in his hands, since it is an ‘income’ as defined in section 2(24) - CIT v. Dr. K.L. Parekh [1994] 208 ITR 965 (Raj.).

3.4-4 When employer directly pays rent to landlord - In CIT v. Jagadish Prosad Goenka [1992] 196 ITR 15/64 Taxman 580 (Cal.) the assessee was a director of a company and as per terms of an agreement with the company, he was entitled to rent-free accommodation. He was occupying a premises on rent as a tenant. As per terms of the aforesaid agreement, the company paid rent on behalf of the assessee directly to the landlord. For the assessment year 1982-83, the assessee computed the perquisite value under section 17(2)(i). However, the ITO applied the provisions of section 17(2)(iv) on the ground that the assessee as the actual tenant was under an obligation to pay rent and completed the assessment. It was held that the company, being the employer of the assessee, had been paying rent directly to the landlord as the assessee was entitled to rent-free accommodation as an employee which the company was under an obligation to provide under the terms of the agreement of the company with the assessee. Accordingly, there was no scope for the application of the provisions of section 17(2)(iv). The assessee’s computation of the perquisite value of the accommodation under section 17(2)(i) was correct.

3.4-5 Relevance of rent control legislation - In Murlidhar Dalmia v. CIT [1981] 129 ITR 67 (Delhi), the court held that section 17(2) of the Act and rule 3 do not require to give any regard to the Rent Act and that these provisions lay down their own measure, their own yardstick, their own formula, to determine the value of a perquisite once it is held that the premises were given at a concessional rent by the master to the servant. In this case the assessee was provided, in 1935, residential accommodation owned by the employer at a rent of Rs. 25 per month. It was a fully furnished bungalow with 16 rooms and an attached garden with free water, electricity and the services of a gardener. Even in 1935, it could not be had on a rent of Rs. 25 per month. There was no tenancy agreement or lease deed. The ITO found that the accommodation was provided on a concessional rent and valued it at 12.5 per cent of employee’s salary. It was contended that the assessee was a tenant and his case was governed by the provisions of rent control law which did not permit any increase in rent. The Court held that the assessee was not a tenant but a licensee and the rent control law did not apply. The value of the perquisite was correctly determined. In arriving at this finding, the Court relied, among others, on the following observations of Denning L.J. in Torbett v. Faulkner :

“A service occupation is, in truth, only one form of licence. It is a particular kind of licence whereby a servant is required to live in the house in order to do his work better... If a servant is given a personal privilege to stay in a house for the greater convenience of his work, and it is treated as part and parcel of his remuneration, then he is a licensee, even though the value of the house is quantified in money; but if he is given an interest in the land, separate and distinct from his contract of service, at a sum properly to be regarded as a rent, then he is a tenant, and  nonetheless a tenant because he is also a servant. The distinction depends on the truth of the relationship and not on the label which the parties choose to put upon it.”

The latest thinking on the subject has been well explained in the case of M.A.E. Paes v. CIT [1998] 230 ITR 60/98 Taxman 380 (Bom.).

In M.A.E. Paes’ case, it was held that on a careful perusal of rule 3(a)(iii) of the Rules and the decisions of the Supreme Court the fair rental value of an accommodation has always to be determined with reference to the standard rent payable under the Rent Control Act applicable to the area where the accommodation is situated. The fair rental value for the purpose of the perquisite can in no case exceed the standard rent determinable on the principles laid down under the Rent Control Act. The assessing authority would have to arrive at its own figure of standard rent by applying the principles laid down under the Rent Control Act for determination of the standard rent and determine the fair rental value of the accommodation on the basis of such figure of standard rent.

The expression ‘rent which a similar accommodation would realise in the same locality’ appearing in Explanation 2 to rule 3(a)(iii) has to be construed only to mean the ‘standard rent’, because no property can be expected to realise any rent higher than the standard rent as that would be in breach of the provisions of the Rent Control Act. Moreover, the expression used in rule 3(a)(iii) is ‘fair market value’. The use of the word ‘fair’ is a clear indicator that it is not the prevailing market rent but the ‘fair rent’ which can never be more than the ‘standard’ rent. If no standard rent has been fixed in respect of particular premises either because it is in the occupation of the owner or his employees or for any other reason and the Assessing Officer wants to adopt a figure other than the municipal valuation, he will have to determine the standard rent himself by applying the principles laid down in the Rent Control Act and if that figure is higher than the municipal valuation, it will be within his powers to accept the same and to determine the value of the perquisite under rule 3(a)(iii) of the Rules at such higher rate.

3.4-6 Meaning of ‘salary’ - In most cases, the salary of the employee forms one of the items that is relevant for the valuation of the perquisite. Under Explanation 1 to clause (a), ‘salary’ includes the pay, allowances, bonus or commission payable monthly or otherwise, but does not include—

 

(i)

dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the assessee concerned;

 

(ii)

employer’s contribution to provident fund;

 

(iii)

allowances which are exempt from tax;

 

(iv)

deductible portion of entertainment allowance.

Some decided cases have been reported on the question of inclusion of certain items in ‘salary’ for the purpose of computing the value of the perquisite, and these cases are explained below :

3.4-6a When salary is received from more than one employer - For evaluating under rule 3 the value of rent-free quarters, term ‘salary due to the assessee’ would refer to aggregate salary due from more than one employer even if rent-free accommodation is provided by only one of the employers - CIT v. Mohanlal Jalan [1989] 43 Taxman 246 (Bom.).

3.4-6b Salary’ includes income-tax borne by the employer - In North British Railway Company v. Scott [1928] 8 TC 332 (HL), a railway officer had, by contract, a salary which was to be paid free of tax, and it was held that the effect was that the real salary was the sum which after deduction of the tax from it would leave the sum which was expressed to be payable to him as salary free of tax. In other words, the House of Lords held that the fact the sums paid by the railway company were not deducted from the salary increased the salaries of the officers of the railway company; and the salaries received by the officers must be deemed to be not only the salaries paid into their hands, but also the sums paid on his behalf to the revenue. Citing reference to this decision, the Kerala High Court held in the case of CIT v. C.W. Steel (No. 2) [1972] 86 ITR 821 that income-tax borne by the employer has to be treated as part of ‘salary’ for the purpose of valuing rent-free accommodation under rule 3. Similar views were expressed in the cases of CIT v. I.G. Mackintosh [1975] 99 ITR 419 (Mad.) and Symonds Distributors (P.) Ltd. v. CIT [1972] 86 ITR 88 (All.). The view was once again confirmed by the Bombay High Court in the case of CIT v. H.D. Dennis [1982] 135 ITR 1 (Bom.), where the Court has exhaustively dealt with the issue. The court took due note of the earlier decisions on the subject (including those by the House of Lords) and observed as follows :

“. . . the purpose of rule 3 is to lay down the mode of valuation of the perquisite for the purpose of computing the income chargeable under the head ‘Salaries’ under section 15 of the Act. The definition of the word ‘salary’ given in section 17, as the section itself shows, is for the purposes of sections 15 and 16 of the Act. It is, therefore, legitimate to presume that the Legislature did not intend to give a different meaning to the word ‘salary’ in rule 3 from that given in section 17 of the Act. Therefore, the two definitions will have to be construed as co-extensive in their scope except so far as there is an express exclusion of some of the payments which otherwise go with the word ‘salary’.

Thirdly, the purpose of giving a separate definition of salary in rule 3 appears to be to exclude certain kinds of payments which are otherwise covered by the word ‘salary’. This is obvious from the fact that the definition of salary given in the said rule excludes from its ambit only certain allowance, viz., dearness allowance or dearness pay, unless it enters into the computation of superannuation or retirement benefits of the employee, employer’s contribution to the provident fund account of the assessee and allowances which are exempted from the payment of tax. If the Legislature did not want to exclude the said allowances and contributions it would not have been necessary to give a separate definition of salary under the said rule. Therefore, it is more than obvious that the said definition given in rule 3 is co-extensive with the definition given in section 17 of the Act, except so far as there is an express exclusion therefrom of the kind of payments mentioned. Next the definition of salary given in the said rule 3 includes pay. The dictionary meaning of the word ‘pay’ includes all periodical payments for services rendered. Thus, the word ‘pay’ is nothing but salary and it is synonymous with it. Hence, the tax paid by the employer on behalf of the employee would amount to a payment to him for the services rendered by him. Hence, both the words ‘salary’ and ‘pay’ would include such tax paid by the employer on behalf of employee. Our attention was invited in this connection to two English decisions, viz., (1) North British Railway Company v. Scott [1922] 8 TC 322 (HL) and (2) Hartland v. Diggines [1926]  10 TC 247 (HL), wherein it has been held that the word ‘salary’ would in its natural import comprehend within it taxes paid on behalf of the employees. In the first case, it was a  contract entered into by the company with its employees to pay the salary free of income-tax which fell for consideration and what was debated was whether the taxes paid by the company under the said contract would come within the words ‘fees, emoluments or salary’. It was held that the sum paid by the company is not a sum outside of the officer’s salary or independent of it, but is a part of his salary, and if the employer did not set off this sum against the employee’s salary, the latter would simply pocket the full salary, his debt to the revenue having been paid by another, not by himself, that his all. In the second case, in accordance with the custom, the income-tax payable by the employee was paid by the employer-company. It was held that ratio in the earlier case would equally be applicable notwithstanding the fact that there was no specific agreement between the employer and the employee to pay the salary free of income-tax. It was emphasised in this case that in effect what the employee has received is the money paid into his hands plus the immunity i.e., the immunity from paying the tax. The substance of the matter was that the salary paid to the employee is not all that he received. He had received, in addition, money’s worth to the extent of the sum which was paid in respect of that salary to the revenue. With respect, we are in complete agreement with the view expressed in the said decisions and/or of the view that the income-tax paid on behalf of the employee would be a part of the salary of the employee by the mere connotation of the expression ‘salary’. There is also no reason why the tax so paid by the employer would not amount to an allowance even if it is held that it did not form part of his salary, and admittedly the said rule does not exclude from the definition of salary the allowance of the kind paid in the present case. . . .” (pp. 11-13)

The CBDT has also taken the view that tax borne by the employer forms part of salary for the purposes of rule 3 - Letter F. No. 35/50/65-IT(B), dated 27-4-1966 [Annex 3.7].

3.4-6c ‘Salary’ includes certain items  - In CIT v. C.W. Steel (No. 2) [1972] 86 ITR 821 (Ker.), the Court held that electricity allowance and profession tax reimbursed by the employer have to be taken into account in determining the quantum of salary of the assessee for the purpose of computing the value of the rent-free accommodation. However, the use of employer’s car by the assessee is not an allowance within the meaning of the definition of salary and it has to be excluded in computing the assessee’s salary.

3.4-6d Sumptuary allowance not includible - The CBDT have clarified that sumptuary allowance, to the extent to which it is deductible in computing salary income, will not form part of ‘salary’ for the purpose of rule 3 - Letter F. No. 35/32/66-IT(B) dated 24-9-1966 [Annex 3.8].

3-4-6e Conclusion - The following chart gives in a nutshell the items to be included and the items to be excluded from the term ‘salary’:

Items to be included

Items to be excluded

Basic pay

Dearness allowance, if it is not taken into account for computing retirement benefits, or if it does not form part of salary according to terms of employment.

Dearness  allowance, if the terms of employment so provides

Employer’s contribution to provident fund

Other allowances which are not exempt from tax

Other allowances which are exempt from tax

Bonus or commission or fees

Entertainment allowance, to the extent deduction is admissible thereon

Taxes borne by the employer

Value of perquisites

Electricity/gas/water expenses paid or reimbursed by the employer to his employee

 

 

While computing salary for the purpose of valuation of perquisite in respect of rent-free accommodation, salary, bonus, etc., are included on ‘due’ basis. Again it may be noted that salary of the period during which rent-free accommodation is not occupied by the employee, will not be considered.

3.4-7 How to compute the value - For computation of perquisite value of rent-free residential accommodation, all employees are divided in the following three categories :

u Central and State Government employees

u Semi-Government employees

u Private Sector employees

Government employees

Value of perquisite

This category includes :

Standard rent chargeable under the relevant Government rules.

u Central and State Government Employees

u Government employees whose services have been lent to a public sector undertaking or a Government body, the accommodation itself having been allotted to such body or undertaking by the Government.

 

 

 

Semi-Government employees

 

This category includes, employees of—

10 per cent of the salary of the employee.

a.

Reserve Bank of India;

 

b.

a  corporation  established by a Central, State or Provincial Act or its  wholly  owned  subsidiary company;

 

c.

a company in which all the shares (whether singly or taken together) are held by the Government or Reserve Bank of India or a corporation owned by that bank, or its wholly owned subsidiary company;

 

d.

a body or undertaking, including a society registered under the Societies Registration Act, 1860, financed  wholly  or  mainly  by  the Government; and

 

e.

a company [other than a corporation referred to in (b) and (c) above] in which not less than 40 per cent of the shares are held (whether singly or taken together) by the Government or Reserve Bank of India, provided the employee is a retired Government Officer or a Government Officer on deputation.

 

As an exception to this general rule, in the cases cited above where the perquisite is to be valued at 10 per cent of the salary, if the employee is of the opinion that the fair rental value of the accommodation provided to him is less than 10 per cent of his salary, he can, make a claim before the Assessing Officer at the assessment stage or through his return of income that the fair rental value may be adopted as the value of the perquisite.

 

 

Value of the perquisite

 

Other employees, i.e.,

Accommodation

Accommodation

 

Private Sector

situated in Bombay,

situated in other

 

Employees

Calcutta, Delhi or

places

 

 

Madras

 

u

Fair rental value is less than 10 per cent of the salary of the employee

Fair rental value

Fair rental value

u

Fair rental value is 10 per cent of salary or more but not more than 60 per cent of the salary of the employee

10 per cent of the salary of the employee

Not applicable

u

Fair rental value is more than 60 per cent of the salary of the employee

Fair rental value minus 50 per cent of the salary of the employee

Not applicable

u

Fair rental value is 10 per cent of salary or more but not more than 50 per cent of the salary of the employee

Not applicable

10 per cent of the salary of the employee

n

Fair rental value is more than 50 per cent of the salary of the employee

Not applicable

Fair rental value minus 40 per cent of the salary of the employee

 

Refer also to CBDT circulars at Annexes 3.2 to 3.4

3.4-8 What is fair rental value - Fair rental value is the rent which a similar accommodation would fetch in the same locality, or the municipal valuation of the accommodation, whichever is higher.

Where accommodation is subject to the Rent Control Act, the fair rental value as determined above, cannot exceed the standard rent determined (or determinable even if not fixed) under the Rent Control Act.

Where the accommodation is owned by the employer, expenses incurred by the employer on maintenance of garden attached to the accommodation (inclusive of salary of gardener), will also to be taken into account - See Circular No. 122, dated 19-10-1973 [Annex 3.10].

However, if such accommodation is not owned by the employer and the employer provides facility of gardener, etc., to the employee, salary paid to gardener will not enter into the computation of fair rental value, but will be taken as perquisite in employee’s hands.

Illustrations

1. X provides a rent-free house to his employee. Municipal valuation of house is Rs. 60,000 and rent of similar house in same locality is Rs. 65,000.

In above case, fair rental value will be Rs. 65,000.

2. If in case above, property being subject to Rent Control Act, the standard rent fixed under Rent Control Act is Rs. 60,000.

In such a case, fair rental value will be Rs. 60,000.

However, if standard rent fixed under Rent Control Act is Rs. 70,000, then the fair rental  value will be Rs. 65,000.

3. If in case 1 above accommodation is owned by the employer and the employer also provides services of gardener (salary : Rs. 5,000) to look after the garden attached to the accommodation. In such a case fair rental value will be Rs. 70,000 (Rs. 65,000 + Rs. 5,000).

If, however, the house is not owned by the employer in case 1 above, the salary paid to gardener will not be added to fair rental value of Rs. 65,000; however, perquisite in respect of free gardener would be taxable under rule 3(ba) [see para 3.7].

3.4-9 Additions to be made if the accommodation is furnished - The value of the perquisite calculated as above will represent the value for unfurnished accommodation only. Where the accommodation is furnished by the employer (i.e., by way of sofa sets, cots, dining table, T.V. set, radio, refrigerators and other household appliances) the value of the perquisite computed as if it is an unfurnished accommodation should be increased to the following extent :

u

Where the furnishings are owned by the employer

10 per cent per annum of the original cost of the furnishings

u

Where  the  furnishings are taken on hire by the employer

Hire charges borne by the employer.

Illustrations

1. An employee working in the private sector in Delhi, is getting basic pay of Rs. 3,000 p.m. In addition, he is paid dearness allowance of Rs. 1,500 p.m. (50 per cent of which counts for retirement benefits), conveyance allowance of Rs. 1,000 p.m. (which is exempt from tax), and entertainment allowance of Rs. 500 p.m. (which is taxable). He has been provided by the employer with a furnished accommodation, having fair rental value of Rs. 40,000 per annum. Cost of furnishings owned by the employer is Rs. 10,000.

The value of the perquisite will be worked out as follows :

‘Salary’ will include, apart from basic pay, 50 per cent of dearness allowance, and entertainment allowance. It will work out for one year to  : (3,000 + 750 + 500) × 12 = Rs. 51,000. Since fair rental value (Rs. 40,000) is more than 60 per cent of salary (Rs. 30,600), the value of the perquisite for unfurnished accommodation will be :

Rs. 40,000 minus 50 per cent of Rs. 51,000 i.e.,

Rs. 14,500

Add : 10 per cent of the original cost of furnishings

Rs.   1,000

Total value of the perquisite

Rs. 15,500

 

2. An employee working in the private sector in Pune, is getting a basic pay of Rs. 2,000 p.m., dearness allowance of Rs. 1,000 p.m. which does not count for computing retirement benefits, and city compensatory allowance of Rs. 200 p.m. He is also getting a bonus of Rs. 4,000 per annum. He has been provided with a furnished accommodation by his employer, the fair rental value of which is Rs. 20,000 per annum. The employer had taken the furnishings on hire, and was paying the hire charges of Rs. 3,000 per annum.

The value of the perquisite will work out as follows :

‘Salary’ will not include dearness allowance, but will include city compensatory allowance and bonus. It will work out for the year to : (2,000 + 200) × 12 + 4,000 = Rs. 30,400.

Fair rental value (Rs. 20,000) being more than 50 per cent of salary (Rs. 15,200), value of perquisite for unfurnished accommodation will be Rs. 20,000 minus 40 per cent of Rs. 30,400.

 

 

Rs.   7,840

Add : Hire charges of furnishing

Rs.   3,000

Total value of the perquisite

Rs. 10,840

 

Provision of accommodation at concessional rent

3.5 Where the employer provides residential accommodation to an employee at a concessional rent, the value of the perquisite should first be calculated as if the residential accommodation is provided rent-free. From the value so arrived at, the rent actually paid by the assessee should be deducted, so as to arrive at the value of taxable perquisite. [Clause (b) of rule 3].

Rule 3(b) deals with the mode of computing the value of residential accommodation provided at a concessional rate. The term ‘concessional’ has not been defined in rule 3(b) and no guidelines are set out as to the circumstances in which a concession can be regarded as having been made - All India Union Bank Officers’ Federation v. Union Bank of India [1999] 155 CTR (Mad.) 28.

3.5-1 Some ‘concession’ must be present - The question of evaluating the perquisite in the form of provision of accommodation at concessional rent will arise if the employer has in fact given any ‘concession’ in the matter of rent. Merely because rent recovered from the employee-tenant was less than 10 per cent of his salary, it cannot automatically be concluded that a taxable perquisite had arisen.

3.5-2.  The Bhilai Steel Plant case - In the case of Officers Association, Bhilai Steel Plant v. Union of India [1983] 139 ITR 937 (MP), the High Court made it clear that the question of application of rule 3(b) would arise only after it is established that a ‘perquisite’ had been allowed. If the employer gave no concession in the matter of rent, there could be no question of any perquisite. The High Court emphasised that if the rent of the accommodation was fixed (as in the case of standard rent) irrespective of the person who occupied it, the difference between 10 per cent of salary and the fixed rent paid by the employee could not be said to be any perquisite, and that in such cases it could not be said that the employee was granted any concession in the matter of rent. The High Court went on to observe that the question whether the employee was in receipt of any concession in the matter of rent would depend upon two factors : (i) the normal rent for the accommodation in occupation of the employee, and (ii) rent actually paid by the employee. The High Court held that the employer was not right in treating in every case the difference between 10 per cent of the salary and the rent actually paid as a perquisite for the purposes of deduction of tax at source.

3.5-3 The Indian Bank/Vijaya Bank Cases - In the case of Indian Bank Officers Association v. Indian Bank [1994] 209 ITR 72/75 Taxman 376, the question was whether the employer was justified in treating the difference between 10 per cent of salary and the standard rent paid by the employees as a perquisite for purposes of deduction of tax at source. The High Court cited with approval the judgment in the case of Bhilai Steel Plant (supra), and observed, (i) that the question of concession must be determined with reference to the nature of accommodation provided, the normal rent payable in respect of such accommodation by other employees similarly situated and lastly, the actual rent paid by the employee concerned, (ii) that the standard rent as fixed by the government or other authorities is acceptable as the normal rent for the purpose of determining the question of concession, (iii) that the question of perquisite must be determined before the question of computing the value of such perquisite arose, and (iv) that, by following the method of valuation provided, the income-tax authorities could not determine the existence of the perquisite. In the case of ITO v. All India Vijaya Bank Officers Association [1997] 225 ITR 37,  the Division Bench affirmed the view taken in Indian Bank Officers Association’s case (supra), and reiterated that accommodation provided to the employees on payment of standard rent was not a concession so as to be included within the meaning of a ‘perquisite’, and that rule 3(b) could not be invoked in such cases.

3.5-4 The Rashtriya Ispat Nigam case - In the case of Steel Executives Association v. Rashtriya Ispat Nigam Ltd. [2000] 241 ITR 20/109 Taxman 127, the employer-respondent had provided quarters to its employees and recovered standard rent from them. Though the employer did not treat this as a taxable perquisite for purposes of deduction of tax at source, the Assessing Officer directed the employer to treat the difference between 10 per cent of salary and the standard rent as a taxable perquisite. The High Court analysed the issue in detail and substantively agreed with the decisions taken earlier by the Madhya Pradesh High Court and the Calcutta High Court to the effect that there was no taxable perquisite. Some of the observations of the High Court, detailed below, are worth notice :

 

 

u

It is necessary for the revenue to first establish that the rent charged is a concessional rent, before valuing the same under rule 3(b).

 

u

The argument of the revenue that, with reference to the fair market value of the accommodation, there was a concession in rent, cannot be accepted as a material indicating any concession, since the fair market value cannot be taken as a comparable factor in cases where the employer constructs a large number of residential houses for its employees in a particular location to suit its convenience.

 

u

The only relevant factor to be considered is whether a single employee gets a concession compared to other employees in respect of the same type of accommodation.

 

u

There can be no concession at all where all the employees are treated alike and standard rent is charged in respect of the same type of accommodation.

 

u

This is a case where the departmental officers have misunderstood the meaning of the concession. Such a misunderstanding would surely have been dispelled if only they had taken a moment to consider their own salary bill to realise that in an identical situation they are not considered to be having any concession, even though they are paying standard rent which is much less than 10 per cent of their salary.

 

u

The department cannot coerce the employer into deduction of tax at source on an amount which is in dispute as a perquisite by the employer.

 

3.5-5 Where employer derives corresponding benefit - Where the assessee-employee had been allowed concession in rent in respect of accommodation provided by his employer, and the employee had made an interest-free deposit with the employer, the extent of interest foregone by the employee must be taken into account while determining the value of the perquisite - CIT v. Ashraf-Ur-Rehman Azimullah [1994] 73 Taxman 105 (Bom.).

What is required to be treated as perquisite when a residential accommodation is provided to an employee by an employer is the value thereof in cases where the accommodation has been provided rent-free, as also in cases where the accommodation is provided at a concessional rate. Where an employer provides accommodation to its employees on a rental basis which is not concessional and which obviously is not provided rent-free, it is the actual rent that is required to be considered and not a notional rent. An employer, who builds residential building and apartments for the purpose of accommodating his employees does not do so as an investment with the object of obtaining highest monetary benefit by way of rent, but merely as a facility for his employees with a view to provide them with the basic comforts without which they may be unwilling to remain in the employment of the employer or may feel dissatisfied, which may effect their morale and ultimately productivity of the organisation. The difference between the market rate of rent of such accommodation, if the employer had to hire similar accommodation for the employee and the rate which the employee pays to the employer for occupying the accommodation owned by the employer, cannot be treated as a perquisite - All India Union Bank Officers’ Federation v. Union Bank of India [1999] 155 CTR (Mad.) 28.

Free Boarding/Lodging facilities

3.6 Where an employer incurs expenditure on the provision on food or other beverages to his/its employees, whether at the place of work or outside the place of work but during working hours, it has been clarified that, in hands of the employees, the amount upto Rs. 35 per day will not be treated as income, provided the amount is paid by the employer directly to the caterer, restaurant, eating place, canteen etc. - Circular No. 727, dated, 27-10-1995 [Annex 3.12].

In the case of hotel employees provided with free boarding and lodging in the hotel premises itself, the perquisite is required to be valued under rule 3(a)(iii) (in respect of  lodging),  and  rule  3(g)  (in  respect  of  boarding)  -  Circular  No.  311, dated 24-8-1981  [Annex 3.5].

Provision of sweeper/gardener/watchman

3.7 Under rule 3(ba), inserted with effect from 2-6-1995, the benefit to an employee resulting from the provision of free services of a sweeper, a gardener or a watchman by the employer, shall be valued at Rs. 120 per month per person. Earlier, the valuation of this perquisite was governed under executive instructions [see Annex 3.10].

In case of any other domestic servant, entire salary paid by employer to servant shall be taxable.

Note : If a domestic servant is engaged by the employee and salary is paid or reimbursed by the employer, the perquisite is taxable in the hands of all employees (specified as well as non-specified) under section 17(2)(iv). If, however, a domestic servant is engaged by the employer, the perquisite thereof is taxable in the hands of only specified employees under section 17(2)(iii).

Provision of motor car

3.8 Except where otherwise stated, the question of taxability of perquisite; the shape of provision of car will arise only in case of specified employees. Where an employee is provided with a motor car by his employer, whether exclusively for his personal use or partly for official use and partly for personal  use, the value of the perquisite is to be computed in accordance with clause (c) of rule 3. The use of the car by the employee for private purpose must have been authorised under the contract of employment between the employer and the employee. It has been held that any unauthorised user of the car owned by the employer by the employee could not constitute a perquisite under section 17 - CIT v. A.R. Adaikappa Chettiar [1973] 91 ITR 90 (Mad.) and CIT v. Jawaharlal Nagpal [1988] 171 ITR 136 (MP).

3.8-1 Mode of valuation - The manner of valuation is presented below in tabular form :

Car owned or hired by employer

Value of the perquisite

 

Maintenance and running charges met by

Car used wholly for private purposes by employee

Car used partly for official and partly for private purposes by employee

Car used solely for official purposes

Employee

Value of normal wear and tear   of   the   car   or   hire charges,  plus,  if chauffeur is provided at   employer’s expense,         remuneration paid to chauffeur

Proportionate value of normal wear and tear or hire charges (as well as chauffeur’s remuneration). If determination of such value presents difficulties, at the following rates

Nil

 

 

  Small car: Rs. 200 p.m.

 

 

 

  Big car : Rs. 300 p.m.

 

 

 

  Chauffeur : Rs. 300 p.m.

 

Employer

Expenditure   incurred    by employer for maintenance and   running   of car  plus value  of  normal wear and tear or hire  charges (as the case  may  be)   plus  remuneration  paid  to chauffeur

Reasonable    proportion    of sum     actually      spent     by employer   for   maintenance and      running,     value     of normal   wear   and   tear   or hire    charges    (as    well   as chauffeur’s     remuneration) If     determination    on    this basis     presents    difficulties, at the following rates :

Nil

 

 

Small car : Rs. 600 p.m.

 

 

 

Big car : Rs. 800 p.m.

 

 

 

Chauffeur : Rs. 300 p.m

 

 

Notes :

1. ‘Small car’ is one whose h.p. rating does not exceed 16. ‘Big car’ is one whose h.p. rating/engine capacity exceeds 16 h.p.

2. ‘Month’ means a completed month according to the English calendar, any part of the month should be ignored.

3. Where no particular car is placed at the disposal of the employee but he is allowed to use one or more cars out of a pool of cars, and any of such cars is a ‘Big car’, valuation will be on basis of ‘Big car’.

4. User of employer’s vehicle for purposes of going from his residence to place where duties of employment are to be performed or from such place back to his residence cannot be taken as user for private purposes and will not be a taxable perquisite.

5. Conveyance facility provided to Judges of High Courts/Supreme Court is exempt from tax.

Car owned by employee

Perquisite , if any, will be taxable in case of all employees. Taxability will be on the following basis :

 

 

 

Value of perquisite

u

Where   car   expenses  are  met  by employee

Nil

u

Where  maintenance   and  running expenses  are  met  by  employer

 

 

-If  car  is  used wholly  for  official  purposes

Nil

 

-If  car  is  used  wholly  for private purposes

Actual expenditure incurred by employer

 

-If  car  is  partly  used  for  official purposes  and   partly  for  private purposes

A reasonable proportion of sum actually incurred by employer which in Assessing Officer’s opinion can reasonably  be attributed to use of car for private purposes

 

 

 

 

 

 

 

3.8-2 Provision of car at a concessional rate - This perquisite is taxable only in cases of specified employees. In some cases, the employer may provide the amenity of a car to the employee, but recover some amount from the employee at a fixed rate to cover the cost of the personal use of the car. In such cases, the value of the perquisite should first be determined as if the amenity has been allowed free of cost, and from the amount so arrived at, the amount recovered from the employee should be deducted, so as to arrive at the taxable value of the perquisite.

Provision of conveyance other than car

3.9 The value of the perquisite in cases where the employer provides any conveyance other than a car to an employee will be determined as so much of the sum actually expended by the employer on the maintenance and running of the conveyance (where the conveyance is owned by the employer, the value of the normal wear and tear of the vehicle should also be added) which, in the opinion of the Assessing Officer can reasonably be attributed to the user by the assessee for purposes other than in the performance of the duties.

Free supply of gas, electricity or water for household consumption

3.10 If the employer arranges free supply of gas, electric energy or water for household consumption by the employer, the value of the perquisite will be determined as follows, under clause (d) of rule 3 :

u

Where such supply is made from re-sources owned by the employer without purchasing them from any other outside agency (like supply of electric energy by an Electricity Board to its employees)

Nil

 

u

Where supply is made by purchasing them from outside agencies:

 

 

-If  the  items   are  for  private  use by the employee

Amount paid by employer to the supplying agency

 

 

 

 

-If   the  Assessing   Officer  is satisfied that the items are consumed by employer also for the purpose of his official duties

Amount paid by employer to the supplying agency or 6¼ per cent of the salary of the employee, whichever is less

 

 

 

 

‘Salary’ for above purposes will include basic pay, dearness allowance (if terms of contract  of employment so provides) and commission. [Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1 (SC)].

It may be noted that where gas, electricity and water connection is in the name of the employee, perquisite will be taxable in case of all employees. Where, however, the said connections are in the name of the employer, perquisites will be taxable only in cases of specified employees.

Free education

3.11 Taxability of this perquisite, as laid down in clause (e) of rule 3 is as follows :

 

 

Value of perquisite

uAmount spent by employer for training/ educating employee

Nil

Fixed allowance paid to employee

Exempt to the extent of Rs. 100 per child per month (maximum of two children)*

uReimbursement  of  school fees or other educational expenses

Sum so paid

uEducation facilities to employee’s family members in an institution maintained by employer

Reasonable cost of education in a similar institution in or near the locality

 

*Note : Any allowance granted to an employee to meet hostel expenditure of his child is exempt from tax to the extent of Rs. 300 per month per child for a maximum of two children.

See  also Annex 3.8A.

Free transport

3.12 The  basis  of  valuation  of  such  a  perquisite  as  laid  down  in  clause  (f) of rule 3 is as follows :

u Transport facility provided by a transport undertaking engaged in carriage of goods or passengers to any employee and dependent family members of the employee (including dependent relatives), either, free of charge or at concessional rate, is not taxable provided conveyance used for this purpose is owned by the employer. Accordingly, the facility of granting privilege passes and privilege tickets to the railway employees and similar facility made available to the employees of Air India and Indian Airlines, is not taxable.

u In other cases, the actual amount spent by an employer is taxable, under section 17(2)(iii) as a perquisite.

3.12-1 Privilege passes - The CBDT had clarified that ‘no attempt should be made to include under the head ‘Salaries’ in the assessment of railway employees, any sum on account of the issue of privilege passes or privilege ticket orders’ - Circular No. 41, dated 27-10-1956 [Annex 3.9].

Any other benefit

3.13 Under clause (g) of rule 3, the value of any benefit or amenity which is not covered in the preceding paragraphs, is to be determined on such basis and in such amount as the Assessing Officer considers fair and reasonable. Such a benefit or amenity must necessarily be non-monetary in character, since rule 3 deals with perquisites not provided for by way of monetary payment to the assessee. There may be cases where monetary payment by employer is involved, but such payment is made to a third party resulting in some benefit to the assessee, or some concession is granted by the employer to the assessee. Such cases will fall under this residuary category only. Some examples of such cases are explained in the succeeding paragraphs.

3.13-1 Grant of loans to employees at a concession - This will normally be a ‘benefit’ to the employee, and will hence be a taxable perquisite only in the case of ‘specified employees’. In the year 1984, a provision was inserted in the Act to tax the perquisite in cases where the employer advanced any loan to an employee for building a house, or purchasing  a site or a house, or for purchasing a motor-car, and such loan carried either no interest or interest at concessional rates. However, this provision was later deleted before it came into operation. Interpreting this deletion, one High Court observed that the law-makers thought that, but for the above-said provision, there was no provision to treat such a loan as a benefit and a perquisite, and that ‘it was never intended to treat the interest free loan advanced to the employee for house building purposes as a perquisite under section 17(2)(iii)’ - CIT v. M.K. Vaidya   [1997] 224 ITR 186 (Kar.). It has, therefore, to be inferred that, where loans are granted by employers to employees for the aforesaid purposes, either interest-free or at concessional interest, there will be no taxable perquisite.

In the case of CIT v. C. Kulandaivelu Konar [1975] 100 ITR 629 (Mad.), the assessee was a managing director of a company. In the company’s books, he had a debit balance in his current account. The company was borrowing moneys in respect of which it was paying interest at 9 per cent. The ITO considered that to the extent of the debit balance against the assessee, there had been a diversion of money for non-business purposes, and, therefore the amount of interest (paid by the company to its creditors) which, but of the company’s paying, the assessee would have had to pay, was a ‘perquisite’ within the meaning of section 17(2)(iv) of the Act. However, the Tribunal held that section 17(2)(iv) would not apply since there was no privity of contract between the creditors of the company and the assessee, and therefore there was no obligation on the part of the assessee to pay any interest to the creditors, which the company could be said to have paid on his behalf. The Tribunal also held that section 17(2)(iii) would also not be attracted. The High Court agreed with the view that section 17(2)(iv) would not be attracted, but held that the Tribunal was not correct in its decision that section 17(2)(iii) was not applicable.

The Court observed :

“. . . in cases where in addition to the debtor and creditor relationship there exists a relationship of employer and employee and such employee is a director of the employer, the provisions of section 17(2)(iii) would be directly attracted. It is by reason of the fact of his being an employee deriving such a benefit, that provision directs it to be included in the salary income of such an employee. Normally, a company is not expected to allow its funds to be utilised by its employee for his personal benefit. In cases where the company permits an employee to utilise its funds for his own benefit, it shall be deemed to have given a personal benefit to such employee. The relationship of employer and employee, in such circumstances, is the primary reason for grant of such benefits to the employee. The benefit was not derived by the employee de hors his status as an employee.” (p. 635)

On this reasoning, the High Court held that the ITO was justified in treating the transaction as having given rise to a taxable perquisite.

In CIT v. Mahendra Swarup & Vikram Swarup [1993] 71 Taxman 268 (Cal.) it was held that grant of loan by company to the assessees, being its directors, at a concessional rate of interest does not amount to assessable perquisites within the meaning of section 17(2)(iii)(a).

Again, in the case of Addl. CIT v. A.K. Lakshmi [1978] 113 ITR 368 (Mad.), the assessee was a director in a company and her account with that company disclosed overdrawings on which the company had not charged any interest. The ITO treated this concession as a perquisite provided by the company to the assessee, and the High Court affirmed the ITO’s view. The Court observed:

“. . . It is well known, that it is difficult, if not impossible, to borrow amounts for one’s own use without having any liability to pay interest. Putting it positively, ordinarily borrowing can be had only by incurring an obligation to pay interest. What would be the amount of interest will be, unless there are statutory provisions governing the matter, a matter of agreement between the lender and the borrower. But, if either due to magnanimity or with a view to help an employee any amounts are advanced by an employer to an employee without an obligation to pay any interest, we have no hesitation in coming to the conclusion that the employee would be deriving a benefit in that he gets the use of the monies belonging to the company or any other employer, without having any liability to pay interest. The cost of the benefit would depend upon what is fair, just and reasonable, as envisaged by rule 3(g) of the Income-tax Rules. This will have to be determined by the assessing authorities by applying the provisions contained in that rule...” (p. 375)

In P. Bhavani Shankar v. CIT [1999] 155 CTR (Mad.) 402 it was held that payment of interest subsidy either to the employees or to the agencies like LIC/HDFC on employees’ behalf is a taxable perquisite under section 17(2)(iv). In other words, the payment of interest to other financial institutions on behalf of the employees by the employer is a taxable perquisite.

3.13-1a     INTEREST SUBSIDYIn certain public sector undertakings employees who have taken loans from housing agencies for purposes of construction/acquisition of houses are paid subsidy by their employers towards interest paid on such loans.  This scheme was actually initiated by the Ministry of Industry of the Government of India in November 1986, and the Ministry decided that the public enterprises should adopt a scheme of interest subsidy to pay the difference between the rate of interest charged by the housing finance agencies and the rate of interest charged by the Central  Government under their House Building Advance Rules.  The question whether this interest subsidy is taxable as a perquisite came up before the Andhra Pradesh High Court in the case of P.V. Rajagopal v. Union of India  [1998] 233 ITR 678 (AP) and the High Court held the that the said subsidy was not a taxable perquisite because (i) it was not a periodical payment so as to be treated as ‘salary’, and (ii) it was a direct payment to the employees and not a payment to a third party.  In the course of the judgment, the High Court also invited attention to the assurance given by the Chairman, CBDT in July, 1990 to the effect that the subsidy was not taxable. Relevant extracts from the letter of the Chairman, CBDT dated 13-7-1990 to the Chairman of the Standing Conference of Public Enterprises (quoted by the High Court) read as follows:

“Wherever an employer has advanced any loan to its employee for the purpose of building 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….  If any Assessing Officer has actually treated such a differential as a perquisite or taxable income he is clearly in error.  If this is happening on a large scale, the Board will also consider issuing suitable instructions in this regard”.

Apart from not issuing any instructions in this regard so far, the department has repeatedly taken up the issue before High Courts but met with little success.  Apart from the judgment  of the Andhra Pradesh High Court mentioned above which went against the department, the Karnataka High Court had also held that the interest subsidy was not a taxable perquisite – P. Krishna Murthy v. CIT [1997] 224 ITR  183 (Kar.). Only the Madras High Court had taken the view that such interest subsidy was a taxable perquisite – P. Bhavani Shankar v. CIT [2000] 242 ITR 152 (Mad.). Surprisingly, the assessees involved in the cases before the Andhra Pradesh High Court and the Madras High Court belonged to the same organisation (BHEL), thus creating an anomalous situations whereby some employees are taxed, and some other employees are not taxed.  The situation calls for remedy by suitable executive instructions from the CBDT [Refer also to para 2.26-1]

3.13-1b LOANS FOR HOUSING -  From above discussion it can be inferred that, where loans are granted by employers to employees for the aforesaid purposes, either interest-free or at concessional interest, there will be no taxable perquisite. 

3.13-1c LOANS FOR OTHER PURPOSESIf such loans are granted for other purposes, there may be a taxable perquisite to the extent of the difference in interest liability between the normal reasonable lending rate prevailing in the market and the interest actually charged. In CIT v. A.K. Lakshmi [1978] 113 ITR 368 (Mad.), it was held that where the borrowed fund was advanced without interest, the value of the perquisite could be determined at the rate of interest at which the employer borrowed the funds.  If, however, the employer had not borrowed any fund or the interest-free loan/advance given to the employee was from the fund on which no interest was payable by the employer, the value of the perquisite in such case would be the reasonable sum representing the interest which the employee would have to pay to borrow that amount.

3.13-2 Concessional sale of vehicles - In some cases the employer may decide to sell a vehicle owned by him to one of his employees at the book value (depreciated value), and such book value may happen to be less than the market value of the vehicle. In such cases, the department’s view is that there will be a taxable perquisite to the extent of the difference between the market value and the sale value - Instruction No. 1145, dated 27-1-1978 [Annex 3.11]. The view may be correct if the transaction has arisen out of the contract of employment itself. Where the contract of employment does not specifically provide for such a transaction, the question of any perquisite cannot arise.

In fact in the case of A.K. Chellani v. ITO [1983] 3 ITD 194 (Hyd. - Trib.), the Tribunal had taken the view that a transaction of sale of company’s car to its employee at book value was commercial in character quite independent of the contract of employment, and that in a transfer or sale it was not possible to arrive at the conferment of benefit implied in the definition of ‘perquisite’ under section 17(2).

3.13-3 Payment of insurance policies - The Act itself provides that where the employer pays the premia on the insurance policies taken in the name of the employee (specified or non-specified) there will be a taxable perquisite. However, in the case of personal accident insurance policies, one High Court has taken the view that no taxable perquisite would arise, since no immediate benefit  accrues to the employee and the financing of such policies is in the business interest of the employer.

In another case it was held that contribution by employer towards annual premium to trust created for insuring employees’ lives is not taxable in assessee-employee’s hands - [see para 3.13-3b]

In any case premium paid by the employer for taking an accident insurance policy on employees is not taxable if employer is beneficiary under such policy, otherwise it is taxable. [See CIT v. T.V. Sundaram Iyengar & Sons [1999] 235 ITR 491 (Mad.)]

3.13-3a ACCIDENT INSURANCE POLICIES - The question whether premia paid by the employer on personal accident insurance policies taken in respect of the employees, is a taxable perquisite arose in the case of CIT v. Lala Shri Dhar [1972] 84 ITR 192 (Delhi). In this case, the board of directors of the employer-company decided by a resolution to purchase personal accident insurance under comprehensive policy in respect of the assessee-employee and the premium was paid by the employer-company. While the ITO treated the premia paid as a taxable perquisite, the Tribunal held that it could not be treated as a perquisite, either under sub-clause (iii) or under sub-clause (iv) of section 17(2) as it stood then. The High Court agreed with the view taken by the Tribunal.

The Court observed :

“This resolution clearly shows that the decision to take the policy was taken by the board of directors of the employer-company. It was not a voluntary act of the assessee himself. It also shows that the proposal of the policy was to be filled in by the assessee, but it was the duty of the employer-company to pay the premium in respect of such insurance. There is nothing on the record to show that the assessee himself wanted to take that insurance or that if the employer-company stopped paying the premium the policy would still have been taken or that if it had been taken, it would have been renewed from year to year. It is well-known that under the insurance law if the person taking a policy, either on his own life or in respect of personal accidents, does not pay the premium, the policy lapses and the person has no right to claim any insurance from the insurance company by the mere fact that he had signed the proposal for insurance and no payment of premium was made by him to the insurer. The Tribunal, therefore, appears to us to be right when it says that sub-clause (iv) did not apply as it was not possible to hold that the assessee would have been obliged to pay the premium himself if the employer-company had not paid it. The assessee had not voluntarily taken the insurance policy. It was the employer-company which had taken the same for obvious reasons and if, therefore, the employer-company was keen on keeping the policy alive it was up to it to pay the premium.

There is also another way of looking at this matter. Under the law providing for payment of compensation for injuries, etc., to its employees or in the event of the death of an employee for payment of compensation to his legal representatives, it is the duty of the employer-company to make funds available for payment of compensation so long as the accident, fatal or otherwise, takes place in the course of the employment. If the employer-company did not take a policy of insurance, the responsibility for providing funds in the event of such an accident lay on it. It was a matter of no consequence at all to the employee concerned to take an insurance against such risk. Willy or nilly, the employer-company will have to provide funds to pay up the compensation. If in order to protect itself against that contingency the employer-company took up an insurance, its purpose was to protect itself and not to protect the employee. There was thus no obligation cast on the assessee to keep the policy alive. Sub-clause (iv) would, therefore, be obviously inapplicable.” (pp. 197-198)

The court also observed that, since the policies had been taken by the employer-company to safeguard its own interest, the payment of premium in respect of such policies could not be said to be a benefit granted to the assessee as contemplated under sub-clause (iii) of section 17(2). Following this decision, the same High Court held in the cases of CIT v. Vinay Bharat Ram [1981] 129 ITR 128 (Delhi) and CIT v. Bharat Ram Charat Ram (P.) Ltd. [1986] 157 ITR 199 (Delhi) that the premium paid by the employer in respect of insurance against accidents, riots, and civil commotion in the course of chartered flights of the employees was not a perquisite within the meaning of clause (2) of section 17 and was, therefore, not taxable in the hands of the employees.

In the absence of any finding that the personal accident insurance or motor accident insurance was taken by the company was for the personal benefit of the employee and not to safeguard company’s own interest against possible disablement of its employee, it is not possible to come to conclusive finding whether personal accident insurance premium or medical insurance premium amounts to perquisite - Mihir Textiles Ltd. v. CIT [1997] 225 ITR 327 (Guj.).

3.13-3b CONTRIBUTION to trust - In P. Newcome v. CIT [1962] 45 ITR 52 (Ker.)  the employer had provided for the assessee as well as for other employees of old age, by instituting what was called a staff group insurance scheme. It consisted in the creation of a trust for effecting insurance on their lives, and for this purpose the employer had to contribute 5 per cent of the employee’s salary, whereas the employee had to give 10 per cent of the pay. The trust, in turn, had to take out two separate policies on the employees’ lives, and held them in trust. Under the above arrangement, the employer had, for the year ending 31-3-1956, that being the previous year relevant to the assessment year 1956-57, paid Rs. 2,160 to the trustee, the aforesaid amount being the annual premium on the assurance taken by the trust on the life of the assessee.

The Court held that it was obvious that the assessee would obtain indefeasible title only in the event of his leaving the service, his dismissal for misconduct or inefficiency was excluded, and the benefit became dependent on the direction of the employer, should any such event occur. In such circumstances, the assessee would not be getting any vested interest in the years in which payments may be made in what was paid by the employer for purposes of the trustees’ assurance. Therefore, the said payment was not perquisite.

Further sub-clause (v) of Explanation 1 to section 7(1) of the 1922 Act, would not cover payments towards life assurance which are liable to be surrendered, on certain events happening, and the benefit thus becoming payable at the direction of the employer. The employee gets, in payments towards such an assurance only contingent interest in the years in which they are paid, because the possibility of the benefit being diverted at the employer’s direction is not then excluded, and such payments are not covered by the aforesaid clause.

3.13-3c Single premium policies - In CIT v. Nandkishore Sakarlal [1994] 208 ITR 14 (Guj.) the assessee was one of the managing directors of a mill. In the year relevant to the assessment year 1973-74, the total remuneration worked out to Rs. 2,19,335. Out of this amount, Rs. 90,000 were paid to the three directors; Rs. 50,673 related to perquisites allowable to them and the balance amount of Rs. 76,662, which would have been otherwise paid to the three directors, was, because of the resolution passed by the board of directors, not paid to them, but was paid to the Life Insurance Corporation for purchasing deferred annuity policies. The share of the assessee being one-third in the said amount, during the assessment proceedings, a question arose whether Rs. 26,221 being the value of the LIC (policy) taken out by the Mills for the benefit of the assessee was includible as income of the assessee.

In respect of the amount of commission payable to the managing director for the assessment  year  1974-75,  the  board  of  directors  had  passed  a  resolution  on 12-4-1973 whereby it was resolved to purchase single premium deferred annuity policies for the concerned managing directors. Instead of paying the commission payable for the relevant year, it was resolved by the board of directors to provide for the payment of annuity to each of them for his life and upon his death to his dependents. Such payments were to commence from the date of his retirement as managing director of the company or such other date as was mutually agreed between the company and the concerned managing director or from the date of his death whichever was earlier. But in the said resolution, it was further provided that ‘no benefit shall occur to any of the said managing directors or his dependents, as the case may be, nor shall any of the said managing directors have any right, lien or interest in any of the aforesaid policies until the date of the first payment of annuity and the balance sheet and profit and loss account of the company for the year 1972 be prepared accordingly.’

The court held that if one turned to the resolutions, it would become quite clear that the intention was not to create any benefit either in favour of the managing director or his dependent or to create any right, lien or interest in the policy until the date of the first payment of annuity. The payments of the annuity were to commence from the date of retirement of the managing director or from the date of his death whichever occurred earlier. Therefore, even though the deferred annuity policies, which were taken were single premium deferred annuity policies, and even though they were taken out for the benefit of the managing director and in lieu of commission payable to them, it was clearly intended by the board of directors that the managing directors should not have any vested right in the policies. For all these reasons, it could not be said that the sums in question with which the deferred annuity policies were purchased amounted to ‘perquisites’ as contemplated by section 17(2)(v).

The transactions in question could not be said to be devices to avoid payment of tax. If one examined the true nature of the transactions, it became clear  that as a result of these transactions no income accrued to the assessee nor any right was created in favour of the assessee in the sums in question. What happened as a result of passing of these resolutions by the board of directors was to deny the assessee the remuneration which would have become payable in those years and to create a right to receive the same at a future date. The intention of the parties was not to create any present right in favour of the assessee. Thus, the effect of the transactions was to postpone accrual and receipt of income. Therefore, these cases could not be said to be cases where the Mill or the assessee could be said to have adopted a device with a view to avoid tax liability. The sums in question were, therefore, not includible in the total income of the assessee and the assessee was under no obligation to pay tax thereon.

3.13-4 Payment of club bills  - Where the employee is a member of a club (recreational, social or any other type), and the employer pays the club membership/admission fees as well as the monthly club bills, the amounts so paid will be a taxable perquisite in the case of all employees. However, where the employee is already a member of a club and is himself meeting the relevant expenses, and becomes a member of another club at the behest of his employer for purely business purposes, the Tribunal has taken the view in one case that, if the employer bears the expenses in respect of the said ‘other club’, there could be no taxable perquisite.

3.13-5 Benefits under Employees’ Stock Option Scheme - The Finance Act, 2000, has omitted sub-clause (iiia) of clause (2) of section 17 and has inserted a proviso to sub-clause (iii) of clause (2) of section 17 to provide that the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under the Employees’ Stock Option Plan or Scheme of the said company shall not  be chargeable to tax from the assessment year 2001-02.

3.13-6 Tax borne by the employer - Where the tax liability of the employee is borne by the employer, the question arises as to whether it is a perquisite, and if so, whether its value has to be determined on the basis of the ‘grossing-up’ principle (i.e., tax-on-tax basis). In the case of N. Sciandra v. CIT [1979] 118 ITR 675 (Cal.), the Court observed that if the tax paid by the employer is to be added to the salary of the employee as a perquisite under section 17 then it must fulfil the characteristics of a perquisite as laid down in the section. It has been clearly laid down in the section that such perquisite must be paid before it can be treated as a part of salary. In this case, an Indian Government Corporation entered into an agreement with an Italian firm for the setting up of plant in India. The agreement, inter alia, provided for an Italian technician to be sent to India to work on the project. The Indian company was to pay to the Italian firm the remuneration of the personnel deputed. The corporation was to help the foreign personnel in seeking tax exemption and in case any tax was payable on his remuneration, it was to be to the account of the corporation and was to be paid to the Italian firm. In the course of the assessment proceedings, the ITO found that S, the foreign technician, had been paid salary without deduction of tax, though he was not entitled to tax exemption under section 10(6)(vii). He sought to tax the salary, allowances and perquisite as well as an amount deemed to be tax borne by the employer on grossing up basis. The question was whether the tax which was to the account of the corporation was a perquisite in terms of section 17. The Court held that the grossing up of income on tax-on-tax basis for arriving at the value of the assessee’s perquisites under section 17(2)(iv) was unjustified, because (i) there was no relationship of employer and employee between S and the corporation, because the agreement in question was between the Indian Corporation and the Italian firm, (ii) the corporation was to pay to the Italian firm the tax payable by S and there was no finding that the remuneration payable to S was inclusive of the tax payable by the firm, (iii) for the purpose of section 17(2)(iv), perquisites must have been paid before it could be treated as a part of the salary and since the liability to pay tax by the corporation arose later than the previous year, the said amount could not be treated as a perquisite.

This decision was followed by the same High Court in their subsequent decision in the case of CIT v. Ramzo Colma  [1988] 172 ITR 451 (Cal.).

The Andhra Pradesh High Court however struck a different note in the case of Zdzizlaw  Skakuz v. CIT [1986] 158 ITR 420 (AP) by observing that ‘there is no rule of law which lays down that the grossing-up principle cannot have application to a situation where the income was received by the assessee from third parties in order to ensure payment of tax-free salary’.

See also S. Takenada v. CIT [1998] 101 Taxman 346 (Kar.)/T.P.S. Scott  v. CIT [1998] 232 ITR 475 (Delhi).

Tax paid on behalf of assessees by Indian company when they are employees of foreign company cannot be charged as perquisite in their hands - In CIT v. G. Eroppino Giovanni [1992] 196 ITR 618 (Ker.), it was held that merely because the individual is receiving remuneration by virtue of the fact that he is holding an office does not necessarily bring about the relationship of master and servant between himself and the person who pays him the remuneration. It all depends upon the contract under which the individual, who has received the remuneration, is employed. If it is established that the individual is employed under a contract of service it can be held that there existed the relationship of an employer and an employee. On the other hand if the individual is engaged to do the work pursuant to a contract for employment, it cannot be said that the payment received by such an individual is a perquisite within the meaning of section 17. Tax paid on behalf of assessees by Indian company when they are employees of foreign company cannot be charged as perquisite in their hands.

3.13-7 Benefit/perquisite granted to relatives of employee - The Andhra Pradesh High Court made it clear in the case of Addl. CIT v. P.R. Parthasarathy [1979] 118 ITR 869, that section 17 applies only insofar as perquisites are provided or allowed, to the assessee are concerned, and that the perquisites, if any, provided to the wife of an assessee independently, cannot be treated as perquisites granted to the assessee. In this case, the assessee-employee undertook a foreign tour on behalf of his employer-company, and at the latter’s instance, his wife also accompanied him. The company directly met the expenses on the foreign tour of the wife. The Court held that the expenditure incurred, qua wife’s foreign tour, could not be treated as a benefit to the assessee nor construed as his perquisite under section 17; when no part of the expenditure of the wife of the assessee was met by the assessee or given to him by the company and the entire expenditure involved was met by the company, it could not be a perquisite. The Court distinguished the contrary view taken earlier by the Madras High Court in the case of C. Lakshmi Rajyam v. CIT [1960] 40 ITR 340 on the ground that in that case, the amount was paid by the employer directly to the assessee-employee.

3.13-8 Private tour expenses - In the case of Mrs. Sugra Sulaiman v. CIT [1989] 44 Taxman 1 (Mad.), the assessee was an employee of a company of which her husband was the managing director. The company had met the expenditure of Rs. 16,620 incurred by assessee in respect of a foreign tour in which she accompanied her husband. This amount was subjected by the ITO to tax as perquisite under section 17(2)(iv). The High Court confirmed the ITO’s action, and held that, inasmuch as the assessee was an employee of the company and the foreign tour was undertaken by such employee not in connection with the business of the company, but otherwise, definitely an obligation was cast on the assessee to defray the expenses in connection with the tour. That obligation had been discharged by the employer by making the payment to meet the expenses of the assessee in connection with the foreign tour undertaken by her. The obligation contemplated under section 17(2)(iv) is an obligation to make a payment or to discharge the liability in respect of the expenses incurred in connection with the tour. The Court therefore held that the amount paid by the company in discharge of the obligation of the assessee to meet the expenses of her private or personal foreign tour should be regarded as perquisite falling under section 17(2)(iv).

3.13-9 Scholarship - In CIT v. M.N. Nadkarni [1986] 161 ITR 544 (Bom.), the Court held that the amount of scholarship given by employer-company to children of its employees solely at its discretion without reference to terms of employment is not assessable as perquisite in hands of employee.

Annexure to Rule 3

Annex 3.1

Circular No 130 [F.No. 142/4/74-TPL], dated 16-3-1974

Rule 3(a) to (c) of Income-tax  Rules - Valuation of perquisites represented by rent-free residential accommodation, residential accommodation at concessional rent and motor cars - Effect of amendments made by Income-tax (Amendment) Rules, 1974

1. The Income-tax (Amendment) Rules, 1974, notified by the Central Board of Direct Taxes on February 28, 1974, have substituted clauses (a), (b) and (c) of rule 3 of the Income-tax Rules, 1962, relating to valuation of certain perquisites by three new clauses. The new clauses have made certain modifications in the provisions relating to the valuation of the perquisites by way of free residential accommodation and motor cars provided by employers to their employees. The salient features of the new provisions are explained hereunder.

2. Valuation of rent-free residential accommodation - Salaried taxpayers have been classified into three broad categories for the purposes of determining the value of the perquisite by way of rent-free residential accommodation provided to them. The first category consists of (a) persons holding an office or post in connection with the affairs of the Union or of a State; and (b) officers of Government whose services have been lent to a body or undertaking under the control of Government, occupying residential accommodation which has been allowed to the body or undertaking by the Government. In the case of a person falling under the aforesaid category, the value of the rent-free residential accommodation (whether furnished or unfurnished) provided to him will be taken to be the rent which would have been determined as payable by him in accordance with the rules framed by the Government for allotment of residences to its officers.

3. The second category of employees consists of—

 

 

(a)

persons employed by the Reserve Bank of India;

 

(b)

persons employed by a statutory corporation or by a company in which all the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that Bank;

 

(c)

persons employed by a body or undertaking financed wholly or mainly by the Government;

 

(d)

officers of Government whose services have been lent to, or who are employed after retirement from Government service with, any company in which not less than 40 per cent of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that Bank.

 

In the case of persons referred to in (a) to (d) above, the perquisite value of unfurnished rent-free residential accommodation will be taken to be 10 per cent of the salary due to the person in respect of the period during which the residential accommodation was occupied by him in the relevant previous year. [For the purposes of computing the perquisite value of rent-free residential accommodation, the term “salary” will include pay, allowances, bonus or commission payable monthly or otherwise but will not include (i) dearness allowance or dearness pay, unless it enters into the computation of superannuation or retirement benefits; (ii) employer’s contribution to the provident fund account of the employee; (iii) allowance which are exempted from payment of tax; and (iv) any allowance in the nature of an entertainment allowance, to the extent such allowance is deductible under section 16(ii).] If the accommodation is furnished, the value of the perquisite will first be determined on the above basis and then increased by an amount equal to 15 per cent of the original cost of the furniture (including refrigerators, television sets, radio sets, other household appliances and air-conditioning equipment) provided to the employee. If the furniture is hired by the employer, the hire charges payable for the furniture will, instead, be taken into account.

4. Employees, who do not fall in the first two categories, would fall in the third or residuary category mainly comprising of employees in the private sector. In the case of these persons, the perquisite value of rent-free unfurnished accommodation will ordinarily be taken to be 10 per cent of the salary of the employee in respect of the period during which he occupied the accommodation during the relevant previous year. If the Income-tax Officer is satisfied that the perquisite value of the accommodation computed on this basis exceeds the fair rental value of the accommodation, the value of the perquisite will be limited to such fair rental value. However, if the fair rental value of the accommodation exceeds 20 per cent of the employee’s salary for the relevant period, the Income-tax Officer will have the discretion to increase the value of the perquisite (computed on the basis of 10 per cent of the salary) by so much of the excess of the fair rental value over 20 per cent of the salary, as he may, having regard to the nature of the accommodation, deem fit. In the case of employees residing at Bombay, Calcutta, Delhi and Madras, the existing instructions of the Board would continue to apply and, as such, only the excess over 30 per cent of the salary will be added to the basic valuation of 10 per cent of the salary in such cases. If the employee is provided with furnished residential accommodation, the value of the perquisite will first be computed as if the accommodation were unfurnished and then increased by an amount equal to 15 per cent of the  original cost of the furniture (including television sets, radio sets, refrigerators, other household appliances and air-conditioning plant and equipment) provided by the employer. If the furniture is hired by the employer, the value of the perquisite will, instead, be increased by the hire charges payable by the employer.

5. Residential accommodation at concessional rent - If residential accommodation is provided by the employer at a concessional rent, the value of the perquisite will first be determined as if the employee had been provided with rent-free residential accommodation and the amount so computed will be reduced by the rent payable by the employee.

6. Value of motor car used by employees for personal or private purposes - If a motor car is provided by the employer exclusively for the private or personal purposes of the employee, the value of the perquisite in the hands of the employee will be (a) the amount of the expenditure incurred by the employer on the maintenance and running of the motor car (including salary paid to a chauffeur), and (b) if the motor car is owned by the employer, a further amount representing the normal wear and tear of the motor car. If a motor car is provided by the employer for use by the employee partly for his private or personal purposes and partly for use in the  performance of his duties, a proportionate part of the expenditure incurred by the employer on the running and maintenance of the motor car and of the amount representing normal wear and tear of the motor car (in cases where the motor car is owned by the employer), which is attributable to the user of the car by the employee for his private or personal purposes, will be taken as the value of the perquisite in the hands of the employee. [In this connection, it may be noted that the use of a motor car by an employee for the purposes of going from his residence to the place where the duties of employment are to be performed or from such place back to his residence, will be regarded as use of the motor car for private or personal purposes and not in the performance of his duties.] If the computation of the value of the perquisite on the aforesaid basis presents any practical difficulty, the value of the perquisite will be computed on the following basis :

 

a.

where the motor car is owned or hired by the employer and the running and maintenance expenses are also borne by him;

 

 

 

-in  the  case  of a motor car with horse power not exceeding 16 or with cubic capacity of the engine not exceeding 1.88 litres

Rs. 300 per month

 

 

-in the case of other motor cars

Rs. 400 per month;

 

b.

where the motor car  is owned or hired by the employer  but the running and maintenance  expenses are borne by the employee :

 

 

 

-in  the  case  of a motor car with horse power not exceeding 16 or with cubic capacity of the engine not exceeding 1.88 litres

Rs. 100 per month

 

 

-in the case of other motor cars

Rs. 150 per month

 

If the employer also provides a chauffeur for running the motor car, the value of the perquisite computed on the above basis will be increased by a sum of Rs. 150 per month.

7. In cases where any particular car is not placed at the disposal of the employee but he is allowed the use of one or more motor cars out of a pool of motor cars owned or hired by the employer, the value of the perquisite will be computed in accordance with the rates specified in the preceding paragraph, as if the employee had been provided with one motor car for use partly for his private or personal purposes and partly in the performance of his duties. However, if the horse power rating of any one of these motor cars exceeds 16 or the cubic capacity of the engine of any one of these motor cars exceeds 1.88 litres, the value of perquisite will be computed as if the employee had been provided with a motor car with horse power exceeding 16. Further, if a chauffeur is provided by the employer to run any of these motor cars, the value of the perquisite will be increased by a sum of Rs. 150 per month.

8. If the employee owns a motor car but the actual running and maintenance charges (including salary of the chauffeur, if any) are  met or reimbursed by the employer, proportionate part of the expenditure borne by the employer as is reasonably attributable to the user of the motor car by the employee for his private or personal purposes, will be taken by the Income-tax Officer as the value of the perquisite.

9. Use of motor car at concessional rate - In cases where the employee is provided with, or allowed the use of, a motor car for his private or personal purposes at a concessional rate, the value of the perquisite will first be computed as if the perquisite had been provided by the employer free of charge and the amount so computed will be reduced by the amount payable by the employee to the employer.

10. Use of conveyance other than motor cars - Where any other type of conveyance is provided by the employer to the employee, a proportionate part of the expenditure incurred by the employer on  the running and maintenance of the conveyance (including amount representing the normal wear and tear of the conveyance) as is attributable to the user of the conveyance by the employee for his private or personal purposes, will be taken by the Income-tax Officer as the value of the perquisite in the hands of the employee.

11. The new provisions will take effect from April 2, 1974  and will, accordingly, apply for the purposes of deduction of tax at source from salaries during the financial year 1974-75 and for the purposes of making regular assessments in the case of salaried taxpayers from the assessment year 1975-76.

Annex 3.2

Circular No. 150 [F.No. 142(46)/74-TPL], dated 19-11-1974

Rule 3(a) of Income-tax Rules - Valuation of perquisite represented by rent-free residential accommodation in the case of Government employees - Effect of amendments made by Income-tax (Third Amendment) Rules, 1974

1. The Income-tax (Third Amendment) Rules, 1974, notified by the Central Board of Direct Taxes on 21-9-1974, have substituted sub-clause (i) of clause (a) of rule 3 of the Income-tax Rules, relating to valuation of the perquisite represented by rent-free residential accommodation in the case of Government employees, etc., by a new sub-clause. The provisions of the new sub-clause are explained hereunder.

2. Under rule 3(a)(i), as it stood prior to the amendment made by the Income-tax (Third Amendment) Rules, 1974, the perquisite value of rent-free residential accommodation (whether furnished or unfurnished) provided to (a) persons holding an office or post in connection with the affairs of the Union or of a State, and (b)  officers of Government whose services have been lent to a body or undertaking under the control of Government (occupying residential accommodation allotted to the body or undertaking by the Government) was to be taken to be the rent which would have been determined as payable by the person in accordance with the rules framed by the Government for allotment of residences to its officers. Under the new provision, the perquisite value of rent-free residential accommodation in such cases will be determined as follows :

1. If the accommodation is unfurnished, the perquisite value of the accommodation will be determined on the same basis as adopted hitherto. The perquisite value will thus be taken to be an amount equal to the rent which has been or would have been determined as payable by the person concerned in accordance with the rules framed by the Government for allotment of residences to its officers.

2. If the accommodation is furnished, the value of the perquisite will first be computed in accordance with (1) above as if the accommodation was furnished; the amount so computed will then be increased by an amount equal to 15 per cent of the original cost of the furniture (including television sets, radio sets, refrigerators, other household appliances and air-conditioning plant and equipment, if any) provided by the employer. If the furniture is hired by the employer, the value of perquisite will, instead, be increased by the hire charges payable  by the employer.

The effect of the new provision is that the perquisite value of free furniture (including television sets, radio sets, refrigerators, other household appliances and air-conditioning plant and equipment) provided to all categories of salaried taxpayers will be taken to be 15 per cent of the original cost of such furniture or, where the furniture is hired, the hire charges payable by the employer.

3. The new provision has come into force on 21-9-1974 and will, accordingly, apply for the assessment year 1975-76 and subsequent years. The new provisions will, however, have to be taken into account for the purposes of deducting income-tax on income chargeable under the head “Salaries” under section 192 during the financial year 1974-75.

Annex 3.3

Circular No. 5 [C.No. 35(20)-IT/49], dated 6-9-1950

Rule 3(a)(i) of Income-tax Rules - Valuation of perquisite represented by the rent-free residential accommodation in the case of military personnel on active service

Under Explanation 1 to section 7(1) of the 1922 Act [corresponding to section 17(2)(i) of the 1961 Act], the right of a person to occupy, free of rent, as a place of residence any premises provided by the employer, is a perquisite for the purposes of this section and is usually taken at 10 per cent of the emoluments of the person concerned for the purposes of his income-tax assessments. It has been represented that military personnel serving in forward/operational areas and in isolated localities on the frontier and other posts are provided with rent-free accommodation consisting of dug-out trenches, places in open fields and under the trees, etc.  As the accommodation provided has no rental value, no addition should be made for income-tax purposes thereof. Where, however, the accommodation provided has a rental value or the value thereof can be ascertained, an addition, therefore, should be made for income-tax purposes subject to the usual maximum of 10 per cent of the emoluments.

Annex 3.4

Circular No. 374 [F. No. 200/135/83-IT(A-I)], dated 14-12-1983

Rule 3(a)(iii) of Income-tax Rules - Valuation of perquisite represented by rent-free residential accommodation in the case of non-Government employees

1. Under rule 3(a)(iii) the value of the perquisite in the form of rent-free residential accommodation provided by an employer other than the Government and statutory corporations wholly owned by the Government, etc., referred to in rule 3(a)(i) and (ii), is to be taken at 10 per cent of the salary paid to the employee. However, if the actual rental value of the accommodation is in excess of 20 per cent of the salary the value of the perquisite is to be increased by the amount of such excess. Having regard to the high cost of rented accommodation in metropolitan cities, instructions had been issued that in the case of rent-free accommodation provided at Bombay, Calcutta, Delhi and Madras only the excess over 30 per cent of the employee’s salary should be added for the purpose of determining the perquisite value of the accommodation.

2. The Central Government has had occasion to review the situation in the light of the increasing costs of rented accommodation not only in the aforesaid cities but in all other parts of the country as well. Keeping in view the steep escalation in rents the Central Government has decided that in the case of rent-free accommodation provided by an employer to an employee at Bombay, Calcutta, Delhi and Madras the perquisite value will be calculated by adding the excess over 60 per cent of the salary of the employee. The valuation in regard to other places in India would be with reference to the excess over 50 per cent. The examples given below will clarify the position :

Example I

Rent-free residential accommodation

in Bombay/Calcutta/Delhi/Madras

 

 

Rs.

Salary of the employee

48,000

Rent paid by the employer

36,000

Perquisite to be valued as under  :

 

First 10 per cent of salary

4,800

Next 50 per cent (ignored)

24,000

Excess over 60 per cent

7,200

Total value of the perquisite

12,000

 

Example II

Rent-free residential accommodation

at any other place

 

Rs.

Salary of the employee

48,000

Rent paid by the employer

36,000

Perquisite to be valued as under  :

 

First 10 per cent of salary

4,800

Next 40 per cent (ignored)

19,200

Excess over 50 per cent

12,000

Total value of the perquisite

16,800

 

3. In cases of rent-free furnished accommodation, an addition in respect of the perquisite by way of furniture at the rate of 10 per cent per annum of the original cost of such furniture is to be made. If such furniture is hired from a third party, the actual hire charges payable should be added.

4. This relaxation will come into effect from the assessment year 1984-85 and will, therefore, relate to tax deduction at source on salaries during financial year 1983-84.

Annex 3.5

Circular No. 311 [F.No. 200/50/77-IT(A-I)], dated 24-8-1981

Rule 3(a)(iii) of Income-tax Rules - Valuation of perquisite represented by free boarding and lodging in the case of hotel employees

1. Attention is invited to Board’s circular, dated 2-3-1960 issued from F. No. 35/24/59-IT(A-I) on the above subject. A copy of this circular is enclosed for ready reference [printed here as Annex].

2. Rule 3 of the Income-tax Rules, 1962 lays down the mode of valuation of perquisites. The provisions of rule 3(a)(iii) would apply for valuation of rent-free residential accommodation provided by an employer to an employee. The valuation of perquisites in the form of free food will have to be determined in terms of rule 3(g).

3. In view of the specific provision contained in the rules as mentioned hereinabove, the Circular of 1960 stands superseded.

ANNEX  - CIRCULAR DATED 2-3-1960 REFERRED TO IN CLARIFICATION

1. The Board observe that no uniform practice is being followed in all the Commissioner’s charges for the valuation of perquisites by way of free boarding and lodging in the case of hotel employees who are obliged to live in the hotel premises and who are provided free boarding. It has now been decided that the value of such perquisites should be determined as under  :

Lodging - 12 per cent or 10 per cent of the salary (according as the accommodation provided is furnished or unfurnished) or the usual rent of the accommodation, whichever is less.

Boarding - The hotel’s actual cost (including overheads) of the food supplied to the employees.

2. The above formula is to be applied only to bona fide employees and not to directors who have a substantial interest in the hotel company.

Annex 3.6

Instruction No. 1146 [F.No. 200/9/78-IT(A-I)], dated 27-1-1978

[Source : 143rd Report (1978-79) of the Public Accounts
Committee, pp. 37-38]

Rule 3(a)(b) of Income-tax Rules - Valuation of perquisite of rent-free accommodation or of provision of accommodation at concessional rent

The Revenue Audit have recently pointed out several instances of mistakes in valuing the perquisite of rent-free accommodation or of provision of accommodation at concessional rent.

One of the mistakes commonly noticed is that periods during which the employee has been away on short leave/annual leave has been left out in calculating the value of the perquisite. Even periods during which the employee has been on official tours have been excluded. This is not correct. If the accommodation has been placed at the disposal of the employee, the employee should be deemed to have enjoyed the perquisite of rent-free accommodation or accommodation at concessional rent, even if he is not in physical occupation of the accommodation.

Annex 3.7

Letter F. No. 35/50/65-IT(B), dated 27-4-1966

Salary for the purpose of determining perquisite value of residential accommodation under rule 3(a) of Income-tax Rules - Whether includes tax paid by the employer on behalf of the assessee

The Board’s view on the above subject is that the amount reimbursed by way of tax by the employer to the employee forms part of the profits derived from the employment and is thus “salary” for the purpose of rule 3 of the Income-tax Rules.

Annex 3.8

Letter F. No. 35/32/66-IT(B), dated 24-9-1966

Sumptuary allowance being in the nature of entertainment allowance not to be included in term “salary” for the purposes of determining perquisite value of residential accommodation under rule 3(a) of Income-tax Rules

According to the Board’s instruction, “sumptuary allowance” has to be treated as an entertainment allowance. In view of this, the sumptuary allowance received by a person, who is in receipt of salary from the Government, to the extent that such allowance is required to be deducted in computing the income chargeable under the head “Salaries” under section 16(ii)(a), may be regarded as an allowance exempted from payment of income-tax. Allowance in the nature of entertainment allowance, to the extent such allowance is deductible under clause (ii) of section 16 is excluded from the term “salary” under Explanation (2)(iv) [as it stood before the amendment made by the Income-tax (Amendment) Rules, 1974,] to rule 3(a) of the Income-tax Rules, and, therefore, sumptuary allowance may not be included in the term “salary”  for the purposes of said rule.

Annex 3.8A

letter f. no. 35/7/65-IT(B), dated 12-2-1965

Rule 3(e) of Income-tax Rules - Valuation of perquisite by way of children’s education allowance/reimbursement of tuition fee to Central Government employees

1. Enquiries are being received by the Board about the taxability or otherwise of children’s education allowance granted at flat rates in accordance with the Ministry of Finance (Department of Expenditure), Office Memorandum No. 10(1)-Estt. (Spl.)/60, dated 30-1-1962 and tuition fees reimbursed in accordance with the same Ministry’s Office Memorandum No. 17(1)-E 11(B)/64, dated 3-6-1964. In this connection attention is invited to the instructions contained in the Board’s Circular No. 2D of 1956 in which it has been clearly stated that in all the circumstances mentioned below payments made to the employee or on behalf of the employee will be liable to income-tax :

     (a)  where fixed allowances are given in cash by the employer to the employee to meet the cost of education of the latter’s children;

     (b)  where the education fees of the employee’s children are paid by the employer directly to the school; and

     (c)  where the employee incurs the expenses in the first instance and gets reimbursement from the employer.

2. In view of the above instructions, the children’s education allowances and the reimbursement of tuition fees to Central Government employees will be liable to income-tax.

Annex 3.9

Circular No. 41 (LVIII-2), dateD 27-10-1956

Rule 3(f) of Income-tax Rules - Valuation of perquisite by way of privilege passes/ticket  order granted to railway employees

Recently a question was raised whether the value of privilege passes and privilege ticket orders granted to railway employees is taxable as a ‘perquisite’ under section 7 of the 1922 Act [corresponding to section 17(2) of the 1961 Act] in the hands of the employees concerned. After careful consideration, the Board has decided that no attempt should be made to include under the head “Salaries” in the assessment of railway employees any  sum on account of the issue of privilege passes or privilege ticket orders.

Annex 3.10

Circular No. 122 [F.No. 200/3/72-IT(A-I)], dated 19-10-1973

Rule 3(g) of Income-tax Rules - Valuation of perquisite on account of services of household servants

Clarification 1

1. I am directed to invite reference to the Board’s Instruction No. 133 [F.No. 40/25-69-IT (A-I)], dated 10-12-1969 on the above subject.

2. The Board in consultation with the Ministry of Law has re-examined the question of taxability of the salaries paid to the gardeners of the buildings belonging to the employers and occupied by the employees as a perquisite. Section 17(2)(iv) provides that the term “perquisite” includes “any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee.” Hence, for this definition to apply, the position must be that if the employer had not laid out the money, the employee himself should have been obliged to do so. An individual might not be interested in having a gardener at all and he might allow the garden to run to weed. On the other hand, he might be an enthusiastic gardener who might himself have laid out large sums on the garden and have employed more gardeners than one. A gardener is employed by the employers primarily with a view to maintain the garden and he renders services whether or not the building is occupied by any employee. In view thereof, it amounts to the maintenance of the house and the grounds which the employer in any case would have done irrespective of the fact whether the building was occupied or vacant. As such, the amount spent on the salary of a gardener by the employer does not represent a sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the employee. The payment of salary to a gardener as such cannot be regarded as a perquisite so as to justify that amount being taxed in the hands of the employees. However, the expenses incurred by way of maintenance of a gardener may be taken into account for the purposes of estimating the value of the rent-free residential accommodation provided by the employer under rule 3 of the Income-tax Rules, 1962.

3. The Board’s Instruction No. 133, dated 10-12-1969 referred to in para 1 [Annex] above stands modified to the above extent.

ANNEX - PARA 1 OF INSTRUCTION NO. 133, DATED 10-2-1969 REFERRED
TO IN CLARIFICATION

“It has been decided by the Board that the taxable perquisite in the hands of the employee on account of services of gardeners, night watchmen and sweepers, provided by the employer should be calculated on the following ad hoc basis :

Sweeper : 75 per cent of actual wages or Rs. 60 per month, whichever is less. Gardener/Watchman  : 50 per cent of actual wages or Rs. 60 per month, whichever is less.”

CLARIFICATION ii

Board’s Instruction No. 133 [F.No. 40/25/69-IT(A-I), dated 10-12-1969] provides that the taxable perquisite in the hands of the employee on account of the services of gardeners, night watchmen and sweepers provided by the employer should be calculated on the following ad hoc basis :

 

 

(i)

Sweeper - 75 per cent of actual wages or Rs. 60 p.m. whichever is less;

 

(ii)

Gardener; and

 

(iii)

Watchman - 50 per cent of actual wages or Rs. 60 p.m., whichever is less.

 

2. The Board has received representation to clarify whether reimbursement by the employer of wages of sweeper engaged by the employee is covered by the above Instruction.

3. Board’s Instruction No. 133, dated 10-12-1969 is applicable only when the services of sweeper are provided by the employer, i.e., the sweeper is recruited by the employer and remunerated by him but his services are placed at the disposal of the employee. Therefore, the reimbursement of wages of sweeper, gardener or watchman engaged by the employee is fully taxable as income from “Salaries” in the hands of the employee.

Circular : No. 662, dated 27-9-1993.

 

Annex 3.11

Instruction No. 1145 [F.No. 200/6/78-IT(A-I)], dated 27-1-1978

[Source : 143rd Report (1978-79) of the Public
Accounts Committee, pp. 36-37]

Rule 3(g) of Income-tax  Rules - Valuation of perquisite in cases of sale of vehicles by an employer to its employees at a nominal price

1. The Comptroller and Auditor-General of India in the report for the year 1975-76 has pointed out that instances have come to his notice that companies sell their vehicles to their employees at nominal prices and the benefits derived by the employees are not taxed as perquisites in their hands.

2. The above observation of the Comptroller and Auditor-General has been considered by the Board. Section 17(2)(iii) lays down that the value of any benefit or amenity granted or provided free of cost or at a concessional rate in any of the following cases will be perquisites :

 

 

(i)

by a company to an employee who is a director thereof;

 

(ii)

by a company to an employee being a person who has a substantial interest in the company;

 

(iii)

by any employer (including a company) to an employee to whom the provisions of (i) and (ii) above do not apply and whose income under the head “Salaries” exclusive of all value of benefits or amenity not provided for by way of monetary payment exceeds 8,000 rupees.

 

The sale of transport vehicles/furniture, etc., to the employees enumerated above has to be examined in the light of section 17(2)(iii). It has been decided by the Board that in such cases the difference between the market price and the sale price is taxable as a perquisite within the meaning of section 17(2)(iii).

3. The Income-tax Officers assessing the employer should specially enquire at the time of their assessment whether any assets have been sold to their directors or employees falling in the categories mentioned in para 2 above. If such a sale has been effected, an examination should be made whether the sale was at market price or at less than the market price. If such a sale is for a price which is less than the market price the difference between the  market price and the sale price should be taxed as a perquisite.

4. The amount of such perquisites will also have to be taken into consideration while determining the disallowance under section 40A(5).

Annex 3.12

Circular No. 708, dated 18-7-1995

Supply of food to employees

1. Reference is invited to the Board’s Circular No. 644, dated 15-3-1993 wherein it was clarified that the expenditure on provision of food or beverages by an employer to the low-paid  employees will not be treated as entertainment expenditure within the meaning of the Explanation under section 37(2) of the Income-tax Act, 1961, even if the facility is provided in places other than the place of work provided the same is provided during the working hours and the expenditure is genuine and reasonable. Representations have since been received for extending the benefit of the circular to all the employees irrespective of salary limits, subject to monetary limits on the expenditure.

2. The Board has since considered the matter and has decided that expenditure up to Rs. 35 per day per employee shall not be treated as in the nature of entertainment if the same is incurred on food or beverages even outside the place of work, but during working hours subject to proof of genuineness of the expenditure. In case the expenditure exceeds the above limit, only the excess over Rs. 35 per day per employee shall be treated as entertainment in nature within the meaning of Explanation under section 37(2) of the Act. In the hands of the employees, however, the amount shall be treated as income subject to the provisions of section 17 of the Act.

3. The circular shall apply with reference to the expenditure incurred during the financial year 1995-96 relevant to the assessment year 1996-97 and subsequent years.

Circular No. 727, dated 27-10-1995

1. Reference is invited to the Board’s Circular No. 708, dated 18-7-1995 on the above referred subject.

2. In partial modification of the circular the following sentence appearing at the end of para 2—

“In the hands of the employees, however, the amount shall be treated as income subject to the provisions of section 17 of the Act.”

may be substituted for the following :

“in the hands of the employee, the amount up to Rs. 35 per day will not be treated as income, provided the amount is paid by the employer directly to the caterer, restaurant, eating place, canteen, etc.”

Annex 3.13

letter f. no. 133/80/94-tpl(PT), dated 3-6-1996

Income-tax (Fifth Amendment) Rules, 1995 - Date of its applicability

I am directed to refer to your letter dated 8-4-1996 seeking clarification regarding the date of applicability of Income-tax (Fifth Amendment) Rules, 1995 and to say that the Income-tax (Fifth Amendment) Rules, 1995 providing for the revised rates of valuation of certain perquisites were published in the Official Gazette vide  S.O. No. 497(E) on 2-6-1995. Since, there is no change in any substantive provisions of the law, they shall come into operation immediately from the date of its publication, i.e.,  from 2-6-1995 and not from the 1st April, 1996.