Section 17(2)/income-tax act

[2004] 140 taxman 173 (ker.)

HIGH COURT OF KERALA

Federal Bank Officers’ Association

v.

Union of India

P.R. RAMAN, J.

OP NO. 10767 OF 2003 (F)

MARCH 12, 2004

Section 17(2)(vi) is constitutionally valid

Section 17(2), read with section 295, of the Income-tax Act, 1961 as amended by the Finance Act, 2001, read with rule 3 of the Income-tax Rules, 1962 and articles 14, 19 and 246 of the Constitution of India - Salaries - Perquisites - Whether in light of section 17(2) and inclusive definition contained therein of term ‘perquisite’, and also fact that expression has been understood as an advantage or a benefit conferred upon an employee and that it is an inclusive definition, section 17(2)(vi) cannot be said to have conferred unguided or uncontrolled power on rule making authority - Held, yes - Whether, therefore, validity of section 17(2)(vi) cannot be struck down as violative of any constitutional provision - Held, yes - Whether if the Legislature classified persons or properties into different categories, which are subjected to different rates of taxation with reference to income or property, such a classification would not be open to attack of inequality on ground that total burden resulting from such a classification is unequal - Held, yes - Whether, therefore, classification of Central Government and State Government employees on one hand and employees of public sector and private sector on other hand for purpose of determining value of perquisite with reference to accommodation provided to those employees by their employer cannot be said to be unreasonable or violative of article 14 - Held, yes - Whether provisions contained in section 295(2)(c) are wide enough to empower Board to frame rules for purpose of identifying types of fringe benefits or amenities - Held, yes - Whether interest- free loan or loan provided at a concessional rate of interest by employer to employees results in benefit to employee as employee derives benefit by such concession and it reduces his financial liability and, therefore, it would be a perquisite - Held, yes

Circulars and notifications - Notification No. 940(E), dated 25-9-2001 issued by the Central Board of Direct Taxes

Facts

The petitioners in the instant writ petitions sought for a declaration that section 17(2)(vi) as inserted by the Finance Act, 2001, was illegal and violative of articles 19(1)(g) and 246 of the Constitution and also for a declaration that rule 3 of the Income-tax Rules, 1962, as substituted by the Income-tax (22nd Amendment) Rules, 2001 was illegal and unconstitutional being hit by the vice of excessive delegation of power besides being ultra vires the rule making power of the second respondent, the CBDT.

It was averred that amendment to rule 3 was arbitrary since it discriminated between the Central/State Government employees on one hand and public sector and private sector employees on the other hand that the same was not a reasonable classification and had no nexus with the object sought to be achieved. It was also averred that fringe benefit does not include interest subsidy and it is not a perquisite and therefore, taxing interest subsidy and reimbursement of conveyance allowance was violative of section 17(2). It was also stated that even assuming that interest subsidy could be treated as a perquisite the second respondent was not entitled to fix the rates at 10 per cent or 13 per cent as the benchmark rate for computing the value of perquisite.

Held

Sub-clauses (i) to (v) of section 17(2) specifies what are to be treated as perquisites. The definition itself is an inclusive definition. The value of rent-free accommodation provided to the assessee by his employer, value of concession in the matter of rent respecting any accommodation, value of a benefit or amenity granted or provided free of cost are specifically included in the definition clause itself. As per section 17(2)(vi), the value of any other ‘fringe benefit’ or ‘amenity’ to be prescribed is included within the definition of ‘perquisite’. Therefore, any value of fringe benefit or amenity would also come under the purview of the term ‘perquisite’. Going by Webster’s Encyclopaedic Unabridged Dictionary, the term ‘fringe benefit’ means a benefit as free life or health insurance received by an employee in addition to his regular pay and ‘amenity’ means the quality of being pleasing or agreeable in situation, prospect, disposition, etc. The meaning of the expression in several other dictionaries also would show that what it actually means is an advantage obtained by an employee. It cannot, therefore, be said that the word ‘fringe benefit’ or ‘amenity’ are expressions which have not gained specific understanding both in daily and commercial use. In the light of section 17(2), and the inclusive definition contained therein of the term ‘perquisite’ and also the fact that the expression has been understood as an advantage or a benefit conferred upon an employee and considering the fact that it is an inclusive definition, it cannot be said that section 17(2)(vi) should be struck down on the ground that it confers unguided or uncontrolled power on the rule making authority. [Para 12]

There is neither excessive delegation nor is there any delegation of essential legislative functions to the rule making authroity. In the said circumstances, the validity of section 17(2)(vi) cannot be struck down as violative of any of the constitutional provisions. [Para 13]

There is a difference between discrimination and differentiation. If the differentiation is rational having due regard to the objects sought to be achieved, then such differentiation is not discriminatory. The Governmental power is exercised by the State while making laws to operate differently with different groups or class of persons. Therefore, there cannot be any strict formulae or doctrine to be applied for testing as to whether such exercise is violative of article 14. But article 14 only forbids unreasonable classification. [Para 15]

If the Legislature has classified persons or properties into different categories, which are subjected to different rates of taxation with reference to income or property, such a classification would not be open to the attack of inequality on the ground that the total burden resulting from such a classification is unequal. Undoubtedly it is true that taxation laws must also pass the test of article 14. In deciding whether taxation law is discriminatory or not, the State has a wide discretion in the matter of selecting the persons or objects to be taxed. [Para 16]

The classification of Central Government and State Government employees on one hand and the employees of public sector and private sector on the other hand for the purpose of determining the value of perquisite with reference to accommodation provided to those employees by their employer cannot be said to be unreasonable or violative of article 14. They belong to distinguished and different classes of employees. Their work responsibility, service conditions, etc., also differ. Therefore, they cannot be held to be similarly situated and what is provided in the Rules is only prescriptions of rate of rent-free accommodations to some State Government and Central Government employees in terms of article 309 and the service conditions are governed by the said Rules framed by the President of India and Governors, respectively. Therefore, they stand as Government servants as specified by specific service rules. The provision for a fixed rate of 7.5 per cent and 10 per cent commensurate with the H.R.A. granted to those employees who are not provided with house could not be said to be in any way arbitrary or unreasonable or violative of article 14. [Para 17]

As per clause (c) of section 295(2), the Board is authorised to determine not only the fringe benefit chargeable under the Act but also can determine what is meant by fringe benefit or amenities. As a matter of fact, sub-clause (vi) of clause (2) of section 17 provides for determination of fringe benefit or amenity by means of prescription in the Rules. The provisions contained in section 295(2)(c) are wide enough to empower the Board to frame rules for the purpose of identifying the types of fringe benefits or amenities. The expression ‘as may be prescribed’ occurring in sub-clause (vi) of clause (2) of section 17 has necessarily to be understood as conferring power on the rule-making authority to prescribe what is fringe benefit or amenity. In such circumstances, there is no merit in the contention that by virtue of clause (c) of section 295(2), the Board has no power to determine what is meant by ‘fringe benefit’ or ‘amenity’. [Para 18]

If interest-free loan is provided or loan is provided at a concessional rate of interest by the employer to the employees, certainly that would result in benefit to the employee since he derives the benefit by such concession and it reduces his financial liability. Therefore, it is the income in his hands. Therefore, interest-free loans or loans advanced at concessional rate of interest to the employee has necessarily to be treated as perquisite. [Para 19]

If the rate of interest for the housing loan given by the employer is equal to or higher than the prevailing rate of interest given by the nationalised and other banks, then there is no question of receiving any benefit or concession from the employer. When as per rules interest rate of 10 per cent was fixed and any loan granted at interest rate below 10 per cent had to be taken as a perquisite liable to be taxed, no discretion was vested with the ITO to consider as to whether the rate of interest on the loan provided by the employer had conferred any benefit or concession on its employees having due regard to the prevailing interest rate of any other financial institutions and banks for such type of loans. It is beyond his powers. In such circumstances, unless and until suitable circulars are issued by the Board, the provisions shall be read down and understood with a rider that the rate provided in the rule will be applicable unless the assessee proves to the satisfaction of the Assessing Officer that rate of interest or any part thereof charged by the employer does not amount to any concession or benefit having due regard to the rate of interest charged for such type of loan by public financial institutions. [Para 20]

As regardings the contention that the employee was to maintain details regarding the journey to be undertaken by him and procedure to be followed was impracticable, there is no merit in that contention. Merely because a particular mode of proof is required and it may be inconvenient or causing difficulty to employee, it is not a ground to nullify the validity of the Rule. There is no question of any double taxation in the instant case. As per section 4(1), income-tax shall be charged on every person and income earned by an employee has to be exempted as per the status of that service and the employee is required to pay tax only in respect of the income he or she receives. Further, how it actually worked out to be double taxation was also not pleaded. Lastly section 17(2)(vi) came into force from 17-4-2002 and that is applicable to the assessment year 2002-2003. [Para 22]

Cases referred to

Bhel Employees’ Association v. Union of India [2003] 261 ITR 15/128 Taxman 309 (Kar.) [Para 6], Aditya Cement Staff Club v. Union of India [2003] 131 Taxman 609 (Raj.) [Para 6], Tata Workers’ Union v. Union of India [2002] 256 ITR 725/123 Taxman 426 (Jhar.) [Para 6], Harakchand Ratanchand Banthia v. Union of India AIR 1970 SC 1453 [Para 8], Ajay Kumar Banerjee v. Union of India AIR 1984 SC 1130 [Para 8], Devi Das Gopal Krishnan v. State of Punjab AIR 1967 SC 1895 [Para 8], Avinder Singh v. State of Punjab AIR 1979 SC 321 [Para 11], Agricultural Market Committee v. Shalimar Chemical Works Ltd. AIR 1997 SC 2502 [Para 12], Art. 143, Constitution of India and Delhi Laws Act (1912), In re AIR 1951 SC 332 [Para 12], P.N. Tiwari v. Union of India [2003] 265 ITR 224/133 Taxman 482 (All.) [Para 12], Amalgamated Tea Estate Co. Ltd. v. State of Kerala [1974] 94 ITR 479 (SC) [Para 12], Kunnathat Thathunni Moopil Nair v. State of Kerala AIR 1961 SC 552 [Para 16], Jaipur Hosiery Mills (P.) Ltd. v. State of Rajasthan [1970] 26 STC 341 (SC) [Para 16], National Federation of Insurance Field Workers of India v. Union of India [2004] 265 ITR 84/135 Taxman 307 (Uttaranchal) [Para 20], and Kerala State Industrial Development Corpn. Ltd. v. CIT [2003] 259 ITR 51/128 Taxman 29 (SC) [Para 20].

R. Sudhir for the Petitioner. George Varghese and P.K.R. Menon for the Respondent.

Judgment

1. In all these writ petitions, common question arises for consideration. Hence they are taken up together for hearing.

2. O.P. 10569/2003 and O.P. 8425/2002 were taken as the leading cases for argument. In O.P. 10569/2002 petitioners are officers of the third respondent Scheduled Bank. Respondents are (1) Union of India, (2) the Central Board of Direct Taxes and (3) the Federal Bank.

3. The Federal Bank Officers Association itself filed an original petition before the Karnataka High Court, seeking for a declaration that Rule 3(1)(ii) and Rule 3(7)(i) notified by Ext. P1 as unconstitutional and uneforceable. The said writ petition was dismissed by a common judgment dated 17-2-2003. It is thereafter that the present writ petitions were filed challenging the validity of section 17(2)(vi) of the Act which, according to the petitioners, was not a subject matter of challenge in the earlier writ petition. Petitioners seek for a declaration that section 17(2)(vi) of the Income-tax Act as inserted by Finance Act 2001 is illegal and violative of articles 19(1)(g) and 246 of the Constitution of India, and a declaration that Rule 3 of the Income-tax Rules, 1962 as substituted by Income Tax (22nd Amendment) Rules, 2001 by the second respondent under its Notification No. 940(E) dated 25-9-2001 as illegal and unconstitutional being hit by the vice of excessive delegation of power besides being ultra vires the rule making power of the second respondent and to stay the operation of the aforesaid provisions.

4. There are no detailed factual averments in the writ petitions supporting the contentions that the provisions are in any way arbitrary or illegal. However, among the grounds urged, it is averred that amendment to Rule 3 is arbitrary since it seeks to discriminate between the Central/State Government employees on the one hand and public sector and private sector employees on the other and that the same is without any reasonable classification and having no nexus with the object sought to be achieved. It is also averred that the accommodation taken on lease and provided to the employee is not a perquisite and the reimbursement towards motor car allowance cannot be treated as a perquisite as what is provided is by way of motor car allowance is only a facility for reimbursement of petrol/diesel charges is meant for journeys of officers from residence to office and back. It is also averred that fringe benefit does not include interest subsidy and is not perquisite. Therefore, taxing interest subsidy and reimbursement of conveyance allowance is oppose to section 17(2) of the Act. It is the further case that petitioners are eligible to avail various loans such as house building loans, vehicle loan etc. at concessional rate of interest from their employer as per the service rules and the intention of the Legislature is not to treat interest free loan as concessional rate as a ‘perquisite’ by virtue of section 17(2)(vi) as the same was withdrawn by deletion of sub-clause (vi) of section 17(2) with effect from the date of its insertion by enacting the Finance Act, 1985 which was a measure of relief to the salary tax payers. Hence the re-introduction of the same by exercising the power under section 295(2)(c) of the Act is impermissible. It was further stated that even assuming that interest subsidy can be treated as a perquisite the second respondent is not entitled to fix the rates at 10% or 13% as the benchmark rate for computing the value of perquisite. They also rely on the budget speech rendered by the Finance Minister for 2002-2003 which is extracted at page 7 of the original petition to the effect that it propose to provide that no perquisites will be assessed for the assessment year 2002-03 in the case of employees whose taxable salary, excluding perquisites, is up to Rs. 1,00,000 and for the subsequent years, to give an option to the employer to pay the tax on perquisites on behalf of the employees. In the previous year, according to the Minister’s speech, it had rationalized the rules for valuation of perquisites on the basis of their cost to the employer, except in respect of houses and cars where different criteria are adopted for simplicity. According to the petitioner, the intention of the Legislature is to determine the value of perquisites on the basis of their cost to the employer. The cost of funds of the third respondent Bank was 8.98% for the year ended 31-3-2001 which came down to 8.64% for the year ended 31-3-2002. The annual report of the Bank is produced as Ext. P2 in support of the said contention.

5. In O.P. 8425/2002 also the petitioners are employees of another Scheduled Bank. In O.P. 6779/2002 first petitioner is the Cochin Refineries Officers Association which is a registered and recognised Union and the second petitioner is the Projects Manager of the Kochi Refineries. In O.P. 10629/2003 petitioner is the Dhanalakshmi Bank Officers’ Organisation represented by its Deputy General Secretary and in O.P. 10767/2003 the Federal Bank Officers’ Association represented by its General Secretary is the petitioner. In O.P. 10768/2003 petitioners are the Officer employees in the employment of the Lord Krishna Bank. As I have already stated earlier, similar contentions are raised challenging the provisions of section 17(2) of the Income-tax Act and Rule 3 of the Income-tax Rules.

6. A counter affidavit is filed in O.P. 8425/2002 by the Additional Commissioner of Income-tax, on behalf of the respondents. With regard to the submissions advanced by the petitioners that when the loans are given or arranged by the employer without interest or at concessional rate of interest, the same cannot be taken as perquisite up to the prescribed rate of 10 per cent in respect of HBA and conveyance loan and 13 per cent, in respect of other loans, it is stated that the advance of either interest-free loan or loan at concessional rate of interest by the employer to its employees would result in benefit to the employees and it relieves the employee of his liability to pay interest on such loans if he is required to raise the loan from an outside agency. Hence it could undoubtedly be treated as ‘fringe benefit’ or ‘amenity’. The respondents also relied on the decisions of the Karnataka High Court in Bhel Employees’ Association v. Union of India [2003] 261 ITR 151 , Rajasthan High Court in Aditya Cement Staff Club v. Union of India [2003] 131 Taxman 609 and the decision of the Jharkhand High Court in Tata Workers’ Union v. Union of India [2002] 256 ITR 7252  in similar writ petitions wherein the validity of the legislation were upheld. It is stated that section 17(2)(vi) taken within the ambit of perquisite “the value of any other fringe benefit or amenity as may be prescribed”. Therefore, the Legislature has included fringe benefits within the ambit of perquisite and not the Board, the delegated authority empowered to make rules and ‘fringe’ going by the dictionary meaning means extra benefit especially given to an employee in addition to the salary or wages. It is further averred that in section 2(24) of the Income-tax Act the word ‘income’ has been defined which includes value of any ‘perquisite’ or ‘profit in lieu of salary’ or any ‘allowance’ or any ‘benefit’. The word ‘income’ is a word of broadest connotation and it has been held that for the purpose of the Act, it should be interpreted in its widest amplitude. It does not merely include what is received but also what one gains by exploiting or using a relationship, property or benefit. Reference is also made to sections 15 and 17 of the Income-tax Act and contended that the word ‘salary’ includes ‘any payment’ received by an employee from an employer which includes various benefits perquisites, fees, commission, profits, in lieu of or in addition to salary. Perquisites received by the assessee are taxable under section 17(1)(iv) of the Act. Section 17(2) by an inclusive definition has defined the term ‘perquisite’ to include value of any rent free accommodation and also value of any concession in rent for any accommodation provided to the employee by his employer. It is also contended that section 295(1) gives powers to the Central Board of Direct Taxes to make rules and section 295(2)(c) empowers the Board to frame rules and that the Board has powers to determine the value of any perquisite, which is chargeable under the Act. Likewise accommodation provided by the employer is also a perquisite. It is also stated that the rules framed as per section 295 are to be laid under section 296 of the Act before each House of Parliament so as to have a check whether any modification is required to be made with legislative sanction. For Government employees the value of perquisite in respect of accommodation provided was equal to the rent payable in accordance with the rules framed by the Government. In the case of semi Government employees rent free accommodation for the purpose of perquisite is taken as 10% of the salary or fair market value whichever is less. In the case of others, namely, private sector employees the basis was provided for in the unamended rules. But determination of fair market value was found to be very cumbersome and estimation of fair rent has been subject to many litigations. Further rent legislation varies from State to State. Hence it was decided to simplify and rationalize these rules with a view to reduce litigations. For the purpose of valuation of perquisites of accommodation, employees have been classified into two categories (a) Government and State Government Employees and (b) others. In the case of others it was decided that valuation of perquisite of accommodation would be 10% or 7.5% of salary as recommended by the Expert Group to rationalize and simplify Income-tax Law, 1997. But in order to obviate difficulties to those tax payers who were staying in cities with a population of less than four lacs the perquisites value is to be charged at 7.5% of the salary and for other cities perquisite value was taken at 10% of the salary. If the accommodation is taken on lease by the employer, the perquisite value was taken as the actual amount of lease rental paid or payable by the employer or 10% or 7.5% of the salary whichever is lower. It is contended that the rate fixed cannot be considered as unreasonable for the purpose of consideration of the value of the perquisite. It is also contended that Rule 3 is not violative of Article 14 of the Constitution as even under Article 14 a reasonable classification is permissible. Accordingly, it is prayed that the writ petitions may be dismissed.

7. Heard the learned Senior Counsel Sri Sarangan on behalf of the petitioners and M/s. R. Sudhir, K.M.V. Panddalai and Sri. Parameswara Panicker appearing for the petitioners and the learned Senior Standing Counsel Sri, P.K. Raveendranatha Menon appearing for respondents 1 and 2.

8. Even according to the petitioner in O.P. 10569/2003 earlier challenge made to the rules was unsuccessful but they sought to include a challenge to section 17(2) of the Act in this writ petition. As a matter of fact, the validity of section 17(2) of the Income-tax Act and Rule 3 of the Income-tax Rules, 1962 as notified by the notification dated September 25, 2001 arose for consideration before different High Courts and the constitutional validity of the provisions were upheld. The learned counsel Sri Sarangan reiterated his submission which were advanced before the Karnataka High Court in the decision reported in Bhel Employees’ Association’s case (supra). Firstly, it is submitted by him that sub-clause (vi) of clause (2) of section 17 of the Act is required to be struck down on the ground that essential legislative function has been delegated to the executive and hence the same suffers from the vice of excessive delegation. It is his submission that the Legislature cannot allow the Board to prescribe or say what is fringe benefit or amenity and it is for the Legislature itself to State what they are. Even assuming that such an obligation is permissible in the instant case, there is no guidelines laid down for the executive to determine what is meant by ‘fringe benefits’ or ‘amenity’. Secondly, it is submitted that the impugned rule 3 of the Rules providing for various types of ‘fringe benefits’ or ‘amenities’ is arbitrary and unreasonable and discriminatory and violative of Article 14 of the Constitution of India, insofar as there is discrimination between the Central or State Government employees on the one hand and public sector and private sector employees on the other. Thirdly, it is submitted that under clause (c) of sub-section (2) of section 295 of the Act, the Board is authorised to determine the value of any fringe benefit chargeable under the Act in such a manner and on such basis as appears to the Board to be appropriate and reasonable and in the absence or power conferred under section 295 of the Act to determine what is meant by ‘fringe benefit’ or ‘amenity’ the prescription of ‘fringe benefit’ and ‘amenity’ by means of notification issued by the Board is illegal and without authority of law. According to him, in section 17(2)(vi) the words ‘as may be prescribed’ are linked only to the value and hence in the absence of specification in the statute what is meant by ‘fringe benefit’ or ‘amenity’ the Board cannot prescribe what is meant by ‘fringe benefit’ or ‘amenity’. Reference is also made in support of this contention to the decisions of the Supreme Court in Harakchand Ratanchand Banthia v. Union of India AIR 1970 SC 1453, Ajay Kumar Banerjee v. Union of India AIR 1984 SC 1130 and Devi Das Gopal Krishnan v. State of Punjab 1967 AIR SC 1895 and other decisions.

9. Fourthly, it is contended that the impugned provision which provides that when loans are given or arranged by the employer without interest or at concessional rate of interest, they should be taken as perquisite up to the prescribed rate of 10% in the case of house building and conveyance loans and 13% in respect of other loans is totally illegal and unconstitutional since judicial pronouncements have declared them as ‘not perquisite’. It is further submitted that the rules impugned, which provides that the entire cost of travel incurred by the employer to the spouse of the employee should be treated as a perquisite, is also unreasonable and arbitrary. According to him, the travel is undertaken by the employee at the behest of the employer and no benefit is derived by the employee. It is also contended that the impugned rule provides for extremely impractical, cumbersome procedure with regard to the use of motor cars provided by the employer to his/its employees inasmuch as the employee has to maintain complete details of journey undertaken for official purpose such as the date of travel, destination, mileage and the amount of expenditure incurred and to give a certificate that the expenditure was incurred for official purposes only and hence the procedure is wholly unwarranted and cumbersome and requires to be struck down as being unreasonable and arbitrary. It is their contention that the imposition of tax on the emoluments paid to a servant made available to the employee by its employer on the ground that either it is a perquisite or an amenity provided to the employee is liable to be struck own on the ground that it amounts to double taxation. Finally, it is submitted that Rule 3 of the Rules is liable to be nullified on the ground that on the date of issue of the said notification, sub-clause (vi) of clause (2) of section 17 of the Act was not in the statute book and as such the Board had no authority to make the impugned rule.

10. Learned counsel Sri. P.K. Raveendranatha Menon on the other hand repelled the contentions raised by the learned counsel or the petitioners. According to him, the challenge to section 17(2)(vi) of the Act and rule 3 of the Rules having tested by different High Courts and the constitutional validity was upheld for valid reasons after referring to the various provisions of the statute and the case law on the subject. He also reiterated the submission that section 17(2)(vi) does not suffer from the vice of excessive delegation nor is arbitrary or violative of Article 14 of the Constitution of India. According to him, the expression ‘fringe benefit’ is an inclusive definition and by various decisions it is now well-settled as to what is ‘fringe benefit’ and over and above the salary amenities provided by the employer in the form of perquisites are under the head ‘Salary income’. It is only the benefit or advantage of concession that is made subject-matter of tax and that there are guidelines in the statute. It cannot be said that the Board has no powers to frame rules to prescribe what are perquisites. The Board in exercise of the power having framed rules is also not contrary to section 17(2) of the Act nor can it be said to be ultra vires to the provisions of the Act. It is also his contention that no factual matrix is given by the petitioners in any of the writ petition in discharge of their burden to show that rule 3 of the Income-tax Rules, 1962 and section 17(2) of the Act are in any way unconstitutional and violative of Article 14 of the Constitution of India. In the absence of proper plea on the question of discrimination, according to him, the writ petitions lack merit.

11. The submissions made by the learned counsel for the petitioners were elaborately considered by the Division Bench of the Karnataka High Court in Bhel Employees’ Association’s case (supra) wherein reference is also made to the decision of the Supreme Court in Avinder Singh v. State of Punjab AIR 1979 SC 321 in which it laid down the tests for a valid delegation of legislative power as (i) the Legislature cannot efface itself, (ii) it cannot delegate the plenary or the essential legislative function; (iii) even if there be delegation, Parliamentary control over delegated legislation should be a living continuity as a constitutional necessity.

12. It admits of no doubt that essential feature cannot be delineated in detail but at the same time delegation is a constituent element of legislative power under Article 245 of the Constitution of India. (See Agricultural Market Committee v. Shalimar Chemical Works Ltd. AIR 1997 SC 2502. Therefore, the only question is whether the delegation is excessive or whether the Legislature has abdicated its essential functions ? In this connection, it has to be examined the scope of section 17(2)(vi) of the Income-tax Act as to whether it is liable to be struck down on the ground of excessive delegation ? Sub-clause (i) to (v) of clause (2) of section 17 specifies what are to be treated as perquisites. The definition itself is an inclusive definition. The value of rent free accommodation provided to the assessee by his employer, value of concession in the matter of rent respecting any accommodation, value of a benefit or amenity granted or provided free of cost are specifically included in the definition clause itself. As per sub-clause (vi) of section 17(2) the value of any other ‘fringe benefit’ or ‘amenity’ to be prescribed is included in the definition ‘perquisite’. Therefore, any value of fringe benefit of amenity would also come under the purview of the term ‘perquisite’. Going by Webster’s Encyclopaedic Unabridged Dictionary, the term ‘fringe benefit’ means a benefit as free life of health insurance, received by an employee in addition to his regular pay and ‘amenity’ means the quality of being pleasing or agreeable in situation, prospect, disposition, etc. The meaning of the expression in other dictionary also would show that what it actually means is an advantage obtained by an employee. It cannot, therefore, be said that the word ‘fringe benefit’ or ‘amenity’ are expressions which have not gained specific understanding both in daily and commercial use. Further, while considering a challenge that the provisions is bad because of its excessive dilation, it has to be found whether Legislature had left the essential functions to be legislated by delegated authority or merely left the execution of it. As held by the Apex Court in Art. 143, Constitution of India and Delhi Laws Act, (1912), In re AIR 1951 SC 332 it is open to the Legislature to formulate the policy as broadly and with as little or as much details as it thinks proper and it may delegate the rest of the legislative work to a subordinate authority to work out the details within the framework of that policy. In the light of section 17(2) of the Act and the inclusive definition contained thereon of the term ‘perquisite’ and also the fact that the expression has been understood as an advantage or a benefit conferred to an employee and considering the fact that it is an inclusive definition and following the various decisions of the Supreme Court as referred to above, it cannot be said that section 17(2)(vi) of the Act should be struck down on the ground that it confers unguided or uncontrolled power on the rule making authority. Further, the Rajasthan High Court in Aditya Cement Staff Club’s case (supra) also held that sub-clause (vi) of section 17(2) cannot be dubbed in any manner violative of any provisions of the Constitution or parent Act. In fact none of the provisions under section 17(2) or under the impugned rules deviate from the basic concept of perquisites and fringe benefits as part of salary in its wider sense. It was also held that no legislative function has been bestowed on the rule-making authority to make a substantive provision to bring something to tax, which is not envisaged under the parent Act under the head ‘Income from salaries’ by inserting the impugned provision. It is in the nature of clarification and making it more obvious to remove doubts, if any, about the fact that fringe benefits which an employee receives from his employer by way of a personal advantage because of status as an employee and have nexus with the employer-employee relationship to be included in the wholesome expression ‘perquisite’. Section 17(2)(vi) was inserted with effect from 1st April, 2002 and hence applicable to income during the year ended on 31-3-2002. Therefore, it cannot be said that it is violative of any well-settled principle of computing income of previous year 2001-02 as per substantive law prevailing on 1st April, 2002, by applying existing machinery provision. Finally, it was concluded that insertion of sub-clause (vi) in section 17(2) by the Finance Act, 2001 is not violative of any provisions of the Constitution or the parent Act, since only valuation of other fringe benefits has been left to be detailed by the subordinate legislation, there is no abdication of essential legislative function and neither sub-clause (vi) of section 17(2) nor the amended Rule 3 suffers from any invalidity. A Division Bench of the Allahabad High Court in P.N. Tiwari v. Union of India [2003] 265 ITR 2241  also upheld the validity of section 17(2)(vi) of the Income-tax Act, 1961 following the decision of the Karnataka High Court in Bhel Employees’ Association’s case (supra). Reference was also made to the decision of the Supreme Court in Amalgamated Tea Estate Co. Ltd. v. State of Kerala [1974] 94 ITR 479 and various other decisions relevant for consideration.

13. In view of the decision of the Karnataka High Court in Bhel Employees’ Association’s case (supra) and the Allahabad High Court in P.N. Tiwari’s case (supra) and after considering the reasons given therein I am in respectful agreement with the view expressed by those High Courts. As I have already noticed, I do not find that there is any excessive delegation nor is there any delegation of essential legislative functions to the rule making authority. In the circumstances, the validity of section 17(2)(vi) of the Income-tax Act cannot be struck down as violative of any of the constitutional provisions.

14. The next question is as to whether Rule 3 as contended is liable to be struck down on the grounds urged by the petitioners ?

15. The contention that there is a discrimination between the State Government and Central Government employees on one hand and the public sector and others on the other hand, is discriminatory, does not hold any merit. Apart from the fact that no factual pleadings are there, even the grounds urged merely stating that the classification between the Government employees and non-Government employees is violative of Article 14 has to be decided in the light of policy and objects of the legislation. If the classification is rational and based on intelligible differentia which distinguishes the other persons or things then the basis of the differentiation if has actually no rational nexus and relation with the object sought to be achieved cannot be held to be discriminatory. There is a difference between discrimination and differentiation. If the differentiation is rational having due regard to the objects sought to be achieved, then such differentiation is not discriminatory. The Governmental power is exercised by the State while making laws to operate differently with different groups or class of persons. Therefore, there cannot be any strict formulae or doctrine to be applied for testing as to whether such exercise is violative of article 14 of the Constitution. But article 14 only forbids unreasonable classification. Therefore, it is for the petitioners to show that what has been done is irrational and unreasonable. There is always a presumption in favour of the constitutionality of the statute. I do not find anything in the writ petition providing sufficient and relevant factual background to discharge the burden as cast on the petitioners to support the case of arbitrariness in action complained of.

16. The Supreme Court, in case of Kunnathat Thathunnai Moopil Nair v. State of Kerala AIR 1961 SC 552 observed that if the taxation, generally speaking, imposes a similar burden on every one with reference to that particular kind and extent of property, on the same basis of taxation, the law shall not be open to attack on the ground of inequality, even though the result of the taxation may be that the local burden on different persons may be unequal. Therefore, if the Legislature has classified persons or properties into different categories, which are subjected to different rates of taxation with reference to income or property, such a classification would not be open to the attack of inequality on the ground that the total burden resulting from such a classification is unequal. No doubt, it is true that taxation laws must also pass the test of Article 14. In deciding whether taxation law is discriminatory or not it cannot be forgotten that the State has a wide discretion in the matter of selecting the persons or objects to be taxed. In Jaipur Hosiery Mills (P.) Ltd. v. State of Rajasthan [1970] 26 STC 341 the Supreme Court observed as follows :

“...it has to be borne in mind that in matters of taxation the Legislature possesses the large freedom in the matter of classification. Thus wide discretion can be exercised in selecting persons or objects which will be taxed and the statutes is not open to attack on the mere ground that it taxes some persons or objects and not others. It is only when within the range of its selection the law operates unequally and cannot be justified on the basis of a valid classification that there would be a violation of article 14.” (p. 343)

17. Hence the classification of Central Government and State Government employees on the one hand and the employees of public sector and private sector on the other for the purpose of determining the value of perquisite with reference to accommodation provided to those employees by their employer cannot be said to be unreasonable or violative of article 14 of the Constitution of India. They belong to distinguished and different classes of employees. Their work responsibility, service conditions, etc., also differ. Therefore, they cannot be held to be similarly situated and what is provided in the rules is only prescriptions of rate of rent free accommodations to some State Government and Central Government employees in terms of Article 309 of the Constitution of India and the service conditions are governed by the said rules framed by the President of India and Governors respectively. Therefore, they stand as Government servants as specified by specific service rules. The provision for a fixed rate of 7.5% and 10% commensurate with the H.R.A. granted to those employees who are not provided with house cannot be said to be in any way arbitrary or unreasonable or violative of Article 14 of the Constitution of India.

18. As per clause (c) of sub-section (2) of section 295 of the Income-tax Act the Board is authorised to determine not only the fringe benefit chargeable under the Act but also can determine what is meant by fringe benefit or amenities. As a matter of fact, sub-clause (vi) of clause (2) of section 17 provides for determination of fringe benefit or amenity by means of prescription in the Rules. The provision contained in section 295(2)(c) are wide enough to empower the Board to frame Rules for the purpose of identifying the types of fringe benefits or amenities. The expression ‘as may be prescribed’ occurring in sub-clause (vi) of clause (2) of section 17 of the Act has necessarily to be understood as conferring power on the rule-making authority to prescribe what is ‘fringe benefit’ or amenity and it is not shown what is actually prescribed is not fringe benefit at all. It is also not shown that no benefit is conferred by the employer on its employees. In such circumstances, there is no merit in the contention that clause (c) of sub-section (2) of section 295 of the Act the Board has no power to determine what is meant by ‘fringe benefit’ or ‘amenity’.

19. The next contention advanced is that when loans are given or arranged by the employer without interest or at a concessional rate of interest the same cannot be taken as a perquisite up to the prescribed rate of 10% in respect of H.R.A. and conveyance allowance and 13% in respect of other loans. If interest free loan is provided or loan is provided at a concessional rate of interest by the employer to the employees certainly that would result in the benefit of the employee since he derives the benefit by such concession and reduces his financial liability. Therefore it is the income in his hands. It cannot be said that it is a fringe benefit or amenity given to the employee. Therefore, interest free loans or loans advanced at concessional rate of interest to the employee has necessarily to be treated as perquisite and the contention contra is only to be rejected.

20. But the further question is whether the prescription of interest rate at 10% in the case of house building allowance and conveyance allowance and 13% in respect of other loans for determining the value of perquisite is rational ? As in the case of conveyance allowance or in respect of other loans, no factual data is provided in any of these writ petitions that the fixation of such percentage will be offending the very term ‘perquisite’ in that no benefit is derived by the employees. On the other hand, the argument proceeds that even if loans are given on such concessional rates it cannot be taken as a perquisite which I have already considered and rejected. However, in the case of house loans granted by the employer prescription of interest rate at 10% is contended to be arbitrary and also work out to be a taxation on an amount which cannot be called a perquisite at all. It is the contention of the petitioners that a fringe benefit or perquisite must be an amenity or concession extended by the employer to the employee. If the rate of interest for the housing loan given by the employer is equal to or higher than the prevailing rate of interest given by the nationalised and other banks, then there is no question of receiving any benefit or concession from the employer. In the case of Life Insurance at 7% per annum. According to the petitioners, the percentage of interest is excessive in the context of fall of interest market rate since various other financial institution are giving loan charging interest at lower than 10%. While this question was considered by the Uttaranchal High Court in National Federation of Insurance Field Workers of India v. Union of India [2004] 265 ITR 841  on behalf of the Central Board of Taxes it was submitted that they are considering this aspect and it was held that the Central Board of taxes can be moved by filing appropriate representations in this regard as they are empowered to issue circulars under section 295 of the Income-tax Act and finally the Central Board of Direct Taxes was directed to consider lower rate of interest in valuing fringe benefits in tune with market rates of interest and according to the learned counsel Sri P.K. Raveendranatha Menon, this is an aspect which can taken note of by the Central Board of Direct Taxes or by the assessing authority at the time of assessment. When as per rules 10% is fixed and any loan granted at interest rate below 10% has to be taken as a perequisite liable to be taxed, no discretion is vested with the Income-tax Officer to consider as to whether the rate of interest on the loan provided by the employer has conferred any benefit or concession on its employees having due regard to the prevailing interest rate of any other financial institutions and banks for such type of loans is beyond his powers. According to the petitioner, when the interest rates are varying from time to time fixing a particular percentage below which it is seems to be a perquisite has no rational basis. Unless it is shown that the employee has received any concession or benefit or that the rate of interest payable by the employee as per the rules is a concessional rate, that cannot be termed as a perquisite or amenity received or conferred on the employee. In O.P. 10569/2003 the annual report of the Bank is produced. The cost of funds of the third respondent Bank is 8.98% for the year ended 31-3-2001 and 8.64% for the year ended on 31-3-2002. It is averred in the original petition that the Finance Minister in his Budget speech made on 28-2-2002 has stated that in the previous year he has rationalised the rules for valuing perquisite on the basis of their costs to the employer. Therefore, according to the petitioner, in the light of the Budget speech of the Finance Minister the benchmark rate fixed by the second respondent for determining the value of persquisite in so far as interest free or concessional rates loans is arbitarry. He also relied on the decision of the Supreme Court in Kerala State Industrial Development Corpn. Ltd. v. CIT [2003] 259 ITR 511  in support of his contention that the Finance Minister’s speech before introducing the Bill can be relied on to throw light on the object and purpose of the provisions. This aspect of the matter has not been specifically met with in the counter affidavit. On the other hand, the definite stand taken by the Board is that this matter will be looked into by them as noticed in the decision of the Uttaranchal High Court in National Federation of Insurance Field Workers of India’s case (supra). In such circumstances, I direct that unless and until suitable circulars are issued by the Central Board of Direct Taxes the provisions shall be read down and understood with a rider that the rate provided in the Rule will be applicable unless the assessee proves to the satisfaction of the Assessing Officer that rate of interest or any part thereof charged by the employer does not amount to any concession or benefit having due regard to the rate of interest charged for such type of loan by public financial institutions.

21. The next contention as to whether the travel benefits given to the spouse is a fringe benefit does not arise in any of these original petition in the absence of any factual pleadings to that effect.

22. Regarding the contention that the employee has to maintain details regarding the journey to be undertaken by him and procedure to be followed as impracticable, I do not find there is merit in this contention. Merely because a particular mode of proof is required it may be inconvenient or causing difficulty to employee is not a ground to nullify the validity of the rule. There is no question of any double taxation in the present case. As per section 4(1) of the Act income-tax shall be charged on every person and income earned by an employee has to be exempted as per the status of that service and the employee is required to pay tax only in respect of the income he or she receives. I am unable to find any merit in the contention. Further how it actually works out to be double taxation is also not pleaded in any of the writ petitions. Lastly it has to be held that section 17(2)(vi) of the Act came into force from 17th April, 2002 and that is applicable to the assessment year 2002-2003 (2001-02 being the financial year). I respectfully agree with the view expressed by the Karnataka High Court and other High Courts on the point No other points are argued.

In the result, the original petitions are dismissed subject to what is indicated above in respect of the percentage of interest fixed by rules before calculating the value of fringe benefits. The amount deposited by the employer as per the interim direction shall be paid over to the Income-tax Department with details of deduction made for each of the employee within three weeks from today. Since the amount was deducted but not paid over as per the order of the Court, the employer will not be liable to pay any interest thereon.

nn

 

 

 [S1]1. 128 Taxman 309.

 [S2]2. 123 Taxman 426.

 [S3]1. 133 Taxman 482.

 [S4]1. 135 Taxman 307.

 [S5]1. 128 Taxman 29.