Steel Executives Association v. Rashtriya Ispat Nigam Ltd.

1. These four writ petitions seek a direction with reference to the inclusion of a perquisite value in respect of residential accommodation provided by the employer as part of taxable salary income while deducting tax at source.

2. Writ Petition No. 4400 of 1996 has been filed by the Steel Executives' Association, Visakhapatnam. The members of the association are the employees of Rashtriya Ispat Nigam Limited (a Government of India undertaking) (for short "the Nigam"). It is stated that the employees of the Nigam were provided with residential accommodation. Upto April 1, 1990, 10 per cent. of the basic pay of each employee was deducted as the value of the accommodation provided by the employer. Under the memorandum of settlement between the Nigam and recognised trade union arrived at in April, 1990, the rates of house rent charged were brought on par with the rates charged for the Central Government employees under Rule 45-A of the Fundamental Rules and fixed as standard rents on the basis of the plinth area of the accommodation provided irrespective of the location of the accommodation anywhere in India. For the assessment year 1992-93, the Income-tax Officer, Ward-4, Visakhapatnam, issued notices to the some of the employees stating that the difference between 10 per cent. of the salary and the standard rent paid by them was a perquisite under Section 17(2) of the Income-tax Act and had to be included in the income assessable under the head "Salary". This was contested and in the appeal, all those appeals were allowed by the Deputy Commissioner (Appeals). However, the Income-tax Officer, Ward-6, TDS, Visakhapatnam, treated the Nigam as an assessee in default for not deducting the tax at source with reference to the said perquisite and levied a sum of Rs. 31.20 lakhs in respect of the assessment year 1994-95 corresponding to the financial year 1993-94. The Nigam filed an appeal which was dismissed. Thereupon, the Nigam issued a circular dated February 5, 1996, to the employees proposing to deduct the tax at source by including the said perquisite in the salary. Consequently, the writ petition has been filed for quashing the said circular.

3. Writ Petition No. 4978 of 1996, has been filed by the employees' trade union along with an individual employee of Nigam. The facts given in the other writ petitions have been repeated and it is claimed that there could be no perquisite liable to tax and, consequently, the deduction of tax at source by including such a perquisite was untenable.

4. Writ Petition No. 5664 of 1996 has been filed by the All India Andhra Bank Federation along with an individual employee of Andhra Bank. It is stated that under article 25 of the Andhra Bank Officers' Service Regulation, 1992, accommodation may be provided by the bank to the employees on payment of 6 per cent. of the pay or the standard rent whichever is less. Therefore, the bank was providing accommodation and deducting the standard rent from the pay bills. However, on May 19, 1992, a Circular No. 16 was issued stating that under the Income-tax Rules, the value of rent-free accommodation is 10 per cent. of the salary and, consequently, the difference between the standard rent actually paid and 10 per cent. of the salary will be treated as a perquisite for income-tax purposes. It is stated that W. P. No. 7978 of 1992 was filed challenging the said circular but on the bank stating that no deductions were actually made for the assessment year 1992-93, the writ petition was dismissed as premature. A similar writ petition was filed in the Calcutta High Court wherein an interim direction was given suspending the said circular. But the bank gave the benefit of such suspension only to the members of the union which filed that writ petition in Calcutta and deducted the tax adding the perquisite value for the members of the petitioners-union for the assessment year 1994-95. It is also stated that in respect of Indian Bank Officers' Association's case , also the Calcutta High Court by judgment dated August 6, 1993, in Civil Order No. 9740(W) of 1993 allowed the writ petition following the decision in Officers' Association, Bhilai Steel Plant v. Union of India [1983] 139 ITR 937 (MP). Hence, this writ petition pleads for similar relief.

5. Writ Petition No. 33904 of 1997 has been filed by the trade union of Hindustan Shipyard. It is stated that upto April 1, 1990, ten per cent. of the pay was deducted from the employees' salary towards accommodation provided by the employer. But thereafter, the house rent was rationalised on par with the Central Government employees governed by rule 45a of the fundamental rules and accordingly only the standard rent was charged. For the assessment year 1996-97, Hindustan Shipyard included the difference between the standard rent and ten per cent. of the pay as a perquisite for the purpose of deduction of tax at source. It is claimed that there was no perquisite in providing accommodation on a standard rent and a direction is sought to that effect.

6. Counter affidavit has been filed by the Income-tax Officer as the second respondent in W. P. No. 4400 of 1996. It is stated that the standard rent being less than 10 per cent. of the salary, the employees enjoy accommodation at a concessional rent which had to be valued and added as a perquisite. It is also stated that the order passed under Section 201 against the Nigam was confirmed in appeal and, therefore, the employees cannot collaterally challenge that action against the employer.

7. Learned counsel for the petitioners submitted that the issue whether the difference between the standard rent and 10 per cent. in the salary could be treated as perquisite has been decided against the Revenue in three judgments in Officers' Association, Bhilai Steel Plant v. Union of India [1983] 139 ITR.937 (MP) ; Indian Bank Officers' Association v. Indian Bank and ITO v. All India Vijaya Bank Officers' Association . It was submitted that since no appeal has been filed against any of these judgments, any action contrary to those judgments were clearly illegal. Secondly, it was submitted that in respect of the employees of the same company posted in other States, no such perquisite was taxed and there was thus clear discrimination against the employees working in this State. Thirdly, it was submitted that the employer having failed to protect the interest of the employees, they had to take joint action to challenge such an illegal levy.

8. Learned senior standing counsel for the Revenue submitted that the counter affidavit filed in W. P. No. 4400 of 1996, can be taken as the counter for all the cases. He submitted that under Section 17(2)(ii) of the Act, the value of any concession in the matter of rent for providing accommodation by the employer was a taxable perquisite. Therefore, the only question was about the valuation of the perquisite which was governed by Rule 3 as the difference between the fair market rent and the rent actually charged. He submitted that in spite of this position, the valuation has in fact been restricted to the difference between 10 per cent. of the salary and the actual rent, even though the fair market value as estimated by the Income-tax Officer was much more than 10 per cent. of the salary. He further submitted that there is no res judicata in income-tax matters and the individual employee has to pursue his own remedies in respect of his income-tax assessment and neither the employer nor the trade union could interfere in the income-tax matters of the individual employees. He submitted that the writ petition has to be dismissed as not maintainable.

9. We have considered these submissions and we are of the opinion that the Income-tax Department has illegally coerced the employers into making a higher deduction of tax at source by adding a perquisite when there is none, in computing the income under the head "Salary". Section 15 charges any salary due or paid by an employer to income-tax under the head "Salaries". Section 17 defines salary to include perquisites. Section 17(2) defines "perquisites" to include (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer. Rule 3 of the Income-tax Rules provides for valuation of perquisites. According to Sub-rule (a), the value of the rent-free residential accommodation (unfurnished) provided to a Government servant is taken as the rent which would be payable by the Government servant in accordance with the rules framed by the Government for allotment of residences. In the case of others, it is taken as 10 per cent. of the salary. Sub-rule (b) states "the value of residential accommodation provided at a concessional rent shall be determined as the sum by which the value computed in accordance with Clause (a), as if the accommodation provided free of rent exceeds the rent actually payable by the assessee for the period of his occupation during the relevant previous year." A reading of these two sub-rules, will at once indicate the difference in treatment between the Government servant and others. In the case of Government servants, the rent-free accommodation is valued at the standard rent. Consequently, if accommodation is provided at standard rent, there will be no perquisite because the actual rent paid will not be less than the value of the rent-free accommodation both being standard rents. In the case of other employees, rent-free accommodation being taken at 10 per cent., the Revenue presumes that the difference between the rent actually paid and 10 per cent. of the salary is the value of a perquisite enjoyed by the employee.

10. The fallacy in this will be apparent if Sub-rule (b) is read carefully. It provides only for valuation of the perquisite if the residential accommodation is provided at a concessional rent. Therefore, it is necessary for the Revenue to first establish that the rent charged is a concessional rent before it can be said that there is a perquisite and thereafter, such a perquisite will be valued as the difference between the actual rent paid and 10 per cent. of the salary. What has happened in this case is that the Revenue has put the cart before the horse and assumes that there is a concession because the rent charged is less than 10 per cent. of the salary.

11. Faced with this situation, learned senior standing counsel for the Revenue submitted that there was really a concession because in the order made under Section 201 against the employer, the Income-tax Officer had material to indicate that the fair market value of the accommodation provided is much more than 10 per cent. of the salary. We are unable to accept that material as indicating any concession because in a situation where the employer constructs a large number of residential accommodation for its employees in a particular location suitable for its convenience, the fair market rent of such accommodation cannot be determined with reference to the rent of any other kind of accommodation available in the town even if it happens to be nearby. The regular residences in a town have their own environment which cannot be compared with a tenement provided by the employer for locating the employee because the employee has no choice in accepting that accommodation. There are several other reasons germane to the employment and the needs of the employer to keep the employees available and satisfy its own needs which go into the determination of the rent of the accommodation. When we consider the question of concession we will have to consider only whether a single employee gets a concession compared to other employees in respect of the same type of accommodation. In other words, the import of concession is similar to the import of rent-free accommodation. Where others pay rent and one employee is provided rent-free accommodation, there is a perquisite and the value of that perquisite is the rent paid by the others. Similarly, only if an employee pays less than what other employees for similar accommodation pay can it be said that there is a concession. In our considered opinion, there can be no concession at all where all employees are treated alike and standard rents are charged in respect of the same type of accommodation. In fact, the rents charged had been rationalised looking to the nature of the accommodation provided, removing the anomaly where 10 per cent. of the salary is deducted irrespective of the nature of the accommodation provided. As pointed out by the Calcutta High Court in Indian Bank Officers' Association v. Indian Bank [19941 209 ITR 72, it would be illogical to determine the norm of rent payable with reference to the paying capacity of the employee which is variable in respect of the nature of the accommodation which is fixed.

12. It is also stated that the rationalisation achieved by charging standard rent was on the basis of Rule 45 of the Fundamental Rules where the Government employees were given the same benefit. It cannot be said that there will be a perquisite in the case of other employees when there is no perquisite in the case of Government employees, the facts being identical. Learned senior standing counsel submitted that there can be classification in respect of taxation but this is not a case of classification at all. This is a case where the Department's officers have misunderstood the meaning of 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.

13. We are fortified in this view by the decision of the Madhya Pradesh High Court in Officers' Association, Bhilai Steel Plant v. Union of India [1983] 139 ITR 937, where it was even pointed out that if Rule 3 were to be construed as deeming the difference between the actual rent paid and 10 per cent. of the salary as receipt of a concession, it will go beyond the rule-making power under Section 295(2) and be invalid. The Calcutta High Court has followed that decision in ITO v. All India Vijaya Bank Officers' Association , and confirmed the decision of the single judge in the case of the Indian Bank Officers' Association . Though it was stated by the Revenue that they had no information whether any appeals were pending against these judgments, our information through the NICNET is to the effect that no such appeals have been filed. Presumably, the Revenue has accepted these decisions.

14. We have dealt with the concept of tax deduction at source at length in our judgment of even date in the case of P. V. Rajagopal v. Union of India . Suffice it to say that the Department cannot coerce the employer into deduction of the tax at source on an amount which is in dispute as a perquisite by the employer. More so, where in the individual assessments, it has been declared that there is no perquisite. There is also a glaring discrimination among the employees of the same organisation where in the case of employees in Calcutta there has been no charge to tax while employees in Andhra Pradesh were subjected to deduction of tax at source. The officers of the Indian Bank do not pay the tax on identical situation in respect of which the officers of the Vijaya Bank in Andhra Pradesh are deprived of part of their salary as deduction of tax at source. The argument that they can file returns and get the refund is an argument of despair. Such an attitude of the Department cannot be countenanced.

15. The technical objection of the Revenue that the trade unions cannot espouse the personal income-tax problems of the employees, is also unsustainable. This is a case where at the instance of the Revenue, part of the salary of the employee is withheld unreasonably, discriminatively and illegally. Since the employer has given up the contest, the union has come to the rescue as it should, the main object of the trade union being the welfare and service conditions of the employees. Deduction of tax at source affects the service conditions when it is done by the employer without proper authority. When the employer defends itself by setting up the Income-tax Department as the instigator, the trade union must of necessity intervene. We must, in fact, appreciate the action taken by the trade unions as it avoids multiplicity of litigation for thousands of employees who would be needlessly drawn into litigation. Such an unnecessary deduction will really amount to a national waste of paper and energy requiring the filing of thousands of returns and refund orders with consequential work for the banks. One would have expected the Revenue to have been alert in foreseeing the inevitable consequences of such wrong actions and nip it in the bud, particularly when there are decisions of the courts which have presumably been accepted. Efficient tax management requires such far-sight and not a blind defence of futile actions of the field officers.

16. In the circumstances, there will be a mandamus restraining the respondents from treating any standard rent charged for accommodation provided by the employer, as a concession for the purpose of deducting the income-tax at source. The writ petitions are allowed with costs of Rs. 1,000 each.