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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • — Y.S Dharmadhikari.
  • Nos. 1, 3, 4 and 6 — P.S Khirwadkar.
  • Nos. 2 and 5 — A.P Tare.
Judges
  • G.P Singh, C.J
  • U.N Bhachawat, J.
Acts
  • rule 3(a). Similarly rule 3(b)
  • Rule 3 of the I.T. Rules
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • — Y.S Dharmadhikari.
  • Nos. 1, 3, 4 and 6 — P.S Khirwadkar.
  • Nos. 2 and 5 — A.P Tare.
Judges
  • G.P Singh, C.J
  • U.N Bhachawat, J.
Acts
  • rule 3(a). Similarly rule 3(b)
  • Rule 3 of the I.T. Rules
See more information ...
Smart Summary

Structured Summary of the Provided Opinion

Factual and Procedural Background

Petitioner No. 1 is the Officers Association, Bhilai Steel Plant, a society registered under the Madhya Pradesh Societies Registrikaran Adhiniyam, 1973. Petitioner No. 2 is an officer of the Bhilai Steel Plant serving as Divisional Engineer (Construction). Petitioner No. 2 occupies a Plant quarter for which the rent is fixed at Rs. 100 per month under rule 45a of the fundamental rules applied to officers; that rent is fixed irrespective of the occupant's salary. Petitioner No. 2's salary is about Rs. 1,500 per month, so the rent he pays is less than one-tenth of his salary. Other officers in the Plant similarly occupy quarters and pay rent less than one-tenth of their salaries.

The Plant's management has been deducting income-tax at source under section 192 of the Income-tax Act by treating the difference between one-tenth (10%) of an officer's salary and the rent actually paid as a perquisite. The management stated that it adopted this course on the basis of instructions received from the Income-tax authorities. The petitioners challenged this practice and sought a direction restraining the respondents from treating the difference between 10% of salary and the rent paid as a perquisite for purposes of deduction of income-tax at source.

The Income-tax authorities (joined as respondents) denied issuing any circular or instruction to the management directing this treatment, but asserted that the legal position supports the management's approach. The management expressed concern that, if it did not deduct on this interpretation, it might be made liable for payment of tax under section 201 of the Act.

Although normally the question would be decided at assessment, the court considered it desirable to decide the issue under Article 226 of the Constitution because the dispute affected a large number of employees and touched on the performance of the statutory function entrusted to an employer under section 192 (deduction at source).

Legal Issues Presented

  1. Whether, for the purposes of deduction of income-tax at source under section 192 of the Income-tax Act, the difference between one-tenth (10%) of an employee's salary and the rent actually paid for employer-provided accommodation can be treated as a perquisite merely because the rent paid is less than 10% of salary.
  2. Whether Rule 3 of the Income-tax Rules (framed under section 295 of the Act), which provides methods for valuing perquisites (including taking the value of unfurnished rent-free accommodation as 10% of salary), can be applied to deem the existence of a perquisite whenever the rent paid by an employee is less than 10% of salary (i.e., whether Rule 3 can be used to determine the existence of a perquisite, not merely its valuation).

Arguments of the Parties

Petitioners' Arguments

  • Merely because the rent paid by an officer is less than one-tenth of his salary, the difference between one-tenth of salary and the rent paid cannot be treated as a perquisite.
  • The Plant's fixed low rent (Rs. 100) applicable irrespective of salary does not amount to a concession in the matter of rent that would make the difference a perquisite.
  • The petitioners sought a direction restraining respondents from treating the difference as a perquisite for purposes of TDS (deduction at source).

Respondents' / Management's Position

  • The management said it was treating the difference between 10% of salary and rent actually paid as a perquisite in deducting income-tax at source under section 192, asserting that this course was based on instructions from the Income-tax authorities.
  • The management also contended that, if it did not deduct tax on this interpretation, it could be made liable for the payment of tax under section 201 of the Act.

Income-tax Authorities' Position

  • The Income-tax authorities denied that any circular or instruction had been issued to the management directing it to treat the difference as a perquisite, but maintained that the management's treatment represented the correct legal position.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court's analysis proceeded by reference to the relevant statutory definitions and the rule-making power under the Act:

  1. Statutory definitions:
    • Section 17(1) of the Act defines "salary" to include perquisites.
    • Section 17(2) defines "perquisite" and, relevantly, includes "(ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer." Thus the statutory language focuses on "any concession in the matter of rent."
  2. Rule-making and valuation provisions:
    • Section 295(1) empowers the Board to make rules for carrying out the purposes of the Act; section 295(2)(c) allows rules for determining the value of any perquisite chargeable to tax in such manner and on such basis as the Board thinks proper and reasonable.
    • Rule 3 of the Income-tax Rules, made under section 295, prescribes methods for valuing perquisites. Relevant portions provide that for certain employers the value of unfurnished rent-free accommodation is to be assessed as 10% of the salary, and that the value of residential accommodation at a concessional rent is the excess of that notional value over the rent actually payable.
  3. Distinction between "existence of a perquisite" and "valuation of a perquisite":
    • The court emphasized that sub-clause (ii) of section 17(2) is directed at "any concession in the matter of rent." A concession exists only if the rent normally payable for the accommodation is higher than the rent actually paid. If the employer gives no concession, there is no perquisite under that provision.
    • Rule 3, the court held, is framed under section 295(2)(c) for the purpose of determining the value of a perquisite once it is established that a perquisite exists. The rule operates after a factual finding that the employee is in receipt of a perquisite; it cannot be used to determine whether the officer is in receipt of any perquisite in the first place.
    • Accordingly, applying the notional 10% figure in rule 3 does not create a deeming that whenever the rent paid is less than 10% of salary a concession (and hence a perquisite) must be treated as having been granted.
  4. Application to the facts:
    • The court observed that accommodations of a lower category (with lower normal rent) may be occupied because suitable higher-category accommodation is not available; in such situations the rent paid could be less than 10% of salary without any concession having been given by the employer.
    • If the rent actually paid equals the normal rent of that specific accommodation, the employee is not receiving any concession in the matter of rent even though that rent may be less than 10% of his salary.
  5. Limitation on rule construction:
    • The court concluded that construing Rule 3 as a deeming provision (i.e., as automatically treating any rent paid below 10% of salary as a concessional perquisite) would go beyond the rule-making power conferred by section 295(2) and would render the rule invalid in that respect.
    • Therefore, the management was not justified in treating the difference between 10% of salary and the rent actually paid as a perquisite in every case for the purposes of deduction of income-tax at source.

Holding and Implications

Holding: The petition is allowed. The court directed Respondent No. 2 (the Plant management) not to treat, in every case, the difference between the rent actually paid and 10% of the salary as a perquisite for the purposes of deduction of income-tax at source.

Immediate consequences and directions ordered by the court (as stated in the opinion):

  • The Plant management (Respondent No. 2) is directed not to treat the difference between the rent actually paid and 10% of salary as a perquisite in every case for purposes of TDS under section 192.
  • There shall be no order as to costs of this petition.
  • The security amount shall be refunded to the petitioners.

Broader legal implication articulated by the court (drawn from the court's reasoning in the opinion):

  • Rule 3 of the Income-tax Rules is a valuation provision and cannot be used to create or deem the existence of a perquisite where none exists; treating Rule 3 as a deeming provision would exceed the rule-making power under section 295(2) and would be invalid. Consequently, a factual inquiry into whether a concession in the matter of rent has in fact been granted is required before applying Rule 3 to determine value for taxation purposes.

The opinion does not purport to list or rely upon precedents, and it resolves the dispute by examining statutory language and the scope of the rule-making power; the direct effect is the protective direction to the respondents and the refund/no-costs outcome set out above.

Show full summary ...

    Officers' Association, Bhilai Steel Plant, Bhilai And Another v. Union Of India And Others

    - Petitioner No. 1, in this petition, is the Officers Association, Bhilai Steel Plant, which is a society registered under the Madhya Pradesh Societies Registrikaran Adhiniyam, 1973. Petitioner No. 2 is an officer of the Bhilai Steel Plant (hereinafter referred to as "the Plant") serving at present as Divisional Engineer (Construction). Petitioner No. 2 is in occupation of a quarter, the rent of which is Rs. 100 per month. This rent was fixed as the standard rent by the plant under r. 45a of the fundamental rules which have been applied to the officers. In other words, the rent of the quarter is Rs. 100 irrespective of the salary of the occupant. The salary payable to petitioner No. 2 works out to nearly Rs. 1,500 per month. Petitioner No. 2 is thus paying a rent which is less than one-tenth of his salary. There are other officers employed in the Plant who are also occupying quarters and paying rent less than one-tenth of the salary of an officer. In deducting income-tax at source under s. 192 of the i.t. act (hereinafter referred to as "the act"), the one-tenth of his salary and the rent paid by him as a perquisite. The management says that this course is being adopted on the basis of the instructions received from the I.T. authorities. The petitioners contend that merely because the rent paid by an officer is less than one-tenth of his salary, the difference cannot be treated as perquisite and income-tax cannot be deducted at source on the footing. The petitioners pray for a direction that the respondents be restrained from treating the difference between 10 per cent. of the salary and the rent paid as a perquisite for purposes of deduction of income-tax at source.

    The I.T. authorities, joined as respondent in this petition, deny that there is any circular or instruction issued to the management for treating the difference between 10 per cent. of the salary and the rent paid as a perquisite for purposes of deduction of income-tax at source. They, however, submit that this is the correct legal position. The stand of the management is that it has to deduct the income-tax on this interpretation, otherwise is would be made liable for the payment of tax under s. 201 of the Act. Normally a question of the nature raised in this petition is determined at the stage of assessment but having regard to the fact that the dispute involves a large number of employees and relates to the construction of certain provisions of the Act and the Rules made thereunder and toughs the performance of the statutory function entrusted to an employer under s. 192 in making the deduction at source, it is desirable that the question be decided in this petition under art. 226 of the Constitution.

    Section 17(1) of the Act defines "salary" to include, amongst others, perquisites. The definition of "perquisite" is contained in s. 17(2) which, in so far as relevant, reads as under :

    "(2) perquisite includes -

    (i) the value of rent-free accommodation provided to the assessee by his employer;

    (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;"

    Section 295(1) of the Act empowers the Board to make rules for carrying out the purposes of the Act. Section 295(2) enumerates various matters on which rules can be made without prejudice to the generality of the power conferred by s. 295(1). One of the matters enumerated in s. 295(2)(c) is as follows :

    "(c) the determination of the value of any perquisite chargeable to tax under this Act in such manner and on such basis as appears to the Board to be proper and reasonable;"

    Rule 3 of the I.T. Rules made under s. 295 deals with the valuation of perquisites. In so far as relevant, the rule reads as follows :

    "3. Valuation of perquisites. - For the purposes of computing the income chargeable under the head Salaries the value of the perquisites (not provided for by way of monetary payment to the assessee) mentioned below shall be determined in accordance with the following clauses, namely :-

    (a) The value of rent-free residential accommodations shall NACFG be determined on the basis provided hereundera.namely :- ....

    (ii) where the accommodation is provided...

    (B) by a corporation established by a Central, State of Provincial Act, 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, to any person employed by it;.......

    an amount equal to -

    (1) if the accommodation is unfurnished, 10 per cent. of the salary due to such person or officer, as the case may be, in respect of the period during which the said accommodation was occupied by him during the previous year.

    (2) if the accommodation is furnished, an amount calculated in accordance with sub-clause (ii)(1) plus 15 per cent. per annum, of the original cost of the furniture (including television sets, radio sets, refrigerators, other household appliances and air-conditioning plant or equipment) or if such furniture is hired from a third party, the actual hire charges payable therefor;......

    (b) 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 were provided free of rent. Exceeds the rent actually payable by the assessee for the period of his occupation during the relevant previous year."

    Sub-cl. (ii) of the definition of "perquisite" in s. 17(2) extends the meaning of that term by including therein "the valuer of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer". It is "any concession in the matter of rent" which falls within this clause. If If the employer gives no concession to the employee in the matter of rent, there can be no question of any perquisite. A case of concession in the matter of rent would arise when the rent normally payable for the accommodation is higher than the rent paid. The definition of "perquisite" does not say that if the rent paid by the employee is less than 10 per cent. of his salary, the difference will be deemed as perquisite. It is not uncommon that accommodations suiting the standard of the officers are not available and they haves to occupy accommodations which area or lower category. The rent of such accommodations is low and if the rent paid in such a situation is less than 10 per cent. of the salary (which is the rent normally payable for an accommodation of the category which should haves been allotted to the officer), the difference cannot be treated as perquisite, similarly, if the rent of an accommodation is fixed irrespective of the person who occupies it, the difference between 10 per cent. of salary and the fixed rent paid cannot be said to be any perquisite. In these cases if cannot be said that the officer was granted any concession in the matter of rent.

    Rule 3, the relevant portions of which have been extracted, has been framed in exercise of the rule-making power conferred by s. 295(2)(c). The object of s. 3 is the determination of the value of the perquisite chargeable to tax. The rule operates at the stage when a finding is reached that the employeee is in receipt of any perquisite as defined in s. 17(2). The rule cannot be used to determine whether the officer is really in receipt of any perquisite. The rule applied only for determining the value of the perquisite when the fact of receipt of perquisite is otherwise established. Rule 3(a) deals with the case when the employee is in occupation of rent-free residential accommodation. If the fact that the employee is in occupation of rent-free accommodation is established, the value thereof would be calculated by applying the method provided in rule 3(a). Similarly rule 3(b) applies when the employee is in occupation of residential accommodation at a concessional rent. If it is established that the employee is in fact in occupation if an accommodation at a concessional rent, the value thereof would be calculated in the manner provided in this rule. The effect of the rule in taking the value of rent-free unfurnished accommodation at 10 per cent. is not to lay down that the moment it is found that an employees is paying less than 10 per cent. of his salary as rent, it must be deemed that the has been provided accommodation at a concessional rent.

    The question whether an employee is in occupation of an accommodation at a concessional rent, in other words, the question whether the employee is 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. If the employees is paying that rent which is the normal rent of the accommodation in his occupation, it cannot be said that he is receiving any concession in the matter of rent even though the rent paid by him is less then 10 per cent. of his salary. As earlier pointed out, there is no deeming clause in the definition of "perquisite" contained in s. 17(2) that once it is established that an employee is paying rent less then 10 per cent. of his salary it must be deemed that he is receiving a concession in the matter of rent and no such deeming clause can be inferred from r. 3. Indeed, if r. 3 were to be so constured, it will go beyond the rule making power conferred by s. 295(2) and would become invalid. We are, therefore, clearly of opinion that the management of the plant 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 income-tax.

    The petition is allowed. Respondent No. 2 is directed not to treat the difference between the rent actually paid and 10 per cent. of the salary as a perquisite in every case for purposes of deduction of income-tax. These shall be no order as to costs of this petition. The security amount shall be refunded to the petitioners.

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    Comments

    Officers' Association, Bhilai Steel Plant, Bhilai And Another v. Union Of India And Others
    (Oct 29, 1980)