Kumar & Ors Vs. Union of India & Ors  Insc 597 (15 September 2006)
Sabharwal, C.K. Thakker & P.K. Balasubramanyan
CASES (C) Nos. 101 AND 102 of 2006 C.K. THAKKER, J.
Civil Appeal as well as in Transferred Cases, the appellants have challenged
validity of Rule 3 of the Income Tax Rules, 1962, as amended by the Income Tax
(Twenty-second) Amendment Rules, 2001, (hereinafter referred to as 'the Rules')
which amended the method of computing valuation of perquisites under Section
17(2) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act').
According to the appellants, amended Rule 3 is inconsistent with the parent Act
and also ultra vires Article 14 of the Constitution.
understand the controversy raised in the present proceedings, relevant factual
background in Civil Appeal No. 3270 of 2003 may be stated;
appellants were employed as officers/ executives by Tata Iron & Steel Co.
Ltd. ('TISCO' for short). According to the appellants, usually public sector undertakings
provide housing facilities or grant house rent allowance in lieu of
accommodation to their employees. Normally, house rent allowance is granted
where public sector enterprises are unable to provide housing accommodation to
their employees. Such situations arise when officers/executives are posted in
cities or metropolitan offices of the enterprises where company accommodation
is either not available or available to a limited extent. For the purpose of
accommodating its employees, TISCO has constructed several residential
bungalows/ flats/ quarters/ accommodations in the township of Jamshedpur and around its plants. They were allotted to its employees
as also to other agencies including employees of the Central Government and
State Government who were either transferred or posted in Jamshedpur. TISCO used to fix annual licence
fees of each such accommodation at the rate of 5% of the capital
cost/expenditure of the bungalows/flats/quarters.
On September 25, 2001, the Central Board of Direct Taxes
(CBDT) issued Notification, No. S.O. 940 (E) in the exercise of power under
Section 295 read with sub-section (2) of Section 17 and sub-section (2C) of
Section 192 of the Act by which Rule 3 had been amended. The substituted rule
revised the method of computing valuation of perquisites in the matter of
rental accommodation provided by employers to their employees.
stated that pursuant to the amendment in Rule 3, Respondent NO. 4 (TISCO)
issued a letter dated October 25, 2001 informing all its employees about
amended Rule 3 in respect of valuation of perquisite which were to be added to
the salary of the employees for taxing purposes.
by the above action, the appellants herein filed Writ Petition No. 2835 of 2002
in the High Court of Jharkhand at Ranchi for the following reliefs;
For issuance of
an appropriate writ(s)/ order(s)/direction(s) in the nature of certiorari
quashing the notification No. S.O. 940 (E) dated 25.09.2001 whereby and whereunder
Rule 3 of the Income Tax Rules has been amended by the Government of India,
Ministry of Finance, Department of Revenue (Central Board of Direct Taxes) and
to hold and declare it as ultra vires the Income Tax Act.
For issuance of
a further appropriate writ/ order/ direction, including writ of mandamus
directing the Respondents, particularly Respondent Nos. 3 and 4, not to
implement the provisions of the aforesaid amended Rule during the pendency of
the writ petition, AND/OR
Pass any other
order(s)/direction(s) as Your Lordship may deem fit and proper in the facts and
circumstances of the case.
contended by the employees before the High Court that Rule 3 as amended in 2001
conferred arbitrary and unfettered powers on the Revenue and was ultra vires
the Act. It was also urged that the computation-method was neither based on
intelligible differentia nor had any nexus with the object sought to be
achieved and thus ultra vires Article 14 of the Constitution.
counter-affidavit was filed by the Revenue stating that the Finance Minister in
his Budget Speech had outlined that "the value of perquisites, benefits or
amenities shall be determined on the basis of their cost to the employer except
in respect of house and cars where different criteria would be adopted for
stated that in adopting and applying Rule 3 as it existed prior to the impugned
amendment, there being three classes of employees, the Revenue was facing
difficulties with respect to various matters including the determination of the
fair market value of the property which was found very cumbersome. Moreover, it
did not take into account high rent in the metro towns. It has been averred in
the reply-affidavit that the estimation of fair rent had been the
subject-matter of litigation at various levels mainly on account of the fact
that legislation with respect to rents being State subject differed from State
to State. The value of fair rent could not be determined as the standard rent
was not uniform in all municipal areas. It was accordingly decided to simplify
and rationalize the procedure for determining the perquisite value and
accordingly as per the impugned rules, the employees have been divided only in
Revenue had also explained in the counter the rationale for the distinction
between Government employees and other employees. It has been stated that for
purposes of the valuation of the perquisites relating to accommodation, the
employees have been classified under the impugned amended rule into two
(Central and State) employees and
maintain continuity and equity with their remuneration and a variety of other
benefits available in other sectors, the earlier system of valuation of
perquisites relating to accommodation on the basis of rent payable as per rules
framed by the Government has been retained for Central and State Government
employees. For others, that is, employees belonging to private as well as
public sector undertakings, it has been decided that the valuation of the
perquisites relating to accommodation should be 10 per cent or 7.5 per cent of
the salary as the case may be. As per the assertion of the respondents, this
was decided in keeping with the recommendation of the expert group constituted
to rationalize and simplify income-tax laws.
that the classification between cities with population of less than four lakhs
and others with more than four lakhs as reasonable and rational, the High Court
upheld the validity of Rule 3. According to the Court "for rationalizing
and simplifying the procedure, the Board brought about the impugned
notification" which could not be held unreasonable from any yardstick or
parameter. The said decision is reported as Tata Workers' Union & Anr. v. Union of India & Ors., (2002) 256 ITR 725.
similar question was raised before the High Court of Calcutta in Coal Mines
Officers' Association of India & Anr. v. Union of India & Ors., (2004) 266 ITR 429. Taking note of the
language of Rule 3 prior to amendment in 2001 and after the amendment, a single
Judge held that after 2001, there was no scope for determination of 'fair
rental value'. The concept of fair rental value on the basis of the normal rent
or on the basis of market rent available in the locality or on the basis of the
municipal valuation has been done away with. It was also held that the rule
devised the method and basis of ascertaining the value of concession in the
matter of rent which could not be declared arbitrary or ultra vires. The Court
was also of the view that the difference between the Government employees and
other employees was not violative of Article 14 of the Constitution.
correctness of the decisions of the High Courts of Jharkhand and Calcutta has been questioned in the present
have heard the learned counsel for the parties.
Salve, Senior Advocate appearing for the appellants raised several contentions.
He urged that the condition precedent for exercise of power under Section 17
(2) of the Act read with Rule 3 of the Rules is that it must be a
"perquisite" within the meaning of the Act. Clause (ii) of
sub-section (2) of Section 17 can be attracted provided there is
"concession" in the matter of rent respecting any accommodation
provided by the employer to his employee. If there is no "concession",
sine qua non or condition precedent is absent and there is no 'perquisite' as
well. Since there is no concession in the instant case, Section 17 (2) (ii) of
the Act would not apply nor Rule 3 of the Rules is attracted and no liability
has arisen. It was alternatively urged that old Rule 3, prior to its amendment
in 2001, made available a 'window' by providing that in cases where assessee
claimed and the Assessing Officer was satisfied that there was no 'concession',
the assessee was not liable to pay tax. The rule as amended in 2001 has taken
away the right of the assessee to claim that there was no concession as
envisaged by Section 17 (2) (ii) and hence Rule 3 had no application.
Similarly, it took away the power of the Assessing Officer to hold that there
was no 'concession', even if he is 'satisfied' about the absence of
'concession'. 'Concession' is the "jurisdictional fact" for the
exercise of power under the Act and in absence thereof, the authority cannot
impose taxing liability. It was also submitted that in Rule 3, the Court may
apply the concept of audi alteram partem and observance of natural justice by a
process of 'reading down'. By such process, Rule 3 can be saved from vice of
arbitrariness and unreasonableness. If such a process is expressly or impliedly
prohibited, the rule becomes arbitrary and ultra vires Articles 14 and 19 of
to Mr. Salve, the parent Act imposes an obligation on the assessee to deduct
tax at source from the salary of his employee provided that the employer has
extended accommodation to his employee at a concessional rate. Rule 3 merely
provides mode, method or manner of calculation of liability and is thus a
"machinery" provision. The liability, according to the learned
counsel, must be fixed by a competent Legislature under the statute i.e. under
Section 17(2)(ii) of the Act and only after such liability is fixed, the
question of computation thereof will arise which can be done by machinery
provision i.e. under Rule 3 of the Rules. Rule 3, which is a child legislation,
delegated legislation or subordinate legislation cannot impose liability on the
employer to deduct tax or on the employee to pay tax holding that the concessional
rent was 'perquisite' within the meaning of Section 17 (2) (ii) of the Act. That
is the exclusive domain of the Legislature. Since there was no 'concession',
Rule 3 has no application.
also submitted that the argument on behalf of the Revenue that such a course
had been adopted by fixing flat rates because of "practical difficulties"
of the Revenue in calculating the amount of rent and in dealing with individual
cases is not only irrelevant and immaterial but is illegal, unlawful and
without power or authority of law. The counsel fairly stated that as a rough
and ready test, the procedure laid down in Rule 3 for fixing rent on the basis
of population may not be objectionable but it is only when it is proved that
there is a concession in the matter of rent respecting any accommodation
provided by the employer to the employee that such method can be applied. He,
however, contended that even in such cases, there must be a provision allowing
or permitting the assessee to contend that there is no concession.
Senior Advocate appearing for one of the petitioners, adopted the arguments of
Mr. Salve. He, however, additionally contended that a distinction sought to be
made between employees of the Government on one hand and employees of
Companies, Corporations or other Undertakings on the other hand, is artificial
and irrational, neither based on intelligible differentia nor has it any nexus
to the object to be achieved. Difference of payment while considering
'perquisite' between the two classes would thus be arbitrary, discriminatory
and ultra vires Article 14 of the Constitution.
learned Additional Solicitor General appearing on behalf of the Revenue
supported the decisions impugned in the present proceedings. He submitted that
the Rules prior to 2001 were based on "fair rental value of the
accommodation". In view of the said concept, it provided an opportunity to
the assessee, if he claimed to satisfy the Assessing Officer that the sum
arrived at on the basis of Rule 3, as it then stood, did not exceed such 'fair
rental value of the accommodation' and hence could not be said to be
'perquisite' within the meaning of Section 17 (2) (ii) of the Act. The concept
of fair rental value of the accommodation has been given the go by in view of
practical difficulties realized by Revenue. Under the amended rule of 2001,
"fair rent", "market rent" "standard rent",
"reasonable rent" etc., has no relevance at all. Keeping in view the
ground reality and rent usually charged in cities having population exceeding
four lacs and in other cities, the rule has been amended.
a relevant and germane consideration which can neither be termed arbitrary nor
unreasonable, nor violative of the provisions of the Constitution. According to
Mr. Parasaran, ultimately it was a policy decision taken by the authority as to
how calculation of perquisite should be made. Prior to 2001 one policy was
accepted by the Government. The said policy was subsequently changed and now,
new policy has been deviced. In such policy matters, normally, a court of law
would not interfere unless the policy is totally arbitrary or unreasonable. It
was also submitted that the amended rule was challenged by employers and assessees
and several High Courts upheld the validity thereof.
to Mr. Parasaran, considering all relevant facts, it was decided by Revenue
that providing accommodation at less than 10% of salary in cities having
population exceeding four lakhs and 7.5% of salary in other cities would be
deemed to be "concession" in the matter of rent respecting such
accommodation provided to the employees by the employer. In the light of such
decision, Rule 3 cannot be held ultra vires either the parent Act or the
Constitution. He further submitted that if this Court comes to the conclusion
that "concession" in the matter of rent is a condition precedent for
the exercise of power under Section 17 (2) (ii) of the Act and only thereafter
the machinery provision of Rule 3 would apply, the Court may invoke the
doctrine of 'reading down' holding it intra vires and constitutional by
extending an opportunity to assessee to satisfy the Assessing Officer that
there was no 'concession'.
discrimination between employees of Government and employees of Companies,
Corporations and other Undertakings, he submitted that it is a valid
classification and it has been based on intelligible differentia. It also seeks
to achieve an object by considering the position of two sets of employees. Such
a provision cannot be struck down as infringing Article 14 of the Constitution.
we proceed to consider the rival contentions of the parties, it may be
appropriate if we refer to the relevant provisions of the Act, the Rules and
important decisions on the point. Section 17 of the Act defines 'salary',
'perquisite' and 'profits in lieu of salary'.
part of the said section reads thus
For the purposes
of sections 15 and 16 and of this section.
the value of
rent-free accommodation provided to the assessee by his employer;
the value of any
concession in the matter of rent respecting any accommodation provided to the assessee
by his employer.
thus clear that the definition of the term 'perquisite' covers various items
mentioned therein. It is also clear that the definition is inclusive in nature
and not exhaustive.
to Bouvier's Law Dictionary, the expression 'perquisite' in a most limited
sense means "something gained by a place or office beyond the regular
salary or fee".
English Dictionary defines 'perquisite' as "any casual emolument, fee or profit
attached to an office or position in addition to a salary or wages".
to Webster's New International Dictionary, 'perquisite' is "a gain or
profit incidentally made from employment in addition to regular salary or
wages, especially one of a kind expected or promised".
is thus a privilege, gain or profit incidental to an employment in addition to
regular salary or wages.
observed by the House of Lords in Owen v. Pook, (1969) 74 ITR 147 (HL),
'perquisite' has a known normal meaning, namely, a personal advantage. The word
would not apply to a mere reimbursement of a necessary disbursement. In Rendell
v. Went, (1964) 2 All ER 464 (HL), the House held that any benefit or
advantage, having a money value, which the holder of an office under the
company derives from the company's spending on his behalf will come under the
Courts have also held that 'perquisite' is a benefit or an advantage received
by the holder of an office over and above his salary. The benefit received by
an employee is incidental to employment in excess of or in addition to the
295 of the Act enables the Board [as defined in clause (12) of Section 2 as
'Central Board of Direct Taxes' (CBDT) constituted under the Central Boards of
Revenue Act, 1963] to make rules for carrying out the purposes of the Act.
relevant part reads thus;
to make Rules.
The Board may
subject to the control of the Central Government, by notification in the
Gazette of India, make rules for the whole or any part of India for carrying out the purposes of
and without prejudice to the generality of the foregoing power, such rules may
provide all or any of the following matters;
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." .. .. ..
(2C) of Section 192 of the Act enacts that a person responsible for paying any
income chargeable under the head "Salaries" shall furnish to the
person to whom such payment is made a statement giving correct and complete
particulars of perquisites or profits in lieu of salary provided to him and the
value thereof in such form and manner as may be prescribed.
exercise of the power conferred by Section 295 of the Act, the Board framed
rules known as the Income Tax Rules, 1962. Rule 3 lays down the method for
computing valuation of perquisite. Before the amendment in 2001, relevant part
of the said rule read as under Valuation of perquisites.
For the purpose
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,
The value of
rent-free residential accommodation shall be determined on the basis provided
accommodation is provided
by Government to
a person holding an office or post in connection with the affairs of the Union or of a State;
by a body or
undertaking under the control of Government to any officer of Government whose
services have been lent to that body or undertaking (the accommodation itself
having been allotted to it by Government), an amount equal to
accommodation is unfurnished, the rent which has been or would have been
determined as payable by such person or officer in accordance with the rules
framed by Government for allotment of residences to its officers;
accommodation is furnished, an amount calculated in accordance with sub-clause
(i)(1) plus [10 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 therefore;] Provided
where the fair
rental value of the accommodation is in excess of 20 per cent of the assessee's
salary, the value of perquisite shall be taken to be 10 per cent of the salary
increased by a sum equal to the amount by which the fair rental value exceeds
20 per cent of the salary; so, however, that the Assessing Officer may, having
regard to the nature of the accommodation, determine the sum by which10 per
cent of the salary is to be increased, as a percentage (not exceeding 100 per
cent) of the amount by which the fair rental value exceeds 20 per cent of the
where the assessee
claims, and the Assessing Officer is satisfied that the sum arrived at on the
basis provided above exceeds the fair rental value of the accommodation, the
value of the perquisite to the assessee shall be limited to such fair rental
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.
Income Tax (Twenty-second Amendment) Rules, 2001, Rule 3 was amended and the
relevant part reads thus "3. Valuation of perquisites:
the purpose of computing the income chargeable under the head 'salaries', the
value of perquisites provided by the employer directly or indirectly to the assessee
(hereinafter referred to as 'employee') or to any member of his household by
reason of his employment shall be determined in accordance with the following
The value of
residential accommodation provided by the employer during the previous year
shall be determined on the basis provided in the Table below Sl. No.
Where accommodation is unfurnished Where accommodation is furnished (1) (2) (3)
(4) (1) Where the accommodation is provided by the Central Government or any
State Government to the employees either holding office or post in connection
with the affairs of the Union of or such State or serving with any body or
undertaking under the control of such Government on deputation Licence fee
determined by the Central Government or any State Government in respect of
accommodation in accordance with the rules framed by such Government as reduced
by the rent actually paid by the employees.
value of perquisite as determined under column (3) and increased by 10% per
annum of the cost of furniture (including television sets, radio sets,
refrigerators, other household appliances, air conditioning plant or equipment)
or if such furniture is hired from a third party, the actual hire charges
payable for the same as reduced by any charges paid or payable for the same by
the employee during the previous year.
accommodation is provided by any other employer and
accommodation is owned by employer, or
accommodation is taken on lease or rent by the employer.
10% of salary in
cities having population exceeding 4 lakhs as per 1991 census;
75% salary in
other cities, in respect of the period during which the said accommodation was
occupied by the employee during the previous year as reduced by the rent, if
any, actually paid by the employee.
amount of lease rental paid or payable by the employer or 10% of salary
whichever is lower as reduced by the rent, if any, actually paid by the
value of perquisite as determined under column (3) and increased by 10% per
annum of the cost of furniture (including television sets, radio sets,
refrigerators, other household appliances, air conditioning plant or equipment
or other similar appliances or gadgets) or if such furniture is hired from a
third party, by the actual hire charges payable for the same as reduced by any
charges paid or payable for the same by the employee during the previous year.
Where the accommodation
is provided by the employer specified in serial number (1) or (2) above in a
hotel (except where the employee is provided such accommodation for a period
not exceeding in aggregate 15 days on his transfer from one place to another)
Not applicable 24% of salary paid or payable for the previous year or the
actual charges paid or payable to such hotel, which is lower, for the period
during which such accommodation is provided as reduced by the rent, if any,
actually paid or payable by the employee:
that nothing contained in this sub- rule would be applicable to any
accommodation located in a 'remote area' provided to an employee working at a
Mining site or an onshore oil exploration site, or a project execution site or
an accommodation provided in an offshore site of similar nature;
further that where on account of his transfer from one place to another, the
employee is provided with accommodation at the new place of posting while
retaining the accommodation at the other place, the value of perquisite shall
be determined with reference to only one such accommodation which has the lower
value with reference to the Table above for a period not exceeding 90 days and
thereafter the value of perquisite shall be charged for both such accommodation
in accordance with the Table.
3, before the amendment as also after the amendment of 2001 came up for
consideration before various High Courts as well before this Court in some
cases. The learned counsel for the parties invited our attention to those
Salve for the appellants placed heavy reliance on a decision of the Division
Bench of the High Court of Madhya Pradesh in Officers' Association, Bhilai
Steel Plant v. Union of India & Others, (1983) 139 ITR 937. In that case, a
petition was filed in the High Court by the Officers' Association, Bhilai Steel
Plant and Divisional Manager (Construction). The Divisional Manager was in
occupation of a quarter the rent of which was Rs.100/- per month. The rent was
fixed as the standard rent under Rule 45A of the Fundamental Rules which had
been applied to the officers. In deducting income tax at source under Section
192 of the Act, the management was treating the difference between the 1/10th
of the salary of the employee and the rent paid by him as perquisite. It was
contended by the petitioners that merely because the rent paid by an officer
was less than 1/10th of his salary, the difference could not be treated as
perquisite and tax could not be deducted at source on that footing. A prayer
was, therefore, made that the authorities be restrained from treating the
difference between 10 per cent of the salary and the rent actually paid as
'perquisite' for the purposes of deduction of income tax at source.
Income Tax Authorities denied of having issued any circular or instruction to
the Management for treating difference between 10% of the salary and the rent
paid as 'perquisite but maintained that that was the correct legal position.
High Court was, therefore, called upon to decide whether the provisions of
Section 17(2)(ii) read with Rule 3 of the Rules would be applicable and whether
tax was required to be deducted at source treating the difference as
'perquisite', as contended by the Revenue. The Court conceded that sub-section
(2) of Section 17 defined 'perquisite' and sub-clause (ii) included within its
ambit the "value of any concession in the matter of rent respecting any
accommodation provided to the assessee by his employer", but it was
"any concession in the matter of rent" which was covered by that
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
employee 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
rule applies 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 of 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 employee is paying less than 10 per cent of his salary as rent
it must be deemed that he has been provided accommodation at a concessional
supplied) The Court went on to consider that the question was whether an
employee was in occupation of an accommodation at a concessional rate, that is,
whether the employee had received any concession which could be termed as
'perquisite' and gave the answer that it would depend upon two factors;
the normal rent
for accommodation in occupation of the employee; and
paid by the employee. If the rent paid by the employee is normal rent of
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 than
10 per cent of his salary.
then made the following pertinent observations .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 than 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
construed, it will go beyond the rule making power conferred by s. 295(2) and
would become invalid. (emphasis supplied) In Indian Bank Officers' Association
& Ors. v. Indian Bank & Ors., (1994) 209 ITR 72, a single Judge of the
High Court of Calcutta again considered a similar question. There accommodation
was provided by a nationalized bank to its employees. Petitioners who were
employees of the Bank were paying rent in accordance with the standard rent
fixed by Regulations of the Bank.
other employees similarly situated as petitioners were also paying rent in the
same manner and to the same extent. The High Court held that in the
circumstances no 'concession' could be said to have been enjoyed by the
petitioners within the meaning of Section 17(2)(ii) of the Act and no tax was
deductible on notional perquisite value of accommodation under Rule 3 of the
Rules. The Court observed that the question of concession should 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 the
actual rent paid by the employee concerned.
the principle laid down by the High Court of Madhya Pradesh in Officers'
Association, Bhilai Steel Plant, the Court observed that what Rule 3 stated was
valuation of perquisites and the manner of computation thereof provided it was
a concession or perquisite. The rule, however, did not seek to fix any
liability which had not been created by Section 17(2) of the Act.
to the Court, the question of perquisite must be determined first and only
thereafter the question of computing the value of such perquisite would arise.
One cannot put cart before the horse. By following the method of valuation
provided, the income tax authorities cannot determine the existence of
perquisite. It can be done only under Section 17(2) of the Act. "The rule
cannot be permitted to be read in a manner beyond the powers conferred under
the substantive provisions of the Act." (emphasis supplied) It appears
that the matter was taken up by way of intra-court appeal before the Division
Bench and the Division Bench in Income Tax Officers v. All India Vijaya Bank
Officers' Association, (1997) 225 ITR 37, confirmed the view taken by the
learned single Judge by dismissing the appeal.
Steel Executives Association v. Rashtriya Ispat Nigam Ltd., (2000) 241 ITR 20,
again an identical question arose before the High Court of Andhra Pradesh.
accommodation was provided by the employer to the employees and the question
that came up for consideration before the High Court was whether it was
perquisite within the meaning of the Act and the Rules and whether the employer
was required to deduct tax at source. The Court relying upon the decision in
Officers' Association, Bhilai Steel Plant and Indian Bank Officers' Association
held that the provision would apply only in cases where the rent was paid at concessional
rent was not concessional, department could not ask employer to deduct tax at
source treating standard rent as concessional rent and such an action could not
be said to be legal or lawful. The Court observed that reading the provision
carefully, it was clear that it provided only for valuation of perquisite if
the residential accommodation was provided at a concessional rate.
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.
has happened in this case is that the Revenue has put the cart before the horse
and assumed that there is a concession because the rent charged is less than 10
per cent of the salary.
supplied) The Court noted the submission on behalf of the Revenue that there
was really a concession because the Income Tax Officer had material to indicate
that the fair market value of the accommodation provided was much more than 10
per cent of the salary. But, the Court negatived the contention and said;
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
Court also referred to its earlier decision in P.V. Rajagopal v. Union of
India, (1998) 233 ITR 678 and observed that department could not coerce the
employer to deduct tax at source of an amount which was in dispute as a
perquisite by the employer.
on the other hand, submitted that several High Courts upheld the validity of
Rule 3 by approving the method adopted by the Revenue for fixation of
perquisite under the said rule. Decisions of two High Courts i.e. the High
Court of Jharkhand and the High Court of Judicature at Calcutta are before us.
High Court of Jharkhand, as already observed earlier, upheld the validity of
Rule 3 observing that the amendment was brought out as a consequence of Budget
Speech of the Finance Minister in Parliament.
the decision was taken on the recommendation of Expert Group constituted to
rationalize and simplify Income Tax laws.
also referred to Coal Mines Officers' Association of India wherein the High
Court of Calcutta again considered the scope of the expression
"concession" in the matter of rent under Section 17 (2) (ii) of the
Act. There also, it was contended on behalf of the employees that since there
was no "concession" in the matter of rent, it should not be termed as
perquisite under Section 17 (2) (ii) of the Act. It was argued that whether or
not there was concession, must be decided first. For the said purpose, it was
required to be determined as to what would be the rent and if the accommodation
is provided by the employer to an employee at a rate lower than such rent, it
would be treated as 'concession' under Section 17 (2) (ii) of the Act and has
to be calculated under Rule 3 of the Rules.
Court, however, indicated that previous decisions dealt with Rule 3 as it then
stood which laid down a totally different method than the one which has been
prescribed after the amendment in 2001.
Court then stated The present rule, thus, does not address exclusively to
devise the method and basis of ascertaining the value of rent-free
also addresses to devise explicitly the method and basis of ascertaining the
value of concession in the matter of rent. While, however, doing so it made the
value of concession explicit, which was implied in the previous rule. While
devising the same it has categorized two types of employees. The first of them
are pure Government employees and the second of them are all other employees.
In addition to that, it categorized two types of accommodation- one provided by
the Government and the other provided by all others. In so far as the
Government employees, who have been provided Government accommodations, are
concerned, the rule says that the value of rent-free accommodation as
perquisites would be the licence fee determined by the Government in accordance
with the rules and the value of the concession would be the difference between
such licence fee and the amount of rent paid by the employees. In so far as
other employees, who have been provided accommodations by their respective
employers, are concerned, the rule says that the value of rent-free
accommodation would be ten per cent of the salary if the accommodations are in
certain cities and if the accommodations are in other cities, 7.5 per cent of
the salary and nothing else. The rule further provides that in relation to
other employees, the value of the concession would be the difference between 10
per cent or 7.5 per cent of the salary, as the case may be, and the amount of
rent actually paid. There is no scope for determination of fair rental value.
The concept of fair rental value either on the basis of the normal rent or on
the basis of the market rent available in the locality or on the basis of the
municipal valuation has been done away with.
Court proceeded to state that the rent comparable with market would always be
higher than the fair or standardized rent. Since the new rule does not provide
for 'fair rent', 'normal rent' or 'standard rent', none of the said concepts
would be attracted or applied.
Court finally concluded;
the normal circumstances, the pure, simple and grammatical sense of the
language used by the Legislature is the best way of understanding what the
Legislature intended. If the Legislature intended that the meaning of the word
'rent' as used in sub-clause (ii) of clause (2) of Section 17 of the Act would
be as has been set out above, the Legislature could have used the same in the
section itself. The Legislature brought sub-clause (ii) in clause (2) of
Section 17 of the Act after introducing sub-clause (i) of clause (2) of Section
17 of the Act. These two sub- clauses should not be read in isolation. They
were intended to be read together and if read together, it makes it abundantly
clear, and as was done previously as well as done presently, that the
Legislature intended to value the rent-free accommodation for the purpose of
arriving at the value of the concession by making a simple calculation of the
difference between the value of rent-free accommodation and the rent actually
paid." Our attention was also invited by Mr. Parasaran to BHEL Employees
Association v. Union of India, (2003) 261 ITR 15 (Kant). It related to fringe
benefits and amenities as perquisites. The Court held that provision to treat
fringe benefits as perquisites in the light of Section 17 (2)(vi) read with
Rule 3 of the Rules can neither be held ultra vires the Constitution nor Rule 3
can be struck down on the ground that there was excessive delegation of power
by the Legislature to the Executive.
was also made to a decision of the High Court of Madras in BHEL
Executive/Officers Association & Another v. Dy. Commissioner of Income Tax
& Another, (2004) 264 ITR 390. One of the arguments raised on behalf of the
employees was that the distinction on the basis of size of population had no
rationale and Rule 3 as amended in 2001 was ultra vires. The argument was negatived.
also relied on an order dated September 1, 2004
passed by the Division Bench of the High Court of Madhya Pradesh in All India
State Bank of Indore Officers' Co-ordination Committee & Ors. v. Central
Board of Direct Taxes & Ors., (2004) 186 CTR 649 (MP).
that case, the attention of the Court was invited to Officers' Association, Bhilai
Steel Plant followed by the High Courts of Calcutta and Andhra Pradesh and
decisions taking contrary view by the High Courts of Rajasthan and Karnataka.
Considering conflicting views, the Court referred the matter to a larger Bench.
grievance of the appellants is that the amended Rule 3 does not provide for
giving an opportunity to the assessee to convince the Assessing Officer that no
"concession" was shown by the employer to the employee in respect of
accommodation provided. Mr. Salve submitted that the rule will apply and the
liability to deduct tax will arise only if 'concession' is shown in the matter
of rent respecting any accommodation and it is "perquisite" under the
Act, the authority must come to the conclusion that Section 17 (2) (ii) is
of any provision enabling the assessee to show to the Assessing Officer that it
was not a 'concession' and, therefore, 'perquisite' within the meaning of
Section 17 (2) (ii) of the Act would make Rule 3 ultra vires and unconstitutional.
In such a situation, a court of law may not adopt literal interpretation of a
provision of law but by applying "reading down" formula, sustain the
validity thereof invoking the principles of natural justice.
doctrine of 'reading down' is well-known in the field of Constitutional Law.
Colin Howard in his well- known work "Australian Federal Constitutional
down puts into operation the principle that so far as it is reasonably possible
to do so, legislation should be construed as being within power. It has the
practical effect that where an Act is expressed in language of a generality
which makes it capable, if read literally, of applying to matters beyond the
relevant legislative power, the Court will construe it in a more limited sense
so as to keep it within power.
observed by this Court in Commissioner of Sales Tax, Madhya Pradesh &
Others v. Radhakrishnan & Ors., (1979) 2 SCC 249, in considering the
validity of a statute the presumption is always in favour of constitutionality
and the burden is upon the person who attacks it to show that there has been
transgression of constitutional principles. For sustaining the
constitutionality of an Act, a court may take into consideration matters of
common knowledge, reports, preamble, history of the times, object of the
legislation and all other facts which are relevant. It must always be presumed
that the Legislature understands and correctly appreciates the need of its own
people and that discrimination, if any, is based on adequate grounds and
considerations. It is also well-settled that courts will be justified in giving
a liberal interpretation in order to avoid constitutional invalidity. A
provision conferring very wide and expansive powers on authority can be construed
in conformity with legislative intent of exercise of power within
constitutional limitations. Where a statute is silent or is inarticulate, the
court would attempt to transmulate the inarticulate and adopt a construction
which would lean towards constitutionality albeit without departing from the
material of which the law is woven. These principles have given rise to rule of
'reading down' the provisions if it becomes necessary to uphold the validity of
several cases, courts have invoked and applied the doctrine of 'reading down'
and upheld the constitutional validity of the Act, In Olga Tellis v Bombay
Municipal Corporation, (1985) 3 SCC 545: AIR 1986 SC 180: 1985
Supp (2) SCR 51, the Supreme Court was called upon to decide constitutional validity
of Section 314 of the Bombay Municipal Corporation Act, 1888 which empowered
the Commissioner to demolish illegal construction without notice. It was
contended that the provision was arbitrary, unreasonable and violative of
the provision intra vires and 'reading' the doctrine of audi alteram partem
therein, the Court stated;
in its proper perspective, section 314 is in the nature of an enabling
provision and not of a compulsive character. It enables the Commissioner, in
appropriate cases, to dispense with previous notice to persons who are likely
to be affected by the proposed action. It does not require and, cannot be read
to mean that, in total disregard of the relevant circumstances pertaining to a
given situation, the Commissioner must cause the removal of an encroachment
without issuing previous notice. The primary rule of construction is that the
language of the law must receive its plain and natural meaning. What section
314 provides is that the Commissioner may, without notice, cause an
encroachment to be removed. It does not command that the Commissioner shall,
without notice, cause an encroachment to be removed.
it differently, section 314 confers on the Commissioner the discretion to cause
an encroachment to be removed with or without notice. That discretion has to be
exercised in a reasonable manner so as to comply with the constitutional
mandate that the procedure accompanying the performance of a public act must be
fair and reasonable. We must lean in favour of this interpretation because it
helps sustain the validity of the law. Reading section 314 as containing a command not to issue notice before the
removal of an encroachment will make the law invalid." (emphasis supplied)
In Salem Advocate Bar Association v. Union of India (2005) 6 SCC 344, this
Court had an occasion to consider the constitutional validity of certain
amendments in Order 17 of the Code of Civil Procedure, 1908 effected by the
Code of Civil Procedure (Amendment) Act, 1999 relating to adjournments. One of
the amendments provided that no adjournment shall be granted more than three
times to a party during a trial.
it was an express provision, this Court observed that there may be extreme
cases or exceptional circumstances beyond the control of the party which may
compel him to seek adjournment. Serious ailment, accident, sudden
hospitalization, earth quake, rioting, tsunami etc., are either vis major or
unforeseen eventualities which may compel a party to ask for an adjournment.
Literal interpretation may make the provision arbitrary, unreasonable and ultra
vires. The Court, therefore, stated that "to save the proviso to Order 17,
Rule 1, from the vice of Article 14 of the Constitution, it is necessary to
read it down so as not to take it away the discretion of the Court in the
extreme hard cases".
is equally well settled that if the provision of law is explicitly clear,
language unambiguous and interpretation leaves no room for more than one
construction, it has to be read as it is. In that case, the provision of law
has to be tested on the touchstone of the relevant provisions of law or of the
Constitution and it is not open to a Court to invoke the doctrine of
"reading down" with a view to save the statute from declaring it
ultra vires by carrying it to the point of 'perverting the purposes of the
in Minerva Mills Limited v. Union of India, (1980) 3 SCC 625, validity of
Article 31C of the Constitution as amended by the Constitution (42nd Amendment)
Act, 1976 conferring immunity from challenge of laws giving effect to directive
principles in Part IV of the Constitution was questioned in this Court.
submitted on behalf of the Union of India that the Court may apply the
principle of "reading down" by restricting the challenge to only such
laws which would not violate "basic structure" of the Constitution.
the contention and speaking for the majority, Chandrachud, CJ said; "If
the Parliament has manifested a clear intention to exercise an unlimited power,
it is impermissible to read down the amplitude of that power so as to make it
limited. The principle of reading down cannot be invoked or applied in
opposition to the clear intention of the legislature. We suppose that in the
history of the constitutional law, no constitutional amendment has ever been
read down to mean the exact opposite of what it says and intends. In fact, to
accept the argument that we should read down Article 31C, so as to make it
conform to the ratio of the majority decision in Kesavananda Bharati is to
destroy the avowed purpose of Article 31C as indicated by the very heading
"Saving of certain laws" under which Articles 31A, 31B and 31C are
grouped. Since the amendment to Article 31C was unquestionably made with a view
to empowering the legislatures to pass laws of a particular description even if
those laws violate the discipline of Articles 14 and 19, it seems to us
impossible to hold that we should still save Article 31C from the challenge of
unconstitutionality by reading into that Article words which destroy the
rationale of that Article and an intendment which is plainly contrary to its
proclaimed purpose." (emphasis supplied) Similarly in Delhi Transport Corporation v. D.T.C. Mazdoor
Congress & Others, (1991) Supp 1 SCC 600, the validity and vires of
Regulation 9(b) of the Delhi Road Transport Authority (Conditions of
Appointment and Service) Regulations, 1952 relating to 'termination of service'
was challenged. It provided for termination of service of permanent employees
of the Corporation on one month's notice or pay in lieu of notice without any
enquiry whatsoever. The provision was challenged, being ultra vires the
Constitution, violative of principles of natural justice and inconsistent with
Section 23 of the Contract Act, 1872. One of the questions raised before this
Court was whether it would be open to a court of law to apply the formula of
'reading down' and save the provision by importing natural justice into it. The
majority (4:1) held the provision ultra vires and unconstitutional by
describing it as "Henry VIII clause" and refusing to apply the
doctrine of 'reading down'. It held that the language of the Regulation was
clear, unambiguous and explicit and it was not permissible for the Court to read
down something not intended by the Regulations. The doctrine of reading down
may be applied if the statute is silent, ambiguous or allows more than one
interpretation. But where it is express and clearly mandates to take certain
actions, the function of the Court is to interpret it plainly and declare intra
vires or ultra vires without adding, altering or subtracting anything therein.
have already indicated earlier, Rule 3 prior to its amendment in 2001 was
totally different. It dealt with the method of calculation of concession
keeping in view the concept of "fair rental value". In the light of
the principle and phraseology in Rule 3, the rule making authority provided an
opportunity to the assessee to satisfy the Assessing Officer that the rent sought
to be recovered from the employee could not be said to be 'concession' as it
was 'fair rent', 'reasonable rent', 'market rent' or 'standard rent'. When the
rule is amended and the concept of "fair rental value" has been done
away with and the only method which has been adopted is to calculate the rent
on the basis of population of the city in question, it cannot be successfully
contended that the intention of the rule making authority was to afford an
opportunity to the assessee to convince the Assessing Officer that the rent
recovered by the employer from his employee was not in the nature of
concession. Nor a court of law would, by interpretative process, grant such
opportunity to the assessee so as to enable him to convince the Assessing
Officer that the rent fixed was not covered by Section 17(2)(ii) of the Act and
therefore was not a 'perquisite'.
are, therefore, unable to accept the argument of Mr. Salve and allow import of
the principles of natural justice in Rule 3.
question, therefore, is whether such a provision is ultra vires Article 14 of
the Constitution. Though there is no direct decision of this Court on the
point, some High Courts have considered the question.
BHEL Employees Association v. Union of India, (2003) 261 ITR 15 (Kar), validity
of amended Rule 3 was challenged. In that case, however, the Court was
concerned with fringe benefits (which stand altogether on a different footing).
But the argument was that there was excessive delegation of power by the
Legislature to the Executive and the provision was, therefore, ultra vires the
parent Act as also violative of Article 14 of the Constitution.
several cases on the point, the Court held that Section 295 of the Act
conferred power to frame Rules on a high functionary i.e. Central Board of
Direct Taxes (CBDT), subject to the control of Central Government. It was also
observed that the Board consisted of very high functionaries of the Government
of India who were expected to have deep knowledge about the policy as envisaged
for imposition of tax in the country. When power was conferred on such Expert
Body and after considering the relevant aspects, it took a decision, it could
not be said to be unlawful or unwarranted. The legislative policy had been
reflected in Section 17 of the Act and the Rule Making Authority, merely
implemented the said policy on the basis of essential legislative functions
performed by Parliament.
Court, therefore, negatived the contention of excessive delegation. Any
difficulty or hardship in an individual case or to a particular person would
not make the Rule ultra vires or unconstitutional.
similar view was taken by the High Court of Rajasthan in Aditya Cement Staff
Club v. Union of India, (2004) 266 ITR 70.
impugned order, the High Court of Jharkhand held the classification between
cities with population of less than four lakhs and more than four lakhs as
reasonable classification. It was, therefore, held that the rule did not suffer
from vice of arbitrariness.
the High Court of Calcutta, in the order impugned in two matters upheld the
validity of the rule observing, inter alia, that while ascertaining the
concession, the rule addresses itself to relevant and germane considerations
and such a provision cannot be held arbitrary or ultra vires.
opinion, the submission of Mr. Parasaran, learned Additional Solicitor General
deserves to be accepted that when the concept of "fair rent",
"market rent", "reasonable rent" or "standard
rent" is no more relevant or germane in deciding the question, it was open
to the Legislature to empower the rule making authority to provide the method
for calculation of "concession". We are further of the view that the
criterion which was adopted by the rule making authority in treating cities
having population of less than four lakhs and more than four lakhs cannot be
said to be arbitrary or unreasonable and fixation of rent on the basis of
population of city cannot be interfered with in exercise of power of judicial
review. The said argument, therefore, has no substance and cannot be upheld.
our opinion, the fundamental question of applicability of Section 17 (2) of the
Act still remains. It cannot be gainsaid that Section 17 (2) would apply only
if there is 'perquisite'. Indisputably, the definition of 'perquisite' is
inclusive in nature and takes within its sweep several matters enumerated in
clauses (i) to (vii).
17 (2) (ii) declares that the value of any "concession" in the matter
of rent respecting any accommodation provided to the employee by his employer
would be "perquisite". Nevertheless it must be a
"concession" in the matter of rent respecting any accommodation
provided by the employer to his employee.
word "concession" has neither been defined in the Act nor in the
Rules. According to Concise Oxford English Dictionary, "concession"
is "a thing that is conceded"; "a gesture made in recognition of
a demand or prevailing standard", "a reduction in price for a certain
category of person". It is "a grant; ordinarily applied to a grant of
specific privileges by Government, a special privilege granted by a Government,
Corporation or other authority" (P.R. Aiyer; "Advanced Law
Lexicon", 2005; Vol. 1; p. 944). It is "an act of yielding or
conceding as to a demand or argument; something conceded; usually employing a
demand; claim or request"; "a thing yielded", "a
grant". [Indian Aluminium Co. Ltd. v. Thane Municipal Corporation; (1992)
Supp 1 SCC 480] "Concession" is a form of "privilege" [V. Pechimethu
v. Gowrammal, (2001) 7 SCC 617].
therefore, clear that before Section 17(2)(ii) can be invoked or pressed into
service and before calculation of concession as per Rule 3 is made, the
authority exercising power must come to a positive conclusion that it is a concession.
'Concession', in our judgment is, thus a foundational, fundamental or
"jurisdictional fact" is a fact which must exist before a Court,
Tribunal or an Authority assumes jurisdiction over a particular matter. A
jurisdictional fact is one on existence or non-existence of which depends
jurisdiction of a court, a tribunal or an authority. It is the fact upon which
an administrative agency's power to act depends. If the jurisdictional fact
does not exist, the court, authority or officer cannot act.
Court or authority wrongly assumes the existence of such fact, the order can be
questioned by a writ of certiorari. The underlying principle is that by
erroneously assuming existence of such jurisdictional fact, no authority can confer
upon itself jurisdiction which it otherwise does not posses.
Laws of England, it has been stated;
the jurisdiction of a tribunal is dependent on the existence of a particular
state of affairs, that state of affairs may be described as preliminary to, or
collateral to the merits of, the issue. If, at the inception of an inquiry by
an inferior tribunal, a challenge is made to its jurisdiction, the tribunal has
to make up its mind whether to act or not and can give a ruling on the preliminary
or collateral issue; but that ruling is not conclusive".
existence of jurisdictional fact is thus sine qua non or condition precedent
for the exercise of power by a court of limited jurisdiction.
Raja Anand Brahma Shah v. State of U.P. & Ors., AIR 1967 SC 1081 : (1967) 1
SCR 362, sub-section (1) of Section 17 of the Land Acquisition Act, 1894
enabled the State Government to empower Collector to take possession of 'any
waste or arable land' needed for public purpose even in absence of award. The
possession of the land belonged to the appellant had been taken away in the
purported exercise of power under Section 17(1) of the Act. The appellant
objected against the action inter alia contending that the land was mainly used
for ploughing and for raising crops and was not 'waste land', unfit for
cultivation or habitation. It was urged that since the jurisdiction of the
authority depended upon a preliminary finding of fact that the land was 'waste
land', the High Court was entitled in a proceeding for a certiorari to
determine whether or not the finding of fact was correct.
the contention and declaring the direction of the State Government ultra vires,
this Court stated;
our opinion, the condition imposed by s. 17(1) is a condition upon which the
jurisdiction of the State Government depends and it is obvious that by wrongly
deciding the question as to the character of the land the State Government
cannot give itself jurisdiction to give a direction to the Collector to take
possession of the land under s. 17(1) of the Act.
well-established that where the jurisdiction of an administrative authority
depends upon a preliminary finding of fact the High Court is entitled, in a
proceeding of writ of certiorari to determine, upon its independent judgment,
whether or not that finding of fact is correct". (emphasis supplied) In
State of M.P. & Ors. v. D.K. Jadav, AIR 1968
SC 1186 : (1968) 2 SCR 823, the relevant statute abolished all jagirs including
lands, forests, trees, tanks, wells etc., and vested them in the State. It,
however, stated that all tanks, wells and buildings on 'occupied land' were
excluded from the provisions of the statute. This Court held that the question
whether the tanks, wells etc., were on 'occupied land' or on 'unoccupied land'
was a jurisdictional fact and on ascertainment of that fact, the jurisdiction
of the authority would depend.
Court relied upon a decision in White & Collins v. Minister of Health
(1939) 2 KB 838 : 108 LJ KB 768, wherein a question debated was whether the
court had jurisdiction to review the finding of administrative authority on a
question of fact. The relevant Act enabled the local authority to acquire land
compulsorily for housing of working classes. But it was expressly provided that
no land could be acquired which at the date of compulsory purchase formed part
of park, garden or pleasure-ground. An order of compulsory purchase was made
which was challenged by the owner contending that the land was a part of park.
The Minister directed public inquiry and on the basis of the report submitted,
confirmed the order.
with the finding of the Minister and setting aside the order, the Court of
first and the most important matter to bear in mind is that the jurisdiction to
make the order is dependent on a finding of fact; for, unless the land can be
held not to be part of a park or not to be required for amenity or convenience,
there is no jurisdiction in the borough council to make, or in the Minister to
confirm, the order. In such a case it seems almost self-evident that the Court which
has to consider whether there is jurisdiction to make or confirm the order must
be entitled to review the vital finding on which the existence of the
jurisdiction relied upon depends. If this were not so, the right to apply to
the Court would be illusory." [See also Rex v. Shoredich Assessment
Committee; (1910) 2 KB 859 : 80 LJ KB 185].
question under the Income Tax Act, 1922 arose in Raza Textiles Ltd. v. Income
Tax Officer, Rampur, (1973) 1 SCC 633 : AIR 1973 SC 1362. In that case, the ITO
directed X to pay certain amount of tax rejecting the contention of X that he
was not a non-resident firm. The Tribunal confirmed the order. A single Judge
of the High Court of Allahabad held X as non-resident firm and not liable to
deduct tax at source. The Division Bench, however, set aside the order
observing that "ITO had jurisdiction to decide the question either way. It
cannot be said that the Officer assumed jurisdiction by a wrong decision on
this question of residence". X approached this Court.
the appeal and setting aside the order of the Division Bench, this Court
Appellate Bench appears to have been under the impression that the Income-tax
Officer was the sole judge of the fact whether the firm in question was
resident or non- resident. This conclusion, in our opinion, is wholly wrong. No
authority, much less a quasi-judicial authority, can confer jurisdiction on
itself by deciding a jurisdictional fact wrongly The question whether the
jurisdictional fact has been rightly decided or not is a question that is open
for examination by the High Court in an application for a writ of certiorari.
If the High Court comes to the conclusion, as the learned single Judge has done
in this case, that the Income-tax Officer had clutched at the jurisdiction by
deciding a jurisdictional fact erroneously, then the assesses was entitled for
the writ of certiorari prayed for by him. It is incomprehensible to think that
a quasi- judicial authority like the Income-tax Officer can erroneously decide
a jurisdictional fact and thereafter proceed to impose a levy on a
citizen." (emphasis supplied) From the above decisions, it is clear that
existence of 'jurisdictional fact' is sine qua non for the exercise of power.
If the jurisdictional fact exists, the authority can proceed with the case and
take an appropriate decision in accordance with law. Once the authority has
jurisdiction in the matter on existence of 'jurisdictional fact', it can decide
the 'fact in issue' or 'adjudicatory fact'. A wrong decision on 'fact in issue'
or on 'adjudicatory fact' would not make the decision of the authority without
jurisdiction or vulnerable provided essential or fundamental fact as to
existence of jurisdiction is present.
opinion, the submission of Mr. Salve is well founded and deserves to be
accepted that "concession" under clause (ii) of sub-section (2) of
Section 17 of the Act is a 'jurisdictional fact'. It is only when there is a
'concession' in the matter of rent respecting any accommodation provided by an
employer to his employee that the mode, method or manner as to how such
concession can be computed arises. In other words, concession is a
'jurisdictional fact'; method of fixation of amount is 'fact in issue' or
'adjudicatory fact'. If the assessee contends that there is no 'concession',
the authority has to decide the said question and record a finding as to
whether there is 'concession' and the case is covered by Section 17 (2) (ii) of
the Act. Only thereafter the authority may proceed to calculate the liability
of the assessee under the Rules. In our considered opinion, therefore, in spite
of the legal position that Rule 3 is intra vires, valid and is not inconsistent
with the provisions of the parent Act under Section 17 (2) (ii) of the Act, it
is still open to the assessee to contend that there is no 'concession' in the
matter of accommodation provided by the employer to the employee and hence the
case did not fall within the mischief of Section 17 (2) (ii) of the Act.
is yet another aspect of the matter which is important and having a bearing on
the question. We have extracted Section 17(2)(ii) in the earlier part of the
judgment. It does not contain any 'deeming clause' that once it is established
that an employee is paying rent less than 10 per cent of his salary in cities
having population of four lakhs or 7.5 per cent in other cities, it should be
deemed to be a 'concession' within the meaning of the Act and such employee
must be deemed to receive a 'concession' in the form of 'perquisite' in the
payment of rent. An employer may provide residential accommodation to his
employees for several reasons. It is also possible that for making available
staff quarters/ colonies/accommodations, State Governments or Central
Government may provide land to Public Sector Undertakings/ Companies/
Corporations at a concessional rate imposing appropriate conditions including
amount of rent, if any, to be recovered by the employer. Mr. Salve also invited
our attention to certain decisions wherein it had been held that residential
facility provided by the employer to the employee was not held 'perquisite'
within the meaning of Income Tax laws.
Salve placed reliance on a decision in Alexander Tenant v. Robert Smith, 1892
AC 150 (HL).
the appellant who was an agent for the Bank of Scotland at Montrose, had been
granted accommodation by his employer as part and parcel of his duty. The House
of Lords held that he was bound as part of his duty as agent to live in the
bank house as the nature of the employment required that he should live in his
master's dwelling house or business-premises instead of occupying a separate
residence of his own. According to the Court, "such an occupation could
not be regarded as part of appellant's income". He occupied the bank house
as a part of his duty. It was observed that the situation could not be
distinguished from that of the Master of a Ship who was spared the cost of
house rent while afloat.
cabin, does not, on that account become a part of his income". (emphasis
supplied) In Tyrer v. Smart, (1978) 1 All ER 1089 : (1978) 1 WLR 415; a private
company offered preferential right to purchase shares to its employees below
market price and the question before the Court was whether it could constitute
a taxable benefit or amenity. The Court of Appeal reiterated the principle laid
down in Alexander Tenant and held that if something is done by an employer to
attract employees to encourage their loyalty, it could not be regarded as
reward for the services rendered and could not become a taxable perquisite. A
benefit or facility which furthers commercial interest of the employer would
not per se become perquisite. Such facility of accommodation furthers commercial
interest of the employer by having satisfactory work force which but for such
accommodation, would not have been available.
such cases, e.g. doctors/ superintendents/ rectors/ professors/ teachers/ Grihpatis/
Grihmatas, etc. to stay in the accommodation provided by the employer may be
more a 'compulsion' than a 'concession'.
Salve also submitted that in such cases, it is for the authorities, seeking to
tax the subject, to establish the taxing liability and it is not for the
subject to prove that his case is covered by an exception. As observed in Hochstrasser
v. Mayes, 1960 AC 376 (HL), "it is not enough for the Crown to establish
that the employee would not have received the sum on which tax is claimed had
he not been an employee. The Court must be satisfied that the service agreement
was the causa causans and not merely the causa sine qua non of the receipt of
the profit". (emphasis supplied) The counsel also submitted that the
object of Rule 3 is to extend relief to employees and keeping in view the said
purpose, it has to be interpreted liberally. In support of the submission,
reliance was placed on a three Judge Bench decision of this Court in CIT,
Bombay v. British Bank of Middle East, (2001) 8 SCC 36. The question for
determination of this Court related to expenditure incurred by an employer on
facility of car provided to an employee for private use.
Section 40-A (5) of the Act and Rule 3 of the Rules and highlighting the object
underlying in enacting both the provisions, one of us (Y.K. Sabharwal, J. as
His Lordship then was) stated that "Section 40-A (5) and Rule 3 operate in
different fields and apply to different set of assessees. The provision of the
Act was enacted to provide for ceiling on expenditure on employees. The object
of the Rule is to give relief to the employees. Applying Rule 3 for the purpose
of determining the deduction in relation to the assessment of the employer
would be doing violence to and ignoring the legislative intent evident in
Section 40-A (5)".
are, however, not inclined to enter into larger question as in our view, it is
not necessary in the light of statutory provision relating to 'concession' in
the matter of rent respecting any accommodation' in Section 17(2)(ii) of the
Act. We are of the view that Rule 3 would apply only to those cases where
'concession' has been shown by an employer in favour of an employee in the
matter of rent respecting accommodation. Thus, whereas 'charging provision' is
found in the Act of Parliament [Section 17(2)(ii)], 'machinary component' is in
the subordinate legislation (Rule 3). The latter will apply only after
liability is created under the former.
the liability arises under Section 17(2)(ii) of the Act, Rule 3 has no
application and the method of valuation for calculating concessional benefits
cannot be resorted to.
who appeared for federation of employees, invited our attention to "Report
of the Pay Revision Committee for Public Sector Executives", published by
the Government of India in October, 1998.
into account the crucial and pivotal role played by Public Sector Undertakings
and considering their importance in the light of the fact that it is a limb of
Government and "State" within the meaning of Article 12 of the
Constitution, the Government of India had constituted a Committee headed by Hon'ble
Mr. Justice S. Mohan (Retd.). The Committee considered various issues including
issues as to pay scales, perquisites etc., of employees of Public Sector
Undertakings. The counsel referred to various recommendations made by the
Committee and submitted that different treatment shown by the authorities to
employees of Government and employees of Public Sector Undertakings is
arbitrary, discriminatory and unreasonable being violative of Articles 14, 16
and 19 of the Constitution.
therefore, submitted that the benefits extended to Government employees ought
to have been extended to employees of Public Sector Undertakings as well.
unable to uphold the argument. As already indicated earlier, the High Court of
Calcutta in the impugned order considered the question and held classification
between Government employees and employees of Companies, Corporations and other
Public Undertakings as reasonable. Though the doctrine of equity has no place
in taxing statutes, an attempt has been made by the rule making authority to
introduce equity by keeping in view the ground reality. According to the High
Court, it cannot be disputed that in the sphere of income, Government employees
are far below to the employees of Companies, Corporations and other
Undertakings. The benefits which have been provided to employees of
Corporations, Companies and other Undertakings are much more than the benefits
extended to Government employees. If on the basis of the factual scenario, a
classification is made between two classes of employees, it cannot be struck
down as ultra vires.
no doubt true that Article 14 guarantees equality before the law and confers
equal protection of laws. It is also true that it prohibits the State from
denying persons or class of persons equal treatment provided they are equals
and are similarly situated. But, it is equally well established that Article 14
seeks to prevent or prohibit a person or class of persons from being singled
out from others situated similarly. If two persons or two classes are not
similarly situated or circumstanced, they cannot be treated similarly. To put
it differently, Article 14 prohibits dissimilar treatment to similarly situated
persons, but does not prohibit classification of persons not similarly
situated, provided such classification is based on intelligible differentia and
is otherwise legal, valid and permissible.
recently in Confederation of Ex-Servicemen Associations & Ors. v. Union of India & Ors. decided on August 22, 2006, the Constitution Bench had an
occasion to consider a similar question. Referring to State of West Bengal v. Anwar Ali Sarkar & Another,
(1952 SCR 284 : AIR 1952 SC 75) and several other cases, one of us (C.K. Thakker,
J.) observed that "it is clear that every classification to be legal,
valid and permissible, must fulfill the twin-test, namely;
classification must be founded on an intelligible differentia which must
distinguish persons or things that are grouped together from others leaving out
or left out; and
differentia must have rational nexus to the object sought to be achieved by the
statute or legislation in question".
opinion, distinction sought to be made by the rule making authority between
employees of the Central Government as well as State Governments and other
employees i.e., employees of Companies, Corporations and other Undertakings is
reasonable classification based on intelligible differentia. It has also
rational nexus to the object sought to be achieved. Rule 3 takes into account
service conditions of employees of Government vis-`-vis employees of
Corporations, Companies and other Undertakings and prescribes method of
calculating value of all perquisites. Such a provision, in our considered
opinion, cannot be held ultra vires Article 14 of the Constitution.
under the Constitution, such a distinction has been upheld in several cases by
this Court. Article 311 of the Constitution confers certain benefits which are
not available to employees of Corporations, Companies and other Undertakings.
It was contended on behalf of those employees that such Corporations, Companies
and Undertakings were covered by the definition "State" within the
meaning of Article 12 of the Constitution and they also must be granted all the
benefits which had been granted to employees of the Government. The contention
was, however, negatived by this Court holding that application of Part XIV of
the Constitution would be limited to Services under the Union and the States and not to other employees [vide S.L.
Agarwal v. General Manager, Hindustan Steel Ltd; (1970) 1 SCC 177 : (1970) 3
SCR 363; Ajit Kumar Nag v. General Manager, Indian Oil Corporation Ltd., (2005)
7 SCC 764]. We, therefore, see no substance in the argument that the impugned
provision differentiating employees of Government and employees of Companies,
Corporations and other Undertakings is arbitrary and objectionable.
the foregoing reasons, we hold that though Rule 3 of the Rules cannot be held
arbitrary, discriminatory or ultra vires Article 14 of the Constitution nor
inconsistent with the parent Act [Section 17(2)(ii)], it is in the nature of
'machinery-provision' and applies only to the cases of 'concession' in the
matter of rent respecting any accommodation provided by an employer to his
employees. Whether or not Parliament could have in the exercise of legislative
power created a 'deeming fiction' as to concession in the matter of rent in
certain circumstances (for which we express no final opinion), no such deeming
provision is found in the Act. It is, therefore, open to the assessee to
contend that there is no 'concession' in the matter of accommodation provided
by the employer to the employees and the case is not covered by Section 17 (2)
(ii) of the Act.
the foregoing reasons, Civil Appeal No. 3270 of 2003 is partly allowed to the
extent indicated above.
view of our order passed in Civil Appeal No. 3270 of 2003, Transferred Cases
Nos. 101 & 102 of 2006 stand disposed of.
facts and circumstances of the case, there shall be no order as to costs.