Current Affairs

Source – Supreme Court

Why in News?

The Supreme Court in its recent case of All India Bank Officers' Confederation v. The Regional Manager, Central Bank of India & Ors., has stated that Rule 3(7)(i) of the Income Tax Rules, 1962 does not contravene Article 14 of the Constitution of India, 1950 (COI).

• The benefits in the form of interest-free or concessional loans extended by banks to their employees will be considered taxable perquisites under Section 17 of the Income Tax Act, 1961 (IT Act).

What was the Background of All India Bank Officers' Confederation v. The Regional Manager, Central Bank of India & Ors. Case?

• Various bank staff unions and officers' associations contested the validity of Section 17(2)(viii) of the IT Act, and Rule 3(7)(i) of the Income Tax Rules, 1962 (IT Rules), through writ petitions in the Madhya Pradesh High Court and Madras High Court which were dismissed by the respective High Courts.
• Appeal is filled to challenge the judgment of High Court. Section 17(2)(viii) and Rule 3(7)(i) are challenged on the grounds of excessive delegation of essential legislative function to the Central Board of Direct Taxes.
• Rule 3(7)(i) is also challenged as arbitrary and violative of Article 14 of the COI insofar as it treats the PLR of SBI as the benchmark instead of the actual interest rate charged by the bank from a customer on a loan.
• The Supreme Court dismissed the appeals and upheld the impugned judgments of the High Courts of Madras and Madhya Pradesh.

What were the Court’s Observations?

• Justice Sanjiv Khanna and Justice Dipankar Datta observe that perquisite is a fringe benefit attached to the post held by the employee unlike profit in lieu of salary, which is a reward or recompense for past or future service.
  • It is incidental to employment and in excess of the salary. It is a benefit given to employment.
  • The employer's grant of interest-free loans or loans at a concessional rate will certainly qualify as a fringe benefit and perquisite.
• The Court observed the effect of Rule 3(7)(i) of IT Rules.
  • It categorizes the value of interest-free or concessional loans as another fringe benefit or amenity under Section 17(2)(viii).
  • It outlines the method for valuing these loans for taxation purposes.
• Furthermore, the Court recognized that while explicit definitions in laws are useful for precision, it's impractical to define every term exhaustively. Hence, common parlance or commercial usage often guides the interpretation of undefined terms in statutes, including tax laws.
• Regarding delegation of legislative function, the Court held that Section 17(2)(viii) provided sufficient guidance to the rule-making authority and didn't grant boundless power. Therefore, the enactment of Rule 3(7)(i) for taxing interest-free or concessional loans fell within the delegated authority and wasn't excessive.
• In addressing the alleged violation of Article 14, the court found that using the State Bank of India's interest rate as a benchmark wasn't arbitrary or discriminatory. This benchmarking ensured uniformity and prevented disparate treatment among bank employees.
• Additionally, the Court acknowledged that interest-free or concessional loans are unique benefits for bank employees and thus qualify as perquisites subject to taxation.
  • The use of SBI's interest rate as a benchmark was justified due to its influence on other banks' interest rates, promoting consistency and reducing potential disputes.

What are the Relevant Legal Provisions Involved in it?

Taxation in India:

• Taxation in India is based on two precepts:
  • Firstly, based on the mandate of COI that no tax shall be levied or collected except by authority of law.
  • Secondly, it is based on the principle of sureness, that any tax levied ought not to be vague, must be consistent and predictable.

The Income Tax Act 1961:

About:

• It came into force on 1^st April 1962 and provides about the provisions for calculation of tax.
• It is an Act to consolidate and amend the law relating to income tax and super-tax.
  • Income Tax: It refers to a type of tax Governments impose on the income of businesses and individuals within their jurisdiction.
    • All individuals earning above a certain amount are required to pay income tax on their earned income.
  • Super Tax: A very high rate of income tax or company tax paid by those with a very high level of income or profit.
• Appeal under this act lies to High Court (HC) under Section 260A and to the to the Supreme Court (SC) under Section 261.
• The Income-tax Law classifies the year as the previous year (year in which income is earned) and assessment year (year in which the income is charged to tax).
• Appearance by an authorized representative is made under Section 288 of the Act.
• The act also talks about assessing tax authorities (the person who has the jurisdiction (rights) to make an assessment of an assessee, who is liable under the Income-tax Act.

Section 17 of IT Act:

• Section 17 of the Act deals with the definitions of Salary, Perquisite, and Profits in lieu of salary.
• Section 17(2) of the IT Act specifies that "perquisite" includes various fringe benefits and amenities provided to an employee by their employer, which are taxable under the Act.
• Section 17(2)(viii) of the IT Act provides the definition of perquisites and states that it includes any other fringe benefit or amenity as may be prescribed.

Rule 3 of Income Tax Rules, 1962:

• Rule 3 of the IT Rules provides additional fringe benefits or amenities which are taxable as perquisites.
• Rule 3(7)(i) of the IT Rules provided that interest-free/concessional loan benefits provided by banks to bank employees shall be taxable as fringe benefits or amenities if the interest charged by the bank on such loans is lesser than the interest charged according to the Prime Lending Rate (PLR) of the State Bank of India (SBI).

Landmark Cases:

• In the case of Arun Kumar v. Union of India (2006), the Supreme Court had held that perquisites refer to privileges, gains, or profits incidental to employment and are provided in addition to regular salary or wages.
• In the case of Additional Commissioner of Income Tax v. Bharat V Patel (2018), the Supreme Court had held that perquisite commonly denotes any supplementary benefit or perk that accompanies an employee's compensation beyond their salary.