SC upholds constitutional validity of perquisite valuation of interest concession

 This Tax Alert summarizes a recent ruling of the Supreme Court (SC) in the case of All India Bank Officers' Confederation (Taxpayer) ^[1] in a batch of appeals filed by various associations of bank employees wherein the Taxpayer had challenged the constitutional validity of perquisite valuation of interest concession with reference to rate of interest charged by State Bank of India (SBI) to its customers.

Section (s.) 17(2)(viii) of Income-tax Act (ITA) provides that the value of any other fringe benefit or amenity as may be prescribed by Central Board of Direct Taxes (CBDT) shall be included in “perquisite”, taxable as Salary income, in the hands of taxpayer. Rule 3(7)(i) of Income-tax Rules, inter-alia, provides that the value of the benefit to the taxpayer resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his/her household shall be determined by reckoning the interest rate charged by SBI as on the first day of the relevant tax year for similar loans.

The two issues formulated by the SC were (a) whether s. 17(2)(viii) and/or Rule 3(7)(i) lead to delegation of the “essential legislative function” to CBDT? and (b) is Rule 3(7)(i) arbitrary and violative of Article 14 of the Constitution of India insofar as it treats SBI rate as the benchmark?

The SC held both the issues in favor of tax authority. On the first issue, it held that s.17(2)(viii) and Rule 3(7)(i) do not lead to delegation of “excessive legislative function”. They fall within the parameters of permissible delegation as s.17(2)(viii) clearly delineates the legislative policy and lays down standards for the rule-making authority, thereby satisfying the test of “essential legislative function”. While s.17(2)(viii) delegates the power to CBDT to prescribe what constitutes fringe benefit or amenity and also provides for its valuation, the power is demarcated with the condition that anything made taxable by CBDT under this rule should be a “perquisite” in the form of “fringe benefit or amenity”. On the second issue, the SC held that Rule 3(7)(i) is intra vires s. 17(2)(viii) and not violative of Article 14 of the Constitution. It provides for uniform basis of valuation for all employees. It does not treat unequal as equal. The fixation of SBI rate as benchmark rate is neither arbitrary nor unequal exercise of power