Interest-Free/Concessional Loans To Bank Employees Taxable As Perquisite : Supreme Court Upholds Rule 3(7)(I) Of Income Tax Rules

Background Facts

Staff Unions and Officers' Associations (Appellants) of various banks across India had challenged the vires of Section 17(2)(viii) of the Income Tax Act, 1961 (IT Act) and Rule 3(7)(i) of the Income Tax Rules, 1962 (IT Rules) through various writ petitions before the Madhya Pradesh High Court and Madras High Court which were dismissed by the High Courts.

Section 17(2)(viii) of the IT Act provides the definition of perquisites and states that it includes an 'any other fringe benefit or amenity as may be prescribed'. Rule 3 of the IT Rules provides the 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).

Section 17(2)(viii) and Rule 3(7)(i) were challenged on the grounds of excessive delegation of essential legislative function to the Central Board of Direct Taxes (CBDT). Rule 3(7)(i) was also challenged as being violative of Article 14 of the Constitution since it provides PLR of SBI as the benchmark instead of the actual interest rate charged by the respective bank from a customer on a loan.

Findings of the Court

The court observed that Clauses (i) to (viiia) to Section 17(2) of the IT Act provide for various items which are included in the ambit of perquisites. Further Section 17(2)(viii) is a residuary clause which deliberately leaves it to the appropriate authority to tax any other fringe benefit or amenity by promulgating a rule. In pursuance of the power provided under the clause (viii), CBDT enacted Rule 3(7)(i).

The court observed that there was a twofold effect of Rule 3(7)(i) i.e. the value of interest-free or concessional loans is to be treated as other fringe benefit or amenity for the purposes of Section 17(2)(viii). Secondly, it prescribed the method of valuation of the interest-free/concessional loan for the purposes of taxation.

The court further observed that legislature can delineate the meaning of terms through explicit definitions which enacting laws. These specific meanings are assigned for precision to distinguish them from loose meanings or to restrict/expand the meanings of such words or to designate terms of art. Although explicit definitions are useful, defining each word and expression is neither possible nor expedient.

The court remarked that it is assumed that the legislature is aware of the well-understood meaning of a words/expressions, and thus it is implied that if the legislature does not prescribe a fixed definition to a word, it ascribes the meaning assigned to the word/expression in common parlance or commercial usage. The court observed that this rule also applies to a taxation statute.

The court further observed that Section 17(2)(viii) was enacted as an “an enabling catch-within-domain provision”. Thus, a pragmatic and commonsensical approach needs to be taken while determining the meaning of 'perquisites' in common parlance and commercial usage. The court placed reliance on the case of Arun Kumar v. Union of India wherein the Supreme Court had held that 'perquisites' were a privilege, gain or profit incidental to employment and in addition to regular salary or wages. The court further placed reliance on the case of Additional Commissioner of Income Tax v. Bharat V. Patel wherein the Supreme Court had held that 'perquisite', in the common parlance relates to any perk attached to an employee besides salary.

Based on the above judgements, the court held 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 or in addition to the salary. It is an advantage or benefit given because of employment, which otherwise would not be available.

From this perspective, 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 thus held that grant of an interest-free loan or loans at concessional rate would qualify as perquisites or fringe benefits.

In context to the issue of delegation of essential legislative function, the court held that the subordinate authority's power under Section 17(2)(viii) was not boundless and was demarcated by language of Section 17 of the IT Act. Anything made taxable under Section 17(2)(viii) should be a perquisite in the form of a fringe benefit or amenity. Thus Section 17(2)(viii) clearly gave express guidance to the rule-making authority and reflected the legislative policy.

The court further observed that express delineation of perquisites in Section 17 of the IT Act does not take away the power of the legislature to delegate the authority to bring any other fringe benefit or amenity within the ambit of perquisites.

The court thus observed that enactment Rule 3(7)(i) for levying tax on interest free/concessional loans as a fringe benefit is within the rule making power under Section 17(2)(viii) of the IT Act and thus there was no excessive delegation

In context to the issue of violation of Article 14 of the Constitution, the court held that the fixation of SBI's rate of interest as the benchmark was neither an arbitrary nor unequal exercise of power. unequals were not treated as equals by CBDT.

The court remarked that the benefits enjoyed by bank employees from interest-free loans or loans at a concessional rate is a unique benefit enjoyed by them. It being in the nature of a 'perquisite' is liable to be taxed.

The court remarked that SBI was the largest bank in India and the interest rates fixed by them impact the interest rates charged by other banks. Thus, a single clear benchmark fixed for computation of the perquisite prevents different interest rates being charged by different banks from the customers and checks unnecessary litigation.

With the aforesaid observation, the court confirmed the orders of the Madras and Madhya Pradesh High Courts and dismissed the Civil Appeals.

Case No.- Civil Appeal No. 7708 of 2014 & Ors

Case Name- All India Bank Officers' Confederation Vs The Regional Manager, Central Bank Of India & Others

Citation : 2024 LiveLaw (SC) 352