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Synopsis

The Supreme Court has on May 7, 2024 said that the enactment of subordinate legislation for levying tax on interest free or concessional loans on salaries of the banks employees as a fringe benefit is within the rule making power under Section 17(2)(viii) of the Income Tax Act. 

A bench of Justices Sanjiv Khanna and Dipankar Datta upheld the vires of Section 17(2)(viii) of the Income Tax Act, 1961 or Rule 3(7)(i) of the Income Tax Rules, 1962, while dismissing a batch of petitions filed by All India Bank Officers Federation and others.

"We are of the opinion that the enactment of subordinate legislation for levying tax on interest free/concessional loans as a fringe benefit is within the rulemaking power under Section 17(2)(viii) of the Act. Section 17(2)(viii) itself, and the enactment of Rule 3(7)(i) is not a case of excessive delegation and falls within the parameters of permissible delegation. Section 17(2) clearly delineates the legislative policy and lays down standards for the rule-making authority. Accordingly, Rule 3(7)(i) is intra vires Section 17(2)(viii) of the Act," the bench said.

The court also held that the fixation of SBI’s rate of interest as the benchmark is neither an arbitrary nor unequal exercise of power. 

"The rule-making authority has not treated unequal as equals. The benefit enjoyed by bank employees from interest-free loans or loans at a concessional rate is a unique benefit/advantage enjoyed by them. It is in the nature of a ‘perquisite’, and hence is liable to taxation," the bench said.

The court also pointed out when it comes to uniform approach the laws relating to fiscal or tax measures enjoy greater latitude than other statutes. The Legislature should be allowed some flexibility in such matters and this court would be more inclined to give judicial deference to legislative wisdom.

"Commercial and tax legislations tend to be highly sensitive and complex as they deal with multiple problems and are contingent. This court would not like to interfere with the legislation in question, which prevents possibilities of abuse and promotes certainty. It is not iniquitous, draconian or harsh on the taxpayers. A complex problem has been solved through a straitjacket formula, meriting judicial acceptance," the bench said.

To hold otherwise, would lead to multiple problems or issues and override the legislative wisdom. The universal test in the present case is pragmatic, fair and just. Therefore, Rule 3(7) is held to be intra vires Article 14 of the Constitution, the bench said.

Section 17(2)(viii) of the Act included in the definition of ‘perquisites’, ‘any other fringe benefit or amenity’, ‘as may be prescribed’. Rule 3 of the Rules prescribed additional ‘fringe benefits’ or ‘amenities’, taxable as perquisites, pursuant to Section 17(2)(viii). 

It also prescribed the method of valuation of such perquisites for taxation purposes. Rule 3(7)(i) of the Rules stipulated 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 of the State Bank of India.

Both the provisions were challenged on the grounds of excessive and unguided delegation of essential legislative function to the Central Board of Direct Taxes. Rule 3(7)(i) was also challenged as arbitrary and violative of Article 14 of the Constitution insofar as it treated the PLR of SBI as the benchmark instead of the actual interest rate charged by the bank from a customer on a loan. 

The court noted the effect of the rule is twofold. First, the value of interest-free or concessional loans is to be treated as ‘other fringe benefit or amenity’ for the purpose of Section 17(2)(viii) and, therefore, taxable as a ‘perquisite’. Secondly, it prescribes the method of valuation of the interest-free/concessional loan for the purposes of taxation.

"'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," the bench said.

"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’, as understood through its natural usage in common parlance," the bench added.

The bench found that Rule 3(7)(i) can be hardly argued, to be arbitrary or irrational for the reason it benchmarked computation of the perquisite with reference to the SBI’s PLR. 

SBI is the largest bank in the country and the interest rates fixed by them invariably impact and affect the interest rates being charged by other banks. By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation, the bench said.

"Rule 3(7)(i) ensures consistency in application, provides clarity for both the assessee and the revenue department, and provides certainty as to the amount to be taxed. When there is certainty and clarity, there is tax efficiency which is beneficial to both the tax payer and the tax authorities. These are all hallmarks of good tax legislation. Rule 3(7)(i) is based on an uniform approach and yet premised on a fair determining principle which aligns with constitutional values," the court said.