The Hindu Business Line : Fairness frayed

TAXATION of salaries and perquisites has been the focus of attention and debate, particularly in the past decade or so. Of the 25 million assessees/taxpayers in the country, it would be interesting to find how many salaried assessees are on record. The general impression is that the salaried class is the most harassed lot, since every rupee paid to the employee is subject to tax deduction at source by the employer on a monthly basis. Most of the items of salaries and perquisites suffer tax and the exemptions available in the Rules are restrictive and not-so-attractive from the tax planning point of view.

Rule 3 of the Income-Tax Rules, 1962, deals with valuation of perquisites and lists out the various categories of perquisites that are liable to tax. This rule underwent a major change through Notification No. S.O. 940 (E)1 of September 25, 2001, with retrospective effect from April 1, 2001. The purpose was to simplify and rationalise the procedure for determining the perquisite value for various categories, based on the recommendation of an expert group constituted for this purpose.

The above notification was the subject of a writ petition before the Jharkhand High Court in Tata Workers' Union and Another vs Union of India and Others (2002 256 ITR 725 Jharkhand).

Rules for housing

The amended Rule 3 for valuation of perquisites for housing in respect of private sector employees states that where the accommodation is provided by any other employer and where the accommodation is owned by the employer, the value is 10 per cent of salary in cities having a population exceeding four lakh as per 1991 census and 7.5 per cent of 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.

Facts/issues

The Tata union workers filed a writ petition challenging the vires of Notification S.O. 940 (E). The impugned notification was assailed mainly on two grounds.

First, that it gave arbitrary and unfettered powers to the Revenue because computation of the perquisite on the basis of the percentage of the salary (10 per cent of salary and 7.5 per cent of salary) had no nexus with the object sought to be achieved and was not based on an intelligible differentia.

And that there could be cases where the houses allotted to the employees by the employer may be such lower rental that 10 per cent or even 7.5 per cent of the salary may be considered to be very much on the higher side.

Basically, the writ petition focussed attention on valuation of perquisites relating to housing. The earlier rule limited the value of perquisite to fair rental value (FRV) of the accommodation where such value was lesser than 10 per cent of salary.

The new Rule 3 dealing on the subject fixes an arbitrary figure of 10 per cent of salary irrespective of the actual FRV of the property in question.

Court decision

The Jharkhand High Court dismissed the writ and held that the substituted Rule 3 was in the right direction: "... Looking to the reasonableness of the classification between the cities with population of less than four lakh and others with bigger population, we do not find anything unreasonable in the value being fixed at 7.5 per cent and 10 per cent, respectively, of the salary. We do not consider this unreasonable from any yardstick or parameter. According to us, the amended Rule 3 does appear to be a step in the right direction especially when looking to the simplification aspect of the same."

It found that the notification did not suffer from any arbitrariness because for rationalising and simplifying the procedure, the Board had brought about the notification. While there can be two views as to whether the notification would stand the scrutiny of High Courts on a writ petition, the fact remains that valuation for housing as laid down by new Rule 3 suffers from unreasonableness. There are several cases where factories are situated in the outskirts of metros and accommodation is provided for private sector employees. Salary levels may be high depending on the nature of the business, type of the company and the levels of employees. FRV of the accommodation may be low only because of the locational considerations.

In such an eventuality, merely taking a fixed per cent of salary as perquisite value where FRV is substantially lower smacks off arbitrariness and unreasonableness. There is a case to restate the erstwhile Rule 3 on this subject to accommodate situations where FRV can be taken as perquisite value when it is less.

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