[Published in 406 ITR (Journ.) p.73 (Part-3)]

Transcription

1 1 Valuation of residential accommodation as a perquisite [Valuation of perquisite in respect of residential accommodation provided by the employer to the employee] [Published in 406 ITR (Journ.) p.73 (Part-3)] S.K. Tyagi The computation of income under the head Salaries is required to be made under sections 15 to 17 of the Income-Tax Act, 1961 (the Act). In this connection, section 17(1)(iv), inter-alia, states that salary includes perquisites. The term perquisite is given an inclusive definition under section 17(2) of the Act. For our purpose, clauses (i) and (ii) of section 17(2) of the Act are relevant. These clauses deal with the following situations : (a) Value of rent-free accommodation provided to the assessee by his employer [ Section 17(2)(i) ] (b) Value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer [ Section 17(2)(ii) ] In the present context, rule 3 of the Income-Tax Rules, 1962 (the Rules), is also relevant. It may be stated in this regard that under section 295(2)(c) of the Act, the CBDT is empowered to frame rules for the determination of the value of any perquisite chargeable to tax under the Act in such a manner and on such basis as appears to the CBDT to be proper and reasonable. Under these powers, the CBDT has prescribed rule 3 of the Rules for the valuation of the aforesaid perquisites. Before we proceed further, it will be appropriate to understand the meaning of the term perquisite, because the term perquisite has not been given a comprehensive and specific definition in the Act or the Rules. Section 17(2) of the Act, clearly states that perquisite will include certain specified items. The term perquisite may be described as follows : (i) In general terms perquisite indicates a personal advantage to the employee Owen Vs Pook [1969] 74 ITR 147 (HL) (ii) Perquisite is an advantage received by the holder of an office over and above the salary. Any benefit received incidental to employment in excess of salary is a perquisite. Perquisite postulates a relationship of employer and employee. Perquisite is a benefit attached to an office Shailendra Kumar Vs Union of India [1989] 175 ITR 494 (All)

2 2 (iii) In order to come within the definition of the word perquisite, it ought to be emolument, fee or profit attached to the office or position or an addition to salary or wages CIT Vs D.R. Phatak [1975] 99 ITR 14 (Bom). The various aspects in connection with the valuation of the perquisite in respect of rental accommodation and other connected benefits provided by the employer to the employee are discussed as follows : I. Perquisite value in respect of rental accommodation provided by the employer to the employee, whether owned by the employer or taken on lease In this context, rule 3 of the Income-Tax Rules, 1962 (the Rules), is relevant, because rule 3 deals with the valuation of perquisites. For our purpose rule 3(1) is relevant, which is reproduced as follows : 3. Valuation of perquisites For the purpose of computing the income chargeable under the head Salaries, the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub-rules, namely: (1) The value of residential accommodation provided by the employer during the previous year shall be determined on the basis provided in the Table below. TABLE I Sl. No. Circumstances Where accommodation is unfurnished Where accommodation is furnished (1) (2) (3) (4) (2) Where the accommodation is provided by any other employer and (a) where the accommodatio n is owned by the employer, or (i) 15% of salary in cities having population exceeding 25 lakhs as per 2001 census; (ii) 10% of salary in cities having population exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 census; (iii) 7.5% of salary in other areas, in respect of the The value of perquisite as determined under column (3) and increased by 10% per annum of the cost of furniture (including television sets, radio sets, refrigerators, other household appliances, air-conditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, by the actual hire charges payable for the same as reduced by any charges paid or payable for the same by the employee during the

3 3 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. previous year. (b) where the accommodatio n is taken on lease or rent by the employer. Actual amount of lease rental paid or payable by the employer or 15% of salary whichever is lower as reduced by the rent, if any, actually paid by the employee. The value of perquisite as determined under column (3) and increased by 10% per annum of the cost of furniture (including television sets, radio sets, refrigerators, other household appliances, air-conditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, by the actual hire charges payable for the same as reduced by any charges paid or payable for the same by the employee during the previous year. In the present context, Explanation (i) to rule 3 of the Rules is also relevant, because it defines the term accommodation. The aforesaid Explanation (i) is reproduced as follows : Explanation For the purpose of this rule (i) accommodation includes a house, flat, farm house or part thereof, or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure. In connection with the valuation of the aforesaid perquisite, the following aspects are relevant : 1. For the valuation of perquisite in respect of rent-free accommodation, the rule prescribing the mode of computation of perquisite value is mandatory. In the present connection, a reference may be made to the judgement of Madras High Court in the case of CIT Vs K.S. Sundaram [1999] 239 ITR 851 (Mad) : 163 CTR 515 (Mad). In this case the ITO computed the perquisite value of the residential accommodation provided by the employer to the assessee at Rs.54,600 and restricted it to Rs.54,000 under the then rule 3(a)(iii) of the Income-Tax Rules, This was confirmed by the CIT(A), but on further appeal, the Appellate Tribunal held that rule 3(a)(iii) was not applicable to the assessee s case and reduced the perquisite value to Rs.6,000, being the actual rent paid by the employer to the owner of the building.

4 4 On a reference, at the instance of the I.T. Department, reversing the decision of the Appellate Tribunal, it was held by the High Court that rule 3 of the Income-Tax Rules, 1962, provides that the value of perquisites shall be determined in accordance with rules and the expression, shall in rule 3 clearly indicates that rule 3 should be applied in the cases covered by the said rule. Mere employment of the expression ordinarily in the main part of rule 3(a)(iii) does not show that the rule is directory. When the statute provides for a uniform method of valuation of perquisite, the statutory method of valuation of perquisite should be adopted and all the authorities functioning under the Act, including the Appellate Tribunal, are bound by the Rules and it is not permissible to ignore or refuse to apply rule 3 on the ground that it is only directory in nature or it is applicable only in cases where the house is owned by the employer and given to the employee free of rent. The object of the rule is to determine the value of the perquisite in all situations. It is an immaterial consideration whether the building was owned by the employer or taken on rent by the employer for the proper application of rule 3 of the Rules and in both the situations, rule 3(a)(iii) will apply as there are no limiting expressions found in rule 3 to make it applicable only in the case of a property owned by the employer. The foresaid judgement of Madras High Court was later on affirmed by the Supreme Court in the case of K.S. Sundaram Vs CIT [2001] 251 ITR 781 (SC) : 170 CTR 557 (SC). It was held in this case that rule 3(a) applies to all cases covered by the said rule to determine the value of perquisite whether the building is owned by the employer or taken on rent by the employer. 2. The notional interest on interest-free advance or security deposit given by the employer to the landlord is not a perquisite In this regard, a reference may be made to the judgements of Bombay and Delhi High Court. The same are discussed as follows : (i) CIT Vs Shankar Krishnan [2012] 349 ITR 685 (Bom) In this case the assessee was provided with a rent-free accommodation in Mumbai by his employer. The monthly rent paid by the employer in respect of the flat was Rs.10,000, per month. The employer had given interest-free refundable security deposit of Rs.30 lakhs to the landlord for renting out the premises. In the assessment year , the assessee computed the perquisite value of the accommodation at Rs.1,20,000, calculated at Rs.10,000, per month, being the rent paid by the employer to the landlord. The Assessing Officer (AO), was of the opinion that since the employer had given interest-free deposit of Rs.30 lakhs to the landlord, interest at the rate of 12 per cent on the deposit was required to be taken into consideration for estimating a fair rental value of the flat given to the assessee and accordingly, the AO enhanced the perquisite value of the residential accommodation

5 5 provided to the assessee. This was upheld by the CIT(A). The Tribunal, however, held that under the amended rules, there is no concept of determination of the fair rental value for the purpose of ascertaining the perquisite value of the rent-free residential accommodation provided to the employees. On appeal to the High Court by the I.T. Department, dismissing the appeal, it was held that the actual amount of lease rent paid by the employer was less than 10 percent of the salary of the assessee. Therefore, the actual amount of lease rent paid by the employer should be taken into consideration while computing the perquisite value of the residential accommodation. It was also held that under rule 3 of the Rules, as amended with retrospective effect from , the value of perquisites for the residential accommodation provided by the employer shall be the actual amount of lease rent paid or payable by the employer or 10 per cent of the salary, whichever is lower, as reduced by the rent, if any, actually paid by the employee. Thus, the perquisite value of the residential accommodation provided by the employer is to be computed on actual amount of lease rental paid or payable by the employer and not on notional basis. (ii) CIT Vs Vijay Singh [2010] 323 ITR 446 (Del) : 43 DTR 302(Del) In this case the assessee was the managing director of a company and had been provided with accommodation by the employer-company. In terms of the lease, a rent of Rs.50,000 per month along with interest-free security deposit of 3.10 crores and additional guarantee of Rs.5.50 crores was provided by the employer-company on behalf of the employee. Thereafter, the assessee purchased the accommodation for a consideration of Rs.3.12 crores and simultaneously entered into an agreement with the employer-company for providing interest-free security deposit of Rs.3.10 crores for lease of the accommodation by the assessee to the employer-company. The AO treated a sum of Rs.27,28,000, being notional interest on the loan of Rs.3.10 crores at 10 percent per annum as perquisite in the hands of the assessee. The CIT(A) deleted the addition made by the AO. The Tribunal came to a conclusion that the money had not been given by the employer interest-free before the flat had been taken on lease, but the interestfree security deposit had been given by the employer for taking the flat belonging to the assessee on lease and therefore, it could not be treated as interest-free loan. The Tribunal further held that the assessee had also not derived any other advantage as he had leased out the flat on the same monthly rent with the same amount of interest-free security deposit and had in fact not demanded any additional guarantee as in the case when the erstwhile owner had leased out the same flat to the employer. The Tribunal, therefore, came to the

6 6 conclusion that there was no infirmity in the order of the CIT(A) in deleting the addition made by the AO and upheld the same. On further appeal by the I.T. Department, dismissing the appeal, it was held by the High Court that the findings of fact arrived at concurrently by the authorities below did not warrant any interference by the Court in that appeal and accordingly, the decision of the Tribunal was upheld. 3. The expenses incurred by the employer towards the repairs and renovations of the leasehold residential accommodation could not be brought to tax as a perquisite in the hands of the assessee-employee. In this context, the judgement of Delhi High Court, in the case of Scott R. Bayman Vs CIT [2012] 76 DTR 113 (Del), is relevant. The issue before the Delhi High Court in this case was whether expenses incurred by the assessee s employer towards repairs and renovations of the leasehold residential accommodation occupied by him, could be brought to tax as a perquisite in the hands of the assessee-employee. It was held by the High Court that the relevant provisions of rule 3 of the Income-Tax Rules, 1962 (the Rules), which elaborate various contingencies in relation to perquisite in respect of rent-free accommodation, rules out the intention of the Parliament to treat the expenses in relation to improvement, repairs or renovations, as falling within the meaning of perquisite. Therefore, expenses incurred by the assessee s employer towards repairs and renovations of the leasehold residential accommodation occupied by him, cannot be included in his taxable income as a perquisite, particularly in the absence of any recital in the lease deed spelling out any obligation on the assessee-employee to carry out repairs and renovations. It was also held in this case that in the absence of any recital in the lease deed spelling out any obligation on the assessee to carry out repairs and renovations, section 17(2)(iv) of the Act, could not be applied. II. Perquisite value of residential accommodation provided by the employer in other cases In the present context, a reference may also be made to other cases where the question of valuation of perquisite in respect of accommodation provided by the employer to the employee is involved. These cases are discussed as follows : 1. ITO and Ors Vs All India Vijaya Bank Officers Association [1997] 225 ITR 37 (Cal) : 141 CTR 126 (Cal) In this case, the respondent was a nationalized bank which provided residential accommodation to some of its officers charging a standard rent as fixed under the Regulations framed by the

7 7 bank. By a Circular dated , the bank informed its branches that the standard rent recovered by the bank in the case of accommodation provided to the employees, was not a fair rental value and that it was a perquisite to be calculated in accordance with rule 3(b) of the Income-Tax Rules, On a writ petition filed by the association of officers of the bank, a single judge held in favour of the employees. On appeal to a Division Bench by the Department, dismissing the appeal, it was held that rule 3(b) was for the purpose of valuation of the perquisite provided to the employee and if there was no perquisite, the question of valuation did not arise. Rule 3(b) of the Income-Tax Rules could only be applied where the accommodation had been given to the employees at a concessional rate and if there was no concession, rule 3(b) of the Rules was not applicable. The question of concession depended on the nature of accommodation provided to the employee, namely, the normal rent for such accommodation, provided by the employer, payable by other employees similarly situated and employed by the same employer and the actual rent paid by the assessee-employee concerned. The rent paid by all the employees of the bank was at a uniform rate and there was no departure of any kind in favour of any of the employees. It was, thus, held that there was no perquisite where the bank provided residential accommodation to its employees on payment of uniform standard rent fixed under its Regulations. 2. Officers Association, Bhilai Steel Plant Vs Union of India [1983] 139 ITR 937 (MP) In this case, the Petitioner No.1 was the Officers Association, Bhilai Steel Plant, which was a society registered under the Madhya Pradesh Societies Registration Act, The Petitioner No.2 is the Officer of the Bhilai Steel Plant serving as Divisional Engineer (Construction). The Petitioner No.2 was in occupation of a quarter, the rent of which was Rs.100 per month. This rent was fixed as a standard rent by the Bhilai Steel Plant under rule 45A of the Fundamental Rules which had been applied to the officers. In other words, the rent of the quarter was Rs.100 irrespective of the salary of the occupant. The salary paid to Petitioner No.2 worked out to nearly Rs.1500 per month. The Petitioner No.2 was thus, paying a rent which was less than one-tenth of his salary. There were other officers employed in the Plant who were also occupying quarters and paying less rent than one-tenth of salary of an officer. In deducting income-tax at source under section 192 of the Act, the management of the Plant was treating the difference between the one-tenth of his salary and the rent paid by him as a perquisite. The management said that this course was being adopted on the basis of instructions received from the I.T. Authorities. The Petitioners contended that merely because the rent paid by an officer is less than one-tenth of his salary, the difference could not be treated as a perquisite and income-

8 8 tax could not be deducted on that footing. The Petitioners prayed for a direction that respondents be restrained from treating the difference between 10 percent of the salary and the rent paid, as a perquisite for the purposes of deduction of income-tax at source. It was held in this case that the definition of perquisite in sub-clause (ii) of section 17(2) of the Act, extends the meaning of that term by including therein the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer. If the employer gives no concession to the employee in the matter of rent, there can be no question of any perquisite. A case of concession in the matter of rent would arise when the rent normally payable for the accommodation is higher than the rent paid by the employee. It was further held that there is no deeming clause in the definition of perquisite contained in section 17(2) that once it is established that an employee is paying rent less than ten percent of his salary, it must be deemed hat he is receiving a concession in the matter of rent and no such deeming clause can be inferred from rule 3. If rule 3 were to be so construed, it will go beyond the rule-making power of the CBDT conferred by section 295(2) and would become invalid. It was, thus, held that the difference between the rent actually paid and ten percent of the salary could not be treated as a perquisite merely because the rent paid by the employee is less than one-tenth of his salary. Accordingly, the Petitioner No.2, viz. the employer, was directed not to treat the difference between the rent actually paid and 10 per cent of the salary, as a perquisite for the purposes of deduction of income-tax at source. 3. Steel Executives Association Vs Rashtriya Ispat Nigam Ltd [2000] 241 ITR 20 (AP): 160 CTR 38 (AP) In this case, vide four writ petitions, a direction was sought with reference to inclusion of a perquisite value in respect of residential accommodation provided by the employer, as part of taxable salary income while deducting tax at source. In this case, in respect of residential accommodation provided by the employer, standard rent was charged from all the employees, which was fixed at par with the rates charged for Central Government employees under rule 45A of the Fundamental Rules. For the AY , the ITO issued notices to some of the employees stating that the difference between 10 per cent of salary and the standard rent paid by them was a perquisite under section 17(2) of the Act and the same had to be included in the income assessable under the head Salary. This was contested in appeal and the appeals were allowed by the first Appellate Authority. However, the ITO. Ward-6 (TDS), treated the Nigam as an assessee-indefault for not deducting tax at source with reference to the said perquisite and levied a sum of

9 9 Rs lakhs in respect of the AY corresponding to the financial year The Nigam filed an appeal which was dismissed. Thereupon the Nigam issued a Circular, dated to the employees proposing to deduct tax at source by including the said perquisite in the salary. Consequently, a writ petition was filed by the Steel Executives Association for questioning the said Circular. The Department s contention, inter-alia, was that the order under section 201 against the Nigam was confirmed in the appeal and therefore, the employees could not challenge that action against the employer. It was held that the rent charged was not concessional rent and therefore, the difference between the rent actually paid and 10 percent of the salary, was not a perquisite within the meaning of rule 3(b) of the Income-Tax Rules, Therefore, the Department had illegally called upon the employers to make a higher deduction of tax at source by adding a perquisite where there was none and more so where in the individual assessments it had been declared that there was no perquisite at all. It was, thus, held that there was no perquisite in providing accommodation at standard rent which was fixed at par with the rates charged for Central Government employees under rule 45A of the Fundamental Rules, to all the employees. Accordingly, the employer was directed not to deduct tax at source by including such perquisite in the salaries of the employees. III. Perquisite in regard to provision of furniture In this connection, a reference may be made to the judgement of Calcutta High Court in the case of All India Vijaya Bank Officers Association & Ors Vs Vijaya Bank & Ors. [2001] 250 ITR 500 (Cal) 169 CTR 506 (Cal). In this case, the Petitioner, an association of officers employed in the respondent-bank, challenged the action of the bank authorities in recovering tax on perquisites on account of supply of furniture at a concessional rate. It was held that section 17(2) of the Act, authorizes the employer concerned to deduct at source on account of tax on the value of any benefit or amenity granted or provided free of cost or at a concessional rate in any of the cases mentioned in clauses (a), (b) and (c). It was further held that there was no concession in providing amenities by letting out the furniture at a uniformly standard rate so as to bring it within the purview of the definition of perquisites. The rate charged for realization of rent by the bank concerned from all the employees who were similarly situated and placed, was uniform and there was no discrimination. Therefore, the recovery of tax was unjustified and deductions already made had to be adjusted

10 10 IV. Summary In the light of the discussion in the preceding paragraphs, the various aspects, including the legal precedents, in regard to the valuation of perquisite in respect of residential accommodation provided by the employer to the employee, may be summarized as follows : 1. For the valuation of perquisite in respect of rent-free accommodation, rule 3 of the Income-tax Rules, 1962, prescribing the mode of computation of perquisite value is mandatory. 2. The notional interest on interest-free advance or security deposit given by the employer to the landlord, in respect of leasehold residential accommodation, is not a perquisite in the hands of the employee. 3. The expenses incurred by the employer towards the repairs and renovations of the leasehold residential accommodation, could not be brought to tax as a perquisite in the hands of the assessee-employee. 4. There was no perquisite where the employer-bank provided residential accommodation to its employees on payment of uniform standard rent fixed under its Regulations. 5. The difference between the rent actually paid and ten percent of the salary could not be treated as a perquisite in the hands of the employee, merely because the rent paid by the employee is less than one-tenth of his salary. 6. There was no perquisite in providing accommodation at standard rent which was fixed at par with the rates charged for Central Government employees under rule 45A of the Fundamental Rules, to all the employees. 7. The provision of furniture to the employees on the payment of standard rent was not a concession so as to be included in the meaning of perquisite. S. K. TYAGI Office : (020) Flat No.2, (First Floor) M.Sc., LL.B., Advocate : (020) Gurudatta Avenue Ex-Indian Revenue Service Residence : (020) Popular Heights Road Income-Tax Advisor Website: s : tyagi@sktyagitax.com : sktyagitax@gmail.com : sktyagidt@airtelmail.in Koregaon Park PUNE