The Hindu Business Line : The rule of class elimination

IN THE 1990s, taxation of salaries and perquisites was in the throes of controversy. The Department felt that there was leakage through various types of reimbursements dolled out by employers to employees.

Accordingly, the system of salary taxation, particularly valuation of perquisites, was rationalised in the latter part of 1990s. This culminated in a new Rule 3 being introduced in the Income-tax Rules effective October 1, 2001.

This rule, dealing with valuation of various perquisites such as motorcars, housing, concessional loans, and so on, effectively plugged various loopholes that existed earlier. But like any other new legislation or rule, the amended Rule 3 had to face litigation.

The Madras High Court, in the BHEL Executives/Officers Association vs DCIT (2003 269 ITR 390) case, had to deal with a writ petition questioning the class differential, between public sector employees and other categories of employees, which was created by the new Rule 3.

Facts, issues

Historically, there were three categories of employees — a) Central/State government; b) public sector; and c) private sector — for valuation of perquisites relating to housing. Under the amended Rule 3, salaried employees get classified only into two categories a) government employees; and b) others.

As a result, public sector employees lost their separate identity or distinct classification.

The employees of BHEL challenged this, highlighting that it offended Article 14 of the Constitution. Further, the petition also challenged the provision relating to perquisite relating to concessional loans granted by employers to employees.

The new rule placed a restriction of 10 per cent for housing and 13 per cent for other categories of loans.

In other words, any lower interest charged by the employer would be liable to be treated as a perquisite on the differential interest arising thereon.

The petition challenged the stipulated rates, of 13 and 10 per cent respectively, as excessive and unreasonable.

Court decision

The Madras High Court held that the lawmakers were at liberty to have a reasonable classification and treat public sector employees on a par with other employees and it did not amount to discrimination of any sort.

The court also held that the power conferred on the Board to make rules is a delegated legislative power. The rule-making authority, especially while making the rules for determining the value of perquisites, is required to proceed on a basis which "appears to the Board to be proper and reasonable".

The court reasoned that "salaried employees are classified in rule 3 as amended, into those in the service of Government and other employees. The elimination of public sector employees as a separate class does not in any way offend Article 14.

"Salaried employees who are not in the service of the Government form a class, all of whom have the common characteristic of not being employed under the Government, while those in Government service form a distinct class of being employees of the Government, whether, State or Central, whose salaries and other conditions of service are distinct, when compared to those who are not in Government service.

"It has been held by the Supreme Court in more than one case that the State had a wide discretion with regard to persons or objects to be taxed, the point of levy as also the quantum thereof. The deletion of public sector employees as separate class has apparently been effected in the context of shrinking role of the public sector and the increased emphasis on private enterprise in the present era of globalisation."

The court accordingly held that the deletion of that special provision does not in any way violate Article 14, as those employees have no special right to be treated as a special class.

On the issue of perquisite value for concessional loans, the court reasoned that "the grievance of the petitioners with regard to the rate of interest fixed in rule 3 for the purpose of computing the value of perquisites by way of interest-free loan or loans at a concessional rates of interest, for acquiring houses and for conveyance at 10 per cent and at 13 per cent, for other loans reduced by the interest, if any, actually paid by the employees, also cannot be said to be so arbitrary as to warrant interference.

"It is always open to the employees not to avail of the loan from the employer, if the employees are of the view that the percentage of the interest fixed under this rule is excessive and that they can avail of loans elsewhere at a lower rate of interest.

"One of the indirect consequences of interest rates fixed in the amended rules would be to dissuade employers from setting apart substantial funds to be made available to their employees by way of loan... ." On this ground also, the Madras High Court dismissed the petition.

Courts have, by and large, dismissed cases where classification matters are involved, whether it be treatment of perquisites or exemption for voluntary retirement payments. Still such issues get litigated on some pretext or the other.

One may note that effective April 1, 2004, the rate fixed for concessional loans under the rules has been reduced and is now determined on the basis of the rate charged by the State Bank of India on the first day of the relevant previous year.

(The author is a Chennai-based chartered accountant.)