SC Uphold Validity of I-T Provisions on Interest-Free Loans to Bank Employees Under Rule 3(7)(i)

The appeals filed by staff unions and officers’ associations of various banks, impugning judgments which dismiss their writ petitions, where the vires of Section 17(2)(viii) of the Income Tax Act, 19611 or Rule 3(7)(i) of the Income Tax Rules, 19622 , or both, were challenged

The applicants along with the staff unions and officer’s associations of distinct banks, contested the vires of provisions of Section 17(2)(viii) of the Income Tax Act, 19611 or Rule 3(7)(i) of the Income Tax Rules, 1962 claiming against the taxation of interest- free/concessional loans provided by banks to their employees.

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Section 17(2)(viii) of the Act includes in the definition of ‘perquisites’3 , ‘any other fringe benefit or amenity’, ‘as may be prescribed’. 4 Rule 3 of the Rules prescribes additional ‘fringe benefits’ or ‘amenities’, taxable as perquisites, pursuant to Section 17(2)(viii). It also prescribes the method of valuation of such perquisites for taxation purposes. Rule 3(7)(i) of the Rules stipulates 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 Rate5 of the State Bank of India.

Under this petitions, Section 17(2)(viii) and Rule 3(7)(i) 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) is also challenged as arbitrary and violative of Article 14 of the Constitution insofar as it treats the PLR of SBI as the benchmark instead of the actual interest rate charged by the bank from a customer on a loan.

‘Perquisite’ has been defined in Section 17(2) for clarity, and also, to include and widen its scope. Clauses (i) to (viiia) to Section 17(2) make the following taxable as ‘perquisites’:

 Clause (i) – rent-free accommodation by employer.

Clause (ii) – accommodation at a concessional rate by employer.

Clause (iii) – benefit of amenity provided free of cost/at a concessional rate, in specified cases.

Clause (iv) – sum paid by the employer for an obligation.

Clause (v) – sum payable by the employer through a fund (barring specified exceptions) to effect an assurance on the life of the assessee or to effect a contract for annuity.

Clause (vi) – specified security or sweat equity shares allotted/transferred by employer at concessional rate/free of cost.

Clause (vii) – specified amounts contributed to assessee’ account by employer such as provident fund, superannuation fund etc.

 Clause (viia) – annual accretion by way of interest, dividend or other similar amounts with respect to clause (vii).

In terms of the power conferred under Section 17(2)(viii), CBDT has enacted Rule 3(7)(i) of the Rules. Rule 3(7)(i) states that interest-free/concessional loan made available to an employee or a member of his household by the employer or any person on his behalf, for any purpose, shall be determined as the sum equal to interest computed at the rate charged per annum by SBI, as on the first date of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by interest, if any, actually paid. However, the loans made available for medical treatment in respect of diseases specified in Rule 3A or loans whose value in aggregate does not exceed Rs.20,000/- , are not chargeable.

Additional Commissioner of Income Tax v. Bharat V. Patel ,(2018) 15 SCC 670,  this Court held that ‘perquisite’, in the common parlance relates to any perk or benefit attached to an employee or position besides salary or remuneration. It usually includes non-cash benefits given by the employer to the employee in addition to the entitled salary or remuneration.

The court concerning the benchmarking of interest rates to the PLR of SBI considered the same rational and non-arbitrary. It learned that the interest rates of SBI influence those of other banks and that those who use a single benchmark ensure consistency and clarity in taxation. The Court concluded that Rule 3(7)(i) was established on a fair determining principle and did not breach Article 14.

The decision of the Supreme Court to keep the taxation of interest-free/concessional loans to bank employees reaffirms the legality of Rule 3(7)(i) under the Income Tax Rules. On the taxation of fringe benefits, the judgment delivers clarity and highlights the importance of consistency and justice in tax legislation.

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