Where employer bank has given loan to employees at rate of interest lower than SBI lending rate, value of concessional loan is taxable as perquisite
SUMMARY OF THE CASE LAWS
The Legislature, by inserting sub-clause (vi) to clause(2) of section 17 with effect from 1-4-2009, has prescribed fringe benefits or amenities which are treated to be perquisite. Rule 3(7) prescribes the amenity/benefit by way of valuation; it has the status of the benchmark; if the valuation results in a positive figure, i.e., State Bank of India rate, rate at which the employer grants loan, then it would be treated as a concession; thus, the rule lays down an express method and provides for a basis of ascertaining the value for concession.
CASE LAWS DETAILS
DECIDED BY: HIGH COURT OF MADHYA PARDESH, IN THE CASE OF: All India Punjab National Bank Officers’ Association v. Chairman-cum- Managing Director, Punjab National Bank, APPEAL NO: Writ Petition Nos.3222,3275, 3343,3489, 3658,3749, 3752,3837,3951, 3957,3958, 3959,3962, 3963,3973, 4003, 4012,4013,4015, 4181,4242, 4243,4487, 14056 of 2008 and 3656, 3659 and 3660 of 2009, DECIDED ON November 30, 2009
2. The petitioner, All India Punjab National Bank Officer’s Association, is aggrieved by the deduction of tax at source by the authorities of the bank, respondents Nos. 1 to 3 in respect of interest-free loans given to the members of the Officer’s Association. Respondents Nos. 1 to 3 have issued a Circular for taxing the said loans as the rate of interest being charged from the members of the Association is less than the lending rate of the State Bank of India. It is contended that rule 3 of the Income-tax Rules, 1962, (for short “the 1962 Rules”) has been amended by Notification No. 271 of 2007 dated November 7, 2007, and is made applicable for the assessment year 2008-08, that is the financial year April 1, 2007 to March 31, 2008. it is urged that vide circular dated January 24, 2008, respondents Nos. 1 to 3 have included loan available at concessional rate of interest under the head “Salaries” by treating such loan as a perquisite in case it is less than the SBI lending rate.
4. It is urged that the determination of perquisite in the matter of concessional loan by comparing it to the SBI PLR rate is arbitrary since the respondent-bank has to determine its own cost of funds and only thereafter can proceed to deduct tax in case their lending rate is less than the costs incurred by them. It is put forth that the petitioners are challenging the deduction of tax at source on the valuation of loans at concessional interest. It is put forth that the valuation of perquisite in the form of loan at concessional rate or interest-free loan with reference to the SBI lending rates is contrary to the decision rendered in Arun Kumar  286 ITR 89 (SC) wherein it has been held that before section 17(2)(ii) can be invoked or pressed into service and before the calculation of concession as per rule 3 is made, the authorities exercising power must come to a positive conclusion that it is a concession. The determination of concession can only be made with reference to the cost to the employer and not with reference to any other third party’s rate of interest because the third party’s rate of interest would also include the profit element of that party. In this background, a prayer has been made to declare Circular No. FD/HO/A&T/CIR No. 3 of 2008, dated January 24, 2008, contrary to the decision of the apex court in so far as the valuation of perquisite in respect of loan at concessional rate of interest is being made with reference to the SBI lending rates while the same should be made with reference to the SBI lending rates while the same should be made with reference to the cost to the employer which is unsustainable.
7. The single question that emerges for consideration is whether the loan granted by the employer at the rate of interest below the rate of interest on State Bank of India loan be regarded as a concessional loan and thereby would be amenable to tax which would be deducted at source or it should be treated as machinery provision and be determined at the time of assessment. The learned counsel for the petitioners has submitted that if the language of sub-clause (i) of clause (7) of rule 3 is read in the proper perspective, it would mean that the value of the benefit to the assessee resulting from interest-free or concessional loan has to be determined as per the basis provided thereafter and hence, the significant term is “concessional loan”. The existence of concessional, contends the learned counsel for the petitioner, becomes a jurisdictional fact which has to necessarily exist before valuation thereof can be ascertained. The adoption of the SBI interest rate as the yardstick for the determining the value and then treating it as a concession is contrary to the principles laid down in Arun Kumar [p2006] 286 ITR 89 (SC). It is urged that the factum of concessional loan or otherwise has, therefore, to be determined first before proceeding to apply the second part of the rule relating to valuation of the concessional loan. In this backdrop, Mr. Sumit Nema, learned counsel who has led the arguments, subnmitted that the existence of concession is a jurisdictional fact which has to necessarily exist before any valuation thereof can be ascertained. It is canvassed by him that if the stand of the Revenue is accepted the difference between the SBI rate and the rate at which loan is granted to an employee per se is a concession, then the term “concession” would lose its meaning because in that case, any loan without the word “concession” before it would become perquisite it is propounded by him that the word “concession” has a distinct meaning and the method of valuation vis-à-vis the SBI rate cannot determine the concession. It is also highlighted by him that the adoption of SBI the interest rate as the yardstick for arriving at concession for determining the value first and then treating it as a perquisite it will be deemed concession without any deeming provision. The valuation is required to be done on determination of the jurisdictional fact of “concession” with reference to the cost of funds of the employer and only when the cost is higher than the rate at which the loan is given, concession can be said to exist.
9. Before we proceed to dwell upon the issue whether the loan of the present nature can be treated as a perquisite and whether it can be regarded as a concession, it is apt to take note of the previous background of the provisions and the law relating to the same. It is worth nothing that section 17(2) of the Act was inserted by the Taxation Laws (Amendment) Act, 1984. Sub-clause (vi) of clause (2) of section 17 of the Act which came to be inserted by the Amendment Act, 1984, stipulates that where the employer had advanced any loan for the purpose of building a house or purchasing a site or a house and a site or for purchasing a motor car, either no interest is charged by the employer on the amount of such loan or interest is charged by the employer on the amount of such loan or interest is charged at a rate lower than the rate of interest which the Central Government having regard to the rate of interest charged from its employees on loans for such purposes granted to them specified in this behalf by notification in the Official Gazette, an amount calculated on certain basis which would be regarded as “perquisite received by the employee and charged to tax accordingly. The said amendment was intended to take effect from April 1, 1985. However, subsequently the Finance Act, 1985, omitted the aforesaid provisions with effect from the date of their insertion, i.e., April 1, 1985. At this juncture, it is apposite to mention that, after clause (vi) was inserted in section 17(2) of the Amendment Act, 1984, the Income-tax Rules were amended by incorporating rule 3A to give effect to clause (vi). The said rule 3A was also deleted after the omission of sub-clause (vi) of section 17(2).
14. On a scrutiny of the history of the amendment and the anatomy of the provisions it is evident that the Legislature, by inserting sub-clause(vi) to clause (2) of section 17 with effect from 1-4-2009, has prescribed fringe benefits or amenities which are treated to be perquisite. Rule 3(7) prescribes the fringe benefit and at the same time it states that the “Value-thereof shall be determined in the manner provided hereunder”. After the said postulate sub-clauses (i) to (ix) lay down the procedure. As is evident, rule 3(7) prescribes the amenity/benefit by way of valuation yardstick. It has the status of the benchmark. If the valuation results in a positive figure, i.e., State Bank of India rate, rate at which the employer grants loan, then it would be treated as a concession. Thus, the rule lays down an express method and provides for a basis of ascertaining the value for concession.
22. From the aforesaid pronouncement of law, it is quite luculent that in Arun Kumar  286 ITR 89, the apex court, while interpreting section 17(2)(ii) which was a substantive provision containing the prescription of concession in the matter of rent, held that rule 3 is in the nature of machinery provision and applies only in the cases of concession. In the case at hand under section 17(2)(vi), power has been given to the Central Board of Direct Taxes to frame rules both for prescribing a perquisite and for its valuation. Thus, rule 3 contains both he facets, namely, prescription of a perquisite and the valuation thereof. Quite apart from the above, there is a distinction between the extension of benefit of accommodation and the grant of loan. As is manifest, the statue has made a device as regards the manner and method of ascertaining the perquisite and, therefore, it cannot be faulted. The valuation method clearly provides for a yardstick. The submission of the learned counsel for the petitioners to the effect that unless it values below the cost impact of the employer it cannot be treated as a concessional loan, does not commend acceptance. We are disposed to think that when a standard has been made in respect of the bank employees qua the availability of the loan, the same is concession and, accordingly, there is not warrant for interference.