Case Law Details
CIT Vs Shankar Krishnan (Bombay High Court)
Whether Notional Interest on Security Deposit paid by employer for accommodation of its employee will also be included while calculating perquisites.
BRIEF FACTS:
1. The Assessee is a salaried employee with McKinley & Company Inc., India. The Assessee was provided with rent free accommodation in Cuffe Parade, Mumbai by his employer company. The monthly rent paid by the employer in respect of the said flat was Rs.10,000/- p.m. The employer had given an interest free refundable security deposit of Rs.30 lacs to the landlord for renting out the said premises.
2. In the Assessment Year 2000-20021 , in question, the Assessee computed the perquisite value of the accommodation at Rs.1,20,000 calculated (@Rs.10,000/- pm.) being the rent paid by the employer to the landlord. The Assessing Officer was of the opinion that since the employer had given interest free deposits of Rs.30 lacs to the landlord, interest @ 12% on the said deposit is required to be taken into consideration for estimating a fair rental value of the flat given to the Assessee and accordingly, the Assessing Officer enhanced the perquisite value of the residential accommodation provided to the Assessee.
APPEAL BEFORE CIT(A)
3. On appeal filed by the Assessee, the CIT(A) upheld the decision of the assessing officer.
APPEAL BEFORE ITAT
4. On further appeal filed by the assessee, the ITAT held that under Rule 3 of the IT Rules, 1962 as amended with retrospective effect from 1.4.2001, 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% of the salary whichever is lower, as reduced by the rent, if any, actually paid by the employee.
5. The Tribunal 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.
6. In the present case, the yearly rent paid by the employer was Rs.1,20,000/- whereas 10% salary of the employee came to Rs. 14,01,878/- as such, the rent paid by the employer being less than 10% of the salary of the employee, the perquisite value of the accommodation was liable to be computed at Rs.1,20,000/. Accordingly, the ITAT held that as per the amended Rule 3, the perquisite value of the accommodation given by the assessee is liable to be accepted.
APPEAL BEFORE HIGH COURT
Challenging the above said order, the revenue has filed the present appeal.
7. Mr.Suresh Kumar, learned counsel appearing for the revenue submitted that since the employer has paid a sum of Rs.30.0 lacs for obtaining the residential premises, notional interest payable on the said deposit has to be taken into consideration while including the perquisite value of the premises given by the employer to the assessee.
8. Rule 3 of the Income Tax Rules, 1962 as amended by the Income Tax (Twenty-second Amendment) Rules, 2001 to the extent relevant reads thus:
“3. Valuation of perquisites. – For the purpose of computing the income chargeable under the head Salaries, the value of perquisite s 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 subrules, 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) |
| (1) | Where the accommodation is provided by the Central Government or any State Government to the employees either holding office or post in connection with the affairs of the Union or of such State or serving with any body or undertaking under the control of such Government on deputation. | License fee determined by the Central Government or any State Government in respect of accommodation in accordance with the rules framed by such Government as reduced by the rent 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 if such furniture is hired from a third party, 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. |
| (2) | Where the accommodation is provided by any other employer and-
(a) where the accommodation is owned by the employer, or (b) where the accommodation is taken on lease or rent by the employer. |
(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 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. 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.
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. |
| (3) | Where the accommodation is provided by the employer specified in serial number (1) or (2) in a hotel (except where the employee is provided such accommodation for a period not exceeding in aggregate fifteen days on his transfer from one place to another) | Not applicable | 24% of salary paid or payable for the previous year or the actual charges paid or payable to such hotel, which is lower, for the period during which such accommodation is provided as reduced by the rent, if any, actually paid or payable by the employee. |
9. Thus, on a plain reading of Rule 3, it is seen that 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. Therefore, in our opinion, the contention of the revenue that the notional interest on the deposits paid by the employer to the landlord has to be taken into consideration while computing the perquisite value of the residential accommodation cannot be accepted in view of the express words used in Rule 3 of the Income Tax Rules, 1962 as amended w.e.f. 1.4.2001.
10. In the present case, admittedly, the actual amount of lease rent paid by the employer is less than 10% of the salary of the Assessee and therefore, the decision of the ITAT in holding that the actual amount of lease rent paid by the employer should be taken into consideration while computing the perquisite value of the residential accommodation cannot be faulted.
11. Appeal is accordingly dismissed.
CONCLUSION: from above judgement it is clear that perquisite value of a residential accommodation provided by the employer to its employee will be calculated on the basis of actual rent paid or payable and no notional interest on Security Deposit deposited by employer with the landlord will be taken into account. Rule 3 of the Income Tax Rules,1962 also provides that the rent paid or payable should be actual and not notional.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Where an employer takes residential premises on rent by giving security deposit for the benefit of employees, whether the notional interest on such security deposit is liable to be included in the perquisite value of the accommodation given to the assessee employee is the question raised in this appeal?
2. The Assessment Year involved here in A.Y.20012002.
3. The Assessee is a salaried employee with McKinley & Company Inc., India. The Assessee was provided with rent free accommodation in Cuffe Parade, Mumbai by his employer company. The monthly rent paid by the employer in respect of the said flat was Rs.10,000/- p.m. The employer had given an interest free refundable security deposit of Rs.30 lacs to the landlord for renting out the said premises.
4. In the Assessment Year in question, the Assessee computed the perquisite value of the accommodation at Rs.1,20,000 calculated (@Rs.10,000/ pm.) being the rent paid by the employer to the landlord. The Assessing Officer was of the opinion that since the employer had given interest free deposits of Rs.30 lacs to the landlord, interest @ 12% on the said deposit is required to be taken into consideration for estimating a fair rental value of the flat given to the Assessee and accordingly, the Assessing Officer enhanced the perquisite value of the residential accommodation provided to the Assessee.
5. On appeal filed by the Assessee, the CIT(A) upheld the decision of the assessing officer. On further appeal filed by the assessee, the ITAT held that under Rule 3 of the IT Rules, 1962 as amended with retrospective effect from 1.4.2001, 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% of the salary whichever is lower, as reduced by the rent, if any, actually paid by the employee. The Tribunal 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.
6. In the present case, the yearly rent paid by the employer was Rs.1,20,000/ whereas 10% salary of the employee came to Rs. 14,01,878/ as such, the rent paid by the employer being less than 10% of the salary of the employee, the perquisite value of the accommodation was liable to be computed at Rs.1,20,000/. Accordingly, the ITAT held that as per the amended Rule 3, the perquisite value of the accommodation given by the assessee is liable to be accepted. Challenging the above said order, the revenue has filed the present appeal.
7. Mr. Suresh Kumar, learned counsel appearing for the revenue submitted that since the employer has paid a sum of Rs.30.0 lacs for obtaining the residential premises, notional interest payable on the said deposit has to be taken into consideration while including the perquisite value of the premises given by the employer to the assessee.
8. Rule 3 of the Income Tax Rules, 1962 as amended by the Income Tax (Twentysecond Amendment) Rules, 2001 to the extent relevant reads thus:
“3. Valuation of perquisites. For the purpose of computing the income chargeable under the head ‘Salaries’, the value of perquisite s 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 subrules, 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:”
| Sl. No. | Circumstances | Where the accommodation is unfurnished | Where the accommodation is furnished |
| (1) | (2) | (3) | (4) |
| (1) | |||
| (5) | Where the accommodation is provided by any other employer and
(a)………….. (b) Where the accommodation is taken on lease or rent by the employer. |
Actual amount of lease rental paid or payable by the employer or 10% of salary whichever is lower as reduced by the rent, if any, actually, paid by the employee. | |
| (2) |
9. Thus, on a plain reading of Rule 3, it is seen that 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. Therefore, in our opinion, the contention of the revenue that the notional interest on the deposits paid by the employer to the landlord has to be taken into consideration while computing the perquisite value of the residential accommodation cannot be accepted in view of the express words used in Rule 3 of the Income Tax Rules, 1962 as amended w.e.f. 1.4.01.
10. In the present case, admittedly, the actual amount of lease rent paid by the employer is less than 10% of the salary of the Assessee and therefore, the decision of the ITAT in holding that the actual amount of lease rent paid by the employer should be taken into consideration while computing the perquisite value of the residential accommodation cannot be faulted.
11. In the result, we see no merits in the appeal.
12. Appeal is accordingly dismissed.
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