Bombay High Court
All India Central Bank Officers … vs Union Of India And 3 Ors on 20 January, 2025
Author: M.S.Sonak
Bench: M.S.Sonak
wp.825-2006 & ors(F).docx
2025:BHC-OS:834-DB
Pradnya
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 825 OF 2006
1. All India Central Bank ]
Officers Federation, ]
a trade union, having it's office ]
at Kasturi Building, ]
J. N. Tata Road, Churchgate, ]
Bombay 400020 ]
2. Shri Ramesh Chandra Agarwal, ]
General Secretary of the ]
Petitioner No 1 residing at ]
E-301, Central Apartments, ]
Dayaldas Road, Vile Parle (East), ]
Bombay 400057 ] ...Petitioners
VERSUS
1. Union of India, ]
through the Commissioner of ]
Income Tax (Judicial) ]
Ayakar Bhavan, Annexe Building ]
third floor, New Marine Lines, ]
Bombay 400020 ]
2. The Central Board of Direct Taxes, ]
having it's Office at North Block, ]
New Delhi, 110001 ]
3. The Chief Commissioner of ]
Income Tax, Ayakar Bhavan, ]
New Marine Lines, ]
Bombay 400020 ]
4. Central Bank of India, ]
constituted under the Banking ]
Companies (Acquisition and ]
1
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transfer of undertakings) Act, ]
1970, and having its Central Office]
at Chander Mukhi, Nariman Point, ]
Bombay 400021 ] ...Respondents
WITH
NOTICE OF MOTION NO. 476 OF 2010
IN
WRIT PETITION NO. 825 OF 2006
All India Central Bank Officers'
Federation and anr. ...Applicants
VERSUS
Union of India and ors. ...Respondents
WITH
NOTICE OF MOTION NO. 55 OF 2010
IN
WRIT PETITION NO. 825 OF 2006
All India Central Bank Officers
Federation and anr. ...Applicants
VERSUS
Union of India and ors. ...Respondents
WITH
WRIT PETITION NO. 438 OF 2008
1. The Canara Bank Officers' ]
Association, ]
a Trade Union registered under ]
the Trade Unions Act, having its ]
registered office at 402-406, ]
Himalaya House, 79, ]
Mata Ramabai Ambedkar Marg, ]
Fort, Mumbai 400 001 ]
2. Shri Hanamant K. Kulkarni, ]
Vice President, ]
2
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Having his address at 21, ]
Gurudarshan Manpada Road, ]
Dombivli (East) 421201 ]
3. Sri Avinash M Pandhare, ]
Having his address at 504-D, ]
Mukund Canara Bank Officers' ]
Quarters Mahakali Caves Road, ]
Andheri (East), Mumbai-400093 ]
4. Ramachandra Anant Shahpurkar, ]
Having his address at 404-D, ]
Mukund Canara Bank Officers' ]
Quarters Mahakali Caves Road, ]
Andheri (East), Mumbai-400093 ] ...Petitioners
VERSUS
1. Union of India, ]
through the Commissioner of ]
Income Tax (Judicial) having his ]
address at Ayakar Bhavan, ]
Annexe Building, third floor, ]
New Marine Lines, ]
Bombay 400020 ]
2. The Central Board of Direct Taxes, ]
having it's office at North Block, ]
New Delhi, 110001 ]
3. The Chief Commissioner of ]
Income Tax, Ayakar Bhavan, ]
New Marine Lines, ]
Bombay 400020 ]
4. Canara Bank, ]
Constituted under the Banking ]
Companies (Acquisition and ]
Transfer of Undertakings) Act, ]
1970, and having its Head Office ]
at 112, Jayachamrajendra Road, ]
Bangalore 560 002 ]
3
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5. The Indian Banks Association, ]
An Association of Bank ]
Managements, Having it's office at ]
World Trade Centre, 6th Floor, ]
Centre 1 Building, World Trade ]
Centre Complex, Cuffe Parade, ]
Mumbai - 400005 ] ...Respondents
WITH
WRIT PETITION NO. 506 OF 1996
1. Federation of Bank of India ]
Officers Association, ]
having its registered office at ]
Bank of India Building, 70-80, ]
M.G. Road, Fort, ]
Mumbai 400 023. ]
2. Manilal L. Gala, ]
being the President of ]
Petitioner No.1, having office at ]
Bank of India Building, 70-80, ]
M.G. Road, Fort, ]
Mumbai 400 023. ] ...Petitioners
VERSUS
1. Union of India, ]
through the Office of the ]
Central Government Advocate ]
at Aaykar Bhavan, ]
Annexe Building, 3rd floor, ]
New Marine Lines, ]
Bombay - 400 020 ]
2. The Central Board of Direct Taxes, ]
having its office on North Block, ]
New Delhi 110 001 ]
3. The Chief Commissioner of ]
Income Tax, Aayakar Bhavan, ]
4
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New Marine Lines, ]
Bombay - 400 020 ]
4. Bank of India, ]
having its Head Office at Express ]
Towers, Nariman Point, ]
Mumbai 400 021 ] ...Respondents
WITH
WRIT PETITION NO. 1350 OF 2008
Syndicate Bank Officers' Association, ]
th
Lawrence & Mayo House, 4 floor, ]
276, D. N. Road, Fort, Mumbai 400001 ]
through its General Secretary, ]
Shri K. S. Shetty ] ...Petitioner
VERSUS
1. Union of India, ]
through the Commissioner of ]
Income-Tax (Judicial), ]
Aayakar Bhavan, Annexe Building,]
3rd floor, New Marine Lines, ]
Mumbai 400 020 ]
2. The Central Board of Direct Taxes, ]
North Block, New Delhi 110 001 ]
3. The Chief Commissioner of ]
Income-Tax, Aayakar Bhavan, ]
New Marine Lines, ]
Mumbai 400 020 ]
4. Syndicate Bank, ]
a Nationalised Bank duly ]
constituted under the Banking ]
Companies (Acquisition and ]
Transfer of Undertakings) Act, ]
1970, and having its Central ]
Accounts Department - Tax Cell ]
at Head Office, Manipal ]
(Karnataka) ] ...Respondents
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wp.825-2006 & ors(F).docx
WITH
WRIT PETITION NO. 1347 OF 2008
1. The State Bank of India Officers ]
Federation, a Trade Union ]
registered under the Trade Unions ]
Act, having its registered office at ]
10th floor, State Bank Bhavan, ]
Madame Cama Road, ]
Mumbai 400 021 ]
2. Shri V. D. Deshpande, ]
Joint General Secretary, ]
All India State Bank Officers' ]
Federation, 10th floor, State Bank ]
Bhavan, Madame Cama Road, ]
Nariman Point, Mumbai 400 021 ] ...Petitioners
VERSUS
1. Union of India, ]
(through the Commissioner of ]
Income-Tax-Judicial), Aayakar ]
rd
Bhavan, Annexe Building, 3 floor,]
New Marine Lines, ]
Mumbai 400 020 ]
2. The Central Board of Direct Taxes, ]
North Block, New Delhi - 110 001 ]
3. The State Bank of India, ]
State Bank Bhavan, 10th floor, ]
Mumbai - 400 021 ] ...Respondents
WITH
NOTICE OF MOTION NO. 481 OF 2010
IN
WRIT PETITION NO. 1347 OF 2008
The State Bank of India Officers
Federation and anr. ...Applicants
VERSUS
Union of India and ors. ...Respondents
6
wp.825-2006 & ors(F).docx
WITH
WRIT PETITION NO. 928 OF 1994
1. All India Central Bank ]
Officers' Federation, ]
a Trade Union, having its Office ]
at Kasturi Building, ]
J. N. Tata Road, Churchgate, ]
Bombay 400020 ]
2. Shri Ramesh Chandra Agarwal, ]
General Secretary of the ]
Petitioner No.1, residing at ]
E-301, Central Apartments, ]
Dayaldas Road, Vile Parle (E), ]
Bombay 400057. ] ...Petitioners
VERSUS
1. Union of India, ]
through the Office of the Central ]
Government Advocate, ]
at Aaykar Bhavan, ]
Annexe Building, 3rd floor, ]
New Marine Lines, ]
Bombay - 400020 ]
2. The Central Board of Direct Taxes, ]
having its Office on North Block, ]
New Delhi - 110001 ]
3. The Chief Commissioner of ]
Income Tax, Ayakar Bhavan, ]
New Marine Lines, ]
Bombay - 400020 ]
4. Central Bank of India, ]
Constituted under the Banking ]
Companies (Acquisition and ]
Transfer of Undertakings) Act, ]
1970, and having its Central Office]
at Chander Mukhi, Nariman point,]
Bombay 400 021 ] ...Respondents
__________________________________________________________
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A PPEARANCES -
Mr K. P. Anil Kumar, a/w Ms Jayshree Kumar, Ms Priyanka
Kumar, Mr Chinmay Apte, for the Petitioner in
WP/506/1996, WP/1350/2008 and WP/1347/2008.
Mr Shreyas Thakur, i/b. M. S. Bodhanwalla & Co., for
Respondent No.4 in WP/506/1996.
Ms Ashna Shah, i/b. Mr Sean Wassoodew, for the Petitioners
in WP/825/2006 and WP/438/2008.
Mr Sagar Amrut Rane, i/b. Raju Z. Moray, for the Petitioner in
WP/928/1994.
Mr Suresh Kumar, for Respondent No.3 in WP/825/2006, for
Respondent Nos.1 to 3 in WP/438/2008 and for
Respondents in WP/1350/2008.
Mr P. C. Chottaray, for Respondents in WP/1347/2008.
Mr Aditya V. Tayade, i/b. Mr Piyush N. Shah, for Respondent
No.4 in WP/438/2008.
Mr Vishal Talsania, a/w Mr Netaji Gawade i/b. M/s. Sanjay
Udeshi & Co., for Respondent No.4 in WP/928/1994 and
WP/825/2006.
__________________________________________________________
CORAM : M.S.Sonak &
Jitendra Jain, JJ.
RESERVED ON : 08 January 2025
PRONOUNCED ON : 20 January 2025
JUDGMENT (Per MS Sonak J):
–
1. Heard learned counsel for the parties.
2. Learned counsel for the parties agree that a common
judgment and order can dispose of these Petitions because
substantially common issues of law and fact arise. Learned
counsel agree that Writ Petition No.825 of 2006 may be
treated as the lead Petition.
8
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3. The Petitioners are Associations/Federations of the
officers of nationalised banks. They purport to represent the
bank officers. In some of the Petitions, there was a prayer for
a grant of leave to prosecute these Petitions in a
representative capacity. However, such prayers were not
pursued, possibly because the Petitioners felt that if the
impugned provisions of the Income Tax Act, 1961 (“IT Act“)
were struck down, then the benefit of such striking down
would inure to all the bank officers and not just the bank
officers whom the Petitioners expressly represent.
4. Though the reliefs in some of these Petitions are
somewhat convoluted and confused, the Petitioners mainly
challenge Explanations 1 and 4 below Section 17(2) of the IT
Act by the Finance Act, 2007, which entered force with
limited retrospective effect. [Explanations 1 to 3 from 1 April
2002, and explanation 4, from 1 April 2006]. (impugned
amendments).
5. The impugned amendments introduced a legal fiction
that an employee shall be deemed to have received a
concession in the value of rentals once it was established that
the employee was provided an employer-owned
accommodation and the rent recoverable or payable by the
employee-assessee was less than the specified percentage of
such employee’s salary.
PETITIONER’S CONTENTIONS
6. Mr Sean Wassoodew, Mr K. P. Anil Kumar and Mr Sagar
Rane, learned counsel for the Petitioners, contended that the
impugned amendments were introduced to nullify or overrule
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the Hon’ble Supreme Court’s decision in Arun Kumar and
others vs. Union of India and others1. They pointed out that
the impugned amendments no longer rendered it necessary
for the AOs to determine the jurisdictional fact of whether any
concession in the matter of rent was actually granted by the
employer to the employees. By a deeming provision,
concession in the matter of rent was deemed provided upon
fulfilment of some conditions. Accordingly, learned counsel for
the Petitioners contended that this is a case of impermissible
judicial override, which defies the doctrine of separation of
powers. Mr Wassoodew relied on the decision of the Hon’ble
Supreme Court in Indian Aluminum Co. and others vs. State
of Kerala and others2 to support this contention.
7. The learned counsel for the Petitioners submitted that
the impugned amendments and the Explanations below
Section 17(2)(ii) of the IT Act introduced thereby are
inconsistent, repugnant and destructive of the main body of
Section 17(2)(ii), which provides that a “perquisite” includes
the value of any concession in the matter of rent respecting
any accommodation provided to the assessee by his employer.
They submitted that by introducing a legal fiction and
dispensing with the requirement of determining whether any
concession was being granted to the employees, Section 17(2)
(ii) was rendered otiose.
8. Learned counsel for the Petitioners, without prejudice to
the above contentions, contended that the legislature, by
granting retrospectivity to the impugned amendments had
acted with manifest arbitrariness. They submitted that there
1
(2007) 1 SCC 732
2
(1996) 7 SCC 637
10
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was no ambiguity in Section 17(2)(ii) of the IT Act as
interpreted by the Hon’ble Supreme Court in the case of Arun
Kumar (supra). They submitted that in the absence of any
ambiguity, it was not open to the legislature to introduce any
Explanations and, by such Explanations, to create a legal
fiction and bring about substantive and substantial changes
regarding the taxability of perquisites. They submitted that
the impugned amendments are neither clarificatory nor
declaratory. Therefore, relying on Union of India and others
vs. Martin Lottery Agencies Limited 3, they contended that the
impugned amendments could not be construed as operating
retrospectively.
9. Learned counsel for the Petitioners submitted that the
impugned amendments are arbitrary, discriminatory and
therefore violative of Article 14 of the Constitution of India
because they discriminated between the bank employees and
Central, State and even RBI employees in as much as the
impugned amendments were not made applicable to the later
three classes. Accordingly, they submitted that the
classification made by the impugned amendments lacked any
rational basis.
10. Learned counsel for the Petitioners submitted that the
value of any concession in the matter of rent respecting any
accommodation provided to the employee-assessee by his
employer could never have been determined with reference to
the employee’s salary. The value of the concession had to be
essentially determined with reference to the accommodation
provided, its area, location, and other factors, including the
3
(2009) 12 SCC 209
11
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rent that such accommodation would typically fetch. Thus,
applying an irrelevant parameter like the salary of the
employees constituted an arbitrary and unreasonable exercise
infringing the guarantee of non-arbitrariness in Article 14 of
the Constitution.
11. Learned counsel for the Petitioners submitted that two
or more employees living in the same building having almost
identical accommodations in terms of area, etc., would be
compelled to pay unequal taxes simply because of the
differences in their positions and, consequently, the salaries
drawn by them in the bank. This was a case of treating equals
unequally, violating Article 14 of the Constitution.
12. Learned counsel for the Petitioners submitted that the
impugned amendments place a cumbersome burden on the
bank employees by ignoring the reality that the bank
employees rarely have any option regarding the
accommodation offered by the bank. They submitted that the
bank employees are liable to be transferred nationwide. They
are often transferred to remote places where decent
accommodations are difficult. Still, even if the market rentals
for such accommodations are much less than the specified
salary percentage or even the rentals recovered by the banks
from the employees, the impugned amendments levy or
facilitate the levy of taxes on such alleged concession by
creating a legal fiction. This is arbitrary, discriminatory,
unconstitutional, null and void;
13. Learned counsel for the Petitioners submitted that the
impugned amendments distinguish between accommodations
in metropolitan and non-metropolitan areas, but no
12
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distinction is made between urban and suburban areas.
Without appreciating such fundamental distinctions, illogical,
arbitrary and unreasonable criteria have been adopted to
determine the value of the alleged concession and tax the
employees. This is arbitrary, unreasonable, unconstitutional,
null and void.
14. Learned counsel for the Petitioners submitted that the
impugned amendments interfere with the staff regulations
and the settlements between the banks and their employees.
This is arbitrary and violative of Article 14 of the Constitution.
15. Mr. K. P. Anil Kumar submitted that the impugned
amendment promoted double taxation. He argued that
officers transferred from their hometowns usually rent out
their accommodations. The rent they receive is taxed as
income from house property. Because of the impugned
amendments, such employees are forced to pay tax on the
value of alleged concessions regarding rent provided by the
banks. He submitted that such double taxation is ultra-vires
the IT Act and, in any event, violates Article 14 of the
Constitution.
16. Learned counsel Mr Sagar Rane, whilst adopting the
arguments of Mr Wassoodew and Mr Anil Kumar, relied on the
decision of the Division Bench of the Madhya Pradesh High
Court in Officers’ Association, Bhilai Steel Plant vs. Union of
India and others4. In particular, he stressed on paragraph 8 in
which it was noted that there was no deeming clause in the
definition of “perquisite” contained in Section 17(2) of the IT
Act. Further, if Rule 3 of the IT Rules were to be construed as
4
(1983) Vol.139 ITR 937
13
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having some deeming clause for determining the value of the
concession in the matter of rent, then it would go beyond the
rule-making power conferred by Section 295(2) of the IT Act
and would be invalid.
17. Mr Rane submitted that the Explanations introduced by
the impugned amendments also go beyond the substantive
provisions in Section 17(2)(ii) of the IT Act and, to that
extent, conflict with the main clauses they should explain. He
submitted that this is also an additional ground for striking
down the impugned amendments and the Explanations
introduced by the impugned amendments.
18. For all the above reasons, the learned counsel for the
Petitioners submitted that the impugned amendments should
be declared illegal, unconstitutional, ultra-vires and struck
down.
RESPONDENT’S RESPONSE
19. Mr Chottaray and Mr Suresh Kumar, learned counsel for
the Respondents, submitted that this was not a case of any
improper judicial override. They referred to some
observations in paragraphs 86 and 99 of Arun Kumar (supra)
and submitted that the Parliament addressed the
shortcomings referred to in these paragraphs by introducing
the impugned amendments. They submitted that most
arguments based on alleged violation of Article 14 of the
Constitution were considered and answered against the
assessees in Arun Kumar (supra).
20. Learned counsel for the Respondents submitted that the
amendments bring about uniformity, certainty and efficiency
14
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in tax governance. Courts have upheld the constitutional
validity of similar amendments. They relied on All India Bank
Officers’ Confederation vs. Regional Manager, Central Bank of
India and others5 to support their contentions.
21. Learned counsel for the Respondents submitted that
there is a presumption of constitutionality, and the legislature
should be allowed substantial flexibility and latitude
regarding fiscal legislation. They submitted that nothing was
wrong in creating a legal fiction or giving any limited
retrospective effect to the impugned amendments. They
submitted that the impugned amendments relate to the
machinery for collecting or measuring such tax. Therefore,
there was nothing wrong in construing such provisions
retrospectively. In any event, they pointed out that the
legislature had explicitly granted the impugned amendments
a limited retrospective effect in the present case. They
submitted that a legislature was competent to do so.
22. Learned counsel for the Respondents submitted that the
impugned amendments ought not to be struck down based on
illustrations or examples given by the Petitioners. They
pointed out several instances where banks provided
accommodations to their employees in prime locations by
charging rents representing only a fraction of the standard or
the market rents. Accordingly, they submitted that any minor
crudities or imperfections should not be the factors in judging
the validity of fiscal legislation.
5
(2024) 9 SCC 664
15
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23. For all the above reasons, learned counsel for the
Respondents submitted that these petitions be dismissed and
the interim orders be vacated.
SUBMISSION ON BEHALF OF THE BANKS
24. Mr Talsania, learned counsel appearing on behalf of
some of the banks, submitted that the banks had no concern
with the constitutionality or otherwise of the impugned
amendments. However, he pointed out that the banks were
disabled from deducting tax at source due to the interim
orders made in these Petitions. Therefore, if these Petitions are
to be dismissed and the interim orders vacated, the banks
should not be held as entities in default. He also pointed out
the impossibility of now recovering any amounts from the
employees since they may have long retired. He, therefore,
submitted that if the Petitions are dismissed, the Revenue
Department can always proceed to recover taxes from the
employees without, in any manner, holding the banks
responsible for recoveries.
EVALUATION OF THE RIVAL CONTENTIONS
25. The rival contentions now fall for our determination.
26. In some Petitions instituted before the Finance Act 2007
came into force, the Petitioners challenged the amended Rule
3(1) of the IT Rules, as notified in the official Government
Gazette on 28 February 2005, as ultra-vires the constitution.
However, after the Finance Act 2007 entered force and made
amendments in Section 17(2) of the IT Act, the Petitioners
amended these Petitions and sought a declaration that such
amendments were ultra-vires the Constitution. At the hearing
16
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of these Petitions, the Petitioners mainly challenged the
impugned amendments introduced by the Finance Act, 2007
on the grounds that they were ultra-vires.
27. Sections 15 to 17 of the IT Act relate to Income Tax
chargeable on salaries. Section 15 stipulates incomes that are
chargeable to income tax as “Salaries”. Section 16 prescribes
the deductions allowable under “Salaries”. Section 17 defines
the expression “Salary”, “Perquisites”, and “Profits in lieu of
salary” for the purposes of Sections 15 and 16.
28. Section 17(1) provides that “Salary” includes wages,
annuity or pension, gratuity, fees, commissions, perquisites or
profits in lieu of or in addition to salary or wages, and
advance of salary, payments received by employees in respect
of leave not availed of, the annual accretion to the balance at
the credit of an employee participating in a recognised
provident fund, etc.
29. Section 17(2) before its amendment by the Finance Act,
2007 read as follows: –
“Perquisite” includes: –
(i) the value of rent-free accommodation provided to
the assessee by his employer.
(ii) the value of any concession in the matter of rent
respecting any accommodation provided to the assessee
by his employer.
30. Section 11 of the Finance Act, 2007 introduced
amendments in Section 17 of the IT Act. Accordingly, for the
17
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convenience of reference, we transcribe Section 11 of the
Finance Act, 2007: –
“11. In section 17 of the Income-tax Act,–
(a) in clause (I), in sub-clause (viii), for the
words “Central Government”, the words “Central
Government or any other employer” shall be
substituted and shall be deemed to have been
substituted with effect from the 1st day of April,
2004;
(b) in clause (2),-
(A) after sub-clause (ii),–
(i) the following Explanations shall be
inserted and shall be deemed to have been inserted
with effect from the 1st day of April, 2002,
namely:–
‘Explanation I.–For the purposes of this sub-
clause, concession in the matter of rent shall be
deemed to have been provided if,–
(a) in a case where an unfurnished
accommodation is provided by any employer other
than the Central Government or any State
Government and–
(i) the accommodation is owned by the
employer, the value of the accommodation
determined at the rate of ten per cent of salary in
cities having population exceeding four lakhs as
per 1991 census and seven and one-half per cent
of salary in other cities, in respect of the period
during which the said accommodation was
occupied by the assessee during the previous year,
exceeds the rent recoverable from, or payable by,
the assessee;
(ii) the accommodation is taken on lease
or rent by the employer, the value of the
accommodation being the actual amount of lease
rental paid or payable by the employer or ten per
cent of salary, whichever is lower, in respect of the18
wp.825-2006 & ors(F).docxperiod during which the said accommodation was
occupied by the assessee during the previous year,
exceeds the rent recoverable from, or payable by,
the assessee;
(b) in a case where a furnished
accommodation is provided by the Central
Government or any State Government, the licence
fee determined by the Central Government or any
State Government in respect of the
accommodation in accordance with the rules
framed by such Government as increased by the
value of furniture and fixtures in respect of the
period during which the said accommodation was
occupied by the assessee during the previous year,
exceeds the aggregate of the rent recoverable from,
or payable by, the assessee and any charges paid or
payable for the furniture and fixtures by the
assessee;
(c) in a case where a furnished
accommodation is provided by an employer other
than the Central Government or any State
Government and –
(i) the accommodation is owned by the
employer, the value of the accommodation
determined under sub-clause (i) of clause (a) as
increased by the value of the furniture and fixtures
in respect of the period during which the said
accommodation was occupied by the assessee
during the previous year, exceeds the rent
recoverable from, or payable by, the assessee;
(ii) the accommodation is taken on lease
or rent by the employer, the value of the
accommodation determined under sub-clause (ii)
of clause (a) as increased by the value of the
furniture and fixtures in respect of the period
during which the said accommodation was
occupied by the assessee during the previous year,
exceeds the rent recoverable from, or payable by,
the assessee;
(d) in a case where the
accommodation is provided by the employer in a
hotel (except where the assessee is provided such19
wp.825-2006 & ors(F).docxaccommodation for a period not exceeding in
aggregate fifteen days on his transfer from one
place to another), the value of the accommodation
determined at the rate of twenty-four per cent of
salary paid or payable for the previous year or the
actual charges paid or payable to such hotel,
whichever is lower, for the period during which
such accommodation is provided, exceeds the rent
recoverable from, or payable by, the assessee.
Explanation 2.–For the purposes of this sub-
clause, value of furniture and fixtures shall be ten
per cent per annum of the cost of furniture
(including television sets, radio sets, refrigerators,
other household appliances, airconditioning plant
or equipment or other similar appliances or
gadgets) 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 assessee during the previous year.
Explanation 3.–For the purposes of this sub-
clause, “salary” includes the pay, allowances, bonus
or commission payable monthly or otherwise or
any monetary payment, by whatever name called,
from one or more employers, as the case may be,
but does not include the following, namely:–
(a) dearness allowance or dearness pay
unless it enters into the computation of
superannuation or retirement benefits of the
employee concerned;
(b) employer’s contribution to the
provident fund account of the employee;
(c) allowances which are exempted from
the payment of tax;
(d) value of the perquisites specified in
this clause;
(e) any payment or expenditure
specifically excluded under the proviso to this
clause;
20
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(ii) in Explanation 1 as so inserted, for clause
(a), the following clause shall be substituted and
shall be deemed to have been substituted with
effect from the 1st day of April, 2006, namely:-
“(a) in a case where an unfurnished
accommodation is provided by any employer other
than the Central Government or any State
Government and-
(i) the accommodation is owned by the
employer, the value of the accommodation
determined at the specified rate in respect of the
period during which the said accommodation was
occupied by the assessee during the previous year,
exceeds the rent recoverable from, or payable by,
the assessee;
(ii) the accommodation is taken on lease
or rent by the employer, the value of the
accommodation being the actual amount of lease
rental paid or payable by the employer or fifteen
per cent of salary, whichever is lower, in respect of
the period during which the said accommodation
was occupied by the assessee during the previous
year, exceeds the rent recoverable from, or payable
by, the assessee;”
(iii) after Explanation 3 as so inserted,
the following Explanation shall be inserted and
shall be deemed to have been inserted with effect
from the 1st day of April, 2006, namely:–
‘Explanation 4.- For the purposes of this sub-
clause, “specified rate” shall be–
(i) fifteen per cent of salary in cities having
population exceeding twenty-five lakhs as per
2001 census;
(ii) ten per cent of salary in cities having
population exceeding ten lakhs but not exceeding
twenty-five lakhs as per 2001 census; and
(iii) seven and one-half per cent of salary in any
other place.’;
21
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(B) in sub-clause (iii), the proviso shall be
omitted with effect from the 1st day of April,
2008.”
31. As noted above, the petitioners have challenged Section
11 of the Finance Act, 2007, or, more precisely, Section 11(b)
of the Finance Act, 2007, to the extent that it amends Section
17(2) of the IT Act.
32. Before the impugned amendments, section 17(2)(ii) did
not contain any deeming provision regarding the value of
concession in the matter of rent respecting any
accommodation provided to the assessee by his employer.
Section 17(2)(ii) also did not provide for the machinery or the
measure for computing the value of the concession. However,
Rule 3 of the IT Rules, 1962, provided for such machinery and
measure.
33. The Hon’ble Supreme Court, in the case of Arun Kumar
(supra), upheld the constitutional validity of Rule 3(1) of the
IT Rules. Still, it held that ‘receiving a concession’ was a
jurisdictional fact for the purposes of Section 17(2)(ii), and
therefore, the AOs had first to decide whether, in fact, any
bank employee was in receipt of any concession in the matter
of rent and only if the AOs were to determine that the
assessee had received such concession, could the AOs proceed
to calculate/determine the tax liability under Rule 3(1) of the
IT Rules.
34. In paragraphs 86 and 99 of Arun Kumar (supra), the
Hon’ble Supreme Court made the following observations:-
“86. There is yet another aspect of the matter which is
important and having a bearing on the question. We have
extracted Section 17(2)(ii) in the earlier part of the22
wp.825-2006 & ors(F).docxjudgment. It does not contain any “deeming clause” that
once it is established that an employee is paying rent less
than 10 per cent of his salary in cities having population of
four lakhs or 7.5 per cent in other cities, it should be
deemed to be a “concession” within the meaning of the Act
and such employee must be deemed to receive a
“concession” in the form of “perquisite” in the payment of
rent. ….”
99. For the foregoing reasons, we hold that though Rule 3
of the Rules cannot be held arbitrary, discriminatory or ultra
vires Article 14 of the Constitution nor inconsistent with the
parent Act [Section 17(2)(ii)], it is in the nature of
machinery provision and applies only to the cases of
concession in the matter of rent respecting any
accommodation provided by an employer to his employees.
Whether or not Parliament could have in the exercise of
legislative power created a “deeming fiction” as to
concession in the matter of rent in certain circumstances (for
which we express no final opinion), no such deeming
provision is found in the Act. It is, therefore, open to the
assessee to contend that there is no concession in the matter
of accommodation provided by the employer to the
employees and the case is not covered by Section 17(2)(ii)
of the Act.”
35. The Hon’ble Supreme Court decided Arun Kumar
(supra) on 15 September 2006. As a result, determining the
value of any concession under Section 17(2)(ii) and taxing
the same would have involved a humongous exercise
involving the AOs examining the cases of lakhs of employees,
collecting data about standard and market rents in cities and
villages throughout the country, perhaps evaluating the
infrastructure of the accommodation provided by the banks to
their employees and several similar factors. Therefore, taking
a hint from the observations in paragraphs 86 and 99 of Arun
Kumar (supra), the legislature, through the Finance Act, 2007,
introduced the impugned amendments in Section 17(2)(ii) of
the IT Act.
23
wp.825-2006 & ors(F).docx
36. The impugned amendments created a legal fiction based
on which it could now be presumed that the employees
allotted bank-owned accommodation are deemed to have
received a concession in the matter of rent respecting such
accommodation. The impugned amendments broadly measure
the value of such concession as the difference between the
specified percentage of the employee’s salary and the rent
recoverable or payable by such employees. A limited
retrospective effect was also given to the impugned
amendments, as otherwise, it would be almost impossible for
the Revenue to determine in every individual case whether
any concession was at all granted and the value of such
concession.
37. The impugned amendments thus created a deeming
fiction that once it was established that an employee was
paying rent of less than 10% of his salary in cities having a
population of four lakhs or 7.5% in other cities, it should be
deemed to be a concession within the meaning of Section
17(2)(ii) of the IT Act and such employees must be deemed to
receive ‘concession’ in the form of ‘perquisites’ in the payment
of rent. This provision was given a retrospective effect from
1st April 2002 because otherwise, it would be almost
impossible or disproportionately cumbersome for the revenue
to compute whether an employee was indeed in receipt of any
concession in the matter of rent respecting any
accommodation provided by his employer. This was in the
context of the observations in Arun Kumar (supra) that
receiving a concession was a jurisdictional fact for the
purposes of Section 17(2)(ii), and this fact had to be
established by the revenue in each case before the value of
24
wp.825-2006 & ors(F).docx
concession could be determined by following Rule 3(1) of the
IT Rules.
38. Similarly, from 1 April 2006, the impugned amendment
provides that a concession in the matter of rent shall be
deemed provided at the specified rate by an employer to his
employee by providing unfurnished employer-owned
accommodation. The value of such concession in terms of
Explanation 4 would be 15% of the salary in cities having a
population exceeding twenty-five lakhs as per 2001 census;
10% of salary in cities having a population exceeding ten
lakhs but not exceeding twenty-five lakhs as per 2001 census;
and 7.5% of salary in any other place less the rent recoverable
from or payable by the employee.
39. Thus, if for the period between 2002 to 2006, an
employer were to have provided to his employee unfurnished
employer-owned accommodation in a city having a population
exceeding four lakhs as per the 1991 census and such
employee had a monthly salary of Rs.1 lakh and was paying a
monthly rent of Rs.5,000/- towards such accommodation,
then, the value of the concession for the purposes of Section
17(2)(ii) had to be determined as the difference between 10%
of such employee’s salary i.e. Rs.10,000/- and the rental of
Rs.5,000/- which such employee was payable to the employer.
This means that the value of the concession would be
computed at Rs.5,000/-, the amount on which such an
employee would be liable to pay tax.
25
wp.825-2006 & ors(F).docx
IMPERMISSIBLE JUDICIAL OVERRIDE ARGUMENT
40. The first and foremost challenge mounted against the
impugned amendments was that the legislature introduced
such amendments to overrule and nullify the decision in Arun
Kumar (supra). Accordingly, it was urged that this was a case
of impermissible judicial override. Strong reliance was placed
on the observations in paragraph 56(8) of Indian Aluminum
Co. and others (supra).
41. Paragraph 56(8) of Indian Aluminum Co. and others
(supra) reads as follows: –
“56(8). In exercising legislative power, the legislature by
mere declaration, without anything more, cannot directly
overrule, revise or override a judicial decision. It can render
judicial decision ineffective by enacting valid law on the topic
within its legislative field fundamentally altering or changing
its character retrospectively. The changed or altered
conditions are such that the previous decision would not have
been rendered by the court, if those conditions had existed at
the time of declaring the law as invalid. It is also empowered
to give effect to retrospective legislation with a deeming date
or with effect from a particular date. The legislature can
change the character of the tax or duty from impermissible to
permissible tax but the tax or levy should answer such
character and the legislature is competent to recover the
invalid tax validating such a tax on removing the invalid base
for recovery from the subject or render the recovery from the
State ineffectual. It is competent for the legislature to enact
the law with retrospective effect and authorise its agencies to
levy and collect the tax on that basis, make the imposition of
levy collected and recovery of the tax made valid,
notwithstanding the declaration by the court or the direction
given for recovery thereof.”
42. In Arun Kumar (supra), the challenge was to Rule 3(1)
of the IT Rules, which was the machinery provision for
determining the value of concession in the matter of rent
respecting any accommodation provided by the employer to
26
wp.825-2006 & ors(F).docx
his employee. The impugned rule had inter alia provided that
the value of the concession would be the difference between
the rentals paid by the employee to the employer and 10% of
the salary in cities having a population of more than four
lakhs and 7.5% of the salary in other cities. The validity of the
rule was upheld by the Hon’ble Supreme Court, noting that
the concepts of “fair rent”, “market rent”, “reasonable rent”, or
“standard rent” were consciously departed from. The criteria
of linking the value of the concession with salary slabs of 10%
and 7.5%, depending upon the city population, was also
upheld. Thus, in principle, the challenge to Rule 3(1) of the IT
Rules was expressly repelled.
43. However, in Arun Kumar (supra), the Hon’ble Supreme
Court, being conscious that it was only dealing with the
constitutional validity of a “Rule”, as opposed to a “Primary
Legislation” noted that the definition of “perquisite” included
the value of a concession in the matter of rent respecting
accommodation provided to the employees by the employer,
and held that the factum of “receiving the concession” was a
jurisdictional fact that had to be determined in each case by
the Assessing Officer, before, the value of such concession
could be regarded as a perquisite and brought to tax.
44. As noticed above, the Hon’ble Supreme Court, in
paragraph 86, noted that there was no deeming provision
either under the IT Act or the IT Rules based upon which the
AOs could presume that a concession was received by an
employee where the employer-bank allotted an
accommodation owned by it to such employee. The impugned
amendment has addressed this lacuna or shortcomings the
Hon’ble Supreme Court flagged. Instead of simply amending
27
wp.825-2006 & ors(F).docx
Rule 3(1) of the IT Rules, the legislature deemed it
appropriate to amend Section 17 (2)(ii) of the IT Act so that
any contention about the rules being ultra-vires the IT Act
could be preempted.
45. Arun Kumar (supra) had otherwise upheld the validity
of Rule 3(1) of the IT Rules after rejecting the challenges
based on Article 14 or the challenges based on the rule
travelling beyond the import of the parent Act. However, Arun
Kumar (supra) had referred to the decision of the Division
Bench of the Madhya Pradesh High Court in Officers’
Association, Bhilai Steel Plant (supra) in which the Division
Bench had also noted that there was no deeming clause in the
definition of “perquisite” contained in Section 17(2) that once
it was established that an employee was paying rent of less
than 10% of his salary, it must be deemed that he was
receiving a concession in the matter of rent and further “no
such deeming clause can be inferred from r.3.” The Division
Bench went on to observe:
“Indeed, if r.3 were to be so construed, it will go beyond the
rule making power conferred by s.295(2) and would become
invalid.”
46. Possibly, to ward off the challenge that Rule 3, if
amended by introducing a deeming clause, might go beyond
the rule-making power conferred by Section 295(2) of the IT
Act, the legislature chose to amend Section 17 (2)(ii) and
introduced a legal fiction therein. Since the primary
legislation is amended, the challenge to the rules travelling
beyond the Act would also stand addressed.
28
wp.825-2006 & ors(F).docx
47. The above exercise by a competent legislature
addressing the lacuna or the shortcomings pointed out by the
Courts can hardly be regarded as an instance of impermissible
judicial override. By introducing the impugned amendments,
the legislature has neither overruled the decisions in Arun
Kumar (supra) nor in Officers’ Association, Bhilai Steel Plant
(supra). The legislature has only taken immediate steps to
repair or rectify the lacuna or the shortcomings flagged by
these Court decisions. According to us, this is a time-tested
and permissible legislative exercise, more so because the
legislative competence of the Parliament to undertake such an
exercise was never doubted and questioned.
48. In M/s. Krishnamurthi and Co. ETC vs. State of Madras
and another6, the Hon’ble Supreme Court explained that in
case the Court concludes that levy of tax is not valid as the
legal provision enacted for this purpose does not warrant the
levy of tax imposed because of some defect in phraseology or
other infirmity, the legislature quite often passes an amending
and validating Act. The object of such an enactment is to
remove and rectify the defect in phraseology or lacuna of
other nature and to validate the proceedings, including the
realisation of tax, which has taken place in pursuance of the
earlier enactment which has been found by the Court to be
vitiated by an infirmity. In the very nature of things, such an
amending and validating Act has a retrospective operation. Its
aim is to effectuate and carry out the object for which the
earlier principal Act had been enacted. Such an amending and
validating Act to make “small repairs” is a permissible mode of
legislation and is frequently resorted to in fiscal enactments.
6
AIR 1972 SC 2455
29
wp.825-2006 & ors(F).docx
49. The Hon’ble Supreme Court also referred to a passage
from 73 Harvard Law Review 692 at p. 705:
“It is necessary that the legislature should be able to
cure inadvertent defects in statutes or their
administration by making what has been aptly called
‘small repairs’. Moreover, the individual who claims that
a vested right has arisen from the defect is seeking a
windfall since had the legislature’s or administrator’s
action had the effect it was intended to and could have
had, no such right would have arisen. Thus, the interest
in the retroactive curing of such a defect in the
administrative of government outweighs the individual’s
interest in benefiting from the defect…The Court has
been extremely reluctant to override the legislative
judgment as to the necessity for retrospective taxation,
not only because of the paramount governmental
interest in obtaining adequate revenues, but also
because taxes are not in the nature of a penalty or a
contractual obligation but rather a means of
apportioning the costs of government among those who
benefit from it.”
50. The above passage was quoted with approval by the
Constitution Bench of this Court in the case of Assistant
Commissioner of Urban Land Tax and others vs. The
Buckingham & Carnatic Co. Ltd, ETC7.
51. Even paragraph 56(8) of Indian Aluminum Co. and
others (supra), after holding that the legislature cannot, by a
mere declaration, without anything more, directly overrule,
revise or override a judicial decision, has held that the
legislature can render a judicial decision ineffective by
enacting valid law on the topic within its legislative field
fundamentally altering or changing its character
retrospectively. The changed or altered conditions should be
such that the Court would not have rendered the previous
7
(1970) 1 SCR 268
30
wp.825-2006 & ors(F).docx
decision, if those conditions had existed at the time of
declaring the law invalid. The legislature is competent to
enact the law with retrospective effect and authorise its
agencies to levy and collect tax on that basis, make the
imposition of the levy collected and the recovery of the tax
made valid, notwithstanding the declaration by the Court or a
direction given for the recovery thereof.
52. In the present case, by the impugned amendments, the
legislature has not made a mere declaration, without anything
more and attempted to overrule the decision in Arun Kumar
(supra). The impugned amendments are broadly quite
consistent with the law in Arun Kumar (supra). However,
since Arun Kumar (supra) had noted the absence of a deeming
provision and, based upon such absence, ruled that the AOs
had to verify case-wise whether any concession in the value of
rent was indeed granted, the law was amended with limited
retrospective effect to create a fiction. The amended law
primarily incorporates the machinery and measure provisions
in the principal Act. The exercise, therefore, is quite consistent
with the law laid down in Indian Aluminum Co. and others
(supra).
53. In Serum Institute of India (P.) Ltd. vs. Union of India8,
the constitutional validity of sub-clause (xviii) of Section
2(24) of the IT Act, inserted by the Finance Act, 2015, was
under challenge. This sub-clause provided that all incentives
given in whichever form by the government and with
whatever purpose or objective were to be treated as “income”
irrespective of whether such incentives were capital or
8
[2023] 157 taxmann.com 107 (Bombay)
31
wp.825-2006 & ors(F).docx
revenue in nature. One of the main challenges was that the
legislature, by the impugned amendment, had overruled
judicial precedents that distinguished capital receipts from
revenue receipts, subsuming both under “income” and
subjecting them to taxation, overriding established legal
principles.
54. The Petitioners referred to several judicial precedents
that held that “income” includes only “capital receipts” and
not “revenue receipts.” The precedents also stated that a
capital or revenue receipt had to be determined based on a
“purpose test.” Therefore, the incentives and subsidies
received on the capital account would not qualify as “income”
and would not be taxed. The Petitioners argued that by doing
away with this distinction, the legislature had overruled
judicial precedents without bothering to remove or alter the
basis of such judicial pronouncement. Therefore, it was
contended that this was a case of impermissible judicial
override.
55. A Coordinate Bench of this Court rejected the above
contentions, which were quite similar to those now raised on
behalf of the Petitioners, by referring to the decision of the
Hon’ble Supreme Court in the case of M/s. Hindustan Gum
and Chemicals Ltd. vs. State of Haryana and others 9. Here, the
Court held that it was permissible for a competent legislature
to overcome the effect of a decision of a Court setting aside
the imposition of tax by passing suitable legislation, amending
the relevant provisions of the statute concerned with
retrospective effect, thus taking away the basis on which the
9
(1985) 4 SCC 124
32
wp.825-2006 & ors(F).docx
decision of the Court had been rendered and by enacting
appropriate provision validating the levy and collection of tax
made before the decision in question was rendered.
56. Incidentally, one of the arguments in Serum Institute of
India (P.) Ltd. (supra) was that the legislature could have
removed the lacuna pointed out in judicial precedents only by
providing an “Explanation” to the section and not by
introducing an independent sub-clause. This argument was
rejected. In the present case, however, the legislature has
addressed the lacuna or shortcomings by providing a series of
explanations. Since the Act is amended, the argument about
Rule 3(1) of the IT Rules travelling beyond the parent Act also
no longer holds good.
57. By introducing the impugned amendments, the
legislature, apart from addressing the lacuna and
shortcomings pointed out in the Court decisions, has provided
consistency, clarity and uncertainty. These factors promote
good tax governance. In fiscal matters or tax measure laws, it
is well settled that the legislature enjoys far greater latitude
than what may be permitted in non-fiscal legislation.
58. For all the above reasons, we see no force in the
contention that the impugned amendments constitute an
instance of impermissible judicial override or that the
legislature has overruled the judicial precedents in Arun
Kumar (supra) or Officers’ Association, Bhilai Steel Plant
(supra).
33
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ARGUMENTS ABOUT THE SCOPE OF EXPLANATIONS AND
LEGAL FICTION
59. The next contention is about the impugned
amendments being inconsistent, repugnant and destructive of
the main body of Section 17(2)(ii), which provides that a
“perquisite” includes the value of any concession in the matter
of rent respecting any accommodation provided to the
assessee by his employer. The Petitioners submitted that by
introducing a legal fiction and dispensing with the
requirement of determining whether any concession was at all
granted to the employees, the main body of Section 17(2)(ii)
was destroyed and rendered otiose. The Petitioners contended
that what may not be a “concession” is now regarded as a
concession and brought to tax by such a legislative exercise. In
short, the contention was that the legislature could not
introduce a legal fiction and impose tax by calling something
a “concession” even though the same may not, in fact, be a
concession.
60. As noted earlier, the Coordinate Bench considered and
rejected a very similar argument in Serum Institute of India (P.)
Ltd. (supra). There, the argument was that the legislature bid
something that was not a “capital receipt” to be treated as
such and sought to tax it. The Coordinate Bench held that the
legislature was very competent to do this, and there was no
question of any destruction of the main body of the Act
involved.
61. It is very well settled that the legislature is quite
competent to create a legal fiction, in other words, to enact a
deeming provision to assume the existence of a fact that may
34
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not really exist, provided the declaration of non-existent facts
as existing does not offend the constitution. (see J. K. Cotton
Spinning and Weaving Mills Ltd. & another vs. Union Of India
& others10). In interpreting a provision creating a legal fiction,
the court is to ascertain for what purpose the fiction is
created. After ascertaining this, the court is to assume all
those facts and consequences which are incidental or
inevitable corollaries to the giving effect to the fiction.
62. In CIT, Bombay vs. Bombay Trust Corporation 11, the
Privy Council, in interpreting a fiction created by the Indian
Income-tax Act, 1922, which by section 43 provided that
under certain circumstances, an agent shall for all the
purposes of this Act, be deemed to be such agent of a non-
resident person and which by section 42 further provided that
such agent shall be deemed to be, for all the purposes of this
Act, the assessee, held that such agent was an assessee for all
the purposes of the Act and hence chargeable to income-tax,
assesseee being defined by section 2(2) as the person by
whom income-tax is payable. Viscount Dunedin, in that
connection, observed:-
“Now when a person is `deemed to be’ something the only meaning
possible is that whereas he is not in reality that something the Act of
Parliament requires him to be treated as if he were.”
63. In East End Dwelling Co. Ltd. vs. Finsbury Borough
Council12, Lord Asquith stated: “If you are bidden to treat an
imaginary state of affairs as real, you must surely, unless
prohibited from doing so, also imagine as real the consequence
and incidents which, if the putative state of affairs had in fact
10
AIR 1988 SC 191
11
AIR 1930 PC 54
12
(1951) 2 All ER 587
35
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existed, must inevitably have flowed from or accompanied it-.
The statute says that you must imagine a certain state of affairs;
it does not say that having done so, you must cause or permit
your imagination to boggle when it comes to the inevitable
corollaries of that state of affairs.”
64. Thus, the arguments about the impugned amendments
being inconsistent, repugnant and destructive of the main
body of Section 17(2)(ii) of the IT Act carry no force and
cannot be accepted, as discussed earlier, the legislature
creating legal fiction is a permissible legislative exercise. If
such exercise is shown not to offend any constitutional
provisions, there is no scope to interfere with such an
exercise.
65. The following argument about the necessity of
introducing an explanation without demonstrating that there
was any ambiguity in Section 17(2)(ii) of the IT Act also
cannot be accepted. The purposes of introducing or adding an
explanation to a Section can be manifold. The legislature has
broad discretion in such matters.
66. In Dattatraya Govind Mahajan and others vs. State of
Maharashtra and another13, it was held that a mere
description of a certain provision, such as an Explanation, is
not decisive of its true meaning. The orthodox function of an
Explanation, indeed, is to explain the meaning and effect of
the primary provision to which it is an Explanation and to
clear up any doubt or ambiguity in it. Still, ultimately, it is the
intention of the Legislature that is paramount, and mere use
of a label cannot control or deflect such intention.
13
AIR 1977 SC 915
36
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67. An Explanation, even though it may not have been made
retrospective in its operation, can have an effect even for the
period prior to its insertion as it clarifies the provision of the
section as existing [CIT vs Doraiswami Chetty (P) Ltd. 14]. To
the same effect are the observations in R. M. Krishnaswamy
Naidu & Sons and others vs. The State of Madras 15 where it
was held that an ‘Explanation’ merely elucidates the meaning
of a provision and, when inserted as a subsequent
amendment, can be considered retrospective in scope.
68. Therefore, the impugned amendments and the
explanations introduced thereby cannot be struck down either
because the legislature was incompetent to create a legal
fiction, because such an explanation was unnecessary, because
it destroyed the principal section, or because they were
otherwise unconstitutional, ultra-vires, or null and void.
RETROSPECTIVITY ARGUMENT
69. The following argument concerns the retrospectivity of
the impugned amendments. The basic contention was that the
impugned amendments were neither clarificatory nor
declaratory. They introduced a new and substantive liability,
so giving such amendments a retrospective effect is an
impermissible legislative exercise. In any event, it was
contended that giving such retrospectively renders the
impugned amendments ultra-vires of Article 14 of the
Constitution. Strong reliance was placed on Martin Lottery
Agencies Limited (supra).
14
(1990) 183 ITR 559 SC
15
(1965) 16 STC 671 (MAD)
37
wp.825-2006 & ors(F).docx
70. In Martin Lottery Agencies Limited (supra) the
explanation appended to sub-clause (ii) of Section 65(19) of
the Goods and Services Tax Act had not been given any
retrospective effect by the legislature. Still, the Revenue
contended that since the explanation was clarificatory or
declaratory, it should be construed as having a retrospective
effect. On the other hand, the assessee claimed the
explanation sought to include “lottery tickets” in the definition
of “goods”; therefore, the explanation was a substantive
amendment to the existing law. The assesses contended that
such an explanation could not be construed as retrospective
without any explicit legislative provision or intendment.
71. In the above context, the Hon’ble Supreme Court
accepted the assessees’ contention that the explanation was
not clarificatory or declaratory and that it brought about a
substantive change in the legal position. Therefore, the
Hon’ble Supreme Court concluded that in the absence of any
specific retrospectivity being granted by the legislature, the
same could not be construed retrospectively under the guise
of interpretation.
72. In the present case, the legislature has specifically given
a limited retrospective effect to the impugned amendments.
Therefore, there is no question of “construction” involved.
Even the issue of the amendment being clarificatory or
substantive is irrelevant in the present case. The discussion in
Martin Lottery Agencies Limited (supra) was in the content of
the legislature introducing the explanation through the
Finance Act, 1994, without stating whether the amendment
was to take effect retrospectively or prospectively. Therefore,
to determine whether such an amendment should be
38
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construed retrospectively or prospectively, the Court had to go
into the issue of whether the amendment was
clarificatory/declaratory or whether the same introduced a
substantive change in the legal position from that which
obtained earlier. Having concluded that there was a
substantive change, the Court ruled that the amendment
could not be construed retrospectively. Therefore, based on
Martin Lottery Agencies Limited (supra), we cannot find any
fault with the impugned amendments being given a limited
retrospectivity.
73. In Additional Commissioner of Income Tax vs. Bharat V
Patel16, the Hon’ble Supreme Court was considering a
challenge to the amendments to Section 17(2) of the IT Act by
which certain benefits transferred by the employer to the
employees were sought to be brought within the ambit of the
tax net. One of the issues involved was whether the
amendment was retrospective or would only apply
prospectively. The revenue contended that the amendment
was clarificatory and, hence, retrospective. The assessee
claimed that the amendment was substantive and, therefore,
prospective in nature.
74. The Hon’ble Supreme Court, upon examining the rival
contentions, concluded that the Respondent got the Stock
Appreciation Rights (SARs) and eventually received an
amount on account of its redemption before 1 April 2000. On
that date, the amendment of the Finance Act, 1999 came into
force. Therefore, the Hon’ble Supreme Court concluded: “In
the absence of any express statutory provision regarding the
16
(2018) 15 SCC 670
39
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applicability of such amendment from retrospective effect, we do
not find any force in the argument of the revenue that such
amendment came into force retrospectively. It is well established
rule of interpretation that taxing provisions shall be construed
strictly so that no person who is otherwise not liable to pay tax,
be made liable to pay tax.”
75. As noted earlier, the legislature has made express
provisions about retrospectivity in the present case. Therefore,
relying upon the decision where no such express provision
was made, the Petitioners cannot contend that the impugned
amendments cannot be given retrospective effect or that they
violate Article 14 of the Constitution because they have been
given a retrospective effect.
76. Regarding the argument of retrospectivity, we note that
in Arun Kumar (supra), the provision of Rule 3(1) was held to
pertain to the machinery for valuing and taxing the
“perquisite.” Such machinery provisions, being procedural, are
held to apply even to pending proceedings. There is no
general rule against construing these provisions
retrospectively or holding that any retrospective construction
of such provisions would render them ultra-vires Article 14 of
the Constitution or any other constitutional guarantees.
77. In Commissioner of Wealth Tax, Meerut vs. Sharvan
Kumar Swarup and Sons17 the issue which arose before the
Hon’ble Supreme Court was whether prescribing method and
mode of valuation alters the substantive right or whether the
rule is merely procedural or whether it applies to all pending
assessments proceedings which had been initiated even before
17
(1994) 210 ITR 886
40
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the commencement of the relevant assessment year but were
yet to be completed. The Hon’ble Supreme Court held the
provisions to be procedural in nature and, therefore,
applicable with retrospective effect even to the pending
proceedings. The Court referred to its decision in Murarilal
Mahabir Prasad & Ors. vs B. R. Vad & Ors. 18 in which it was
held that the provisions prescribed for machinery for
computation of tax and not to bring a charge are to be
construed as machinery provisions which would therefore
apply retrospectively.
78. In Associated Cement Company Ltd vs. Commercial Tax
Officer, Kota & Ors.19, the Hon’ble Supreme Court held that
the distinction must be made by the Courts while interpreting
the provisions of a taxing statute between charging provisions
which imposed the charge to tax and machinery provisions
which provide the machinery for quantification of the tax and
levying, and collection of tax so imposed. While charging
provisions are construed strictly, machinery sections are
generally not subject to rigorous construction. The Courts are
expected to construe the machinery sections in such a manner
that the charge to tax is not defeated.
79. In Aditya Cement Staff Club vs Union of India & Ors. 20,
the Court explained that perquisites had been considered
substantively to be forming part of the salary, and the value of
different perquisites had to be included in the computation of
total taxable income under the head ‘income from salaries’.
Once it is determined that the particular advantage, benefit or
18
1976 (37) STC 77 (SC)
19
(1981) 48 STC 466 SC
20
2002 SCC OnLine Raj 937
41
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amenity received forms part of perquisite as defined under
Section 17(2) of the IT Act, the question of its quantification
falls within the machinery provision for quantification of
proper tax liability of the taxpayer, which can be left to be
determined according to well-known principles of valuing a
particular advantage to the assessee when he receives it with
reference to the cost which the assessee is likely to incur in
securing that advantage and to enquire into the price which it
was likely to pay for getting those amenities or benefits. The
Court held that the cost at which the benefit is received by an
assessee so also the value of the payment in the hands of the
recipient of such a benefit on a fixed percentage of salary
received by him to avoid the determination at different
variable factors, which may result in arriving at different
conclusions on the same set of facts by different assessing
authorities was a well-known method of valuation.
80. In the present case, however, we need not explore
whether the Explanations inserted by the impugned
amendments are clarificatory. This is because the issue of
construction and determining retrospectivity arises when a
legislature is either silent or ambiguous. Here, the legislature,
has expressly provided a limited retrospective operation.
There is nothing inherently wrong in providing for such a
retrospective operation. Therefore, merely because a limited
retrospectivity is granted to the impugned amendments, we
cannot hold that the impugned amendments violate Article 14
of the Constitution or otherwise ultra-vires the constitutional
provisions.
42
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81. For all the above reasons, we find no force in the
challenge based on the retrospectivity of the impugned
amendments.
CHALLENGES BASED ON ARTICLE 14 OF THE CONSTITUTION
82. The following argument is about the impugned
amendments violating Article 14 of the Constitution of India.
83. Most of the arguments based on Article 14 of the
Constitution, now raised by the Petitioners, were considered
and rejected by the Hon’ble Supreme Court in Arun Kumar
(supra) in the context of Rule 3(1) of the IT Rules. This Rule
also distinguished between Central/State Government
employees and other employees. This Rule also determined
the value of the concession based on the employees’ salaries,
and the percentage of the salary was linked to the city’s
population where the accommodation was provided.
Therefore, following the reasoning in Arun Kumar (supra),
most of the challenges now raised will have to be rejected.
84. In Arun Kumar (supra), the Court explained that Rule 3
before its amendment in 2001 was different as it dealt with
the calculation method of concession, keeping in view the
concept of “fair rental value”. The amended rule, however, did
away with the idea of fair rental value. The only method
adopted was to calculate the rent based on the population of
the city in question. Therefore, the Court held that there was
no necessity to grant the assessee an opportunity to satisfy the
Assessing Officer that the rent sought to be recovered from
the employee was not a concession and that it was the fair
43
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rent, the reasonable rent, the market rent or the standard
rent. The Court explicitly held that the criteria adopted by the
Rule-making authority in treating cities with populations of
less than four lakhs and more than four lakhs could not be
said to be arbitrary and unreasonable. The fixation of rent
based on the city’s population cannot be interfered with in
exercising the power of judicial review.
85. Besides, when it comes to challenges to the
constitutional validity of fiscal legislation, we must bear in
mind and apply certain well-settled principles. The first is the
presumption in favour of the statute’s constitutionality and
that the burden is upon the Petitioners who attack the statute
to show that there has been a clear transgression of the
constitutional principles. This Rule assumes that the
legislature understands and correctly appreciates the needs of
its people, its laws are directed to problems made manifest by
experience and its discrimination is based on adequate
grounds. The presumption of constitutionality is so strong that
to sustain it, the Court may consider matters of common
knowledge, matters of common report, and the history of the
times. It may assume every state of fact that can be conceived
existed at the time of legislation. (see RK Garg & Ors. vs.
Union of India & Ors.21).
86. The second principle of equal importance is that the
laws relating to economic activities should be viewed with
greater latitude than the laws touching civil rights such as
freedom of speech, religion, etc. In this field, the Court should
extend greater play in the joints to the legislature because the
21
(1982) 133 ITR 239 (SC)
44
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legislature must deal with complex problems that do not
admit solutions through any doctrine or straitjacket formula.
The Courts should feel more inclined to give judicial
deference to the legislative judgment in economic regulation
than in other areas where fundamental human rights are
involved. (See RK Garg, etc).
87. In the context of fiscal legislation, the Courts in India
have followed Justice Frankfurter’s opinion in Morey vs.
Doud22:
“In the utilities, tax and economic regulation cases, there are
good reasons for judicial self-restraint if not judicial difference
to legislative judgment. The legislature after all has the
affirmative responsibility. The courts have only the power to
destroy, not to reconstruct. When these are added to the
complexity of economic regulation, the uncertainty, the liability
to error, the bewildering conflict of the experts and the number
of times the judges have been overruled by events-self-limitation
can be seen to be the path to judicial wisdom and institutional
prestige and stability.”
88. Several judicial precedents require the courts to
recognise that economic or fiscal legislation is directed to
practical problems. The financial and fiscal mechanism is
highly sensitive and complex; many issues are singular or
contingent, and the laws are not abstract propositions or do
not relate to abstract units that could be measured by abstract
symmetry. The exact wisdom and nice adoption of remedy are
not always possible. The legislative judgment is essentially a
prophecy based on meagre and un-interpreted references.
Therefore, every legislation, particularly in economic matters,
is essentially empiric and is based on experimentation or what
one may call the trial-and-error method, and therefore, it
22
354 US 457 (1957)
45
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cannot provide for all possible situations or anticipate all
possible abuses. (See RK Garg etc.).
89. There may be crudities and inequities in complicated
experimental economic legislation, but it cannot be struck
down as invalid on that account alone. The courts cannot, as
pointed out by the United States Supreme Court in Secretary
of Agriculture vs. Central Reig Refining Company23 be
converted into tribunals to relieve such crudities and
inequities. There may even be possibilities of abuse, but that too
cannot of itself be a ground for invalidating the legislation,
because it is not possible for any legislature to anticipate as if by
some divine prescience, distortions and abuses of its legislation
which may be made by those subject to its provisions and to
provide against such distortions and abuses.
90. Indeed, however great the care bestowed on its framing
may be, it is difficult to conceive of legislation that is
incapable of being abused by perverted human ingenuity. The
Court must, therefore, adjudge the constitutionality of such
legislation by the generality of its provisions and not by its
crudities or inequities or by the possibilities of abuse of any of its
provisions. If any crudities, inequities or possibilities of abuse
come to light, the legislature can always step in and enact
suitable amendatory legislation. That is the essence of a
pragmatic approach, which must guide and inspire the
legislature in dealing with complex economic issues. (See RK
Garg etc.).
91. Several precedents suggest that the Courts must “be
resilient, not rigid, forward looking, not static, liberal, not
23
(1950) 94 L. Ed. 381
46
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verbal” while examining the constitutional validity of fiscal
legislations. These precedents require the Courts not to
substitute their social and economic beliefs for the judgment
of the legislative bodies. These precedents require the Courts
to defer to legislative judgment in matters relating to social
and economic policies, and the Courts must not interfere
unless the legislative exercise appears to be palpably arbitrary.
The Courts must remember that the problems of the
government are practical and may justify rough
accommodations, though they may sometimes seem illogical
and unscientific. In this area where the trial and error method
is well accepted, the government’s errors should be subject to
minimal judicial review. The Courts must remember that the
trial-and-error method is inherent in every legislative effort to
deal with an obstinate social or economic issue.
92. In Federation of Hotel and Restaurant Association of
India vs. Union of India & Ors.24, the Constitution Bench of
our Supreme Court has held that though taxing laws are not
outside article 14, however, having regard to the wide variety
of diverse economic criteria that go into the formulation of a
fiscal policy, legislature enjoys wide latitude in the matter of
taxation. Legislative assumption cannot be condemned as
irrational. Judicial veto is to be exercised only in cases that
leave no room for reasonable doubt. Unless a fiscal statute is
manifestly arbitrary or discriminatory in its provisions or its
operation, it is typically upheld. This allows for a broad range
of discretion for the legislature in determining the classes of
individuals or entities that are subject to or exempt from
taxation, if there is a rational basis for such a classification.
24
AIR 1990 SC 1637
47
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93. No precise or set formulae, doctrinaire tests, or precise
scientific principles of exclusion or inclusion are to be applied.
The test to be used could be of palpable arbitrariness applied
in the context of the felt needs of the times and societal
exigencies informed by experience. The Courts have permitted
the legislatures to exercise vast discretion in classifying items
for tax purposes so long as it refrains from clear and hostile
discrimination against particular persons or classes. In
examining the allegations of hostile, discriminatory treatment,
what is looked into is not its phraseology but the actual effect
of its provisions. One must look beyond the classification and
to the purposes of the law. Classifications based on differences
in the value of articles or the economic superiority of the
persons of incidence are well recognised.
94. A reasonable classification includes all who are similarly
situated and none who are not. Further, differentia must have
a rational nexus with the object sought to be achieved by the
law. A taxing statute is not, per se, a restriction of freedom
under article 19(1)(g). In its effectuation, the tax policy
might, of course, cause some hardship in some individual
cases. But that is inevitable, so long as law represents a
process of abstraction from the generality of cases and reflects
the highest common factor. Then again, the mere
excessiveness of a tax or even the circumstance that its
imposition might tend towards the diminution of the earnings
or profits of the persons of incidence does not, per se, and
without more, constitute a violation of constitutional rights.
48
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95. In Union of India and ors. vs. M/s. Nitdip Textile
Processors Pvt. Ltd. and anr.25 the Hon’ble Supreme has held
that a taxation statute can pick and choose to tax some for
functional expediency and even otherwise. The power to
classify is extremely broad and based on diverse
considerations of executive pragmatism, and the judicature
cannot rush where even the Legislature warily treads. All
these operational restraints on judicial power must weigh
more emphatically where the subject is taxation.
Discrimination resulting from fortuitous circumstances arising
out of particular situations, in which some taxpayers find
themselves, is not hit by Article 14 if the legislation is of
general application and does not single them out for harsh
treatment. Advantages or disadvantages to individual
assessees are accidental and inevitable. They are inherent in
every taxing statute as it must draw a line somewhere, and
some cases necessarily fall on the other side of the line.
96. In Elel Hotels and Investments Ltd. and anr. vs. Union of
India26, the Hon’ble Supreme Court has held that it is now
well-settled that a vast latitude is available to the Legislature
in classifying objects, persons and things for taxation
purposes. It must be so having regard to the complexities
involved in formulating a taxation policy. Taxation is no
longer a mere source of raising money to defray the
government’s expenses. It is a recognised fiscal tool for
achieving fiscal and social objectives. The differentia of
classification presupposes and proceeds on the premise that it
distinguishes and keeps hotels with higher economic status
25
(2012) 1 SCC 226
26
(1989) 3 SCC 698
49
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apart as distinct classes reflected in one of the indicia of such
economic superiority.
97. In Spences Hotel (P) Ltd. vs. State of West Bengal 27 the
Hon’ble Supreme Court has held that “Perfect equality in
taxation has been said time and again, to be impossible and
unattainable. Approximation to it is all that can be had. Under
any system of taxation, however, wisely and carefully framed, a
disproportionate share of the public burdens would be thrown on
certain kinds of property, because they are visible and tangible,
while others are of a nature to elude vigilance. It is only where
statutes are passed which impose taxes on false and unjust
principle, or operate to produce gross inequality, so that they
cannot be deemed in any just sense proportional in their effect
on those who are to bear the public charges that courts can
interpose and arrest the course of legislation by declaring such
enactments void.” “Perfectly equal taxation”, it has been said,
“will remain an unattainable good as long as laws and
Government and man are imperfect.” “Perfect uniformity and
perfect equality of taxation”, in all aspects in which the human
mind can view it, is a baseless dream”.
98. Thus, applying the above principles to the case at hand,
the contentions relating to the classification between
government servants and others, urban and non-urban areas,
or the arguments based on the alleged lack of nexus between
salaries of the employees and the computation of concession
in matters of rents for accommodation provided by the
employer, would not pass muster. Even the instances cited by
the Petitioners could, at the highest, be regarded as some
27
(1991) 2 SCC 154
50
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crudities or inequities. Based on the same, there is no scope to
interfere with economic or fiscal legislation. The learned
Counsel for the Respondents also referred to instances where
bank employees are provided accommodation in areas where
the rentals would far exceed even fifty to sixty per cent of the
salaries of such employees. They gave instances of areas like
Nariman Point in Bombay to support their argument that the
rentals would exceed the salaries drawn by the bank
employees.
99. Again, we must clarify that it is not open for us to decide
on the constitutional validity of economic or fiscal legislation
based on such crudities and inequities. Even individual
hardships are not very relevant in such matters. There is
nothing arbitrary or manifestly arbitrary in linking the issue of
determination of the value of the concession with the salary
structure of the bank employees. Based upon such instances,
examples or arguments, we cannot hold that the classification
or the criteria adopted was not within the broad and flexible
range available to the legislature in such matters. Such
classifications or adopting such criteria do not transgress the
fundamental principles of equality. The impugned
amendments are not vulnerable on the grounds of
discrimination merely because the burden of taxes is higher
upon the employees who draw higher salaries from the bank.
100. Simply because bank employees drawing higher salaries
are called upon to bear a proportionately higher burden does
not mean that there is any hostile discrimination within the
class or any manifest arbitrariness involved in the impugned
amendments. Classifications based on the economic
superiority of the persons of incidence are well recognised.
51
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101. In M/s. Kodar & Ors vs. State of Kerala & Ors 28, the tax
rate depended on turnover. This, in effect, meant that the tax
rate on the sale of the same goods would vary with a dealer’s
turnover. The Petitioners alleged that turnover volume had no
nexus with the imposition of sales tax on the same set of
goods, and therefore, there was a violation of Article 14 of the
Constitution. Rejecting this contention, the Court explained
that just as in taxes upon income or upon transfers at death,
so also in imposts upon business, the little man, because of
inferior capacity to pay, should bear a lighter load of taxes
relatively as well as absolutely, than is borne by the big one.
The flat rate is less efficient than the graded one as an
instrument of social justice. The large dealer occupies a
position of economic superiority because of his greater volume
of business. And, to make his tax heavier, both absolutely and
relatively, is not arbitrary discrimination but an attempt to
proportion the payment to capacity to pay and thus to arrive
at a more genuine equality. The Court held that the economic
wisdom of tax is within the exclusive province of the
legislature. The only question for the Court to consider is
whether there is rationality in the legislature’s belief that the
capacity to pay the tax increases, by and large, with a rise in
receipts. For this, the Hon’ble Supreme Court followed the
dissenting opinions of Justice Cardozo, Justice Brandeis and
Justice Stone in Stewart Dry Goods Co. V. Lewis29.
102. The Court held that the capacity of a dealer, in
particular circumstances, to pay tax is not an irrelevant factor
in determining the tax rate, and one index of capacity is the
28
AIR 1974 SC 2272
29
294 US 550
52
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quantum of turnover. The argument that a dealer beyond a
certain limit is obliged to pay higher tax when others bear less
tax, and it is consequently discriminatory, really misses the
point, namely that former kind of dealers are in a position of
economic superiority because of their volume of business and
form a class by themselves. They cannot be treated as on par
with comparatively small dealers. An attempt to proportion
the payment to capacity to pay and thus bring about real and
factual equality cannot be ruled out as irrelevant in the tax
levy on the sale or purchase of goods. The object of a tax is
not only to raise revenue but also to regulate the economic
life of the society.
103. In the Federation of Hotel and Restaurant Association of
India (supra), the Constitution Bench rejected similar
arguments by explaining that the classifications based on
differences in the value of articles or economic superiority of
the persons of incidents are well recognised. The Court
explained that the reasonable classification includes all who
are similarly situated and none who are not. To ascertain
whether persons are equally placed, one must look beyond the
classification and the law’s purposes. In the context of
expenditure tax, the Court upheld the classification between
hotels where units of residential accommodation were priced
at over Rs.400/- per day per individual and others, which
were not as a valid classification. The Court held that such a
classification cannot be said to be arbitrary or unintelligible
nor as being without a rational nexus with the object of law.
The Court deferred to the legislative wisdom in classifying
persons based on the economic superiority of those who might
enjoy its customs, comforts and services.
53
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104. The Court held that the legislative assumption cannot be
condemned as irrational. It is equally well recognised that
judicial veto is to be exercised only in cases that leave no
room for reasonable doubt. Constitutionality is to be
presumed. The question of arbitrariness cannot be decided in
the abstract. These are policy decisions where the legislature
has been vested with significant latitude. The legislature has
created a legal fiction, and further rational criteria are
provided for measuring and levying the tax. Such a provision
introduces certainty and clarity. Due to such a provision, there
is tax efficiency, which is, in the long run, beneficial to both
the taxpayer and the tax authorities. Therefore, the impugned
amendments cannot be declared ultra-vires, irrational or
unconstitutional.
105. After referring to the decisions in Union of India vs.
Bombay Tyre International Ltd30 and CCE vs. Grasim
Industries Ltd.31 the Court held that there ought to be a
“nexus” between the nature of tax and the measure of tax.
However, the measure cannot be controlled by the rigours of
the nature of tax. The nexus between the measure and levy of
tax need not be “direct and immediate”. The nexus must be
“reasonable” and have some relationship with the nature of
levy. The reasonability of the nexus will largely depend upon
the nature of the tax and the means available to the
legislature to designate the measure of the tax. Since the levy
measure is a matter of legislative policy and convenience, the
reasonability of the nexus between the measure and tax must
be determined by the courts on a case-to-case basis. While
30
(1984) 1 SCC 467, para 14
31
(2018) 7 SCC 233
54
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doing so, the Court will bear in mind the fundamental
principle that the legislature possesses broad discretion in
matters of fiscal levies. (See Express Hotels (P) Ltd. vs. State of
Gujarat32).
106. The impugned amendments introduce a legal fiction
subject to fulfilling certain conditions. These conditions
determine the existence and measure of the concession in the
matter of renting employer-owned accommodation allotted to
employees. The necessity of the AO undertaking the
disproportionately cumbersome exercise of determining each
case is substantially dispensed with. The computation is made
relatively easy. The tax efficiency is increased. The taxpayer
and the revenue know where they stand on this subject. The
litigation and controversies could be expected to be reduced if
not eliminated. The criteria and classification adopted are
reasonable and have a clear nexus with the objects of the
impugned amendments. By following the principles to judge
the constitutional validity of taxing legislation, no case of
judicial veto is made out.
107. In All India Bank Officers’ Confederation (supra), Rule
3(7)(i) of the IT Rules was challenged. This Rule provided
that the value of interest-free or concessional loans granted by
the banks to its employees was to be treated as “other fringe
benefit or amenity” for the purpose of Section 17(2)(viii) and,
therefore, taxable as a perquisite. Further, this Rule also
prescribed the method of valuation of the
interest-free/concessional loan for taxation by linking the
same to the PLR of SBI. After considering arguments like
those raised in the present Petitions, the Hon’ble Supreme
32
(1989) 2 SCC 677, Para 25
55
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Court rejected the challenge. The Court held that the
impugned rule, positing the SBI’s rate of interest as a
benchmark to determine the value of the benefit to the
assessee compared to the interest rates charged by several
other individual banks, was not arbitrary or irrational. By this
Rule, unequals were not treated as equals. SBI was the
country’s largest bank; their fixed interest rates invariably
impacted and affected the interest rates charged by other
banks. Therefore, by fixing a clear benchmark for computation
of the perquisite, the rule obviated ascertainment of interest
rates charged by different banks from the customers and, in that
sense, checked unnecessary litigation.
108. The Court held that the impugned rule provided
consistency, clarity and certainty. Where there is certainty and
clarity, there is tax efficiency, which benefits the taxpayers and
the tax authorities. These are all hallmarks of good tax
litigation. Therefore, based on a uniform approach yet
premised on a bare determining principle aligning with the
constitutional values, the impugned rule could not be struck
down as ultra-vires or unconstitutional.
109. The Court also noted that fiscal or tax measures laws
enjoy greater latitude than other statutes when it comes to a
uniform approach. The legislature should be allowed some
flexibility in such matters, and courts would be more inclined
to make judicial deference to legislative wisdom. Commercial
and tax legislation tend to be highly sensitive and complex as
they deal with multiple problems and are contingent. Courts do
not interfere with legislation which prevents possibilities of abuse
and promotes certainty. The Court noted that the complex
problem had been solved using a straitjacket formula, which
56
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merited judicial acceptance. To hold otherwise would meet
multiple problems/issues and override legislative wisdom. The
Court accepted the universal test by introducing the impugned
rule and observed that this test was pragmatic, fair and just.
110. There is yet another aspect that bears consideration in
these matters. As noticed earlier, the value of concession in
rents respecting accommodation provided by an employer to
an employee was always included in the definition of
perquisite, and the value of such concession was taxable. Just
like Rule 3(1) of the IT Rules, the impugned amendments only
provide the machinery for assessing and recovering such tax.
Contrary to what was feebly contented, the impugned
amendments do not create any taxing liability or amend the
charging provisions for the first time. Therefore, the
arguments regarding the validity of such provisions, including
the issue of prospectivity or retrospectivity of such provisions,
must be considered slightly differently.
111. In Mineral Area Development Authority and another vs.
Steel Authority of India and another 33, the Hon’ble Supreme
Court has explained that among its elements, a tax has to
provide for the charge of tax, the incidence of tax, the
measure of tax and will contain provisions like the machinery
for assessment and recovery. The Court held that it is now a
well-settled principle that the determination of the principles
for assessing the amount of tax is within the legislative
domain (See S. Kodar vs State of Kerala 34). The quantification
or measurement of liability is done based on the procedures
laid down by the competent legislature (see Shaktikumar M.
33
(2024) 10 SCC 1
34
(1974) 4 SCC 422, Para 10
57
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Sancheti vs. State of Maharashtra35). In situations where the
legislature selects one method out of the many available for
assessing tax, the courts should not strike down the levy on
the ground that the legislature should have adopted another
method unless the method is capricious, fanciful, arbitrary or
clearly unjust (See Khandige Sham Bhat vs. CIT (Ag) 36.
Although the liability may be quantified or measured in many
ways, there is a clear distinction between the subject matter of
a tax and the standard by which the amount of tax is
calculated. Therefore, by bearing in mind that the impugned
provisions are concerned with the machinery for assessment
and recovery, we are satisfied that no case is made to interfere
with the said provisions or strike down such provisions as
being ultra-vires or unconstitutional.
112. For all the above reasons we see not much force in the
challenges to the impugned amendments on the grounds of
any breach of Article 14 of the Constitution or any other
constitutional provisions.
BANK’S SUBMISSION
113. Now, regarding the contention raised by Mr Talsania on
behalf of the banks, it is true that on account of the interim
reliefs granted, some of the banks may not have been able to
make any deductions of the tax at source.
114. At this stage, it is too premature to decide whether the
banks could be held to be “assesses in default” or made liable
to pay any taxes on behalf of the employees. Therefore, we do
not wish to make any observations on this issue. However, we
35
(1995) 1 SCC 351, Para 3.
36
1962 SCC OnLine SC 15, Para 10
58
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clarify that if and when such issues arise, all parties’
contentions regarding this issue are kept open. Such issues
should be dealt with in accordance with law by all concerned.
115. The revenue authorities must consider that this Court
had interdicted tax deductions at source through interim
orders that operated during the pendency of some of these
Petitions. The tax authorities must also consider the plight of
the banks vis-a-vis its employees, most of whom must have
retired by now. In any event, for the present, since such issues
are yet to arise, we make no further observations on such
matters, leaving all contentions of parties open.
CONCLUSION
116. For the above reasons, we dismiss these Petitions and
vacate the interim reliefs granted. There shall be no costs
order.
117. All pending Notice of Motions are disposed of.
118. All concerned to act on an authenticated copy of this
order.
(Jitendra Jain, J) (M. S. Sonak, J) After pronouncement :
119. At this stage, learned counsel for the Petitioners in Writ
Petition Nos.825 of 2006 and 438 of 2008 seeks for
continuation of the interim relief.
59
wp.825-2006 & ors(F).docx
120. The interim relief had only restrained the banks from
deducting tax at source. Accordingly, we are not inclined to
extend this interim relief, now that we have upheld the
constitutional validity of the impugned amendments. No case
of any immediate prejudice is also made out by the Petitioners
or employees whom they purport to represent. Accordingly,
this request for continuation of interim relief is denied.
(Jitendra Jain, J) (M. S. Sonak, J)
Signed by: Pradnya Bhogale
Designation: PA To Honourable Judge 60
Date: 20/01/2025 17:30:08
