Benefit enjoyed by bank staff in form of interest free loans taxable as perquisites: SC [Read Judgment]

NEW DELHI: In a setback to bank employees, the Supreme Court has said the benefit enjoyed by them as loans free from interest or at a concessional rate is a unique advantage enjoyed by them, which is in the nature of a ‘perquisite’, and thus is liable to taxation under the Income Tax Act.

A bench of Justices Sanjiv Khanna and Dipankar Datta, in its judgment on May 7, upheld the validity of Section 17(2)(viii) of the Income Tax Act, 1961 or Rule 3(7)(i) of the Income Tax Rules, 1962.

The court also approved the fixation of SBI’s rate of interest as the benchmark for the purpose, saying it is neither an arbitrary nor unequal exercise of power, as the rule-making authority has not treated unequal as equals.

"Commercial and tax legislations tend to be highly sensitive and complex as they deal with multiple problems and are contingent. This court would not like to interfere with the legislation in question, which prevents possibilities of abuse and promotes certainty," the bench said.

The court also held the provisions are not iniquitous, draconian or harsh on the taxpayers.

"A complex problem has been solved through a straitjacket formula, meriting judicial acceptance," the bench said.

All India Bank Officers Federation and others challenged the validity of the provisions on the ground of excessive and unguided delegation of essential legislative function to the Central Board of Direct Taxes.

The petitioners also claimed the provisions were arbitrary and violative of Article 14 of the Constitution for those treated the prime lending rate of SBI as the benchmark instead of the actual interest rate charged by the bank from a customer on a loan.

The court, however, felt, "By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation."

The bench said, "When it comes to uniform approach the laws relating to fiscal or tax measures enjoy greater latitude than other statutes. The Legislature should be allowed some flexibility in such matters and this court would be more inclined to give judicial deference to legislative wisdom."

As per the rules, the interest-free/concessional loan benefits provided by banks to its employees would be taxable as ‘fringe benefits’ or ‘amenities’, if the interest charged by the bank on such loans is lesser than the interest charged according to the prime lending rate of the State Bank of India.

The court said 'perquisite’ is a fringe benefit attached to the post held by the employee unlike ‘profit in lieu of salary’, which is a reward or recompense for past or future service. This is incidental to employment and in excess of or in addition to the salary. It is an advantage or benefit given because of employment, which otherwise would not be available, it noted.
 

[Read Judgment]