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Deemed iniquitous
April, 14th 2007
In spite of the Supreme Court interpreting Rule 3 in a fair manner so as to exclude its operation in respect of accommodation provided at normal rate, having regard to the location and other circumstances, the Government has thought it fit to impose a deeming clause in Section 17(2) (ii) by way of an Explanation.

The salaried class seems to be the special target of recent Budgets, to plug what the Government thinks are loopholes in the law. It is forgotten that the scheduler system of taxation discriminates against salary earners. Standard deduction has been abolished. Rules are getting tightened. Rental value of perquisites provided by companies free of charge or at concessional rate is tackled by the definitions given in Section 17 of the Income-Tax Act, 1961.

Salary includes perquisites or profits in lieu of or in addition to any salary or wages. The term `perquisite' as defined in Section 17 (2) includes

the value rent-free accommodation provided to the assessee by his employer and

the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer.

Rule 3 of the Income-Tax Rules, 1962, provides the method of computation for determining the perquisite value in the matter of rent. A rough and ready calculation was provided for taking the perquisites as 10 per cent of salary in places with population exceeding 4 lakhs and 7.5 per cent of salary for places with lesser population. Quite often, employees are given accommodation in townships where factories are located. It helps the employees to stay close to the work-spot. The rental value in such cases may be smaller than the presumptive rate of 10 per cent or 7.5 per cent.

The Rule was challenged as ultra vires of the law in Arunkumar vs. Union of India 286 ITR 89 (SC). The Supreme Court upheld the validity of the Rule and pointed out that there was no `deeming clause' in Section 17(2)(ii) to hold that an employee paying less than 10 per cent of his salary or 7.5 per cent as the case should be deemed to have received `concession' in the form of `perquisites' in the payment of rent. It was argued before the Supreme Court that the Rule may come into play even when there is no concession. The Court thought the fear was baseless. The Central Board of Direct Taxes was empowered to provide a yardstick for valuation of perquisites. Rule 3 was only a machinery provision. It can apply only when there is real concession in the matter of Rent.

The Finance Bill Amendment

The Finance Bill, 2007 brings in a deeming provision by inserting an Explanation to Section 17(2) (ii). As per this amendment, concession in the matter of rent shall be deemed to have been provided at 10 per cent of the salary, if the accommodation is provided by the employer in cities having population more than 4 lakhs. It will be 7.5 per cent of the salary in other cities. Provision is also made for valuing perquisite for furnished and unfurnished accommodation.

In other words, in spite of the Supreme Court interpreting Rule 3 in a fair manner so as to exclude its operation in respect of accommodation provided at normal rate, having regard to the location and other circumstances of the case, the Government has thought it fit to impose a deeming clause in Section 17(2) (ii) by way of an Explanation. Even if normal market rent is charged, the amendment requires that if it falls short of the prescribed percentage of the salary, a concession will be deemed and brought to tax. The amendment takes retrospective effect from April 1, 2002.

The Government has taken the clue from the Supreme Court which had pointed out that there is no deeming clause in Section 17(2)(iii). A lacuna is smelt in spite of the Supreme Court's rulings on the subject. The decision was in favour of the Government. The amendment seeks to cast a burden on the employees by presuming a concession even when there is none. The Government thinks that there can be no challenge to the Section, though a Rule can be challenged.

Where the accommodation is taken on lease or rent by the employer, concession shall be deemed to have been provided to the extent indicated below:

Actual amount of lease rent, or

10 per cent of salary whichever is lower.

The percentages have been doubled with effect from April 1, 2006.

There is discrimination in applying the deeming clause. It does not apply to accommodation provided by Central and State governments to their employees. They may be housed in posh localities and in high rises. The licence fee payable to the Government may be nominal; yet, no concession will be inferred in the case of government employees. Only company employees are chosen for the special treatment. The revenue potential of such favours shown to government servants can be phenomenal. On the other hand, the coverage of the deeming clause brought in by the Amendment will be miniscule.

T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax.)

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