In a landmark ruling, the Supreme Court of India declared that the benefit of interest-free or concessional rate loans granted to bank employees constitutes a ‘perquisite’ and is, therefore, taxable under the Income Tax Act. The decision came after a comprehensive evaluation of the policies by a bench comprising Justices Sanjiv Khanna and Dipankar Datta, affirming the classification of such benefits as unique advantages enjoyed exclusively by bank employees.
The court rejected the petitions filed by the All India Bank Officers Federation and other entities, which argued that this classification involved an excessive and unguided delegation of essential legislative functions to the Central Board of Direct Taxes. The petitioners also contended that using the State Bank of India’s (SBI) prime lending rate as a standard benchmark was arbitrary and violated Article 14 of the Constitution, which guarantees equality before the law.
However, the Justices noted that fixing SBI’s interest rate as a benchmark ensures uniformity and prevents legal disputes over varying interest rates charged by different banks. This measure not only avoids unnecessary litigation but also simplifies the process of calculating the taxable value of this fringe benefit.
“Commercial and tax legislation are inherently complex and must tackle numerous issues delicately,” the bench remarked. It emphasized that the rule-making authority had acted fairly without treating unequal parties as equals, hence supporting the need for legislative precision and prevention of abuse.
The ruling specifically upheld the validity of Section 17(2)(viii) of the Income Tax Act, 1961, and Rule 3(7)(i) of the Income Tax Rules, 1962, stating that the provision is neither iniquitous, draconian, nor harsh on taxpayers. The court highlighted that such a standardized approach allows the legislature some leeway in fiscal matters, which are generally afforded a broader scope than other statutes.
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Justice Khanna and Justice Datta elaborated on the nature of a ‘perquisite’, clarifying that it is a benefit linked to the employment position, distinct from ‘profit in lieu of salary’ which is compensation for services. They concluded that perquisites are incidental to employment and provide an advantage due to the employment status, not available under normal circumstances.
