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CASE NO.:

Appeal (civil) 3270 of 2003

PETITIONER:

ARUN KUMAR & OTHERS

RESPONDENT:

UNION OF INDIA & ORS.

DATE OF JUDGMENT: 15/09/2006

BENCH:

Y.K. SABHARWAL, C.K. THAKKER & P.K. BALASUBRAMANYAN

JUDGMENT:

J U D G M E N T

WITH

TRANSFERRED CASES (C) Nos. 101 AND 102 of 2006

C.K. THAKKER, J.

In Civil Appeal as well as in Transferred Cases, the

appellants have challenged validity of Rule 3 of the

Income Tax Rules, 1962, as amended by the Income Tax

(Twenty-second) Amendment Rules, 2001, (hereinafter

referred to as 'the Rules') which amended the method of

computing valuation of perquisites under Section 17(2)

of the Income Tax Act, 1961 (hereinafter referred to as

'the Act'). According to the appellants, amended Rule 3

is inconsistent with the parent Act and also ultra vires

Article 14 of the Constitution.

To understand the controversy raised in the

present proceedings, relevant factual background in Civil

Appeal No. 3270 of 2003 may be stated;

The appellants were employed as officers/

executives by Tata Iron & Steel Co. Ltd. ('TISCO' for

short). According to the appellants, usually public

sector undertakings provide housing facilities or grant

house rent allowance in lieu of accommodation to their

employees. Normally, house rent allowance is granted

where public sector enterprises are unable to provide

housing accommodation to their employees. Such

situations arise when officers/executives are posted in

cities or metropolitan offices of the enterprises where

company accommodation is either not available or

available to a limited extent. For the purpose of

accommodating its employees, TISCO has constructed

several residential bungalows/ flats/ quarters/

accommodations in the township of Jamshedpur and

around its plants. They were allotted to its employees as

also to other agencies including employees of the Central

Government and State Government who were either

transferred or posted in Jamshedpur. TISCO used to fix

annual licence fees of each such accommodation at the

rate of 5% of the capital cost/expenditure of the

bungalows/flats/quarters.

On September 25, 2001, the Central Board of

Direct Taxes (CBDT) issued Notification, No. S.O. 940 (E)

in the exercise of power under Section 295 read with

sub-section (2) of Section 17 and sub-section (2C) of

Section 192 of the Act by which Rule 3 had been

amended. The substituted rule revised the method of

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computing valuation of perquisites in the matter of

rental accommodation provided by employers to their

employees.

It was stated that pursuant to the amendment in

Rule 3, Respondent NO. 4 (TISCO) issued a letter dated

October 25, 2001 informing all its employees about

amended Rule 3 in respect of valuation of perquisite

which were to be added to the salary of the employees for

taxing purposes.

Aggrieved by the above action, the appellants

herein filed Writ Petition No. 2835 of 2002 in the High

Court of Jharkhand at Ranchi for the following reliefs;

(i) For issuance of an appropriate writ(s)/

order(s)/direction(s) in the nature of certiorari

quashing the notification No. S.O. 940 (E)

dated 25.09.2001 whereby and whereunder

Rule 3 of the Income Tax Rules has been

amended by the Government of India,

Ministry of Finance, Department of Revenue

(Central Board of Direct Taxes) and to hold

and declare it as ultra vires the Income Tax

Act.

(ii) For issuance of a further appropriate writ/

order/ direction, including writ of mandamus

directing the Respondents, particularly

Respondent Nos. 3 and 4, not to implement

the provisions of the aforesaid amended Rule

during the pendency of the writ petition,

AND/OR

(iii) Pass any other order(s)/direction(s) as Your

Lordship may deem fit and proper in the facts

and circumstances of the case.

It was contended by the employees before the High

Court that Rule 3 as amended in 2001 conferred

arbitrary and unfettered powers on the Revenue and was

ultra vires the Act. It was also urged that the

computation-method was neither based on intelligible

differentia nor had any nexus with the object sought to

be achieved and thus ultra vires Article 14 of the

Constitution.

A counter-affidavit was filed by the Revenue stating

that the Finance Minister in his Budget Speech had

outlined that "the value of perquisites, benefits or

amenities shall be determined on the basis of their cost

to the employer except in respect of house and cars

where different criteria would be adopted for simplicity".

It was stated that in adopting and applying Rule 3 as it

existed prior to the impugned amendment, there being

three classes of employees, the Revenue was facing

difficulties with respect to various matters including the

determination of the fair market value of the property

which was found very cumbersome. Moreover, it did not

take into account high rent in the metro towns. It has

been averred in the reply-affidavit that the estimation of

fair rent had been the subject-matter of litigation at

various levels mainly on account of the fact that

legislation with respect to rents being State subject

differed from State to State. The value of fair rent could

not be determined as the standard rent was not uniform

in all municipal areas. It was accordingly decided to

simplify and rationalize the procedure for determining

the perquisite value and accordingly as per the

impugned rules, the employees have been divided only in

two categories.

The Revenue had also explained in the counter the

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rationale for the distinction between Government

employees and other employees. It has been stated that

for purposes of the valuation of the perquisites relating

to accommodation, the employees have been classified

under the impugned amended rule into two categories,

namely, (i) Government (Central and State) employees

and (ii) others. To maintain continuity and equity with

their remuneration and a variety of other benefits

available in other sectors, the earlier system of valuation

of perquisites relating to accommodation on the basis of

rent payable as per rules framed by the Government has

been retained for Central and State Government

employees. For others, that is, employees belonging to

private as well as public sector undertakings, it has been

decided that the valuation of the perquisites relating to

accommodation should be 10 per cent or 7.5 per cent of

the salary as the case may be. As per the assertion of

the respondents, this was decided in keeping with the

recommendation of the expert group constituted to

rationalize and simplify income-tax laws.

Observing that the classification between cities

with population of less than four lakhs and others with

more than four lakhs as reasonable and rational, the

High Court upheld the validity of Rule 3. According to

the Court "for rationalizing and simplifying the

procedure, the Board brought about the impugned

notification" which could not be held unreasonable from

any yardstick or parameter. The said decision is

reported as Tata Workers' Union & Anr. v. Union of India

& Ors., (2002) 256 ITR 725.

A similar question was raised before the High Court

of Calcutta in Coal Mines Officers' Association of India &

Anr. v. Union of India & Ors., (2004) 266 ITR 429. Taking

note of the language of Rule 3 prior to amendment in

2001 and after the amendment, a single Judge held that

after 2001, there was no scope for determination of 'fair

rental value'. The concept of fair rental value on the

basis of the normal rent or on the basis of market rent

available in the locality or on the basis of the municipal

valuation has been done away with. It was also held

that the rule devised the method and basis of

ascertaining the value of concession in the matter of rent

which could not be declared arbitrary or ultra vires. The

Court was also of the view that the difference between

the Government employees and other employees was not

violative of Article 14 of the Constitution.

The correctness of the decisions of the High Courts

of Jharkhand and Calcutta has been questioned in the

present matters.

We have heard the learned counsel for the parties.

Mr. Harish Salve, Senior Advocate appearing for

the appellants raised several contentions. He urged that

the condition precedent for exercise of power under

Section 17 (2) of the Act read with Rule 3 of the Rules is

that it must be a "perquisite" within the meaning of the

Act. Clause (ii) of sub-section (2) of Section 17 can be

attracted provided there is "concession" in the matter of

rent respecting any accommodation provided by the

employer to his employee. If there is no "concession",

sine qua non or condition precedent is absent and there

is no 'perquisite' as well. Since there is no concession in

the instant case, Section 17 (2) (ii) of the Act would not

apply nor Rule 3 of the Rules is attracted and no liability

has arisen. It was alternatively urged that old Rule 3,

prior to its amendment in 2001, made available a

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'window' by providing that in cases where assessee

claimed and the Assessing Officer was satisfied that

there was no 'concession', the assessee was not liable to

pay tax. The rule as amended in 2001 has taken away

the right of the assessee to claim that there was no

concession as envisaged by Section 17 (2) (ii) and hence

Rule 3 had no application. Similarly, it took away the

power of the Assessing Officer to hold that there was no

'concession', even if he is 'satisfied' about the absence of

'concession'. 'Concession' is the "jurisdictional fact" for

the exercise of power under the Act and in absence

thereof, the authority cannot impose taxing liability. It

was also submitted that in Rule 3, the Court may apply

the concept of audi alteram partem and observance of

natural justice by a process of 'reading down'. By such

process, Rule 3 can be saved from vice of arbitrariness

and unreasonableness. If such a process is expressly or

impliedly prohibited, the rule becomes arbitrary and

ultra vires Articles 14 and 19 of the Constitution.

According to Mr. Salve, the parent Act imposes an

obligation on the assessee to deduct tax at source from

the salary of his employee provided that the employer

has extended accommodation to his employee at a

concessional rate. Rule 3 merely provides mode, method

or manner of calculation of liability and is thus a

"machinery" provision. The liability, according to the

learned counsel, must be fixed by a competent

Legislature under the statute i.e. under Section 17(2)(ii)

of the Act and only after such liability is fixed, the

question of computation thereof will arise which can be

done by machinery provision i.e. under Rule 3 of the

Rules. Rule 3, which is a child legislation, delegated

legislation or subordinate legislation cannot impose

liability on the employer to deduct tax or on the

employee to pay tax holding that the concessional rent

was 'perquisite' within the meaning of Section 17 (2) (ii)

of the Act. That is the exclusive domain of the

Legislature. Since there was no 'concession', Rule 3 has

no application.

It was also submitted that the argument on behalf

of the Revenue that such a course had been adopted by

fixing flat rates because of "practical difficulties" of the

Revenue in calculating the amount of rent and in dealing

with individual cases is not only irrelevant and

immaterial but is illegal, unlawful and without power or

authority of law. The counsel fairly stated that as a

rough and ready test, the procedure laid down in Rule 3

for fixing rent on the basis of population may not be

objectionable but it is only when it is proved that there is

a concession in the matter of rent respecting any

accommodation provided by the employer to the

employee that such method can be applied. He, however,

contended that even in such cases, there must be a

provision allowing or permitting the assessee to contend

that there is no concession.

Mr. Dhankar, Senior Advocate appearing for one of

the petitioners, adopted the arguments of Mr. Salve. He,

however, additionally contended that a distinction

sought to be made between employees of the

Government on one hand and employees of Companies,

Corporations or other Undertakings on the other hand,

is artificial and irrational, neither based on intelligible

differentia nor has it any nexus to the object to be

achieved. Difference of payment while considering

'perquisite' between the two classes would thus be

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arbitrary, discriminatory and ultra vires Article 14 of the

Constitution.

Mr. Parasaran, learned Additional Solicitor General

appearing on behalf of the Revenue supported the

decisions impugned in the present proceedings. He

submitted that the Rules prior to 2001 were based on

"fair rental value of the accommodation". In view of the

said concept, it provided an opportunity to the assessee,

if he claimed to satisfy the Assessing Officer that the

sum arrived at on the basis of Rule 3, as it then stood,

did not exceed such 'fair rental value of the

accommodation' and hence could not be said to be

'perquisite' within the meaning of Section 17 (2) (ii) of the

Act. The concept of fair rental value of the

accommodation has been given the go by in view of

practical difficulties realized by Revenue. Under the

amended rule of 2001, "fair rent", "market rent"

"standard rent", "reasonable rent" etc., has no relevance

at all. Keeping in view the ground reality and rent

usually charged in cities having population exceeding

four lacs and in other cities, the rule has been amended.

It is a relevant and germane consideration which can

neither be termed arbitrary nor unreasonable, nor

violative of the provisions of the Constitution. According

to Mr. Parasaran, ultimately it was a policy decision

taken by the authority as to how calculation of perquisite

should be made. Prior to 2001 one policy was accepted

by the Government. The said policy was subsequently

changed and now, new policy has been deviced. In such

policy matters, normally, a court of law would not

interfere unless the policy is totally arbitrary or

unreasonable. It was also submitted that the amended

rule was challenged by employers and assessees and

several High Courts upheld the validity thereof.

According to Mr. Parasaran, considering all relevant

facts, it was decided by Revenue that providing

accommodation at less than 10% of salary in cities

having population exceeding four lakhs and 7.5% of

salary in other cities would be deemed to be "concession"

in the matter of rent respecting such accommodation

provided to the employees by the employer. In the light of

such decision, Rule 3 cannot be held ultra vires either

the parent Act or the Constitution. He further submitted

that if this Court comes to the conclusion that

"concession" in the matter of rent is a condition

precedent for the exercise of power under Section 17 (2)

(ii) of the Act and only thereafter the machinery provision

of Rule 3 would apply, the Court may invoke the doctrine

of 'reading down' holding it intra vires and constitutional

by extending an opportunity to assessee to satisfy the

Assessing Officer that there was no 'concession'.

Regarding discrimination between employees of

Government and employees of Companies, Corporations

and other Undertakings, he submitted that it is a valid

classification and it has been based on intelligible

differentia. It also seeks to achieve an object by

considering the position of two sets of employees. Such a

provision cannot be struck down as infringing Article 14

of the Constitution.

Before we proceed to consider the rival contentions

of the parties, it may be appropriate if we refer to the

relevant provisions of the Act, the Rules and important

decisions on the point. Section 17 of the Act defines

'salary', 'perquisite' and 'profits in lieu of salary'.

Relevant part of the said section reads thus\027

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17. For the purposes of sections 15 and 16 and of

this section.\027

(1) \005\005

(2) 'perquisite' includes\027

(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.

\005. \005. \005.. \005.

It is thus clear that the definition of the term

'perquisite' covers various items mentioned therein. It is

also clear that the definition is inclusive in nature and

not exhaustive.

According to Bouvier's Law Dictionary, the

expression 'perquisite' in a most limited sense means

"something gained by a place or office beyond the regular

salary or fee".

Oxford English Dictionary defines 'perquisite' as

"any casual emolument, fee or profit attached to an office

or position in addition to a salary or wages".

According to Webster's New International

Dictionary, 'perquisite' is "a gain or profit incidentally

made from employment in addition to regular salary or

wages, especially one of a kind expected or promised".

'Perquisite' is thus a privilege, gain or profit

incidental to an employment in addition to regular salary

or wages.

As observed by the House of Lords in Owen v. Pook,

(1969) 74 ITR 147 (HL), 'perquisite' has a known normal

meaning, namely, a personal advantage. The word

would not apply to a mere reimbursement of a necessary

disbursement. In Rendell v. Went, (1964) 2 All ER 464

(HL), the House held that any benefit or advantage,

having a money value, which the holder of an office

under the company derives from the company's spending

on his behalf will come under the term 'perquisite'.

Indian Courts have also held that 'perquisite' is a

benefit or an advantage received by the holder of an

office over and above his salary. The benefit received by

an employee is incidental to employment in excess of or

in addition to the salary.

Section 295 of the Act enables the Board [as

defined in clause (12) of Section 2 as 'Central Board of

Direct Taxes' (CBDT) constituted under the Central

Boards of Revenue Act, 1963] to make rules for carrying

out the purposes of the Act.

The relevant part reads thus;

"295. Power to make Rules. (1) The Board may

subject to the control of the Central Government,

by notification in the Gazette of India, make rules

for the whole or any part of India for carrying out

the purposes of this Act.

(2) In particular, and without prejudice to

the generality of the foregoing power, such rules

may provide all or any of the following matters;

(a) \005

(b) \005

(c) the determination of the value of any

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perquisite chargeable to tax under

this Act in such manner and on such

basis as appears to the Board to be

proper and reasonable."

\005 \005.. \005.. \005..

Sub-section (2C) of Section 192 of the Act enacts

that a person responsible for paying any income

chargeable under the head "Salaries" shall furnish to the

person to whom such payment is made a statement

giving correct and complete particulars of perquisites or

profits in lieu of salary provided to him and the value

thereof in such form and manner as may be prescribed.

In exercise of the power conferred by Section 295 of

the Act, the Board framed rules known as the Income

Tax Rules, 1962. Rule 3 lays down the method for

computing valuation of perquisite. Before the

amendment in 2001, relevant part of the said rule read

as under\027

Valuation of perquisites.

3. For the purpose of computing the income

chargeable under the head "Salaries" the value of

the perquisites (not provided for by way of

monetary payment to the assessee) mentioned

below shall be determined in accordance with the

following clauses, namely:\027

(a) The value of rent-free residential

accommodation shall be determined on the basis

provided hereunder, namely:\027

(i) where the accommodation is provided\027

(A) by Government to a person holding

an office or post in connection with

the affairs of the Union or of a

State;

(B) by a body or undertaking under

the control of Government to any

officer of Government whose

services have been lent to that

body or undertaking (the

accommodation itself having been

allotted to it by Government),

an amount equal to\027

(1) if the accommodation is

unfurnished, the rent which has

been or would have been

determined as payable by such

person or officer in accordance

with the rules framed by

Government for allotment of

residences to its officers;

(2) if the accommodation is furnished,

an amount calculated in

accordance with sub-clause (i)(1)

plus [10 per cent] per annum, of

the original cost of the furniture

(including television sets, radio

sets, refrigerators, other household

appliances and air-conditioning

plant or equipment) or if such

furniture is hired from a third

party, the actual hire charges

payable therefore;]

Provided that\027

(1) where the fair rental value of the

accommodation is in excess of 20 per cent of

the assessee's salary, the value of perquisite

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shall be taken to be 10 per cent of the salary

increased by a sum equal to the amount by

which the fair rental value exceeds 20 per

cent of the salary; so, however, that the

Assessing Officer may, having regard to the

nature of the accommodation, determine the

sum by which10 per cent of the salary is to be

increased, as a percentage (not exceeding 100

per cent) of the amount by which the fair

rental value exceeds 20 per cent of the salary;

(2) where the assessee claims, and the Assessing

Officer is satisfied that the sum arrived at on

the basis provided above exceeds the fair

rental value of the accommodation, the value

of the perquisite to the assessee shall be

limited to such fair rental value;

(b) The value of residential accommodation

provided at a concessional rent shall be

determined as the sum by which the value

computed in accordance with clause (a), as if

the accommodation were provided free of rent,

exceeds the rent actually payable by the

assessee for the period of his occupation

during the relevant previous year.

\005.. \005.. \005.. \005.

By the Income Tax (Twenty-second Amendment)

Rules, 2001, Rule 3 was amended and the relevant part

reads thus\027

"3. Valuation of perquisites:

For the purpose of computing the income

chargeable under the head 'salaries', the value of

perquisites provided by the employer directly or

indirectly to the assessee (hereinafter referred to

as 'employee') or to any member of his

household by reason of his employment shall be

determined in accordance with the following

sub-rule, namely\027

(1) The value of residential accommodation

provided by the employer during the previous

year shall be determined on the basis provided

in the Table below\027

Sl.

No.

Circumstances

Where

accommodation is

unfurnished

Where

accommodation

is furnished

(1)

(2)

(3)

(4)

(1)

Where the

accommodation is

provided by the Central

Government or any

State Government to the

employees either

holding office or post in

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connection with the

affairs of the Union of or

such State or serving

with any body or

undertaking under the

control of such

Government on

deputation

Licence fee

determined by the

Central

Government or any

State Government

in respect of

accommodation in

accordance with

the rules framed by

such Government

as reduced by the

rent actually paid

by the employees.

The value of

perquisite as

determined under

column (3) and

increased by 10%

per annum of the

cost of furniture

(including television

sets, radio sets,

refrigerators, other

household

appliances, air

conditioning plant or

equipment) or if such

furniture is hired

from a third party,

the actual hire

charges payable for

the same as reduced

by any charges paid

or payable for the

same by the

employee during the

previous year.

(2)

Where the

accommodation is

provided by any other

employer and

(a) where the

accommodation is

owned by employer,

or

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(b) where the

accommodation is taken

on lease or rent by the

employer.

(i) 10% of salary in

cities having

population

exceeding 4 lakhs

as per 1991

census;

(ii) 75% salary in

other cities,

in respect of the

period during which

the said

accommodation was

occupied by the

employee during the

previous year as

reduced by the rent,

if any, actually paid

by the employee.

Actual amount of

lease rental paid

or payable by the

employer or 10%

of salary

whichever is lower

as reduced by the

rent, if any,

actually paid by

the employee.

The value of

perquisite as

determined under

column (3) and

increased by 10%

per annum of the

cost of furniture

(including television

sets, radio sets,

refrigerators, other

household

appliances, air

conditioning plant or

equipment or other

similar appliances or

gadgets) or if such

furniture is hired

from a third party,

by the actual hire

charges payable for

the same as reduced

by any charges paid

or payable for the

same by the

employee during the

previous year.

(3)

Where the

accommodation is

provided by the

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employer specified in

serial number (1) or (2)

above in a hotel (except

where the employee is

provided such

accommodation for a

period not exceeding in

aggregate 15 days on

his transfer from one

place to another)

Not applicable

24% of salary paid or

payable for the

previous year or the

actual charges paid

or payable to such

hotel, which is lower,

for the period during

which such

accommodation is

provided as reduced

by the rent, if any,

actually paid or

payable by the

employee:

Provided that nothing contained in this sub-

rule would be applicable to any accommodation

located in a 'remote area' provided to an

employee working at a Mining site or an onshore

oil exploration site, or a project execution site or

an accommodation provided in an offshore site

of similar nature;

Provided further that where on account of his

transfer from one place to another, the employee

is provided with accommodation at the new

place of posting while retaining the

accommodation at the other place, the value of

perquisite shall be determined with reference to

only one such accommodation which has the

lower value with reference to the Table above for

a period not exceeding 90 days and thereafter

the value of perquisite shall be charged for both

such accommodation in accordance with the

Table.

\005\005 \005\005 ..\005 \005.

Rule 3, before the amendment as also after the

amendment of 2001 came up for consideration before

various High Courts as well before this Court in some

cases. The learned counsel for the parties invited our

attention to those decisions.

Mr. Salve for the appellants placed heavy reliance

on a decision of the Division Bench of the High Court of

Madhya Pradesh in Officers' Association, Bhilai Steel

Plant v. Union of India & Others, (1983) 139 ITR 937. In

that case, a petition was filed in the High Court by the

Officers' Association, Bhilai Steel Plant and Divisional

Manager (Construction). The Divisional Manager was in

occupation of a quarter the rent of which was Rs.100/-

per month. The rent was fixed as the standard rent

under Rule 45A of the Fundamental Rules which had

been applied to the officers. In deducting income tax at

source under Section 192 of the Act, the management

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was treating the difference between the 1/10th of the

salary of the employee and the rent paid by him as

perquisite. It was contended by the petitioners that

merely because the rent paid by an officer was less than

1/10th of his salary, the difference could not be treated

as perquisite and tax could not be deducted at source on

that footing. A prayer was, therefore, made that the

authorities be restrained from treating the difference

between 10 per cent of the salary and the rent actually

paid as 'perquisite' for the purposes of deduction of

income tax at source.

The Income Tax Authorities denied of having issued

any circular or instruction to the Management for

treating difference between 10% of the salary and the

rent paid as 'perquisite but maintained that that was the

correct legal position.

The High Court was, therefore, called upon to

decide whether the provisions of Section 17(2)(ii) read

with Rule 3 of the Rules would be applicable and

whether tax was required to be deducted at source

treating the difference as 'perquisite', as contended by

the Revenue. The Court conceded that sub-section (2) of

Section 17 defined 'perquisite' and sub-clause (ii)

included within its ambit the "value of any concession in

the matter of rent respecting any accommodation

provided to the assessee by his employer", but it was

"any concession in the matter of rent" which was covered

by that clause.

The Court stated;

The object of s. 3 is the determination of the

value of the perquisite chargeable to tax. The rule

operates at the stage when a finding is

reached that the employee is in receipt of any

perquisite as defined in s. 17(2). The rule

cannot be used to determine whether the

officer is really in receipt of any perquisite.

The rule applies only for determining the value of

the perquisite when the fact of receipt of perquisite

is otherwise established. Rule 3(a) deals with the

case when the employee is in occupation of rent-

free residential accommodation. If the fact that the

employee is in occupation of rent-free

accommodation is established, the value thereof

would be calculated by applying the method

provided in rule 3(a). Similarly rule 3(b) applies

when the employee is in occupation of residential

accommodation at a concessional rent. If it is

established that the employee is in fact in

occupation of an accommodation at a concessional

rent, the value thereof would be calculated in the

manner provided in this rule. The effect of the rule

in taking the value of rent-free unfurnished

accommodation at 10 per cent is not to lay down

that the moment it is found that an employee is

paying less than 10 per cent of his salary as rent it

must be deemed that he has been provided

accommodation at a concessional rent.

(emphasis supplied)

The Court went on to consider that the question

was whether an employee was in occupation of an

accommodation at a concessional rate, that is, whether

the employee had received any concession which could

be termed as 'perquisite' and gave the answer that it

would depend upon two factors; (i) the normal rent for

accommodation in occupation of the employee; and (ii)

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rent actually paid by the employee. If the rent paid by

the employee is normal rent of accommodation in his

occupation, it cannot be said that he is receiving any

concession in the matter of rent even though the rent

paid by him is less than 10 per cent of his salary.

The Court then made the following pertinent

observations\027

\005.there is no deeming clause in the definition of

"perquisite" contained in s.17(2) that once it is

established that an employee is paying rent less

than 10 per cent of his salary it must be deemed

that he is receiving a concession in the matter of

rent and no such deeming clause can be inferred

from r.3. 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. (emphasis supplied)

In Indian Bank Officers' Association & Ors. v. Indian

Bank & Ors., (1994) 209 ITR 72, a single Judge of the

High Court of Calcutta again considered a similar

question. There accommodation was provided by a

nationalized bank to its employees. Petitioners who were

employees of the Bank were paying rent in accordance

with the standard rent fixed by Regulations of the Bank.

All other employees similarly situated as petitioners were

also paying rent in the same manner and to the same

extent. The High Court held that in the circumstances

no 'concession' could be said to have been enjoyed by the

petitioners within the meaning of Section 17(2)(ii) of the

Act and no tax was deductible on notional perquisite

value of accommodation under Rule 3 of the Rules. The

Court observed that the question of concession should

be determined with reference to the nature of

accommodation provided, the normal rent payable in

respect of such accommodation by other employees

similarly situated and the actual rent paid by the

employee concerned.

Reiterating the principle laid down by the High

Court of Madhya Pradesh in Officers' Association, Bhilai

Steel Plant, the Court observed that what Rule 3 stated

was valuation of perquisites and the manner of

computation thereof provided it was a concession or

perquisite. The rule, however, did not seek to fix any

liability which had not been created by Section 17(2) of

the Act.

According to the Court, the question of perquisite

must be determined first and only thereafter the

question of computing the value of such perquisite

would arise. One cannot put cart before the horse. By

following the method of valuation provided, the income

tax authorities cannot determine the existence of

perquisite. It can be done only under Section 17(2) of

the Act. "The rule cannot be permitted to be read in

a manner beyond the powers conferred under the

substantive provisions of the Act." (emphasis

supplied)

It appears that the matter was taken up by way of

intra-court appeal before the Division Bench and the

Division Bench in Income Tax Officers v. All India Vijaya

Bank Officers' Association, (1997) 225 ITR 37, confirmed

the view taken by the learned single Judge by dismissing

the appeal.

In Steel Executives Association v. Rashtriya Ispat

Nigam Ltd., (2000) 241 ITR 20, again an identical

question arose before the High Court of Andhra Pradesh.

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There accommodation was provided by the employer to

the employees and the question that came up for

consideration before the High Court was whether it was

perquisite within the meaning of the Act and the Rules

and whether the employer was required to deduct tax at

source. The Court relying upon the decision in Officers'

Association, Bhilai Steel Plant and Indian Bank Officers'

Association held that the provision would apply only in

cases where the rent was paid at concessional charges.

If the rent was not concessional, department could not

ask employer to deduct tax at source treating standard

rent as concessional rent and such an action could not

be said to be legal or lawful. The Court observed that

reading the provision carefully, it was clear that it

provided only for valuation of perquisite if the residential

accommodation was provided at a concessional rate.

The Court stated;

Therefore, it is necessary for the Revenue

to first establish that the rent charged is a

concessional rent before it can be said that

there is a perquisite and thereafter, such a

perquisite will be valued as the difference between

the actual rent paid and 10 per cent of the salary.

What has happened in this case is that the

Revenue has put the cart before the horse and

assumed that there is a concession because the

rent charged is less than 10 per cent of the salary.

(emphasis supplied)

The Court noted the submission on behalf of the

Revenue that there was really a concession because the

Income Tax Officer had material to indicate that the fair

market value of the accommodation provided was much

more than 10 per cent of the salary. But, the Court

negatived the contention and said;

We are unable to accept that material as

indicating any concession because in a situation

where the employer constructs a large number of

residential accommodation for its employees in a

particular location suitable for its convenience, the

fair market rent of such accommodation cannot be

determined with reference to the rent of any other

kind of accommodation available in the town even

if it happens to be nearby. The regular residences

in a town have their own environment which

cannot be compared with a tenement provided by

the employer for locating the employee because the

employee has no choice in accepting that

accommodation. There are several other reasons

germane to the employment and the needs of the

employer to keep the employees available and

satisfy its own needs which go into the

determination of the rent of the accommodation.

The Court also referred to its earlier decision in P.V.

Rajagopal v. Union of India, (1998) 233 ITR 678 and

observed that department could not coerce the employer

to deduct tax at source of an amount which was in

dispute as a perquisite by the employer.

Mr. Parasaran, on the other hand, submitted that

several High Courts upheld the validity of Rule 3 by

approving the method adopted by the Revenue for

fixation of perquisite under the said rule. Decisions of

two High Courts i.e. the High Court of Jharkhand and

the High Court of Judicature at Calcutta are before us.

The High Court of Jharkhand, as already observed

earlier, upheld the validity of Rule 3 observing that the

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amendment was brought out as a consequence of

Budget Speech of the Finance Minister in Parliament.

Moreover, the decision was taken on the

recommendation of Expert Group constituted to

rationalize and simplify Income Tax laws.

Mr. Parasaran also referred to Coal Mines Officers'

Association of India wherein the High Court of Calcutta

again considered the scope of the expression

"concession" in the matter of rent under Section 17 (2)

(ii) of the Act. There also, it was contended on behalf of

the employees that since there was no "concession" in

the matter of rent, it should not be termed as perquisite

under Section 17 (2) (ii) of the Act. It was argued that

whether or not there was concession, must be decided

first. For the said purpose, it was required to be

determined as to what would be the rent and if the

accommodation is provided by the employer to an

employee at a rate lower than such rent, it would be

treated as 'concession' under Section 17 (2) (ii) of the Act

and has to be calculated under Rule 3 of the Rules.

The Court, however, indicated that previous

decisions dealt with Rule 3 as it then stood which laid

down a totally different method than the one which has

been prescribed after the amendment in 2001.

The Court then stated\027

The present rule, thus, does not address

exclusively to devise the method and basis of

ascertaining the value of rent-free accommodation;

it also addresses to devise explicitly the method

and basis of ascertaining the value of concession in

the matter of rent. While, however, doing so it made

the value of concession explicit, which was implied

in the previous rule. While devising the same it

has categorized two types of employees. The first of

them are pure Government employees and the

second of them are all other employees. In addition

to that, it categorized two types of accommodation-

one provided by the Government and the other

provided by all others. In so far as the Government

employees, who have been provided Government

accommodations, are concerned, the rule says that

the value of rent-free accommodation as perquisites

would be the licence fee determined by the

Government in accordance with the rules and the

value of the concession would be the difference

between such licence fee and the amount of rent

paid by the employees. In so far as other

employees, who have been provided

accommodations by their respective employers, are

concerned, the rule says that the value of rent-free

accommodation would be ten per cent of the salary

if the accommodations are in certain cities and if

the accommodations are in other cities, 7.5 per

cent of the salary and nothing else. The rule

further provides that in relation to other employees,

the value of the concession would be the difference

between 10 per cent or 7.5 per cent of the salary,

as the case may be, and the amount of rent

actually paid. There is no scope for determination

of fair rental value. The concept of fair rental value

either on the basis of the normal rent or on the

basis of the market rent available in the locality or

on the basis of the municipal valuation has been

done away with.

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The Court proceeded to state that the rent

comparable with market would always be higher than

the fair or standardized rent. Since the new rule does not

provide for 'fair rent', 'normal rent' or 'standard rent',

none of the said concepts would be attracted or applied.

The Court finally concluded;\027"In the normal

circumstances, the pure, simple and grammatical sense

of the language used by the Legislature is the best way of

understanding what the Legislature intended. If the

Legislature intended that the meaning of the word 'rent'

as used in sub-clause (ii) of clause (2) of Section 17 of

the Act would be as has been set out above, the

Legislature could have used the same in the section

itself. \005The Legislature brought sub-clause (ii) in clause

(2) of Section 17 of the Act after introducing sub-clause

(i) of clause (2) of Section 17 of the Act. These two sub-

clauses should not be read in isolation. They were

intended to be read together and if read together, it

makes it abundantly clear, and as was done previously

as well as done presently, that the Legislature intended

to value the rent-free accommodation for the purpose of

arriving at the value of the concession by making a

simple calculation of the difference between the value of

rent-free accommodation and the rent actually paid."

Our attention was also invited by Mr. Parasaran to

BHEL Employees Association v. Union of India, (2003)

261 ITR 15 (Kant). It related to fringe benefits and

amenities as perquisites. The Court held that provision

to treat fringe benefits as perquisites in the light of

Section 17 (2)(vi) read with Rule 3 of the Rules can

neither be held ultra vires the Constitution nor Rule 3

can be struck down on the ground that there was

excessive delegation of power by the Legislature to the

Executive.

Reference was also made to a decision of the High

Court of Madras in BHEL Executive/Officers Association

& Another v. Dy. Commissioner of Income Tax & Another,

(2004) 264 ITR 390. One of the arguments raised on

behalf of the employees was that the distinction on the

basis of size of population had no rationale and Rule 3

as amended in 2001 was ultra vires. The argument was

negatived.

Mr. Parasaran also relied on an order dated

September 1, 2004 passed by the Division Bench of the

High Court of Madhya Pradesh in All India State Bank of

Indore Officers' Co-ordination Committee & Ors. v. Central

Board of Direct Taxes & Ors., (2004) 186 CTR 649 (MP).

In that case, the attention of the Court was invited to

Officers' Association, Bhilai Steel Plant followed by the

High Courts of Calcutta and Andhra Pradesh and

decisions taking contrary view by the High Courts of

Rajasthan and Karnataka. Considering conflicting views,

the Court referred the matter to a larger Bench.

The grievance of the appellants is that the amended

Rule 3 does not provide for giving an opportunity to the

assessee to convince the Assessing Officer that no

"concession" was shown by the employer to the employee

in respect of accommodation provided. Mr. Salve

submitted that the rule will apply and the liability to

deduct tax will arise only if 'concession' is shown in the

matter of rent respecting any accommodation and it is

"perquisite" under the Act, the authority must come to

the conclusion that Section 17 (2) (ii) is attracted.

Absence of any provision enabling the assessee to show

to the Assessing Officer that it was not a 'concession'

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and, therefore, 'perquisite' within the meaning of Section

17 (2) (ii) of the Act would make Rule 3 ultra vires and

unconstitutional. In such a situation, a court of law may

not adopt literal interpretation of a provision of law but

by applying "reading down" formula, sustain the validity

thereof invoking the principles of natural justice.

The doctrine of 'reading down' is well-known in the

field of Constitutional Law. Colin Howard in his well-

known work "Australian Federal Constitutional Law"

states;

Reading down puts into operation the

principle that so far as it is reasonably possible to

do so, legislation should be construed as being

within power. It has the practical effect that where

an Act is expressed in language of a generality

which makes it capable, if read literally, of applying

to matters beyond the relevant legislative power,

the Court will construe it in a more limited sense so

as to keep it within power.

As observed by this Court in Commissioner of Sales

Tax, Madhya Pradesh & Others v. Radhakrishnan & Ors.,

(1979) 2 SCC 249, in considering the validity of a statute

the presumption is always in favour of constitutionality

and the burden is upon the person who attacks it to

show that there has been transgression of constitutional

principles. For sustaining the constitutionality of an Act,

a court may take into consideration matters of common

knowledge, reports, preamble, history of the times,

object of the legislation and all other facts which are

relevant. It must always be presumed that the

Legislature understands and correctly appreciates the

need of its own people and that discrimination, if any, is

based on adequate grounds and considerations. It is

also well-settled that courts will be justified in giving a

liberal interpretation in order to avoid constitutional

invalidity. A provision conferring very wide and

expansive powers on authority can be construed in

conformity with legislative intent of exercise of power

within constitutional limitations. Where a statute is

silent or is inarticulate, the court would attempt to

transmulate the inarticulate and adopt a construction

which would lean towards constitutionality albeit

without departing from the material of which the law is

woven. These principles have given rise to rule of

'reading down' the provisions if it becomes necessary to

uphold the validity of the law.

In several cases, courts have invoked and applied

the doctrine of 'reading down' and upheld the

constitutional validity of the Act,

In Olga Tellis v Bombay Municipal Corporation,

(1985) 3 SCC 545 : AIR 1986 SC 180 : 1985 Supp (2)

SCR 51, the Supreme Court was called upon to decide

constitutional validity of Section 314 of the Bombay

Municipal Corporation Act, 1888 which empowered the

Commissioner to demolish illegal construction without

notice. It was contended that the provision was

arbitrary, unreasonable and violative of natural justice.

Holding the provision intra vires and 'reading' the

doctrine of audi alteram partem therein, the Court

stated;

"Considered in its proper perspective, section 314

is in the nature of an enabling provision and not

of a compulsive character. It enables the

Commissioner, in appropriate cases, to dispense

with previous notice to persons who are likely to be

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affected by the proposed action. It does not require

and, cannot be read to mean that, in total

disregard of the relevant circumstances pertaining

to a given situation, the Commissioner must cause

the removal of an encroachment without issuing

previous notice. The primary rule of construction is

that the language of the law must receive its plain

and natural meaning. What section 314 provides is

that the Commissioner may, without notice, cause

an encroachment to be removed. It does not

command that the Commissioner shall, without

notice, cause an encroachment to be removed.

Putting it differently, section 314 confers on the

Commissioner the discretion to cause an

encroachment to be removed with or without

notice. That discretion has to be exercised in a

reasonable manner so as to comply with the

constitutional mandate that the procedure

accompanying the performance of a public act

must be fair and reasonable. We must lean in

favour of this interpretation because it helps

sustain the validity of the law. Reading

section 314 as containing a command not to

issue notice before the removal of an

encroachment will make the law invalid."

(emphasis supplied)

In Salem Advocate Bar Association v. Union of India

(2005) 6 SCC 344, this Court had an occasion to

consider the constitutional validity of certain

amendments in Order 17 of the Code of Civil Procedure,

1908 effected by the Code of Civil Procedure

(Amendment) Act, 1999 relating to adjournments. One of

the amendments provided that no adjournment shall be

granted more than three times to a party during a trial.

Though it was an express provision, this Court observed

that there may be extreme cases or exceptional

circumstances beyond the control of the party which

may compel him to seek adjournment. Serious ailment,

accident, sudden hospitalization, earth quake, rioting,

tsunami etc., are either vis major or unforeseen

eventualities which may compel a party to ask for an

adjournment. Literal interpretation may make the

provision arbitrary, unreasonable and ultra vires. The

Court, therefore, stated that "to save the proviso to Order

17, Rule 1, from the vice of Article 14 of the

Constitution, it is necessary to read it down so as not to

take it away the discretion of the Court in the extreme

hard cases".

But it is equally well settled that if the provision of

law is explicitly clear, language unambiguous and

interpretation leaves no room for more than one

construction, it has to be read as it is. In that case, the

provision of law has to be tested on the touchstone of the

relevant provisions of law or of the Constitution and it is

not open to a Court to invoke the doctrine of "reading

down" with a view to save the statute from declaring it

ultra vires by carrying it to the point of 'perverting the

purposes of the statute'.

Thus, in Minerva Mills Limited v. Union of India,

(1980) 3 SCC 625, validity of Article 31C of the

Constitution as amended by the Constitution (42nd

Amendment) Act, 1976 conferring immunity from

challenge of laws giving effect to directive principles in

Part IV of the Constitution was questioned in this Court.

It was submitted on behalf of the Union of India that the

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Court may apply the principle of "reading down" by

restricting the challenge to only such laws which would

not violate "basic structure" of the Constitution.

Negativing the contention and speaking for the

majority, Chandrachud, CJ said; "If the Parliament has

manifested a clear intention to exercise an unlimited

power, it is impermissible to read down the amplitude of

that power so as to make it limited. The principle of

reading down cannot be invoked or applied in opposition

to the clear intention of the legislature. We suppose that

in the history of the constitutional law, no constitutional

amendment has ever been read down to mean the exact

opposite of what it says and intends. In fact, to accept

the argument that we should read down Article 31C, so

as to make it conform to the ratio of the majority

decision in Kesavananda Bharati is to destroy the

avowed purpose of Article 31C as indicated by the very

heading "Saving of certain laws" under which Articles

31A, 31B and 31C are grouped. Since the amendment

to Article 31C was unquestionably made with a view

to empowering the legislatures to pass laws of a

particular description even if those laws violate the

discipline of Articles 14 and 19, it seems to us

impossible to hold that we should still save Article

31C from the challenge of unconstitutionality by

reading into that Article words which destroy the

rationale of that Article and an intendment which is

plainly contrary to its proclaimed purpose."

(emphasis supplied)

Similarly in Delhi Transport Corporation v. D.T.C.

Mazdoor Congress & Others, (1991) Supp 1 SCC 600, the

validity and vires of Regulation 9(b) of the Delhi Road

Transport Authority (Conditions of Appointment and

Service) Regulations, 1952 relating to 'termination of

service' was challenged. It provided for termination of

service of permanent employees of the Corporation on

one month's notice or pay in lieu of notice without any

enquiry whatsoever. The provision was challenged, being

ultra vires the Constitution, violative of principles of

natural justice and inconsistent with Section 23 of the

Contract Act, 1872. One of the questions raised before

this Court was whether it would be open to a court of

law to apply the formula of 'reading down' and save the

provision by importing natural justice into it. The

majority (4:1) held the provision ultra vires and

unconstitutional by describing it as "Henry VIII clause"

and refusing to apply the doctrine of 'reading down'. It

held that the language of the Regulation was clear,

unambiguous and explicit and it was not permissible for

the Court to read down something not intended by the

Regulations. The doctrine of reading down may be

applied if the statute is silent, ambiguous or allows more

than one interpretation. But where it is express and

clearly mandates to take certain actions, the function of

the Court is to interpret it plainly and declare intra vires

or ultra vires without adding, altering or subtracting

anything therein.

As we have already indicated earlier, Rule 3 prior to

its amendment in 2001 was totally different. It dealt with

the method of calculation of concession keeping in view

the concept of "fair rental value". In the light of the

principle and phraseology in Rule 3, the rule making

authority provided an opportunity to the assessee to

satisfy the Assessing Officer that the rent sought to be

recovered from the employee could not be said to be

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'concession' as it was 'fair rent', 'reasonable rent',

'market rent' or 'standard rent'. When the rule is

amended and the concept of "fair rental value" has been

done away with and the only method which has been

adopted is to calculate the rent on the basis of

population of the city in question, it cannot be

successfully contended that the intention of the rule

making authority was to afford an opportunity to the

assessee to convince the Assessing Officer that the rent

recovered by the employer from his employee was not in

the nature of concession. Nor a court of law would, by

interpretative process, grant such opportunity to the

assessee so as to enable him to convince the Assessing

Officer that the rent fixed was not covered by Section

17(2)(ii) of the Act and therefore was not a 'perquisite'.

We are, therefore, unable to accept the argument of Mr.

Salve and allow import of the principles of natural justice

in Rule 3.

The question, therefore, is whether such a

provision is ultra vires Article 14 of the Constitution.

Though there is no direct decision of this Court on the

point, some High Courts have considered the question.

In BHEL Employees Association v. Union of India, (2003)

261 ITR 15 (Kar), validity of amended Rule 3 was

challenged. In that case, however, the Court was

concerned with fringe benefits (which stand altogether

on a different footing). But the argument was that there

was excessive delegation of power by the Legislature to

the Executive and the provision was, therefore, ultra

vires the parent Act as also violative of Article 14 of the

Constitution.

Considering several cases on the point, the Court

held that Section 295 of the Act conferred power to frame

Rules on a high functionary i.e. Central Board of Direct

Taxes (CBDT), subject to the control of Central

Government. It was also observed that the Board

consisted of very high functionaries of the Government of

India who were expected to have deep knowledge about

the policy as envisaged for imposition of tax in the

country. When power was conferred on such Expert

Body and after considering the relevant aspects, it took a

decision, it could not be said to be unlawful or

unwarranted. The legislative policy had been reflected in

Section 17 of the Act and the Rule Making Authority,

merely implemented the said policy on the basis of

essential legislative functions performed by Parliament.

The Court, therefore, negatived the contention of

excessive delegation. Any difficulty or hardship in an

individual case or to a particular person would not make

the Rule ultra vires or unconstitutional.

A similar view was taken by the High Court of

Rajasthan in Aditya Cement Staff Club v. Union of India,

(2004) 266 ITR 70.

In the impugned order, the High Court of

Jharkhand held the classification between cities with

population of less than four lakhs and more than four

lakhs as reasonable classification. It was, therefore, held

that the rule did not suffer from vice of arbitrariness.

Likewise, the High Court of Calcutta, in the order

impugned in two matters upheld the validity of the rule

observing, inter alia, that while ascertaining the

concession, the rule addresses itself to relevant and

germane considerations and such a provision cannot be

held arbitrary or ultra vires.

In our opinion, the submission of Mr. Parasaran,

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learned Additional Solicitor General deserves to be

accepted that when the concept of "fair rent", "market

rent", "reasonable rent" or "standard rent" is no more

relevant or germane in deciding the question, it was open

to the Legislature to empower the rule making authority

to provide the method for calculation of "concession". We

are further of the view that the criterion which was

adopted by the rule making authority in treating cities

having population of less than four lakhs and more than

four lakhs cannot be said to be arbitrary or

unreasonable and fixation of rent on the basis of

population of city cannot be interfered with in exercise of

power of judicial review. The said argument, therefore,

has no substance and cannot be upheld.

But in our opinion, the fundamental question of

applicability of Section 17 (2) of the Act still remains. It

cannot be gainsaid that Section 17 (2) would apply only

if there is 'perquisite'. Indisputably, the definition of

'perquisite' is inclusive in nature and takes within its

sweep several matters enumerated in clauses (i) to (vii).

Section 17 (2) (ii) declares that the value of any

"concession" in the matter of rent respecting any

accommodation provided to the employee by his

employer would be "perquisite". Nevertheless it must be

a "concession" in the matter of rent respecting any

accommodation provided by the employer to his

employee.

The word "concession" has neither been defined in

the Act nor in the Rules. According to Concise Oxford

English Dictionary, "concession" is "a thing that is

conceded"; "a gesture made in recognition of a demand

or prevailing standard", "a reduction in price for a

certain category of person". It is "a grant; ordinarily

applied to a grant of specific privileges by Government, a

special privilege granted by a Government, Corporation

or other authority" (P.R. Aiyer; "Advanced Law Lexicon",

2005; Vol. 1; p. 944). It is "an act of yielding or

conceding as to a demand or argument; something

conceded; usually employing a demand; claim or

request"; "a thing yielded", "a grant". [Indian Aluminium

Co. Ltd. v. Thane Municipal Corporation; (1992) Supp 1

SCC 480] "Concession" is a form of "privilege" [V.

Pechimethu v. Gowrammal, (2001) 7 SCC 617].

It is, therefore, clear that before Section 17(2)(ii) can

be invoked or pressed into service and before calculation

of concession as per Rule 3 is made, the authority

exercising power must come to a positive conclusion that

it is a concession. 'Concession', in our judgment is, thus

a foundational, fundamental or jurisdictional fact.

A "jurisdictional fact" is a fact which must exist

before a Court, Tribunal or an Authority assumes

jurisdiction over a particular matter. A jurisdictional

fact is one on existence or non-existence of which

depends jurisdiction of a court, a tribunal or an

authority. It is the fact upon which an administrative

agency's power to act depends. If the jurisdictional fact

does not exist, the court, authority or officer cannot act.

If a Court or authority wrongly assumes the existence of

such fact, the order can be questioned by a writ of

certiorari. The underlying principle is that by erroneously

assuming existence of such jurisdictional fact, no

authority can confer upon itself jurisdiction which it

otherwise does not posses.

In Halsbury's Laws of England, it has been stated;

"Where the jurisdiction of a tribunal is

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dependent on the existence of a particular

state of affairs, that state of affairs may be

described as preliminary to, or collateral to

the merits of, the issue. If, at the inception of

an inquiry by an inferior tribunal, a challenge

is made to its jurisdiction, the tribunal has to

make up its mind whether to act or not and

can give a ruling on the preliminary or

collateral issue; but that ruling is not

conclusive".

The existence of jurisdictional fact is thus sine qua

non or condition precedent for the exercise of power by a

court of limited jurisdiction.

In Raja Anand Brahma Shah v. State of U.P. & Ors.,

AIR 1967 SC 1081 : (1967) 1 SCR 362, sub-section (1) of

Section 17 of the Land Acquisition Act, 1894 enabled the

State Government to empower Collector to take

possession of 'any waste or arable land' needed for

public purpose even in absence of award. The possession

of the land belonged to the appellant had been taken

away in the purported exercise of power under Section

17(1) of the Act. The appellant objected against the

action inter alia contending that the land was mainly

used for ploughing and for raising crops and was not

'waste land', unfit for cultivation or habitation. It was

urged that since the jurisdiction of the authority

depended upon a preliminary finding of fact that the

land was 'waste land', the High Court was entitled in a

proceeding for a certiorari to determine whether or not

the finding of fact was correct.

Upholding the contention and declaring the

direction of the State Government ultra vires, this Court

stated;

"In our opinion, the condition imposed by s.

17(1) is a condition upon which the jurisdiction

of the State Government depends and it is

obvious that by wrongly deciding the question

as to the character of the land the State

Government cannot give itself jurisdiction to

give a direction to the Collector to take

possession of the land under s. 17(1) of the Act.

It is well-established that where the

jurisdiction of an administrative authority

depends upon a preliminary finding of fact

the High Court is entitled, in a proceeding

of writ of certiorari to determine, upon its

independent judgment, whether or not that

finding of fact is correct". (emphasis

supplied)

In State of M.P. & Ors. v. D.K. Jadav, AIR 1968 SC

1186 : (1968) 2 SCR 823, the relevant statute abolished

all jagirs including lands, forests, trees, tanks, wells etc.,

and vested them in the State. It, however, stated that all

tanks, wells and buildings on 'occupied land' were

excluded from the provisions of the statute. This Court

held that the question whether the tanks, wells etc.,

were on 'occupied land' or on 'unoccupied land' was a

jurisdictional fact and on ascertainment of that fact, the

jurisdiction of the authority would depend.

The Court relied upon a decision in White & Collins

v. Minister of Health (1939) 2 KB 838 : 108 LJ KB 768,

wherein a question debated was whether the court had

jurisdiction to review the finding of administrative

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authority on a question of fact. The relevant Act enabled

the local authority to acquire land compulsorily for

housing of working classes. But it was expressly

provided that no land could be acquired which at the

date of compulsory purchase formed part of park, garden

or pleasure-ground. An order of compulsory purchase

was made which was challenged by the owner

contending that the land was a part of park. The

Minister directed public inquiry and on the basis of the

report submitted, confirmed the order.

Interfering with the finding of the Minister and

setting aside the order, the Court of Appeal stated;

"The first and the most important matter to

bear in mind is that the jurisdiction to make

the order is dependent on a finding of fact;

for, unless the land can be held not to be part

of a park or not to be required for amenity or

convenience, there is no jurisdiction in the

borough council to make, or in the Minister to

confirm, the order. In such a case it seems

almost self-evident that the Court which has

to consider whether there is jurisdiction to

make or confirm the order must be entitled to

review the vital finding on which the existence

of the jurisdiction relied upon depends. If this

were not so, the right to apply to the Court

would be illusory."

[See also Rex v. Shoredich Assessment

Committee; (1910) 2 KB 859 : 80 LJ KB 185].

A question under the Income Tax Act, 1922 arose

in Raza Textiles Ltd. v. Income Tax Officer, Rampur,

(1973) 1 SCC 633 : AIR 1973 SC 1362. In that case, the

ITO directed X to pay certain amount of tax rejecting the

contention of X that he was not a non-resident firm. The

Tribunal confirmed the order. A single Judge of the High

Court of Allahabad held X as non-resident firm and not

liable to deduct tax at source. The Division Bench,

however, set aside the order observing that "ITO had

jurisdiction to decide the question either way. It cannot

be said that the Officer assumed jurisdiction by a wrong

decision on this question of residence". X approached

this Court.

Allowing the appeal and setting aside the order of

the Division Bench, this Court stated;

"The Appellate Bench appears to have been

under the impression that the Income-tax

Officer was the sole judge of the fact whether

the firm in question was resident or non-

resident. This conclusion, in our opinion, is

wholly wrong. No authority, much less a

quasi-judicial authority, can confer

jurisdiction on itself by deciding a

jurisdictional fact wrongly The question

whether the jurisdictional fact has been

rightly decided or not is a question that is

open for examination by the High Court in an

application for a writ of certiorari. If the High

Court comes to the conclusion, as the learned

single Judge has done in this case, that the

Income-tax Officer had clutched at the

jurisdiction by deciding a jurisdictional fact

erroneously, then the assesses was entitled

for the writ of certiorari prayed for by him. It

is incomprehensible to think that a quasi-

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judicial authority like the Income-tax

Officer can erroneously decide a

jurisdictional fact and thereafter proceed

to impose a levy on a citizen." (emphasis

supplied)

From the above decisions, it is clear that existence

of 'jurisdictional fact' is sine qua non for the exercise of

power. If the jurisdictional fact exists, the authority can

proceed with the case and take an appropriate decision

in accordance with law. Once the authority has

jurisdiction in the matter on existence of 'jurisdictional

fact', it can decide the 'fact in issue' or 'adjudicatory

fact'. A wrong decision on 'fact in issue' or on

'adjudicatory fact' would not make the decision of the

authority without jurisdiction or vulnerable provided

essential or fundamental fact as to existence of

jurisdiction is present.

In our opinion, the submission of Mr. Salve is well

founded and deserves to be accepted that "concession"

under clause (ii) of sub-section (2) of Section 17 of the

Act is a 'jurisdictional fact'. It is only when there is a

'concession' in the matter of rent respecting any

accommodation provided by an employer to his employee

that the mode, method or manner as to how such

concession can be computed arises. In other words,

concession is a 'jurisdictional fact'; method of fixation of

amount is 'fact in issue' or 'adjudicatory fact'. If the

assessee contends that there is no 'concession', the

authority has to decide the said question and record a

finding as to whether there is 'concession' and the case

is covered by Section 17 (2) (ii) of the Act. Only thereafter

the authority may proceed to calculate the liability of the

assessee under the Rules. In our considered opinion,

therefore, in spite of the legal position that Rule 3 is intra

vires, valid and is not inconsistent with the provisions of

the parent Act under Section 17 (2) (ii) of the Act, it is

still open to the assessee to contend that there is no

'concession' in the matter of accommodation provided by

the employer to the employee and hence the case did not

fall within the mischief of Section 17 (2) (ii) of the Act.

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 the

judgment. 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. An employer may provide residential

accommodation to his employees for several reasons. It

is also possible that for making available staff quarters/

colonies/accommodations, State Governments or Central

Government may provide land to Public Sector

Undertakings/ Companies/ Corporations at a

concessional rate imposing appropriate conditions

including amount of rent, if any, to be recovered by the

employer. Mr. Salve also invited our attention to certain

decisions wherein it had been held that residential

facility provided by the employer to the employee was not

held 'perquisite' within the meaning of Income Tax laws.

Mr. Salve placed reliance on a decision in

Alexander Tenant v. Robert Smith, 1892 AC 150 (HL).

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There, the appellant who was an agent for the Bank of

Scotland at Montrose, had been granted accommodation

by his employer as part and parcel of his duty. The

House of Lords held that he was bound as part of his

duty as agent to live in the bank house as the nature of

the employment required that he should live in his

master's dwelling house or business-premises instead of

occupying a separate residence of his own. According to

the Court, "such an occupation could not be regarded as

part of appellant's income". He occupied the bank house

as a part of his duty. It was observed that the situation

could not be distinguished from that of the Master of a

Ship who was spared the cost of house rent while afloat.

"His cabin, does not, on that account become a part

of his income". (emphasis supplied)

In Tyrer v. Smart, (1978) 1 All ER 1089 : (1978) 1

WLR 415; a private company offered preferential right to

purchase shares to its employees below market price and

the question before the Court was whether it could

constitute a taxable benefit or amenity. The Court of

Appeal reiterated the principle laid down in Alexander

Tenant and held that if something is done by an

employer to attract employees to encourage their loyalty,

it could not be regarded as reward for the services

rendered and could not become a taxable perquisite. A

benefit or facility which furthers commercial interest of

the employer would not per se become perquisite. Such

facility of accommodation furthers commercial interest of

the employer by having satisfactory work force which but

for such accommodation, would not have been available.

In such cases, e.g. doctors/ superintendents/ rectors/

professors/ teachers/ Grihpatis/ Grihmatas, etc. to stay

in the accommodation provided by the employer may be

more a 'compulsion' than a 'concession'.

Mr. Salve also submitted that in such cases, it is

for the authorities, seeking to tax the subject, to

establish the taxing liability and it is not for the subject

to prove that his case is covered by an exception. As

observed in Hochstrasser v. Mayes, 1960 AC 376 (HL), "it

is not enough for the Crown to establish that the

employee would not have received the sum on which tax

is claimed had he not been an employee. The Court

must be satisfied that the service agreement was

the causa causans and not merely the causa sine

qua non of the receipt of the profit". (emphasis

supplied)

The counsel also submitted that the object of Rule

3 is to extend relief to employees and keeping in view the

said purpose, it has to be interpreted liberally. In

support of the submission, reliance was placed on a

three Judge Bench decision of this Court in CIT, Bombay

v. British Bank of Middle East, (2001) 8 SCC 36. The

question for determination of this Court related to

expenditure incurred by an employer on facility of car

provided to an employee for private use.

Interpreting Section 40-A (5) of the Act and Rule 3

of the Rules and highlighting the object underlying in

enacting both the provisions, one of us (Y.K. Sabharwal,

J. as His Lordship then was) stated that "Section 40-A

(5) and Rule 3 operate in different fields and apply to

different set of assessees. The provision of the Act was

enacted to provide for ceiling on expenditure on

employees. The object of the Rule is to give relief to the

employees. Applying Rule 3 for the purpose of

determining the deduction in relation to the assessment

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of the employer would be doing violence to and ignoring

the legislative intent evident in Section 40-A (5)".

We are, however, not inclined to enter into larger

question as in our view, it is not necessary in the light of

statutory provision relating to 'concession' in the matter

of rent respecting any accommodation' in Section

17(2)(ii) of the Act. We are of the view that Rule 3 would

apply only to those cases where 'concession' has been

shown by an employer in favour of an employee in the

matter of rent respecting accommodation. Thus,

whereas 'charging provision' is found in the Act of

Parliament [Section 17(2)(ii)], 'machinary component' is

in the subordinate legislation (Rule 3). The latter will

apply only after liability is created under the former.

Unless the liability arises under Section 17(2)(ii) of the

Act, Rule 3 has no application and the method of

valuation for calculating concessional benefits cannot be

resorted to.

Mr. Dhankar, who appeared for federation of

employees, invited our attention to "Report of the Pay

Revision Committee for Public Sector Executives",

published by the Government of India in October, 1998.

Taking into account the crucial and pivotal role played

by Public Sector Undertakings and considering their

importance in the light of the fact that it is a limb of

Government and "State" within the meaning of Article 12

of the Constitution, the Government of India had

constituted a Committee headed by Hon'ble Mr. Justice

S. Mohan (Retd.). The Committee considered various

issues including issues as to pay scales, perquisites etc.,

of employees of Public Sector Undertakings. The counsel

referred to various recommendations made by the

Committee and submitted that different treatment

shown by the authorities to employees of Government

and employees of Public Sector Undertakings is

arbitrary, discriminatory and unreasonable being

violative of Articles 14, 16 and 19 of the Constitution.

He, therefore, submitted that the benefits extended to

Government employees ought to have been extended to

employees of Public Sector Undertakings as well.

We are unable to uphold the argument. As already

indicated earlier, the High Court of Calcutta in the

impugned order considered the question and held

classification between Government employees and

employees of Companies, Corporations and other Public

Undertakings as reasonable. Though the doctrine of

equity has no place in taxing statutes, an attempt has

been made by the rule making authority to introduce

equity by keeping in view the ground reality. According

to the High Court, it cannot be disputed that in the

sphere of income, Government employees are far below

to the employees of Companies, Corporations and

other Undertakings. The benefits which have been

provided to employees of Corporations, Companies and

other Undertakings are much more than the benefits

extended to Government employees. If on the basis of the

factual scenario, a classification is made between two

classes of employees, it cannot be struck down as ultra

vires.

It is no doubt true that Article 14 guarantees

equality before the law and confers equal protection of

laws. It is also true that it prohibits the State from

denying persons or class of persons equal treatment

provided they are equals and are similarly situated. But,

it is equally well established that Article 14 seeks to

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prevent or prohibit a person or class of persons from

being singled out from others situated similarly. If two

persons or two classes are not similarly situated or

circumstanced, they cannot be treated similarly. To put

it differently, Article 14 prohibits dissimilar treatment to

similarly situated persons, but does not prohibit

classification of persons not similarly situated, provided

such classification is based on intelligible differentia and

is otherwise legal, valid and permissible.

Very recently in Confederation of Ex-Servicemen

Associations & Ors. v. Union of India & Ors. decided on

August 22, 2006, the Constitution Bench had an

occasion to consider a similar question. Referring to

State of West Bengal v. Anwar Ali Sarkar & Another,

(1952 SCR 284 : AIR 1952 SC 75) and several other

cases, one of us (C.K. Thakker, J.) observed that "it is

clear that every classification to be legal, valid and

permissible, must fulfill the twin-test, namely;

(i) the classification must be founded on an

intelligible differentia which must

distinguish persons or things that are

grouped together from others leaving out

or left out; and

(ii) such a differentia must have rational

nexus to the object sought to be achieved

by the statute or legislation in question".

In our opinion, distinction sought to be made by

the rule making authority between employees of the

Central Government as well as State Governments and

other employees i.e., employees of Companies,

Corporations and other Undertakings is reasonable

classification based on intelligible differentia. It has also

rational nexus to the object sought to be achieved. Rule

3 takes into account service conditions of employees of

Government vis-`-vis employees of Corporations,

Companies and other Undertakings and prescribes

method of calculating value of all perquisites. Such a

provision, in our considered opinion, cannot be held

ultra vires Article 14 of the Constitution.

Even under the Constitution, such a distinction

has been upheld in several cases by this Court. Article

311 of the Constitution confers certain benefits which

are not available to employees of Corporations,

Companies and other Undertakings. It was contended on

behalf of those employees that such Corporations,

Companies and Undertakings were covered by the

definition "State" within the meaning of Article 12 of the

Constitution and they also must be granted all the

benefits which had been granted to employees of the

Government. The contention was, however, negatived by

this Court holding that application of Part XIV of the

Constitution would be limited to Services under the

Union and the States and not to other employees [vide

S.L. Agarwal v. General Manager, Hindustan Steel Ltd;

(1970) 1 SCC 177 : (1970) 3 SCR 363; Ajit Kumar Nag v.

General Manager, Indian Oil Corporation Ltd., (2005) 7

SCC 764]. We, therefore, see no substance in the

argument that the impugned provision differentiating

employees of Government and employees of Companies,

Corporations and other Undertakings is arbitrary and

objectionable.

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

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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.

For the foregoing reasons, Civil Appeal No. 3270 of

2003 is partly allowed to the extent indicated above.

In view of our order passed in Civil Appeal No. 3270

of 2003, Transferred Cases Nos. 101 & 102 of 2006

stand disposed of.

In the facts and circumstances of the case, there

shall be no order as to costs.