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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.