'Bank employees' interest-free loans taxable'

Interest-free or concessional loans given by banks to their employees will qualify as “fringe benefits” or “amenities,” thus taxable, the Supreme Court has held, giving a major blow to the bank employees.

While upholding the income tax rule in this regard, the apex court said that such benefits enjoyed by bank employees are a “unique” to them and are in the nature of a ‘perquisite,’ hence liable to taxation.

Staff unions and officers’ associations of various banks had challenged the constitutionality of Section 17(2)(viii) of the Income Tax Act, 1961 and Rule 3(7)(i) of the Income Tax Rules, 1962. Section 17(2)(viii) defines perquisites and includes “any other fringe benefit or amenity as may be prescribed”. Their stand was that Rule 3(7)(i) was arbitrary and violated Article 14 of the Constitution by treating the prime lending rate of SBI as the benchmark, instead of the actual interest rate charged by the bank from a customer on a loan.

A bench comprising justices Sanjiv Khanna and Dipankar Datta said that “perquisite” is a fringe benefit attached to the post held by the employee unlike ‘profit in lieu of salary’, which is a reward or recompense for past or future service. “It is incidental to employment and in excess of or in addition to the salary. It is an advantage or benefit given because of employment, which otherwise would not be available,” it said.

According to the apex court, the fixation of SBI’s rate of interest as the benchmark is neither an arbitrary nor unequal exercise of power, as the rule-making authority has not treated unequal as equals.

“By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation,” it said.

SBI is the largest bank in the country and the interest rates fixed by it invariably impact and affect the rates charged by other banks, the judgment stated.

“We are of the opinion that the enactment of subordinate legislation for levying tax on interest free/concessional loans as a fringe benefit is within the rulemaking power under Section 17(2)(viii) of the Act,” according to the judgment.

It also held the tax provisions are not iniquitous, draconian or harsh on the taxpayers. “A complex problem has been solved through a straitjacket formula, meriting judicial acceptance,” the bench said, approving charging the prime lending rate of SBI as the benchmark.

The top court also observed that when it came to a uniform approach, the laws relating to fiscal or tax measures enjoy greater latitude than other statutes. The legislature should be allowed some flexibility in such matters and the top court would be more inclined to give judicial deference to legislative wisdom, said the bench.

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

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