New Delhi: The Supreme Court has upheld the constitutional validity of Rule 3 of the Income Tax Rules, 1962, as amended by the Income Tax (22nd) Amendment Rules, 2001, revising the method of computing valuation of perquisites in the matter of rental accommodation provided by the employer to his employees under Section 17 (2) of the Income Tax Act.

Pursuant to the amendment, the valuation of perquisites relating to accommodation was to be added to the salaries of employees for taxation purposes. For the purposes of valuation, employees were classified into two categories — Government (Central and State) employees and others.

Amendment challenged

A batch of petitions were filed in the Jharkhand and Calcutta High Courts, challenging the validity of Rule 3 as amended in 2001, and both courts held that it was valid. The present appeal by Arun Kumar and others was against the decision of the Jharkhand High Court.

A three-Judge Bench, comprising Chief Justice Y.K. Sabharwal and Justices C.K. Thakker and P.K. Balasubramanyan, held that Rule 3 could not be held to be arbitrary, discriminatory or ultra vires Article 14 of the Constitution. The Bench said: "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." The Bench was of the view that the distinction sought to be made by the rule-making authority between employees of the Central Government as well as State Governments and others was a 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 the Government employees vis-à-vis employees of corporations, companies and other undertakings, and prescribes the method of calculating value of all perquisites. Such a provision, in our considered opinion, cannot be held ultra vires Article 14 of the Constitution," it said.

Disposing of the appeal, the Bench, however, said: "It is open to the assesses 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 IT Act."

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