Latest News

Supreme Court Decision on Taxation of Interest Free Loans to Bank Employees


➡️ Click here to join our Whatsapp Group

A recent decision by a Division bench of the Supreme Court has clarified the taxation of interest-free/ concessional loans provided by banks to bank employees. The case, titled All India Bank Officers’ Confederation Vs The Regional Manager, Central Bank Of India & Others, dealt with the interpretation of Rule 3(7)(i) of the Income Tax Rules, 1962 and its compatibility with Article 14 of the Constitution of India.

The court held that Rule 3(7)(i) is not violative of Article 14 and that the provision of interest-free/concessional loan benefits provided by banks to bank employees shall be taxable as a perquisite under Section 17 of the Income Tax Act, 1961.

Background and Legal Challenge

Staff Unions and Officers’ Associations of various banks across India had challenged the vires of Section 17(2)(viii) of the Income Tax Act, 1961 (IT Act) and Rule 3(7)(i) of the Income Tax Rules, 1962 (IT Rules) through various writ petitions before the Madhya Pradesh High Court and Madras High Court. However, these petitions were dismissed by the High Courts.

Section 17(2)(viii) of the IT Act provides the definition of perquisites and includes “any other fringe benefit or amenity as may be prescribed.” Rule 3(7)(i) of the IT Rules, enacted by the Central Board of Direct Taxes (CBDT), specifies that interest-free/concessional loan benefits provided by banks to bank employees shall be taxable as ‘fringe benefits’ or ‘amenities’ if the interest charged by the bank on such loans is lesser than the interest charged according to the Prime Lending Rate (PLR) of the State Bank of India (SBI).

The legal challenge raised concerns about the excessive delegation of essential legislative functions to the CBDT and the violation of Article 14 of the Constitution, as Rule 3(7)(i) uses the PLR of SBI as the benchmark instead of the actual interest rate charged by the respective bank from a customer on a loan.

Court’s Observations and Ruling

The court observed that Section 17(2)(viii) of the IT Act provides for various items that are included in the ambit of perquisites, and Rule 3(7)(i) is a rule enacted by the CBDT in pursuance of the power provided under this section.

The court further noted that the grant of interest-free loans or loans at a concessional rate qualifies as a ‘fringe benefit’ and ‘perquisite’ under common parlance and commercial usage. It is an advantage or benefit given because of employment, which otherwise would not be available.

Regarding the issue of excessive delegation, the court held that the power of the subordinate authority under Section 17(2)(viii) is not boundless and is demarcated by the language of Section 17 itself. The court emphasized that anything made taxable under Section 17(2)(viii) should be a perquisite in the form of a fringe benefit or amenity, and the rule-making authority’s power is guided by the legislative policy reflected in the section.

In relation to the violation of Article 14, the court found that the fixation of SBI’s rate of interest as the benchmark was not arbitrary or unequal. It observed that the benefits enjoyed by bank employees from interest-free loans or loans at a concessional rate are unique and in the nature of a ‘perquisite’ that is liable to be taxed. The use of a single clear benchmark prevents different interest rates being charged by different banks and avoids unnecessary litigation.

Based on these observations, the court upheld the validity of Rule 3(7)(i) and confirmed the orders of the Madras and Madhya Pradesh High Courts, dismissing the Civil Appeals.

Court said:

‘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.

From this perspective, the employer’s grant of interest-free loans or loans at a concessional rate will certainly qualify as a ‘fringe benefit’ and ‘perquisite”.

  • Case No.- Civil Appeal No. 7708 of 2014 & Ors
  • Case Name- All India Bank Officers’ Confederation Vs The Regional Manager, Central Bank Of India & Others

Leave a Reply

Your email address will not be published. Required fields are marked *

Home
Calculators
Menu
Search