Amount exceeds a specified limit: The entire amount becomes taxable

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Amount exceeds a specified limit: The entire amount becomes taxable

Issue:

While calculating Income under the head salary if the children of employee are studying in the school maintained and owned by the employer it is treated as allowance. The amount of allowance is calculated by checking the cost of education in a similar institution in or near the locality. In case the cost of such education or the value of benefit does not exceed Rs. 1,000 per month per child, the perquisite value shall be taken to be Nil. The question is, can the  limit of Rs. 1,000 per month per child be allowed as standard deduction while computing the perquisite value of free or concessional education facility provided to the employee by the employer. So whether the taxable amount is difference of perquisite and limit of Rs 1000 subject to condition that perquisite exceeds Rs 1000?

Opinion:

As per the judgment of High Court in the case CIT (TDS) v. Director, Delhi Public School (2011) it was held that in case the value of perquisite for free/concessional educational facility arising to an employee exceeds Rs. 1,000 per month per child, the whole perquisite shall be taxable in the hands of the employee and no standard deduction of Rs. 1,000 per month per child can be provided from the same.
It is only in case the perquisite value is less than Rs. 1,000 per month per child, the perquisite value shall be nil.
Therefore, Rs. 1,000 per month per child is not a standard deduction to be provided while calculating such  a perquisite.

The copy of order is reproduces hereunder.

  1. This order shall dispose of a bunch of six appeals bearing ITA Nos. 662, 663, 753 of 2008 filed by the revenue and ITA Nos. 835, 836 and 837 of 2008 filed by the person responsible for deduction of tax at source (hereinafter referred to as “the assessee”) arising from the order of the Tribunal dated 25.6.2007 whereby the appeals of the revenue and the cross-objections filed by the assessee were dismissed. For brevity, the facts are being extracted from ITA No. 662 of 2008 filed by the revenue and ITA No. 835 of 2008 preferred by the assessee relating to the assessment year 2003-04.
  2. These appeals have been preferred by the revenue and the assessee under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 25.6.2007 passed by the Income Tax Appellate Tribunal, Delhi Bench “H”, New Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 2384/D/2006 and cross-objection No. 283 (Del)/2006, relating to the assessment year 2003-04.
  3. In appeal Nos. 662, 663 and 753 of 2008 filed by the revenue, the following substantial question of law has been raised:-

“Whether on the facts and circumstances of the case, the Hon’ble ITAT has erred in providing a different method of calculating the perquisite when the perquisite value calculated by the assessee was not disputed by the AO and when the only grievance of the assessee against the order of ITO was regarding reduction of Rs.1,000/- P.M. from the perquisite value claimed by the assessee?”

  1. The substantial questions of law as claimed by the assessee in appeal Nos. 835, 836 and 837 are as under:-

(1) Whether ITAT was justified in the eyes of law in disallowing the benefit to the assessee, which has been provided to him under Rule 3 (5) of Income Tax Rules, 1962?

(2) Whether ITAT was correct in law in passing the impugned judgment, after misinterpreting the provisions of law provided under Rule 3(5) of Income Tax Rules, 1962?

(3) Whether it is correct in the eyes of law to levy the value of the perquisite which has been exempted under the law?

(4) Whether ITAT was correct in law in considering the “cost of education” of the wards of the employees equal to the price of education charged from the students of the school (which includes other expenses) in or the nearby vicinity under the provisions of law under Rule 3(5) of Income Tax Rules, 1962?

(5) Whether ITAT was justified in the eyes of law to impose tax on the value of the perquisites in the hands of the assessee when the said value shall be determined with reference to the cost of the education of his ward in a similar institution in or nearby vicinity and the cost of such education is less than Rs.1000/- and, therefore, exempted by the proviso to Rule 3(5) of Income Tax Rules, 1962?”

  1. Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee is running a public school and was liable to deduct tax at source from salary and remuneration paid to its teaching staff. The person responsible (the assessee herein) is the director of the School who filed the return of salaries on 28.11.2003. At the time of checking of Form 12BA annexed along with Form No.16 relating to various employees, it was found that the assessee had been providing free/concessional educational facilities to the wards of teachers and other staff members of the school. However, while calculating the amount of perquisite taxable in the hands of teachers/staff qua free/concessional educational facilities provided to their wards, the assessee had been allowing a deduction of Rs.1000/- per month per child from the total amount of educational facilities provided free of cost to them. The Assessing Officer held that the assessee had wrongly allowed a deduction of Rs.1000/- per month per child while calculating the amount of taxable perquisite and added an amount of Rs.12,000/- per annum per child to the value of perquisites on account of free educational facilities provided to the wards of the employees/staff of the school and calculated short deduction to that extent and treated the assessee to be in default. The Assessing Officer also charged interest. Accordingly, during the assessment year 2003- 04, the demand was raised at Rs.3,93,586/- (i.e. short deduction of tax at Rs.2,97,606/- plus Rs.95,980/- as interest). Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT(A) vide order dated 26.4.2006 made the average monthly cost of education per student at Rs.1553.23 by taking into account the total expenditure claimed by the assessee in P&L account at Rs.6,33,90,432.30 and dividing it by number of students, i.e. 3401. The CIT(A) directed the Assessing Officer to adopt the said value for working out short deduction of tax and thereafter charge interest under Section 201(1A) of the Act. Against the order of the CIT(A), the department filed an appeal whereas the assessee filed cross-objections. The Tribunal vide order dated 25.6.2007 held that proviso to Rule 3(5) of the Income Tax Rules, 1962 (in short the “1962 Rules”) was not applicable. The Tribunal further held that while computing total cost both direct and indirect expenses have to be taken into account to work out the cost per child. As the cost computed by the CIT(A) was different from the cost or perquisite value declared by the assessee to the Assessing Officer, the liberty was given to the assessee to point out any error involved in the computation of perquisite value to the Assessing Officer who would objectively consider such objections and pass an appropriate order. Hence, these appeals.
  2. The point for consideration in these appeals is relating to the correct interpretation of Rule 3(5) of the 1962 Rules and determination of the valuation of the free/concessional educational facility provided to the wards of teachers/staff of the assessee-school.
  3. Learned counsel for the revenue submitted that according to Rule 3(5) of the 1962 Rules, the value of perquisites in the form of free education to the wards of its teachers and other staff members exceeded Rs.1,000/- per month per child and, therefore, the entire amount was perquisite in the hands of the employee and the assessee was liable to deduct tax at source thereon. Learned counsel elaborating the scope of Sections 201(1) and 201(1A) of the Act, placed reliance upon the judgment of the Apex Court in Commissioner of Income-tax v. M/s Eli Lilly & Company (India) Pvt. Ltd., JT 2009(5) SC 78 in support of his submission. The method of valuation of the perquisite different from the one adopted by the Assessing Officer was also assailed.
  4. On the other hand, learned counsel for the assessee submitted that in terms of proviso to Rule 3(5) of the 1962 Rules, the value of the perquisite relating to free educational facility provided to the wards of the employees/staff of the school had to be on the basis of value of such facility in a comparable case and if it exceeded Rs.1000/- per month per child, then the amount of Rs.1000/- per month per child had to be reduced from the perquisite value and tax deducted at source on the remaining amount, if any. The cost of education for determining the value of free/concessional educational facility was also challenged. Strong reliance was placed on the judgment of the Delhi High Court in Commissioner of Income Tax (TDS) v. Delhi Public School [2009] 318 ITR 234 (Delhi). Special Leave Petition against the said decision was dismissed on 23.3.2009.
  5. Support was also gathered from the following pronouncements:-
  6. Commissioner of Income Tax v. Nestle India Ltd.

[2000] 243 ITR 435 (Del);

  1. Commissioner of Income Tax v. Kannan Devan Hill Produce Co. Ltd. [1986] 161 ITR 477 (Ker);
  2. Gwalior Rayon Silk Co. Ltd. v. Commissioner of Income-Tax [1983] 140 ITR 832 (MP);
  3. Income Tax Officer v. Gujarat Narmada Valley Fertilizers Co. Ltd. [2001] 247 ITR 305.
  4. We have given our thoughtful consideration to the respective submissions of learned counsel for the parties and do not find any merit in the contention of learned counsel for the assessee.
  5. It would be expedient to refer to Rule 3(5) of the 1962 Rules which reads thus:-

“5. The value of benefit to the employee resulting from the provision of free or concessional educational facilities for any member of his household shall be determined as the sum equal to the amount of expenditure incurred by the employer in that behalf or where the educational institution is itself maintained and owned by the employer or where free educational facilities for such member of employees’ household are allowed in any other educational institution by reason of his being in employment of that employer, the value of the perquisite to the employee shall be determined with reference to the cost of such education in a similar institution in or near the locality. Where any amount is paid or recovered from the employee on that account, the value of benefit shall be reduced by the amount so paid or recovered:

Provided that where the education institution itself is maintained and owned by the employer and free educational facilities are provided to the children of the employee or where such free educational facilities are provided in any institution by reason of his being in employment of that employer, nothing contained in this sub-rule shall apply if the cost of such education or the value of such benefit per child does not exceed one thousand rupees per month.”

  1. From a bare perusal of the rule, it is clear that valuation of free or concessional educational facility to the ward of an employee is to be calculated in the following manner:-

(a) the actual amount of expenditure incurred by the employer in that behalf; or

(b) where the educational institution is maintained and owned by the employer or free educational facilities are allowed in any other educational institution, then the value of perquisite shall be with reference to the cost of such education in a similar institution in or near the locality;

(c) In case any amount is paid or recovered from the employees towards free or concessional educational facility, the value of benefit shall stand reduced by the amount so paid or recovered.

  1. However, in view of the proviso to Rule 3(5) of the 1962 Rules, such rule is not applicable where the educational institution itself is owned by the employer and free educational facilities are provided to the children of the employee or such facilities are provided in any institution by reason of employment of that employee if the cost of such free education or concessional educational facilities does not exceed Rs.1000/- per month per child.
  2. In other words, on plain reading of sub-rule (5) of Rule 3 of the 1962 Rules, it emerges that where the value of the perquisite of free/concessional educational facility arises to an employee and thevaluation thereof exceeds Rs.1000/- per month, then the entire amount is added and is liable to be taxed in the hands of the recipient. However, an exception has been carved out in the proviso attached to this sub-rule whereunder the sub-rule has no applicability in a situation where the cost of such education or value of such benefit per child does not exceed Rs.1000/- per month. It no where provides that while determining the value of the perquisite wherever it exceeds Rs.1000/- per month then the amount of Rs.1000/- per month has to be reduced from the value of such perquisite. Thus, the value of the benefit of free education to the wards of the employees shall be quantified as the value of the perquisite in the hands of the employer without any reduction of Rs.1000/- per month per child.
  3. The Assessing Officer while adjudicating the issue against the assessee had specifically held that the tuition fee in the case of the students of the assessee school was more than Rs.1000/- per month as the assessee had deducted tax at source from the salary of the employees including valuation of perquisite after reducing Rs.12000/- per annum per child. Once the value of the perquisite exceeded Rs.1000/- per mensem, Rule 3(5) of 1962 Rules applied and proviso thereto had no applicability.
  4. Adverting to the judgment of Delhi High Court in Delhi Public School’s case (supra) on which strong reliance has been placed, in that the conclusion on facts was that the value of perquisite of free education to the employee was Rs.902.27 per child per month which was less than Rs.1000/-. The proviso to Rule 3(5) of 1962 Rules was, thus, fully applicable. The issue under consideration was notrelating to exemption/deduction of Rs.1000/- per month in respect of each child of an employee where cost/value of perquisite was evaluated to be exceeding Rs.1000/-. The said decision does not advance the case of the assessee. Further, Nestle India Ltd., Kannan Devan Hill Produce Co. Ltd., Gwalior Rayon Silk Co. Ltd. and Gujarat Narmada Valley Fertilizers Co. Ltd’s cases (supra) also do not come to the rescue of the assessee being based on individual fact situation involved therein.
  5. Referring to the decision of the Apex Court in M/s Eli Lilly & Company (India) Pvt. Ltd’s case (supra), it would be advantageous to read para 34, where while discussing the scope of Sections 201(1)and 201(1A)of the Act, it was held as under:-

“34. A perusal of Section 201(1) and Section 201 (1A) shows that both these provisions are without prejudice to each other. It means that the provisions of both the sub-sections are to be considered independently without affecting the rights mentioned in either of the sub-sections. Further, interest under Section 201(1A) is compensatory measure for withholding the tax which ought to have gone to the exchequer. The levy of interest is mandatory and the absence of liability for tax will not dilute the default. The liability of deducting tax at source is in the nature of a vicarious liability, which pre-supposes existence of primary liability. The said liability is a vicarious liability and the principal liability is of the person who is taxable. A bare reading of Section 201(1) shows that interest under Section 201(1A) read with Section 201(1) can only be levied when a person is declared as an assessee-in-default. For computation of interest under Section 201(1A) , there are three elements. One is the quantum on which interest has to be levied. Second is the rate at which interest has to be charged. Third is the period for which interest has to be charged. The rate of interest is provided in the 1961 Act. The quantum on which interest has to be paid is indicated by Section 201(1A) itself. Sub- section (1A) specifies “on the amount of such tax” which is mentioned in sub-section (1) wherein, it is the amount of tax in respect of which the assessee has been declared in default. The object underlying Section 201(1) is to recover the tax. In the case of short deduction, the object is to recover the shortfall. As far as the period of default is concerned, the period starts from the date of deductibility till the date of actual payment of tax. Therefore, the levy of interest has to be restricted for the above stated period only. It may be clarified that the date of payment by the concerned employee can be treated as the date of actual payment.”

  1. Necessary conclusion that follows is that the assessee had short deducted tax at source from the salary paid to its employees. The assessee having made short deduction of tax at source would, thus, be liable under Sections 201(1) and 201(1A) of the Act.
  2. Further, the Tribunal referring to the method of determination of the cost of the perquisite had noted that both direct and indirect expenses incurred in the running of the school excluding depreciation where education was being imparted to the children had to be taken into consideration for determination of the cost/value of the perquisite being granted to an employee. The Tribunal had remanded the matter to the Assessing Officer for recomputation of cost/value of perquisite to an employee by providing an opportunity to the assessee to point out any difference in the valuation as made by the Assessing Officer and the CIT(A). No error or perversity could be pointed out in the approach of the Tribunal.
  3. In view of the above, the substantial question of law in the appeal of the revenue and the questions of law claimed by the assessee are answered accordingly. The appeals filed by the revenue and the assessee stand disposed off.

 

 

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