Rule 3 of the Income-tax Rules, 1962 read with section 88 of the Income-tax Act, 1961 - Valuation of perquisites

Last updated: 27 September 2007

Court :
IN THE ITAT DELHI BENCH ‘G’

Brief :
Rule 3 of the Income-tax Rules, 1962 read with section 88 of the Income-tax Act, 1961 - Valuation of perquisites - Assessment years 2004-05 and 2005-06 - Assessee, a public school was providing free educational facilities to children of its employee - Assessee filed its return for relevant assessment years - While framing assessment Assessing Officer noticed that assessee had recovered nothing from its employees in respect of free educational facilities provided to members of their house-hold and, therefore, he concluded that wherever value of benefit exceeded Rs. 1,000 per month per child, whole of value of benefit to employees resulting from free educational facilities had to be taken as value of perquisite without allowing any deduction therefrom - However, Commissioner (Appeals) in view of proviso to rule 3(5) held that where perquisite value exceeded Rs. 1000 deduction to extent of Rs. 1,000 per month per child would be allowed while computing taxable perquisite in respect of free educational facilities and accordingly, directed Assessing Officer to allow deduction to that extent - Whether order of Commissioner (Appeals) was justified - Held, yes FACTS The assessee, a public school, was providing free educational facilities to children of its employee. It filed its returns for the assessment years 2004-05 and 2005-06. During course of assessment proceedings the Assessing Officer noticed that the assessee had recovered nothing from its employees in respect of free educational facilities provided to members of their house-hold. The Assessing Officer based on the proviso to rule 3(5) held that wherever the value of benefit exceeded Rs. 1,000 per month per child, the whole of the value of the benefit to the employees resulting from free educational facilities had to be taken as the value of the perquisite without allowing any deduction therefrom. He further held that while calculating the perquisite value, the assessee wrongly allowed a deduction of Rs. 1,000 per month per child leading to lesser deduction of tax at source from the salary than what ought to have been made. The Assessing Officer, therefore, raised demand for tax and interest thereon under section 201(1) and section 201(1A) respectively on the assessee. On appeals, the Commissioner (Appeals) held that purposive interpretation of rule 3(5) required that the word ‘cost’ should be distinguished from the word ‘price’ and, therefore, deduction of Rs. 1,000 per month per child should be allowed while computing the perquisite in respect of free educational facilities. He, therefore, directed the Assessing Officer to allow deduction as above. On revenue’s appeals:

Citation :
Income-tax Officer, Ward 49(2), New Delhi v Bal Bharti Public School

HELD The assessee, had referred to the provisions contained in third proviso below sub-section (5) of section 88 and argued that even if the whole of the amount was added to its income as perquisite from concessional education, it would be entitled to deduct an equivalent amount from the income under this proviso, and that, therefore the Assessing Office wrongly included the value of perquisite in the hands of the assessee by not allowing deduction at the rate Rs. 1,000 per month for each child. [ Para 5] The third proviso was inserted in sub-section (5) of section 88 by the Finance Act, 2003, with effect from 1-4-2004. Thus, this proviso is applicable to the assessment year 2004-05 and onwards. The provisions contained in the third proviso below sub-section (5) .of section 88, provides for grant of deduction up to Rs. 12,000 per child in respect of tuition fees, excluding any payments towards any development fees or donation or payment of similar nature, whether at the time of admission or thereafter to any university, college, school or other educational institution situated within India. The employer, at the time of payment of salaries and deduction of tax therefrom, has to consider various deductions or exemptions available to the employee in the statute, especially when the deduction is in respect of perquisite granted by the employer itself. Thus, if free educational facility is a perquisite, includible in the salaries as income, then, deduction in accordance with third proviso will have to be granted to the assessee in computing the income and then tax will have to be deducted from the income. If that was done, the perquisite and deduction cancel each other out to the extent of Rs. 1,000 per month per child. The Commissioner (Appeals) had also granted deduction only to the extent of Rs. 1,000 per month per child in case where the perquisite value exceeded this amount as per proviso to rule 3(5). Therefore, there was no error in the order of the Commissioner (Appeals). [Para 5.4]