Section 17(2) of the Income-tax Act, 1961 read with Rule 3

IN THE ITAT MUMBAI BENCH 'E' Sankar Krishnan v. Assistant Commissioner of Income-tax, Ward 28(2), Mumbai SUNIL KUMAR YADAV, JUDICIAL MEMBER AND ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT APPEAL NO. 1715 (MUM) OF 2005 [Assessment year: 2001-02] January 28,2008 Section 17(2) of the Income-tax Act, 1961 read with Rule 3 of Income-tax Rules, 1962 - Salaries - Perquisites - Assessment year 2001-02 - Assessee a salaried employee had been provided rent free accommodation (a flat) by his employer-company - Monthly rent of said fiat was Rs. 10,000 - Employer had also given an interest free refundable security deposit of Rs. 30 lakhs to land lord for renting said flat - Assessee had shown accommodation perquisites of Rs. 1,20,000 on account of said rent free accommodation provided by employer - Total salary received by assessee in relevant previous year was Rs. 1,41,38,780 - Assessing Officer on noticing that employer had given interest free deposits of Rs. 30 lakhs to land lord observed that interest at prevailing rate of 12 per cent on said deposit was required to be taken into consideration for estimating fair rental value of said fiat - He, therefore, worked out monthly rent of said fiat at Rs. 35,000 as against Rs. 10,000 per month shown by assessee and, thus, estimated rent receivable for said flat for full year at Rs. 4,20,000 - Assessing Officer further invoking provisions of rule 3 (a) (iii) adopted 10 per cent of above salary amounting to Rs. 14,01,878 as taxable value of accommodation perquisites - Whether as per amended provisions of rule 3 effective from 1-4-2001 actual amount of lease rent paid or payable by employer or 10 per cent of salary whichever is lower, as reduced by rent if any actually paid by employee, is value of perquisites for rent free residential accommodation provided by employer and fair rental value has no role to play in ascertaining value of perquisite for rent free accommodation - Held, yes - Whether therefore, Assessing Officer was not justified in taking into consideration fair rental value of accommodation for computing perquisite value of rent free accommodation and he had to accept perquisite value of rent free accommodation as declared by assessee - Held, yes FACTS The assessee, a salaried employee, had been provided a rent free accommodation (a flat) by his employer company. The monthly rent of the said flat was Rs. 10,000. The employer had also given an interest free refundable security deposit of Rs. 30 lakhs to the landlord for renting the said flat. For the relevant assessment year 2001-02, the assessee filed his return of income declaring total income as Rs. 1,46,45,373. During the course of scrutiny assessment proceedings, the Assessing Officer observed that the accommodation perquisites of Rs. 1,20,000 shown by the assessee on account of said rent-free accommodation provided by the employer, was not correctly computed. The Assessing Officer observed that the said fiat had been sold by the land lord on 20-4-2001 for a total consideration of Rs. 95 lakhs. He further inferred that the said amount of Rs. 95 lakhs actually represented the cost of flat when it was taken on rental basis and hence the market rent of the said flat, should be between Rs. 50,000/- to Rs. 75,000/- per month. Since the employer had given interest free deposits of Rs. 30 lakhs to the landlord, the Assessing Officer was of the view that the interest at the prevailing rate of 12 per cent on the said deposit was required to be taken into consideration for estimating the fair rental value of the said flat. The Assessing Officer, therefore, worked out the monthly rent of the said flat at Rs. 35,000 as against Rs. 10,000 per month shown by the assessee employee. Taking consideration of these facts, the Assessing Officer, had estimated the total rent receivable for the said flat for the full year at Rs.4,20,000. The Assessing Officer further held that as per rule 3(a)(iii)(A), 10 per cent of the salary was required to be taken as taxable value of the rent free accommodation perquisites. He having noticed that the total salary received by the assessee in the relevant year was Rs. 1,41,38,780 adopted 10 per cent of the above salary amounting to Rs. 14,01,878 as the taxable value of the accommodation perquisites. On appeal, the Commissioner (Appeals) confirmed the action of the Assessing Officer. On second appeal: HELD The lower authorities had examined the issue in the light of old provisions of rule 3(a), whereas, rule 3, has been amended by the Income-tax (Amendment) Rules, 2001 with retrospective effect from 1-4-2001. As per the amended Rules, the value of perquisites for the residential accommodation provided by the employer, shall be the actual amount of lease rent paid or payable by the employer or 10 per cent of the salary whichever is lower, as reduced by rent if any paid by the employee. As per the amended Rules, there is no concept of determination of the fair rental value for the purpose of ascertaining the value of perquisites for rent free residential accommodation provided to the employees. As per old Rules, the perquisite value of the rent free residential un-furnished accommodation shall ordinarily be a sum equal to 10 per cent of the salary due to the assessee in respect of the period during which the said accommodation was occupied by him during the previous year, provided that where the fair value of accommodation is in excess of 20 per cent of the assessee's salary, the value of perquisites shall be taken to be 10 per cent of the salary increased by sum equal to that amount by which fair rental value exceeds 20 per cent of the salary. But, according to the second proviso where the Assessing Officer is satisfied that sums arrived at on the basis of first proviso exceeds the fair rental value of the accommodation, the value of perquisites to the assessee, shall be limited to such fair rental value. As per old provisions, the fair rental value was required to be determined as it has its own role to play in determination of value of perquisites of rent free accommodation. But, after the amendment, rule has been simplified and Table 1 given under rule 3 and according to its item (2)(b), the actual amount of lease rent paid or payable by the employer or 10 per cent of the salary whichever is lower, as reduced by the rent if any actually paid by the employee, is the value of perquisites of the rent free residential accommodation. As per amended Rules, the fair rental value has no role to play and only the actual amount of lease rent paid or payable by the employee, shall the value of the perquisites if it is less than 10 percent of the salary of the assessee. [Para 9] In the instant case, the employer had paid the yearly rent of Rs. 1,20,000 and 10 per cent of the salary of the assessee, came to Rs. 14,01,878. As such, the rent paid by the employer was less than the 10 per cent of the salary of the employee. According to the amended rule 3 this actual lease rent paid shall be the value of perquisites of the rent free accommodation provided to the assessee. Since the fair rental value is not required to be computed as per the amended Rules, no cognizance can be taken of the interest free security given to the landlord by the employer. Moreover, it is well settled that the interest on interest free security deposits, should not be considered, while determining the fair rental value of the property. Thus, the Assessing Officer was not justified in taking into consideration the fair rental value of accommodation for computing perquisites value of rent free accommodation and he was directed to accept the perquisite value of the rent free accommodation as declared by the assessee. [Para 10]