The employees-association before the High Court challenged the constitutional validity of rule 3(7)(i) which prescribed the method of valuation for interest-free/concessional loan made available to employee by employer by taking the interest charged by the SBI for the loans advanced for the same purpose, as the basis for determining whether the grant of interest-free or concessional loan to an employee is a perquisite or not. The employers contend that the Rule Making Authority had deprived the individual employees of their rights to contest a jurisdictional fact namely that what was granted to them was not a concession or benefit or amenity.

The High Court held that rule 3(7)(i) provides definite method to find out value of fringe benefit, instead of leaving it to individual wisdom of Assessing Officers to find out whether something is a concession or not. Furthermore, impact of rule 3(7)(i) will not be same on all categories of employees but would differ from person to person depending upon income bracket, to which, he belongs and rate of interest, at which, he is granted a loan by his employer and, consequently, said rule does not seek to treat unequals as equals. High Court, further held that rule does not impose hardship upon assessees as what is taxed at hands of employee, at maximum, is about 30 per cent of privilege given to an employee by an employer, which he enjoys as an extra benefit and therefore, challenge to constitutional validity of said rule is invalid. On appeal to the Supreme Court, Court held that in terms of the power conferred under section 17(2)(viii), CBDT has enacted rule 3(7)(i). Rule 3(7)(i) states that interest-free/concessional loan made available to an employee or a member of his household by the employer or any person on his behalf, for any purpose, shall be determined as the sum equal to interest computed at the rate charged per annum by SBI, as on the first date of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by interest, if any, actually paid. The effect of the rule is twofold. First, the value of interest-free or concessional loans is to be treated as ‘other fringe benefit or amenity’ for the purpose of section 17(2)(viii) and, therefore, taxable as a ‘perquisite’. Secondly, it prescribes the method of valuation of the interest-free/concessional loan for the purposes of taxation. In the present case, section 17(2)(viii) is a residuary clause, enacted to provide flexibility. Since it is enacted as an enabling catch-within-domain provision, the residuary clause is not iron-cast and exacting. A more pragmatic and commonsensical approach can be adopted by locating the prevalent meaning of ‘perquisites’ in common parlance and commercial usage. Thus, ‘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’, as understood through its natural usage in common parlance. The universal test in the present case is pragmatic, fair and just. Therefore, rule 3(7) is held to be intra vires article 14 of the Constitution of India.  The appeals are to be dismissed and the impugned judgments of the High Courts of Madras and Madhya Pradesh are upheld.