Interest-free or concessional loans given by banks to employees are taxable fringe benefits.

(i) Section 17(2)(viii) of the Income Tax Act, 1961 and Rule 3(7)(i) of the Income Tax Rules, 1962 were challenged by staff unions and officers’ associations of various banks on the grounds of constitutionality. They argued that Rule 3(7)(i) was arbitrary and violated Article 14 of the Constitution by using the prime lending rate of SBI as the benchmark instead of the actual interest rate charged by the bank to a customer on a loan.

(ii) The Court held that “perquisite” is a fringe benefit attached to the employee’s position, 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”.

(iii) Using the SBI interest rate as the benchmark is not an arbitrary or unequal exercise of power as the rule-making authority has not treated unequal as equals. “By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation”.

(iv) SBI, being the largest bank in the country, has a significant impact on the interest rates charged by other banks. “We are of the opinion that the enactment of subordinate legislation for levying tax on interest free/concessional loans as a fringe benefit is within the rulemaking power under Section 17(2)(viii) of the Act”.

(v)) Tax provisions are not unjust, draconian, or harsh on taxpayers. “A complex problem has been solved through a straitjacket formula, meriting judicial acceptance,”.

(vi) Laws relating to fiscal or tax measures are granted greater latitude compared to other statutes when it comes to a uniform approach. The legislature should be allowed some flexibility in such matters and that the court would be more inclined to give judicial deference to legislative wisdom. “Commercial and tax legislations tend to be highly sensitive and complex as they deal with multiple problems and are contingent. This court would not like to interfere with the legislation in question, which prevents possibilities of abuse and promotes certainty”.