Holding

The amendment to Rule 3 is intra vires, not arbitrary, and applies only when a concession is positively found; the classification is reasonable and the rule stands.

Summary

The appellants, employees of Tata Iron & Steel Co., challenged the amendment to Rule 3 of the Income Tax Rules, 1962 which altered the method of valuing perquisites for rent‑free accommodation. They argued that the amendment was arbitrary, violated Article 14 of the Constitution and was inconsistent with Section 17(2)(ii) of the Income Tax Act, 1961 because it did not require a finding of "concession" before applying the rule. The Supreme Court held that the amendment is a valid exercise of the Board’s rule‑making power, that the classification between government employees and other employees based on city population is a reasonable intelligible differentia, and that "concession" is a jurisdictional fact which must be determined before Rule 3 can be invoked. Consequently, Rule 3 is a permissible "machinery provision" and not ultra vires. The Court partly allowed the appeal and disposed of the transferred cases.

Issues considered

The validity of the amendment to Rule 3 of the Income Tax Rules, 1962 in view of Section 17(2)(ii) of the Income Tax Act, 1961 and Article 14 of the Constitution.
Whether "concession" under Section 17(2)(ii) is a jurisdictional fact that must be established before Rule 3 can be applied.
Whether the classification of employees based on government versus private sector and city population is reasonable and non‑arbitrary.
Whether the doctrine of "reading down" can be employed to save the amended Rule 3.
Whether Rule 3 is a mere valuation mechanism (machinery provision) and thus applicable only after liability under the parent Act arises.

Legislation cited

Constitution of Indias. Article 12, s. Article 14, s. Article 311
Income Tax Act, 1961s. 17(2)(ii), s. 192, s. 295, s. 40-A(5)
Income Tax Rules, 1962s. Rule 3

Subjects

Income TaxPerquisite valuationRule 3ConcessionArticle 14ClassificationJurisdictional factReading downRule‑making powerTax law

Judgment

A ARUN KUMAR AND ORS.
i:
UNION OF INDIA AND ORS.

SEPTEMBER 15. 2006

B [Y.K. SABHARWAL. CJ. C.K. THAKKERAND
P.K. BALASUBRAMANY AN. JJ.]

Income· fox Rules, 196] --Rule 3-lncome Tax Act, 1961 -Section
C 1-12, -- .\lethod fur computing valuation u( perquisites-Amendment of-
( ·1assifi<·a1ion made between employees uf Government and employees of
! - •lil[Janies. Corporal ions or other Undertakings regarding acco111111uda1io11
1wovided hy employers-Validity oF-Held: Classification is reasonable based
011 i/1/elligible differenlia, h(n·ing rational nexus to the object sought to he

achieved-It is neither arbitrw~-. discriminato~v or ultra vires Article I./ nor
D in.-onsiste/l/ with s<!ction t •(!J(iiJ uf the Act--Rule 3 applies 011~11 tu the
cases ol 'cum:cssiun' sho1m hi· employer to his empi<~rees in the muller of
rent respecting accommodation--There is no provision creating 'deeming
jh·tion' as to concession-Thus. assessee can co/1/end that there is no
·concession' in the mailer of rem respecting accommodation and the case is
E nut covered by section li{2)(ii)--Constilution of India, 1950-Artic/e /./.
Jurisdiction: Jurisdictional fact-faistence of-Held: Is sine qua non
or condition precedent for the exercise of power by a court-Ifjurisdictional
fact exists, the authority can take appropriate decision in accordance with
la11~l1 can decide the fact in issue' or 'adjudicatory fact'.

F Principles/Doctrines: Principle of 'reading down '-Application of. to
uphold the validity of the lmr---faplained.

By a Notification, Rule 3 of the Income Tax Rules, 1962 was amended
and the method of computing valuation of perquisites in the matter of rental
G accommodation provided by employers to their employees under Section 17(2)
of the Income Tax Act, 1961 was revised. In respect of the employees belonging
to private as well as public sector undertakings, the valuation of the perquisites
relating to accommodation would be 10 per cent of the salary in cities having
population exceeding 4 lakhs or 7.5 per cent of the salary in cities having
po1>ulation less than four lakhs. With regard to Central and State Government
I-I 290
ARUN KUMAR v. U.0.1. 291

employees, earlier system of valuation of perquisite was retained. Appellants- A
employees of private sector challenged the validity of Rule 3 of the Rules. It
was contended that the amended Rule 3 conferred arbitrary and unfettered
powers on the Revenue; that it was inconsistent with the parent Act; and that
the computation-method was neither based on intelligible differentia nor had
any nexus with the object sought to be achieved, thus ultra i1ires Article 14 of B
the Constitution. High Court,held that the classification between cities with
regard to population was reasonable and rational, and thus, upheld the rnlid,ity ·
of Rule3.

In a similar issue before another High Court, the validity of Rule 3 was
upheld obsen'ing that the rule devised the method and the basis of ascertaining C
the value of concession in the matter of rent which could not be held arbitrary
or ultra vires; and that the classification between Government employees and
employees of Companies, Corporations and other Public Undertakings was
reasonable and not violative of Article 14 of the Constitution. Hence the
present matters.
D
Partly allowing the appeal and disposing of the transfer cases, the Court

HELD: I. In considering the validity of a statute the presumption is
always in favour of constitutionality and the burden is upon the person who
attacks it to show that there has been transgression of constitutional
principles. For sustaining the constitutionality of an Act, a court may take E
into consideration matters of common knowledge, reports, preamble, history
of the times, object of the legislation and all other facts which are relevant. It
must always be presumed that the Legislature understands and correctly
appreciates the need of its own people and that discrimination, if any, is based
on adequate grounds and considerations. It is also well-settled that courts will F
be justified in giving a liberal interpretation in order to avoid .constitutional
invalidity. A provision conferring very wide and expansive powers on authority
can be construed in conformity with legislative intent of exercise of power
within constitutional limitations. Where a statute is silent or is inarticulate,
the court would attempt to transmulate the inarticulate and adopt a
construction which would lean towards constitutionality albeit without G
departing from the material of which the law is woven. These principles have
given rise to rule of 'reading down' the provisions if it becomes necessary to
uphold the validity of the law. But if the provision of law is explicitly clear,
language unambiguous and interpretation leaves no room for more than one
construction, it has to be read as it is. In that case, the provision of law has to H
292 SUPREME COURT REPORTS (2006] SUPP. 6 S.C.R.

A be tested on the touchstone of the relevant provisions of law or of the
Constitution and it is not open to a Court to invoke the doctrine of "reading
down" with a view to save the statute from declaring it ultra vires by carrying
it to the point of 'perverting the purposes of the statute'.
1315-B-F; 316-G-H; 317-A-BI

B Commissioner of Sales Tax, Madhya Pradesh & Ors. v. Radhakrishnan
& Ors.. 119791 2 SCC 249; Olga Tellis v. Bombay Municipal Corporation.
1198513 SCC 545; Salem Advocate Bar Association v. Union of'fndiu, 120051
6 SCC 344; Minen1a Mills limited v. Union of India, 1198013 SCC 625 and
Delhi Transport Corporation v. D. T.C. Mazdoor Congress and Ors., 11991 I
C Supp I SCC 600, relied on.
"Australian Federal Constitutional law" by Colin Howard, referred
to.

2.1. Rule 3 of the Income Tax Rules, 1962 prior to its amendment dealt
with the method of calculation of concession keeping in view the concept of
D "fair rental value". The rule making authority provided an opportunity to the
assessee to satisfy the Assessing Officer that the rent sought to be recovered
from the employee could not be said to be 'concession' as it was 'fair rent',
'reasonable rent', 'market rent' or 'standard rent' and hence could not be
said to be perquisite within the meaning of section 17(2)(ii) of the Income Tax
E Act, 1961. In the amended Rule 3 of the Rules, the concept of "fair rental
value" has been done away with. When the concept of"fair rent", "market
rent", "reasonable rent" or "standard rent" is no more relevant or germane
in deciding the question, it was open to the Legislature to empower the rule
making authority to provide the method for calculation of"concession". The
only method which has been adopted is to ci:lculate the rent on the basis of
F population of the city in question which cannot be interfered with in exercise
of power of judicial revie"'.1318-C-E; 319-F-HI

2.2. It cannot beacc~pted that the intention of the rule making authority
was to afford an opportunity to the assessee to convince the Assessing Orticer
that the rent recovered by the employer from his employee was not in the
G nature of concession. Nor a court of law would, by interpretative process, grant
such opportunity to the assessee so as to enable him to convince the Assessing
Officer that the rent fixed was not covered by section 17(2)(ii) of the Act and
therefore, was not a 'perquisite'.1318-E-Gl

2.3. It cannot be gainsaid that section 17 (2) wou Id apply only if there is
H 'perquisite'. 'Perquisite' includes the value of rent-fr~e accommodation
ARUN KUMAR v. U.0.1. 293
provided to the assessee by his employer; the value of any concession in the A
matter of rent respecting any accommodation provided to the assessee by his
employer. The definition of 'perquisite' is inclusive in nature and not
exhaustive and takes within its sweep several matters enumerated in clauses
(i) to (vii). 'Perquisite' is thus a privilege, gain or profit incidental to an
employment in addition to regular salary or wages. Section 17(2) (ii) declares B
that the value of any "concession" in the matter of rent respecting any
accommodation provided to the employee by his employer would be
"perquisite". Nevertheless it must be a "concession" in the matter of rent
respecting any accommodation provided by the employer to his employee. The
word "concession" has neither been defined in the Act nor in the Rules.
...
Therefore, it is clear that before Section 17(2)(ii) can be invoked or pressed C
into service and before calculation of concession as per Rule 3 is made, the
authority exercising power must come to a positive conclusion that it is a
concession. 1320-A-FI

Officers· Association, Bhillai Steel Plant v. Union of India and Ors.,
(1983) 1 139 ITR 937; Indian Bank Offiw·s' Association and Ors. v. Indian D
Bank and Ors., (1994) 209 ITR 72; Income Tax Officers v. All India Vijaya
· Bank Officers' Association, (1997) 225 ITR 37; Steel Executives Associatioit
v. Rashtrzva /spat Nigam ltd, (2000) 241 ITR 20; P. V. Rajgopal v. Union of
India, (1998) 233 ITR ~78; BHEL Employees Association v. Union of India,
(2003) 261 ITR IS (Kant); BHEl Executive/Officers Association and Anr. v. E
Dy. Commissioner of Income Tax and Anr., (2004) 264 ITR 390; All India
State Bank of Indore Officers' Co-ordination Committee and Ors. v. Central
Board of Direct Taxes and Or~'., (2004) 186 CTR 649 (MP); Indian Aluminium
Co. ltd. v. Thane Municipal Corporation, 119921 Supp I SCC 480 and V.
Pechimethu v. Gowrammal, 120011 7 SCC 617, referred to.
F
Owen v. Pook, (1969) 74 ITR 147 (HL); Rendell v. Went, (1964) 2 All
ER 464 (HL), referred to.

Bouvier's law DictionWJ'; Oxford English DictionalJ'; Webster's New
International Dictio11G1y; Concise Oxford English Dictio11G1y; "Advanced law
Lexicon" by P.R. Aiyer (2005) Vol. I p. 944, referred to. G
3.1. A "jurisdictional fact" is a fact which must exist before a Court,
Tribunal or an Authority assumes jurisdiction over a particular matter. The
existence of jurisdictional fact is thus sine qua non or condition precedent
for the exercise of power by a court of limited jurisdiction. If the jurisdictional
fact exists, the authority can proceed with the case and take an appropriate H
294 SUPREME COURT REPORTS [2006J SUPP. 6 S.C.R.

A decision in accordance with law. Once the authority has jurisdiction in the
matter on existence of'jurisdictional fact', it can decide the 'fact in issue' or
'adjudicatory fact'. If the jurisdictional fact does not exist, the court, authority
or officer cannot act. If a Court or authority wrongly assumes the existence
of such fact, the order can be questioned by a writ of cerliorari. The underlying
B principle is that by erroneously assuming existence of such jurisdictional
fact, no authority can confer upon itself jurisdiction which it otherwise do
not posses. Further a wrong decision on 'fact in issue' or on 'adjudicatory
fact' would not make the decision of the authority without jurisdiction or
vulnerable provided essential or fundamental fact as to existence of jurisdiction
is present. 1320-F-H; 323-FI
c Raja Anand Brahma Shah v. State of U.P. & Ors .. AIR (1967) SC 1081
: 1196711SCR362; State of M.P. & Ors. v. D.K. Jadav, AIR (1968) SC 1186
: 1196812 SCR 823 and Ra:a Textiles ltd v. lncome Tar Officer, Rampur, 119731
I SCC 633: AIR (1973) SC 1362, referred to.

D While & Collins v. /\Iinisler af Heallh. (1939) 2 KB 838: 108 LJ KR
768, referred to.

Ha!sblllJ' 's laws of England. referred to.

3.2. The "concession" under clause (ii) of sub-section (2) of Section 17
E of the Act is a 'jurisdictional fact'. It is only when there is a 'concession' in
the matter of rent respecting any accommodation provided by an employer to
his employee that the mode, method or manner as to how such concession
can be computed arises. The method of fixation of amount is 'fact in issue' or
'adjudicatory fact'. If the assessee contends that there is no 'concession', the
authority has to decide the said question and record a finding as to whether
F there is 'concession' and the case is covered by Section 17 (2) (ii) of the Act.
Only thereafter the authority may proceed to calculate the liability of the
assessee under the Rules. Therefore, in spite of the legal position that Rule
3 is intra vires, valid and is not inconsistent with the pro\' is ions of the parent
Act under Section 17 (2) (ii) of the Act, it is still open to the assessee to
G contend that there is no 'concession' in the matter of accommodation provided
by the employer to the employee and hence the case did not fall within the
mischief of Section 17 (2) (ii) of the Ad. !323-G-H; 324-A-BI

3.3. Section 17(2)(ii) does not contain any 'deeming clause' that once it
is established that an employee is paying rent less than 10 per cent of his
H salary in cities having population of four lakhs or 7.5 per cent in other cities,
ARUN KUMAR v. U.0.1. 295
it should be deemed to be a 'concession' within the meaning of the Act and A
such employee must be deemed to receive a 'concession' in the form of
'perquisite' in the payment of rent. An employer may provide residential
accommod<1tron to his employees for several reasons. It is also possible that
for making available staff quarters/ colonies/accommodations, State
Governments or Central Government may provide land to Public Sector
Undertakings/ Companies/ Corporations at a concessional rate imposing
B
appropriate conditions including amount of rent, if any, to be recovered by
the employer. 1324-C-EI

3.4. Rule 3 would apply only to those cases where 'concession' has been
shown by an employer in favour of an employee in the matter of rent C
respecting accommodation. Thus, whereas 'charging provision' is found in
the Act of Parliament !Section I 7(2)(ii)I, 'machinery component' is in the
subordinate legislation (Rule 3). The latter will apply only after liability is
created under the former. Unless the liability arises under Section I 7(2)(ii)
of the Act, Rule 3 has no application and the method of valuation for
calculating concessional benefits cannot be resorted to. 1326-B-CI D
CIT, Bombay v. British Bank of Middle East, 1200118 SCC 36, referred
to.

Alexander Tenant v. Robert Smith, (1892) AC 150 (HL); Tyrer v. Smart
1197811 All ER 1089: (1978) I WLR 415; Hochstrasser v. Mayes, (1960) E
AC 376 (HL), referred to.

4.1. Article 14 of the Constitution guarantees equality before the law
and confers equal protection of laws. It is also true that it prohibits the State
from denying persons or class of persons equal treatment provided they are
equals and are similarly situated. But, it is equally well established that F
Article 14 seeks to prevent or prohibit a person or class of persons from
being singled out from others situated similarly. If two persons or two classes
are not similarly situated or circumstanced, they cannot be treated similarly.
Article 14 prohibits dissimilar treatment to similarly situated persons, but
does not prohibit classification of persons not similarly situated, provided G
such classification is based on intelligible differentia and is otherwise legal,
valid and permissible. 1327-B-DI

4.2. The distinction sought to be made by the rule making authority
between employees of the Central Government as well as State Governments
and other employees i.e., employees of Companies, Corporations and other H
296 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A Undertakings is reasonable classification based on intelligible differentia. It
has also rational nexus to the object sought to be achieved. Rule 3 takes into
account service conditions of employees of Government vis-a-1·is employees
of Corporations, Companies and other Undertakings and prescribes method
of calculating value of all perquisites. Such a provision, cannot be held to be
B arbitrary, objectionable or ultra vires Article 14 of the Constitution.
1327-G-H; 328-AI

Confederation of E.'C-Servicemen Associalions & Ors. v. Union of India
& Ors., decided by S.C. on August 22, (2006), relied on.

S.l. Agarwal v. General Manager, Hindustan Steel Ltd., I19701 1 SCC
C 177: (19701 3 SCR 363; Ajit Kumar Nag v. General Manager, Indian Oil
Corporation Ltd., 120051 7 SCC 764; BHEL employees Assuciatioli v. Union
of India, (2003) 261 ITR 15 (Kar) and Aditya Cement Staff Club v. Union of
India, (2004) (266) ITR 70, referred to.

0 CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3270 of2003.

From Final Judgment!Order dated 14.6.2002 of the High Court of Jharkhand
at Ranchi in W.P. (T) No. 2835/2002.
WITH
E TC (C) Nos. 101and102 of2006.

Jagdeep Dhankar, M.N. Krishnamani, Harish N. Salve, M.L. Venna, Barun
K. Sinha, Pratibha Sinha, B.K. Satija, Satya Mitra, M.K. Dua, Yash Pal Dhingra,
Anil Mittal and Kailash Chand for the Appellants.

Mohan Parasaran, A.S.G., 1'javin Prakash, Gaurav Dhingra, Chidananda
F D.L., Sulakshana Jayaram, Senthil V.elan, B.V. Balaram Das, Kirti Mishra and
Rustom B. Hathikhanawala for the Respondent (Union of India).

Rohit Singh. D.K. Sinha. Bharat Sangal, N.P. Midha. R.K. Kumar, S.
Chatterji and L. Roshmani for MPSEB,

G M.L. Venna and Punit Dutt Tyagi for TISCO.

The Judgment of the Court was delivered by

C.K. THAKKER, J. In Civil Appeal as well as in Transferred Cases, the
appellants have challenged validity of Rule 3 of the Income Tax Rules, 1962,
H as amended by the Income Tax (Twenty-second) Amendment Rules, 2001.
ARUN KUMAR v. U.0.1. [C.K. THAKKER. J.j 297
(hereinafter referred to as 'the Rules') which amended the method of computing A
valuation of perquisites under Section I 7(2) of the Income Tax Act. 196 I
(hereinafter referred to as 'the Act'). According to the appellants, amended
Rule 3 is inconsistent with the parent Act and also ultra vires Article 14 of
the Constitution.

To understand the controversy raised in the present proceedings, B
relevant factual background in Civil Appeal No. 3270 of 2003 may be stated;

The appellants were employed as officers/ executives by Tata Iron &
Steel Co. Ltd. ('TISCO' for short). According to the appellants, usually public
sector undertakings provide housing facilities or grant house rent allowance
in lieu of accommodation to their employees. Nom1ally, house rent allowance c
is granted where public sector enterprises are unable to provide housing
accommodation to their employees. Such situations arise when officers/
executives are posted in cities or metropolitan offices of the enterprises
where company accommodation is either not available or available to a
limited extent. For the purpose of accommodating its employees. TISCO has D
constructed several residential bungalows/ flats/ quarters/ accommodations
in the township of Jamshedpur and around its plants. They were allotted to
its employees as also to other agencies including employees of the Central
Government and State Government who were either transferred or posted in
Jamshedpur. TISCO used to fix annual licence fees of each such
~ccommodation at the rate of 5% of the capital cost/expenditure of the
E
' . bungalows/flats/quarters.

On September 25, 2001, the Central Board of Direct Taxes (CBDT)
issued Notification, No. S.O. 940 (E) in the exercise of power under Section
295 read with sub-section (2) of Section 17 and sub-section (2C) of Section
F
I92 of the Act by which Rule 3 ha\l been amended. The substituted rule
revised the method of computing valuation of perquisites in the matter of
rental accommodation provided by employers to their employees.

It was stated that pursuant to the amendment in Rule 3, Respondent
NO. 4 (TISCO) issued a letter dated October 25, 200 I informing all its G
employees about amended Rule 3 in respect of valuation of perquisite which
were to be added to the salary of the employees for taxing purposes.

Aggrieved by the above action, the appellants herein filed Writ Petition
No. 2835 of2002 in the High Court of Jharkhand at Ranchi for the following
reliefs; H
298 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A (i) For issuance of an appropriate writ(s)/ order(s)/direction(s) in the
nature of certiorari quashing the notification No. S.O. 940 (E)
dated 25.09.2001 whereby and whereunder Rule 3 of the Income

B
Tax Rules has been amended by the Government of India. Ministry
of Finance. Department of Revenue (Central Board of Direct
Taxes) and to hold and declare it as ultra vires the Income Tax
..
Act.
(ii) For issuance of a further appropriate writ/ order/ direction,
including writ of mandamus directing the Respondents, particularly
Respondent Nos. 3 and 4, not to implement the provisions of the
aforesaid amended Rule during the pendency of the writ petition,
c AND/OR
(iii) Pass any other order(s)/direction(s) as Your Lordship may deem
fit and proper in the facts and circumstances of the case.

It was contended by the employees before the High Court that Rule 3
D as amended in 200 I conferred arbitrary and unfettered powers on the Revenue
and was ultra vires the Act. It was also urged that the computation-method
was neither based on intelligible differentia nor had any nexus with the object
sought to be achieved and thus ultra virr;s Article 14 of the Constitution.

A counter-affidavit was filed by the Revenue stating that the Finance
E Minister in his Budget Speech had outlined that "the value of perqui~ites,
benefits or amenities shall be determined on the basis of their cost to the
employer except in respect of house and cars where different criteria would
be adopted for simplicity". It was stated that in adopting and applying Rule
3 as it existed prior to the impugned amendment, there being three classes of
F employees, the Revenue was facing difficulties with respect to various matters
including the determination of the fair market value of the property which was
found very cumbersome. Moreover, it did not take into account high rent in
the metro towns. It has been averred in the reply-affidavit that the estimation
of fair rent had been the subject-matter of litigation at various levels mainly
on account of the fact that legislation with respect to rents being State
G subject differed from State to State. The value of fair rent could not be
determined as the standard rent was not unifonn in all municipal areas. It was
accordingly decided to simplify and rationalize the procedure for determining
the perquisite value and accordingly as per the impugned rules, the employees
have been divided only in two categories.
H
ARUN KUMAR v. U.0.1. [C.K. THAKKER. J.] 299
The Revenue had also explained in the counter the rationale for the A·
distinction between Government employees and other employees. It has been
stated that for purposes of the valuation of the perquisites relating to
accommodation, the employees have been classified under the impugned
amended rule into two categories, namely, (i) Government (Central and State)
employees and (ii) others. To maintain continuity and equity with their B
remuneration and a variety of other benefits available in other sectors, the
earlier system of valuation of perquisites relating to accommodation on the
basis of rent payable as per rules framed by the Government has been
retained for Central and State Government employees. For others, that is,
employees belonging to private as well as public sector undertakings, it has
been decided that the valuation of the perquisites relating to accommodation C
should be 10 per cent.or 7.5 per cent of the salary as the case may be. As
per the assertion of the respondents, this was decided in keeping with the
recommendation of the expert group constituted to rationalize and simplify
income-tax laws.

Observing that the classification between cities with population of less D
than four lakhs and others with more than four lakhs as reasonable and
rational, the High Courtupheld the validity of Rule 3. According to the Court
"for rationalizing and simplifying the procedure, the Board brought about the
impugned notification" which could not be held. unreasonable from any
yardstick or parameter. The said decision is reported as Tata Workers' Union E
& Anr. v. Union of India & Ors., (2002) 256 !TR 725.

A similar question was raised before the High Court of Calcutta in Coal
Mines Officers' Association of India & Anr. v. Union of India & Ors., (2004)
266 !TR 429. Taking note of the language of Rule 3 prior to amendment in 2001
and after the amendment, a single Judge held that after 2001, there was no F
scope for determination. of 'fair rental value'. The concept of fair rental value
on the basis of the normal rent or on the basis of market rent available in the
locality or on the basis of the municipal valuation has been done away with.
It was also held that the rnle devised the method and basis of ascertaining
the value of concession in the matter of rent which could not be declared
arbitrary or ultra vires. The Court was also of the view that the difference G
between the Government employees and other employees was not violative
of Article 14 of the Constitution.

The correctness of the decisions of the High Courts of Jharkhand and .
Calcutta has been questioned in the present matters.
H
300 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A We have heard the learned counsel for the parties.

Mr. Harish Salve, Senior Advocate appearing for the appellants raised
several contentions. He urged that the condition precedent for exercise of
power under Section 17 (2) of the Act read with Rule 3 of the Rules is that
it must be a .. perquisite" within the meaning of the Act. Clause (ii) of sub-
B section (2) of Section 17 can be attracted provided there is .. concession" in
the matter of rent respecting any accommodation provided by the employer
to his employee. If there is no ··concession'', sine qua non or condition
precedent is absent and there is no 'perquisite' as well. Since there is no
concession in the instant case, Section 17 (2) (ii) of the Act would not apply
C nor Rule 3 of the Rules is attracted and no liability has arisen. It was
alternatively urged that old Rule 3, prior to its amendment in 2001, made
available a 'window' by providing that in cases where assessee claimed and
the Assessing Officer was satisfied that there was no 'concession', the
assessee was not liable to pay tax. The rule as amended in 200 I has taken
away the right of the assessee to claim that there was no concession as
D envisaged by Section 17 (2) (ii) and hence Rule 3 had no application. Similarly.
it took away the power of the Assessing Officer to hold that there was no
'concession'. even if he is 'satisfied' about the absence of 'concession'.
'Concession· is the "jurisdictional fact" for the exercise of power under the
Act and in absence thereof. the authority cannot impose taxing liability. It was
E also submitted that in Rule 3, the Court may apply the concept of dudi
alteram partem and observance of natural justice by a process of 'reading
down'. By such process, Rule 3 can be saved from vice of arbitrariness and
unreasonableness. If such a process is expressly or impliedly prohibited, the
rule becomes arbitrary and ultra vires Articles 14 and 19 of the Constitution.
According to Mr. Salve, the parent Act imposes an obligation on the assessee
F to deduct tax at source from the salary of his ~mployee provided that the
employer has extended accommodation to his employee at a concessional
rate. Rule 3 mere I) provides mode, method or manner of calculation of liability
and is thus a "machinery'' provision. The liability, according to the learned
counsel, must be fixed by a competent Legislature under the statute i.e. under
G Section 17(2)(ii) of the Act and only after such liability is fixed, the question
of computation thereof will arise which can be done by machinery provision
i.e. under Rule 3 of the Rules. Rule 3. which is a child legislation, delegated
legislation or subordinate legislation cannot impose liability on the employer
to deduct tax or on the employee to pay tax holding that the concessional
rent was 'perquisite' within the meaning of Section 17 (2) (ii) of the Act. That
H is the exclusive domain of the Legislature. Since there was no ·concession',
ARUN KUMAR v. U.0.1. [C.K. THAKKER. J.J 301
Rule 3 has no application. A
It was also submitted that the argument on behalf of the Revenue that
such a course had been adopted b.Y fixing flat rates because of "practical
difficulties" of the Revenue in calculating the amount of rent and in dealing
with individual cases is not only irrelevant and immaterial but is illegal,
unlawful and without power or authority of law. The counsel fairly stated that B
as a rough and ready test, the procedure laid down in Rule 3 for fixing rent
on the basis of population may not be objectionable but it is only when it
is proved that there is a concession in the matter of rent respecting any
accommodation provided by the employer to the employee that such method
can be applied. He, however, contended that even in such cases, there must
be a provision allowing or permitting the assessee to contend that there is C
no concession.
Mr. Dhankar, Senior Advocate appearing for one of the petitioners,
adopted the arguments of Mr. Salve. He, however, additionally contended that
a distinction sought to be made between employees of the Government on
one hand and employees of Companies, Corporations or other Undertakings D
on the other hand, is artificial and irrational, neither based on intelligible
differentia nor has it any nexus to the object to be achieved. Difference of
payment while considering 'perquisite' between the two classes would thus
be arbitrary, discriminatory and ultra vires Article 14 of the Constitution.
Mr. Parasaran, learned Additional Solicitor General appearing on behalf E
of the Revenue supported the decisions impugned in the present proceedings.
He submitted that the Rules prior to 200 I were based on "fair rental value of
the accommodation". In view of the said concept, it provided an opportunity
to the assessee, if he claimed to satisfy the Assessing Officer that the sum
arrived at on the basis of Rule 3, as it then stood, did not exceed such 'fair F
rental value of the accommodation' and hence could not be said to be
'perquisite' within the meaning of Section 17 (2) (ii) of the Act. The concept
of fair rental value of the accommodation has been given the go by in view
of practical difficulties realized by Revenue. Under the amended rule of 200 I,
"fair rent", "market rent" "standard rent", "reasonable rent" etc., has no
relevance at all. Keeping in view the ground reality and rent usually charged G
in cities having population exceeding four lacs and in other ci~s. the rule has
been amended. It is a relevant and germane consideration which can neither
be termed arbitrary nor unreasonable, nor violative of the provisions of the
Constitution. According to Mr. Parasaran, ultimately it was a policy decision
taken by the authority as to how calculation of perquisite should be made. H
302 SUPREME COURT REPORTS [20061SUPP.6 S.C.R.

A Prior to 200 I one policy was accepted by the Government. The said policy
was subsequently changed and now, new policy has been deviced. In such
policy matters, normally, a court of law would not interfere unless the policy
is totally arbitrary or unreasonable. It was also submitted that the amended
rule was challenged by employers and assessees and several High Courts
upheld the validity thereof. According to Mr. Parasaran, considering all relevant
B facts, it was decided by Revenue that providing accommodation at less than
10% of salary in cities having population exceeding four lakhs and 7.5% of
salary in other cities would be deemed to be "'concession" in the matter of
rent respecting such accommodation provided to the employees by the
employer. In the light of such decision, Rule 3 cannot be held ultra vires
C either the parent Act or the Constitution. He further submitted that if this
Court comes to the conclusion that ''concession" in the matter of rent is a
condition precedent for the exercise of power under Section 17 (2) (ii) of the
Act and only thereafter the machinery provision of Rule 3 would apply, the
Court may invoke the doctrine of 'reading down' holding it intra vires and
constitutional by extending an opportunity to assessee to satisfy the Assessing
D Officer that there was no 'concession'. Regarding discrimination between
employees of Government and employees of Companies, Corporations and
other Undertakings, he submitted that it is a valid classification and it has
been based on intelligible differentia. It also seeks to achieve an object by
considering the position of two sets of employees. Such a provision cannot
be struck down as infringing Article 14 of the Constitution.
E
Before we proceed to consider the rival contentions of the parties, it
may be appropriate if we refer to the relevant provisions of the Act, the Rules
and important decisions on the point. Section 17 of the Act defines 'salary',
·perquisite' and ·profits in lieu of salary'. Relevant part of the said section
F reads thus -

17. For the purposes of sections 15 and 16 and of this section.

(I) ... ...

(2) 'perquish." includes
G
(i), the value 01 ~ent-free accommodation provided to the
assessee by his employer;

(ii) the value of any concession in the matter of rent respecting
any accommodation provided to the asse:so·cf l1"' his
employer.
H
ARUN KUMAR v. U.0.1. [C.K. THAKKER. J.). 303
A
It is thus clear that the definition of the term 'perquisite' covers various·
items mentioned therein. It is also clear that the definition is inclusive in
nature and not exhaustive.

According to Bouvier's law DictionmJ', the expression 'perquisite' in B
a most limited sense means "something gained by a place or office beyond
the regular salary or fee".

Oxford English Dictionary defines 'perquisite' as "any casual
emolument, fee or profit attached to an office or position in addition to a
salary or wages".
c
According to Webster's New lnternalional Dictionary, 'perquisite' is
"a gain or profit incidentally made from employment in addition to regular
salary or wages, especially one of a kind expected or promised".

'Perquisite' is thus a privilege, gain or profit incidental to an emp_loyment
in addition to regul1r salary or wages. D
As observed by the House of Lords in Owen v. Pook, (1969) 74 ITR
147 (HL), 'perquisite' has a known normal meaning, namely, a personal
advantage. The word would not apply to a mere reimbursement of ii necessary
disbursement. In Rende/Iv. IVent, [1964] 2 All ER 464 (HL). the House held·
that any benefit or advantage, having a money value, which the holder of an E
office under the company derives from the company's spending on his behalf
will come under the tem1 'perquisite'.
Indian Courts have also held that 'perquisite' is a benefit or an advantage
received by the holder of an office over and above his salary. The benefit
received by an employee is incidental to employment in excess of or in F
addition to the salary.
Section 295 of the Act enables the Board [as defined in clause ( 12) of
Section 2 as 'Central Board of Direct Taxes' (CBDT) constituted under the
Central Boards of Revenue Act, 1963] to make rules for carrying out the
purposes of the Act. G
The relevant part reads thus;
"295. Power to make Rules. (I) The Board may subject to the control
of the Central Government, by notification in the Gazette of India,
make rules for the whole or any part of India for carrying out the
H
304 SUPREME COURT REPORTS [2006) SUPP. 6 S.C.R.

A purpos.:s of this Act.
(2) In particular. and without prejudice to the generality of the
foregoing power, such rules may provide all or any of the following
matters:
(a) ....... (b)
B
(c) the determination of the value of any perquisite
chargeable to tax under this Act in such manner and on
such basis as appears to the Board to be proper and
reasonable.''

c
Sub-section (2C) of Section 192 of the Act enacts that a person
responsible for paying any income chargeable under t6e head ·'Salaries" shall
furnish to the person to whom such payment is made a statement giving
correct and complete particulars of perquisites or profits in lieu of salary
D provided to him and the value thereof in such form and manner as may be
pre;cr:bed.

In exercise of the power conferred by Section 295 of the Act. the Board
framed rules known as the Income Tax Rules, 1962. Rule 3 lays down the
method for computing valuation of perquisite. Before the amendment in 2001.
E relevant part of the said rule read as under -
Valuation of perquisites.
3. For the purpose of computing the income chargeable under the
head "Salaries" the value of the perquisites (not provided for by way
of monetary payment to the assessee) mentioned below shall be
F determined in accordance with the following clauses, namely:
(a) The value of rent-free residential accommodation shall be
determined on the basis provided hereunder. namely:
(i) where the accommodation is provided -
G (A) by Government to a person holding an office or post m
connection with tht: affairs of the Union or of a State;

(B) by a body or undertaking under the control of Government
to any officer of Government whose services have been lent
to that body or undertaking (the accommodation itself having
H
ARUN KUMAR'" U.0.1. (C.K. THAKKER. l l 305
been allotted to it by Government), A
an amount equal to

(I) if the accommodation is unfurnished. the rent which has
been or would have been determined as payable by such
person or officer in accordance with the rules framed by B
Government for allotment of residences to its officers;

(2) if the accommodation is furnished, an amount calculated in
accordance with sub-clause (i)(l) plus [I 0 per cent] per
annum, of the original cost of the fu\·niture (including
television sets, radio sets, refrigerators, other household C
appliances and air-conditioning plant or equipment) or if
such furniture is hired from a third party, the actual h.ire
charges payable therefore;]

Provided that
D
(I) where the fair rental value of the accommodation is in excess of
20 per cent of the assessee's salary, the value of perquisite shall
be taken to be I0 per cent of the salary increased by a sum equal
to the amount by which the fair rental value exceeds 20 pt:r cent
of the salary; so, however, that the Assessing Officer may, having E
regard to the nature of the accommodation, determine the sum
by which I 0 per cent of the salary is to be increased, as a
percentage (not exceeding I00 per cent) of the amount by which
the fair rental value exceeds 20 per cent of the salary;
(2) where the assessee claims, and the Assessing Officer is satisfied F
that the sum arrived at on the basis provided above exceeds the
fair rental value of the accommodation, the value of the perquisite
to the assessee shall be limited to such fair rental value;
(b) The value of residential accommodation provided at a
concessional rent shall be detennined as the sum by which the
value computed in accordance with clause (a), as if the G
accommodation were provided free of rent, exceeds the rent
actually payable by the assessee for the period of his occupation
during the relevant previous year.

H
306 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A By the Income Tax (Twenty-second Amendment) Rules, 200 I, Rule 3
was amended and the relevant part reads thus -

"3. Valuation of perquisites:

For the purpose of computing the income chargeable under the head
B 'salaries'. the value of perquisites provided by the employer directly
or indirectly to the assessee (hereinafter referred to as 'employee') or
to any member of his household by reason of his employment shall
be determined in accordance with the following sub-rule, namely

(I) The value of residential accommodation provided by the employer
C during the previous year shall be determined on the basis provided in the
Table below
SI. Circumstam:es Where Where
No. accommodation is accommodation
unfurnished is furnished
(I) (2) (3) (4)
D
I) \\!here the accommodation I. iccncc frc determined b) The value of perquisite as
is provided by the Central the Central Government or determined under column
Government M any State any State Government in (3) and increased by 10%
Government to the respect of accommodation per annum of the cost of
employees either holding in accordance with the furn iturc (including
office or post in connection rules framed by such television sets. radio sets.
E with the affairs of the Government as reduced by refrigerators. other
Union of or such State or the rent actually paid by household appliances, air
serving with any body or the employees. conditioning plant or
undertaking under the equipment) or if such
control of such furniture is hired from a
Government on deputation third party. the actual hire
charges payable for the
F same as reduced by any
charges paid or payable for
the same by the employee
during the previous year.

(2) Vi.'hcre the accommodation (i) 10% of salary in cities
The value of perquisite as
is provided by any other having population determined under column
G employer and (a) where the exceeding 4 lakhs as per (3) and increased by 10%
accommodation is owned 199 I census: per annum of the cost of
by emplo) er. or (including
(ii) 75% salary in other furniture
cities. in respect of the television sets. radio sets.
period during which the refrigerators. other
said accommodation was household appliances. air
occupied by the employee conditioning plant or
H during the previous year as equipment or other similar
ARUNKUMARi°' U.0.l. [C.K. THAKKER, J.] 307
reduced by the rent. 1t any. appliances or gadgets) or 11 A
actually paid by the such furniture is hired from
employee. a third party, by the actual
hire charges payable for the
(b) where the Actual amount of leas.e s·ame as reduced by any
accommodation is taken on rental paid or payable by charges paid or payable for
lease or rent by the employer. the employer or I 0% of the same by the employee
salary whichever is lower during the previous year. B
as reduced by the rent. if
any, actually paid by the
employee.

3) Where the accommodation is Not applicable 24% of salary paid or
provided by the employer payable for the previous
specified in serial number (I) year or the actual charges
or (2) above in a hotel paid or payable to such C
(except where the employee hotel, which is lower, for
is provided such the period during which
accommodation for a period such accommodation is
not exceeding in aggregate provided as reduced by the
rent. if any. actually paid
15 days on his transfer from
or payable by the
one place to_ another)
employee: D

Provided that nothing contained in this sub-rule would be
applicable to any accommodation located in a 'remote area' provided
to an employee working at a Mining site or an onshore oil exploration
site, o~ a project execution site or an accommodation provided in an
offshore site of similar nature; E
Provided further that where on account of his transfer from one
place to another, the employee is provided with accommodation at
the new place of posting while retaining the accommodation at the
other place, the value of perquisite shall be determined with reference
to only one such accommodation which has the lower value with F
reference to the Table above for a period not exceeding 90 days and
thereafter the value of perquisite shall be charged for both such
accommodation in accordance with the Table.

G
Rule 3, before the amendment as also after the amendment of 2001
came up for consideration before various High Courts as well before this
Court in some cases. The learned counsel for the parties invited our attention
to those decisions.

H
308 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A Mr. Salve for the appellants placed heavy reliance on a decision of the
Division Bench of the High Court of Madhya Pradesh in Officers· Associalion.
Bhilai Steel Plant v. Union of India & Ors. (1983) 139 ITR 937. In that case,
a petition was filed in the High Court by the Officers' Association, Bhilai
Steel Plant and Divisional Manager (Construction). The Divisional Manager
B was in occupation of a quarter the rent of which was Rs. I00/- per month. The
rent was fixed as the standard rent under Rule 45A of the Fundamental Rules
which had been applied to the officers. In deducting income tax at sourct:
under Section 192 of the Act, the management was treating the difference
between the I/I 0th of the salary of the employee and the rent paid by him
as perquisite. It was contended by the petitioners that merely because the rent
C paid by an officer was less than II I0th of his salary, the difference could not
be treated as perquisite and tax could not be deducted at source on that
footing. A prayer was, therefore, made that the authorities be restrained from
treating the difference between I0 per cent of the salary and the rent actually
paid as 'perquisite' for the purposes of deduction of income tax at source.

D The Income Tax Authorities denied of having issued any circular or
instruction to the Management for treating difference between I0% of the
salary and the rent paid as 'perquisite but maintained that that was the correct
legal position.

The High Court was, therefore, called upon to decide whether the
E provisions of Section I 7(2)(ii) read with Rule 3 of the Rules would be
applicable and whether tax was required to be deducted at source treating the
difference as 'perquisite', as contended by the Revenue. The Court conceded
that sub-section (2) of Section 17 defined 'perquisite' and sub-clause (ii)
included within its ambit the "value of any concession in the matter of rent
F respecting any accommodation providtd to the assessee by his employer",
but it was "any concession in the matter of rent" which was covered by that
clause.

The Court stated;

G The object ofs. 3 is the determination of the value of the perquisite
chargeable to tax. The rule operates al the stage when a finding is
reached thal the employee is in receipt of any perquisite as defined
in s. 17(2). The rule cannol be used to de/ermine whether the officer
is really in receipt of any perquisite. The rule applies only for
detennining the value of the perquisite when the fact of receipt of
H perquisite is otherwise established. Rule 3(a) deals with the case when
ARUN KUMAR v. U.0.1. [C.K. THAKKER, l] 309
the employee is in occupation of rent-free residential accommodation. A
If the fact that the employee is in occupation of rent-free
accommodation is established, the value thereof would be calculated
by applying the method provided in rule 3(a). Similarly rule 3(b)
applies when the employee is in occupation of residential
accommodation at a concessional rent. If it is established that the
employee is in fact in occupation of an accommodation at a B
concessional rent, the value thereof would be calculated in the manner
provided in this rule. The effect of the rule in taking the value of rent·
free unfurnished accommodation at IO per cent is not to lay down
that the moment it is found that an employee is paying less than I0
per cent ·of his salary as rent it must be deemed that he has been C
provided accommodation at a concessional rent.

(emphasis supplied)

The Court went on to consider that the question was whether an
emp1oyee was in occupation of an accommodation at a concessional rate, that D
is, whether the employee had received any concession which could be termed
as 'perquisite' and gave the answer that it would depend upon two factors;
(i) the normal rent for accommodation in occupation of the employee; and
(ii) rent actually paid by the employee. If the rent paid by the employee is
1.ormal rent of accommodation in his occupation, it cannot be said that he is
receiving any concession in the matter of rent even though the rent paid by E
him is less than IO per cent of his salary.

The Court then made the following pertinent observations ·

.... there is no deeming clause in the definition of"perquisite" contained
in s.17(2) that once it is established that an employee is paying rent F
less than I 0 per cent of his salary it must be deemed that he is
receiving a concession in the matter of rent and no such deeming
clause can be inferred from r.3. Indeed. if r. 3 were to be so construed.
it will go beyond the rule making power conferred bys. 295(2) and
would become invalid. (emphasis supplied)
G
In Indian Bank Officers' Association & Ors. v. Indian Bank & Ors.,
(1994) 209 ITR 72, a single Judge of the High Court of Calcutta again
considered a similar question. There accommodation was provided by a
nationalized bank to its employees. Petitioners who were employees of the
Bank were paying rent in accordance with the standard rent fixed by H
310 SUPREME COURT REPORTS [20061 SUPP. 6 S.C.R.

A Regulations of the Bank. All other employees similarly situated as petitioners
were also paying rent in the same manner and to the same extent. The High
Court held that in the circumstances no ·concession' could be said to have
been enjoyed by the petitioners within the meaning of Section l 7(2)(ii) of the
Act and no tax was deductible on notional perquisite value of accommodation
under Rule 3 of the Rules. The Court observed that the question of concession
B should be determined with reference to the nature of accommodation provided,
the normal rent payable in respect of such accommodation by other employees
similarly situated and the actual rent paid by the employee concerned.

Reiterating the principle laid down by the High Court of Madhya Pradesh
C in Officers' Association, Bhilai Steel Plant, the Court observed that what
Rule 3 stated was valuation of perquisites and the manner of computation
thereof provided it was a concession or perquisite. The rule, however, did not
seek to fix any liability which had not been created by Section 17(2) of the
Act.

D According to the Court, the question of perquisite must be determined
first and only thereafter the question of computing the value of such perquisite
would arise. One cannot put cart before the horse. By following the method
of valuation provided, the income tax authorities cannot dete~mine the
existence of perquisite. It can be done only under Section 17(2) of the Act.
"The rule cannot be permitted to be read in a manner beyond the powers
E conferred under the substanlive provisions of the Act. " (emphasis supplied)

It appears that the matter was taken up by way of intra-court appeal
before the Division Bench and the Division Bench in Income Tax Officers v.
All India Vijaya Bank.Officers' Association, (1997) 225 !TR 37, confirmed
F the view taken by the learned single Judge by dismissing the appeal.

In Steel Executives Association v. Rashtriya /spat Nigam ltd, (2000)
241 ITR 20, again an identical question arose before the High Court of
Andhra Pradesh. There accommodation was provided by the employer to the
employees and the question that came up for consideration before the High
G Court was whether it was perquisite within the meaning of the Act and the
Rules and whether the employer was required to deduct tax at source. The
Court relying upon the decision in Officers· Association, Bhilai Steel Plant
and Indian Bank Officers' Association held that the provision would apply
only in cases where the rent was paid at concessional charges. If the rent was
not concessional, department could not ask employer to deduct tax at source
H
ARUN KUMAR v. U.0.1. [C.K. THAKKER, J.] 311
treating standard rent as concessional rent and such an action could not be A
said to be legal or lawful. The Court observed that reading the provision
carefully, it was clear that it provided only for valuation of perquisite if the
residential accommodation was provided at a concessional rate.

The Court stated;
B
Therefore, it is 11ecessa1y for the Revenue to first establish that
the rent charged is a concessional rent before it can be said that
there is a perquisite and thereafter, such a perquisite will be valued
as the difference between the actual rent paid and I 0 per cent of the
salary. What has happened in this case is that the Revenue has put the C
cart before the horse and assumed that there is a concession because
the rent charged is less than I0 per cent of the salary.

(emphasis supplied)

The Court noted the submission on behalf of the Revenue that there
was really a concessio1~. because the Income Tax Officer had material to D
indicate that the fair market value of the accommodation provided was much
more than I0 per cent of the salary. But, the Court negatived the contention
and .said;

We are unable to accept that material as indicating any concession
because in a situation where the employer constructs a large number E
of residential accommodation for its employees in a particular location
suitable for its convenience, the fair market rent of such
accommodation cannot be determined with reference to the rent of
any other kind of accommodation available in the town even if it
happens to be nearby. The regular residences in a town have their p
own e.nvironment which cannot be.compared with a tenement provided
by the employer for locating the employee because the employee has
no choice in accepting that accommodation. There are several other
reasons germane to the employment and the needs of the employer
to keep the employees available and satisfy its own needs which go
into the determination of the rent of the accommodation. G
'· The Court also referred to its earlier decision in P. V. Rajagopal v.
Union of India, (1998) 233 !TR 678 and observed that department could not
coerce the employer .to deduct tax at source of an amount which was in
dispute as a perquisite by the employer.
H
312 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A Mr. Parasaran, on the other hancl. submitted that several High Courts
upheld the validity of Rule 3 by approving the method adopted by the Revenue
for fixation of perquisite under the said rule. Decisions of two High Courts
i.e. the High Court of Jharkhand and the High Court of Judicature at Calcutta
are before us. The High Com1 of Jharkhand. as already observed earlier,
B upheld the validity of Rule 3 observing that the amendment was brought out
as a consequence of Budget Speech of the Finance Minister in Parliament.
Moreover, the decision was taken on the recommendation of Expert Group
cormitut~d to rationalize and simplify Income Tax laws.

\fr. Parasaran also referred to Coal Mines Officers· Association of India
C wherein the High Court of Calcutta again considered the scope of the
expression "concession" in the matter of rent under Section 17 (2) (ii) of the
Act. There also, it was contended on behalf of the employees that since there
was no "concession" in the matter of rent, it should not be tenned as perquisite
under Section 17 (2) (ii) of the Act. It '' ;" argued that whether or not there
was concession, must be decided first. Fo1 the said purpose, it was required
D to be determined as to what would be the rent and if the accommodation is
provided by the employer to an employee at a rate lower than such rent, it
would be treated as 'concession' under Section 17 (2) (ii) of the Act and has
to be calculated under Rule 3 of the Rules.

The Court. however, indicated that previous decisions dealt with Rule
E 3 as it then stood which laid down a totally different method than the one
which has been prescribed after the amendment in 200 I.

The Court then stated-

The present rule, thus, does not address exclusively to devise the
F method and basis of ascertaining the value of rent-free accommodation;
it also addresses to devise explicitly the method and basis of
ascertaining the value of concession in the matter of rent. While,
however, doing so it made the value of concession explicit, which
was implied in the previous rule. While devising the same it has
G categorized two types of employees. The first of them are pure
Government employees and the second of them are all other
employees. In addition to that, it categorized two types of
accommodation-one provided by the Government and the other
provided by all others. In so far as the Government employees, who
have been provided Government accommodations, are concerned, the
H rule says that the value of rent-free accommodation as perquisites
ARUN KUMAR v. U.O.L [CK. TMAKKER. J.J 313
would be the licence fee determined by the Government in accordance A
with the rules and the vaiue of the concession would be the difference
between such licence fee and the amount of rent paid by the employees.
In so far as other employees, who have been provided accommoda1ions
by their respective employers, are concerned, the rule says that the
value of rent-free accommodation would be ten per cent of the salary
ifthe accommodations are in certain cities and if the accommodations B
are in other cities, 7.5 per cent of the salary and nothing else. The
rule further provides that in relation to other employees, the value of
the concession would be the difference between I0 per ce11t or 7.5
per cent of the salary, as the case may be, and the amount of rent
actually paid. There is no scope for determination of fair rental value. C
The concept of fair rental value either on the basis of the nonnal rent
or on the basis of the market rent available in the locality or on the
basis of the mu11icipal valuation has been done away with.

The Court proceeded to state 1hat the rent comparable with market
would always be higher than the fair or standardized rent. Since the new rule [)
does not provide for 'fair rent'. 'normal rent' or 'standard rent'. none of the
said concepts would be attracted or applied.

The Court finally concluded; "In the normal circumstances, the p11re,
simple and grammatical sense of the language used by the Legislature is the
best way of understanding what the Legislature intended. If the Legislature . E
intended that the meaning of the word 'rent' as used in sub-clause (ii) of
clause (2) of Section 17 of the Act would be as has been. set out above, the
Legislature could have used the same in the section itself. The Legislature
brought sub-clause (ii) in clause (2) of Section 17 of the Act after introduCing
sub-clause (i) of clause (2) of Section 17 of the Act: These two sub-clauses F
should not be :ead in isolation. They were intended to be read together and
if read together, it makes it abundantly clear, and as was done previously as
well as done presently, that the Legislature intended to value the rent-free
accommodation for the purpose of arriving at the value of the concession bv
making a simple calculation of the differe~ce between the value of rent-fre~
accommodation and the rent actually paid." G

Our attention was also invited by Mr. l'arasaran to BHEI. Employees
Association v. Union r~f India. (2003) 261 !TR 15 (Kant). It related to fringe
benefits and amenities as perquisites. The Court held that provision to treat
fringe benefits as perquisites in the light of Section 17 (2)(vi) read with Ruic
3 of the Rules can neither be held u/1ra vires the Constitution nor Rule 3 can H
314 SUPREME COURT RU'ORTS [2006] SUPP. 6 S.C.R.

A be struck down on the ground that there was excessive delegation of power
by the Legislature to the Executive.

Reference was also made to a decision of the High Court of Madras in
BHEL Executive/Officers Association & Anr. v. Dy. Commissioner 1~{ Income
Tax & Anr.. (2004) 264 !TR 390. One of the arguments raised on behalf of
B the employees was that the distinction on the basis of size of population had
no rationale and Rule 3 as amended in 2001 was ultra 1·ires. The argument
was negatived.

Mr. Parasaran also relied on an order dated September 1, 2004 passed
by the Division Bench of the High Court of Madhya Pradesh in All India
c State Bank of Indore Officers' Co-ordination Committee & Ors. v. Central
Board of Direct Taxes & Ors., (2004) 186 CTR 649 (MP). In that case, the
attention of the Court was invited to Officers ' Association, Bhilai Steel Plant
followed by the High Courts of Calcutta and Andhra Pradesh and decisions
taking contrary view by the High Courts of Rajasthan and Karnataka.
D Considering conflicting views, the Court referred the matter to a larger Bench.
The grievance of the appellants is that the amended Rule 3 does not
provide for giving an opportunity to the assessee to convince the Assessing
Officer that no .. concession" was shown by the empl~yer to the employee in
respect of accommodation provided. Mr. Salve submitted that the rule will
E apply and the liability to deduct tax will arise only if ·concession' is shown
in the matter of rent respecting any accommodation and it is "perquisite"
under the Act, the authority must come to the conclusion that Section 17 (2)
(ii) is attracted. Absence of any provision enabling the assessee to show to
the Assessing Officer that it was not a ·concession' and, therefore, 'perquisite'
F within the meaning of Section 17 (2) (ii) of the Act would make Rule 3 ultra
vires and unconstitutional. In such a situation, a court of law may not adopt
literal interpretation of a provision of law but by applying "reading down''
fonnula. sustain the validity thereof invoking the principles of natural justice

The doctrine of 'reading down' is well-known in the field of
G Constitutional Law. Colin Howard in his well-known work .. Australian Federal
Constitutional Law" states;

Reading down puts into operation the principle that so far as it is
reasonably possible to do so, legislation should be construed as being
within power. It has the practical effect that where an Act is expressed
H
ARUN KUMAR v. U.0.1. [C.K: THAKKER. J.] 315

in language of a generality which makes it capable, if read literally, A
of applying to matters beyond the relevant legislative power, the
Court will construe it in a more limited sense so as to keep it within
power.

As observed by this Court in Commissioner of Sales Tax, Madhya
Pradesh & Ors. v. Radhakrishnan & Ors., (1979] 2 sec 249, in considering B
the validity of a statute the presumption is always in favour of constitutionality
and the burden is upon the person who attacks it to show that there has been
transgression of constitutional principles. For sustaining the constitutionality
of an Act, a court may take into consideration matters of common knowledge,
reports, preamble, history of the times, object of the legislation and all other C
facts which are relevant. It must always be presumed that the Legislature
understands and correctly appreciates the need of its own people and that
discrimination, if any, is based on adequate grounds and considerations. It is
also well-settled that courts will be justified in giving a liberal interpretation
in order to avoid constitutional invalidity. A provision conferring very wide
and expansive powers on authority can be construed in conformity with D
legislative intent of exercise of power within constitutional limitations. Where
a statute is silent or is inarticulate, the court would attempt to transmulate the
inarticulate and adopt a construction which would lean towards constitutionality
albeit without departing from the material of which the law is woven. These
principles have given rise to rule of'reading down' the provisions ifit becomes E
necessary to uphold the validity of the law.

In several cases, courts have invoked and applied the doctrine of 'reading
down' and upheld the constitutional validity of the Act

In Olga Tellis v. Bombay Municipal Corporation, [1985] 3 SCC 545: F
AIR (1986) SC 180 : [ 1985] Supp 2 SCR 51, the Supreme Court was called
upon to decide constitutional validity of Section 314 of the Bombay Municipal
Corporation Act, 1888 which empowered the Commissioner to demolish illegal
construction without notice. It was contended that the provision was arbitrary,
unreasonable and violative of natural justice.
G
Holding the provision intra vires and 'reading' the doctrine of audi
alteram partem therein, the Court stated;

"Co.nsidered in its proper perspective, section 314 is in !he nature of
an enabling provision and not of a compulsive character. It enables
the Commissioner, in appropriate cases, to dispense with previous H
316 SUPREME COURT REPORTS [2006) SUPP. 6 S.C.R.

A notice to persons who are likely to be affected by the proposed action.
It du..:s not require and, cannot be read to mean that. in total disregard
of the rdevant circumstances pertaining to a given situation, the
Commis~ioner must cause the removal of an encroachment without
issuing previous notice. The primary rule of construction is that the
language of the law must receive its plain and natural meaning. What
B section 314 provides is that the Commissioner may, without notice.
cause an encroachment to be removed. It does not command that the
Cu mm issioner shall, without notice, cause an encroachment to be
removed. Putting it differently, section 314 confers on the
Commissioner the discretion to cause an encroachment to be removed
C with or without notice. That discretion has to be exercise in a
reasonable manner so as to comply with the constitutional mandate
that the procedure accompanying the performance of a public act
must be fair and reasonable. We must lean in favour of this
i111erpretation because it helps sustain the validity of the law. Reading
section 31./ as containing a command not to issue notice before the
D remoml of an encroachment will make Jhe law invalid. "

(emphasis supplied)

In Salem Advocate Bar Association v. Union of India, [2005] 6 SCC
344, this Court had an occasion to consider the constitutional validity of
E certain amendments in Order 17 of the Code of Civil Procedure, 1908 effected
by the Code of Civil Procedure (Amendment) Act, 1999 relating to
adjournments. One of the amendments provided that no adjournment shall be
granted more than three times to a party during a trial. Though it was an
express provision, this Court observed that there may be extreme cases or
F exceptional circumstances beyond the control of the party which may compel
him to seek adjournment. Serious ailment, accident, sudden hospitalization,
earth quake, rioting, tsunami etc., are either vis major or unforeseen
eventualities which may compel a party to ask for an adjournment. Literal
interpretation may make the provision arbitrary, unreasonable and ultra vires.
The Court, therefore, stated that "to save the proviso to Order 17, Rule I,
G from the vice of Article 14 of th.: Constitution. it is necessary to read it down
so as not to take it away the discretion of the Court in the extreme hard
cases'"

But it is equally well settled that if the provision of law is explicitly
clear. language unambiguous and interpretation leaves no room for more
H
ARUN KUMAR v. IJ.0.1. [CK. Tl-IAKKER . .I.] 317
than one construction, it has to be read as it is. In that case. the provision of A
law has to be tested on the touchstone of the relevant provisions of law or
of the Constitutior. and it is not open to a Court to invoke the doctrine of
"reading down" with a view to save the statute from declaring it ultra vires
by carrying it to the point of 'perverting the purposes of the statute'.

Thus, in Minerva Mills Limited v. Union of India, (1980] 3 SCC 625, B
validity of Article 31 C of the Constitution as amended by the Constitution
(42nd Amendment) Act, 1976 conferring immunity from challenge of laws
giving effect to directive principles in Part IV of the Constitution was
questioned in this Court. It was submitted on behalf of the Union of India
that the Court may apply the principle of "reading down" by restricting the C
challenge to only such laws which would not violate "basic structure" of the
Constitution.

Negativing the contention and speaking for the majority, Chandrachud,
CJ said; "If the Parliament has manifested a clear intention to exercise an
unlimited power, it is impermissible to read down the amplitude of that D
power so as to make it limited. The principle of reading down cannot be
invoked or applied in opposition to the clear intention of the legislature. We
suppose that in the history of the constitutional law, no constitutional
amendment has ever been read down to mean the exact opposite of what it
says and intends. In fact, to accept the argument that we should read down
Article 3 lC, so as to make it conform to the ratio of the majority decision E
in Kesavananda Bharati is to destroy the avowed purpose of Article 3 IC as
indicated by the very heading "Saving of certain laws" under which Articles
3 IA, 3 IB and 3 IC are grouped. Since the amendment to Article 3 lC was
unquestionably made with a view to empowering the legislatures to pass laws
of a particular description even if those laws violate the discipline of Articles F
14 and 19, it seems to us impossible to hold that we should still save Article
3/C from the challenge of unconstitutionality by reading into that Article
words which destroy the rationale of that Article and an intendment which
is plainly contrw}· to its proclaimed purpose." (emphasis supplied)

Similarly in Delhi Transport Corporation v. D. T.C. Mazdoor Congress G
& Ors., (1991] Supp 1 SCC 600, the validity and vires of Regulation 9(b) of
the Delhi Road Transport Authority (Conditions of Appointment and Service)
Regulations, 1952 relating to 'termination of service' was challenged. It
provided for termination of service of permanent employees of the Corporation
on one month's notice or pay in lieu of notice without any enquiry whatsoever. H
318 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A The provision was challenged. being ultra \"ires the Constitution, violative of
principles of natural justice and inconsistent with Section 23 of the Contract
Act. 1872. One of t.he questions raised before this Court was whether it
would be open to a court of law to apply the formula of 'reading down' and
save the provision by importing natural justice into it. The majority (4: I) held
B the provision ultra vires and unconstitutional by describing it as "Henry VIII
clause" and refusing to apply the doctrine of ·reading down'. It held that the
language of the Regulation was clear. unambiguous and explicit and it was
not permissible for the Court to read down something not intended by the
Regulations. The doctrine of reading down may be applied if the statute is
silent, ambiguous or allows more than one interpretation. But where it is
C express and clearly mandates to take certain actions, the function of the Court
is to interpret it plainly and declare intra vires or ultra vires without adding,
altering or subtracting anything therein.

As we have already indicated earlier, Rule 3 prior to its amendment in
200 I was totally different. It dealt with the method of calculation of concession
D keeping in view the concept of''fair rental value". In the light of the principle
and phraseology in Rule 3. the rule making authority provided an opportunity
to the assessee to satisfy the Assessing Officer that the rent sought to be
recovered from the employee could not be said to be 'concession' as it was
'fair rent'. ·reasonable rent", 'market rent' or 'standard rent'. When the rule
E is amended and the concept of "fair rental value" has been done away with
and the only method which has been adopted is to calculate the rent on the
basis of population of the city in question, it cannot be successfully contended
that the intention of the rule making authority was to afford an opportunity
to the ilSsc~sec to convince the Assessing Officer that the rent recovered by
the employer from his employee was 11ot in the nature of concession. Nor a
F cow1 of law would, by interpretative process, grant such opportunity to the
assessee so as to enable him to convince the As.sessing Officer that the rent
fixed was not covered by Section l 7(2)(ii) of the Act and therefore was not
a ·perquisite'. We arc. therefore. unable to accept th.: argument of Mr. Salve
and allow import of the principles of natural justice in Rule 3.

G The question, therefore, is whether such a provision is ultra vires Article
14 of the Constitution. Though there is no direct decision of this Court on the
point. some High Courts have considered the question. In BHEL Employees
Association v. Union of India. (2003) 261 ITR 15 (Kar), validity of amended
Rule 3 was challenged. In that case, however, the Court was concerned with
H fringe benefits (which stand altogl!ther on a different footing). But the argument
ARUN KUMAR v. U.0.1. [C.K. THAKKER. J.] 319
was that there was excessive delegation of power by the Legislature to the A
Executive and the provision was, therefore, ultra vires the parent Act as also
violative of Article 14 of the Constitution.

Considering several cases on the point, the Court held that Section 295
of the Act conferred power to frame Rules on a high functionary i.e. Central
Board of Direct Taxes (CBDT), subject to the control of Central Government. B
It was also observed that the Board consisted of very high functionaries of
the Government of India who were expected to have deep knowledge about
the policy as envisaged for imposition of tax in the country. When power was
conferred on such Expert Body and after considering the relevant aspects, it
took a decision, it could not be said to be unlawful or unwarranted. The C
legislative policy had been reflected in Section 17 of the Act and the Rule
Making Authority, merely implemented the said policy on the basis of essential
legislative functions perfonned by Parliament. The Court, therefore, negatived
the contention of excessive delegation. Any difficulty or hardship in an
individual case or to a particular person would not make the Rule ultra vires D
or unconstitutional.

A similar view was taken by the High Court of Rajasthan in Aditya
Cement Staff Club v. Union of India, (2004) 266 !TR 70.

In the impugned order, the High Court of Jharkhand held the E
classification between cities with poplllation of less than four lakhs and more
than four lakhs as reasonable classification. It was, therefore, held that the
rule did not suffer from vice of arbitrariness. Likewise, the High Court of
Calcutta, in the order impugned in two matters upheld the validity of the rule
observing, inter alia, that while ascertaining the concession, the rule addresses
itself to relevant and germane considerations and such a provision cannot be F
held arbitrary or ultra vires.

In our opinion, the submission of Mr. Parasaran, learned Additional
Solicitor General deserves to be accepted that when the concept of "fair
rent'', "market rent", "reasonable rent" or "standard rent" is no more relevant G
or germane in deciding the question, it was open to the Legislature to empower
the rule making authority to provide the method for calculation of
"concession". We are further of the view that the criterion which was adopted
by the rule making authority in treating cities having population of less than
four lakhs and more than four lakhs cannot be said to be arbitrary or
unreasonable and fixation of rent on the basis of population of city cannot be H
interfered with in exercise of power of judicial review. The said argument,
320 SUPREME COURT IU:l'ORTS 12006] SllPP. 6 S.C.R.

A therefore. has no substance and cannot be upheld.
But in our opinion, the fundarnental question of applicability of Section
17 (2) of the Act still rernains. It cannot be gainsaid that Section 17 (2) would
apply only if there is ;perquisite·. Indisputably. the definition of ·perquisite'
is inclusive in nature and takes within its sweep several matters enurnerated
B in clauses (i) to (vii). Section 17 (2) (ii) declares that the value of any
··concession·· in the matter of rent respecting any accommodation provided to
the .:mployee by his employer would be ··perquisik··. Nevertheless it must be
a '"concession·· in the matter of rent respecting any accommodation provided
by the employer to his employee.
c The word "'concession.. has neither been defined in the Act nor in the
Rules. According to Concise Oxford English Dictionary. '"concession·· is "a
thing ti.at is conceded''; .. a gesture made in recognition of a demand or
prevailing standard". '"a reduction in price for a certain category of person'".
It is ..a grant: ordinarily applied to a grant of specific privileges by Government,
D a special privilege granted by a Government, Corporation or other authority"
(P.R. Aiyer; "Advanced Law Lexicon". 2005: Vol. I; p. 944). It is .. an act
of yielding or conceding as to a demand or argument: something conceded:
usually employing a demand: claim or request'': "a thing yielded". ··a granf'.
[Indian Aluminium Co. Ltd. v. Thane Municipal Corporation; ( 1992) Supp I
E sec 480] "Concession"' is a form of "privilege'" [V. Pechim1:thu v.
Gowrammal, [200 I I 7 sec 617].

It is. therefore. clear that before Section I 7(2)(ii) can be invoked or
pressed into service and before calculation of concession as per Rule 3 is
made, the authority exercising pO\\er must come to a positive conclusion that
F it is a concession. ·concession·. in our judgment is. thus a foundational.
fundamental or jurisdictional fact.

A "jurisdictional fact'" is a fact which must exist befon: a C'ou11. Tribunal
or an Authority assumes jurbdiction over a particular matter. A jurisdictional
G fact is one on existence or non-existence of which d1:pends jurisdiction of a
court, a tribunal or an authority. It is the fact upon which an administrative
agency's power to act depends. If the jurisdictional fact does not exist. the
court, authority or officer cannot act. If a Court or authority wrongly assumes
the existence of such fact. the order can be questioned by a writ of certiorari.
The underlying principle is that by erroneously assuming existence of such
H jurisdictional fact. no authority can confer upon itself jurisdiction which it
ARUN KUMAR v. U.0.1. IC.K. THAKKER. J.] 321
otherwise does not posses. A
In Halsb111Ji's laws of England, it has been stated;

"Where the jurisdiction of a tribunal is dependent on the existence
of a particular state of affairs, that state of affairs may be described
as preliminary to, or collateral to the merits of, the issue. If, at the B
inception of an inquiry by an inferior tribunal, a challenge is made to
its jurisdiction, the tribunal has to make up its mind whether to act
or not and can give a ruling on the preliminary or collateral issue; but
that ruling is not conclusive".

The existence of jurisdictional fact is thus sine qua non or condition C
precedent for the exercise of power by a court of limited jurisdiction.

In Raja Anand Brahma Shah v. State of U.P. & Ors., AIR (1967) SC
1081 : (1967] I SCR 362, sub-section (1) of Section 17 of the Land Acquisition
Act, 1894 enabled the State Government to empower Collector to take
possession of 'any waste or arable land' needed for public purpose even in D
absence of award. The possession of the land belonged to the appellant had
been taken away in the purported exercise cf power under Section 17(1) of
the Act. The appellant objected against the action inter alia contending that
the land was mainly used for ploughing and for raising crops and was not
·'waste land', unfit for cultivation or habitation. It was urged that since the E
jurisdiction of the authority depended upon a preliminary finding of fact that
the land was 'waste land', the High Court was entitled in a proceeding for
a certiorari to determine whether or not the finding of fact was correct.

Upholding the contention and declaring the direction of the State
Government ultra vires, this Court stated; F
"In our opinion, the condition imposed by s. 17(1) is a condition
upon which the jurisdiction of the State Government depends and it
is obvious that by wrongly deciding the question as to the character
of the land the State Government cannot give itself jurisdiction to
give a direction to the Collector to take possession of the land under G
s. 17( I) of the Act. It is well-established that where the jurisdiction
of an administrative authority depends upon a preliminary finding of
fact the High Court is entitled, in a proceeding of writ of certiorari
to determine, upon its independent judgment, whether or not that
finding of/act is correct". (emphasis supplied) H
322 SUPREME COURT REPORTS [20061 SUPP. 6 S.C.R.

A In State of M.P. & Ors. v. D.K. Jadav, AIR (1968) SC 1186: (1968]
2 SCR 823. the relevant statute abolished all jagirs including lands, forests,
trees, tanks. wells etc .. and vested them in the State. It. however. stated that
all tanks. wells and buildings on 'occupied land' were excluded from the
provisions of the statute. This Court held that the question whether the tanks,
B wells etc., were on 'occupied land' or on 'unoccupied land' was a jurisdictional
fact and on ascertainment of that fact. the jurisdiction of the authority would
depend.

The Court relied upon a decision in White & Collins v. Minister of
Health ( 1939) 2 KB 838 : I08 LJ KB 768, wherein a question debated was
C whether the court had jurisdiction to review the finding of administrative
authority on a question of fact. The relevant Act enabled the local authority
to acquire land compulsorily for housing of working classes. But it was
expressly provided tha• no land could be acquired which at the date of
compulsory purchase formed part of park. garden or pleasure-ground. An
order of compulsory purchase was made which was challenged by the owner
D contending that the land was a part of park. The Minister directed public
inquiry and on the basis of the report submitted. confirmed the order.

Interfering with the finding of the Minister and setting aside the order,
the Court of Appeal stated;

E "The first and the most important matter to bear in mind is that the
jurisdiction to make the order is dependent on a finding of fact; for,
unless the land can be held not to be part of a park or not to be
required for amenity or convenience, there is no jurisdiction in the
borough council. to make, or in the Minister to confirm, the order. In
such a case it seems almost self-evident that the Court which has to
F consider whether there is jurisdiction to make or confirm the order
must be entitled to review the vital finding on which the existence of
the jurisdiction relied upon depends. If this were not so, the right to
apply to the Court would be illusory."

(See also Rex v. Shoredich Assessment Commillee; ( 1910) 2 KB 859:
G
80 LJ KB 185].

A question under the Income Tax Act, 1922 arose in Raza Textiles ltd.
v. Income Tax Officer, Rampur. (1973] I SCC 633: AIR 1973 SC 1362. In
that case, the ITO directed X to pay certain amount of tax rejecting the
H contention of X that he was not a non-resident fim1. The Tribu:ial confirmed
ARUN KUMAR v. U.0.1. [C.K. THAKKER. J.] 323
the order. A single Judge of the High Court of Allahabad held X as non- A
resident firm and not liable to deduct tax at source. The Division Bench,
however, set aside the order observing that "ITO had jurisdiction to decide
the question either way. It cannot be said that the Officer assumed jurisdiction
by a wrong decision on this question of residence". X approached this Court.

Allowing the appeal and setting aside the order of the Division Bench. B
th is Court stated;

"The Appellate Bench appears to have been under the impression that
J
the Income-tax Officer was the sole judge of the fact whether the
firm in question was resident or non-resident. This conclusion, in our
opinion, is wholly wrong. No authority, much less a quasi-judicial c
authority, can confer jurisdiction on itself by deciding a jurisdictional
fact wrongly. The question whether the jurisdictional fact has been
rightly decided or not is a question that is open for examination by
the High Court in an application for a writ of certiorari. If the High
Court comes to the conclusion, as the learned single Judge has done D
in this case, that the Income-tax Officer had clutched at the jurisdiction
by deciding a jurisdictional fact erroneously, then the assesses was
entitled for the writ of certiorari prayed for by him. It is
incomprehensible to 1hink that a quasi-judicial authority like the
Income-tax Officer can erroneously decide a jurisdictional fact and
thereafter proceed to impose a levy on a citizen." (emphasis supplied) E
From the above decisions, it is clear that existence of 'jurisdictional
fact' is sine qua non for the exercise of power. If the jurisdictional fact exists,
the authority can proceed with the case and take an appropriate decision in
accordance with law. Once the authority has jurisdiction in the matter on
existence of 'jurisdictional fact', it can decide the 'fact in issue' or 'adjudicatory F
fact'. A wrong decision on 'fact in issue' or on 'adjudicatory fact' would not
make the decision of the authority without jurisdiction or vulnerable provided
essential or fundamental fact as to existence of jurisdiction is present.

. In our opinion, the submission of Mr. Salve is well founded and deserves G
. to be accepted that "concession" under clause (ii) of sub-section (2) of Section
17 of the Act is a 'jurisdictional fact'. It is only when there is a 'concession'
in the matter of rent respecting any accommodation provided by an employer
to his employee that the mode, method or manner as to how such concession
can be computed arises. In other words, concession is a 'jurisdictional fact';
method of fixation of amount is 'fact in issue' or 'adjudicatory fact'. If the H
324 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A .1ssessee contends that there is no ·concession·. the authority has to decide
the said question and record a finding as to whether there is ·concession· and
the case is covered by Section 17 (2) (ii) of the Act. Only thereafter the
authority may proceed to calculate the liability of the assessee under the
Rules. In our considered opinion, therefore. in spite of the legal position that
B Rule 3 is intra vires, valid and is not inconsistent with the provisions of the
parent Act under Section 17 (2) (ii) of the Act. it is still open to the assessee
to contend that there is no 'concession· in the matter of accommodation
provided by the employer to the employee and hence the case did not fall
within the mischief of Section 17 (2) (ii) of the Act.

C There is yet another aspect of the matter which is important and having
a bearing on the question. We have extracted Section 17{2){ii) in the earlier
part of the judgment. It does not contain any ·deeming clause' that once it
is established that an employee is paying rent less than 10 per cent of his
salary in cities having population of four lakhs or 7.5 per cent in other cities,
it should be deemed to be a "concession' within the meaning of the Act and
D such employee must be deemed to receive a ·concession' in the form of
·perqubite · in the payment of rent. An employer may provide residential
accommodation to his employees for several reasons. It is also possible that
for making available staff quarters/ colonies/accommodations, State
Governments or Central Government may provide land to Public Sector
E Undertakings/ Companies/ Corporations at a concessional rate imposing
appropriate conditions including amount of rent, if any, to be recovered by
the employer. Mr. Salve also invited our attention to certain decisions wherein
it had been held that residential facility provided by the employer to the
employee was not held "perquisite' within the meaning of Income Tax laws.

F Mr. Salve placed reliance on a decision in Alexander Tenant v. Robert
Smith, (1892) AC 150 (HL). There, the appellant who was an agent for the
Bank of Scotland at Montrose, had been granted accommodation by his
employer as part and parcel of his duty. The House of Lords held that he was
bound as part of his duty as agent to live in the bank house as the nature of
the employment required that he should live in his master's dwelling house
G or business-premises instead of occupying a separate residence of his own.
According to the Court, "such an occupation could not be regarded as part
of appellant's income". He occupied the bank house as a part of his duty. It
was observed that the situation could not be distinguished from that of the
Master of a Ship who was spared the cost of house rent while afloat. .. His
cabin. does not. on that account become a part of his income··. (emphasis
H
ARUN KUMAR v. U.0.1. [C.K. lllAKKER. J.] 325
supplied) A
In Tyrer v. Smart, [1978] I All ER 1089: (1978] I WLR 415; a private
company offered preferential right to purchase shares to its employees below
market price and the question before the Courtwas whether it could constitute
a taxable benefit or amenity. The Court of Appeal reiterated the principle laid
down in Alexander Tenant and held that if something is done by an employer B
to attract employees to encourage their loyalty, it could not be regarded as
reward for the services rendered and could not become a taxable perquisite.
A benefit or facility which furthers commercial interest of the employer
would not per se become perquisite. Such facility of accommodation furthers
commercial interest of the employer by having satisfactory work force which C
but for such accommodation, would not have been available. In such cases,
e.g. doctors/superintendents/ rectors/ professors/ teachers!Grihpatis/Grihmatas,
etc. to stay in the accommodation provided by the employer may be more a
'compulsion' than a 'concession'.
Mr. Salve also submitted that in such cases, it is for the authorities,
seeking to tax the subject, to establish the taxing liability and it is not for the D
subject to prove that his case is covered by an exception. As observed in
Hochstrasser v. Mayes, (1960) AC 376 (HL), "it is not enough for the Crown
to establish that the employee would not have received the sum on which tax
is claimed had he not been an employee. The Court must be satisfied that the
service agreement was the causa causans and not merely the causa sine qua E
non of the receipt of the profit". (emphasis supplied)
The counsel also submitted that the object of Rule 3 is to extend relief
to employees and keeping in view the said purpose, it has to be interpreted
liberally. In support of the submission, reliance was placed on a three Judge
Bench decision of this Court in CIT. Bombay v. British Bank of Middle East, F
(2001) 8 SCC 36. The question for determination of this Court related to
expenditure incurred by an employer on facility of car provided to an employee
for private use.
Interpreting Section 40-A (5) of the Act and Rule 3 of the Rules and
highlighting the object underlying in enacting both the provisions, one of us G
(Y.K. Sabharwal, J. as His Lordship then was) stated that ''Section 40-A (5)
and Rule 3 operate in different fields and apply to different set of assessees.
The provision of the Act was enacted to provide for ceiling on expenditure
on· employees. The object of the Rule is to give relief to the employees.
Applying Rule 3 for the purpose of determining the deduction in relation to
H
326 SUPREME COURT REPORTS f2ll06) SUPP. 6 S.C.R.

A the assessment of the employer would be doing violence to and ignoring the
legislative intent evident in Section 40-A (5)".

We are. however, not inclined to enter into larger question as in our
view, it is not necessary in the light of statutory provision relating to
'concession' in the matter of rent respecting any accommodation' in Section
B 17(2)(ii) of the Act. We are of the view that Rule 3 would apply only to those
cases where 'concession' has been shown by an employer in favour of an
employee in the matter of rent respecting accommodation. Thus, whereas
'charging provision' is found in the Act of Parliament [Section I 7(2)(ii)],
'machinary component' is in the subordinate legislation (Rule 3). The latter
C will apply only after liability is created under the former. Unless the liability
arises under Section I 7(2)(ii) of the Act, Rule 3 has no application and the
method of valuation for calculating concessional benefits cannot be resorted
to.
Mr. Dhankar, who appeared for federation of employees. invited our
attention to "Report of the Pay Revision Committee for Public Sector
D Executives", published by the Government of India in October, 1998. Taking
into account the crucial and pivotal role played by Public Sector Undertakings
and considering their importance in the light of the fact that it is a limb of
Government and ·'State" within the meaning of Article 12 of the Constitution,
the Government of India had constituted a Committee headed by Hon'ble
E Mr. Justice S. Mohan (Retd.). The Committee considered various issues
including issues as to pay scales, perquisites etc., of employees of Public
Sector Undertakings. The counsel referred to various recommendations made
by the Committee and submitted that different treatment shown by the
authorities to employees of Government and employees of Public Sector
Undertakings is arbitrary, discriminatory and unreasonable being violative of
F Articles 14, 16 and 19 of the Constitution. He, therefore, submitted that the
benefits extended to Government employees ought to have been extended to
employees of Public Sector Undertakings as well.
We are unable to uphold the argument. As already indicated earlier, the
High Court of Calcutta in the impugned order considered the question and
G held classification between Government employees and employees of
Companies, Corporations and other Public Undertakings as reasonable. Though
the doctrine of equity has no place in taxing statutes, an attempt has been
made by the rule making authority to introduce equity by keeping in view the
ground reality. According to the High Court, it cannot be disputed that in the
H sphere of income, Government employees are far below to the employees of
ARUN KUMAR v. U.0.1. [C.K. THAKKER. J.] 327
Companies, Corporations and other Undertakings. The benefits which have A ·
been provided to employees of Corporations, Companies and other
Undertakings are much more than the benefits extended to Government
employees. If on the basis of the factual scenario, a classification is made
between two classes of employees, it cannot be struck down as ultra vires.

It is no doubt true that Article 14 guarantees equality before the law B
and confers equal protection of laws. It is also true that it prohibits the State
from denying persons or class of persons equal treatment provided they are
equals and are similarly situated. But, it is equally well established that Article
14 seeks to prevent or prohibit a person or class of persons from being
singled out from others situated similarly. If two persons or two classes are C
not similarly situated or circumstanced, they canuot be treated similarly. To
put it differently, Article 14 prohibits dissimilar treatment to similarly situated
persons, but does not prohibit classification of persons not similarly situated,
provided such ciassification is based on intelligible differentia and is otherwise
legal, valid and permissible.
D
Very recently in Confederation of Ex-Servicemen Associations and Ors.
v. Union of India & Ors. decided on August 22, 2006, the Constitution
Bench had an occasion to consider a similar question. Referring to State of
West Bengal v. Anwar Ali Sarkar & Anr, [1952] SCR 284: AIR (1952) SC
75) and several other cases, one of us (C.K. Thakker, J.) observed that "it is
clear that every classification to be legal, valid and. permissible, must fulfill E
the twin-test, namely;
(i) the classification must be founded on an intelligible differentia
which must distinguish persons or things that are grouped
together from others leaving out or left out; and
F
(ii) such a differentia must have rational nexus to the object
sought to be achieved by the statute or legislation in
question".
In our opinion, distinction sought to be made by the rule making
authority between employees of the Central. Government as well as State G
Governments and other employees i.e., employees of Companies, Corporations
and other Undertakings is reasonable classification based on intelligible
differentia. It has also rational nexus to the object sought to be achieved.
Rule 3 takes into account service conditions of employees of Government
vis-a-vis employees of Corporations, Companies and other Undertakings and
prescribes method of calculating value of all perquisites. Such a provision, in H
328 SuPREME COURT REPORTS l20U61 Sl:PP. 6 S.C.R.

A our considered opinion, cannot be held ultra vires Article 14 of the
Constitution.

Even under th.: Constitution, such a distinction ha' b~~n ,1p11dJ m
several cases by this Court. Article 311 of the Cons1itutiun .:un,<:rs certain
benefits which are not available to employees of Corporations. Companies
B and other Undertakings. It was contended on behalf of those empluyees that
such Corporations. Companies and Lindertakings were coven:d by the
definition ··stat.:" within the m.:aning of Article I~ of the Constitution and
they also must be granted all the benefits which had been granted to employees
of the Government. The contention was, however, negatived by this Court
C holding that application of Part XIV of the Constitution would be limited to
Services under the Union and the States and not to other employees [vide
S.L. Agarwal v. General Manager, Hindustan !:>r.:el Ltd; ( 1970) I SCC 177
: (1970) 3 SCR 363; Ajit Kumar Nag v. General Manager, Indian Oil
Corporation Ltd., [2005] 7 SCC 764. We, therefore, see no substance in the
argument that the impugned provision differentiating employees of
D Government and employees of Companies. Corporations and other
Undertakings is arbitrary and objectionable.
For the foregoing reasons, we hold that though Rule 3 of the Rules
cannot be held arbitrary, discriminatory or ultra vires Article 14 of the
Constitution nor inconsistent with the parent Act [Section l 7(2)(ii)]. it is in
E the nature of 'machinery-provision' and applies only to the cases of
'concession' in the matter of rent respecting any accommodation provided by
an employer to his employees. Whether or not Parliament could have in the
exercise of legislative powe; created a 'deeming fiction' as to concession in
the matter of rent in certain circumstances (for which we express no final
F opinion), no such deeming provision is found in the Act. It is, therefore. open
to the assessee to contend that there is no ·concession' in the matter of
accommodation provided by the employer to the employees and the case is
not covered by Section 17 (2) (ii) of the Act.
For the foregoing reasons, Civil Appeal No. 3270 of 2003 is panly
G allowed to the extent indicated above.
In view of our order passed in Civil Appeal No. 3270 of 2003.
Transferred Cases Nos. I0 I & 102 of 2006 stand disposed of.
In the facts and circumstances of the case, there shall be no order as to
H costs.
N.J. Appeals partly allowed and Transferred cases disposed of.