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Interest Free Loans to Bank Employees are Taxable as Perquisites

In a decision delivered by the Supreme Court on May 7, 2024, in the case of All India Bank Officers’ Confederation vs. The Regional Manager, Central Bank of India & Others [2024 INSC 389] it was held that Rule 3(7)(i) of the Income Tax Rules, 1962 is not violative of Article 14 of the Constitution and therefore interest-free or concessional loans provided by banks to their employees are taxable as perquisites under Section 17 of the Income Tax Act, 1961.

The present case was a result of various appeals filed by staff unions and officers’ associations of different banks across India against judgements wherein petitions challenging the scope of Section 17(2)(viii) of the Income Tax Act, 1961 (Income Tax Act) and Rule 3(7)(i) of the Income Tax Rules, 1962 (Income Tax Rules) were dismissed. Section 17(2)(viii) of the Income Tax Act defines perquisites to include any other fringe benefit or amenity as may be prescribed. Further, Rule 3(7)(i) of the Income Tax Rules specifies that interest-free or concessional loans provided by banks are taxable if the interest charged is less than the Prime Lending Rate (PLR) of the State Bank of India (SBI). Thus, Section 17(2)(viii) of the Income Tax Act and Rule 3(7)(i) of the Income Tax Rules were challenged on the grounds that they constituted an excessive delegation of essential legislative functions to the Central Board of Direct Taxes (CBDT). Further, Rule 3(7)(i) of the Income Tax Rules was also challenged for being arbitrary as it treats the Prime Lending Rate of the SBI as the benchmark for charging tax as opposed to the actual rate of interest charged by the bank.

The major issue for deliberation in this case was whether the aforementioned provisions constitute such an excessive delegation of legislative functions which are arbitrary and therefore violative of Article 14 of the Constitution.

The Supreme Court looked into the provisions being challenged and noted that Section 17(2)(viii) of the Income Tax Act acts as a residual clause which intentionally leaves the responsibility of taxing ‘any other fringe benefits or amenity’ to the appropriate rule-making authority by promulgating rules. On this rationale, the court held that the enactment of Rule 3(7)(i) of the Income Tax Rules by the CBDT is within the power conferred under the legislative ambit and therefore not an excessive delegation of essential legislative functions. 

Further, the Court by placing reliance on authoritative definitions and decided precedents noted that the term ‘perquisites’ refers to any additional benefit or privilege that is incidental to employment. Therefore, the Court held that the provision of interest-free or concessional loans qualify as fringe benefits or perquisites. As regards to the usage of the SBI Prime Lending Rate as a benchmark for taxability of the loans, the Court held that it was not an arbitrary action since it ensured consistency in application, provided clarity for both the assessee and the revenue department, and certainty as to the amount to be taxed. The Court held that since the benefit of the interest free loans was a unique advantage enjoyed by the employees, there was no equal treatment of unequals and therefore held that there was no violation of Article 14 of the Constitution.