Supreme Court upholds taxation of bank employees’ concessional loans as ‘perquisites’ under Income Tax Act, endorsing SBI’s interest rate as fair benchmark.
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NEW DELHI: Recently, The Supreme Court has upheld the significance of concessional or interest-free loans extended to bank employees as an exclusive perk for them. These benefits, categorized as ‘perquisites,’ are deemed taxable income under the Income Tax Act. Justices Sanjiv Khanna and Dipankar Datta, presiding over the bench, endorsed the State Bank of India’s (SBI) interest rate as a fair benchmark, refuting any claims of arbitrariness or inequality in its application.
“Commercial and tax laws often navigate intricate and nuanced territory, addressing various issues that are subject to change. This court is hesitant to intervene in the legislation at hand, as it serves to prevent potential misuse and ensure predictability.”
-the bench articulated.
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The court’s decision came in response to petitions lodged by the All India Bank Officers Federation among others, who argued that the legislation delegated too much power to the Central Board of Direct Taxes and was arbitrary, breaching Article 14 of the Constitution by adopting SBI’s prime lending rate as the benchmark instead of the actual rates charged to customers.
“A complicated issue has been resolved through a standardized approach, warranting judicial approval.”
– noted the bench.
The bench further explained that setting a clear, singular benchmark for calculating ‘perquisites’ or fringe benefits prevents the variability of interest rates charged by different banks to customers and consequently curtails unnecessary litigation.
The court, on May 7, affirmed the validity of Section 17(2)(viii) of the Income Tax Act, 1961, and Rule 3(7)(i) of the Income Tax Rules, 1962. The bench explained that fiscal or tax laws are afforded more flexibility compared to other statutes regarding uniformity. It emphasized the need to grant the legislature leeway in such matters, indicating a tendency to defer to legislative judgment.
The judgment specifies that any interest-free or concessional loan benefit granted to bank employees will be subject to taxation if the interest charged by the bank is lower than the prime lending rate set by the SBI. Additionally, the court clarified the term ‘perquisite’ as an incidental benefit associated with the employment role, separate from ‘profit in lieu of salary’, which constitutes payment for services rendered. Perquisites are inherently tied to employment and offer advantages that are generally unavailable outside of that employment context.
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Through this judgment, the Supreme Court has reinforced the framework governing the taxation of benefits derived from employment, ensuring clarity and fairness in the application of tax laws concerning bank employees’ concessional loan benefits.