My client is a bank officer taxed on a deemed concession in rent for the bank's quarters even though the market rent is lower than the percentage of salary applied. Is the deeming provision open to challenge?
Not on the grounds run so far. A Division Bench of the Bombay High Court dismissed a batch of writ petitions by bank officers' associations challenging Explanations 1 to 4 below s.17(2) inserted by the Finance Act 2007 with limited retrospective effect. It held the legal fiction is not an impermissible legislative override of Arun Kumar v Union of India, that the retrospectivity is valid, and that classifying by city population and measuring the concession as a percentage of salary does not offend Article 14.
Decided by the High Court (M.S. Sonak and Jitendra Jain JJ (judgment by M.S. Sonak J)) on 2025-01-20, reported as Writ Petition No. 825 of 2006 with Writ Petitions Nos. 438 of 2008, 506 of 1996, 928 of 1994, 1350 of 2008 and 1347 of 2008 (Bombay High Court); Neutral Citation 2025:BHC-OS:834-DB; reserved 08 January 2025, pronounced 20 January 2025. It bears on section 17(2), section 17(2)(ii), section 15, section 3, section 24, section 192, section 201, section 2(24), section Rule 3, section Rule 3(1) of the Income Tax Act 1961, in Salary & Perquisites, TDS Defaults and How Tax Law Is Read matters.
This is the answer to every argument a bank or PSU officer wants to make about employer-provided accommodation: that the market rent is lower, that two officers in identical flats pay different tax, that the officer has no choice about the quarters allotted, that he is already taxed on the rent from his own let-out house, and that bank employees are treated worse than Central Government, State Government and Reserve Bank employees. All of them were argued at length and all were rejected. The one practical gain in the judgment is at paragraph 121: because interim orders had restrained recovery for years, the Court clarified that going forward the banks should not be held to be entities in default, and that where recovery has become impossible or the employees have retired the Revenue may adopt a discretionary approach on individual circumstances. On valuation, the judgment prints the specified rates as they stood under Explanation 4 — fifteen, ten and seven and one-half per cent of salary by 2001 census population — and the rates that preceded the 2006 change. Those figures are legislative history in this judgment and MUST NOT be used as the current valuation: the valuation of accommodation under Rule 3 was substituted by CBDT notification with effect from assessment year 2024-25, and the current percentages and population bands have to be read off the substituted rule.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioners were associations and federations of officers of nationalised banks. They challenged the Explanations below s.17(2)(ii) of the Income-tax Act inserted by the Finance Act 2007 with limited retrospective effect — Explanations 1 to 3 from 1 April 2002 and Explanation 4 from 1 April 2006. The amendments introduced a legal fiction that an employee shall be deemed to have received a concession in the value of rentals once it is established that he was provided employer-owned accommodation and the rent recoverable from or payable by him was less than the specified percentage of his salary, that percentage being fixed by reference to the population of the city under Explanation 4. The petitioners contended that the amendments were introduced to nullify the Supreme Court's decision in Arun Kumar v. Union of India, which had held that whether a concession in the matter of rent was in fact granted is a jurisdictional fact to be determined in each case; that the Explanations were repugnant to and destructive of the main body of s.17(2)(ii); that the retrospectivity was manifestly arbitrary; that the exclusion of Central Government, State Government and Reserve Bank employees was discriminatory; that value of a concession in rent can only be measured by reference to the accommodation and not to the employee's salary, so that officers in identical flats pay unequal tax; that bank officers have no real choice about accommodation and are liable to transfer nationwide; and that officers who let out their own homes suffer double taxation. Interim orders had restrained recovery for many years.
The writ petitions were dismissed and the interim orders set aside (paras 120 and 122). The Court held that the impugned amendments do not amount to an impermissible legislative override of Arun Kumar (para 52); that the distinction between bank employees on the one hand and Central Government, State Government and Reserve Bank employees on the other has a clear rational basis because those categories fall within separate regulatory frameworks administered by separate statutory regimes (paras 111 and 112); that classification by city population as per census data is a rational, objectively determinable classification and the legislature was not bound to sub-classify by urban and suburban areas (paras 113 to 116); and that there is no double taxation, tax on rent received being charged as income from house property while tax on the value of the concession in rent is charged as salary, there being no provision prohibiting taxation of income from multiple sources (paras 117A to 119). The Court clarified that going forward the banks should not be held to be entities in default, and that where recoveries become impossible or employees have retired a discretionary approach may be adopted by the Revenue on individual circumstances (para 121).
The Court accepted that after Arun Kumar, decided on 15 September 2006, determining the value of a concession under s.17(2)(ii) case by case would have required assessing officers to examine lakhs of employees and to collect data on standard and market rents across the country, and held that the legislature, taking a hint from paragraphs 86 and 99 of Arun Kumar, supplied by the Finance Act 2007 the deeming fiction and the measure that Arun Kumar had found absent (paras 35 to 37). On the override argument it applied Indian Aluminum Co. v. State of Kerala, holding that while a legislature cannot by a mere declaration overrule a judicial decision it can render a decision ineffective by validly altering the character of the law retrospectively, and that here the amendments are broadly consistent with Arun Kumar and incorporate machinery and measure provisions into the principal Act rather than declaring the decision wrong (paras 51 and 52); it noted a coordinate Bench had rejected a similar argument in Serum Institute of India (P.) Ltd. v. Union of India on s.2(24)(xviii) (paras 53 and 55). On Article 14 it held that most of the arguments had already been considered and rejected by the Supreme Court in Arun Kumar in the context of Rule 3(1), which likewise distinguished Government from other employees and measured the concession by a percentage of salary linked to city population, and that Arun Kumar had explained that the amended rule did away with the concept of fair rental value so that there was no need to give the assessee an opportunity to show that the rent recovered was the fair, reasonable, market or standard rent (paras 83 and 84). It reiterated the restraint owed to the legislature in matters of fiscal classification (paras 115 and 116).
Thus, the distinction drawn by the legislature in the amended provision between the employees of banks, on one hand, and those of Central/State Governments and RBI, on the other, has a clear rational basis.
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Handle my notice → Ask a CA on WhatsAppNot on the grounds run so far. A Division Bench of the Bombay High Court dismissed a batch of writ petitions by bank officers' associations challenging Explanations 1 to 4 below s.17(2) inserted by the Finance Act 2007 with limited retrospective effect. It held the legal fiction is not an impermissible legislative override of Arun Kumar v Union of India, that the retrospectivity is valid, and that classifying by city population and measuring the concession as a percentage of salary does not offend Article 14. This was decided by the High Court (M.S. Sonak and Jitendra Jain JJ (judgment by M.S. Sonak J)) and bears on section 17(2), section 17(2)(ii), section 15, section 3, section 24, section 192, section 201, section 2(24), section Rule 3, section Rule 3(1) of the Income Tax Act 1961. It is reported as Writ Petition No. 825 of 2006 with Writ Petitions Nos. 438 of 2008, 506 of 1996, 928 of 1994, 1350 of 2008 and 1347 of 2008 (Bombay High Court); Neutral Citation 2025:BHC-OS:834-DB; reserved 08 January 2025, pronounced 20 January 2025. This is the answer to every argument a bank or PSU officer wants to make about employer-provided accommodation: that the market rent is lower, that two officers in identical flats pay different tax, that the officer has no choice about the quarters allotted, that he is already taxed on the rent from his own let-out house, and that bank employees are treated worse than Central Government, State Government and Reserve Bank employees. All of them were argued at length and all were rejected. The one practical gain in the judgment is at paragraph 121: because interim orders had restrained recovery for years, the Court clarified that going forward the banks should not be held to be entities in default, and that where recovery has become impossible or the employees have retired the Revenue may adopt a discretionary approach on individual circumstances. On valuation, the judgment prints the specified rates as they stood under Explanation 4 — fifteen, ten and seven and one-half per cent of salary by 2001 census population — and the rates that preceded the 2006 change. Those figures are legislative history in this judgment and MUST NOT be used as the current valuation: the valuation of accommodation under Rule 3 was substituted by CBDT notification with effect from assessment year 2024-25, and the current percentages and population bands have to be read off the substituted rule. If it applies to you, the first step is this: Do not run a constitutional challenge to the deemed concession; take the point on quantification instead — the salary figure used, the period of occupation, the rent actually recovered from the employee, and whether the accommodation is owned by the employer or taken on lease.
The petitioners were associations and federations of officers of nationalised banks. They challenged the Explanations below s.17(2)(ii) of the Income-tax Act inserted by the Finance Act 2007 with limited retrospective effect — Explanations 1 to 3 from 1 April 2002 and Explanation 4 from 1 April 2006. The amendments introduced a legal fiction that an employee shall be deemed to have received a concession in the value of rentals once it is established that he was provided employer-owned accommodation and the rent recoverable from or payable by him was less than the specified percentage of his salary, that percentage being fixed by reference to the population of the city under Explanation 4. The petitioners contended that the amendments were introduced to nullify the Supreme Court's decision in Arun Kumar v. Union of India, which had held that whether a concession in the matter of rent was in fact granted is a jurisdictional fact to be determined in each case; that the Explanations were repugnant to and destructive of the main body of s.17(2)(ii); that the retrospectivity was manifestly arbitrary; that the exclusion of Central Government, State Government and Reserve Bank employees was discriminatory; that value of a concession in rent can only be measured by reference to the accommodation and not to the employee's salary, so that officers in identical flats pay unequal tax; that bank officers have no real choice about accommodation and are liable to transfer nationwide; and that officers who let out their own homes suffer double taxation. Interim orders had restrained recovery for many years. The matter was decided on 2025-01-20 by the High Court (M.S. Sonak and Jitendra Jain JJ (judgment by M.S. Sonak J)). On those facts the High Court held as follows. The writ petitions were dismissed and the interim orders set aside (paras 120 and 122). The Court held that the impugned amendments do not amount to an impermissible legislative override of Arun Kumar (para 52); that the distinction between bank employees on the one hand and Central Government, State Government and Reserve Bank employees on the other has a clear rational basis because those categories fall within separate regulatory frameworks administered by separate statutory regimes (paras 111 and 112); that classification by city population as per census data is a rational, objectively determinable classification and the legislature was not bound to sub-classify by urban and suburban areas (paras 113 to 116); and that there is no double taxation, tax on rent received being charged as income from house property while tax on the value of the concession in rent is charged as salary, there being no provision prohibiting taxation of income from multiple sources (paras 117A to 119). The Court clarified that going forward the banks should not be held to be entities in default, and that where recoveries become impossible or employees have retired a discretionary approach may be adopted by the Revenue on individual circumstances (para 121).
The Court accepted that after Arun Kumar, decided on 15 September 2006, determining the value of a concession under s.17(2)(ii) case by case would have required assessing officers to examine lakhs of employees and to collect data on standard and market rents across the country, and held that the legislature, taking a hint from paragraphs 86 and 99 of Arun Kumar, supplied by the Finance Act 2007 the deeming fiction and the measure that Arun Kumar had found absent (paras 35 to 37). On the override argument it applied Indian Aluminum Co. v. State of Kerala, holding that while a legislature cannot by a mere declaration overrule a judicial decision it can render a decision ineffective by validly altering the character of the law retrospectively, and that here the amendments are broadly consistent with Arun Kumar and incorporate machinery and measure provisions into the principal Act rather than declaring the decision wrong (paras 51 and 52); it noted a coordinate Bench had rejected a similar argument in Serum Institute of India (P.) Ltd. v. Union of India on s.2(24)(xviii) (paras 53 and 55). On Article 14 it held that most of the arguments had already been considered and rejected by the Supreme Court in Arun Kumar in the context of Rule 3(1), which likewise distinguished Government from other employees and measured the concession by a percentage of salary linked to city population, and that Arun Kumar had explained that the amended rule did away with the concept of fair rental value so that there was no need to give the assessee an opportunity to show that the rent recovered was the fair, reasonable, market or standard rent (paras 83 and 84). It reiterated the restraint owed to the legislature in matters of fiscal classification (paras 115 and 116). In the words reproduced by the source cited on this page: "Thus, the distinction drawn by the legislature in the amended provision between the employees of banks, on one hand, and those of Central/State Governments and RBI, on the other, has a clear rational basis." The decision followed or applied Arun Kumar v. Union of India (SC) — followed and distinguished as to the absence of a deeming provision; Indian Aluminum Co. v. State of Kerala (SC) — applied; Serum Institute of India (P.) Ltd. v. Union of India (Bom) — followed; Assistant Commissioner of Urban Land Tax v. The Buckingham & Carnatic Co. Ltd. (SC) — relied on; Federation of Hotel and Restaurant Association of India (SC) — relied on.
It was decided by the High Court on 2025-01-20 and is reported as Writ Petition No. 825 of 2006 with Writ Petitions Nos. 438 of 2008, 506 of 1996, 928 of 1994, 1350 of 2008 and 1347 of 2008 (Bombay High Court); Neutral Citation 2025:BHC-OS:834-DB; reserved 08 January 2025, pronounced 20 January 2025. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 17(2), section 17(2)(ii), section 15, section 3, section 24, section 192, section 201, section 2(24), section Rule 3, section Rule 3(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The writ petitions were dismissed and the interim orders set aside (paras 120 and 122). The Court held that the impugned amendments do not amount to an impermissible legislative override of Arun Kumar (para 52); that the distinction between bank employees on the one hand and Central Government, State Government and Reserve Bank employees on the other has a clear rational basis because those categories fall within separate regulatory frameworks administered by separate statutory regimes (paras 111 and 112); that classification by city population as per census data is a rational, objectively determinable classification and the legislature was not bound to sub-classify by urban and suburban areas (paras 113 to 116); and that there is no double taxation, tax on rent received being charged as income from house property while tax on the value of the concession in rent is charged as salary, there being no provision prohibiting taxation of income from multiple sources (paras 117A to 119). The Court clarified that going forward the banks should not be held to be entities in default, and that where recoveries become impossible or employees have retired a discretionary approach may be adopted by the Revenue on individual circumstances (para 121). It arises in Salary & Perquisites, TDS Defaults and How Tax Law Is Read matters, on section 17(2), section 17(2)(ii), section 15, section 3, section 24, section 192, section 201, section 2(24), section Rule 3, section Rule 3(1) of the Income Tax Act 1961, and was decided by M.S. Sonak and Jitendra Jain JJ (judgment by M.S. Sonak J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Read the valuation off the current Rule 3 for the year in question. The accommodation valuation table was substituted with effect from AY 2024-25; do not carry forward the older percentages that appear in judgments and in older commentary. Where a bank or PSU has not deducted because of an interim order, rely on paragraph 121 to resist being treated as an entity in default going forward, and to ask the Department to exercise the discretion the Court contemplated where employees have retired. Where the employer is the Central Government, a State Government or the Reserve Bank, note that the amended s.17(2)(ii) machinery does not apply to those employees for the reasons at paragraphs 111 and 112 — check which regime the employer falls in before computing. Do not argue double taxation because the officer lets out his own house and is taxed on that rent; the Court held taxation of income from different sources is not double taxation (paras 117A to 119).
Validity check could not be completed. Validity check could not be completed; no later-treatment search was run, and given the constitutional challenge a special leave petition is a realistic possibility that has not been checked for. Separately, and importantly for use: the judgment states the accommodation valuation percentages as they stood under Explanation 4 to s.17(2)(ii) and under Rule 3 as it then read. The Rule 3 valuation of employer-provided accommodation was substituted by CBDT notification with effect from assessment year 2024-25. I could not retrieve that notification from any government source in this pass and therefore state no current percentage; anyone computing a perquisite for AY 2024-25 or later must read the substituted Rule 3 and must not carry forward the figures printed in this judgment. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The indiankanoon document I read is titled 'Federation Of Bank Of India Officers ... vs Union Of India And Ors' but the raw text is the common judgment in the batch, with Writ Petition No. 825 of 2006 (All India Central Bank Officers Federation) treated as the lead petition by agreement, heard with Writ Petitions Nos. 438 of 2008, 506 of 1996, 928 of 1994, 1350 of 2008 and 1347 of 2008; the same judgment appears on indiankanoon under several document ids. The entry uses the lead petition's cause title as the full name and records the discrepancy. The judgment runs to 122 numbered paragraphs, with an inserted paragraph 117A. I read the header and paragraphs 1 to 13 and paragraphs 35 to 37, 50 to 53, 82 to 84 and 111 to 122 as raw text from the saved fetch; the intervening paragraphs were not read line by line and nothing is attributed to them. Para 4 describes the challenge as being to 'Explanations 1 and 4 below Section 17(2)' and then gives the commencement of Explanations 1 to 3 as 1 April 2002 and of Explanation 4 as 1 April 2006. Para 37 sets out the pre-2006 measure (10 per cent of salary in cities of population above four lakhs, 7.5 per cent elsewhere) while para 114 sets out Explanation 4 (15, 10 and 7.5 per cent by 2001 census); both are historical. I could not retrieve the text of the CBDT notification that substituted the Rule 3 accommodation valuation with effect from AY 2024-25 from any government source in this pass, so no current percentage is stated anywhere in this entry. The key quote at para 112 could NOT be re-verified through a second live route. Four phrase queries on /docfragment/166775773/ — "has a clear rational basis", "distinction drawn by the legislature in the amended provision", "between the employees of banks, on one hand" and "The exclusion of these categories is based on the principle" — all fail to return it, the fragment index for this judgment appearing not to reach past about paragraph 99; and three alternative document ids for the same judgment (/doc/3431800/, /doc/196711870/ and the plain view of /doc/166775773/) each truncate at about paragraph 107 before reaching it. The sentence therefore rests on a single ?type=print fetch. Against that, the saved text was cross-checked three ways and passed: /docfragment/ independently returns paragraph 24 ("the banks should not be held as entities in default", as counsel's submission), paragraph 98 ("…would not pass muster") and paragraphs 9, 11 and 12 (counsel's contentions) with the same wording and the same paragraph numbers as the saved text, and the bench, the neutral citation 2025:BHC-OS:834-DB and the disposal are independently confirmed. Every one of the sixteen paragraph locators cited in this entry was checked line by line against the saved text and each exists and says what is attributed to it. Treat the paragraph 112 sentence as verified only to that extent. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The writ petitions were dismissed and the interim orders set aside (paras 120 and 122). The Court held that the impugned amendments do not amount to an impermissible legislative override of Arun Kumar (para 52); that the distinction between bank employees on the one hand and Central Government, State Government and Reserve Bank employees on the other has a clear rational basis because those categories fall within separate regulatory frameworks administered by separate statutory regimes (paras 111 and 112); that classification by city population as per census data is a rational, objectively determinable classification and the legislature was not bound to sub-classify by urban and suburban areas (paras 113 to 116); and that there is no double taxation, tax on rent received being charged as income from house property while tax on the value of the concession in rent is charged as salary, there being no provision prohibiting taxation of income from multiple sources (paras 117A to 119). The Court clarified that going forward the banks should not be held to be entities in default, and that where recoveries become impossible or employees have retired a discretionary approach may be adopted by the Revenue on individual circumstances (para 121).
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