1. ABC Ltd. (Company) is a company listed with stock exchanges in India. The factory of the company is situated in a small town in Bihar, where the population as per 2001 census does not exceed 10 lakhs. The company has provided unfurnished accommodation to its employees at the factory. Nominal rent is recovered from employees depending on the type of accommodation provided. The company has also provided free furnished accommodation owned by it to its employees at Bangalore.
    

2. Section 17(2)(ii) of the Income-tax Act, is amended by the Finance Act, 2007 to supersede Supreme Court decision in the case of Arun Kumar and others vs. Union of India reported in 286 ITR 89 with a view to provide clarification as to what constitutes concession in the matter of rent. Explanation 1 to 4 inserted in section 17(2)(ii) explains as to under what circumstances concession in the matter of rent shall be deemed to have been provided. In the case of accommodation owned by the employer if the value of accommodation determined at specified rate exceeds rent recovered from the employee, concession in the matter of rent shall be deemed to have been provided.
    

3. The following issues require consideration.

1. How the value of unfurnished accommodation provided to employees at the factory will be computed for accounting years 2005-06, 2006-07 and subsequent years.

2. How the value of furnished accommodation provided to employees at Bangalore will be computed for accounting years 2005-06, 2006-07 and subsequent years.

4. Under Rule 3 (1) of the Income-tax Rules, as amended by Income Tax (Seventh Amendment) Rules, 2005 w.e.f. 1-4-2005 (i.e.; A.Y. 2006-07), the value of the perquisite for accommodation provided to employees is to be calculated as under.

1. Where unfurnished accommodation is owned by the employer — @ 20% of salary in cities having population exceeding 4 lakhs as per 2001 census.
    

2. In cases where accommodation is in other cities, it will be 15% of salary.
    

3. Where the accommodation is furnished, the above amount shall be increased by 10% of the cost of furniture, T.V. etc. provided by the employer. If the furniture, T.V. etc. is taken on hire, the actual hire charges shall be added.
    

4. The above amount shall be reduced by the rent, if any, recoverable from the employee.

5. In the case of Arunkumar and Others vs. Union Bank of India 286 ITR 89 the Supreme Court held that section 17(2)(ii) only provides that perquisite will include any “concession” in rent of the accommodation provided by the employer. The section does not state what is deemed to be a “concession” for the purposes of this section. To overcome this difficulty the Explanation 1 to 4 has been added by the Finance Act, 2007 w.e.f 1-4-2002.
    

6. New Explanation 1 and 4 to section 17(2) (ii) which apply from A.Y. 2006-07 and onwards provide as under.

1. If unfurnished accommodation owned by the employer is provided to the employee at a rent not exceeding the specified percentages as stated herein in a city with population (a) exceeding 25 lakhs as per 2001 census, 15% (b) exceeding 10 lakhs but not exceeding 25 lacs as per 2001 census, 10% or (c) less than 10 lakhs, 7.5% of the salary of the employee, it shall be deemed to be concession given to him or her. The value of accommodation determined at the aforesaid percentage, after deducting the rent recoverable from the employee, shall be deemed to be value of the perquisite in the hands of the employee.
    

2. If the unfurnished accommodation is taken on lease or rent by the employer, the value of the accommodation being actual amount of lease or rental paid or payable by the employer or 15% of the salary, whichever is lower, after deducting the rent recoverable from the employee, shall be deemed to be the value of perquisite to the employee.
    

3. If the accommodation provided to the employee is furnished, the above amount shall be increased by 10% of the cost of the furniture, T.V. etc. provided by the employer. If the furniture, T.V. etc. is taken on hire, the actual hire charges shall be added to the above amount. This amount will be reduced by the rent recoverable from the employee to determine the value of the perquisite.

7. It may be noted that in the Finance Bill, 2007, the proposal was to insert Explanation 1 and 2, with the same wording as in Rule 3 (1), after section 17(2)(ii). It was only at the stage of passage of the Finance Bill, that the Finance Minister moved amendments and explanations 1 to 4 were enacted. The Finance Minister has given concession to employees with retrospective effect from A.Y. 2006-07. This is evident from the following extract of para 58 of his speech in the Lok Sabha on 3-5-2007. (160 Taxman - Page 139).
   
   “I have received a number of representations complaining about the rate of 20 per cent. Being responsive to suggestions and in order to give relief, I have reviewed the rate to be applied for putting a value on the concessional accommodation. I have decided that the rate shall be reduced from 20 per cent to 15 per cent if the population is above 25 lakhs; to 10 per cent if the population is between 10 lakhs and 25 lakhs; and 7.5 per cent if the population is below 10 lakhs. Thus, every employee will get substantial relief. I also propose to give retrospective effect to the reduction from financial year 2005-06, which is the year when the 20 per cent rate was introduced.”
    

8. From the wording of the above explanations inserted below section 17(2)(ii), and the speech of the Finance Minister, it is evident that there is no reference to framing of any Rule by the Government. In effect, what was earlier provided in Rule 3 (1) relating to the method of valuing the perquisite in the form of provision of unfurnished or furnished rent-free accommodation or provision of accommodation at concessional rate, definition of salary etc. has now been provided in Explanations 1 to 4 of section 17(2)(ii). These Explanations come into force w.e.f. 1-4-2006; i.e., A.Y. 2006-07. In other words, Rule 3(1) will not be applicable for computation of value of perquisite relating to provision of furnished or unfurnished accommodation to the employees for A.Y. 2006-07 and onwards.
    

9. It is well settled principle that the delegated authority has power to frame Rules only if such power is delegated by the legislation. Further, the rule making authority (Central Government or CBDT) can frame Rules which are consistent with the legislation under which such authority is given. If any Rule is framed which imposes tax liability in excess of what is provided under a particular legislation, it will be ultra virus the delegated authority and is not binding on the assessee. In this case section 17(2)(ii) does not give any authority to the Central Government to frame any Rules for computing the value of housing perquisite, except as provided in Explanation 1(b) dealing with Central and State Government employees. Therefore, in the case of private sector employees Explanations 1 to 4 will be operative w.e.f. A.Y. 2006-07 and Rule 3(1) has become infructuous.

The above view is supported by the following judicial pronouncements.

1. Union of India vs. Somasundaran Vishwanath AIR 1988 S.C. 2255 — In this case it is held that where there is a conflict between the rules framed and the statue itself, the rule will be disregarded and the statue will prevail even though the rules have statutory authority.
    

2. State Bank of Kerala vs. K.M. Cheria Abdulla & Co. AIR 1965 SC 1585 — In this case it is held that a Rule must give way to the Act if inconsistent with the Act. Even if there is apparent conflict between a section of the Act and a Rule made thereunder, the Rule must be construed so as to make it consistent with the Act.

10. It can, therefore, be concluded that —

1. In the case of the company, the employees of the factory pay a nominal rent for the accommodation provided to them. The population of that place is below 10 lakhs as per 2001 census. Therefore, 7.5% of the salary, less rent recoverable, will be considered as value of the perquisite in the hands of the employee for accounting year 2005-06 and onwards.
    

2. If no rent is recoverable from any employee, the value of perquisite will be 7.5% of salary as provided in Explanations 1 and 4 to section 17(2)(ii) for the accounting years 2005-06 and onwards.
    

3. So far as employees at Bangalore are concerned, the accommodation is furnished. Therefore, 15% if the salary plus 10% of cost of furniture, T.V. etc., after deducting the rent recoverable, will be considered as the value of the perquisite for accounting year 2005-06 and onwards.

11. The company must have deducted tax at source from salary paid to each employee during the year ending 31-3-2006 and 31-3-2007 by considering value of perquisite in the form of accommodation provided at the rates (20% or 15%) given in Rule 3(1) of the Income-tax Rules. The tax so deducted would be higher, as compared to tax payable by each employee at the reduced rate (15% or 7.5%) provided in the amended section 17(2)(ii), which is applicable to the accounting year 2005-06 and 2006-07. Therefore, each employee, who has suffered higher TDS as a result of calculation of perquisite value under Rule 3(1), can claim refund by filing revised return for A.Y. 2006-07 before 31-3-2008. The employee can calculate the perquisite value at the reduced rate provided in amended section 17(2)(ii). Similarly, they can claim refund for A.Y. 2007-08 by calculating the perquisite value at the reduced rate as provided in the amended section 17(2)(ii) of the Income tax Act.
     

12. The company will not be able to claim refund for tax deducted at source from salary of employees on higher income for the accounting years 2005-06 and 2006-07. The company can give a letter to each employee giving revised working for each of the two years i.e. 2005-06 and 2006-07 in view of the amendment in section 17(2)(ii) with retrospective effect. This will enable each employee to revise his/her return for A.Y. 2006-07 and to file return for A.Y. 2007-08 showing value of housing perquisite as provided in amended section 17(2)(ii) for A.Y. 2007-08. The company can calculate the value of perquisite for accommodation provided to employees at the reduced rates u/s. 17(2)(ii) for the current year i.e. accounting year ending 31-3-2008 and calculate TDS amount on that basis.