IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION CIVIL APPELLATE JURISDICTION CIVIL APPELLATE JURISDICTION WRIT PETITION NO. 1411 OF 1992 WRIT PETITION NO. 1411 OF 1992 WRIT PETITION NO. 1411 OF 1992 1. All India State Bank Officers Federation 2. State Bank of India Officers Association (Mumbai Circle) .. Petitioners V/s 1. Union of India 2. Central Board of Direct Taxes 3. State Bank of India .. Respondents Mr.P.F. Kaka with Mr.Raju Z. Moray for the Petitioners. Mr.B.M. Chatterjee for Respondents No.1 and 2. Mr.Prakash Shinde i/b M. Dhruva & Co. for Respondent No.3. Mr.B.A. Desai, Additional Solicitor General for the Attorney General of India. AND AND AND WRIT PETITION NO. 1915 OF 1997 WRIT PETITION NO. 1915 OF 1997 WRIT PETITION NO. 1915 OF 1997 WITH WITH WITH CIVIL APPLICATION NO. 2799 OF 1998 CIVIL APPLICATION NO. 2799 OF 1998 CIVIL APPLICATION NO. 2799 OF 1998 1. All India Reserve Bank Employees’ Association 2. Reserve Bank of India Employees Association Mumbai 3. Shri P.B. More .. Petitioners V/s 1. Union of India 2. Central Board of Direct Taxes - 2 - 3. Reserve Bank of India 3. Assistant Commissioner of Income-tax.. Respondents Mr.P.F. Kaka with Mr.Raju Z. Moray for the Petitioners. Mr.B.M. Chatterjee for Respondents No.1, 2 and 4. None present for Respondent No.3 though served. Mr.B.A. Desai, Additional Solicitor General for the Attorney General of India. AND AND AND O.S. WRIT PETITION NO. 213 OF 1997 O.S. WRIT PETITION NO. 213 OF 1997 O.S. WRIT PETITION NO. 213 OF 1997 Shri Sunil A. Bendre .. Petitioner V/s 1. Reserve Bank of India 2. Union of India 3. The 1st Income-tax Officer, Salaries Branch, TDS Section .. Respondents Mr.P.F. Kaka with Mr.Raju Z. Moray for the Petitioner. None present for Respondent No.1 though served. Mr.B.M. Chatterjee for Respondents No.2 and 3. Mr.B.A. Desai, Additional Solicitor General for the Attorney General of India. CORAM : H.L. GOKHALE & V.R. KINGAONKAR, JJ. DATE OF RESERVING THE JUDGMENT : 14TH AUGUST 2006 - 3 - DATE OF PRONOUNCING THE JUDGMENT : 13TH NOVEMBER 2006 JUDGMENT JUDGMENT JUDGMENT: (Per H.L. Gokhale, J.) 1. The first of these three writ petitions, i.e. Writ Petition No.1411 of 1992, is filed by a Federation of Officers of State Bank of India and its regional unit from Mumbai. The second writ petition, i.e. Writ Petition No.1915 of 1997, is filed by All India Reserve Bank Employees’ Association and its Association in Mumbai. A Civil Application is taken out therein for interim relief. The third petition, i.e. Writ Petition No.213 of 1997, is filed by an officer of Reserve Bank of India. All these three writ petitions seek to challenge the constitutional validity of the latter part of clause (v) of the first proviso to section 17(2) of the Income Tax Act, 1961 [appearing in the section after clause (vi)] to the extent it treats the medical reimbursement above Rs.15,000/- per annum as taxable perquisite for the salaried persons. Since all the three petitions raise the same question of law, they have been heard and decided together. 2. The main contesting Respondents to these three petitions are the Union of India and the Central Board of Direct Taxes and the concerned Income Tax Officer. Since the vires of a provision of a Central Statute is under challenge, a notice was issued to the Attorney General of India and Mr.B.A. Desai, Additional - 4 - Solicitor General, has appeared for him. Mr.B.N. Chatterjee has appeared for the Union of India and its officers. Mr.Kaka and Mr.Moray have appeared for the Petitioners in all the three petitions. 3. All the three petitions are based on grievances of individual employees. Thus, Writ Petition No.1411 of 1992 points out that one Shri Subhash Banhatti, an officer of the State Bank of India, was going to the branch at Navghar near Vasai on 6th June 1991 accompanied by a fellow officer when the taxi in which they were travelling met with a serious accident between Jogeshwari and Goregaon on the Western Express Highway. Shri Banhatti was first moved to Cooper Hospital of the Municipal Corporation at Vile Parle and since the facility over there did not appear to be adequate, the officers of the bank removed Shri Banhatti to Jaslok Hospital. Shri Banhatti’s life was saved, but the medical expenses incurred by the bank on his treatment amounting to about Rs.3,46,000/- were added to his taxable income and he was asked to make arrangement to meet the tax liability. 4. Writ Petition No.1915 of 1997 is concerning the claim for reimbursement by the 3rd Petitioner therein who is working as a Typist in the office of Reserve Bank of India at Pune. His minor son suffers from - 5 - Haemophilia, which is a disorder wherein there is a tendency of the patient bleeding severely even due to a slight injury. According to the Petitioner, the only place where the child could get treatment in Pune was one Dohade Hospital wherein the Haemophilia Care Centre of the Maharashtra Society of Haemophilia is situated. However, that hospital is not an approved hospital and, therefore, Petitioner No.3 is sought to be taxed for the amount of reimbursement made to him by the Reserve Bank of India. 5. The Petitioner in Writ Petition No.213 of 1997 is an officer working in Reserve Bank of India and is a kidney patient suffering from chronic renal failure. He was required to undergo haemodialysis thrice a week and the annual cost of this treatment at the relevant time was in the range of Rs.1.5 lakhs. That was reimbursed to him by the Reserve Bank of India. If this reimbursement was to be added to his salary as taxable income, the tax deductible at source would work out to Rs.50,000/- per year. 6. All these three petitions have been admitted and an interim order has been passed restraining the respective employers from treating the medical reimbursement as taxable income pending the final disposal of the writ petitions. Consequently, the tax thereon is not deducted. - 6 - 7. (a) Before we consider the rival submissions, it will be desirable to refer to the relevant statutory provisions. Section 4 of the Income Tax Act is the charging section, which authorises the levy of income tax on the income of any person. Section 5 of the Act gives the scope of total income and sub-section (1) thereof lays down that the total income of a resident Indian in any previous year includes all income from whatever source derived which (a) is received or is deemed to be received in India by or on behalf of such person, (b) accrues or arises or is deemed to accrue or arise to him in India, or (c) accrues or arises to him outside India during such year. Section 2(24) gives the definition of "income" which is an inclusive definition. Amongst others, in clause (iii) thereof, it is provided that income includes the value of any perquisite or profit in lieu of salary taxable under sub-section (2) and (3) of section 17. Section 14 of the Act gives the various heads of income. It lays down that save as otherwise provided under the Act, all income for the purposes of charge of income tax and computation of total income shall be classified under the following heads of income: (A) Salaries (B) Interest on securities (omitted by Finance Act, 1988 w.e.f. 1-4-1989) - 7 - (C) Income from house property (D) Profits and gains of business or profession (E) Capital gains (F) Income from other sources Section 15 deals with various factors which constitute the income chargeable to income tax under the head "salaries". Section 16 lays down that income chargeable under the head "Salaries" shall be computed after making deductions mentioned therein. Section 17 defines "salary", "perquisite" and "profits in lieu of salary". Section 17(1) gives an inclusive definition of "salary" and in clause (iv), it specifically includes perquisites. Section 17(2) defines "perquisite" also in an inclusive manner. Clause (iv) thereof is relevant for our purpose which includes in the concept of perquisite any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee. Clause (v) includes the employer’s contribution to a life insurance scheme other than those specified and clause (vi) the fringe benefits. (b) The first proviso thereafter however lays down that nothing in sub-section (2) of section 17 will apply to the particular medical treatments on hospitalisation mentioned in clauses (i) and (ii) or insurance premia - 8 - mentioned in clauses (iii) and (iv) therein. Clause (v) appearing thereafter lays down that any sum paid by the employer in respect of expenditure actually incurred by the employee on his medical treatment other than the two cases of hospitalisation covered in clauses (i) and (ii) will also be excluded from the coverage of perquisite provided however the same does not exceed Rs.15,000/- in the previous year. It is the vires of the latter part of this sub-clause (v) restricting the benefit to Rs.15,000/- which is under challenge. Sub-section 3) of section 17 gives the inclusive definition of "profits in lieu of salary". We are not concerned with that definition in the present matter. 8. It is therefore necessary to reproduce sub-sections (1) and (2) of section 17 of the Act which define salary and perquisite respectively. "Salary", "perquisite" and "profits in lieu of salary" defined. "17. "17. "17. For the purposes of sections 15 and 16 and of this section.- (1) "salary" "salary" "salary" includes - (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; (va) any payment received by an employee in respect of any period of leave not availed of by him; - 9 - (vi) the annual accretion to the balance at the credit of an employee parti- cipating in a recognised provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; and (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participat- ing in a recognised provident fund, to the extent to which it is charge- able to tax under sub-rule (4) thereof; (viii) the contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD; (2) "perquisite" "perquisite" "perquisite" includes- (i) the value of rent-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 assessee by his employer; (iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following case- (a) by a company to an employee who is a director thereof; (b) by a company to an employee being a person who has a substantial interest in the company; (c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head "salaries" (whether due from, or paid or allowed by, one or more employers), exclusive of - 10 - the value of all benefits for amenities not provided for by way of monetary payment, exceeds fifty thousand rupees; Provided Provided Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees’ Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government. [Explanation Explanation Explanation.- For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause; (iiia) [Omitted by the Finance Act, 2000 w.e.f. 1-4-2001] (iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee; (v) any sum payable by the employer, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund or a Deposit-linked Insurance Fund established under section 3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 (46 of 1948) or, as the case may be, section 6C of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952), to effect an assurance on the life of the assessee or to effect a contract for an annuity; and - 11 - (vi) the value of any other fringe benefit or amenity excluding the fringe benefits chargeable to tax under Chapter XII-H as may be prescribed. Provided Provided Provided that nothing in this clause shall apply to- (i) the value of any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer; (ii) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family- (a) in any hospital maintained by the Government or any local authority or any other hospital approved by the Government for the purposes of medical treatment of its employees; (b) in respect of the prescribed diseases or ailments, in any hospital approved by the Chief Commissioner having regard to the prescribed guidelines; Provided Provided Provided that, in a case falling in sub-clause (b), the employee shall attach with his return of income a certificate from the hospital specifying the disease or ailment for which medical treatment was required and the receipt for the amount paid to the hospital; (iii) any portion of the premium paid by an employer in relation to any employee, to effect or to keep in force an insurance on the health of such employee under any scheme approved by the Central Government or the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) for the purposes of clause (ib) of sub-section (1) of section 36; - 12 - (iv) any sum paid by the employer in respect of any premium paid by the employee to effect or to keep in force an insurance on his health or the health of any member of his family under any scheme approved by the Central Government or the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) for the purposes of section 80D; (v) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family other than the treatment referred to in clauses (i) and (ii), so, however, that such sum does not exceed fifteen thousand rupees in the previous year; (vi) any expenditure incurred by the employer on- (1) medical treatment of the employee, or any member of the family of such employee, outside India; (2) travel and stay abroad of the employee of any member of the family of such employee for medical treatment; (3) travel and stay abroad of one attendant who accompanies the patient in connection with such treatment; Subject to the condition that- (A) the expenditure on medical treatment and stay abroad shall be excluded from perquisite only to the extent permitted by the Reserve Bank of India; and (B) the expenditure on travel shall be excluded from perquisite only in the case of an employee whose gross total income, as computed before including therein the said expenditure, does not exceed two - 13 - lakh rupees; (vii) any sum paid by the employer in respect of any expenditure actually incurred by the employee for any of the purposes specified in clause (vi) subject to the conditions specified in or under that clause: [Provided Provided Provided further that for the assessment year beginning on the 1st day of April, 2002, nothing contained in this clause shall apply to any employee whose income under the head "salaries" (whether due from, or paid or allowed by, one or more employers) exclusive of the value of all perquisites not provided for by way of monetary payment, does not exceed one lakh rupees.] Explanation Explanation Explanation.- For the purposes of clause (2).- (i) "hospital" includes a dispensary or a clinic or a nursing home; (ii) "family", in relation to an individual, shall have the same meaning as in clause (5) of section 10; and (iii) "gross total income" shall have the same meaning as in clause (5) of section 80B." 9. The submissions of the Petitioners are principally two-fold. They firstly submit that reimbursement of medical expenditure cannot be considered to be a perquisite and that it is irrational to treat it as such. There is no element or regularity or benefit therein and the amount is to be passed on or is already passed to a hospital on and then reimbursed. There is no element of any vested right or advantage to the assessee therein. Secondly, it is submitted that under sub-clause (v) of the proviso, a limit is placed at Rs.15,000/- and - 14 - reimbursement above Rs.15,000/- by the employer will be considered as perquisite to the employee. On the other hand, even if the amount spent on an employee is more than Rs.15,000/-, but it is spent in a hospital maintained by Government or Local Body or an approved hospital treating specified ailments, that would still not be included as perquisite under clauses (i) and (ii) of the proviso and will not be added to the salary of the employee concerned. It is therefore submitted that out of two employees needing hospitalisation, one going to the Government or the Municipal or the approved hospital may get medical treatment exceeding Rs.15,000/- and yet it will not be added to his income as perquisite. On the other hand, merely because an employee goes to a private hospital and incurs expenses exceeding Rs.15,000/-, in the event of reimbursement of such amount by his employer, that amount will be added to his salary and will become taxable. It is submitted that the line drawn at Rs.15,000/- is arbitrary and discriminates against an equally situated employee. It is therefore submitted that there is a violation of the constitutional guarantee of equal protection of the laws contained in Article 14 of the Constitution of India. The latter part of this sub-clause (v), namely "so, however, that such sum does not exceed fifteen thousand rupees in the previous year" is therefore sought to be struck down. - 15 - 10. A good number of judgments were cited by the counsel for both the parties. As far as the Petitioners are concerned, reliance was placed firstly on the judgment of the House of Lords in Owen v. Pook (Inspector of House of Lords in Owen v. Pook (Inspector of House of Lords in Owen v. Pook (Inspector of Taxes) - (1969) 2 WLR 775 Taxes) - (1969) 2 WLR 775 Taxes) - (1969) 2 WLR 775. The taxpayer in this case carried on practice as a general medical practitioner. He also had two part-time appointments with two different hospitals and under those appointments he was supposed to be on a standby duty at certain specified time. He was paid certain travelling expenses for that purpose. He sought deduction of the whole cost of travelling incurred from his income. It was submitted on his behalf that this reimbursement of the travelling expenses was not a perquisite within the meaning of the concept under paragraph 1(1) of Schedule 2 to the Finance Act, 1956. This paragraph provided as follows:- "Tax under Case I, II or III shall, except as hereinafter mentioned, be chargeable on the full amount of the emoluments falling under that case, subject to such deductions only as may be authorised by the Income Tax Acts, and the expression "emoluments" shall include all salaries, fees, wages, perquisites and profits whatsoever." The House of Lord held that the travelling allowance paid by the hospital committee was the reimbursement for actual expenditure. It was not an emolument of the taxpayer’s office or employment. The Court held that the term "perquisite" has a known normal meaning, namely a personal - 16 - advantage, which would not apply to a mere reimbursement of necessary disbursements and "there is nothing in the other words of the definition to give it a different meaning". 11. This judgment has been quoted with approval in a decision of a Division Bench of the Gujarat High Court in the case of Commissioner of Income v. S.G. Pgnatale - Commissioner of Income v. S.G. Pgnatale - Commissioner of Income v. S.G. Pgnatale - (1980) 124 ITR 391 (1980) 124 ITR 391 (1980) 124 ITR 391. The assessee in that case was an employee of a French company which had entered into an agreement with an Indian company for rendering certain services in Europe and also provided backup and other services in installing a plant in India. Amongst others, he was to be paid a living allowance of Rs.220/- per day when posted at Delhi and Rs.150/- per day when posted at Baroda to cover the extra cost of living. The Division Bench noted that the very fact that the allowance was likely to be reduced or increased depending upon the change in the circumstances from place to place and depending upon whether free accommodation or free transport was allowed or not goes to indicate that the allowance was given as reimbursement rather than a personal advantage. The Division Bench followed the test in Owen v. Pook (supra) that the word "perquisite" would not apply to a mere reimbursement of a necessary disbursement. The Court observed that in its opinion, the better test was to decide whether the allowance of this - 17 - kind was given by way of reimbursement or was given by way of a personal advantage. 12. The question as to whether a daily allowance is a perquisite came up before a Division Bench of the Gauhati High Court in Commissioner of Income-tax v. Goslino Mario Commissioner of Income-tax v. Goslino Mario Commissioner of Income-tax v. Goslino Mario - (2000) 241 ITR 314 (Gauhati) - (2000) 241 ITR 314 (Gauhati) - (2000) 241 ITR 314 (Gauhati). In that matter, the assessee, who was a Italian technician, had come to India under an agreement with an Italian firm to work with the Fertilizer Corporation of India in Assam. The question was whether daily allowance payable to the assessee was taxable or not. It was held that in view of section 10(14) of the Income-tax Act, any special allowance granted to meet expenses incurred for the purposes of duties of an office was not included in the total income. It was held that the word "perquisite" would not apply to reimbursement of necessary disbursement. It was confirmed by the Apex Court in CIT v. Goslino Mario - (2000) 241 CIT v. Goslino Mario - (2000) 241 CIT v. Goslino Mario - (2000) 241 ITR 312 (S.C.) ITR 312 (S.C.) ITR 312 (S.C.)