In a recent ruling, the Bombay High Court stated that requiring higher-paid bank employees to bear a proportionately higher tax burden was justified and not violative of Article 14 of the Constitution and upheld the constitutional validity of the 2007 amendments to Section 17(2) of the Income Tax Act, 1961.
Trade unions and federations representing officers of nationalized banks, such as the All India Central Bank Officers’ Federation, Canara Bank Officers’ Association, Syndicate Bank Officers’ Association, and State Bank of India Officers’ Federation, filed several writ petitions.
The challenge was against Explanations 1 and 4 to Section 17(2) of the Income Tax Act, 1961 (introduced by the Finance Act, 2007), which created a legal fiction deeming employer-provided accommodations as taxable “perquisites” under certain conditions.
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The amendment stated that employer-provided accommodations would be treated as taxable benefits (called perquisites) if the rent paid by employees was less than certain percentages of their salary. These percentages were 15% for large cities (population over 25 lakhs), 10% for medium cities (population 10–25 lakhs), and 7.5% for smaller cities. The amendment applied from 2002 to 2006 for different provisions and aimed to simplify tax calculations, addressing issues raised in the Arun Kumar case.
The petitioners argued that the amendments violated Article 14 of the Constitution by being arbitrary, discriminatory, and irrational. The petitioner’s counsel argued that the amendments unfairly imposed retrospective liabilities, deeming non-existent concessions taxable.
The petitioners also argued that discrimination was alleged against bank employees compared to Central and State government employees who were not subjected to similar provisions. The retrospective application of the amendments (from 2002 to 2006) was arbitrary and constituted an undue burden on taxpayers.
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The respondents defended the amendments stating they were introduced to address administrative challenges raised by the Supreme Court in Arun Kumar v. Union of India, in which the Court questioned the absence of a deeming provision in the Income Tax Act.
The bench comprising Justice M.S. Sonak and Justice Jitendra Jain observed that requiring bank employees with higher salaries to bear a proportionately higher tax burden does not constitute hostile discrimination or manifest arbitrariness. The court explained that classifications based on the economic superiority of individuals are well-recognized and align with established principles of taxation.
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The court referenced Krishnamurthi and Co. v. State of Madras and Serum Institute of India v. Union of India, which supported the principle that legislative amendments addressing defects identified by courts are permissible even with retrospective effect.
The court rejected the claim that the amendments constituted an impermissible judicial override or contradicted the principles established in Arun Kumar. The court explained that his amendments were consistent with judicial observations and addressed the gap without overstepping legislative competence. The court dismissed the writ petitions.
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