Rule 3(7)(i) and Section 17(2)(viii) Upheld; SBI Rate Benchmark for Concessional Loans Valid

By | November 13, 2026
0 Comment
Rule 3(7)(i) and Section 17(2)(viii) Upheld; SBI Rate Benchmark for Concessional Loans Valid

Issue

Whether Section 17(2)(viii) of the Income-tax Act, 1961 (corresponding to Section 16 of the Income-tax Act, 2025) and Rule 3(7)(i) of the Income-tax Rules, 1962 (corresponding to Rule 15 of the Income-tax Rules, 2026) are constitutionally valid, within permissible delegation limits, and compliant with Article 14 when using SBI’s interest rate as a benchmark for taxing concessional loans as perquisites.

Facts

  • The legal dispute centered on the taxation of interest-free or concessional loans provided by employers as taxable salary perquisites (fringe benefits).
  • Subordinate legislation under Rule 3(7)(i) of the Income-tax Rules, 1962 (now Rule 15 of the Income-tax Rules, 2026) was enacted under the rule-making authority conferred by Section 17(2)(viii) of the Income-tax Act, 1961 (now Section 16 of the Income-tax Act, 2025).
  • Under this rule, the State Bank of India’s (SBI) rate of interest was fixed as the benchmark for determining the taxable perquisite value of such loans.
  • A challenge was mounted questioning whether Section 17(2)(viii) amounted to excessive delegation of essential legislative functions and whether fixing SBI’s interest rate was arbitrary or violative of Article 14 of the Constitution of India.

Decision

  • Valid Rule-Making Power: Enacting subordinate legislation to tax interest-free or concessional loans as a fringe benefit falls squarely within the rule-making power granted under Section 17(2)(viii).
  • No Excessive Delegation: Neither Section 17(2)(viii) nor the enactment of Rule 3(7)(i) constitutes an excessive delegation of essential legislative functions; both remain well within the parameters of permissible delegation.
  • Clear Legislative Policy: Section 17(2) clearly outlines the legislative policy and establishes adequate standards to guide the rule-making authority, rendering Rule 3(7)(i) intra vires Section 17(2)(viii).
  • Reasonable Benchmark: Using the SBI rate of interest as a benchmark is neither an arbitrary nor an unequal exercise of power.
  • Constitutional Compliance: Rule 3(7)(i) adopts a uniform approach grounded in a fair determining principle aligned with constitutional values, making Rule 3(7) completely intra vires Article 14 of the Constitution of India.
  • Final Verdict: The matter was decided entirely in favor of the Revenue.

Key Takeaways

  • Permissible Delegation: Parliament’s delegation of perquisite valuation mechanics to the executive under Section 17(2)(viii) (and Section 16 of the 2025 Act) is valid because the parent statute provides clear policy guidelines.
  • Benchmark Legitimacy: Adopting SBI’s lending rate as a uniform standard for valuing employee loan benefits satisfies the equality test under Article 14 and avoids arbitrary tax assessments.
  • Continuity Under New Tax Regime: The principles upholding Rule 3(7)(i) under the 1961 Act seamlessly reinforce the validity of corresponding provisions under Section 16 of the Income-tax Act, 2025, and Rule 15 of the Income-tax Rules, 2026.
HIGH COURT OF MADRAS
Catholic Syrian Bank Executive Forum
v.
Union of India
Sushrut Arvind Dharmadhikari, CJ.
and G. Arul Murugan, J.
WP No. 5888 of 2010
MP No.1 of 2010
OCTOBER  14, 2026
R. Ramesh for the Petitioner. Dr. B. Ramaswamy, Senior Standing Counsel for the Respondent.
ORDER
G. Arul Murugan, J. – This writ petition is filed seeking a declaration to declare that the Amendment to Section 17(2) of the Income Tax Act, 1961 as amended by Finance Act 2007, and also Circular dated 02/01/2008 issued by the 4th Respondent Bank are unconstitutional and ultra vires and null and void.
2. The provisions of Section 17(2), 17(2)(iii), 17(2)(vi), 17(2) (viii) of the Act and Rule 3(7)(i) of the Income Tax Rules, 1962 (in short ‘the Rules’) were under challenge before this Court in separate writ petitions and a Division Bench of this Court, heard the entire batch of writ petitions analogously and by common judgment dated 20.04.2026 in the case of All India Union Bank Officers v. Union of India [CDJ 2016 MHC 2413] dismissed the writ petitions and upheld the constitutional validity of Section 17(2)(viii) of the Act and Rule 3(7)(i) of the Rules. The relevant portion of the judgment dated 20.04.2016 reads as under:
“49. More than helping the petitioners, the said decision helps the respondent – Department. If salary is taxable and some perquisite or benefit forms part of a package, the same should also be taxed. Therefore, we are of the considered view that the challenge to Section 17(2) (viii) as well as Rule 3(7)(i) has to fail.
50. As a consequence, all the above writ petitions are dismissed as devoid of any merits. Consequently, all connected pending MPs are also dismissed. There will be no order as to costs.”
3. In the appeals filed against the aforesaid judgment in the case of All India Bank Officers’ Confederation v. Regional Manager, Central Bank of India 464 ITR 286 (SC)/2024 INSC 389, (Civil Appeal No.7708 of 2014 and batch of cases), the Hon’ble Supreme Court upheld the judgment of this Court dated 20.04.2016 and dismissed the appeals upholding the constitutional validity of Section 17(2) of the Act and Rule 3(7) of the Rules.
3.1 . The relevant portions of the Supreme Court judgment is usefully reproduced hereunder:
31. We are of the opinion that the enactment of subordinate legislation for levying tax on interest free/concessional loans as a fringe benefit is within the rule- making power under Section 17(2)(viii) of the Act. Section 17(2)(viii) itself, and the enactment of Rule 3(7)(i) is not a case of excessive delegation and falls within the parameters of permissible delegation. Section 17(2) clearly delineates the legislative policy and lays down standards for the rule-making authority. Accordingly, Rule 3(7)(i) is intra vires Section 17(2)(viii) of the Act. 26 AIR (1967) SC 1895. Section 17(2)(viii) does not lead to an excessive delegation of the ‘essential legislative function’.
II. Is Rule 3(7)(i) arbitrary and violative of Article 14 of the Constitution insofar as it treats the PLR of SBI as the benchmark?
32. Rule 3(7)(i) posits SBI’s rate of interest, that is the PLR, as the benchmark to determine the value of benefit to the assessee in comparison to the rate of interest charged by other individual banks. The fixation of SBI’s rate of interest as the benchmark is neither an arbitrary nor unequal exercise of power. The rule-making authority has not treated unequal as equals. The benefit enjoyed by bank employees from interest-free loans or loans at a concessional rate is a unique benefit/advantage enjoyed by them. It is in the nature of a ‘perquisite’, and hence is liable to taxation.
33. Rule 3(7)(i), it can be hardly argued, is arbitrary or irrational for the reason it benchmarks computation of the perquisite with reference to the SBI’s PLR. SBI is the largest bank in the country and the interest rates fixed by them invariably impact and affect the interest rates being charged by other banks. By fixing a single clear benchmark for computation of the perquisite or fringe benefit, the rule prevents ascertainment of the interest rates being charged by different banks from the customers and, thus, checks unnecessary litigation. Rule 3(7)(i) ensures consistency in application, provides clarity for both the assessee and the revenue department, and provides certainty as to the amount to be taxed. When there is certainty and clarity, there is tax efficiency which is beneficial to both the tax payer and the tax authorities. These are all hallmarks of good tax legislation. Rule 3(7)(i) is based on an uniform approach and yet premised on a fair determining principle which aligns with constitutional values.
34. It is also apposite to note that when it comes to uniform approach the laws relating to fiscal or tax measures enjoy greater latitude than other statutes. The Legislature should be allowed some flexibility in such matters and this Court would be more inclined to give judicial deference to legislative wisdom. Commercial and tax legislations tend to be highly sensitive and complex as they deal with multiple problems and are contingent. This Court would not like to interfere with the legislation in question, which prevents possibilities of abuse and promotes certainty. It is not iniquitous, draconian or harsh on the taxpayers. A complex problem has been solved through a straitjacket formula, meriting judicial acceptance. To hold otherwise, would lead to multiple problems/issues and override the legislative wisdom. The universal test in the present case is pragmatic, fair and just. Therefore, Rule 3(7) is held to be intra vires Article 14 of the Constitution of India.
35. We, accordingly, dismiss the appeals and uphold the impugned judgments of the High Courts of Madras and Madhya Pradesh. No order as to costs.”
4. In view of the fact that already the issue regarding the constitutional validity of Section 17(2) of the Act has been considered by this Court and decided in favour of the Revenue and the said order was also upheld by the Supreme Court in the judgment referred supra, the issue raised in this writ petition is squarely covered by the aforesaid judgments of this Court and the Hon’ble Supreme Court.
In view of the above, the writ petition stands dismissed. There shall be no order as to costs. Consequently, the interim applications stand closed.