Constitutional Validity of Rule 3(7)(i) Upheld; Perquisite Valuation for Concessional Loans Remains Valid

By | November 13, 2026
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Constitutional Validity of Rule 3(7)(i) Upheld; Perquisite Valuation for Concessional Loans Remains Valid

Issue

Whether Rule 3(7)(i) of the Income-tax Rules, 1962, relating to the valuation of interest-free or concessional loans as perquisites under Section 17 of the Income-tax Act, is unconstitutional and ultra vires.

Facts

  • The petitioner filed a writ petition before the High Court challenging the constitutional validity of Rule 3(7)(i) of the Income-tax Rules, 1962.
  • The petitioner sought a formal declaration that the said rule is ultra vires Section 17 of the Income-tax Act, 1961, which governs the taxation of salary perquisites.
  • The core challenge contested the statutory mechanism used for valuing interest-free or concessional loans provided to employees.
  • The court examined whether the precise legal question regarding the validity of the rule was res integra or already adjudicated by higher judicial forums.

Decision

  • The Court noted that the constitutional validity of Rule 3(7)(i) of the Income-tax Rules, 1962, had already been conclusively upheld by both the High Court and the Supreme Court in earlier precedents.
  • It was determined that the issue raised in the instant writ petition was squarely covered by these binding prior judgments.
  • Consequently, the writ petition was dismissed.
  • The ruling was rendered in favor of the Revenue.

Key Takeaways

  • Binding Precedent: The constitutional validity of Rule 3(7)(i) concerning concessional loan perquisites under the Income-tax Act is well-settled and immune to challenge based on prior Supreme Court and High Court rulings.
  • Perquisite Taxation: Valuation rules framed under subordinate legislation for employer-provided loans continue to hold full legal force.
  • Judicial Economy: Writ petitions raising issues already covered by authoritative judicial pronouncements are liable to summary dismissal.
HIGH COURT OF MADRAS
South Indian Bank Employees Association
v.
Union of India
Sushrut Arvind Dharmadhikari, CJ.
and G. Arul Murugan, J.
WP No. 2617 of 2011
OCTOBER  14, 2026
Ms. Akshayaa M. and Bhagawath Krishnan for the Petitioner. Dr. B. Ramaswamy, Senior Standing Counsel for the Respondent.
ORDER
G. Arul Murugan, J. – This writ petition is filed seeking to declare Rule 3(7)(i) of the Income Tax Rules and sub-para (c) of Para B of Circular dated 26.10.2009 issued by the 4th respondent bank are unconstitutional and ultra vires the Income-tax Act, 1961 and, therefore, 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 20.04.2016 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. On appeal, the Hon’ble Supreme Court in ll India Bank Officers’ Confederation v. Regional Manager, Central Bank of India [2024] 162   (SC)/2024 INSC 389, upheld the aforesaid judgment of this Court 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 Rule 3(7)(i) of the Rules has been considered by this Court and decided in favour of the Revenue and the said order was 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 application stands closed.