Valuation of cost of free or concessional education
Rule 3 of the Income tax Rules 1962 provide for valuation of various forms of perquisites in the case of employed personnel. Among such rules there is one sub-rule (5) that attempts to determine the value of free or concessional education benefit. It more particularly reads as under:
“(5) The value of benefit to the employee resulting from the provision of free or concessional educational facilities for any member of his household shall be determined as the sum equal to the amount of expenditure incurred by the employer in that behalf or where the educational institution is itself maintained and owned by the employer or where free educational facilities for such member of employees’ household are allowed in any other educational institution by reason of his being in employment of that employer, the value of the perquisite to the employee shall be determined with reference to the cost of such education in a similar institution in or near the locality. Where any amount is paid or recovered from the employee on that account, the value of benefit shall be reduced by the amount so paid or recovered:
Provided that where the educational institution itself is maintained and owned by the employer and free educational facilities are provided to the children of the employee or where such free educational facilities are provided in any institution by reason of his being in employment of that employer, nothing contained in this sub-rule shall apply if the cost of such education or the value of such benefit per child does not exceed one thousand rupees per month.”
In the context of valuation of perquisite for free education in the hands of school staff the Delhi High Court in Commissioner of Income (TDS) v Delhi Public School (2009) 318ITR234 decried the department’s attempt to determine the cost of education with reference to cost for other students in the same school as the perquisite value.
In this case the department proceeded to tax the school staff for free education on the basis of the cost of education at Rs. 902.27 per month per child as drawn from the accounts maintained by the school. The High Court held that the department misinterpreted rule 3(5) as the same requires the school to determine such value with reference to the cost of education in a similar institution in or near the locality. The Supreme Court has also dismissed the special leave petition against the judgment.
In a previous instance in the case of ITO v. Director, Delhi Public School  302 ITR (AT) 117;  18 SOT 453 the Commissioner of Income-tax (Appeals) held a view that deduction of Rs. 1,000 per month should be allowed from the cost for working out the perquisite. On the issue of cost versus fee, it was pointed out that the assessee is a charitable institution, being run on no-profit-no-loss basis. Hence, the cost would be nothing but the fees charged from the other students. The Delhi Tribunal in this case observed that different methods of computing perquisite value of free or concessional educational facilities to staff are provided under the rule. If the amount of expenditure actually incurred is available, then that amount is to be taken. If such actual expenditure incurred is not available, then the perquisite value of cost in a similar institution in or near the locality where the educational institution in question is situated can be taken. Different computations are separated by the word “or”. Therefore, the words “cost” or “value of perquisite” are used alternatively. It further held therefore that where the value of free education was less than Rs. 1,000 per month per child, nothing could be taken as perquisite in the hands of the teachers or staff members. However, if it exceeded Rs. 1,000 per child, then, the whole of the amount would become chargeable as perquisite in the hands of the teachers and staff members. It was further held that for working out the cost for the purpose of valuing the perquisite, all expenses in running the school, whether direct or indirect, will have to be taken into account, but the depreciation had to be excluded. It was also held that where any amount was recovered from the teachers or the staff members, the same would be deducted in arriving at the cost.
So much so that after the pronouncement by the Delhi High Court neither does expenditure actually incurred by the school nor does the fee charged from other students are a good criterion to estimate the perquisite value on account of free education to the wards of a teacher and other staff members of the school.
The Central Board of Direct Taxes Circular No. 4/2020 dated 16 January 2020 with reference to the subject ‘income-tax deduction from salaries during the financial year 2018-19 under section 192 of the Income-tax Act, 1961’prescribe the following guideline in this regard:
“V Free or concessional education [Rule 3(5)]: Perquisite on account of free or concessional education for any member of the employee‘s household shall be determined as the sum equal to the amount of expenditure incurred by the employer in that behalf. However, where such educational institution itself is maintained and owned by the employer or where such free educational facilities are provided in any institution by reason of his being in employment of that employer, the value of the perquisite to the employee shall be determined with reference to the cost of such education in a similar institution in or near the locality if the cost of such education or such benefit per child exceeds Rs.1000/- p.m. The value of perquisite shall be reduced by the amount, if any, paid or recovered from the employee.”
The Circular further advocates the determining cost of education for the purpose of computation of perquisite to be with reference to the one in a similar institution in or near the locality.
What is the correct criterion?
The subject rule 3(5) has two limbs. In the first limb it provides for taxation on the basis of actual expenditure incurred by the employer on free or concessional educational facilities for children of those in employment of a non-teaching institution. In the second limb it provides for taxation in particular to those in employment of a teaching institution in which case the value of perquisite is stated to be commensurate with the cost of education in a similar institution in or near the locality of the school.
In other words in the context of a school teacher who derive free or concessional education benefit for his or her ward admitted in his or her school may be taxed with reference to the cost of their education in a similar institution in or near the locality. The rule does not set any criteria other than that the school under reference may be in the same or similar locality. There is no reference in the given rule to any yardstick or parameters to scale out a similar institution such as public or private school or kind of accreditation or type of infrastructure or school curriculum or international exposure or faculty etc.
In other words the present rule is loosely worded to enable upon a teacher to draw relief with reference to the minimum possible cost of education in a similar school located in or near the locality.
Thus in a case of a private school teacher the value of perquisite/benefit on account of free education of her ward can be computed on the basis of fee charged in a State run school in the same or near the locality which data may be available in public domain. More importantly the Delhi Tribunal in ITO v. Director, Delhi Public School  302 ITR (AT) 117;  18 SOT 453 held that the assessee could always insist that the Revenue should adopt the mode of computation, which would put the least burden on the assessee (employer/employee). As a matter of fact the schools run by the Delhi Government today are up-scaled to match the education standards of privately run schools at affordable costs which may be taken as reference for perquisite valuation in the absence of any restriction in rule 3(5) in a Delhi school teacher case.