TaxTMI 
TaxTMI 
2019 (12) TMI 1042
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....e Bill, 2005 in the Floor of Parliament, the Finance Minister in his speech rendered as under: 160. I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value. At present, where the benefits are fully attributable to the employee they are taxed in the hands of the employee; that position will continue. In addition, I now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer. However, transport services for workers and staff and canteen services in an office or factory will be outside the tax net. EXPLANATORY MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL. "the rationale for levying a fringe benefit tax on the employer lies in the inherent difficulty in isolating the 'personal element' where there is collective enjoyment of such benefits and attributing the same directly to the employee. This is so especially where the ex....
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....eceive on behalf of such person or accrues or arises to him during such year. Hence, fringe benefit tax does not amount to taxation of income at all, let alone constituting an additional income tax. C. Chapter XII- H cannot be an anti-avoidance measure as the employer is not guilty of any overt act in order to constitute tax avoidance and hence, chapter XII - H requires to be struck down. D. In as much as there cannot be any additional tax when there is no income tax, the tax on fringe benefits will not be in the nature of income tax and is thus beyond the legislative competence of Parliament. E. The entire concept of taxing fringe benefits is irrational and has no nexus to be objective sought to be achieved and hence, the chapter requires to be struck down. F. In as much as there is patent discrimination between Government and non-Government employees and also preferential treatment given as per the provisions of Section 115-WC (2), the chapter offends the provisions of Article 14 of the Constitution of India and requires to be struck down. G. In as much as the provisions of the Chapter would clearly lead to double taxation, th....
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....iorari or otherwise the provisions of Section 115 WB of the Act and specifically those in Section 115 WB(2) of the Act as taxing the employer as the petitioner in respect of such expenditure amounts to double taxation which is not permissible under the Act. O. Without prejudice and in the alternative read down the provisions of Section 115 WB(2) in general and 115 WB(2)(D) in particular that only where any direct benefit/amenity arises to an employee by reason of the expenditure specified therein the levy of Fringe Benefit Tax is sustainable and not otherwise. P. In the alternative and without prejudice quash by an appropriate writ in the nature of certiorari or otherwise the statutory instructions of the Central Board of Direct Taxes contained in circular No.8 of 2005 dated: 29th August 2005, Annexure-A to the extent it provides for levy of FBT even on such expenditure which does not confer any benefit/amenity on the employee. Q. Issue a writ, order or direction more particularly in the nature of a Writ of Declaration to declare Section 115 WA to WL of the Income tax Act, 1961 as introduced by the Finance Act, 2005, with effect from 01.04.2006 vide Annex....
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....e wherein fringe benefit is not part and parcel of income. Sub Section 43 of Section 2 of the Act, 1961 relates to 'Tax' wherein fringe benefit has not been included. 6. Learned counsel for the petitioners submitted that Section 4 of the Act, 1961 relates to charge of income Tax and Section 5 relates to scope of total income for which receipt is mandatory for income. Section 115 WA under chapter XII - H relates to additional income Tax. In this backdrop, learned counsel for the petitioners submitted that Article 265 of the Constitution provides for not to impose taxes save by authority of Law and Article 246 List I and Entry No.82 deals with Taxes on income other than Agriculture income. 7. Learned counsel for the petitioners further submitted that on perusal of the compilations of various provisions, it is evident that fringe benefits is not included in the definition of income under 'Sub-section 24 of Section 2 whereas Sub-section 43 relates to taxes wherein fringe benefits has been included. Therefore, total income is required to be taken under Section 4 which is the charging section. 8. Learned counsel for the respondent vehemently contended that where a validity of an....
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....those which cannot thereby adversely affecting market structure. However, the taxation of fringe benefits raises some problems primarily because (a) all benefits cannot be individually attributed to employees, particularly in cases where the benefit is collectively enjoyed; (b) of the present widespread practice of providing perquisites, wherein many perquisites are disguised as reimbursements or other miscellaneous expenses so as to enable the employees to escape/reduce their tax liability; and (c) of the difficulty in the valuation of the benefits. 2.2 In India, prior to assessment year 1998-99, some perquisites/fringe benefits were included in salary in terms of section 17 and accordingly taxed under section 15 of the Income-tax Act in the hands of the employee and a large number of fringe benefits were taxed by the employer-based disallowance method where the quantum of the disallowance was estimated on a presumptive basis. In practice, taxation of fringe benefits by the employer-based disallowance method resulted in large-scale litigation on account of ambiguity in defining the tax base. Therefore, the taxation of fringe be....
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....ct of the introduction of Chapter-XII-H of the act that the expenses incurred which are not independently identifiable, have been subjected to tax under this chapter-XII-H. Hence the above contention is incorrect. 7. The revenue seeks leave of this Hon'ble Court to reply on the following judgments. a) R & B Falcon (A) Pty. Ltd., Vs. CIT 301 ITR 309 (SC). The Hon'ble Supreme Court dealing with Circular No.8/2005 dated: 29/08/2005 has dealt with the concept of fringe benefit tax, interpretation of provisions of Section 115 WB and also the object of the Parliament in introducing the concept of fringe benefits. This Hon'ble Court attention is invited to paras-12, 13, 14 and 18 of the judgment. b) Bengal SREI Infrastructure Development Vs. UOI (2017) 397 ITR 757 (Calcutta) The Calcutta High Court while dealing with the constitutional validity of section 115 WB of the Act, has upheld the same. (Para- 10) c) Gujarat Chamber of Commerce & Industry Vs UOI (2017) 395 ITR 457 (Gujarat) The Gujarat High Court while dealing with the constitutional validity of Circular No.8/2005 dated 29/08/2005 by upholding the same has dealt with c....
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....considering the constitutional validity, has upheld the same. (Para-11, 18, 22, 24, 28, 33 and 34) Wherefore it is respectfully prayed that this Hon'ble Court may be pleased to dismiss the above writ petition in the interest of Justice and equity. 10. The Petitioners in response to the written propositions of the Respondents states as under: 1. The constitutional attack is based on three premises. First, the Income-tax Act is relatable to entry 82, list 1 of schedule VII of the constitution and does not permit of any expenditure tax. Entry 97 is applicable to any stand-alone statue. And the definition of income does not include expenditure. 2. Secondly, the percentages fixed are arbitrary and not based on any intelligible criteria. Without prejudice, the provisions will have to read down to permit the assessee to show that the percentages fixed in its case are excessive and faulty. 3. Thirdly, the chapter is admittedly meant to plug tax evasion but does not come within the parameters of tax evasion as there is no overt act on the part of the assessee. 4. The Petitioner has relied on various case laws and these have been provided to th....
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.... equity. 11. Question for consideration is Chapter XII-H of the Income Tax Act, 1961 or any part thereof would be unconstitutional being violative of Articles 14 and 246(1) read with Entry 82, List I of the Seventh Schedule to the Constitution of India? Section 115WB is a part and parcel of Chapter XII-H of the Income Tax Act, 1961 and it was incorporated to the Statute from the year 2005-2006 and it was in vogue till 2009-2010. Chapter XII-H relates to Fringe Benefits Tax. Whereas Section 115WA contemplates that, additional income tax referred to as Fringe Benefits Tax would be payable in respect of fringe benefits provided or deemed to have been provided by an employer to his employee during the previous year at the rate of 30 percent of the value of such benefits. Whether an employee is receiving a fringe benefit from the employer has to be determined and decided for Fringe Benefits to be attracted. 17 issues have been specified under sub-section (2) of Section 115WB which attracts the legal fiction. Chapter XII-H of the Income Tax is premised upon the legal fiction of fringe benefits being given by the employer to the employee. 12. Power of Taxation in the case of Citi....
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....any tax not mentioned in List II and List III are part and parcel of Union List. Therefore, impugned provision even though do not fall under Entry No.82 that tax on income other than agricultural income at the same time, Source of Power is available to the Parliament under Entry No.97 that in other matter not enumerated in List No. II or List No. III including any tax not mentioned in List No. II and List No. III. Consequently, one of the contention of the petitioners is that Parliament has no power to pass the impugned Act under Entry No.82 is not tenable. DIRECT TAX is imposed directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. INCOME TAX: (Entry No. 82 of the Union list):- Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families or firms or cooperative societies (other than companies) and trusts (identified as bodies of individuals associations of persons) or every artificial juridical person. In case of non resident corporations, tax levied on income earned from business transactions in India or any other Indian sources depending on bilateral agre....
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....quirements or is made arbitrarily with bad faith or oblique motives or opposed to public policy-^1 - Mohan Kumar Singhania V. Union of India, AIR 1992 SC 1 at p. 23 : (1992) 1 SCC Supp 594. It must be assumed that the Legislature understands and appreciates the need of the people and the laws it enacts are directed to problems which are made manifest by experience and that the elected representatives assembled in a Legislature enact laws which they consider to be reasonable for the purpose for which they are enacted and that the Legislature is free to recognize degrees of harm and may confine its restrictions to those cases where the needs is deemed to be the clearest^2. - Charanjit Lal V. Union of India, AIR 1951 SC 41. There is considerable authority for the proposition that the Courts are not at liberty to declare an Act void because in their opinion it is opposed to a spirit supposed to pervade the Constitution but not expressed in words. Where the fundamental law has not limited, either in terms or by necessary implication, the general powers conferred upon the Legislature we cannot declare a limitation under the notion of having discovered something in the spirit of the....
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....ok behind the names, forms and appearances to discover the true character and nature of the legislation^2:-Dwarkadas Shrinivas v. The Sholapur Spinning and Weaving Company Ltd., AIR 1954 SC 119 at p. 123. "In State of Karnataka v. M/s. Hansa Corporation Reported in AIR 1981 SC 463 at pp 469-470, the Supreme Court observed as under: "There is always a presumption of constitutionality of a statute. If the language is rather not clear and precise as it ought to be, attempt of the Court is to ascertain the intention of the Legislature and put that construction which would lean in favour of the constitutionality unless such construction is wholly untenable. However, where one has to look at a section not very well drafted but the object behind the legislation and the purpose of enacting the same is clearly discernible, the Court cannot hold its hand and blame the draftsman and chart an easy course of striking down the statute. In such a situation the Court should be guided by a creative approach to ascertain what was intended to be done by the Legislature in enacting the legislation and so construe it as to give force and life to the intention of the Legislature. This is not....
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....ough it relates to a single individual if, on account of some special circumstances or reasons applicable to him and not applicable to others, that single individual may be treated as a class by himself; (b) that there is always a presumption in favour of the constitutionality of an enactment and the burden is upon him who attacks it to show that there has been a clear transgressions of the constitutional principles; (c) that it must be presumed that the Legislature understands and correctly appreciates the need of its own people, that its laws are directed to problems made manifest by experience and that its discriminations are based on adequate grounds; (d) that the Legislature is free to recognize degrees of harm and may confine its restrictions to those cases where the need is deemed to be the clearest; (e) that in order to sustain the presumption of constitutionality, the Court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation; (f) that while good faith and knowledge of the existing....
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....object sought to be achieved by the legislation. It is difficult to expect the Legislature carving out a classification which may be scientifically perfect or logically complete or which may satisfy the expectations of all concerned still the Court would respect the classification dictated by the wisdom of legislature and shall interfere only on being convinced that the classification would result in pronounced inequity or palpable arbitrariness on the touchstone of Article 14 of the Constitution of India. Article 14 forbids class legislation but does not forbid reasonable classification which means (1) must be based on reasonable and intelligible differentia and (2) such differentia must be on rational basis. The question whether institutional reservation fulfills the aforementioned criteria or not must be judged on the following:- (1) There is a presumption of constitutionality; (2) The burden of proof is upon the writ petitioners as they have questioned the constitutionality of the provisions; (3) There is a presumption as regard the State's power on extent of its legislative competence; (4) Hardship of few cannot be the basi....
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.... the group and that differentia has a rational nexus to the object sought to be achieved, there arises no question of infringement of Article 14 of the Constitution. Though Article 14 of the Constitution forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. When any impugned rule or statutory provision is assailed on the ground that it contravenes Article 14 its validity can be sustained if the two tests referred in this article are satisfied. The condition while inviting technical tenders by Maharashtra State Road Transport Corporation (MSRTC), that manufacturers of spare parts who are supplying their products to Original Equipment Manufacturer (OEM) suppliers are alone entitled to participate in tender is unreasonable, unfair and violative of Article 14 of the Constitution. The constitutional fact of the classification has been explained by the Supreme Court in the case of Mohd. Sujat Ali vs Union of India in the following words: "This doctrine recognizes that the legislature may classify for the purpose of legislation but requires that the classification must be reasonable. It should ensure that persons or things sim....
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....4 in question. A law based on a permissible classification fulfills the guarantee of the equal protection of the laws and is valid whereas a law based on an impermissible classification violates the guarantee and is void. Equality is violated by treating persons similarly situated differently. If a law deals equally with the members of a well defined class it is not open to challenge such a law on the ground of denial of equal protection. In order to sustain the presumption of constitutionality, the Court can take into consideration matters of common knowledge and at the same time the Court must presume that the Legislature understands and correctly appreciates the need of its own people. 20. It is well-established that Article 14 forbids class legislation but does not forbid classification. Permissible classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and the differentia must have a rational relation to the object sought to be achieved by the statute in question. In permissible classification mathematical nicety and perfect equality are not required. Similarity, not id....
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....poration of Kalyan & Dombivali & Ors.) and 2004 Volume 6 Supreme Court Cases page 59 (State of West Bengal v. Sadan K. Bormal & Anr.) in support of the contentions that, a legal fiction cannot be extended beyond the purpose for which it is created. He has contended that, Section 115WB (2) has to be read down to mean that only items which satisfies the test of Section 115WA(1) and which are relatable to employer employee relationship can be charged for Fringed Benefits Tax. He has relied upon 2017 Volume 3 Supreme Court Cases page 467 (Southern Motors v. State of Karnataka & Ors.) and has submitted that, although equity and taxation are often strangers, the Court should attempt that they do not remain always so. 4. Learned Advocate appearing for the revenue has submitted that, the section as it stands, does not require a reading down. Chapter XII-H has to be read as a whole. There is no justification in the apprehension that the first petitioner or an assessee would be slapped with a Fringe Benefits Tax when such assesse is not liable for the same. In any event, assuming that, such a situation does arise, such individual assesse is entitled to challenge the order of assessm....
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....purpose for which it is created. Chapter XII-H of the Income Tax Act, 1961 is premised upon the legal fiction of fringe benefits being given by the employer to the employee. 10. It has been contended that, the 17 broad heads stipulated in Sub- section (2) of Section 115WB will prompt any Assessing Officer to charge Fringe Benefits Tax whenever an expenditure on such broad account is looked at, without considering whether or not it is fringe benefit given by an employer to an employee. An employer, in its usual course of business, may be called upon to entertain its customers. Such entertainment of customers should not attract Fringe Benefits Tax, as an employee of such employer is not receiving any benefit out of the entertainment extended by the employer to the customers. With respect, whether Fringe Benefit Tax is attracted to a given transaction or not has to be adjudged in the factual basis obtaining therein. Chapter XII-H is clear as to its range of operation. Its provisions have to apply to an individual instance. The legality, validity and sufficiency of its application in a given instance have to be adjudged on the basis of the factual situation obtaining therein. ....
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....on. However, for the present purpose, attention is drawn to Clause (iii) of Section 2(24) of the Act, which provides that income includes the value of any perquisite or profit in lieu of salary taxable under Clauses (2) and (3) of Section 17. This brings us to consider the scheme of computation of total income which is contained in Chapter IV of the Act. Section 14 deals with heads of income. It provides that save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income ; A. Salaries. B. Interest on securities. [Omitted by Finance Act, 1988, w.e.f, 1st April, 1989] C. Income from house Property D. Profits and Gains of business or Profession E. Capital Gains F. Income from other sources. (2) '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 the employer; (iii) the value of any benefit ....
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.... the aforesaid, two things are very obvious. Firstly, that total income chargeable to tax had to be assessed for any assessment year. The income is one which is earned accrued or received by the assessee during the previous year relevant to the assessment year for which income is to be assessed to tax. Concept is of the total income earned during the year is determined at the end of the period. It is required to be computed in accordance with the provisions of the Act. The scheme of computing income under the various provisions of the Act has to be viewed wholesomely and not with isolated vision. Another thing which is obvious from the provisions referred to above is that computation of income under the head 'Income from salaries' is not confined to payment of periodical cash payment but is to be understood in its wider sense to include the valuation of any perquisite or profit in lieu of salary which he enjoys by dint of his employment under Section 2(24)(iii) r/w Section 17(2) and (3) of the Act. 9. In the world of employment, emolument is the wholesome expression what one gets from the employer for services rendered in whatever term. It is wider than &#....
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....: "Emoluments fringe benefits or other incidental profits or benefits attaching to an office or position. Shortened term "perks" used with reference to such extraordinary benefits conferred to business executives, e.g., free car, club membership, insurance, etc. etc." Strouds Judicial Dictionary has explained "perquisites" in the context of the expression used in IT Act and fiscal statutes to mean : '"Perquisites" as used in IT Act, 1842.......might have included a gratis residence by an employee in his employer's house, although employee could not sublet it--but for the fact that construction was prevented by Rule 4 of the same Schedule which defined perquisite for all purposes which defines perquisites, Such profits of offices and employments as arise from fee and other emoluments and payable either by the Crown or by the State in the course of executing such office or employment. Perquisite means personal advantage and as used in Schedule II of para. 1 of the Finance Act, 1956, was held to include use of a car given to an, employee and return of wage reduction, Viewed in that light, the definition of perquisites being an inclusive definition an....
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.... offends Article 14, implementation of Fringe Benefit Tax amounts to double taxation; Section 115 - WB and WC deemed Fringe Benefit Tax which are self contradictory and non-workable, offends Section 200(1) of the Companies Act, 1956, irrespective of non-Government employers are tarred as tax avoiders, no opportunity has been provided while assigning the percentages and Section 115 - WC and it is in violation of Article 14 of the Constitution, no definition of Fringe Benefit Tax with reference to Section 115 - WB(d) and contrary to VII Schedule of Constitution read with Entry 82 provides for tax on income other than agriculture income whereas Section 4 relates to charging of income tax and Section 5 relates to scope of total income and Fringe Benefit is not included under Sub-section (2) of Section 24 of Act, 1961, whereas under Sub-section (43) Fringe Benefit is included. On the other hand, total income is required to be assessed under Section 4 which is a charging section. Perusal of sub-section 37(1) is not contrary to sub-section (2) of Section 24 of Act, 1961. Since XII - H is an independent provision and it is not against Section 5 'total income' and one cannot draw in....