R IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 6th DAY OF DECEMBER , 2019 BEFORE THE HON’BLE MR.JUSTICE P.B. BAJANTHRI W.P. NO.26037/2005 c/w W.P.NO.4464/2007 AND W.P.NO.27087/2005(IT) IN W.P.NO.26037/2005 BETWEEN:
1. M/S T.T.K.PRESTIGE LTD., A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956, HAVING ITS REGISTERED OFFICE AT NO.78, OLD MADRAS ROAD DOORVANINAGAR, BANGALORE-560 016 REPRESENTED BY ITS MANAGING DIRECTOR SRI.S.RAVICHANDRAN 2. SRI.B.K.GURUPRASAD S/O.B.R.KRISHNAMURTHY (LATE) AGED ABOUT 52 YEARS WORKING AS SR.GENERAL MANAGER-HR AN EMPLOYEE OF THE COMPANY … PETITIONERS (BY SRI.R.B.KRISHNA, ADV.) AND:
1. THE UNION OF INDIA REPRESENTED BY ITS FINANCE SECRETARY MINISTRY OF FINANCE NORTH BLOCK, NEW DELHI-110 001 2. THE COMMISSIONER OF INCOME TAX BANGALORE-III C.R.BUILDING QUEENS ROAD BANGALORE. ... RESPONDENTS (BY SMT.LATA PRASAD, CGC FOR R1 SRI.K.V.ARAVIND & SRI.DILIP M., ADV’S FOR R2) THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF CONSTITUTION OF INDIA PRAYING TO STRIKE DOWN THE PROVISIONS OF CHAPTER XII-H INSERTED IN THE INCOME TAX ACT, 1961 BY THE FINANCE ACT, 2005 WITH EFFECT FROM 1.4.2005 AS OFFENDING THE PROVISIONS OF ARTICLE 14 OF THE CONSTITUTION OF INDIA AND AS BEING BEYOND THE LEGISLATIVE COMPETENCE OF PARLIAMENT IN SO FAR AS THE PETITIONER IS CONCERNED AND ETC.
IN W.P.NO.4464/2007 BETWEEN:
M/.S N.RANGARAO & SONS 1553, VANIVILAS ROAD,MYSORE-570 004 REPRESENTED BY ITS PARTNER SRI.R.GURU … PETITIONER (BY SRI.ASHOK A.KULKARNI FOR SRI.K.R.PRASAD, ADV.) AND:
1. THE COMMISSIONER OF INCOME TAX 55/1, SHILPASHREE BUILDING STERLING TALKIES ROAD VIDYARANYA COMPLEX VISHVESHWANAGAR, MYSORE-570 008 2. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 2 (1),MYSORE 3. THE UNION OF INDIA REPRESENTED BY ITS SECRETARY MINISTRY OF FINANCE NORTH BLOCK, NEW DELHI. .. RESPONDENTS (BY SRI.K.V.ARAVIND & SRI.DILIP M., ADV’S FOR R1 & R2 SRI.C.RAMAKRISHNA, CGC FOR R-3) THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF CONSTITUTION OF INDIA PRAYING TO QUASH THE PROVISIONS OF CHAPTER XII-H OF THE INDIAN INCOME TAX ACT 1961 IN SO FAR AS IT PURPORTS TO LEVY A TAX CALLED THE FRINGE BENEFIT TAX UNDER THE PROVISIONS OF THE ACT AND ETC.
IN W.P.NO.27087/2005 BETWEEN:
1. KARNATAKA DRUGS AND PHARMACEUTICALS MANUFACTURERS ASSOCIATION REGISTERED NO.394/98-99 3B, BHARATH DELUXE APARTMENT 44/1, A & B, FAIR FIELD LAYOUT RACE COURSE ROAD, BANGALORE-560 001 REPRESENTED BY ITS SECRETARY SRI.JATISH SHETH, S/O.LATE N.K.SHETH, AGED 48 YEARS 2. KARNATAKA ROLLER FLOUR MILLS ASSOCIATION, REGISTERED NO.46/78-79 101-‘A’, QUEENS CORNER NO.3, QUEENS ROAD BANGALORE-560 001 REPRESENTED BY ITS PRESIDENT SRI.B.N.MAHAVEER S/O.LATE B.J.NABHI RAJAIAH AGED 53 YEARS 3. M/S.MOHAN ALUMINIUM PVT. LTD., 9TH MILE, OLD MADRAS ROAD VIRGONAGAR, BANGALORE REPRESENTED BY ITS DIRECTOR (COMMERCIAL), S/O.SRI.G.SAMBASHIVIAH AGED 62 YEARS. … PETITIONERS (BY SMT.VANI H., ADV.) AND:
1. UNION OF INDIA REPRESENTED BY ITS SECRETARY MINISTRY OF FINANCE GOVERNMENT OF INDIA NORTH BLOCK, NEW DELHI-110 001 2. CENTRAL BOARD OF DIRECT TAXES REPRESENTED BY ITS CHAIRMAN MINISTRY OF FINANCE GOVERNMENT OF INDIA NORTH BLOCK, NEW DELHI-110 001 3. COMMISSIONER OF INCOME TAX CENTRAL REVENUE BUILDING QUEENS ROAD, BANGALORE-560 001. ... RESPONDENTS (BY SRI.E.R.INDRAKUMAR, ADV. FOR R-2 & R-3 SRI.M.V.SHESHACHALA, CGC, FOR R-3 SRI.Y.HARIPRASAD, CGC FOR R1 & R2) THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF CONSTITUTION OF INDIA PRAYING TO DECLARE SECTION 115 WA TO WL OF THE INCOME TAX ACT, 1961 AS INTRODUCED BY THE FINANCE ACT, 2005 WITH EFFECT FROM 1.4.2006 VIDE ANNEX-A AS ULTRA VIRES ARTICLE 14, 19 (1) (G) AND 265 OF THE CONSTITUTION OF INDIA IN SO FAR AS THE PETITIONERS ARE CONCERNED AND ETC.
THESE WRIT PETITIONS HAVING BEEN HEARD AND RESERVED ON 03.09.2019 AND COMING ON FOR PRONOUNCEMENT OF ORDER THIS DAY, THE COURT MADE THE FOLLOWING:
ORDER In these petitions, petitioners have prayed for striking down the provisions of Chapter XII - H inserted in the Income Tax Act, 1961 (for short Act, 1961) by the Finance Act, 2005 (for short Act, 2005) w.e.f. 1.4.2005 on the score that it is offending the provisions of Article 14 of the Constitution and being beyond legislative competency of the parliament.
2. Brief facts of the case, while presenting the Finance 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 expenditure incurred by the employer is ostensibly for purposes of the business but includes, in partial measure, a benefit of a personal nature. Moreover, in cases where the employer directly reimburses the employee for expenses incurred, it becomes difficult to effectively capture the true extent of the perquisite provided because of the problem of cash flow in the hands of the employer.
Therefore, it is proposed to adopt a two pronged approach for the taxation of fringe benefits under the Income Tax Act. Perquisites which can be directly attributed to the employees will continue to be taxed in their hands in accordance with the existing provisions of Section 17(2) of the Income Tax Act and subject to the method of valuation outlined in rule 3 of the Income Tax Rules. In cases, where attribution of the personal benefit poses problems or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been provided to the employee.
Chapter XII – H reads as under:
2. Chapter XII- H was inserted into the Act with effect from 1.4.2005 by the Finance Act of 2005. It provides for the levy of additional income tax called “fringe benefit tax” (hereinafter referred to as “FBI”) on fringe benefits provided or deemed to have been provided by an employer to his employees, in addition to the income tax charged under this Act. The purpose of inserting this Chapter in the Act is contained in the speech of the Finance Minister when he introduced the Financial Bill and also in the Explanatory Memorandum explaining the provisions of the said Bill.
3. Learned counsel for the petitioners contended as under:
A. The levy of tax on fringe benefits is in conflict with the provisions of Section 5 and 37 (1) of the Act ad hence, requires to be struck down.
B. To the extent to which the tax on fringe benefit amounts to taxation of expenditure and not income, it is beyond the legislative competence of Parliament and is to be struck down. The provisions of the chapter XII – H militate against the concept of income as explained under Section 5 of the act, which defines ‘total income’ as all income from whatever source derived which is received or deemed to be receive 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, the provisions therein offend Article 14 of the Constitution of India.
H. The provisions of Section 115-WB and WC carve out various deemed fringe benefits and to the extent to which these are self contradictory they become unworkable. The employer is entitled to collect the tax paid from the employees and thus the liability of the employee increases. In the alternative, if the employer decides to absorb the tax on fringe benefits, it would offend the provisions of Section 200(1) of the Companies At, 1956 and to this extent the provisions of the Chapter are to be struck down.
I. All employers are tarred as tax avoiders with the same brush by the introduction of chapter XII – H and to this extent the provisions therein requires to be struck down.
J. The employer is not granted an opportunity to prove that the fringe benefits actually granted to the employees are much lower than the percentages fixed under Section 115 – WC of the Act, in an adhoc manner and across the board and hence, the entire chapter offends Article 14 of the Constitution of India.
K. Quash by an appropriate writ, order or direction in the nature of certiorari or otherwise the provisions of Chapter XII-H of the Indian Income Tax Act, 1961 in so far as it purports to levy a tax called the Fringe Benefit Tax under the provisions of the Act. In so far as Petitioner is concerned.
L. Without prejudice and in the alternative quash by an appropriate writ, order or direction in the nature of certiorari or otherwise Section 115 WB(2) of the Act in general and in particular 115 WB (2) (D) of the Act in so far as it purports to levy Fringe Benefit Tax on the items of expenditure specified in para 1 of this writ petition where no palpable and direct benefit is contemplated to the employees.
M. Without prejudice and in the alternative quash by an appropriate writ, order or direction in the nature of certiorari or otherwise Section 115 WB (2) of the Act in general and in particular those contained in 115 WB (2) (D) in so far as it relates to the levy of Fringe Benefit Tax on the petitioner in relation to expenditure which directly or palpably does not any benefit to the employees as being violative of article 14 of the Constitution.
N. Without prejudice and in the alternative quash by an appropriate writ, order or direction in the nature of certiorari 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 Annexure-A as ultra vires Article 14, 19 (1) (g) and 265 of the Constitution of India in so far as the Petitioners are concerned.
R. Issue a writ, order or direction more particularly in the nature of a Writ of Declaration to declare the Rules brought into by the Finance Act 2005, in relation to the levy of Fringe Benefit Tax with effect from 01.04.2006 as ultra vires Article 14, 19 (1) (g) and 265 of the Constitution of India in so far as the Petitioners are concerned.
S. Issue a writ, order or direction more particularly in the nature of a Writ of Declaration to declare the Circular No.8/2005 dated 29.08.2005 issued by the Central Board of Direct Taxes, the Second Respondent herein vide Annexure- B as inconsistent and this ultra vires Article 14, 19 (1) (g) and 265 of the Constitution of India in so far as the Petitioners are concerned.
T. To direct the Respondents to pay the costs of this writ Petition.
4. Learned counsel for the petitioners vehemently contended that the definition of the Act, 1961 does not provide for inclusion of perquisite income. Further he pointed out from Section 115 W of the Act, 2005 which reads as under for ready reference:
115W. In this Chapter, unless the context otherwise requires;
(a) “employer” means, (i) a company;
(ii) a firm;
(iii) an association of persons or a body of individuals, whether incorporated or not, but excluding any fund or trust or institution eligible for exemption under clause (23C) of section 10 or registered under Section 12AA;
(iv) a local authority; and (v) every artificial juridical person, not falling within any of the preceding sub-clauses;
(b) “fringe benefit tax” or “tax” means the tax chargeable under section 115 WA.
5. Further, he stressed his argument with reference to Section 115 WB (d) of the Act, 2005 to contend that fringe benefits definition is not incorporated in Act, 1961. Further, he has pointed out 7th schedule to the Constitution of Entry No.82 provides for Tax on income other than Agricultural income.
Therefore, one cannot go beyond Entry No.82 read with definition of ‘income’ under Act, 1961. Consequently, chapter XII-H incorporating under Income Tax Act, 1961 is without authority of law. It was vehemently contended that sub Section 24 of Section 2 of the Act, 1961 relates to income 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 Act is under challenge, scope of interference by the Court is limited to the extent of, “Whether legislative competency is available or not, contrary to Constitutional provision and arbitrariness?”
9. Learned counsel for both the petitioners and respondents have submitted their written submissions/propositions which are as under:
WRITTEN PROPOSITIONS BY REVENUE The respondents in the above matter respectfully submitted as under:-
1. The petitioners in the above matter have challenged the constitutional validity of Chapter-XII-H of the Income Tax Act dealing with levy of fringe benefit tax. The Central Board of Direct Taxes (CBDT) has issued Circular No.8/2005 dated 29/8/2005 where in the object of the legislation has been stated to bring equality. Hence the contention of the petitioner that the introduction of fringe benefit tax was in order to plug evasion of tax, without stating how the evasion was taking place, the introduction of fringe benefit tax is beyond the legislative competence is incorrect. The objective as stated by the CBDT is extracted below for ready reference.
PROVISIONS REALTING TO FRINGE BENEFIT TAX CIRCULAR NO.8/2005, DATED 29-8- 2005 The Finance Act, 2005 has introduced a new levy, namely, Fringe Benefit Tax (hereafter referred to as FBT) on the value of certain fringe benefits. The provisions relating to levy of this tax are contained in Chapter XII-H (sections 115W to 115WL) of the Income-tax Act, 1961. This circular seeks to provide a harmonious, purposive and contextual interpretation of the provisions of the Finance Act, 2005 relating to the FBT so as to further the objective of this levy.
2. Objective 2.1 The taxation of perquisites or fringe benefits is justified both on grounds of equity and economic efficiency. When fringe benefits are under-taxed, it violates both horizontal and vertical equity. A taxpayer receiving his entire income in cash bears a higher tax burden in comparison to another taxpayer who receives his income partly in cash and partly in kind, thereby violating horizontal equity. Further, fringe benefits are generally provided to senior executives in the organization. Therefore, under-taxation of fringe benefits also violates vertical equity. It also discriminates between companies which can provide fringe benefits and 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 benefits by the employer-based disallowance method was withdrawn by the Finance Act, 1997.
However, the withdrawal of the provisions relating to taxation of fringe benefits by the employer-based disallowance method resulted in significant erosion of the tax base. The Finance Act, 2005 has introduced a new levy, namely, the FBT as a surrogate tax on employer, with the objective of resolving the problems enumerated in para 2.1 above, expanding the tax base and maintaining equity between employers.
2. It is submitted that the above legislative intent is unambiguous expressing the intention is to bring equality. Hence the contrary contention of the petitioner is incorrect.
3. It is submitted that Chapter-XII-H (section 115W to 115WL) of the Act is a code by itself, providing for charging section, computation mechanism, assessment and other provisions. Hence the definition of income and provisions of section 4 of the Income Tax Act are not applicable.
4. It is submitted that the Explanation to section 115 WC of the act provides for different percentage of fringe benefit for different class of expenditures. The different percentage is on presumptive basis as a proportion of expenses incurred for the purposes referred to in Section 115WB(2) of the Act. As the percentage is on the basis of different class of expenses, the same is reasonable and permissible under the fiscal statute. Only the restrictions read for different classes by judicial interpretation is the discrimination. The discrimination is not found in prescribing the percentage. Hence the same is within the legislative competence.
5. It was contended on behalf of the petitioner that fringe benefit tax is double levy in the hands of the employer. It is submitted that the expenditure allowed under section 37 of the Act is considered for the purpose of fringe benefit tax. The expenditure being personal in nature disallowed under section 37 of the Act is outside the purview of fringe benefit tax as explained by CBDT Circular dated 29/8/2005 in response to Question No.35. Hence the contention of the assessee that levy of fringe benefit tax is double taxation is incorrect.
6. It is submitted that the petitioner has contended that the benefits/expenses can be taxed in the hands of the employee under section 17 of the Act is incorrect. It is clear from the object 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 concept of fringe benefit tax referring to the judgment of the Apex Court in the case of R & B Falcon. The Gujarat High Court has also dealt with the competence of the CBDT to interpret the provisions of the Act. (Paras-9.2, 9.3, 9.4, 12.2 and 13.0).
d) Karnataka Bank Ltd., Vs. Union of India (2003) 185 CTR 18 (Kar) This Hon’ble Court while dealing with the Constitutional Validity of the Interest Tax Act, considering the legislative competence as per Entry 82 of List-I to Schedule-VII of the Constitution of India and has held that Entry 97 of List-I to Schedule-VII of the Constitution of India would provide for levy of Interest Tax. Similarly the power to levy fringe benefit tax is traced to Entry 97 of List-I to Schedule-VII of the Constitution of India and hence levy of fringe benefit tax is within the legislative competence. (Paras-9, 11).
e) Federation of Hotel & Restaurant Association of India Vs UOI (1989) 77 CTR 141 (SC) The Apex Court while dealing with the constitutional validity of the Expenditure Tax Act has considered the reasonable classification of persona, subject matter, events etc, for taxation. Only restriction which has been read into is the discrimination. It is submitted that as the prescribing percentage under Explanation to Section 115 WC of the Act is without discrimination and within the permissible classification, the same is justified. (Para- 19, 20 and 21) f) Parshanti Medical Services & Research Foundation Vs UOI The Apex Court while considering the constitutional validity of Section 35AC of the Act, has held that in taxing statute, a plea based on equity or/and hardship is not legally sustainable. The constitutional validity of any provision and especially taxing provisions cannot be struck down on such reasoning. (Para- 29).
g) UOI Vs Tata Tea Co. Ltd., (2017) 299 CTR 105 (SC) The assessee has contended that an expenditure is an outflow and hence the same is not in the form of an income chargeable to tax, hence the same cannot be subjected to fringe benefit tax in the hands of the assessee. Section 115-O of the Act provides for levy of tax on the company distributing/paying the dividend to the shareholders. The entire scheme of taxation under Section 115-O and the fringe benefit tax is almost similar. In the above referred judgment the Hon’ble Supreme Court 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 the Hon’ble Court.
5. The rebuttal regarding the case laws now provided by the Respondents are as under:
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 29/8/2005 has dealt with the concept or fringe benefit tax, interpretation of provisions of Section 115 WB and also the object of the Parliament in introducing the concept of fringe benefits. The constitutional validity was not in question. Further, para 20 clarifies that Fringe Benefit Tax is a tax on expenditure.
b) Bengal SREI Infrastructure Development Vs. UOI (2017) 397 ITR 757 (Calcutta) The Calcutta High Court had two issues before it. The first was the question of constitutional validity. See para 6 (i) This issue was not pressed as noted in para 11. Hence, this case did not pertain to the constitutional validity.
c) Gujarat Chamber of Commerce & Industry Vs. UOI (2017) 395 ITR 457 (Gujarat) Here again the constitutional validity of Chapter XII H was not in issue.
d) Karnataka Bank Ltd., Vs. Union of India (2003) 185 CTR 18 (Kar) The issue was with regard to the Constitutional Validity of the Interest Tax Act. This was a separate enactment and therefore Entry 97 was pressed into service. This case did not involve the applicability of both entries 82 and 97 in one legislation as being attempted here.
e) Federation of Hotel & Restaurant Association of India Vs. UOI (1989) 77 CTR 141 (SC) The Apex Court upheld the constitutional validity of the Expenditure Tax Act tracing the power to entry 97 and this was again a stand-alone legislation.
f) Parshanti Medical Services & Research Foundation Vs. UOI There is no plea here with regard to hardship or equity.
g) UOI Vs. Tata Tea Co. Ltd., (2017) 299 CTR 105 (SC) The issue before the Hon’ble Supreme Court was with regard to applicability of Rule 8 of the rules pertaining to computation of taxable non-agricultural income of an integrated tea plantation and whether dividends paid out of agricultural income would be taxable. It is in this context that the comments of the Court will have to be read (Para 26).
Wherefore it is respectfully prayed that this Hon’ble Court may be pleased to allow the above writ petition in the interest of Justice and 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 Citizens Savings and Loan Association V/s Topeka, 20 Wall 655,662,664 (1874) Justice Miller of United States Supreme Court has observed as follows:
“The power to tax is, therefore, the strongest, the most pervading of all the powers of government, reaching directly or indirectly to all classes of people ……..To lay with one hand the power of the government on the property of the citizen and with the other to bestow it upon the favoured individuals, to aid private enterprises and build up private fortunes, is none the less a robbery because it is done under the form of law and is called taxation. This is not legislation. It is a decree under legislative forms …….We have established, we think, beyond cavil that there can be no lawful tax which is not laid for a public purpose.”
13. Even though Article 265 specifies that no tax shall be levied or collected except by the “Authority of law” whereas Article 265 is applicable not only for “levy” but also for the collection of taxes and the expression “assessment” within its compass covers both the aspects carried out by the executive functionary.
14. Supreme Court in the case of G.K.Krishnan & Ors Vs. State of Tamil Nadu (1975) 1 SCC 375 wherein it is held that motive behind imposition of tax is immaterial. Giving wrong reason for imposition of tax does not derogate from validity of tax.
15. Supreme Court in the case of Kunnathat Thathunni Moopil Nair v. State of Kerala and Anr. (1961) 3 SCR (3) 77 held that the tax proposed must be within the legislative competence of the Legislature imposing a tax and authorising collection. Such tax must be subject to the conditions under Article 13 of the Constitution. Article 13(2) specifies that the Legislature shall not make any law which takes away or abridges the equality clause in Article 14.
16. Seventh Schedule to the Constitution consists of three Lists (i) Union List- only parliament can make laws (ii) State List- only state legislatures can make laws (iii) Concurrent List- both central government and state government have power to make laws.
VII Schedule relates to Federal Powers like powers of Union/Central Government and the State Government bifurcated.
Entry No. 82:- Tax on Income other than agriculture income and Entry No. 97:- Any other matter not enumerated in List II or List III including 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 co- operative 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 agreement of that country.
17. In this backdrop, it is to be noted that fringe benefit tax is an independent provision viz., it does not fall under Income Tax (Entry No.82) of the Union List. It would fall under Entry No.97 of Union List. Therefore, the contention of the petitioners that Fringe Benefit Tax would not fall under Entry No.82 and there are no permission is not tenable. Consequently, Parliament is empowered to invoke Entry No.97 for the purpose of including any tax which are not part and parcel of List No. II and List No. III.
…… Constitutionality of legislation. – The question whether a law be void for its repugnancy to the Constitution, is, at all times, a question of much delicacy, which ought seldom, as ever, to be decided in the affirmative in a doubtful case. It is not on slight implication and vague conjecture that the Legislature is to be pronounced to have transcended its powers, and it’s Act to be considered as void. The opposition between the Constitution and the law should be such that the Judge feels a clear and strong conviction of their incompatibility with each other.(1) As Miller, J. said:
“We shall decide that it has transcended its powers only when that is so plain that we cannot avoid the duty” 2 – United State V. Steffens, 100 US 82 : 25 L ED 550.
Lefroy’s Treatise on Constitutional Law (3) – See Kolandayammal V. Sinnavelappa Goundan, AIR 1952 Mad 27 at p. 28 (DB) “It seems quite possible that a particular Act, regarded from one aspect, might be ‘Intra vires’ of a Provincial Legislature, and yet, regarded from another aspect, might also be ‘intra vires’ of the Dominion Parliament. In other words, what is properly called to be the subject matter of an Act may depend upon what is the true aspect of the Act……. The cases which illustrate this principle show, by ‘aspect’ here must be understood the aspect of point of view of the legislator in legislating, the object, purpose and scope of the legislation. The word is used subjectively of the legislator rather than objectivity of the matter legislated upon.”
An enactment is never to be held invalid unless it be beyond question, plainly and palpably in excess of legislative power or it is ultra vires or inconsistent with the statutory or constitutional provisions or it does not conform to the statutory or constitutional requirements or is made arbitrarily with bad faith or oblique motives or opposed to public policy1 – 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 clearest2. – 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 Constitution which is not even mentioned in the instrument. It is difficult upon any general principles to limit the omnipotence of the sovereign legislative power by judicial interposition, except so far as the express words of a written Constitution give that authority for a Court to vacate or repeal a statute on that ground alone. But it is only in express constitutional provisions limiting legislative power and controlling the temporary will of a majority by a permanent and paramount law, settled by the deliberate wisdom of the nation that one can find a safe and solid ground for the authority of Courts of Justice to declare void any legislative enactment. Any assumption of authority beyond this would be to place in the hands of the judiciary powers too great and too indefinite either for its own security or the protection of private rights3.-A.K.Gopalan v. State of Madras, AIR 1950 SC 27 at p 42.
In determining whether the Legislature, in a particular enactment has passed the limits of its constitutional authority, every reasonable presumption must be indulged in favour of the validity of such enactment. It must be regarded as valid, unless it can be clearly shown to be in conflict with the Constitution. To warrant the Courts to set aside the law as unconstitutional, the case must be so clear that no reasonable doubt can be said to exist. The question of the constitutional validity of an impugned statute has to be approached with great caution in view of the provisions of the Constitution and has to be considered with patient attention. The benefit of reasonable doubt has to be resolved in favour of legislative action, though such a presumption is not conclusive1.- A.K.Gopalan v. State of Madras, AIR 1950 SC 27.
In order to decide whether a particular legislation is unconstitutional as offending the provisions of the Constitution, it is necessary to examine with some strictness the substance of the legislation for the purpose of determining what it is that the Legislature has really done; the Court, when such questions arise, is not over –persuaded by the mere appearance of the legislation. In relation to constitutional prohibitions binding a Legislature, it is clear that the Legislature cannot disobey the prohibitions merely by employing an indirect method of achieving exactly the same result. Therefore, in all such cases, the Court has to look behind the names, forms and appearances to discover the true character and nature of the legislation2:-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 charting any hazardous course but is amply borne out by an observation worth reproducing in extensor in Seaford Court Estates Ltd., v. Asher (1994) 2 KB 481. It reads as under:
‘Whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguity. The English language is not an instrument mathematical precision. Our literature would be much the poorer if it were. This is where the draftsmen of Acts of Parliament have been unfairly criticized. A Judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the Judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a Judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give force and life to the intention of the Legislature. That was clearly laid down by the resolution of the Judges (Sir Roger Manwood, C.B., and the other barons of the Exchequer) in Heydon’s case1-(1584) 3 Co Rep 1: 76 ER 637. and it is the safest guide today. Good practical advice on the subject was given about the same time by Plowden in his note (2 Plowd 465) to Eyston v. Studd 2 – (1974) 2 Plowd 463: 75 ER 692.
Put into homely metaphor, it is this: A Judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out? He must then do as they would have done. A Judge must not alter the material of which the Act is woven, but he can and should iron and the creases’,.
18. The principle enunciated above has been consistently adopted and applied in subsequent cases. The decisions of this Court further establish:
(a) that a law may be constitutional even though 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 conditions on the part of a Legislature are to be presumed, if there is nothing on the face of the law or the surrounding circumstances brought to the notice of the Court on which classification may reasonably be regarded as based the resumption of constitutionality cannot be carried to the extent of always holding that there must be some undisclosed and unknown reasons for subjecting certain individuals or corporations to hostile or discriminating legislation.
The above principles will have to be constantly borne in mind by the Court when it is called upon to adjudge the constitutionality of any particular law attacked as discriminatory and violative of the equal protection of the laws”.
19. Learned counsel for the petitioners contended that the impugned fringe benefit tax legislation is violative of Article 14 of the Constitution as it discriminate among Government and its organization and Private organization. In other words, the applicability of fringe benefit tax is not applicable to the Government and its organizations. Therefore, it is necessary to reproduce Article 14 which reads as under:
“Art.14: Equality before law.- The State shall not deny to any equality before the law or the equal protection of the laws within the territory of India.
Object of classification:- The State can make a reasonable classification for the purpose of legislation but the object itself should be lawful. It cannot be discriminatory, or otherwise, for instance, if it is to discriminate against one section of the minority the discrimination cannot be justified on the ground that there is a reasonable classification because it has rational relation to the object sought to be achieved.
Reasonable classification:- Article 14 of the Constitution permits reasonable classification for the purpose of legislation and prohibits class legislation. A legislation intended to apply or benefit a “well defined class”, is not open to challenge by reference to Article 14 of the Constitution on the ground that the same does not extend a similar benefit or protection to other persons. Permissible classification must satisfy the twin tests namely (i) the classification must be founded on an intelligible differentia which distinguishes person or things group together from others left of the class and (ii) such differentia must have a rational relation with the 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 basis for determining the validity of any statute. While adjudicating upon the constitutionality of the provisions of the statute all relevant facts whether existing or conceived may also be noticed.
In case of reimbursement of rent for school buildings if the Government had made a classification for purpose of extending need- based-aid, it cannot be faulted for making such a reasonable classification between those who were paying rent for the school buildings taken on lease and those who owned those buildings under the veil and wanted to be paid from public funds for their own profit making. The two classes are separate and distinct and the modified rules of Private Educational Institutions Grant-in- aid Rules, 1974 are founded on such rational distinction and intelligible differentia which has a close relation with the object sought to be achieved i.e. to provide aid to the needy private public institutions to sustain them for imparting education and not to contribute to their commercial activity by burdening the public exchequer.
While making judicial scrutiny of any State action in contractual matters too, the Court is to ensure the existence of arbitrariness, mala fide, nepotism or oblique motive behind the decision of the State instrumentalities. It is needless to mention that Government actions must be presumed to be reasonable. The State should give primary consideration to protect public interest even at the cost of the interest of an individual and such action taken in the interest of State exchequer should stand the scrutiny of the Court if such action does not suffer from mala fide or otherwise.
Article 14 of the Constitution forbids class legislation. It does not forbid reasonable classification. In order to pass the test of permissible classification two conditions must be fulfilled – (1) that the classification is founded on intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group and (2) that the differentia must have a rational relation to the object sought to be achieved.
Article 14 of the Constitution prohibits the class legislation and not reasonable classification or the purposes of legislation. As long as classification is founded on an intelligible differentia which distinguishes persons or things that which groups together from other left out of 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 similarly situated are all similarly treated. The measure of reasonableness of a classification is the degree of its success in treating similarly those similarly situated.
But the question is what does the ambiguous and crucial phrase similarly situated means? Where are we to look for the test of similarity of situation which determines the reasonableness of a classification? The inescapable answer is that we must look beyond the classification to the purpose of the law. A reasonable classification is one which includes all persons or things similarly situated with respect of the purpose of the law.”
Test of Reasonable Classification;-
Classification must be founded on intelligible differentia and the differentia must have a rational relation to the object sought to be achieved by the statute in question, and that the classification may be founded on different bases, such as, geographical, or according to objects or the like.
There is no question of any discrimination between these two classes or groups of permit holders and it cannot be validly urged that the provisions of the impugned Acts, insofar as they applied to different classes or groups of permit holders, are in any manner violative of the fundamental rights embodied in Article 14 of the Constitution.
The Article 14 of the Constitution prohibits class legislation and not reasonable classification for the purpose of legislation. If the rule making Authority takes care to reasonably classify persons for a particular purpose and if it deals equally with all persons belonging to a well defined class then it would not be open to the charge of discrimination. But to pass the test of permissible classification two conditions must be fulfilled:-
(a) that the classification must be founded on an intelligible differentia which distinguishes persons or things which are grouped together from others left out of the group; and (b) that a differentia must have a reasonable relation to the object sought to be achieved by the statutes in question The Central test for permissible classification has to satisfy two conditions. It must be founded on an intelligible differentia which distinguishes persons or premises that are grouped together from others left out of the groups and the differentia must have a rational relation to the object sought to be achieved by the Punjab Amending Act, 1994 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 identity of treatment, is enough. If there is equality and uniformity within each group, the law will not be condemned as discriminative, bought due to some fortuitous circumstances arising out of a peculiar situation some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine.
21. The power of the legislature to classify is of wide range and flexibility so that it can adjust its system of taxation in all proper and reason-able ways. On this issue Supreme Court has examined in the case of KHANDIGE SHAM BHAT & OTHERS Vs AGRICULTURAL INCOME-TAX OFFICER, KASARAGOD reported in 1963 AIR 591, it was held that there is no violative of Article 14 in treating pending cases as a class different from decided cases.
22. In view of the inherent complexity of fiscal adjustment of diverse elements, a wider discretion is vested in the revenue for the purpose of taxation and ordinarily different interpretation of a particular tariff entry by different authorities as such cannot be assailed as a violative of Article 14 of the Constitution.
23. In BENGAL SREI INFRASTRUCTURE DEVELOPMENT & ORS. Vs UNION OF INDIA & ORS.
Reported in 2017 SCC ONLINE CAL 13012, Supreme Court has held as under:
“3. Referring to Section 115WB(2) of the Act of 1961 learned Additional Advocate General has submitted that, Section 115WA provides for Fringe Benefits Tax to be charged in respect of fringe benefit provided or to be provided by an employer to his employees during the previous year at a stipulate rate. He has submitted that, Section 115WA(1) of the Act of 1961 creates a legal fiction. The legal fiction created cannot be stretched to include items of expenditure which has no nexus with the object of the levy. He has referred to Section 115WB particularly Sub-section (2) and has submitted that, the items provided there under would not attract Fringe Benefits Tax unless it satisfies the legal fiction created in Section 115WA of the Act of 1961. The existence of an employer employee relationship is a condition precedent for the purpose of charging Foreign Fringe Benefits Tax. Such legal fiction may not exist in the provisions of Section 115WB of the Act of 1961. He has relied upon 2004 Volume 11 Supreme Court Cases page 417 (Nandkishore Ganesh Joshi v. Commissioner, Municipal Corporation 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 assessment in terms of the Act of 1961. He has relied upon (2015) 374 Income Tax Reports page 112 (Bombay) (Commissioner of Income-Tax (LTU) v. Tata Consultancy Services Ltd.) and has submitted that, an assessee should follow the same procedure as followed by the assessee in such case. The petitioner is yet to establish that, the assessing officer has charged a Fringe Benefits Tax on an item which is not chargeable. Therefore, the petitioners cannot said to be have any cause of action for the Court to intervene. Relying upon (2003) 259 Income Tax Reports page 449 (SC) (Commissioner of Income-Tax v. Hindustan Bulk Carriers) learned Advocate appearing for the revenue has submitted that, a statute must be read as a whole. One provision of the Act should be construed with reference to the other provisions of the said Act. A statute or any enacting provision thereto must be so construed so as to make it effective and operative. He has also relied upon (2010) 326 Income Tax Reports page 642 (SC) (Ajmera Housing Corporation v. Commissioner of Income-Tax) for the proposition that, a taxing statute is to be construed strictly. Nothing is to be read in and nothing is to be implied in respect of a taxing statute.
9. 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 per cent of the value of such fringe benefits. There has to be an employer employee relationship between the persons for considering whether the employer is giving any fringe benefit to the employee or not. In other words, whether an employee is receiving a fringe benefit from the employer has to be considered and decided for Fringe Benefit Tax to be attracted. Fringe benefits are defined in Section 115WB. Sub-section (2) of Section 115WB stipulates that, fringe benefits shall be deemed to have been provided by the employer to his employees, if the employer has, in the course of his business incurred any expense on or made any payment for, the purposes stipulated there under. Basically 17 heads have been specified under Sub-section (2) of Section 115WB which attracts the legal fiction. Nandkishore Ganesh Joshi (supra) and Sadan K. Bormal & Anr. (supra) have held that, a fiction cannot be extended beyond the 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. In Tata Consultancy Services Ltd. (supra) the assessee was assessed by the Assessing Officer on a particular basis and such assessment had received the consideration of the High Court in reference. Southern Motors (supra) has held that, although equity and taxation are often strangers, the Court should attempt that they do not remain always so. For the Court to admit such a resolution, an affected situation has to come before the Court for the Court to try and marry equity with the taxation law. In the present case, the Assessing Officer is yet to arrive at a finding whether the petitioner is liable to Fringe Benefits Tax on any head or not. It would not be prudent to enter into a discussion in the abstract, without any factual foundational basis. (Emphasis supplied) 24. In ADITYA CEMENT STAFF CLUB Vs THE UNION OF INDIA & ORS reported in 2003 SCC Online Raj 503, Rajasthan High Court has held as under:
Scheme under the patent Act to tax "Income from salaries"
7. In order to appreciate the contentions, and the effect of amendments, it would be apposite to notice the scheme of IT Act particularly in the context of computing income under the head 'Salaries'.
Once the scheme of computing the income under the head 'Salaries' and meaning of term 'perquisites' is properly understood, there is no room for argument to contend that insertion of Clause (vi) in Section 17(2) of the Act w.e.f. 1st April, 2001, suffers from excessive delegation of essential legislative functions.
8. Section 4 of the Act is a charging section, which authorises levy of income-tax on any income of any person. It clearly provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provisions for the levy of additional income- tax) of this Act in respect of the total income of the previous year of every person.
The term 'total income' has been defined in Section 2(45) of the Act to mean the total amount of income referred to in Section 5, computed in the manner laid down in this Act.
Section 2(24) of the Act defines 'Income'. The Act does not define the term 'Income' exhaustively but it provides inclusive definition. 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 or amenity granted or provided free of cost or at concessional rate in any of the following cases :
(a) by a company to an employee being a person who is a director thereof;
(b) by a company to an employee being a person who has a substantial interest in the company;
(c) by any employer (including a company) to an employee to whom the provisions of paras (a) and (b) of this sub-clause do not apply and whose income under the head 'Salaries' (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds fifty thousand rupees;
Provided that nothing contained in this sub- clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures of warrants directly or indirectly under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government.
Explanation : For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause.
(iii) Omitted by the Finance Act, 2000, w.e.f. 1st April, 2001.
(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee; and (v) any sum payable by the employer, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund or a deposit- linked insurance fund established under Section 3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 (46 of 1948), or as the case may be, Section 6C of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952), to effect an assurance on the life of the assessee or to effect a contract for an annuity.
(vi) The value of any other fringe benefit or amenity as may be prescribed." (Inserted by Finance Act, 2001, w.e.f. 1st April, 2002).
From 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 'salaries' in the literal sense. Salary in narrower sense denotes only fixed periodical payment in cash, but does not include reimbursement fee, cash, kind or other advantages from the employer.
The expression "perquisite" with reference to the emoluments of an employment has a well-defined connotation and is not a term of art.
'Perquisites' and fringe benefits' as understood generally and as dealt with under taxing statute'
10. If we look at the ordinary dictionary meaning of "perquisite", it reflects anything benefit, amenity or profit, attached to office or entitlement under employment in addition to regular fixed payment of salary in its narrower sense. In Webster English International Dictionary its meaning is ;
"A gain or profit incidentally made from employment in addition to regular salary or wages especially one of a kind expected or promised".
The Oxford Dictionary gives perquisite its meaning as :
"A casual emolument, fee or profit attached to an office or position in addition to salary or wages."
The Random House Dictionary of English Language says 'perquisite' to be :
"An incidental employment fee or profit over and above fixed income, salary or wages. Also called perk, (Para)".
By way of illustration it has enumerated, use of a servant, a servant's customary right to claim used or discarded items, any bonus or fringe benefits granted to an employee as free use of company car. This is by no means exhaustive to encompass all that comes within the purview of term perquisite in its ordinary sense, as an incidental or additional emolument, benefit, amenity or advantage attached to office.
By envisaging an inclusive definition of term 'perquisite' in the context of income from salary this generic meaning of perquisite is adopted by legislature.
The word "perquisite" in juridical expression has also received the connotation which gives expression "salary a broad spectrum coverage.
Meriam Webster's Dictionary of Law describes fringe benefits as 'an employment benefit (as a pension, a paid holiday, or health insurance) granted by an employer that has a monetary value but that does not affect basic wage rates'.
According to Blacks Law Dictionary, "perquisites" have been defined to mean :
"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 and not exhaustive, the insertion of Clause (vi) by the Finance Act, 2001, to include 'the value of any other fringe benefits or amenity as may be prescribed' is not deviation from the basic concept of perquisite as part of salary. The insertion of Clause (vi) is by way of abundant caution and not by way of any expansion of the definition. No legal fiction has been created to bring within purview of perquisite something which otherwise does not come within the purview of expression perquisites. Where a particular advantage or benefit received by any person as an employee or as a member of the employee's family/household to be assessed under the IT Act will have to be determined firstly, on the basis of general principle and then it is to be valued and to be determined in accordance with rules, if any, prescribing for its valuation else it is to be valued as per current market value of the benefit in the hands of the assessee from his' employer. We see no violation of constitutional limits of legislative powers in leaving it to the rule- making authority to provide for the machinery provision for valuing the perquisites and fringe benefits which may form part of salary as 'perquisites' as per the term defined under Section 17(i)which is to be introduced. Clause (vi) of Section 17(2) does not occur in depiction to treat anything as a fringe benefit as perquisite which may otherwise not come within its purview. In fact, none of the provisions under Section 17(2) or under the impugned rules deviate from the basis concept of perquisites and fringe benefits as part of salary in its wider sense.
25. The overall contentions of the petitioner in these petitions are that incorporation of XII – H and incorporating various provisions relating to fringe benefit tax are without legislative competency and in violation of Article 14 of the Constitution. Further, contention of the petitioners are that it is contrary to Sections 5 and 37(1) of the Act, 1961, Section 5 ‘total income’ concept is contrary to XII – H and it cannot be an anti avoidance measure as an employer, it cannot be an additional income and Fringe Benefit Tax is not income tax and it is beyond legislative competency, Fringe Benefit Tax is irrational and no nexus; there is discrimination among Government and non-
Government employees with reference to Section 115 – WC(2) and Chapter 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 inference that it is an anti-avoidance measure as employer. There is a nexus in introducing FBT and question of irrational concept is not attracted. Section 115-WC (2) do not violate Article 14 of constitution in terms of the above discussion on the issue. Further question of double taxation is not attracted in view of independent provisions for taxation. The petitioners have not pointed out how Section 115-WB & WC would be self contradictory and unworkable and it is only presumption, so also in what manner Section 200(1) of the Companies Act, 1956 offends.
Perusal of various issues like extending certain benefits to the employees by the employer it is evident employers are avoiding tax, so the contention of the petitioners that all employers are tarred as tax avoiders is not tenable. Question of extending opportunity while assigning percentages under Section 115-WC may not arise, since it is a policy matter. The contention of non- inclusion of Fringe Benefit under sub-Section (24) of Section 2 and its inclusion under sub-section (43) does not vitiates provision of FBT with reference to charging section-4, since FBT is incorporated as an independent provision. The cited decisions on behalf of the petitioners do not assist in view of the fact that source of power to incorporate Chapter XII-H of the Income Tax Act, 1961 is available at 7th Schedule to Constitution read under Entry 97. Further violation of Article 14 is not made out in view of my answer to the point in the preceding paragraphs.
26. In that view of the matter petitioners have not made out ground to interfere with Chapter XII-H of the Income Tax Act, 1961 on Fringe Benefits or any part thereof, it is not unconstitutional and opposed to Articles 14 and 246(1) read with Entry 82, List I of the Seventh Schedule to the Constitution of India. Accordingly the above mentioned writ petitions stand dismissed.
Sd/-
JUDGE BS/brn