2019 (12) TMI 1042 - HC - Income Tax

Levy of additional income tax called fringe benefit tax ( FBT ) 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 - Chapter XII-H of the Income Tax Act, 1961 or any part thereof as unconstitutional being violative of Articles 14 and 246(1) read with Entry 82, List I of the Seventh Schedule to the Constitution of India? - HELD THAT - 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 noninclusion 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. 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.

Issues Involved:

1. Conflict with Sections 5 and 37(1) of the Income Tax Act, 1961.
2. Legislative competence of Parliament to levy Fringe Benefit Tax (FBT).
3. Whether Chapter XII-H can be considered an anti-avoidance measure.
4. Nature of FBT as income tax and its legislative competence.
5. Rationality and nexus of taxing fringe benefits.
6. Discrimination between Government and non-Government employees.
7. Alleged double taxation due to FBT.
8. Self-contradiction and workability of Sections 115-WB and 115-WC.
9. Allegation that all employers are treated as tax avoiders.
10. Opportunity to prove actual fringe benefits lower than fixed percentages.
11. Constitutionality of Chapter XII-H under Articles 14, 19(1)(g), and 265 of the Constitution of India.

Issue-wise Detailed Analysis:

1. Conflict with Sections 5 and 37(1) of the Income Tax Act, 1961:
The petitioners argued that the levy of FBT conflicts with Sections 5 and 37(1) of the Income Tax Act, 1961, as Section 5 defines 'total income' and Section 37(1) pertains to the allowance of business expenditure. The court found that FBT is an independent provision and does not conflict with these sections. The court emphasized that Section 115WA under Chapter XII-H is an additional income tax on fringe benefits provided by employers to employees.

2. Legislative competence of Parliament to levy Fringe Benefit Tax (FBT):
The petitioners contended that FBT amounts to taxation of expenditure, not income, and thus falls outside Parliament's legislative competence under Entry 82 of the Union List. The court held that even if FBT does not fall under Entry 82, Parliament has the power under Entry 97 of the Union List to levy taxes not mentioned in List II or III. Hence, the legislative competence of Parliament to enact Chapter XII-H is upheld.

3. Whether Chapter XII-H can be considered an anti-avoidance measure:
The petitioners argued that Chapter XII-H cannot be an anti-avoidance measure as employers are not guilty of any overt act of tax avoidance. The court rejected this argument, stating that the provisions aim to address the difficulty in attributing collective benefits to individual employees and to prevent tax evasion by employers disguising perquisites as fringe benefits.

4. Nature of FBT as income tax and its legislative competence:
The petitioners claimed that FBT is not in the nature of income tax and is beyond Parliament's legislative competence. The court clarified that FBT is an additional income tax levied on employers for fringe benefits provided to employees, which falls within Parliament's legislative competence under Entry 97 of the Union List.

5. Rationality and nexus of taxing fringe benefits:
The petitioners contended that taxing fringe benefits is irrational and lacks a nexus to the objective sought to be achieved. The court found that the rationale for FBT is to address the difficulty in isolating personal elements in collective benefits and to ensure equitable taxation. The court upheld the rationality and nexus of FBT to its legislative purpose.

6. Discrimination between Government and non-Government employees:
The petitioners argued that FBT discriminates between Government and non-Government employees, violating Article 14 of the Constitution. The court held that permissible classification allows for reasonable differentiation and that FBT does not violate Article 14 as it is based on an intelligible differentia with a rational relation to the objective sought to be achieved.

7. Alleged double taxation due to FBT:
The petitioners claimed that FBT leads to double taxation. The court rejected this argument, stating that FBT is an independent provision and does not result in double taxation. The court emphasized that FBT is levied on employers for fringe benefits provided to employees, separate from the taxation of income.

8. Self-contradiction and workability of Sections 115-WB and 115-WC:
The petitioners argued that Sections 115-WB and 115-WC are self-contradictory and unworkable. The court found no evidence to support this claim and held that the provisions are clear and workable. The court emphasized that the percentages assigned under Section 115-WC are policy matters and not arbitrary.

9. Allegation that all employers are treated as tax avoiders:
The petitioners contended that Chapter XII-H tars all employers as tax avoiders. The court rejected this argument, stating that the provisions aim to address tax avoidance by ensuring equitable taxation of fringe benefits. The court found no basis for the claim that all employers are treated as tax avoiders.

10. Opportunity to prove actual fringe benefits lower than fixed percentages:
The petitioners argued that employers are not given an opportunity to prove that actual fringe benefits are lower than the fixed percentages under Section 115-WC. The court held that the fixed percentages are policy decisions and do not violate constitutional provisions. The court emphasized that the provisions are designed to address the difficulty in attributing collective benefits to individual employees.

11. Constitutionality of Chapter XII-H under Articles 14, 19(1)(g), and 265 of the Constitution of India:
The petitioners challenged the constitutionality of Chapter XII-H under Articles 14, 19(1)(g), and 265 of the Constitution. The court upheld the constitutionality of Chapter XII-H, stating that the provisions do not violate Articles 14, 19(1)(g), or 265. The court emphasized that the legislative competence of Parliament under Entry 97 of the Union List is sufficient to enact Chapter XII-H.

Conclusion:
The court dismissed the petitions, upholding the constitutionality of Chapter XII-H of the Income Tax Act, 1961. The court found that the provisions of FBT are within the legislative competence of Parliament, do not violate constitutional provisions, and are rational and equitable in addressing the taxation of fringe benefits.

← Previous Next →