High Court of Karnataka Reserves Judgment on Challenge to Fringe Benefit Tax Provisions. Petitions question constitutional validity of Chapter XII-H of Income Tax Act, 1961 as violative of Article 14 and beyond legislative competence.

Writ petitions under Articles 226 and 227 of the Constitution of India challenging the constitutional validity of Chapter XII-H of the Income Tax Act, 1961.

Petitioners sought striking down of Chapter XII-H and related provisions as ultra vires Articles 14, 19(1)(g), 265 and beyond legislative competence.

The levy of fringe benefit tax on employers was alleged to be unconstitutional, discriminatory, and beyond Parliament's taxation powers.

Whether the levy of fringe benefit tax conflicts with Sections 5 and 37(1) of the Income Tax Act, 1961 Whether the fringe benefit tax is a tax on expenditure, not income, and thus beyond Parliament's legislative competence Whether Chapter XII-H can be sustained as an anti-avoidance measure when the employer is not guilty of any tax avoidance Whether an additional tax can be imposed when there is no primary income tax liability Whether the concept of taxing fringe benefits is irrational and lacks nexus with the objective sought to be achieved Whether the provisions discriminate between government and non-government employees under Section 115WC(2), offending Article 14 Whether the provisions lead to double taxation, violative of Article 14 Whether the deeming provisions in Sections 115WB and 115WC are self-contradictory and unworkable Whether the employer's right to recover the tax from employees imposes an increased liability, and if the employer absorbs the tax, it violates Section 200(1) of the Companies Act, 1956 Whether all employers are treated as tax avoiders without justification Whether the employer is denied an opportunity to prove that actual fringe benefits are lower than the prescribed percentages

The levy of tax on fringe benefits is in conflict with the provisions of Section 5 and 37(1) of the Act and hence requires to be struck down. 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 militate against the concept of income as defined under Section 5. Chapter XII-H cannot be an anti-avoidance measure as the employer is not guilty of any overt act to constitute tax avoidance and hence requires to be struck down. Inasmuch 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 legislative competence. The entire concept of taxing fringe benefits is irrational and has no nexus to the objective sought to be achieved and hence the chapter requires to be struck down. Inasmuch as there is patent discrimination between government and non-government employees and preferential treatment given as per Section 115-WC(2), the chapter offends Article 14 and requires to be struck down. Inasmuch as the provisions clearly lead to double taxation, they offend Article 14. The provisions of Section 115-WB and WC carve out various deemed fringe benefits and to the extent these are self-contradictory they become unworkable. The employer is entitled to collect the tax paid from the employees, increasing employee liability. If the employer decides to absorb the tax, it would offend Section 200(1) of the Companies Act, 1956. All employers are tarred as tax avoiders with the same brush by the introduction of Chapter XII-H and to this extent the provisions require to be struck down. 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 in an ad hoc manner.

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. 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 Chapter XII- H was inserted into the Act with effect from 1.4.2005 by the Finance Act of 2005. The levy of tax on fringe benefits is in conflict with the provisions of Section 5 and 37 (1) of the Act

Writ petitions filed under Articles 226 and 227 before the High Court of Karnataka. Heard and reserved for orders on 03.09.2019. Order pronounced on 06.12.2019.

• Income Tax Act, 1961: Chapter XII-H, Sections 5, 17(2), 37(1), 115WA, 115WB, 115WC
• Constitution of India: Articles 14, 19(1)(g), 265
• Finance Act, 2005:
• Companies Act, 1956: Section 200(1)
• Income Tax Rules: Rule 3