The Hindu Business Line : Circular on FBT deeming provision — Not quite true to legal fiction principle

In the light of the principles of interpretation pertaining to a legal fiction, some of the clarifications on the fringe benefit tax provided in a recent Circular fly in the face of the statutory provision, and subvert the purpose and object of the levy. Undoubtedly, the Circular needs to be re-drafted to bring it in conformity with the letter and spirit of the law, says H. P. Ranina.

CHAPTER XII-H, which was introduced in the Income-Tax Act, 1961 from April 1, is a separate self-contained code for taxing an employer, not on his income, but on the aggregate of prescribed values of certain fringe benefits provided to his employees. This self-contained code embraces the provisions of Sections 115-W to 115-WL. Under Section 115-WB(2), expenses incurred by an employer on certain items prescribed in Items A to P are "deemed" to be fringe benefits.

Therefore, though no personal advantage may be derived by an employee, by a fiction of law the value of such advantage is deemed to be a fringe benefit provided by an employer to his employees attracting the flat rate of tax of 30 per cent on the value specified under Section 115-WC.

To illustrate, if an employee is required to go on a tour in discharge of his duties, it cannot be said that such employee has been provided with a fringe benefit; in fact, he may well argue that he has been put to a personal disadvantage. However, the deeming provision would construe even a disadvantage to be a "fringe benefit", so that the prescribed value thereof becomes liable to tax in the hands of his employer. Undoubtedly, Chapter XII-H will be a gold mine, first for chartered accountants who have to certify the computation of the fringe benefit tax, and subsequently for lawyers who will have to argue thousands of legal cases all over India on the interpretation of the provisions of this Chapter.

A recent Circular, far from ironing out the creases, raised issues that are contrary to the provisions of law. A Circular can liberalise the law in favour of a tax-payer, as held by the Supreme Court in several cases but it cannot impose a burden which the law does not. Some of the clarifications, which are in the form of question and answer, go beyond the legal provision.

Perhaps, the draftsmen of the Circular were carried away by the deeming provision incorporated in Section 115-WB. It is, therefore, necessary to consider the principles of interpretation where a deeming provision is enacted before dealing with controversial issues raised in the Circular.

The principle of interpretation is that a deeming provision needs to be given a strict construction because it is intended to enlarge the meaning of a particular word or expression. Further, a legal fiction has to be carried to its logical conclusion.

As observed by Lord Asquith of Bishopstone in East End Dwellings Co. Ltd. v. Finsbury Borough Council (1952; A.C. 109, 132), "if you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it... The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs."

In S. A. L. Narayan Row v. Ishwarlal Bhagwandas (57 I.T.R. 149) the Supreme Court held that where an Assessing Officer is vested with power under a deeming provision, his power can be exercised only in prescribed cases within the limits of the authority conferred upon him. In C.I.T. v. Teja Singh (35 I.T.R. 408), the Supreme Court held that it is a rule of interpretation well settled that in construing the scope of a legal fiction it would be proper and even necessary to assume all those facts on which alone the fiction can operate.

The Supreme Court held in C.I.T. v. Godavari Sugar Mills Ltd. (63 I.T.R. 310) that a legal fiction can be given effect to only in the field of a definite provision for which the fiction is enacted. In C.I.T. v. Vadilal Lallubhai (86 I.T.R. 2), and in C.I.T. v. Amarchand N. Shroff (48 I.T.R. 59), the Supreme Court laid down the proposition that "legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field."

In C.I.T. v. Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum (129 I.T.R. 440), the Supreme Court held that it is not necessary for the purposes of working out the fiction to assume and supply a missing link. In a classic passage in C.I.T. v. Hindustan Petroleum Corporation Ltd. (187 I.T.R. 1), the Bombay High Court held: "A legal fiction has to be carried to its logical conclusion but only within the parameter of the purpose for which the fiction is created. Moreover, as far as possible, the legal fiction should not be given a meaning so as to cause injustice. It has been held by the Supreme Court in a number of cases that legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond that purpose."

In Mohamed Iqbal Madar Sheikh v. State of Maharashtra (1996; 1 S.C.C. 722), a three-member Bench held that the Legislature can introduce a statutory fiction and Courts have to proceed on the assumption that such state of affairs exists on the relevant date, because when one is bidden to treat an imaginary state of affairs as real one has to also imagine as real the consequences which flow from it, unless prohibited by some other statutory provision. In C.I.T. v. G. Narasimhan (236 I.T.R. 327) the Supreme Court while construing the provision pertaining to deemed dividend laid down that any legal fiction has to be carried to its logical conclusion.

In the light of these principles of construction, it is necessary to consider whether the Circular issued under the fringe benefit tax strictly complies with the provisions of Chapter XII-H or if it goes beyond the statutory provisions encompassed in this Chapter. To consider the objective of this legislation, it is necessary to refer to Paragraph 160 of the Finance Minister's speech when he introduced the Chapter in the Finance Bill, 2005 on February 28. In his speech he made the following statement: "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." In the light of what is stated above, it is clear that what are sought to be taxed by the Government by enacting Chapter XII-H are only benefits enjoyed by employees.

The fiction of law creates a circumstance where a benefit is construed to be enjoyed by an employee, though in fact it is not. However, the fiction has to be carried to its logical conclusion to cover only such cases where expenditure is incurred on employees. It cannot possibly cover a case where the employee is not involved, and expenditure is incurred on other persons.

Even in cases where others are involved, the Circular states that the expenditure will be liable to the fringe benefit tax. For example, a question has been raised in the Circular whether expenditure incurred for hotel stay, air ticket charges, etc. in relation to customer/client is liable to fringe benefit tax.

The answer given by the Circular is that any expenditure incurred for the purposes of lodging and boarding or travel of customer/client could be classified either under the provisions of Clause D or Clause G of Section 115-WB(2) and, accordingly, is liable to fringe benefit tax.

This is a clear case where the Circular seeks to impose a tax burden which, in fact, does not pertain to expenditure on employees; the expenditure on hotel stay, air ticket, etc. pertaining to customers and clients can by no stretch of imagination be treated as fringe benefits provided to employees.

As pointed out above, the concept of a "deeming provision" demands that a legal fiction has to be carried to its logical conclusion and that it has to be strictly construed.

Even the charging Section 115-WA, imposing additional income-tax, only applies in respect of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year at the rate of 30 per cent on the value of such fringe benefits.

Therefore, the deeming provision of Section 115-WB(2) has to be read in the context of the charging Section 115-WA. Section 115-WB(2), Items A to P, set out the nature of the expenditure. It is only in one case, under Item B, that the law specifically covers expenditure incurred by an employer on provision of hospitality "to any person".

The expression "to any person" is not included in any other Item from A to P. Therefore, all other items would necessarily pertain to expenditure on employees alone. The Circular to this extent widens the scope and ambit of Chapter XII-H, which is clearly not permissible in law.

The Circular is also contrary to the law in respect of gifts to customers. It is stated in the answer to the last but one question of the Circular that gifts to customers would be covered by the provisions of Section 115-WB(2)(O). Again, this is against the concept of the fringe benefit tax and the speech of Finance Minister, where the fringe benefit tax is expressly stated to cover only cases of benefits, amenities and privileges enjoyed collectively by employees which are currently not taxed in their hands.

To treat gifts to customers as a fringe benefit to employees is illogical, irrational and absurd, and destroys the concept of a deeming provision which creates a legal fiction.

In the light of the principles of interpretation pertaining to a legal fiction, some of the clarifications provided in the Circular fly in the face of the statutory provision, and subvert the purpose and object of levying the fringe benefit tax. Undoubtedly, the Circular needs to be re-drafted to bring it in conformity with the letter and spirit of the law.

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