R. Anand

R. Anand on the disclosure and allowability of fringe benefit tax

"INCOME-TAX is a tax on income. It is not meant to be a tax on anything else. It is one tax, not a collection of taxes essentially distinct," observed Lord Macnaghten in the London County Council vs Attorney General (1901 AC 26) case. It is the result of income earned or profit derived in respect of the relevant previous year. Therefore, any income-tax paid is not construed as an allowed business deduction.

This has been the position right through, and Section 40a of the Income-Tax Act mandates that any sum paid representing income-tax is not deductible in computing business profits. Similarly, any sum paid on account of wealth tax is not allowed as a business deduction. The subject has been revisited now in the context of fringe benefit tax (FBT).

The charging Section 115WA(1) explains the levy thus: "In addition to the income-tax charged under this Act, there shall be charged... additional income-tax (in this Act referred to as fringe benefit tax)... "

The law on FBT has described this levy as a tax in addition to income-tax. This implies that FBT may be in the nature of income-tax, but not exactly an income-tax. What else is it? Meanwhile, Section 40a has been amended, incorporating clause (i)(c) by which any sum paid on account of FBT under Chapter XII-H will not be treated as a business deduction.

By making the necessary amendments to the connected provisions, it is abundantly clear that FBT is not an allowable business deduction in the normal computation process. This begs the question: What about allowability of FBT in the context of book profits tax?

Board circular

FAQ 103 has answered this question in favour of India Inc., which is as follows:

Whether FBT would be allowable deduction while computing `book profit' under Section 115JB?

FBT is a liability qua employer. It is an expenditure laid out or expended wholly and exclusively for the purposes of the business or profession of the employer.

However, sub-clause (ic) of clause (a) of Section 40 of the I-T Act expressly prohibits the deduction of the amount of FBT paid, for the purposes of computing the income under the head `profits and gains of business or profession'. This does not apply to the computation of `book profit' for the purposes of Section 115JB. Accordingly, FBT is an allowable deduction in the computation of `book profit' under Section 115JB.

There is a tacit admission in the Circular that FBT is an expenditure laid out wholly for the purpose of business of the employer.

This is more so because even the items of expenditure which are susceptible to FBT are also items which are in the nature of normal business expenditure and not all the items relate to employer-employee payments.

If this admission is acceptable and FBT is an item relatable to business expenditure, why should it be disallowed in the normal computation?

Computation of book profits tax is an independent exercise, which involves figuring profits and gains from business in accordance with Sections 28-44.

There are a number of items which are allowed in the computation of book profits but not allowed in the normal computation.

The distortion is inherent in the respective schemes of levy because Section 115JB is basically a tax on reported profits subject to stated adjustments.

In the items listed for adjustments under Section 115JB, the first item deals with "any amount of income-tax paid or payable and provision thereof".

Therefore, income-tax paid or provided by a company is added back in the computation of Section 115JB profits. In the absence of any amendment to Section 115JB relating to FBT, the circular has clarified the position that FBT need not be added back in the book profits computation.

ICAI Guidance Note

The Guidance Note on accounting for FBT highlights primarily the presentation issue on the subject. The said note states that "FBT like any other direct tax" (emphasis applied) is not an allowable expenditure for the purpose of computation of taxable income.

The note is silent on the allowability of FBT in the context of book profits tax. On the question of presentation, the ICAI's guidance note highlights the presentation of FBT on the following basis:

In the context of presentation of the fringe benefits tax in the profit and loss account of companies, it has been considered whether the tax is covered by the requirement of clause 3(vi) of Part II of Schedule VI to the Companies Act, which provides:

"The amount of charge for Indian income-tax and other Indian taxation on profits, including, where practicable, with Indian income-tax any taxation imposed elsewhere to the extent of the relief, if any, from Indian income-tax and distinguishing, where practicable, between income-tax and other taxation."

Thus, FBT should be disclosed as a separate item after determining profit before tax on the face of the profit and loss account for the period in which the related fringe benefits are recognised.

Clarity and brevity are necessary virtues in drafting. The law on FBT may be hazy, but the circular has certainly provided clarity on may issues.

The Madras High Court has reportedly granted an interim stay against the levy of FBT in respect of Kumbhat and Co.

Interestingly, not many of the big chambers of commerce have moved the court over this levy. Is it a wait-and-watch policy or are have they reconciled to the inevitability of compliance?

(The author is a Chennai-based chartered accountant.)

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