The Hindu Business Line : Is FBT a fundamentally blemished tax?

These are specified in Entry 82 (taxes on income other than agricultural income) and Entry 85 (corporation tax), of List I (Union List) of Schedule VII to the Constitution.

The Income-Tax Act is the law enacted in respect to the matters mentioned in these two entries.

Parliament can also make laws under Entry 97 of List I on "Any other matter not enumerated in List II (State List) or List III (Concurrent List), including any tax not mentioned in either of these Lists." This is commonly known as the Residuary Entry.

Since FBT is expressly stated to be an additional income-tax, it must necessarily fall in Entries 82 and 85 of List I and, hence, the possibility of FBT being a tax falling with the Residuary Entry stands excluded.

There are two other provisions to be taken note of. Article 270, inter alia, provides, subject to certain exclusions, that all taxes referred to in the Union List shall be levied and collected by the Government of India. Income-tax and corporation tax are covered by this article.

In addition, Article 271 provides for the levy of "surcharge on certain duties and taxes for purposes of the Union".

The taxes on which a surcharge can be collected include income-tax and corporation tax. A surcharge levied under Article 271 on income-tax and corporation tax is also "income tax".

The income-tax and incorporation tax (hereinafter referred collectively as income tax) collected by the Union of India have to be distributed between the Centre and the States.

But a surcharge levied under Article 271 is exclusively to be retained by the Union Government. The surcharge is an enhancement of the income-tax.

Thus, unless FBT falls in the Legislative Entries 82 and 85 of List I, read with Article 271, this new tax will be ultra vires the Constitution and therefore ab initio null and void.

Section 2 (24) of the Act defines "income" so as to include "profits and gains". `Profits and gains' necessarily applies to business or profession.

Having levied income-tax on profits and gains, the only method of increasing that tax is by way of a surcharge "for purposes of the Union" under Article 271. That option has already been exercised by levying a 10 per cent surcharge. A surcharge is nothing but an additional tax.

A surcharge on income-tax, by whatever name called, can only increase the income-tax already levied.

A surcharge cannot be levied by creating a parallel or additional set of "assessable income" by artificially inflating the already assessed income in its entirety or separately by a fiction deeming part of the items of expenditure (fringe benefits, in the instant case) as not constituting expenditure incurred by business or profession.

The scheme of the new Section 115W and related sections is to create a separate corpus of "additional assessable income" so as to levy the FBT as additional income tax, over and above the income-tax and the surcharge thereon.

The Central Government can only enhance the income-tax payable by a surcharge; that is to say, if you want more money "for purposes of the Union" (which is the avowed object of the FBT), the Finance Minister can still further enhance the surcharge from the currently increased level of 10 per cent, but cannot collect another surcharge as an additional income-tax, in the manner he has done.

What cannot be done directly cannot be done indirectly.

When Article 271 expressly provides for increasing the income-tax for purposes of the Union by the levy of a surcharge on that tax, any other method of levying additional tax on income is debarred.

Having already levied a surcharge, this Article is no longer available to the Finance Minister.

The FBT is, therefore, ultra vires for this reason.

As already seen, the Income-Tax Act is a law enacted in respect to "Taxes on income ... .." and "corporation tax". It was also noted that "income" for the levy of income tax is "profits and gains".

Profits and gains are determined by deducting from the aggregate gross income, all outgoings required to be expended to derive profits and gains and also the deductions (vide, Sections 28 to 43-D).

After arriving at the assessable "income" in this manner, and having levied income-tax on that income, in separately taxing the fringe benefits, albeit part thereof, the Finance Minister is adding to the income statutorily determined a fictitious income.

In other words, he is in effect amending the expression "income" in the Legislative Entry "Taxes on income other than agricultural income". This is tantamount to amending the Constitution by a mere amendment to the I-T Act.

The Constitution cannot be amended in this fashion; it can be done only by following the provisions and elaborate procedures set out in Article 368.

That legislative entries in the Constitution are to be construed in their widest sense is a well accepted rule of construction, but this principle is subject to the exception that where the entries use technical legal terms, otherwise called "terms of art", they must be given their legal meaning.

On this basis T. L. Venkatarama Aiyar J. held in the landmark Supreme Court decision in the Gannon & Dunkerly & Co., case, dealing with works

contract, that in Entry 48 of List II, Schedule 7 of the Government of India Act, the words "sale of goods" had the same meaning which those words had in the Sale of Goods Act (1959 SCR 379). He further observed:

"The ratio of the rule of interpretation that words of legal import, occurring in statutes should be construed in their legal sense, is that those words have, in law, acquired a definite and precise sense and that, accordingly, the Legislature must be taken to have intended that they should be understood in that sense.

"In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in law".

On that basis it was held that the legislative entry used in the Constitution has the same meaning as the expression "sale of goods" used in the Sale of Goods Act.

This necessarily leads us to an enquiry into the meaning of the term "income" in the I-T Act, since the term has not been defined in Entry 82 or Entry 85 of List I.

This term has a technical legal meaning having been used in the Income-Tax Act 1922, which was subjected to judicial interpretation by the highest courts, even before the Constitution was adopted.

This term was merely copied from the 1922 Act into the I-T Act, 1961. That legal meaning was, income is profits or gains of business or profession as determined under the I-T Act.

Entries 82 and 85 of List I, Sch. VII in the Constitution are also exact reproductions of Entries 54 and 46 respectively of List I, Sch. VII of the Government of India Act, 1935.

In this situation, and according to the accepted cannons of construing legislative entries, Parliament must be deemed to have used the term "income" in both these entries in the legal sense used in the pre-Constitution I-T Act, 1922 and that meaning, as already noted, is "profits and gains".

Another important point is that Article 366(a) of the Constitution defines "agricultural income tax" as "agricultural income as defined for purposes of he enactments relating to Indian Income tax".

If so, it will be too much to say that "income other than agricultural income" will have a meaning different from the one ascribed to it in the Indian I-T Act.

Hence, there will be only one assessable income under the I-T Act and that income can be assessed only once.

Thereafter any further tax on the same income can only be by way of a surcharge on the income-tax, and this surcharge has already been levied.

FBT does not fall within the ambit of Legislative Entries 82 and 85 of List I, and is beyond the legislative competence of Parliament.

From another angle, in its true impact and operation, FBT is a tax on expenditure; that is to say the subject matter of the tax is expenditure, as distinct from income.

After allowing a fringe benefit as an expenditure, you cannot tax that expenditure as proposed in the new Section 115WA. You can only tax the residue left after deducting the expenditure. That has already been achieved by computing the assessable income under Sections 28 to 43-D.

By all means, an expenditure claimed by the employer can be disallowed for justified reasons. But it cannot be an admissible expenditure in full under one section and non-admissible expenditure in part under another section, at the same time.

Having regard to the scheme of our I-T Act, a tax on income and a tax on expenditure cannot co-exist. FBT cannot be assimilated into a kind of tax on expenditure for another reason also.

Having proceeded to tax income after reducing the expenditure from the gross aggregate income, the field of taxation on expenditure under the Residuary Entry 97 ("Any other manner not enumerated in List II or List III including any tax not mentioned in either of those Lists") is shut out.

If an expenditure is an admissible deduction for taxing income, then that expenditure, either in full or in part, is thereafter denied to Parliament for levying a tax.

The provision requiring even an employer, who has been consistently incurring loss and therefore is not liable to pay income-tax, to pay the FBT will be clearly confiscatory, because the assessee would virtually have to part with his property within a short period of time in order to bear the burden of the FBT.

In the Moopil Nair (AIR 1961 SC 552) case, the Supreme Court struck down the tax on the assessee, as the tax on the income from his forestland was more than the income he received, by holding it as a colourable exercise of the power to tax.

These are some of the doubts surrounding the constitutional validity of the proposed FBT.

Probably a veritable field for litigation has been created.

(The author is Adviser, Planters' Association of Tamil Nadu.)

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