The Parliament has the legislative competence to enact laws under Entry 97 of the Union List, which deals with "any other matter not enumerated in List II or List III including any tax not mentioned in List II and List III."

ORDER :

In these petitions, petitioners have prayed for striking down the provisions of Chapter XII - H inserted in the Income Tax Act, 1961 (for short Act, 1961) by the Finance Act, 2005 (for short Act, 2005) w.e.f. 1.4.2005 on the score that it is offending the provisions of Article 14 of the Constitution and being beyond legislative competency of the parliament.

2. Brief facts of the case, while presenting the Finance Bill, 2005 in the Floor of Parliament, the Finance Minister in his speech rendered as under:

160. 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. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value. 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. However, transport services for workers and staff and canteen services in an office or factory will be outside the tax net.

EXPLANATORY MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL.

“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 and attributing the same directly to the employee. This is so especially where the expenditure incurred by the employer is ostensibly for purposes of the business but includes, in partial measure, a benefit of a personal nature. Moreover, in cases where the employer directly reimburses the employee for expenses incurred, it becomes difficult to effectively capture the true extent of the perquisite provided because of the problem of cash flow in the hands of the employer.

Therefore, it is proposed to adopt a two pronged approach for the taxation of fringe benefits under the Income Tax Act. Perquisites which can be directly attributed to the employees will continue to be taxed in their hands in accordance with the existing provisions of Section 17(2) of the Income Tax Act and subject to the method of valuation outlined in rule 3 of the Income Tax Rules. In cases, where attribution of the personal benefit poses problems or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been provided to the employee.

Chapter XII – H reads as under:

2. Chapter XII- H was inserted into the Act with effect from 1.4.2005 by the Finance Act of 2005. It provides for the levy of additional income tax called “fringe benefit tax” (hereinafter referred to as “FBI”) 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. The purpose of inserting this Chapter in the Act is contained in the speech of the Finance Minister when he introduced the Financial Bill and also in the Explanatory Memorandum explaining the provisions of the said Bill.

3. Learned counsel for the petitioners contended as under:

A. The levy of tax on fringe benefits is in conflict with the provisions of Section 5 and 37 (1) of the Act ad hence, requires to be struck down.

B. 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 of the chapter XII – H militate against the concept of income as explained under Section 5 of the act, which defines ‘total income’ as all income from whatever source derived which is received or deemed to be receive on behalf of such person or accrues or arises to him during such yea