Assessment procedure of FBT

The Assessing Officer is required to make an assessment of the return of fringe benefits furnished by the employer under section 115 WE and determine the tax or interest payable by him or refund due to him. The procedure for assessment under this section is similar to the corresponding provisions for assessment of a return of income under section 143 of the Act.

Where the employer fails to furnish a return of fringe benefits or fails to comply with the terms of a notice issued under section 115WE(2), the Assessing Officer is required to make the assessment to the best of his judgement, after giving the assessee a reasonable opportunity of being heard. The provisions of section 115WF correspond to the provisions of section 144 in relation to assessment of a return of income.

Where the Assessing Officer has reason to believe that any fringe benefits chargeable to tax have escaped assessment for any assessment year, section 115WG provides for the reassessment of such fringe benefits which have escaped assessment. This provision corresponds to section 147 of the Act in relation to Income escaping assessment.

Section 115WH requires the Assessing Officer to serve a notice on the assessee before making an assessment or reassessment under section 115WG requiring the assessee to file a return in the prescribed form and manner. The notice can be issued after the Assessing Officer records his reasons in writing for doing so. However, no notice can be issued for an assessment year beyond 6 years from the relevant assessment year. Further, in a case where the assessment has been completed under sub-section (3) of section 115WE or section 115WG for the relevant assessment year, the Assessing Officer cannot issue a notice for reopening the assessment after the expiry of 4 years, without the approval of the Chief Commissioner or the Commissioner.

No threshold limit

The FBT law has not specified any threshold limit, and it covers all employers (except individuals, HUF's and Trusts) irrespective of the number of employees. Since it is a deeming provision, even in a situation where there are no employees, if the amount is spent on the specified heads, the tax would be attracted.

Non-rebuttable presumption

The value of fringe benefit is determined by a presumptive method by applying the proportions specified in section 115WC to the fringe benefits provided and deemed to have been provided by the employer and enunciated in section 115WB. The presumption implicit in the proportions specified in section 115WC is not rebuttable. However, the amount of expense incurred or payment made, for the purposes listed in clauses (b) and (c) of sub-section (1) and clauses (A) to (P) of sub-section (2), of section 115WB, is to be determined according to the books of account. (FAQ 5 of the Circular)

Please note the use of the words 'according to the books of accounts' which gives credence to the fact that whatever is debited as expenses in the books has to be considered for the purpose of FBT taxation. FAQ 6 further clarifies that the tax base relating to FBT is calculated on a presumptive basis as a proportion of the expenses incurred for the purposes referred to in sub-section (2) of section 115WB.

Whether the actual expenditure on fringe benefits is more or less than the value of the fringe benefits calculated on the presumptive basis is of no consequence/relevance.

ESOP not to be taxed

The provision relating to the computation of the value of the fringe benefits is contained in section 115WC. It is a settled principle of law that where the computation provision fails, the charging section cannot be effectuated. Therefore, if there is no provision for computing the value of any particular fringe benefit, such fringe benefit, even if it may fall within clause (a) of sub-section (1) of section 115WB, is not liable to FBT.

The value of any benefit provided by the employer to its employees by way of allotment of shares, debentures, or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of the company is a fringe benefit within the meaning of clause (a) of section (1) of section 115WB. However, in the absence of a computation provision in respect of such benefits, the charging section fails. Therefore, the value of the value of any benefit provided by the employer to its employees by way of allotment of shares, debentures, or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of the company, is not liable to FBT (FAQ 7, and 8)

FBT is not tax deductible

The FBT is not allowed as a deduction in computing the income chargeable under the head profits and gains of business or profession (Clause 10.1 of the Circular) under sub-clause (ic) of clause (a) of section 40 of the Income-tax Act. This is unjustified. If FBT is to be a surrogate tax on employer in respect of fringe benefits enjoyed by the employees, it should have been made tax deductible. At least this would be some consolation to the employer. The effect of the amount not being tax deductible is that the impact of the tax is higher than what it apparently seems.

Is FBT to be charged on accrual basis?

FBT would be payable in the year in which the expenditure is incurred. Therefore, FBT would not be payable on payment of advance towards expenses to be incurred in the future. (FAQ 18). It seems there is a contradiction between the interpretation in the Circular and the position as provided by S. 115WB(2) in this matter, since the said Section speaks of 'made any payment for' implying that the charge is on cash basis. The wordings of FAQ19 further add to the confusion, by saying, 'FBT is payable in the year in which the expenditure is incurred….'