Income-tax, as the name suggests, is a tax on income. But, what is income is not defined in the taxing statute. Though the Income-tax Act, 1961 (‘the 1961 Act’) sets out certain provisions as to particular kinds of receipts that should be excluded or included and as to the methods of computing income, the word itself has not been exhaustively defined. Rightly so, as the word ‘income’ for a taxing legislation, cannot have a definitive or static meaning. As to the nature of income, we have to seek guidance from judicial pronouncements, which again are based largely on commercial usage. Commercial usage, unfortunately, is not altogether a reliable guide; and in practice there is no more baffling problem that faces a Commercial Accountant than the allocation of items as between Capital and income1.
This article tries to examine one of the colors of income, namely ‘perquisites’2. Over the years, taxation of perquisites arising to an employees have largely attained definitive meaning, thanks to the elaborate valuation rules. But taxation of perquisites received in the course of carrying on business have not been subjected to greater judicial review, though express charging section existed since 1964. The reason therefor being absence of a robust reporting mechanism for perquisites given in the course of trade. The introduction of Section 194R to the 1961 Act, and the larger consequences of non-deduction of tax has necessitated to understand the meaning of the word ‘perquisite’ in a greater detail.
Historical perspective on taxation of perquisites
The usage of the word ‘perquisite’ dates from feudal times, and meant casual income arising to a feudal chief3. In taxing statutes, perquisites that arise in the course of employment have been legislatively considered as ‘income’ (in the nature of salary) atleast since 1842. Schedule E read with Rules to Schedule of British Income- tax Act, 1842 read as under
Sh E – upon every public office or employment of profit, and upon every annuity, pension or stipend, payable by the Crown
Rule 4 – Perquisites to be assessed under the Act shall be deemed to be such profits of offices, payable by the Crown
The Indian Income-tax Act, 18604 and Indian Income-tax Act, 18865 too contained a similar charging provision. The 1860 Legislation, in Section 3(4) specifically defined ‘salary’ to include allowances, fees, commission, perquisites, or profits received from employment.
It seems perquisites arising from employment have always been treated as income in the nature of salary. However, disputes arose on taxability of such perquisites, due to peculiar wordings of the charging section. Section 8 of the British Customs and Inland Revenue Act, 1876 provided for taxing of perquisites. The Corresponding Section 6(1) of the Indian Income-tax Act, 1918 read as under
Sec. 6- Tax shall be payable in respect of any salary or wages, any annuity, pension or gratuity, and any fee, commission or perquisite received by him in lieu of or in addition to any salary or wages, paid by the Government
Section 3(2)(x) of the 1918 Act also expressly exempted from taxation, “any perquisite or benefit which is neither money, nor reasonably capable of being converted into money.”
Where a rent free accommodation was provided by a Bank to its employee, the House of Lords in Tennant v Smith (Surveyor of Taxes)6 [while interpreting Section 8 of the British Customs and Inland Revenue Act, 1876] inter alia held that, though the benefit provided to an employee is a perquisite, it cannot be subject to tax as the perquisite is not “paid” by the Government. The judgment lead to a series of amendments to taxing statutes across Britain and her colonies.
When the Indian Income-tax Act, 1922 was enacted, Section 3(2)(x) of the 1918 Act was omitted, with the object of bringing to tax perquisites that are not convertible into money. The Report of the Joint Select Committee on the Income-tax Bill, 1922 that lead to the 1922 Act, acknowledged the need of the amendment ‘in order to avoid inequalities in assessments’, The Statement of objects and reasons of 1922 Act, in relation to omission of Section 3(2)(x) of the 1918 Act read as under
“… the existence of this provision [S.3(2)(x)] makes it impossible under the present law to assess. to income-tax rent-free residences in cases where the asséssee has not the power to sub-let, while rent-free residences are liable to the tax where the assessee has the power to sub-let..”
However, the 1922 Act did not amendment the charging section which even under the new law, permitted taxing salary “paid” to an employee. There was no specific charging section to bring perquisites into taxing net either. The section as introduced in 1922 read as under
“Sec. 7(1)- Tax shall be payable in respect of any salary or wages, any annuity, pension or gratuity, and any fee, commission or perquisite received by him in lieu of or in addition to any salary or wages, paid by the Government
Sec 4(3)(vi) – Act shall not apply to special allowance, benefit or perquisite specifically granted to meet expenses wholly and necessarily incurred in the performance of the duties of employment
For the first time, by the Income-tax Amendment Act, 1923, provision of Rent Free Accommodation was specifically treated as ‘perquisite’ for the purpose of taxation of salary [by introduction of Explanation to Section 7(1) of the 1922 Act]. This still did not overcome the problem of salary being subject to tax, only when it is paid.
It was only in 1939 that the Act was comprehensively amended to tax any salary (including perquisite) “due to him, whether paid or not”. Even then, the only perquisite that was subject to taxation in India was rent free accommodation provided to an employee.
The Income-tax Enquiry Committee of 1954, in its report made the following recommendation
Currently, only rent free accommodation is being subject to tax. All other benefits should also be brought to tax on the principle of equity. However, considering the harassment that tax payers would suffer, benefits and perquisites received by directors, and persons earning more than Rs 24,000 alone be taxable.
This lead to a comprehensive substation of provisions relating to taxation of salary by the Income-tax Amendment Act, 1955, and introduction of an inclusive definition of ‘perquisite’.
Interestingly, all these changes concerned taxation of income under the head salary alone. There was no specific provision to taxa perquisites gained by a person carrying on business or profession, perhaps as there was no need for one. In 1964, Section 28(iv) was introduced in the 1961 Act to expressly provide for taxation of value of any benefit or perquisite arising from business or profession carried on by a person. By the Finance Act, 2022, Section 194R of the 1961 Act was introduced, casting an obligation on the person providing the benefit or perquisite to deduct tax at source on the value of the benefit or perquisite.
Meaning of ‘perquisite’
As the word ‘perquisite’ has, for a large part of the history, been associated with taxation of income arising from employment, dictionaries and judgments explain the meaning of the word from the perspective of an employee, more particularly of an individual. According to Murray’s Dictionary, the word means “any casual emolument, fee or profit attached to an office or position in addition to salary or wages”.
Both monetary and non-monetary benefits, over and above the monetary remuneration would be regarded as a perquisite. The fact that the perquisite is agreed to in the terms of engagement would not change its character.
As in the case of income, the word perquisite cannot be subjected to a statutory definition. Anything that denotes a personal advantage, that benefits a man by going “into his own pocket” would be regarded as a perquisite.
A motor car provided by a client to a professional engaged by the client, to commute between the place of residence and work, is not something which is provided in the performance of duties as held in Andrews v. Astley7, and would be regarded as perquisite within its ordinary meaning.
Often questions arise, when a Chartered Accountant or an Advocate is asked by a client to travel to a place away from his usual place of work, for undertaking the client’s work and the expenses of the travel are borne by the client, would they be regarded as a benefit extended to the Chartered Accountant or the Advocate. Useful reference can be made to the explanation of Rowlatt, J of Court of Appeals in Ricketts y..Cvlquhoun8, though the question related to examination of taxing rules from a slightly different perspective. The claim of Mr Ricketts, an advocate practicing in London, for a deduction for expenses to travel to Portsmouth to discharge his duties as Recorder of Portsmouth, was denied on the ground that the expenses were not incurred in performance of his duties. The Court made the following observation when denying the deduction.
“A man must eat and sleep somewhere, whether he has or has not been engaged in the administration of justice. Normally he performs those operations in his own home, and if he elects to live away from his work so that he must find board and lodging away from home, that is, by his own choice, and not by reason of any necessity arising out of his employment ; nor does he, as a rule, eat or sleep in the course of performance of his duties….”
From the natural meaning of the word ‘perquisite’ and the interpretation given by the various Courts, the salient features of perquisites include the following:
- It is a benefit, amenity or profit in addition to regular fixed payment
- It is a privilege, gain, or incidental profit
- It should have monetary value
- The recipient get a right to use the benefit as per own terms
- The benefit may or may not be convertible into money
Seasonal gifts, casual accommodations (even on professional engagement), discounts or special concession, can all constitute perquisites in their ordinary meaning. In First ITO v. G. Delaforge9, providing food during official duties was also regarded as perquisite.
Difference between ‘perquisites’ and ‘benefits’ From a perusal of legislative history of the words, it appears that ‘benefit’ and ‘perquisite’ are used as a pair of words, without there being any intelligible difference between them. While Section 3(2)(vi) of 1918 Act grants certain benefits to “benefit or perquisite”, Section 3(2) (ix) extended the exemption to “perquisite or benefit”. In some other instances, perquisites is defined to include a benefit. The words have thus been used synonymously or a pair of words.
Valuation of perquisite for the purpose of Section 28(iv)
There are no provision under the 1961 Act to determine value of benefits for perquisite for the purpose of S. 28(iv) or 194R. Rule 3 of the 1961 Rules which provides for valuation of perquisites arising in the course of employment, are artificial rules, and would not apply to Section 28(iv) of the 1961 Act. As a general rule, assessable value would be the benefit personally derived estimated in monetary terms and not the price which other persons might be prepared to pay10.
When a director gifted suits to its employees on the occasion of Christmas, the Revenue treated the purchase price of the suits to be the value of perquisite for the employees. The House of Lords held the value of perquisite would be the price which the taxpayer would get for the suits in the open market, if he sold it immediately and not the purchase price or the retail price11.
The Federal Court of Australia in Donaldson v. FCT 12 held that, where what is given is freely transferable, its value may be found by determining what a willing but not anxious purchaser might pay for it.
If benefits cannot be resold (flight tickets, club memberships), as held in Abraham v. Federal Commissioner of Taxation13, followed in Rathinasabapathy Chettiar v. Commissioner Of Wealth-Tax14, ordinary market value has to be taken, assuming that the benefits are transferable.
Withholding tax obligation on perquisites provided
Any taxable perquisites provided to an employee have always been subject to deduction of TDS under Section 192 of the 1961 Act. The scheme has been in operation for more than five decades. Though standard perquisites have been subject to withholding tax, many employers do not practically examine as to whether many a benefits extended to employees are infact taxable perquisites.
Section 194R of the 1961 introduced by the Finance Act 2021 has created a new obligation on persons providing perquisites to deduct tax on the value of the perquisites provided. Being a new obligation, its practical applicability have raised many a questions. In exercise of powers granted under sub-section (2) of the Section, the Central board of Direct Taxes have issued certain guidelines on operation on the Section. Though these are statutory guidelines, they cannot go beyond what the Act says, but would definitely be binding on issues not governed by the Act (including matters relating to judicial interpretation. A few practical issues arising on applicability of the section have been examined below
- Value on which tax is to be deducted – For the purpose of Section 194R of the 1961 Act, the Central Board of Direct Taxes, vide Circular No. 12 of 2022 dated 16.06.2022 specifically provides that, where the perquisites are bought out, the value for the purpose of the section would be the cost incurred. The common law explained in the earlier paragraphs would apply where the perquisites are not bought out, as well as in the case of taxation in the hands of the person receiving the benefit. Certainly, the value for the purpose of TDS need not be value for the purpose of taxation in the hands of the recipient.
- Manner of deduction of tax – Where the perquisite is in the form of cash or cash equivalent (say gift cards), tax can be deducted on the value of the perquisites. If the perquisite is wholly in kind, the person providing the benefit can (a) deduct the equivalent value of tax from other consideration payable to the person receiving the benefit (if any), (b) bear the tax cost (in which case, the value of consideration would have to be grossed up), (c) Require the person receiving the benefit to deposit the quantum of TDS (in the manner provided in the Circular).
- Deduction on deemed benefits/ debts written off – If a trading liability was allowed as a business expense, it would ordinarily not become income upon its remission, as held by the Bombay High Court in Mohsin Rehman Penkar v. CIT15. To overcome this judgment, Section 10(2A) was introduced in the 1922 Act vide Finance Act, 1955 to deem such remission as income. The provision continues as Section 41(1) of the 1961 Act. When a businessman, due to commercial expediency, writes off a debt resulting in a notional income to the debtor, the creditor cannot be regarded as having ‘provided’ a perquisite to the debtor. The section also requires the person providing the benefit to deduct tax before providing/ releasing the benefit. The term “provide” or “release” has not been defined in section 194R of the 1961 Act. The requirement of deducting tax before releasing an income was first introduced in Section 194B of the Act, by the Finance Act, 1997. The context in which the term “provide” and “release” have been used in section 194R of the Act clearly contemplates there should be some positive action on the part of the person providing the benefit/perquisite resulting in something tangible being transferred from the person providing the benefit to the debtor. In the absence of a “provision” of a benefit, nor a “release”, TDS under Section 194R would not apply on write off of debts.
- Applicability of business to consumer transaction – Section 194R of the 1961 Act applies to any perquisite provided to a person carrying on business or profession. If the consumer of the product is a businessman or a professional, the section would apply. To illustrate, if a tractor manufacturer extends certain benefits to a farmer [say free tyre replacement for being the 100th customer for the year], provisions of Section 194R would apply so long as the farmer is carrying on farming as a business, irrespective of the fact that the farmer is a final consumer, nor that the income of the farmer might not liable to tax.
- Applicability on loyalty points – Loyalty points or reward points merely acts as a discount on whatever property or services are being purchased by the consumer. They would by themselves not be regarded as income [Shankar v. Commissioner16]. A US Tax Court has however recently in Konstantin Anikeev v. Commissioner17 held that in certain instances, cash backs can be regarded as income accruing to the person earning the points. Certainly, when the points are redeemed by a businessman or a professional, the value of the goods received would be subject to TDS.
Items which represent business income of the recipient would also be subject to deduction of tax under this Section.
- The Law of income Income-tax in India, V S Sundaram, 6th edition, 1947, page 1
- For reasons given in the latter part of this article, the words ‘benefits’ and ‘perquisites’ are interchangeably used in the statute, and do not have a distinct meaning.
- The Law of income Income-tax in India, V S Sundaram, 6th edition, 1947, page 481
- Schedule 4 of Indian Income-tax Act, 1860, read with Part X of the Rules
- Section 4 read with Second Schedule and Section 3(4) of Indian Income-tax Act, 1886
-  AC 150
-  8 TC 589
- 10 TC 118
-  38 ITD 528 (Bombay ITAT):
- Tennant v. Smith  A.C. 150
- Abbott v. Philbin (Inspector of Taxes)  3 W.L.E. 739 and Wilkins (Inspector of Taxes) v Rogerson  2 W.L.R. 102
- 4 ATR 530
- 70 C.L.R. 23 High Court of Australia
-  93 ITR 555 (Mad)
-  16 ITR 183 (Bom)
- 143 T.C. 140 (2014)
-  127 taxmann.com 612 (TC- US),