April

Rule 2BB of the Income Tax Rules specifies the allowances paid to employees which are not taxable. One of the allowances which is exempt from tax is what is commonly called Uniform Allowance.

Rule 2BB exempts from income tax:

any allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

Recently, a payroll manager known to us wished to introduce a head of pay called Attire Allowance in his organization. A certain sum of money was to be provided to employees under the head for the purpose of buying clothes for office wear. The entire amount paid under the head was to be tax exempt as long as the employees provided proof of expenditure by way of receipts for purchase of clothes. The organization did not enforce uniform clothing for its employees. The payroll manager was of the view that the amount paid under Attire Allowance shall be fully non-taxable. His argument was that the term uniform stated in Rule 2BB can be liberally interpreted as any clothing which is used for office wear, and hence Attire Allowance can be tax exempt.

We are not in agreement with the above view.

Rule 2BB refers to “uniform.” According to the Oxford English Dictionary, the meaning of the word uniform is as follows.

The distinctive clothing worn by members of the same organization or body or by children attending certain schools.

The term distinctive clothing in the above denotes that unless the clothing reflects similar design, colour, etc. it cannot be referred to as uniform. Employees can be said to be wearing uniform only when their outfits are identical and as per the design standard prescribed by the organization. Of course, there can be differences in uniform among certain classes of employees on the basis of, say, seniority or nature of work, within the same organization.

Unless an organization has an explicit policy related to uniform to be worn by employees, any amount paid for the purpose of buying clothes, even if for office wear, shall be fully taxable.

Why should the word uniform be interpreted strictly and not be understood as any formal attire worn at workplace?

Legislative Intent

Rule 2BB presents the allowances for the purposes of clause (14) of section 10 of the Income Tax Act. Section 10, as you may know, specifies the income which are not to be included in Total Income for taxation. Section 10(14) refers to

any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose.

According to Section 10(14), the allowance should be granted to meet expenses incurred wholly, necessarily and exclusively for the performance of official duties, for it to be tax exempt. While expenses on uniform can be deemed to be wholly for official purpose, expenses on other clothing, even if formal wear, cannot be said to have been incurred wholly for official purposes. Hence, it is important to interpret the word uniform in Rule 2BB in a strict manner.

Case Laws

The income tax authorities have, on more than one occasion, held that allowances for clothing shall be fully taxable unless the organization has a defined policy for employee uniform.

1. ITA No. 155, 159, 287 & 332 Ahd 2012

The Income Tax Department’s below argument was accepted by the adjudicating authority.

"Appellant's contention that the normal dress worn by its 
employees in office is "uniform" cannot be accepted. 
 
If appellant's interpretation of 'uniform' were to 
be accepted, in every office, any dress worn by the employees'
would qualify as 'uniform'.

There is no doubt that there was no 'uniform' prescribed in 
ONGC during the period under consideration and this fact was
well within the knowledge of appellant.
 
Conclusion drawn by the ACIT(TDS) that additional salary in the
garb of 'uniform allowance' was being paid is therefore, on 
sound footing. Since the payment in question was not towards
purchase or maintenance of "uniform', it cannot be covered under 
Rule 2BB(l)(f) read with section 10(14)(i)."

2. ITA Nos. 674 to 676, 856 and 857 Ahd 2011

The adjudicating authority rejected that the head of pay called Office Wear Allowance can be tax exempt in the absence of uniform clothing policy.

"At the time of hearing before us, the ld. Counsel for the assessee
could not establish how the wear-allowance paid to the employees was 
exempt u/s 10(14). During the course of argument before us, he fairly 
admitted that there was no dress code for the employees. Thus, the 
employees were free to wear any dress.

When there was no dress code and the employees were free to wear any 
dress, how the wear-allowance can be said to be granted to meet the 
expenses wholly, necessarily and exclusively in the performance of 
duties of an office."

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In the previous post, we had a look at taxability of fuel expense reimbursement to employees for motor car provided by the employer. What about employee-owned car?

Employee owns the car and the employer reimburses fuel expense to employee
The monthly perquisite value is as follows.

i) The car is used wholly and exclusively for official duties.
When the car is used only for official purpose, the monthly perquisite value for the purpose of taxation is Rs 0. This is irrespective of fuel and other car running and maintenance expense amount reimbursed to an employee. For example, if a company reimburses Rs 1 lakh per month for the purpose of fuel expenses to an employee, the entire Rs 1 lakh shall be tax free as long as the car is used solely for official purposes.

Please note that the following conditions should be met for the reimbursement to be tax free.

–	the employer should maintain complete details of journey undertaken for official purpose including date of journey, destination, mileage, and the amount of expenditure incurred.
–	the employer should issue a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties.

From the above, it should be clear that the fuel expense reimbursement shall be fully non-taxable only if the car is wholly used for official purposes and the organization maintains details of journeys undertaken by the employee.

ii) The car is used partly for official purposes and partly for personal purposes of the employee.
When the car is used for both official and personal purposes, the monthly perquisite value for the purpose of taxation is as follows.

Running expenses	Car engine cubic capacity does not exceed 1.6 litres	Car engine cubic capacity exceeds 1.6 litres
The expenses for maintenance and running are fully met or reimbursed by the employer.	Actual amount incurred by the employer minus Rs 1,800 (plus Rs 900, if chauffeur is also provided to run the motor car), per month.	Actual amount incurred by the employer minus Rs 2,400 (plus Rs 900, if chauffeur is also provided to run the motor car), per month.

Can an employee claim a benefit of more than Rs 1,800/Rs 2,400 per month specified in the above table?

If the car is used for both official and personal purposes, there is no need for the employer to maintain details of journeys made. But please note that the benefit shall only be to the extent of Rs 1,800 (plus Rs 900 with chauffeur) if the engine capacity is less than or equal to 1.6 litres and Rs 2,400 (plus Rs 900 with chauffeur) if the engine capacity is greater than 1.6 litres. If an employer spends more than Rs 1,800/Rs 2,400 per month on official journeys, the benefit can be increased to the actual amount spent as long as the employer maintains complete details of journey undertaken for official purpose and issues a certificate to the effect.

Note:

1. Please note that Rule 3 of the Income Tax Rules specifies perquisite amounts for a calendar month and hence it is important that employers record the months for which the perquisite value is applicable, in payroll. Also, employers should receive receipts towards vehicle maintenance expenses in total from employees in case employees seek a reimbursement. For example, if the fuel expense reimbursement of Rs 15,000 is for the month of April, the employer should receive fuel receipts for the entire Rs 15,000 for the month of April.
2. The employer should ascertain that an employee owns a car (by way of checking documents such as the RC book) prior to providing the reimbursement.

Illustration 1
An employee owns a car (with 1.5 litres engine capacity) and his employer reimburses Rs 20,000 per month towards fuel and other car maintenance expenses incurred for both official and personal journeys. The company does not reimburse driver salary and does not maintain records for the official journeys undertaken. What is the monthly perquisite value?

Ans: Since the car’s engine capacity is less than 1.6 litres and the car is used for both official and personal purposes, the perquisite value per month is Rs 20,000 (actual amount incurred towards car running expenses) minus Rs 1,800 = Rs 18,200 per month.

What about taxability of fuel expense reimbursement for employee-owned vehicle which is not a car?

Employee owns a vehicle (say, a motorcycle) other than car and the employer reimburses the fuel expense amount to employee
Rule 3 specifies perquisite valuation for “any other automotive conveyance” (automotive vehicles other than car) as follows. One case presume that the term “other automotive conveyance” refers to vehicles such as motorcycle and autorickshaw. The monthly perquisite value is as follows.

i) The vehicle is used wholly and exclusively for official duties.
When the vehicle is used only for official purpose, the monthly perquisite value for the purpose of taxation is Rs 0. This is irrespective of fuel and other vehicle running and maintenance expense amount reimbursed to an employee. For example, if a company reimburses Rs 1 lakh per month for the purpose of fuel expenses to an employee, the entire Rs 1 lakh shall be tax free as long as the vehicle is used solely for official purposes.

Please note that the following conditions should be met for the reimbursement to be tax free.

–	the employer should maintain complete details of journey undertaken for official purpose including date of journey, destination, mileage, and the amount of expenditure incurred.
–	the employer should issue a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties.

From the above, it should be clear that the fuel expense reimbursement shall be fully non-taxable only if the vehicle is wholly used for official purposes and the organization maintains details of journeys undertaken by the employee.

ii) The vehicle is used partly for official purposes and partly for personal purposes of the employee.
When the vehicle is used for both official and personal purposes, the monthly perquisite value for the purpose of taxation is as follows.

Running expenses	Perquisite value per month (Rs)
The expenses for maintenance and running are fully met or reimbursed by the employer.	Actual amount incurred by the employer minus Rs 900

Can an employee claim a benefit of more than Rs 900 per month specified in the above table?

If the vehicle is used for both official and personal purposes, there is no need for the employer to maintain details of journeys made. But please note that the tax benefit shall only be to the extent of Rs 900 per month. If an employer spends more than Rs 900 per month on official journeys, the tax benefit can be increased to the actual amount spent as long as the employer maintains complete details of journey undertaken for official purpose and issues a certificate to the effect.

Note:

1. Please note that Rule 3 of the Income Tax Rules specifies perquisite amounts for a calendar month and hence it is important that employers record the months for which the perquisite value is applicable, in payroll. Also, employers should receive receipts towards vehicle maintenance expenses in total from employees in case employees seek a reimbursement. For example, if the fuel expense reimbursement of Rs 15,000 is for the month of April, the employer should receive fuel receipts for the entire Rs 15,000 for the month of April.
2. The employer should ascertain that an employee owns the vehicle (by way of checking documents such as the RC book) prior to providing the reimbursement.

Illustration 2
An employee owns a motorcycle and his employer reimburses Rs 5,000 in the month of April towards fuel and other maintenance expenses incurred for both official and personal journeys. The employer does not maintain records for the official journeys undertaken. What is the perquisite value for April?

Ans: Since the motorcycle is used for both official and personal purposes, the perquisite value for April is Rs 5,000 (actual amount incurred towards motorcycle running expenses) minus Rs 900 = Rs 4,100.

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Organizations use “Fuel Expense Reimbursement” as a pay component for tax saving, particularly for members of middle and senior management. The typical payroll treatment for the head of pay is as follows:

1. Pay a certain sum of money as remuneration under the head each month.
2. Seek petrol/diesel purchase receipts from employees.
3. Provide full tax exemption to the extent receipts are submitted.
4. Tax the amount for which receipts are not submitted.

We find employees getting paid significant sums of money under the head and receiving 100% tax exemption to the extent fuel receipts are submitted.

Payroll managers would do well to note that there is no blanket 100% tax benefit on fuel expense reimbursement. In fact, there is no direct reference to petrol/fuel expense reimbursement in the income tax law. Rule 3 of the Income Tax Rules, which pertains to valuation of perquisites, provides guidelines on how to tax amounts paid to employees for the purpose of meeting “running and maintenance charges” of motor car and other vehicles. The term running and maintenance charges includes expenses incurred on petrol/diesel.

Factors that determine taxability of fuel expense reimbursement for car

According to Rule 3, the following factors determine the extent to which fuel expense reimbursement should be taxed.

1. Car ownership – Provided by the employer or owned by the employee
2. Car usage:
   • For official purposes alone
   • For personal purposes alone
   • Partly for official and partly for personal purposes
3. Cubic capacity of the car engine: Lesser than/equal to or more than 1.6 litres

The monthly perquisite values (the salary amount to be added to the taxable income) for fuel expense reimbursement under different circumstances are as follows.

Employer provides the car and reimburses the fuel expense amount to employee
The car could be owned or hired by the employer and provided to the employee. The car may be used by the employee or any member of the employee’s household. The monthly perquisite value is as follows.

i) The car is used wholly and exclusively for official duties.
When the car is used only for official purpose, the perquisite value for the purpose of taxation is Rs 0. This is irrespective of fuel and other car running and maintenance expense amount reimbursed to an employee. For example, if a company reimburses Rs 1 lakh per month for the purpose of fuel expenses to an employee, the entire Rs 1 lakh shall be tax free as long as the car is used solely for official purposes.

Please note that the following conditions should be met for the reimbursement to be tax free.

–	the employer should maintain complete details of journey undertaken for official purpose including date of journey, destination, mileage, and the amount of expenditure incurred.
–	the employer should issue a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties.

From the above, it should be clear that the fuel expense reimbursement shall be fully non-taxable only if the car is wholly used for official purposes and the organization maintains details of journeys undertaken by the employee.

ii) The car is used exclusively for personal purposes of the employee or any member of his household.
When the car is used only for personal purpose, the total perquisite value for the purpose of taxation is the following.

Actual amount of expenditure incurred by the employer on the running and maintenance of motor car including driver salary, if any.
plus
Normal wear and tear of the car. The annual normal wear and tear value is calculated as 10% of the actual cost of the car. If the car expense reimbursement is for a period which is less than a year, the wear and tear value should be correspondingly adjusted for the period.
minus
Any amount charged from the employee for use of the car.

In summary, if a car provided by an employer is used entirely for personal purposes of an employee, the total running and maintenance expense incurred/reimbursed by the employer is taxable in the hands of employee.

iii) The car is used partly for official purposes and partly for personal purposes of the employee.
When the car is used for both official and personal purposes, the perquisite value for the purpose of taxation is as follows.

Running expenses	Car engine cubic capacity does not exceed 1.6 litres	Car engine cubic capacity exceeds 1.6 litres
a) The expenses for maintenance and running are fully met or reimbursed by the employer.	Rs 1,800 per month (plus Rs 900, if chauffeur is also provided to run the motor car)	Rs 2,400 per month (plus Rs 900, if chauffeur is also provided to run the motor car)
b) The expenses for running and maintenance for private or personal use are met by the employee. The employer reimburses expenses pertaining to official use.	Rs 600 per month (plus Rs 900, if chauffeur is also provided to run the motor car)	Rs 900 per month (plus Rs 900, if chauffeur is also provided to run the motor car)

Note:

1. If the car is used for both official and personal purposes, there is no need for the employer to maintain details of journeys made. The perquisite value is irrespective of the actual amount reimbursed.
2. Rule 3 does not explicitly state what the perquisite value is if an employee uses an employer provided car for partly official and partly personal purposes and foots the entire bill for car running expenses.

Illustration
A company provides a car (with 1.5 litres engine capacity) to an employee and reimburses Rs 20,000 per month towards fuel and other car maintenance expenses incurred for both official and personal journeys. The company does not reimburse driver salary. What is the monthly perquisite value?

Ans: Since the car’s engine capacity is less than Rs 1.6 litres and the car is used for both official and personal purposes, the perquisite value per month is Rs 1,800.

We find many organizations providing “Vehicle Maintenance Reimbursement” for employer-provided car as a head of pay to employees, given that the maximum perquisite value is only Rs 3,300 per month if the usage is declared as partly official and partly personal. While this is a legitimate tax saving idea, employers should ensure that the underlying transaction is genuine and the documentation is valid and complete. Let us explain this.

Some organizations create car lease agreements with employees’ friends and relatives (without a car actually being provided to the employee) in order to create an impression that there is a car lease transaction. In many cases organizations do not pay any car lease rent to the car owner. The idea behind such lease agreements is just to create a picture that cars are hired by the employer for the use of employees. The employees are then provided with vehicle expense reimbursements and the corresponding perquisite values are added to the taxable income of employees. From a compliance point of view, such employers argue that since they have created lease agreements, they are in compliance with Rule 3 of the Income Tax Rules.

Please note that compliance with income tax rules requires that any documentation created is for a genuine transaction. If a company creates agreements with individuals for the purpose of creating car lease documentation, the Income Tax Department could well check the following in order to establish the genuineness of the transaction.

1. Does the organization pay car lease rentals to the owner of the car as per the agreement?
2. Does the organization comply with the service tax rules pertaining to car lease transactions for employee use. In other words, if an organization needs to pay service tax for car lease charges under the reverse charge mechanism, does it pay the required service tax?
3. If the car lease agreement is with individuals, does the agreement specify the details of the car? Does the organization maintain copies of documents such as the RC book in order to ensure that the car actually exists?

Payroll managers should ensure that car leases are genuine, and lease agreements do not exist just for the sake of seeking tax benefits.

What if an employer provides more than one car to an employee?

When an employer provides more than one motor car for the use of an employee or the members of the employee’s household, the perquisite value shall be calculated as follows.

1. With regard to the car which is wholly and exclusively used for official purposes, the perquisite value shall be zero.
2. The perquisite value for the second car shall be calculated as though the car is used partly for official and partly for personal purposes and the employee has borne the running and maintenance expenses (described earlier in this article).
3. The perquisite value for third, fourth, etc. cars shall be calculated as though the cars are used fully for personal purposes (described earlier in this article).

The period of perquisite value

Please note that Rule 3 of the Income Tax Rules specifies perquisite amounts for a calendar month and hence it is important that employers record the months for which fuel reimbursements are made and the corresponding perquisite value is applicable, in payroll. Also, employers should receive receipts towards vehicle maintenance expenses in total from employees. For example, if the fuel expense reimbursement of Rs 15,000 is for the month of April, the employer should receive fuel receipts for the entire Rs 15,000 for the month of April.

In the next post, we will take a look at the basis of perquisite value calculation for fuel expense reimbursement for car owned by the employee.

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