[Opinion] Taxability of Cash Benefits from Business or Profession

Raghavan Ramabadran, Bharathi Krishnaprasad & G Janane – [2023] 148 taxmann.com 103 (Article)

Benefits or perquisites are commonly described as rewards that are provided to incentivise an individual. These can take different forms like discounts, free products, coupons, etc,. Taxability of such benefits or perquisites have always been a subject matter of dispute. For an assessee who is employed, such benefits or perquisites are taxed as salaries and a mechanism for valuation of such benefits or perquisites is also provided. For benefits that are given in the course of business or in exercise of a profession, a separate clause was added in the definition of profits or gains from business contained in Section 28 [clause (iv)], to tax the same.

Are cash benefits covered under existing section 28(iv) of the IT Act?

The term ‘benefit’ or ‘perquisite’ is not defined under the IT Act. However, on a bare reading of the section, it can be seen that “value of any benefit or perquisite, whether convertible into money or not” was sought to be covered under the scope of profits and gains of business or profession.

While it appears that the intent of the legislature in bringing out such an amendment to section 28 was to tax all benefits or perquisites in kind (“non-monetary benefits”), a question arose about those benefits or perquisites, which are received in the form of money (“monetary benefits”).

Many divergent views were rendered by various fora as to whether only “non-monetary’ benefits are alone covered under section 28(iv) of the IT Act.

Putting an end to this puzzle, this issue was finally settled by the Supreme Court in the landmark case of Commissioner v. Mahindra and Mahindra. The issue that was under consideration was whether waiver of loan by the lender will be taxable in the hands of the Assessee under section 28(iv) of the IT Act. The ratio laid down by the Court was that for section 28(iv) of the IT Act to attract, the benefit or perquisite should be in a form other than money. Since, waiver of loan by the lender amounts to cash receipts in the hands of the Assessee/borrower, the said section will not be attracted.

Subsequently, many courts and tribunals have consistently followed the decision of Mahindra and Mahindra.

Amendments proposed in the Finance Bill 2023

Now, the Finance Bill, 2023 proposes to bring in an amendment to section 28(iv) which seeks to undo the ruling given by the Supreme Court in the case of Mahindra and Mahindra. The Bill proposes to amend section 28(iv) as under:

”The value of any benefit or perquisite arising from business or the exercise of a profession, whether––

(a) convertible into money or not; or

(b) in cash or in kind or partly in cash and partly in kind;“.

The Memorandum to the Finance bill states that inclusion of clause (b) to the expression “benefit or perquisite” is to align the provision with the intention of legislature for inserting clause (iv) to section 28 of the IT Act vide Finance Act 1964. Once the amendment is made effective, even monetary perquisites will come under the ambit of Section 28(iv).

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