An employee may have to incur expenses to take various modes of transport to commute and reach office from home. Generally, these expenses are paid to an employee in one of the following ways: as transport allowance that is part of the salary; as a reimbursement towards actual amount spent by the employee; or, as a benefit in the form of a vehicle / bus provided to the employee, which may be owned by the employer or provided by the employer through a third party.
Till financial year 2017-2018, transport allowance to the extent of Rs 1,600 per month was exempt from tax. The tax authorities, in view of the reintroduction of standard deduction, withdrew the exemption and hence the transport allowance paid to employees is considered to be fully taxable. For the differently abled, it is exempt to the extent of Rs 3,200 per month.
While Indian tax laws clearly state that employer-owned/employer-provided vehicle for travel between home and office would not be treated as taxable perquisite and not be taxable in the hands of the employee, there is no clarity on the taxability of expenses met by employer through reimbursements of travel costs from home to office or vice versa. This lack of clarity leads to a controversy of whether such expenses are to be treated as taxable, considering them to be personal, or not taxable considering them to be official.
In matters where there is ambiguity in the tax law, we often look up to the courts to decide on such matters and give us the correct interpretation.
Various courts, while determining the taxability of travel expenses, had to first determine whether to consider such expenses as personal or official in nature. The Bombay High Court in the case of Life Insurance Corporation Class I Officers (Bombay) Association and the Gujarat High Court in the case of J.G. Mankad, have held that travelling expenses from home to office or vice versa would not be treated as official expense and is to be treated as a personal expenditure and reimbursement of the expense, is taxable in the hands of employees.
While deciding on this issue, the courts have laid down two tests which an employee must satisfy to treat the expenses as official. These two tests are:
1. The expenses are wholly and necessarily incurred in the performance of the duties of the office; and
2. The employee is required by the conditions of his services to incur such expenses out of his remuneration.
On the other hand, the Gujarat High Court, in the case of Reliance Industries, relied on the tax laws that state that expenditure met by the employer cannot be treated as a benefit if the same is towards use of vehicle by the employee to commute between his residence and place of work. While analysing these provisions of tax laws, the court has discussed that there is no qualification as to the nature of the vehicle or the ownership of the vehicle. Hence, whether the vehicle is owned by the employee or the employer, the expenses met by the employer towards the use of such vehicle to commute between home to office or vice-versa cannot be considered as a taxable perquisite in the hands of the employee.
The Bombay High Court, in the case of Industrial Credit & Investment Corporation of India vs Fourth Income Tax Officer has held that the expenses reimbursed to the employee for travelling from his/her home to office or vice-versa would be treated as taxable if the same was found to be excessive or where the salary is paid in the garb of such travel expenses.
With respect to expenses for travel between home and office met by the employer, as can be seen above, there are conflicting views expressed by the courts in various cases. Therefore, an employer has to carefully consider the facts in its own case and determine the taxability of such expenses met by it. The decision can be based on the ratio drawn from the facts of these case laws correlating to the facts of the employer’s own facts.
Please note that this article does not cover taxability of reimbursement of expenses incurred by the employees such as field staff or salesman for travel in the performance of their official duties.