2012 (6) TMI 137 - AT - Income Tax

Treatment of prepaid expenses under FBT - Revenue contested that prepaid expenses to superannuation fund should be charged under FBT considering section 115WB(2) Held that - The assessee declared fringe benefit value of Rs. 32,76,478/- towards contribution to superannuation funds which was the actual amount debited to P&L Account - the CBDT in Circular No.8/2005 dated 29/8/2005 had made it clear that FBT would be payable in the year in which the expenditure is incurred and would not be payable on payment of advance towards expenses to be incurred in the future - though a contribution of Rs. 42,40,926/- was made during the previous year only a sum of Rs.33,13,584/- related to contribution related to previous year relevant to A.Y 2006-07 and the remaining sum was a pre-paid contribution to superannuation fund the CIT(A) s Order cannot be considered at default against revenue. Treatment of sales promotion expenses under FBT - Revenue contested that expenses on account of sales promotion to be charged under FBT as provided u/s. 115WB(2) Held that - The payment has been made for business promotion to another group company - the charge to FBT is dependent on enjoyment of benefit collectively by the employees as clarified by CBDT s circular No.8 dated 29.08.2005 which is totally missing in the present case of brand equity payment and hence cannot be subjected to FBT against revenue.

Summary

Issues Involved:
1. Inclusion of prepaid expenses in the value of taxable fringe benefits.
2. Taxability of sales promotion expenses under Fringe Benefit Tax (FBT).

Detailed Analysis:

Issue 1: Inclusion of Prepaid Expenses in the Value of Taxable Fringe Benefits

Background:
The assessee, an asset management company, filed a return declaring a total fringe benefit value of Rs. 99,71,836/- for A.Y. 2006-07. The Assessing Officer (AO) added Rs. 9,27,342/- as fringe benefits, considering it as a prepaid contribution towards superannuation funds.

Contention:
The assessee argued that FBT should be payable only on expenses incurred during the year and charged to the Profit & Loss Account, not on prepaid expenses. They cited Circular No. 8/2005, which clarified that FBT is payable in the year the expenditure is incurred.

CIT(A) Decision:
The CIT(A) agreed with the assessee, stating that only the amount of superannuation fund related to the year under consideration and charged to the Profit & Loss Account should be considered for FBT. The prepaid contribution should not be taxed in the year it does not relate to.

Tribunal's Judgment:
The Tribunal upheld the CIT(A)'s decision, noting that the actual amount debited to the Profit & Loss Account was Rs. 32,76,478/-, not Rs. 42,40,926/-. They emphasized that FBT is payable in the year the expenditure is incurred, as clarified by the CBDT Circular. Therefore, the addition of Rs. 9,27,342/- was not justified, and the appeal on this ground was dismissed.

Issue 2: Taxability of Sales Promotion Expenses under FBT

Background:
The assessee paid Rs. 16,40,384/- to Tata Sons Limited for the usage of the 'TATA' name, which the AO considered as sales promotion expenses liable to FBT under Section 115WB(2)(D) of the Act.

Contention:
The assessee contended that this expenditure was in the nature of royalty, not sales promotion, and did not result in any benefit to the employees. They argued that FBT should only apply to benefits enjoyed collectively by employees.

CIT(A) Decision:
The CIT(A) followed a precedent set in the case of Tata Chemicals Ltd., where it was held that payments not resulting in employee benefits are not subject to FBT. The CIT(A) noted that the payment to Tata Sons was for business promotion and did not benefit any employees, thus not falling under the FBT provisions.

Tribunal's Judgment:
The Tribunal agreed with the CIT(A), stating that the charge to FBT depends on the collective enjoyment of benefits by employees, which was absent in this case. They reiterated that the CBDT Circular No.8/2005 clarified that an employer-employee relationship is a prerequisite for FBT. Since the payment was for business promotion and did not benefit the employees, it could not be subjected to FBT. Consequently, the appeal on this ground was also dismissed.

Conclusion:
Both appeals by the revenue were dismissed. The Tribunal upheld the CIT(A)'s decisions, emphasizing that FBT is applicable only to expenses incurred during the year and that the collective benefit to employees is a prerequisite for FBT on sales promotion expenses.