2024 (2) TMI 1498 - HC - Income Tax

Proceedings issued u/s 115WE - taxability of fringe benefits - benefits provided to the employees by way of supply of electricity to their residence, township and street lights - whether this so called benefit is one which is for the welfare of the employees or not and whether it is not part of the statutory obligation? - HELD THAT - As per un-amended Explanation to Section 115WB (2) (E) of the Act, it would further make it clear that any expenditure which was incurred in order to fulfill a statutory obligation would not be considered as an expenditure for employees welfare. So also, when we look into the subsequent amendment brought to the Explanation to Clause E of Sub-Section 2 of Section 115WB, sub-clause (i) it also clearly excludes expenses incurred or payments made to fulfill any statutory obligation. So, under both the circumstances i.e. even prior to the amendment to the explanation w.e.f. 01.04.2009, the expenditure incurred towards the supply of electricity by the appellant to its employees would be excluded for the purpose of treating it as an expenditure towards the employees benefit is concerned. We are of the considered opinion that the view taken by the AO, so also by the CIT (Appeals) and Tribunal are not sustainable and the same is accordingly set aside/quashed. It is held that the expenditure so incurred by the appellant towards the supply of electricity would be excluded from being treated as an expenditure towards the employees welfare. Appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions in this judgment revolve around the following issues:

Whether the expenditure incurred by the appellant towards providing electricity to its employees under the National Coal Wages Agreement (NCWA) qualifies as a statutory obligation and is thus exempt from being treated as a taxable fringe benefit under Section 115WB(2)(E) of the Income Tax Act, 1961.
Whether the NCWA is a statutory document with binding force of law, thereby impacting the tax treatment of benefits provided under its provisions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Expenditure on Employee Welfare

Relevant Legal Framework and Precedents: The legal framework centers on Section 115WA and Section 115WB(2)(E) of the Income Tax Act, 1961, which deal with fringe benefits and their taxability. The explanation to Section 115WB(2)(E) specifies certain expenditures that are not considered as employee welfare expenses, including those fulfilling statutory obligations.
Court's Interpretation and Reasoning: The court examined whether the provision of electricity to employees under the NCWA constitutes a statutory obligation. It referenced the explanation to Section 115WB(2)(E) and previous judgments that recognized NCWA as having statutory force.
Key Evidence and Findings: The court noted that the NCWA, being a tripartite agreement involving the government and labor unions, carries statutory weight as per prior Supreme Court and High Court judgments. The provision of electricity was part of the NCWA obligations.
Application of Law to Facts: The court applied the explanation to Section 115WB(2)(E), determining that the expenditure on electricity was to fulfill a statutory obligation under the NCWA, thus exempt from being treated as a taxable fringe benefit.
Treatment of Competing Arguments: The court rejected the Assessing Officer's stance that the NCWA was merely a contractual obligation without statutory force. It emphasized the binding nature of the NCWA as established in previous legal precedents.
Conclusions: The court concluded that the expenditure on electricity provision was not taxable as a fringe benefit, given its statutory nature under the NCWA.

Issue 2: Statutory Nature of the NCWA

Relevant Legal Framework and Precedents: The court referred to the Industrial Disputes Act, 1947, and previous judgments, including those by the Supreme Court, which recognized the NCWA as a statutory document.
Court's Interpretation and Reasoning: The court reiterated that the NCWA, as a settlement under Section 18(3) of the Industrial Disputes Act, is binding and statutory in nature.
Key Evidence and Findings: The court highlighted the tripartite nature of the NCWA and its recognition as a statutory agreement in previous court decisions.
Application of Law to Facts: The court confirmed that the NCWA's statutory status impacts the tax treatment of benefits provided under its terms, including the provision of electricity.
Treatment of Competing Arguments: The court dismissed the argument that the NCWA lacked statutory force, citing consistent judicial acknowledgment of its binding nature.
Conclusions: The court affirmed the statutory nature of the NCWA, reinforcing its decision on the tax exemption of electricity provision.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The judgments referred to in the preceding paragraphs clearly indicate and lay to rest the issue as to whether it is a statutory document or not, where all the judgments referred to above have clearly held that NCWA is a statutory document and it has binding force of law so far as its enforceability is concerned."
Core Principles Established: The NCWA is a statutory agreement with binding force, and expenditures made under its obligations, such as electricity provision, are exempt from fringe benefit tax.
Final Determinations on Each Issue: The court set aside the decisions of the Assessing Officer, Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal, ruling that the expenditure on electricity is not taxable as a fringe benefit.

The court's decision underscores the legal recognition of the NCWA as a statutory document and clarifies the tax treatment of employee benefits provided under its framework.

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