Tea Companies- FBT is payable on full taxable value of fringe benefits and not 40% - Rule 8 is not applicable ITAT, Kolkata.

[CA DEV KUMAR KOTHARI]

Tea Companies- FBT is payable on full taxable value of fringe benefits and not 40% - Rule 8 is not applicable ITAT, Kolkata.

Relevant links and references:

Income-tax act, 1961 - sections 43(6) – definition of WDF , 115 O relating to dividend distribution tax, 115W to 115WM relating to FBT.

Income–tax Rules – rule 7, 7A, 7B, and 8.

Judgments on issue of FBT in case of tea company:

Deputy Commissioner of Income Tax, Circle-4, Kolkata Versus McLeod Russel India Ltd. 2011 (5) TMI 679 - ITAT KOLKATA

Apeejay Tea Ltd. v. Dy. CIT 2013 (10) TMI 607 - ITAT KOLKATA

Judgment on issue of tax only on 40% of dividend distributed by tea company

Jayshree Tea & Industries Ltd. v. Union of India 2006 (7) TMI 129 - CALCUTTA High Court

Judgments on issue of only 40% of total depreciation actually allowed to be deducted in case of Tea Company:

CIT v. Doom Dooma India Ltd. 2009 (2) TMI 9 - SUPREME COURT

CIT v. Suman Tea & Plywood Industries (P.) Ltd. 1993 (8) TMI 65 - CALCUTTA High Court

CIT V. Suman Tea & Plywood Industries (P.) Ltd. 1997 (3) TMI 81 - CALCUTTA High Court – in this case SLP filed by revenue was also dismissed by the Supreme Court for delay as well as for want of merits.

FRINGE BENEFIT TAX (FBT):

Though FBT had a short duration of its applicability for four years only from AY 2006-07 to 2009-10. During this short duration provisions have been amended many times and lot of clarifications were issued which in fact compounded confusions on many issues.

There have been considerable litigation on various aspects of FBT. The reported judgments so far are in relation to applicability of FBT to various items of expenses and manner of computation. In case of tea companies deriving composite income being 60% as agricultural and balance 40% as business income some companies have claimed that only on 40% of value of taxable fringe benefits FBT should be levied.

The levy of FBT on employer seems ultravirse:

Though a simple way to impose tax on employer instead of on employees was evolved by the GOI, however, it may not be a valid and permitted under the Constitution of India. In this regard a detailed article Titled as FRINGE BENEFIT TAX ON EMPLOYERS SEEMS ULTRA VIRSE THE CONSTITUTION OF INDIA BECAUE TAX ON INCOME CAN BE LEVIED ON PERSON WHO HAS EARNED INCOME AND NOT WHO PAID INCOME TO OTHERS OR INCURRED EXPENESES FOR FRINGE BENEFITS. May be referred to which was recently webhosted on:

http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5319

Authors view- even in case employer derives purely agricultural

Income which is fully exempt FBT will be payable:

So long provisions of FBT are not held unconstitutional courts will have to decide the matters as per law as it stands. In view of such provisions , as per scheme of FBT it was payable in respect of fringe benefits or deemed fringe benefits enjoyed by employees. As the administration of taxation on employees was difficult, an easy way was evolved to estimate value of certain fringe benefits and impose tax on employer irrespective of fact whether he is liable to pay tax or not.

Admittedly the FBT is a tax in relation to fringe benefits enjoyed or deemed to be enjoyed by employees but taxed in hands of employer.

Therefore, even a tea garden or rubber plantation without factories who derive agricultural income which is not at all taxable under the Income-tax act, 1961 will be liable to pay FBT on the value of fringe benefits extended by him to his employees.

Similarly an employer deriving income falling under any heads of income other than income from business or profession and also those deriving tax free income from business, will be liable to pay FBT in respect of fringe benefits provided to employees.

Calcutta ITAT decision in case of Apeejay Tea and McLeod Russel India Ltd

The Calcutta Tribunal in case of Apeejay Tea and then following the same in case of McLeod Russel India Ltd held that fringe benefit tax was payable on 100% of taxable value of fringe benefits and not on 40% although while assessing total income of assessee as per rule 8 of the Income-tax Rules in the case of a tea company like assesse, only 40 per cent of the total net income is liable to pay tax under the Act at the prescribed rate Tribunal considered that FBT, is leviable as per provisions contained in chapter XII-H. FBT is basically the tax on the expenses incurred by the assessee to provide certain privilege, facility or amenities to its employees. FBT is payable even if no tax is payable by an employer. Therefore, FBT is not linked with the income of an employer but it is with reference to the expenditure incurred by the employer on the benefits/privileges provided to its employees.

Assessee had relied on judgment of Calcutta High Court in case of Jayshree Tea & Industries Ltd. v. Union of India 2006 (7) TMI 129 - CALCUTTA High Courtrelating to additional tax on dividend distributed. In this case Calcutta High Court had held that additional tax on dividend distributed in not a tax on share holders but an additional income-tax on company declaring dividend. Therefore, it was held that tax u/s 115 O, in case of tea company to which provisions of Rules 8 applied tax will b on 40% of dividend as dividend is a part of income of company and tax is payable by company because it had declared dividend and to that extent had not retained its profits.

The Tribunal held that FBT being tax on expenditure incurred for fringe benefits, there is no similarity between the provision of section 115WA, vis-à-vis section 115-O relating to dividend distribution tax.

Before Tribunal judgments relating to depreciation actually allowed in case of tea companies were also referred to. The Tribunal held that those judgments have no relevance in context of FBT.

Authors views on ITAT judgments:

Author is of view that the judgments of Tribunal in case of Apeejay and Mc Leod Russle are correct in view of then prevailing provisions. Fringe benefits were taxable in hands of employees under the head ‘salaries’ to the extent of 100% of taxable value of such perquisites. The burden was shifted on employer to pay ax on some of such perquisites provided to employers. The nature of income in hands of employees remains same. Merely because FBT is levied as additional tax on employer, any part of it does not become agricultural income. Even in case of a tea garden (without factory) the employees of such garden will earn salary for the work done as employee and they will   earn / enjoy fringe benefits as an employee and not as owner of agricultural land. The income of such employees will not be agricultural income. therefore, the view taken by the Tribunal is correct.

Rule 7, 7A, 7B and 8 of ITR are applicable for computation of income chargeable to tax under ITA, when income is partly agricultural and partly chargeable under ITA. These rules have nothing relevant to computation of income of employees engaged in agricultural activities. However, these rules may be applicable in case of remuneration and profit of a partner in agricultural farm (who is owner or lessee of land) because his share in whatever name called may bear character same as that of the firm- that is partly agricultural income and partly business income.

However, the validity of levy of FBT it self is very much doubtful and it need to be tested by challenge of the same on ground of constitutional validity as discussed in another article.

Judgment of ITAT in case of Apeejay and Mc Leod Russleare reproduced below is added for analysis:

Deputy Commissioner of Income Tax, Circle-4, Kolkata Versus McLeod Russel India Ltd. 2011 (5) TMI 679 - ITAT KOLKATA

Apeejay Tea Ltd. v. Dy. CIT 2013 (10) TMI 607 - ITAT KOLKATA