2016 (7) TMI 610 - AT - Income Tax

Addition of consideration of tax depreciation of 5% on motor cars used exclusively for hire for the purpose of fringe benefit tax - CIT(A) deleted the addition - Held that - We find that the assessee has paid FBT in respect of expenses incurred for vehicles which are used for office purposes as well as the expenses incurred for cars used by employees in the course of their performance of duties. However, with regard to the expenses incurred wholly and exclusively for maintenance and running of tourist cars for car rental business , no FBT is paid as the said cars were never used by the employees. In this regard, it would be relevant to understand the intention behind introduction of provisions of FBT u/s 115W to 115WL w.e.f. 1.4.2006 by the Finance Act, 2005. We find that the said provision were introduced where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees then the same shall be taxed in the hands of the employer. In the memorandum explaining the bill , it has been pointed out that the rationale for levying FBT on the employer lies in the inherent difficulty in isolating the personal element where there is collective enjoyment of such benefits and attributing the same directly to the employee. We find that the car expenses incurred for the transport business, the maintenance of such cars are separately accounted for as those car expenses have no nexus or relation to any benefit which can be even said to have been collectively enjoyed by the employees and therefore the expenses incurred on such account do not attract the levy of FBT. It is not the case of the revenue that the employees were allowed to enjoy any benefit directly or indirectly from such transport services. We find from the observations of ld CITA supra that the assessee had duly bifurcated the motor cars used for hire and that not used for hire separately in the depreciation schedule itself. - Decided against revenue.

Summary

Issues:
- Whether the consideration of tax depreciation of 5% on motor cars used exclusively for hire for the purpose of fringe benefit tax was justified.

Analysis:
1. The appeal concerned the deletion of the consideration of tax depreciation of 5% on motor cars used exclusively for hire for the purpose of fringe benefit tax. The assessee, engaged in transportation and car rentals, filed its return of fringe benefits for the assessment year 2006-07. The Assessing Officer sought to rectify a mistake in the order passed under section 115WE(3) of the Income Tax Act, stating that 5% depreciation on motor cars for hire was not considered, resulting in under-assessment of fringe benefit. The appellant clarified the classification of motor cars for hire and not for hire, explaining that expenses for cars used exclusively for business were not subject to FBT as they were not used by employees for personal/official purposes.

2. The CIT(A) observed that FBT applies in the relationship of employer and employee. The appellant classified motor cars into hire and non-hire categories, with different depreciation rates accepted by the AO for income assessment. The CIT(A) noted that if cars claimed for hire were not used by employees, FBT would not apply. The revenue challenged this decision, arguing that depreciation of 5% forms part of FBT. However, the Tribunal found that expenses for tourist cars used exclusively for business, not by employees, did not attract FBT as they were not collectively enjoyed by employees.

3. The Tribunal emphasized that FBT is levied when benefits are collectively enjoyed by employees. The intention behind FBT provisions is to tax benefits enjoyed collectively by employees. As the expenses for tourist cars used for business were separately accounted for and not enjoyed by employees, FBT did not apply. The Tribunal relied on a Cochin Tribunal decision supporting the exclusion of depreciation and car value from FBT computation for cars used for business purposes, not for employee benefits. The Tribunal dismissed the revenue's appeal, upholding the decision that the expenses for cars exclusively used for business were not subject to FBT.

4. In conclusion, the Tribunal upheld the decision that expenses for motor cars used exclusively for business, not by employees, were not subject to fringe benefit tax. The appeal of the revenue was dismissed based on the rationale that FBT applies to benefits collectively enjoyed by employees, which was not the case for the expenses in question.

Judgment delivered by:
- Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM