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TMI Blog2012 (6) TMI 484X X X X Extracts X X X X X X X X Extracts X X X X ..... to make a particular assessment or dispose of a particular case in a particular manner so as to interfere with the discretion of the CIT(A) in the exercise of his appellate functions. Expenditure incurred on souvenir distributed to employees on the occasion of decennial celebration - assessee contended them to be in the nature of ‘Employee Welfare’ and not ‘Gifts’ - Held that:- Distribution of Souvenirs was made in consideration of and to recognize the efforts and contribution of employees. Thus, said expenditure cannot be regarded as ‘Gifts.’ and has been correctly treated as ‘employee welfare expenditure - ITA No.20/Bang/2011, ITA No.88/Bang/2011 - - - Dated:- 11-5-2012 - P Madhavi Devi, Jason P Boaz, JJ. For Appellant: Shri Padam Chand Khincha For Respondent: Shri B Saravanan ORDER Per: Jason P Boaz: These two appeals - one by the assessee (ITA No.20/Bang/2011) and one by the Revenue (ITA No.88/Bang/2011) are directed against the order of the Commissioner of Income Tax (Appeals), LTU, Bangalore dated 30.11.2010 for the Assessment Year 2008-09. Since both these appeals pertain to the same order, they are heard together and disposed off by this common o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit and loss account and the value of fringe benefit shown in Form 3CD (page 41 of paper book). The assessee furnished the said details in its reply dt.11.2.2010 (page 42 to 47 of paper book). The JCIT, LTU, vide letter dt.15.4.2010, (page 48 and 49 of paper book) stated that the expenditure in the nature of sales promotion, conveyance, tour and travels and gifts totally amounting to Rs. 3,27,38,110 are liable to fringe benefit tax for the following reasons : i) As per question NO.67 of CBDT s Circular No.8 of 2005 dt.29.8.2005 , expenditure incurred for the purpose of boarding, lodging and travel of customers and clients is liable for Fringe Benefit Tax (FBT). ii) As per section 115WB(2)(8), any expenditure on gifts to customers or promotion of company s products to distributors, retailers is liable for FBT. iii) As per section 115WB(2)(O), any expenditure on distribution of free samples of products to customers is liable for FBT. 2.3 In view of the above, it was stated that the contention of the assessee that FBT was not liable in respect of non-employee related expenditure does not hold good. Secondly, the assessee was asked as to why the expenditure incurred o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated that there are many instances where there is no employer-employee relationship but still the underlying expenditure is charged to FBT. The Tribunal decision in the case of Govardhan Associates (supra) was sought to be distinguished for the reason that the facts of the present case and the facts before the Tribunal are different. By letter dt.16.7.2010 (page 66 of paper book), the assessee was asked to explain whether the expenditure classified under the head Miscellaneous expenditure have been fully / partially offered to FBT or not and the reasons for not offering the same to tax. 2.6 The assessee vide letter dt.19.8.2010 (Pages 67 to 69 of paper book) furnished details called for vide letters dt.2.6.2010 and 16.7.2010. It was submitted that the intention of the legislature in introducing FBT was to tax benefits enjoyed by the employees and hence the scope of section 115WB(2) containing the deeming fiction cannot be extended beyond what is envisaged. The assessee relied on question Nos.2 and 3 and answers thereto of Circular no.8 of 2005 which stated that employer-employee relationship is a pre-requisite for the levy of FBT and an entity which does not have an employee on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the value of fringe benefit @ 20% of the expenditure. Expenses in the nature of conveyance, tour and travel amounting to Rs. 29,08,593 and gifts amounting to Rs. 31,79,517 was fully considered for computing the value of FBT @ 20% and 50% of the expenditure respectively. 2.8 The expenditure incurred on distribution of Souvenirs to employees on the occasion of decennial celebration of the assessee company amounting to Rs. 2,37,75,428 was treated as Gifts as the officer was of the view that Souvenirs are items or mementos which have only significance of display / decoration and has no employee welfare. The FBT was calculated thereon @ 50% of the expenditure as against 20% computed by the assessee who considered as expenditure resulting in employee welfare. 3.1 Aggrieved by the order passed under section 115WE(3), the assessee filed an appeal before the CIT(A) (LTU), Bangalore. In the appeal, apart from challenging the order on merits, the assessee also raised a ground that the order passed under section 115WE(3) by the Addl. CIT, LTU, Bangalore is without jurisdiction, bad in law and liable to be quashed. The assessee filed written submissions, on the merits of the case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) affirmed the conclusion of the Addl. CIT, LTU that courts are bound to take note of CBDT Circulars in interpreting a provision of law. The grounds regarding non-taxability of sales promotion expenses, conveyance, tour and travel expenses and expenses in the nature of Gifts was accordingly dismissed. As regards the issue as to whether expenditure on distribution of Souvenirs to employees on decennial celebrations should be considered as employee welfare OR Gifts , the learned CIT(A) relied on Q. No.76 and answer thereto of the CBDT Circular NO. 8 of 2005 which stated that expenditure incurred on prizes/rewards to employees for achievements is in the nature of employee welfare and accordingly held that the impugned expenditure cannot be considered as Gifts . The charge of interest under section 234D was upheld. In the result the appeal was partly allowed by the CIT(A), LTU. 4. The assessee in ITA No.20/Bang/2011 has challenged the order of the CIT(A), LTU, Bangalore on the aspect of jurisdiction and the finding that sales promotion expenses, conveyance, tour and travel expenses and gifts are liable for FBT. Revenue in ITA No.88/Bang/2011 has challenged the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by learned CIT(A) -LTU, Bangalore be quashed. Or in the alternative (i) expenses incurred the head sales promotion , conveyance, tour and travel and Gifts be held as not liable for fringe benefit tax. (ii) interest levied under section 234D be deleted. 6. The ground raised at S.No.1.1 is general in nature and no adjudication is called for thereon. 7. The ground raised at S.No.2.1 on the aspect of jurisdiction, was not pressed as no argument was advanced and the same is accordingly dismissed. 7.1 The grounds raised at S.Nos.3 1 to 3.5 are on the merits of the case. the learned Authorised Representative at the outset referred to the intention of the legislature in introducing FBT. Referring to the Finance Minister s speech while introducing FBT (page 1 compilation of relevant decisions / material), it was submitted that the intention to levy FBT on benefits enjoyed collectively by employees and which cannot be attributed to an individual employee. Where the benefits are fully attributable to an employee, they are taxed in the hands of an empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate business expenses are taxed ? A. That I have made clear. My speech said only perquisites which are disguised as fringe benefits will be taxed. No legitimate business expenditure will be taxed. The learned Authorised Representative submitted that prior to the introduction of FBT, fringe benefits prescribed under section 17(2)(vi) read with Rule 3(7) were taxable in the hands of the employees. It was submitted that with the introduction of FBT, section 17(2)(vi) and Rule 3(7) were amended so as to exclude fringe benefits chargeable under Chapter XII. Referring to section 115WB(3), the learned Authorised Representative submitted that any privilege, service facility or amenity in respect of which tax is paid or payable by the employee is outside the scope of FBT. 7.2 In respect of the scope of the deeming fiction under section 115WB(2), the submissions of the learned Authorised Representative are as follows : (i) The deeming fiction in section 15WB(2) is with a specific purpose. The FM speech and memorandum explaining the FBT provisions (supra) states that the rationale for levying a fringe benefit tax on the employer lies in the inherent difficulty in isolating the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gilal Laherchand V. CIT (1954) 25 ITR 523 (Bom) and B. M. Desai V. V. Ramamurthy, ITO (1958) 34 ITR 409 (Bom)] 7.3 As regards the reliance placed by the Assessing Officer and the CIT(A) on certain question and answers of CBDT Circular No .8 of 2005 , in support of the conclusion that non-employee related expenditure is also liable for FBT, the learned Authorised Representative submitted that the CBDT Circulars cannot override the provisions of law. The learned Authorised Representative relied on the decision of the jurisdictional High Court in the case of East India Hotels Ltd. Vs. C.R. Shekhar Reddy and Another 230 ITR 622 and the decision of the Hon'ble Apex Court in the case of UCO Bank Vs. CIT 237 ITR 889 in support of the proposition that CBDT circulars even though binding on the income tax authorities are not binding on appellate authorities, Tribunals, Courts and the assessee. 7.4 The learned Authorised Representative also filed a compilation of relevant decisions and material relating to FBT. The decision of the jurisdictional High Court in CIT Vs. Karnataka Power Transmission Corpn. Ltd. in ITA No.368/2011 dt.7.2.2012 was relied on in support of the propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that CBDT Circular No. 8 of 2005 clearly envisages the taxability of expenditure even if the same is not paid to / not incurred for the benefit of employees. It was submitted by the learned Departmental Representative that the Hon'ble Apex Court in the case of K.P. Varghese Vs. ITO (131 ITR 597) has held that circulars issued by the CBDT, the highest executive authority under the Income Tax Act, apart from being binding on Revenue authorities, are clearly in the nature of Contemporanea Expositio furnishing legitimate aid in construction of the statute and the Courts are entitled to give due weight to the interpretation of the statute put through by them. The learned Departmental Representative relied on the finding of the orders of the Assessing Officer and prayed that their orders be upheld. 9. In the rejoinder, the learned Authorised Representative submitted that the deeming fiction under section 115WB(2) does not extend the scope of taxability of fringe benefits beyond amenities or benefits collectively enjoyed by employees. It is submitted that under section 115WB(1) fringe benefit means consideration for employment. Section 115WB(2) carries this further an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of payment made directly to employees and the same has been considered while deducting tax at source from salaries paid to employees under section 192 of the Act. It was submitted that as per section 115WB(3), fringe benefits do not include perquisites in respect of which tax is paid or payable by the employee. It is therefore submitted that even if the above expenditure satisfies the employer-employee relationship, the said expenditure is not liable for FBT since the employee has paid tax on the amount received from the employer. Even otherwise, it is argued that FBT is payable only when perquisites or benefits are extended to an employee and not when a monetary payment is made and as a result FBT is not attracted in respect of such sums. The learned Departmental Representative could not controvert the aforesaid submissions. 10.2 The requirement of employer-employee relationship is satisfied in respect of the expenditure in the nature of employee referral scheme and not in respect of salary for which tax is paid or payable by the employee which would be outside the scope of FBT, as would be in respect of payments made in cash to the employee. The Finance Minister s speech w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the perquisite provided because of the problem of cash flow in the hands of the employer. Therefore, it is proposed to adopt a two pronged approach for the taxation of fringe benefits under the Income Tax Act. Perquisites which can be directly attributed to the employees will continue to be taxed in their hands in accordance with the existing provisions of section 17(2) of the Income Tax Act and subject to the method of valuation outlined in rule 3 of the Income Tax Rules. In cases, where attribution of the personal benefit poses problems, or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been provided to the employees. (emphasis supplied by us) 10.3.3 The relevant extracts of the speech delivered by the Finance Minister in the Lok Sabha on 2.5.2005 is as under : The last one is fringe benefit tax. There were one or two comments about fringe benefit tax. Let me tell you as to what is being done. Fringe benefit tax is a presumptive tax. As I said in my Budget Speech, there are a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that the Finance Minister s speech explaining the reason for introduction of the bill can be relied on in interpreting a statutory provision. The relevant portion from the above decision is as under : . Now, it is time that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted. This is in accord with the recent trend in juristic thought not only in Western Countries but also in india that interpretation of a statute being an exercise in the ascertainment of meaning, every which is logically relevant should be admissible. In fact there are at least three decisions of this court, one in Loka Shikshana Trust V. CIT (1975) 101 ITR 234, the other in Indian Chamber of Commerce V. CIT (1975) 101 ITR 796 and the third in Addl. CIT V. Surat Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thermal Power Corporation Ltd. in ITA No.368 of 2011 dt.7.2.2012 has held that unless fringe benefits are extended to employees and the same are enjoyed by them, there is no question of levying FBT on the employer. The relevant portion of the decision at paras 9 to 11 thereof read as under : 9. We find that while the order of the Tribunal is sustainable, but not necessary for the reasons given by the Tribunal. 10. We say so, for the reason that the charge under Chapter XII-H of the Act is on the value of the fringe benefit extended by an employer to its employees, unless such fringe benefits enjoyed in the hands of the employee is quantified, there is no question of levying fringe benefit tax on the employer at 30% of the tax levied and enjoyed by the employer. When it is not in dispute and as submitted by Sri Aravind, learned standing counsel for the Revenue that the accommodation is given on rent by the employer and not part of the benefit is in fact treated as a fringe benefit in the hands of the employee, the question of treating the expenditure incurred towards maintenance and repair of accommodation rented to the employee by the employer, does not arise. 11. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the CIT(A). 10.8 The decisions of the co-ordinate Bench of this Tribunal in the cases of M/s. Bosch Ltd. Vs. DCIT, LTU in ITA No.1407/Bang/2010 dt.7.10.2011 and Vijaya Bank (supra) have held that FBT is not leviable in the absence of collective enjoyment of benefits by the employees. 10.9 In the case of M/s. Govardhan Associates Vs. DCIT in ITA No.1094/Bang/2009 dt.15.1.2010, the assessee incurred running and maintenance expenses and depreciation on jeeps used for transportation of arrack. It was held that the said expenditure was not liable for FBT since there was no benefit to employees. 11.1 In the instant case, the expenditure in the nature of sales promotion, conveyance, tour and travel and gifts has no element of employee benefit and is a legitimate business expenditure incurred by the assessee in the course of carrying on its business. The impugned expenditure was paid to third parties and not to employees. In view of the above discussion, we are of the considered opinion that legitimate business expenditure, as in the instant case, which does not result in any benefit to employees, is not liable for FBT. 11.2 The learned Assessing Officer, the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has clarified that where the benefits are fully attributable to employees, the same continues to be taxable in the hands of the employees. On a plain reading of sub-section 1 and 2 of section 115WB, it would be evident that sub-section 1 covers those fringe benefits which can be fully attributed to employees and sub-section 2 covers those fringe benefits the personal attribution of which it is difficult to make. Thus, in our opinion, the deeming fiction under section 115WB(2) is limited to those expenditures which result in collective enjoyment of benefits by the employees and where personal attribution of benefit poses difficulty. It is only under these circumstances that, the deeming fiction under section 115WB(2) comes into play. In a case where the benefit is fully attributable to employees or where the expenditure does not result in any benefit at all to employees, as in the instant case, the deeming fiction under section 115WB(2) is not attracted and consequently, no FBT can be levied on the employer. 11.4 In the case of DCIT Vs. Kotak Mahindra Old Mutual Life Insurance Ltd. in ITA Nos.63 491/Mum/2010 dt.25.11.2011, the issue for consideration was whether expenses such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t where specifically provided as in Clause B of sub-section 2). 2. a benefit to employees, collective or may be individual, must necessarily be associated or be inherent for the expenditure to be treated as fringe benefit. In the absence of any inherent benefit to employees, even under the deeming provisions, fringe benefit cannot be assumed. 3. Deeming provisions contained in sub-section 2 of section 115 WB cannot be invoked mechanically and, in respect of every item of expenditure, it is necessary first to associate the benefit to employees arising out of their employment before the expenditure can be categorized to be resulting into fringe benefit, the exception of clause B of sub-section 2 of section 115 WB notwithstanding. One cannot, by the nomenclature alone, classify expenditure to result into fringe benefit. 13. Ground No.2 reads as follows - 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the fringe benefit tax levied on the conveyance including car hire charges ignoring the provisions of section 115WC(c) of the Act. 14. The Commissioner (Appeals) held that the expenditure under consideration are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section provided that the FMV of a capital asset on the date of transfer should be considered as the full value of consideration under certain circumstances. At the time of introduction of the said section, the Finance Minister had assured that the said provision was not aimed at honest and bona fide transactions where the consideration in respect of the transfer is correctly disclosed or declared by the assessee. Soon after the introduction of section 52(2), the CBDT vide circular dt.7.7.1964 drew the attention of the income tax authorities to the assurance given by the Finance Minister. Further, vide another circular dt.14.1.1974, the CBDT vide circular dt.14,1,1974, the CBDT instructed the income tax authorities that while completing the assessments, they should keep in mind the assurance given by the Finance Minister and the provisions of section 52(2) of the Act may not be involved in cases of bona fide transactions. The above two CBDT circulars were in conformity with the assurance given by the Finance Minister in his speech. The Hon'ble Apex Court, therefore, held that the Board circulars are in the nature of contemporanea expositio furnishing legitimate and in construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued by the CBDT so as to require any income tax authority to make a particular assessment or dispose of a particular case in a particular manner so as to interfere with the discretion of the CIT(A) in the exercise of his appellate functions. The Hon'ble Apex Court in the case of CIT Vs. Hero Cycles P. Ltd. (1997) (228 ITR 463) has held that circulars can bind the ITO but will not bind the appellate authority or the Tribunal or the Court or even the assessee. The jurisdictional High Court in the case of East India Hotels Ltd. Vs. C.R. Shekhar Reddy and Another (1998) 230 ITR 622 held that - Similarly, under section 119 of the Act a power has been reserved in favour of the Central Board of Direct Taxes (in short the Board ) to issue instructions to subordinate income tax authorities for proper administration of the Act and who are required to observe and follow such instructions. None the less, it may be made clear that such instructions which may even pertain to the interpretation of a statutory provision under the Act cannot bind the taxpayers requiring to seek any remedy against the said instructions / clarifications either statutory or constitutional. But to my utter su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidering the above expenditure as resulting in employee welfare. Accordingly, the Assessing Officer computed the fringe benefit in respect of expenses on distribution of souvenirs amounting to Rs. 2,87,75,428 at the differential rate of 30% (i.e. 50% - 20%). In the appellate order, the learned CIT(A) relied on Answer to Q.No.76 of CBDT Circular No. 8 of 2005 which states that expenditure incurred on prizes / rewards to employees for achievements is in the nature of employee welfare and accordingly held that the impugned expenditure cannot be considered as Gifts. 14.2 Aggrieved the Revenue is in appeal before us. The grounds of appeal raised are as under : i) The order of CIT(A), LTU is opposed to law and facts of the case. ii) The CIT(A) has erred in treating the expenses incurred on distribution of Souvenir to employees as employee welfare and not as Gifts. iii) Tax effect on this issue is Rs. 71,32,628. iv) For these and such other grounds that may be urged at the time of hearing of appeal it is humbly prayed that the order of the CIT(A) be set aside and that of the Assessing Officer restored. v) The appellant craves to add / alter amend and / o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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