Income Tax Appellate Tribunal - Mumbai
Indian Airlines Ltd. vs Assistant Commissioner Of Income-Tax on 24 June, 1996
Equivalent citations: [1996]59ITD353(MUM)
ORDER
O.P. Jain, Judicial Member
1. These appeals are by the same assessee and arise out of the same set of facts. Hence they were heard together and are being disposed of as under. It would be appropriate to mention here that the assessee is a Public Sector Undertaking and Cabinet Secretariate, Litigation Cell, of the Central Government has permitted the assessee to pursue to the appeals before the Tribunal in the meeting held on 21st September, 1995.
ITA Nos. 2265 to 2269
2. During the scrutiny of annual salary returns filed by the assessee, it was noticed by the Assistant Commissioner of Income-tax, TDS (Salaries), Bombay, that the assessee had been making payment of the following allowances to its employees mainly to the flying crew members :-
(i) Kit Maintenance Allowance
(ii) Telephone Allowance
(iii) Compensatory allowance
(iv) Special Travelling allowance
(v) Additional Special Travelling allowance
(vi) Stay over allowance
(vii) Meal Allowance
(viii) Light Refreshment allowance
(ix) Entertainment Allowance
3. It was claimed by the assessee that the said allowances are not taxable and the Central Board of Direct Taxes had issued instructions to that effect. It was also claimed that whatever has been paid to the employees is nothing but reimbursement of the expenses incurred by them and as such nothing was taxable and for that reason no tax was deducted at the time of payment. The submissions of the assessee did not find favour with the Assessing Officer and he has observed that the instructions issued by the CBDT and relied upon by the assessee were issued before amendment of section 10(14)(i) of the Income-tax Act, which amendment became effective from 1-4-1989. Thus it was held that the payment made by the assessee in respect of the said allowances is taxable. Therefore, the Assessing Officer computed the short deduction of tax at source and passed an order under section 201 of the Act requiring the assessee to make payment of the short deductions.
4. The assessee appealed before the Commissioner of Income-tax (Appeals). It was submitted that the employer is only required to estimate proper tax to be deducted from salaries and if the conduct of the employer is bona fide, the Assessing Officer does not have any jurisdiction to pass any order under section 201(1) of the Act. Reliance was placed on the decision of the Madhya Pradesh High Court in Gwalior Rayon Silk Co. Ltd. v. CIT [1983] 140 ITR 832/14 Taxman 99 and certain other decisions. It was also submitted that the CBDT had issued notifications/instructions to the effect that the said allowances are exempt and as such the estimate of the income of the employees as made by the assessee was honest and reasonable. It was further submitted that the allowances paid by the assessee were in the nature of reimbursement of expenses and as such the amendment brought about with effect from 1-4-1989 does not affect the situation that existed prior to the amendment. It was argued that it could not be the intention of the Legislature to withdraw the exemption regarding such allowances granted through circulars and notifications. It was also submitted that the Board had accepted that where the allowances were reasonable, no attempt will ordinarily be made to call for details of the expenses actually incurred and for that reason the assessee had not obtained any evidence from the employees regarding actual expenditure incurred by them in connection with various allowances. Thus it was contended that the demand raised by the Assessing Officer may be cancelled. It would be appropriate to mention here that the matter with regard to the payment of compensatory allowance was not contested during the hearing of the first appeals. In the written submissions filed before the CIT (Appeals) it was stated by the assessee that it had paid the requisite tax with regard to the compensatory allowance together with interest for the delay in deduction of the same. It may also be mentioned here that the CIT (Appeals) has accepted the assessee's claim that kit maintenance allowance and telephone allowance are exempt.
5. The submissions of the assessee were not acceptable to the CIT (Appeals). He has noted that the provisions of section 10(14) were amended with effect from 1st April, 1989 and, therefore, the circulars/notifications issued by the CBDT under the said section cannot be applied. He observed that by way of amendment, the section underwent an important change with effect from 1st April, 1989. He came to the conclusion that after that amendment, allowances are exempt, only when notified by the Central Government and that too to the extent they are actually spent. He also did not agree that the various allowances were mere reimbursement of expenses. He also rejected the assessee's contention that the estimate of income as made by the assessee was bona fide. He observed that the assessee now accepts that it was liable to deduct tax at source from compensatory allowance and since no tax was deducted from such payment, it clearly shows that the assessee had not acted with due care and caution and thus the assessee's conduct can be said to be mala fide. Thus the CIT (Appeals) has concluded that the assessee had made short deduction of tax at the time of payment and as such the Assessing Officer was justified in passing an order under section 201(1) of the Act and raising demand for the short deductions. As regards quantum of the short deductions, the CIT (Appeals) directed the Assessing Officer to work out the short deductions in the manner mentioned by the CIT (Appeals) in his order. Aggrieved, the assessee has come up in appeals before the Tribunal.
6. The argument advanced on behalf of the assessee can be summarised as follows :-
(a) That in not deducting tax from the various allowances paid by the assessee, the assessee had followed the instructions issued by the Central Board of Direct Taxes from time to time and as such the estimate made by the assessee was bona fide and no mala fide can be attributed. Reference was invited to the following instructions/circulars issued by the Board :-
(i) Instruction No. 1107 dated 5th October, 1977 wherein the Board has issued instructions to all the Commissioners that the special travelling allowance is nothing but a supplementary lay-over allowance and that it is granted to pilots as reimbursement of additional expenses incurred by them in their capacity as senior members of the crew on meals, tips and other incidents. This instruction also recites that the ITO while making the assessment of any recipient of such an allowance need not be very meticulous in determining that the allowance has actually been spent. Instead certificate may be obtained for each employee in respect of such allowance that the allowance in question has actually been incurred by him during the relevant previous year.
(ii) Instruction No. F. No. 200/64/74-IT (A.I.) dated 30th October, 1974 wherein the Board had issued instructions to all the Commissioners that the stay over allowance, meal allowance and light refreshment allowance will remain tax free.
(iii) Instruction F. No. 133/118/90/TPL dated 30th March, 1990 read with Notification S.O. 143(E) dated 21st February, 1989 issued in exercise of the powers under section 10(14)(i), it was specified that the entertainment allowance is specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office of employment or profit.
(b) That as per the provision contained in section 192 of the Act, the assessee is required only to estimate the income of the employee and deduct tax thereon. The deduction has to be made only on the estimated income. The taxability has to be considered in the case of the recipient of the income and no demand can be raised against the employer in the case of short deduction.
(c) That in view of the provision contained in section 119(2)(a) of the Act, the Board can issue general or special orders in respect of any class of incomes or class of cases as to the guidelines, principles or procedures to be followed like other income-tax authorities in the work relating to assessment or collection of revenue. It was pointed out that section 192 falls in Chapter XVII of the Act, which relates to collection and recovery of tax. Since the CBDT had already issued instructions regarding collection of tax with regard to this class of income, the action of the assessee in not deducting tax in respect of the various allowances cannot be said to be wholly incorrect.
(d) That the various allowances paid by the assessee are actually reimbursement of the expenses incurred by the employees and as such they do not form part of the income of the recipient and the amendment made in section 10(14) of the Act with effect from 1st April, 1989 does not bring about a change in the position as it existed prior to the said amendment. It was further submitted that the instructions/circulars issued by the Board prior to the said amendment had not been withdrawn. It was stated that the circulars issued prior to the amendment have been withdrawn on 23rd March, 1995 vide Circular No. 701 reproduced at page 1 of the statute section of 213 ITR. It was pointed out that the assessee has obtained certificates from the concerned employees that various allowances paid to them were wholly incurred by them. A copy of one such certificate dated 26th June, 1995 has been filed at page 96 of the assessee's compilation.
(e) In support of the stand that if the estimate made by the assessee is bona fide and there is no mala fide on the part of the assessee, no action can be taken under section 201(1) against the assessee, reference was made to the under-noted decisions of the Tribunal :-
(i) Decision dated 14th March, 1995 in [IT Appeal Nos. 9869 to 9871 (Bom.) of 1989 in the case of Mahindra & Mahindra Ltd., Bombay.
(ii) Decision dated 18th September, 1995 in [IT Appeal Nos. 781 to 784 (Bom.) of 1990 in the case of Procter & Gamble India Ltd., Bombay.
(iii) Decision dated 12th June, 1995 in IT Appeal Nos. 104 to 107 (Bom.) of 1990 in the case of Glaxo India Ltd., Bombay.
(f) That the Assessing Officer has applied the provisions of sub-clause (i) of sub-section (14) of section 10, whereas the CIT (appeals) has held that sub-clause (ii) is applicable. Therefore, the action of the assessee cannot be said to be unreasonable and no mala fide can be attributed.
7. The submissions of the assessee were strongly opposed by the learned departmental representative. He has placed reliance on the reasons given by the CIT (Appeals) for upholding the action of the Assessing Officer. It was submitted by him that after change was brought about in section 10(14) with effect from 1st April, 1989, the instructions/notifications issued by the Board on earlier dates no longer hold good and the reliance of the assessee on such instructions/notifications is misplaced. He has pointed out that all the circulars/notifications were issued prior to the said amendment. He has also pointed out that after the amendment, the Board has not issued any circular exempting the various allowances paid by the assessee. He has also submitted that in the annual salary returns, the assessee did not disclose these payments and the information was consciously kept back and as such the action of the assessee cannot be treated as bona fide. It was further submitted that the decisions of the Tribunal on which reliance has been placed by the assessee were considered by the Tribunal in a later decision dated 12-3-1996 rendered in the case of Peico Electronics & Electricals Ltd. v. First ITO [IT Appeal Nos. 2483 to 2486 of 1990 dated 12-3-1996] and it was held that the Assessing Officer was justified in raising demand in respect of the short deductions made by the assessee. It was also stated that in their individual returns the recipients of these allowances did not disclose these receipts and the assessments were completed under section 143(1) of the Act and the returned income was accepted. According to him, all payments made to an employee falls within the definition of 'salary' and no part thereof can be treated as exempt unless exemption is notified under section 10(14) of the Act. Strength for this proposition was drawn from the following decisions :-
(1) K.A. Choudary v. CIT [1990] 183 ITR 29/44 Taxman 472 (AP);
(2) CIT v. Govind Chandra Pani [1995] 213 ITR 783/83 Taxman 364 (Ori.);
(3) CIT v. B. Chinnaiah [1995] 214 ITR 368 (AP).
8. In rejoinder, the learned counsel for the assessee has submitted that the annual salary return required to be filed in Form No. 21 relates to the salaries paid and tax deducted at source in the case of employees leaving services. In the note appended to the said form, the definition of 'salary' is inclusive, which includes periodical cash allowances. According to the assessee, the allowances paid by the assessee to its employees were not periodical cash allowances and as such the assessee was not required to disclose such payments in Form No. 21. As regards the statement filed in Form No. 16, it has been pointed out that the present form has been substituted with effect from 28th February, 1991. Prior to it, in the note appended to the form, the definition of 'salary' was inclusive. The various allowances paid by the assessee are not included in such definition. Thus it was contended that the action of the assessee in not including the payments made by way of various allowances in the salary while filings such return, is bona fide.
9. We have considered the rival submissions and have gone through the material placed on record. The contention of the assessee that the instructions/circulars issued by the CBDT prior to 1st April, 1989 were general in nature and so remain unaffected by the amendment, which became effective from 1-4-1989 cannot be accepted. A reading of the instructions/circulars referred to by the assessee goes to indicate that they were issued in connection with the exemption claimed under section 10(14) of the Act. It follows, therefore, that they would cease to have effect after the amendment. We are in agreement with the findings of the CIT (Appeals) that there was a change in law with effect from 1st April, 1989 and the allowances can be treated as exempt only if covered by any notification issued thereafter. The contention of the assessee that the earlier notifications have been withdrawn by the CBDT only on 23rd March, 1995 and till that date they would hold the field is also unacceptable. Vide Circular No. 701 dated 23rd March, 1995, the CBDT did not withdraw the earlier notifications. The said circular was issued to the Chief Commissioners of Income-tax and Directors General of Income-tax on the subject of taxability of allowances received by persons having income under the head 'Salaries'. It was clarified that as per sub-clauses (iiia) and (iiib) of section 2(24) read with section 17 of the Act, any allowance, by whatever name called, given by the employer to employee, is taxable as income in the hands of the employee. The major exemptions allowed under the Act were also specified. In paragraph 3 of the circular, it was clarified that consequent to the amendment of section 10(14) with effect from 1st April, 1989, all circulars, instructions and clarifications issued by the Board regarding section 10(14) up to 31st March, 1989 ceased to have effect from the assessment year 1989-90 and onwards. This was only a clarification of the legal situation. It would be wrong to infer that through this circular the earlier instructions were withdrawn.
10. It is not in dispute that the assessee is assessed to tax for the last many years. Deduction out of the salary paid has to be made as per the provisions contained in section 192 of the Income-tax Act. The said section requires and employer to make deduction from the salary of an employee on the basis of the estimated income. If an employer has made a fair and honest estimate of the taxable salary and deducted and paid tax thereon, he cannot be treated as an assessee in default under section 201(1) of the Act even if the Assessing Officer ultimately assessed the salary at a higher figure. For this proposition, we derive strength from the following observations of the Madhya Pradesh High Court in the case Gwalior Rayon Silk Co. Ltd. (supra) :-
"The provisions of section 201 of the Act are attracted in the case of an employer only when that employer does not deduct tax at source or after deducting fails to pay the tax as required by the Act. A duty is cast on an employer to form an opinion about the tax liability of his employee in respect of the salary income. While forming this opinion, the employer is undoubtedly expected to act honestly and fairly. But if it is found that the estimate made by the employer is incorrect, this fact alone, without anything more, would not inevitably lead to the inference that the employer has not acted honestly and fairly. Unless that inference can be reasonably raised against an employer, no fault can be found with him. It cannot be held that he has not deducted tax on the estimated income of the employee."
11. The ratio laid down in the above decision was followed by the Bombay Benches of the Tribunal in the three decisions referred to by the learned counsel for the assessee and already mentioned earlier. We see no reasons to take a different view.
12. The question that now arises for determination is whether the estimate made by the assessee was honest, fair and reasonable. The instructions/circulars issued by the CBDT prior to the amendment, which became effective from 1st April, 1989, go to indicate that the various allowances involved in these appeals were treated as reimbursement of the expenditure incurred by the employees and, therefore, exempt under section 10(14) of the Act. In the given situation, the stand of the assessee that it was of the view that these allowances are only reimbursement of the expenditure incurred by the employees and as such they cannot form part of their income, cannot be said to be without any basis. In our opinion, the belief of the assessee on the point was bona fide. The mere fact that in respect of the compensatory allowance the assessee did not contest the issue in the first appeals and had paid the requisite tax together with interest for the delay in deduction of the same, would not necessarily mean that the action of the assessee in not deducting tax in respect of the other allowances lacked good faith. Since we are of the opinion that the estimate made by the assessee was honest and bona fide, we are of the opinion that the assessee cannot be treated in default. The reliance placed by the learned departmental representative on the decision of the Tribunal in the case of Peico Electronics & Electricals Ltd. (supra) is of little consequence. The decision rendered in that case does not alter the position. In the said case it was found that the assessee had failed to provide all the details necessitating him to go in for estimation of short deduction. On the facts of that case it was held that the assessee did not make bona fide estimates and as such the finding was delivered against the assessee. In the instant case, we find that the estimate made by the assessee was bona fide and, therefore, the revenue fails to draw any support from the said decision.
13. In view of the foregoing reasons, we hold that the revenue authorities had no jurisdiction under section 201 of the Act to demand further tax from the assessee in respect of the short deduction made concerning the special travelling allowance, additional special travelling allowance, stay over allowance, meal allowance, light refreshment allowance and entertainment allowance. Consequently the appeals filed by the assessee are partly allowed.
ITA 2270 to 2274
14. Since the Assessing Officer had passed an order under section 201(1) of the Act raising demand against the assessee in respect of short deductions made by the assessee, the Assessing Officer had charged interest under section 201(1A) of the Act. The order of the Assessing Officer was challenged in appeals before the CIT (Appeals). It was stated before him that the assessee only want consequential relief. The CIT (Appeals) had allowed some relief in the appeals filed against the order passed under section 201(1) of the Act. Therefore, he had directed the Assessing Officer to work out short deduction of tax at source on the part of the assessee. He had also directed the Assessing Officer to modify the quantum of interest as a result of that order. Aggrieved thereby, the assessee is in appeal before us.
15. No arguments were advanced before us. The direction issued by the CIT (Appeals) is appropriate. Since in the appeals arising out of the order under section 201(1) of the Act we have also allowed some relief to the assessee, we direct the Assessing Officer to modify the quantum of interest taking into consideration the said order of the Tribunal.
16. Subject to the above observations, the appeals by the assessee would be treated as dismissed.