Income Tax Appellate Tribunal - Bangalore
M/S Toyato Kirloskar Motors Pvt. Ltd.,, ... vs Department Of Income Tax on 17 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH "A"
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND
SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
ITA No. & Appellant Respondent
Assessment Year
20/Bang/2011 M/s. Toyota Kirloskar Motor Pvt. Addl. Commissioner of
2008-09 Ltd., Plot No.1, Bidadi Indl. Area, Income Tax, LTU, Bangalore.
Bidadi, Ramanagar District-562 109
PAN AAACT5415B
88/Bang/2011 Addl. Commissioner of Income Tax, M/s. Toyota Kirloskar Motor
2008-09 LTU, Bangalore. Pvt. Ltd.,
Bidadi-562 109
Assessee By : Shri Padam Chand Khincha.
Revenue By : Shri B. Saravanan.
Date of Hearing : 17.04.2012.
Date of Pronouncement : 11.05.2011.
O R D E R
Per Shri Jason P. Boaz, A.M. :
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 order.
2. The facts of the case, in brief, are as under :
2.1 The assessee is a company engaged in the manufacture and trading of automobiles i.e. passenger cars and Multi Utility Vehicles. For the Assessment Year 2008-09, the assessee filed a return of Fringe Benefits on 29.9.2008 declaring Rs. 5,67,29,439 as the value of fringe benefits. The assessee did not consider the following expenses in computing the value of fringe benefits and tax thereon.2
ITA Nos.20 & 88/Bang/2011
i) Sales Promotion Rs. 2,66,50,000.
ii) Conveyance, tour and travel Rs. 29,08,593
iii) Gifts Rs. 31,79,519.
According to the assessee, the above expenditure was neither incurred for the benefit of employees nor was it paid to them, the provisions of fringe benefit tax was not attracted once there is no employer - employee relationship. The auditors of the assessee-company had stated the following in Annexure II to Form No.3CD i.e. Statement of particulars required to be furnished under section 44AB of the Income Tax Act, 1961 (herein after referred as 'the Act') for the relevant period :
" Notes :
1. The company contends that Fringe Benefit Tax is not applicable where there is no employee-employer relationship and accordingly following expenditures/payment have not been included above :
Sl. Nature of expenditure Section under which Amount of
No. chargeable in Fringe expenditure
Benefit Tax incurred
1. Sales Promotion [115WB(2)(D)] 26,650,000
2. Conveyance, Tour and Travel [115WB(2)(F)] 2,908,593
3. Gifts [115WB(2)(O)] 3,179,517
32,738,110
2. The company contends that expenditures/payment aggregating to Rs. 23,775,428 incurred on souvenir distributed to all its employees on the occasion of decennial celebration is in the nature of 'Employee Welfare' and not 'Gifts'.
3. Amount disclosed under the column 'Any other head' represents depreciation as per Income Tax Act, 1961."
2.2 The DCIT, LTU, Bangalore processed the intimation under section 115WE on 23.6.2009. The notice under section 115WE(2) of the Act was issued by the JCIT, LTU, Bangalore on 24.7.2009. Vide letter dt.20.1.2010, the JCIT, LTU asked the assessee to reconcile the expenses debited to 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 3 ITA Nos.20 & 88/Bang/2011 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 on distribution of souvenirs to employees on the occasion of decennial celebration cannot be treated as 'Gifts' and accordingly the value of fringe benefits be computed. Thirdly, the assessee was asked to give the break up and nature of expenditure booked under the head 'Miscellaneous Expenses.' The assessee in its reply dt.21.5.2010 (pages 50 to 63 of paper book) explained as to why non-employee related expenditure totally amounting to Rs. 3,27,28,110 is not liable for FBT and for this proposition relied on the Finance Minister's speech and notes on clauses to the Finance Bill while introducing the FBT in support of its contention that expenditure neither incurred for the benefit of employees nor paid to employees are not liable to FBT. Explaining the scope of the deeming fiction under section 115WB(2), the assessee submitted that (a) the deeming fiction cannot be interpreted so as to cause injustice and (b) the principle of equity and justice should not be lost sight of in interpreting the deeming fiction. The assessee relied on the co-ordinate bench decision of this Tribunal in the case of Govardhan Associates (ITA No.1094/Bang/2009) dt.15.1.2010 in support of its contention. As regards the reliance placed by the Addl. CIT, LTU on CBDT Circular NO.8 of 2005, the assessee submitted that they cannot override the provisions of law.
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ITA Nos.20 & 88/Bang/2011 2.4 In respect of the proposal to treat expenditure incurred on Souvenirs to employees on the occasion of decennial celebration of the company as 'Gifts', the assessee submitted that these Souvenirs were intended to motivate its employees by providing a sense of belonging to the company resulting in better efficiency and productivity. It was submitted that these expenses were classified as 'employee welfare' expenses in the books of account and that they should therefore not be regarded as 'Gifts'. The assessee also furnished the break up of the expenditure under the head 'Miscellaneous Expenses.' 2.5 The Addl. CIT, LTU vide letter dt.2.6.2010 (page 64 of paper book) asked the assessee to submit the break up of -
i) Sales Promotion Rs. 2,66,50,000.
ii) Conveyance, tour and travel Rs. 29,08,593
iii) Gifts Rs. 31,79,517.
Relying on the deeming fiction under section 115WB(2), Answer to Question Nos.56 and 57 of CBDT Circular No.8 of 2005 dt.29.5.2005, the officer stated 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 its rolls will not be liable to FBT. In respect of question Nos.56 & 57 and answers thereto of the Circular No.8 of 2005, it was submitted that circulars can be issued under section 119 for proper administration of the law and no circular can 5 ITA Nos.20 & 88/Bang/2011 be issued that interpret the law. It was submitted that in view of the legislative intention to levy FBT on expenditure resulting in benefit to employees, the circular that transcends legal provision does not have any legal sanctity. The assessee submitted that the principle underlying the decision of the Tribunal in the case of M/s. Govardhan Associates (supra) is that FBT is not leviable in respect of the expenditure that results in no benefit to employees. It was submitted that the above principle is applicable to the present case and is binding on Revenue authorities. The assessee also submitted that, in any case, the matter is capable of two reasonable interpretations and hence the view favorable to the assessee is to be accepted. 2.7 The Addl. CIT, LTU, Bangalore passed the order under section 115WE(3) for Assessment Year 2008-09 on 27.8.2010 in which it was concluded that as per section 15WB(2) and CBDT Circular No.8 of 2005, FBT is leviable even though there is no employer-employee relationship. It was stated in the order that Circular NO.8 of 2005 clarifies various aspects of FBT and hence it cannot be ignored. The Addl. CIT, LTU relied on the decisions in the cases of K.P. Varghese Vs. ITO 131 ITR 37 (SC) and CIT Vs. B M Edward India Sea Foods 119 ITR 334 (Ker) in support of the proposition that CBDT Circulars are in the nature of contemporaneous exposition furnishing legitimate aid in the construction of the statute and courts are bound to take notice of and give due weight to the interpretations put upon such statute by those who are entrusted with the task of constructing, executing and applying it. The Addl. CIT, LTU also held that the decision of M/s. Govardhan Associates (supra) is distinguishable, on facts and in law. The officer held that expenses in the nature of sales promotion, conveyance, tour and travel are liable to FBT. Out of sales promotion expenses amounting to Rs. 2,66,50,000, the officer excluded provision for making expenses and expenses towards annual conference amounting to Rs. 1,76,97,334 and the remaining amount of Rs. 89,52,666 was considered for the purpose of calculating 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 6 ITA Nos.20 & 88/Bang/2011 '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, reiterating the submissions made during the original proceedings before the Addl. CIT, LTU, Bangalore.
3.2 On the issue of jurisdiction, it was submitted that CBDT, Notification NO.1615(E) dt.26.9.2006 had authorized the CIT (LTU), Bangalore to perform the functions under the Act in respect of assessees who opted for the LTU scheme and to issue orders in writing for the exercise of powers and performance of the functions by the Joint Commissioner of Income Tax and not the Additional Commissioner of Income Tax. It was submitted that the term 'Joint Commissioner' does not include 'Addl. Commissioner' after the introduction of the definition of the term 'Addl. Commissioner' in section 2(1C) by Finance Act, 2007 with retrospective effect from 1.6.1994. It was therefore submitted that the order passed by the Addl. CIT, LTU is bad in law and liable to be quashed. The assessee placed reliance on the decisions in the cases of Dr. Nalini Mahajan Vs. DIT (Inv) (2002) 257 ITR 123 (Del), Microfin Securities P. Ltd. Vs. Addl. CIT (2005) 94 TTJ 767 (Lucknow) and Bridal Apparels Ltd (2006) 104 TTJ 950 (Del) in support of the proposition that the order passed by the Addl. CIT, LTU is bad in law. 3.3 The learned CIT(A) disposed the appeal by order dt.30.11.2010. The learned CIT(A) did not accept the assessee's contention that the order passed by the Addl. CIT, LTU was bad in law holding that if the intention of legislature was to segregate 'Joint Commissioner' from 'Additional Commissioner', the reference to 'Additional Commissioner' in the definition of the term 'Joint Commissioner' should have been deleted with the introduction of the definition of the term 'Additional Commissioner'. The learned CIT(A) distinguished the decisions relied on by the assessee, and rather relied on the decision in the case of Shyam Sundar Behl Vs. Addl CIT 7 ITA Nos.20 & 88/Bang/2011 reported in 99 TTJ 1147 in support of the conclusion that the powers and functions of the Joint Commissioner and Additional Commissioner are the same. The ground raised on the issue of jurisdiction was accordingly dismissed by the learned CIT(A), LTU. 3.4 On merits, the learned CIT(A) relied on the deeming fiction under section 115WB(2) and CBDT Circular No.8 of 2005 in support of the conclusion that an expenditure even though not paid to employees or not incurred for the benefit of employees is liable for FBT. The learned CIT(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 of the CIT(A), LTU as to the finding that expenses on distribution of Souvenirs to employees on decennial celebration of the assessee company cannot be regarded as 'Gifts.'
5. First we will adjudicate the appeal filed by the assessee. The grounds raised in the assessee's appeal are as under :
" 1.1 The orders passed by the lower income tax authorities to the extent prejudicial to the appellant is bad in law and liable to be quashed.
2.1 The learned Additional Commissioner of Income Tax, LTU, Bangalore has erred in passing the order under section 115WE(3) without jurisdiction and the learned CIT(A)-LTU has erred in confirming the same. The order passed without jurisdiction is bad in law and liable to be quashed.
WITHOUT PREJUDICE 8 ITA Nos.20 & 88/Bang/2011 3.1 The learned Additional Commissioner of Income Tax, LTU, Bangalore has erred in assessing expenses incurred under the head 'sales promotion', 'conveyance, tour and travel' and 'Gifts' to FBT and the learned CIT(A) - LTU has erred in confirming the same.
3.2 The lower income tax authorities have erred in :
i) stating that employer-employee relationship is not a pre-requisite for levying FBT.
ii) relying on a CBDT circular, which is not binding, in support of the impugned conclusion.
iii) not appreciating that expenses bereft of employer-employee relationship are not liable for FBT.
iv) not appreciating that the impugned expenses were not incurred in relation to employees or paid for / to employees.
3.3 The lower income tax authorities have erred in not appreciating that the jurisdictional ITAT has held that expenses not incurred in relation to employees or paid for / to employees are not chargeable to fringe benefit tax.
3.4 At any rate and without prejudice, the extent of addition is very very excessive. 3.5 On facts and in the circumstances of the case and law applicable, expenses incurred under the head 'sales promotion', 'conveyance, tour and travel' and 'Gifts' are not liable for fringe benefit tax.
4.1 The learned Additional Commissioner of Income Tax, LTU, Bangalore has erred in levying interest under section 234D of the Act and the learned CIT(A) - LTU has erred in confirming the same. On facts and in the circumstances of the case and law applicable, interest under section 234D is not leviable. The appellant denies its liability to pay interest under section 234D.
5.1 In view 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 9 ITA Nos.20 & 88/Bang/2011 employee. Where the benefits are fully attributable to an employee, they are taxed in the hands of an employee and no FBT is leviable on the employer. Referring to the Memorandum explaining the provisions of FBT (pages 3 to 5 of compilation of relevant decisions / material), the learned Authorised Representative submitted that the rationale for levying FBT on the employer lies in the inherent difficulty in isolating the 'personal element' where there is a collective enjoyment of benefits by the employees. It was submitted that as per the Memorandum, FBT is livable only in a case where the expenditure incurred by the employer is ostensibly for the purpose of business but includes an element of benefit of a personal nature which cannot be attributed or is difficult to attribute. As per section 115WB(1), it is submitted that fringe benefits can only mean privilege, service, benefit or amenity provided directly or indirectly by an employer to his employees by reason of their employment. Referring to the Finance Minister's speech in Lok Sabha on 2.5.2005 (page 7 of compilation of relevant decision / material) it was submitted that the intention was to tax that part which is clearly a perquisite or benefit but which is going untaxed both in the hands of the employer and the employee. Referring to the Finance Minister's speech in Rajya Sabha on 5.5.2005 (page 11 of compilation of relevant decisions / material), it was submitted that the legislature itself has excluded legitimate business expenditure which cannot be categorized as fringe benefits from the purview of FBT. The learned Authorised Representative drew our attention to the following extracts from the interview of the Finance Minister with Economic Times (pages 15 & 19 of compilation of relevant decisions / material) in support of the argument that expenditure not resulting in any benefit to employees are outside the scope of FBT.
" Q. There is an uproar over the taxing of fringe benefits.
A. The fringe benefit tax is based on the universal principle that you must tax
CTC. A number of perquisites that are attributable to the employees are taxed in the hands of the employees. There are perquisites which are enjoyed by employees collectively. They are not attributable to any individual employee. On the CTC principle they should be taxed in the hands of the employer. The section lists a number of fringe benefits. These can be debated.
Q. The industry is looking for an assurance from you that no legitimate business expenses are taxed ?
10
ITA Nos.20 & 88/Bang/2011 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 'personal element' where there is collective enjoyment of such benefits and attributing the same directly to the employee. The memorandum further states that FBT is sought to be levied where attribution of the personal benefit poses problems. Thus, deeming fiction under section 15WB is attracted only when the expenditure results in some benefit to employees and / or it is difficult to isolate the personal element of enjoyment or benefit.
(ii) Section 115WB(2) incorporating a deeming fiction should be read along with the intention of legislature to tax the collective enjoyment of benefits by the employees. It is submitted that under section 115WB(2) the expenditure should be incurred in the capacity of 'employer' for his employees and therefore legislative business expenditure bereft of any benefit to employees is outside the ambit of FBT.
(iii) Deeming fiction could include the obvious, the uncertain and even the impossible.
Nevertheless, equity and justice cannot be lost sight of as they have a crucial role to play in interpreting deeming provisions. In case of fiction of law, interpretation should be guided by law and equity. The deeming fiction should be interpreted in such a manner as would not work 11 ITA Nos.20 & 88/Bang/2011 injustice to the party. The decision of CIT Vs. Bina Rai (58 ITR 100) (Guj) and Nathimal Gaya Lal (89 ITR 190) (All) were relied upon for the said proposition.
(iv) It is a settled principle that fiction created for a particular purpose cannot be extended beyond the purpose of which it is intended. Legal fictions are created for definite purposes and are limited for the purposes for which they are created and should not be extended beyond the purpose for which it has been created. [See M.D. Jindal V. CIT (1987) 164 ITR 28 (Cal), Rajputana Trading Co. Ltd. V. CIT (1969) 72 ITR 286 (SC), CIT V. Bai Vina (1965) 58 ITR 100 (Guj), CIT V. Elphinstone Spinning and Weaving Mills Co. Ltd. (1960) 40 ITR 142 (SC), Bengal Immunity Co. Ltd. Vs. State of Bihar (1955) 6 STC 446 (SC) and CIT Vs. P.K. Badiani (1970)76 ITR 369 (Bom)].
(v) Deeming fictions should also be strictly construed. [ See Smt. Tarulata Shyam V. CIT (1977) 108 ITR 345 (SC), CIT V. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC), CIT V. Keshavlal Lallubhai Patel (1965) 55 ITR 637 (SC), Philip John Plasket Thomas V. CIT (1963) 49 ITR 97 (SC), CIT V. Prem Bhai Parekh (1970) 77 ITR 27 (SC), Bhogilal 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 proposition that unless fringe benefits are extended to employees and the same are enjoyed by them, the question of levying FBT on the employer does not arise. The decision of the Delhi 12 ITA Nos.20 & 88/Bang/2011 High Court in T & T Motors in ITA No.899 of 2010 dt.24.1.2012 was relied on in support of the proposition that the legislature itself has excluded expenditure in the form of payments to third persons from the purview of FBT. Reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of DCIT Vs. Kotak Mahindra Old Mutual Life Insurance Ltd and vice versa in ITA Nos.63 & 491/Mum/2010 dt.25.11.2011 in support of the proposition that the deeming provisions of 115WB(2) applies only when the expenditure is in the nature of consideration for employment. The learned Authorised Representative relied on the decisions of the co-ordinate bench of the Tribunal in the case of Bosch Ltd Vs. DCIT, LTU in ITA No.1407/Bang/2010 dt.7.10.2011 and Vijaya Bank Vs. JCIT, LTU in ITA No.1066/Bang/2010 Dt.26.8.2011 in support of the contention that FBT is not leviable in the absence of collective enjoyment of benefits by its employees. The decisions of the co-ordinate bench of this Tribunal in the cases of DCIT Vs. MESCON in ITA No.1178/Bang/2009 dt.19.5.2010 and M/s. Govardhan Associates in ITA No.1094/Bang/2009 dt.15.1.2010 was relied on in support of the proposition that payment to third parties were not liable for FBT.
7.5 The learned Authorised Representative relied on the Finance Minister's speech delivered in the Rajya Sabha on 5.5.2005 and submitted that once the Chartered Accountant certifies the particulars of fringe benefits, as has been done in the instant case, the Assessing Officer had no discretion but to accept the tax audit certificate and hence was wrong in making the adjustment he did. Lastly, the learned Authorised Representative submitted that when an issue is capable of two interpretations, the view favourable to the assessee ought to be adopted.
8. The learned Departmental Representative submitted that in view of the deeming fiction in section 115WB(2), it is neither permissible nor possible to segregate the expenses into employee related and non-employee related. It was submitted that the deeming fiction be given full effect and as a result thereof, even non-employee related expenditure would be chargeable to FBT. It was 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, 13 ITA Nos.20 & 88/Bang/2011 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 and deems certain expenditure incurred for certain purposes by an employer to result in a fringe benefit to an employee. The reference to employer and employee in section 115WB(2) limits the manner in which the section is to be read and understood. It was reiterated by the learned Authorised Representative that the scope of the deeming fiction should be understood in conformity with the legislative intention to tax collective enjoyment of benefits by the employees in the hands of the employer. It was submitted that, therefore, the deeming fiction cannot be extended beyond its scope and cannot be interpreted in a manner as to cause injustice. 10.1 We have heard both parties, carefully perused and considered the orders of the lower authorities, the submissions of the learned Authorised Representative, the paper book and compilation of decisions filed by the assessee. In the instant case, the contention of the assessee is that expenditure which is neither paid to employees nor incurred for the benefit of employees is outside the scope of FBT. The Assessing Officer and the learned CIT(A) have given a concurrent finding that FBT provisions are attracted even if there is no employer- employee relationship. At pages 6 and 7 of the order of assessment the Assessing Officer has referred to the break up of the sales promotion expenses wherein one item is explained as expenditure towards employee referral scheme gift of Rs. 73,000 and has stated thereon as under :
" However, as seen above the assessee has incurred Rs. 73,000 towards employee referral scheme gift, which contradicts the statement that there is no employer- employee relationship in incurring the above expenses."
Thus the Assessing Officer, apart from holding that non-employee related expenditure is liable for FBT, had also held that the expenditure towards employee referral scheme has employer- 14
ITA Nos.20 & 88/Bang/2011 employee relationship and is therefore liable for FBT. The learned CIT(A) has confirmed the views and stand taken by the Assessing Officer. During the hearing, we sought a clarification from the learned Authorised Representative as to how expenditure on employee referral scheme is outside the scope of FBT since the requirement of employer-employee relationship is satisfied in respect of expenditure of the present nature. The learned Authorised Representative, in reply stated that the above expenditure is in the nature 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 while introducing the provisions of FBT and the Memorandum explaining the provisions of FBT states that when the benefits are fully attributable to the employee, they are taxed in the hands of the employer and that position will continue. In the case of Vijaya Bank (supra), the co-ordinate Bench of the Tribunal held that reimbursement of medical expenses to employees can be attributed directly to an employee and hence the said expenditure is not liable for FBT. The above decision was followed in the case of M/s. Bosch Ltd (supra). Hence, expenditure on employee referral scheme, even though satisfies the employer-employee relationship, cannot be subject to FBT.
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ITA Nos.20 & 88/Bang/2011 10.3 In the light of the above finding of fact, the issue for consideration is whether a legitimate business expenditure which does not result in any benefit to employees is liable to FBT ?
10.3.1 Chapter XII 4 of the Act comprising sections 115W to 115WL was inserted by the Finance Act, 2005 w.e.f. 1.4.2006. The relevant extract of the Finance Minister's speech while introducing FBT provisions is as under :
" I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value. At present where the benefits are fully attributable to the employee they are taxed in the hands of the employee; that position will continue. In addition, I now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer." (emphasis supplied by us).
10.3.2 The relevant extracts from the Memorandum explaining FBT provisions is as under :
" The rationale for bringing fringe benefit tax 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. This is so especially where the expenditure incurred by the employer is ostensibly for purposes of the business but includes, in partial measure, a benefit of a personal nature. Moreover, in cases where the employer directly reimburses the employee for expenses incurred, it becomes difficult to effectively capture the true extent 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 16 ITA Nos.20 & 88/Bang/2011 presumptive tax. As I said in my Budget Speech, there are a large number of allowances, perquisites which are given, which go untaxed. Now, the fringe benefit is taxed in many countries. It was taxed in India until 1997 though what is called 'the disallowance route'. But the disallowance route vested a large amount of discretion in the Income Tax Officer. Therefore, in 1997, I amended that section to close that discretion and said, "we will not bother to tax this amount." But what we find is that the effective tax rate of the corporate sector continues to be very low. The effective tax rate of corporate sector when the tax rate was 35 per cent is only about 20 per cent. Therefore, by the presumptive tax method what we are trying to do is to tax that part which is clearly a perquisite, clearly a benefit but which is going untaxed both in the hands of the employer and the employee." (emphasis supplied by us) 10.4 From the above it is evident that the purpose or rationale behind introduction of FBT provisions is to tax a benefit which is enjoyed collectively by the employees which was hitherto untaxed in the hands of the employees and in respect of which the employer was claiming deduction. If the benefit is attributable to employees individually or separately, the question of levying FBT does not arise. This is clear from the Finance Minister's speech and the Memorandum explaining the provisions of the Finance Bill. Likewise, in our opinion, an expenditure which does not result in any benefit to an employee would not be liable for FBT.
FBT is leviable only in a case where expenditure is incurred by the employer ostensibly for the purpose of business but includes in partially a benefit of a personal nature which cannot be attributed or is difficult to attribute. The legislature itself has excluded legitimate business expenditure from the purview of FBT as seen from the Finance Minister's speech in the Rajya Sabha on 5.5.2005, the relevant extract of which is as under :
" .... Even under the fringe benefit, as amended by the Lok Sabha, we have taken care to exclude what I realized would be legitimate business expenditure and perhaps not amenable to the categorization, fringe benefit. ......."
The interview of the Finance Minister which is extracted at para 7.1 of this order also confirmed that legitimate business expenditure is outside the scope of FBT. The Hon'ble Apex Court in the case of K.P. Varghese (supra), has 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 17 ITA Nos.20 & 88/Bang/2011 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 Silk Cloth Manufacturers Association (1980) 121 ITR 1, where the speech made by the Finance Minister while introducing the exclusionary clause in s. 2, Cl.(15) of the Act was relied upon by the court for the purpose of ascertaining what was the reason for introducing that clause....."
The Hon'ble Apex Court in the above decision has held that the statute should be interpreted so as to discover and give effect to the intent of the legislation, the relevant portion of which is as under :
" The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precious of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be "drafted with divine prescience and perfect clarity". We can do no better than repeat the famous words of judge Learned Hand when he said :
" it is true that the words used, even in their literal sense, are the primary and ordinary the most reliable source of interpreting the meaning of any writing; be it a statue, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to 'remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning."
We must not adopt a strictly literal interpretation of s. 52, sub-s. (2), but we must construe its language having regard to the object and purpose which the Legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which s. 52, sub-s.(2), appears, because, as pointed out by judge Learned Hand in the most felicitous language :
" .... the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create."18
ITA Nos.20 & 88/Bang/2011 10.5 The jurisdictional High Court in the case of CIT Vs. Karnataka 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 our considered view, the charging section itself is not attracted to the situation of this nature, as nothing is quantified as fringe benefit enjoyed by an employee and it was extended by the employer. Therefore, we dismiss this appeal without disturbing the order passed by the Tribunal."
10.6 The Hon'ble Delhi High Court in the case of T & T Motors Vs. ACIT in ITA No.899 of 2010 dt.24.1.2012 has held that expenditure on provision of accessories to customers who have purchased cars cannot be regarded as hospitality or sales promotion under the deeming provisions of section 115WB(2). The relevant portion of the decision in para 17 thereof is as under :
" 17. A careful reading of clauses (i), (ii), (iii), (iv), (v), (vi) and (viii) of section 115WB(2)(D) elucidates that the legislature has excluded from FBT expenditure in form of payments to third persons. The exemption in these clauses, it is apparent, has been granted because this is not a fringe benefit which is enjoyed by the "employee/recipient" but it is an expenditure incurred for the purpose of business and the payment is income earned by the third party. In the hands of the said recipient the expenditure is taxable as income earned."
10.7 The co-ordinate bench of this Tribunal in the case of DCIT Vs. MESCOM in ITA No.1178/Bang/2009 dt.29.5.2010 has held that payments to third parties are not liable for FBT. The relevant portion of the decision at para 9.5 is reproduced hereunder : 19
ITA Nos.20 & 88/Bang/2011 " 9.5 Thus, it can be seen that what is intended to be taxed is a benefit attributable to employees collectively but the transport services for workers and staff are to be outside the tax net. In the case before us, items 1, 2 and 3 considered by the CIT(A) are for the purposes of carrying on the business activities of the assessee company by the agencies of the assessee company and it is only item 4, which is spent on the employees for attending the meetings, inspections and other official functions.
From the reading of the provisions of section 115WB(2), it is clear that the benefits given to an employee directly or indirectly only would be taxable under Chapter XII- H. As rightly pointed out by the CIT(A), the other expenditure is incurred for agencies other than the employees, who are outside the scope of the provisions of section 115WB(2). Therefore, we do not see any reason to interfere with the order 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 CIT(A) and the learned Departmental Representative have all relied on the deeming fiction under section 115WB(2) in support of the proposition that an expenditure even if it does not result in any benefit are liable for FBT. Section 115WB (2) reads as under :
" The fringe benefits shall be deemed to have been provided by the employer to his employees, if the employer ahs, in the course of his business or profession (including any activity whether or not such activity is carried on with the object of deriving 20 ITA Nos.20 & 88/Bang/2011 income, profits or gains) incurred any expense on, or made any payment for, the following purposes, namely :- ......"
Section 115WB(2) incorporates a deeming fiction providing that fringe benefits shall be deemed to have been provided by the employer to his employees if he has incurred or made payment for some definite purpose. Deeming fictions are created for some definite purpose and must be limited to that purpose and not be extended beyond that legitimate field or purpose for which it has been created. The decisions in the cases of Bengal Immunity Co. Ltd.Vs. State of Bihar (1955) 6 STC 446 (SC), CIT Vs. Elephinstore Spinning & Weaving Mills Co. Ltd. (1960) 40 ITR 142 (SC), M.D. Jindal Vs. CIT (1987) 164 ITR 28 (Cal), Rajputana Trading Company Ltd Vs. CIT (1969) 72 ITR 286 (SC) and CIT Vs. Bai Vina (1965) 58 ITR 100 (Guj) confirm the above principle. It is also a settled principle that deeming fiction is to be strictly construed. 11.3 The Finance Minister's speech and the memorandum explaining the FBT provisions provides the rationale for levying FBT on the employer lies in the inherent difficulty in isolating the 'personal element' when there is no collective enjoyment of such benefits and in attributing the same directly to the employee. It further provides that 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 FBT on the employer on the value of such benefits provided or deemed to have been provided to the employees. Thus, the intention of creation of a deeming fiction under section 115WB(2) is to include an expenditure resulting in collective enjoyment of fringe benefits by the employees and it is difficult or not feasible to attribute such benefit personally to employees. The legislature itself 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 21 ITA Nos.20 & 88/Bang/2011 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 as telephone, travel, conveyance, business promotion, conference expenses, club membership fees etc. incurred in the regular course of business and which did not result in any benefit to employees were liable to FBT ? The Tribunal in para 10 and 12 thereof held as under :
"10. Sub-section 2 of section 115WB is a deeming provision where certain expenditures incurred by the employee, fringe benefit are deemed to have been provided by the employer to his employee. In our opinion, sub-section (1) of section 115WB which defines "fringe benefit" under Chapter XII-H, control sub-section (2) and any expenditure incurred by an employer in the course of his business or profession, which is not a consideration for employment, cannot be considered as "fringe benefit". Thus, the deeming provisions of sub-section 2 of section 15WB, applies only when the expenditure is in the nature of considered for employment. Thus, while restoring the issue back to the file of Assessing Officer for adjudication afresh, we direct the Assessing Officer to apply the proposition of law as interpreted by us while determining the value of fringe benefit. On the issue of expenditure incurred on conference and meetings, the A.O. shall consider bifurcation submitted to him with respect to the expenditure incurred on the agents and brokers and pass appropriate orders. "Fringe benefit" cannot arise when expenditure is incurred on persons who are not employees. On the issue of club membership fee, the payments made to LIMRA and Actuarial Society of India, are to be excluded as they are not payments to clubs. With these observations, we restore the issue back to the file of Assessing Officer for adjudication afresh.
12. The Commissioner (Appeals) held that the expenditure incurred on office telephones is not considered for employment. We uphold the conclusion of the Commissioner (Appeals), vide para 13 of his order which is reproduced below, holding that no benefit flows to the employee by reason of his employment as far as expenditure on office telephone is concerned.
" 13. In the light of the above background I am constrained to conclude, even within the framework of deeming provisions, that :
1. The phrase "consideration for employment" occurring in sub-section 1 of section 11 SWB has not been superseded by the deeming provision contained in sub-section2 of the said section (except 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 22 ITA Nos.20 & 88/Bang/2011 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 day-to-day local travelling expenditure and taxi hire charges for movement of employees during their working hours. It is not conveyance expenses paid to the employee for travel between his residence and office. Under these circumstances, we uphold the findings of the Commissioner (Appeals) that the payment is not considered for employment. Thus, we dismiss ground No.2, raised by the Revenue." The above decision is in support of the principle that the deeming fiction under section 115WB(2) is not attracted if the expenditure does not result in any benefit to employees. In the present case, the sales promotion expenses, expenses on conveyance, tour and travel and gifts are incurred in the course of business and are not paid to employees. The said expenditure has arisen as a result of payments made to third parties such as dealers, vendors, service providers, etc. and is not incurred directly or indirectly for the benefit of the employees. In view of the above, these expenditure are not liable for FBT.
11.5 The Assessing Officer, the learned CIT(A) and the learned Departmental Representative have relied on various question and answers of CBDT Circular NO.8 of 2005 in support of the proposition that expenditure even if not resulting in any benefit to employees is liable for FBT. The income tax authorities have relied on the decisions in K.P. Varghese (supra), Addl CIT Vs. SRY Ankineedu Prasad (115 ITR 78) (AP) and CIT Vs. B.M. Edward India Sea Foods (119 ITR
334) (Kerala) in support of proposition that -
(i) CBDT circulars are in the nature of contemporanea expositio furnishing legitimate aid in construction of the statute.
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(ii) Courts are to give due weight to the interpretation put upon such statute by those who are entrusted with the task of construing, executing and applying it.
(iii) provisions of the statute may be considered in the light of the CBDT, circular when the language of the section does not clearly bear the legislative intent.
(iv) Since circulars are binding on the assessing authority, who are statutorily required to follow them, the Courts are also bound to take note of such circulars in that light. 11.6 In the case of K.P. Varghese (supra), the Hon'ble Apex Court was concerned with the interpretation of the erstwhile section 52(2) of the Act as was in the decision in the case of SRY Ankineedu Prasad (supra). The said 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 of the statute. For similar reasons, the Hon'ble Andhra Pradesh High Court held that section 52(2) of the Act is to be interpreted in the light of the CBDT circular. In the case of CIT Vs. B.M. Edward India Sea Foods (supra), a CBDT circular was in force at the commencement of the assessment year and the same was withdrawn later. The Assessing Officer passed the order of assessment after the withdrawal of the said circular and took a view contrary to the said circular. The Hon'ble High Court held that the circular was in 24 ITA Nos.20 & 88/Bang/2011 force at the commencement of the assessment year and therefore, the same was binding on the Revenue authorities despite withdrawal of the said circular subsequently. 11.7 In the instant case, the provisions of FBT are intended to tax collective enjoyment of benefits by employees and it is not the intention of legislature to tax a legitimate business expenditure which does not result in any benefit to employees. However, it is seen in circular No.8 of 2005 that the CBDT has opined that expenditure as a result of payment to third parties is also liable for FBT. In Answer to Q.No.14, it is stated that no segregation of expenses incurred on employees and expenses incurred on others is permissible under section 115WB(2). In Answer to Q.No.15, it is stated that there is no requirement to segregate the various expenses referred to in section 115WB, between those incurred for official purposes and personal purposes. For instance in Answer to Q.No.57, it is stated that expenditure on brand or brand ambassador or celebrity endorsement is liable to FBT. In Answer to Q.No.67, it is stated that expenditure for the purpose of boarding and lodging or travel of customers / clients would be liable for FBT. There are some of the instances where the Board has taken a view that appears to be not in tandem with legislative intention. The Hon'ble Apex Court in the case of State of Madhya Pradesh and Another vs. G.S. Dall & Flour Mills (187 ITR 478) held that executive instructions can supplement a statute or cover areas to which the statute does not extend but they cannot run contrary to statutory provisions or whittle down their effect. 11.8 Even otherwise, it is settled principle that circulars are not binding on the assessee, appellate authorities and the Courts. The proviso to section 119(1) states that no orders, instructions or directions shall be issued 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 -
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ITA Nos.20 & 88/Bang/2011 " 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 surprise the respondent/Deputy Commissioner has come on oath before this court to take a stand that the instructions issued by the Commissioners will bind the taxpayers, unless they get rid of it by availing of remedies as suggested by him in his statement quoted above. His statement to the said effect needs to be denounced as not only legal notions. I can only trust that henceforth the income tax authorities should deter from enjoying five star comforts and dinners by accepting the hospitality of corporate people by giving an illusory and ill-conceived impression that they are the final law making and clarifying authorities. It may be clarified that the income tax authorities while discharging their quasi-judicial functions having a bearing on the rights and obligations of the tax payers under the provisions of the Act may take such views on the interpretation of a particular statutory provision as may be permissible which will be always subject to the statutory remedies under the Act. But the view so taken in the particular case cannot partake of the colour of a law of general application so as to bind a whole class of taxpayers and providing them a cause of action for coming before this court seeking interference under the writ jurisdictions."
In view of the above discussion, we are of the opinion that the Circular No.5 of 2008 cannot be relied upon to the disadvantage of the assessee in support of the conclusion that the expenditure in the present case is liable for FBT.
11.9 In the result, the grounds raised at S.Nos. 3.1 to 3.5 of the assessee's appeal is allowed.
12. Ground No. 4.1 relates to challenging the charging of interest under section 234D of the Act is consequential in nature and no separate adjudication is called for thereon. ITA No.88/Bang/2011 13.1 Now, we will take up Revenue's appeal in ITA No.88/Bang/2011. 14.1 In the order passed under section 115WE(3) on 27.8.2010, the expenditure incurred on distribution of Souvenirs to employees on the occasion of decennial celebration of the company amounting to Rs. 2,37,75,428 was treated as 'Gifts.' It was stated that Souvenirs and items or 26 ITA Nos.20 & 88/Bang/2011 mementos which have only significance of display / decoration and has no employee welfare. Value of FBT in respect of the above expenditure was calculated at 50% of the said expenditure whereas the assessee had computed the value of FBT at 20% considering 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 / or delete any of the grounds on or before the hearing of the appeal."
14.3 The learned Departmental Representative relied on the order passed by the Addl. CIT under section 115WE(3) dt.27.8.2010. It was submitted that Souvenirs were given to employees as gifts as a token of love and affection on the occasion of the decennial event. It was also stated that Souvenirs are items or mementos which have only significance of display and decoration and are not indicative of any welfare activity. For the above reasons, the learned Departmental Representative prayed for reversal of the finding of the learned CIT(A) and restoration of the Assessing Officer's finding in the order passed under section 115WE(1) dt.27.8.2010.
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ITA Nos.20 & 88/Bang/2011 14.4 The learned counsel for the assessee submitted that the learned CIT(A) has correctly treated the expenditure as 'employee welfare.' The learned counsel for the assessee drew our attention to the submission made by the assessee during assessment proceedings to the effect that distribution of Souvenirs intended to motivate employees by providing a sense of belonging to the company resulting in better efficiency, productivity and as a token of its appreciation at the decennial event. Hence, it is submitted that the impugned expenditure was correctly classified by the assessee.
14.5 We have heard the arguments of both sides and have carefully considered the material on record. There is no dispute with regard to the fact that during the course of assessment proceedings the assessee explained the reason why the impugned expenditure are in the nature of 'employee welfare' and that they have been classified in the books of account as such. The term 'Employee Welfare' is one of wide import and it is difficult to draw a boundary as to the ways and means of employee welfare. It is not the case of Revenue that it can dictate as to how and in what manner the assessee is to incur expenditure on employee welfare. In the instant case, the distribution of Souvenirs was made in consideration of and to recognize the efforts and contribution of employees. Thus in our view, the said expenditure cannot be regarded as 'Gifts.' We are therefore of the opinion that the expenditure incurred for distribution of Souvenirs to employees on the occasion of decennial celebration of the assessee-company has been correctly treated as 'employee welfare expenditure and that the assessee has correctly computed the value of fringe benefits @ 20% in respect of the above expenditure. Revenue's appeal is accordingly dismissed.
15. In the result, the appeal of the assessee is partly allowed and Revenue's appeal is dismissed.
Order pronounced in the open court on 11th May, 2012.
Sd/- Sd/-
(P. MADHAVI DEVI) (JASON P BOAZ)
Judicial Member Accountant Member
Bangalore, Dated: 11.05.2012.
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ITA Nos.20 & 88/Bang/2011
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, - A Bench.
6. Guard File.
(True copy) By Order
Asstt. Registrar, ITAT, Bangalore