Expenses liable to be considered as fringe benefits only to extent same are incurred in consideration for employment

ITAT PUNE BENCH ‘A’

Desai Brothers Ltd.

versus

Additional Commissioner of Income-tax

IT Appeal No. 168 (PN) of 2009
[ASSESSMENT YEAR 2006-07]

Date of Pronouncement – 31.10.2012

ORDER

Shailendra Kumar Yadav, Judicial Member

This appeal of the assessee is against the order of the CIT(A)-I, Pune, for the assessment year 2006-07. The grounds raised by the assessee are as under:

1. Learned CIT(A) erred in law and on facts in confirming the addition of Rs. 10,23,042/- as the taxable amount of Fringe Benefits to the amount of Fringe Benefits declared by the appellant in his return of FBT.

2. Learned CIT(A) erred in not appreciating that Fringe Benefit Tax is not liable to be paid by the appellant in respect of the following items of Expenditure as they have been either incurred only with relation to non-employees and/or though incurred through employees, but being purely for the business purposes of the assessee and thus not resulting in any benefit to the employees-

3. The learned CIT(A) erred in law and on facts in not appreciating that the above items of expenditure fall beyond the scope and levy of Fringe Benefit Tax contained in section 115WB(2) considering the Legislative intent and objectives while introducing the Fringe Benefit Tax as explained in the Budget Speech in the Explanatory Notes.

2. The entire dispute in this appeal relates to the manner in which the assessee’s liability to pay Fringe Benefit Tax (in short “FBT”) as per section 115WA of the Act is liable to be computed.

3. The contention of the assessee is that the levy of FBT is to be confined to the expenses incurred on persons who are in employment of the assessee and not with respect to expenses incurred on persons who are not employees of the assessee company. In this regard, as per the assessee, the lower authorities have ignored the provisions of section 115WA of the Act which, according to the appellant, confines the charge ability of FBT in respect of fringe benefits provided or deemed to have been provided to employee or employees alone.

4. In this connection, the point made out by the assessee is that, for instance, expenditure on traveling of non-employees, i.e. customers/outsiders has also been considered as a deemed fringe benefit in terms of section 115WB(2) of the Act, which is wrong. The plea of the assessee is that deeming provision of sub-section (2) of section 115WB would operate only if the expenditure specified therein is incurred inconsideration for employment or in other words, it is incurred in connection with the employees of the assessee, and not otherwise.

5. On the other hand, the contention of the Revenue and, which is supported by the impugned order of the Commissioner of Income-tax (Appeals), is that section 115WB(2) lays down 16 items of expenditure which are deemed fringe benefits and that if any of such expenses is incurred by an assessee, the same is liable to FBT and the provision does not contain any qualification to the effect that such expenditure should be incurred in relation to an employee alone.

6. On this aspect, we have considered the rival submissions. Chapter XII-H of the Act creating additional tax liability on the prescribed assessees in the form of FBT was inserted by the Finance Act, 2005 with effect from 1.4.2006. Section 115WA of the Act prescribes that in addition to the income-tax chargeable under the Act, there shall be charged for every assessment year commencing on or after 1.4.2006, a FBT at a specified rate on the value of the fringe benefits provided or deemed to have been provided by an employer to his employees during the relevant previous year. Section 115WB of the Act elucidates the fringe benefits which are liable for charge of FBT as prescribed in section 115WA of the Act. Sub-section (1) of section 115WB prescribes that “For the purposes of this Chapter, “fringe benefits” means any consideration for employment provided by way of …..”. The presence of the expression “any consideration for employment” is significant in section 115WB(1), inasmuch as the benefits by way of clauses (a) to (d) listed therein are directed towards the employees or their families including former employees. Sub-section (2) of section 115WB, which is the focus of controversy before us reads as under:

“(2) The fringe benefits shall be deemed to have been provided by the employer to his employees if the employer has, in the course of his business or profession (including any activity whether or not such activity is carried on with the object of deriving income, profits or gains) incurred any expense on, or made any payment for, the following purposes, namely:-

(A) ……………….(Q)”

7. Sub-section (2) of section 115WB of the Act elucidates the fringe benefits which shall be deemed to have been provided by the employer to his employees. It is provided that if an employer in the course of his business or profession incurs any expenditure for the purposes set out therein, it shall be deemed that ‘fringe benefit’ has been provided by the employer to the employees. The moot point before us is whether the mere incurrence of the expenditure listed in Clauses (A) to (Q) of section 115WB(2) of the Act is enough to trigger the deeming prescription contained in the section or that it is further required to be established that specified expenditure has been incurred on account of consideration for employment so as to attract levy of FBT contemplated in section 115WA(1) of the Act.

8. To appreciate the legal position, we may again refer to the meaning of the expression “Fringe benefits”, as contained in section 115WB(1) of the Act. As noted earlier, Sub-section (1) of section 115WB contains the expression “means any consideration for employment”. The presence of the aforesaid expression means that the ‘fringe benefits’ covered in section 115WB(1) are those which are in consideration for employment. Now, section 115WB(2) contains ‘fringe benefits’ which are deemed to have been provided by the employer to the employees. Section 115WB(2) does not contain the expression “…. means any consideration for employment …” as contained in sub-section (1) of section 115WB, and therefore, it is sought to be canvassed by the Revenue that any payment made by an assessee for the purposes contained in Clauses (A) to (Q) of sub-section (2) of section 115WB shall result in ‘fringe benefits’ deemed to have been provided by the employer to his employees. In other words, as per the Revenue the expenses listed in Section 115WB(2) need not be incurred on employees so as to qualify for charging of FBT. In our considered opinion, sub-section (1) of section 115WB itself qualifies that the meaning of the expression ‘fringe benefits’ contained therein is “For the purposes of this Chapter” and, therefore, it implies that the overriding condition of the incurrence of expenditure in consideration for employment is even relevant for the purposes of assessing or ascertaining fringe benefits, which are deemed to have been provided by the employer to its employees in terms of sub-section (2) of section 115WB of the Act also. Therefore, even in the circumstances provided in sub-section (2) of section 115WB of the Act ‘fringe benefits’ can be deemed to have been provided by the employer to his employees, only in cases where the prescribed expenditure is incurred in consideration for employment. So, however, the Revenue has contended that the CBDT has clarified by way of Circular No. 8 of 2005 that the deeming provision contained in sub-section (2) of section 115WB cannot be restricted to expenses which are incurred on employees alone and, in this context the answer to Question No. 14 of the Circular has been referred to. On the strength of the circular of the CBDT, it is sought to be pointed out that the interpretation placed by the Revenue is liable to succeed.

9. The interpretation sought to be advanced by the Revenue is not borne out of the statutory provisions. Ostensibly, the clarification issued by the CBDT vide Question No. 14 in Circular No. 8 of 2005 (supra) seeks to enlarge the scope of levy of FBT, which is not supported by the language of the statute. The Honorable Supreme Court in the case of Kerala Financial Corpn. v. CIT [1994] 210 ITR 129 has clearly opined that the Circulars issued by CBDT cannot override the provisions of the Act. In any case, it is quite well-settled that an executive instruction/circular cannot create any additional liability on the assessee. Secondly, it is also to be appreciated that the stand of the Revenue is also not in consonance with the legislative intent. The import and intent of introducing Chapter XII-H was to tax such benefits which are collectively enjoyed by the employees and cannot be attributed to any individual employee. Such benefits escape taxation as perquisite in the hands of the individual employees as they are not attributable to any individual employee. Therefore, such benefits were sought to be taxed in the hands of the concerned employer. Though the speech of the Honorable Finance Minister may not be a decisive test, so however, it is indeed a relevant and contemporaneous exposition of the legislative intent and can be relied upon, as propounded by the Honorable Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597. Considered in that light too, we find that the interpretation sought to be made out by the Revenue with regard to the meaning of the expression ‘fringe benefits’ for the purposes of section 115WB(2) of the Act is quite misplaced. Considering the aforesaid, we therefore do not subscribe to the interpretation sought to be placed by the Revenue on section 115WB(2) of the Act and instead, hold that the expenses prescribed therein are liable to be considered as fringe benefits only to the extent the same are incurred in consideration for employment. To the same effect is also the view of our co-ordinate Bench in the case of Dy. CIT v. Kotak Mahindra Old Mutual Life Insurance Ltd. [2012] 134 ITD 388.

10. Let us analyze different expenditures in question. First is the issue of entertainment expenditure. The stand of the assessee is that the provisions of FBT can be invoked in respect of expenses which are incurred on employees or their family members but in the present case, as mentioned on page No.5 of the paper book, the entertainment expenses have been incurred for guests of the company, which has not been disputed by the Revenue. So same are not liable to be subjected to provisions of section 115WB(2) of the Act. The next issue is with regard to sales promotion of Rs. 35,06,333/- and gifts of Rs. 3,70,334/-. In this case, expenditure has been incurred on food of H.O., but it does not tell the details whether same has been incurred on food of guests or employees in the course of employment. So, that has to be looked into by the Assessing Officer under the provisions of section 115WB(2) after providing due opportunity of hearing to the assessee. Regarding gifts, these payments include the club payments but again it is not clear from the details furnished by the assessee whether same has been incurred on employees of the assessee or outsiders. So the Assessing Officer is directed to verify the same and allow the same after due verification of the same under the provisions of section 115WB(2) of the Act after providing due opportunity of hearing to the assessee. The next issue is with regard to Auditors traveling. Auditors are not employees of the assessee so any expenditure on their traveling expenses or otherwise does not fall in the ambit of the provisions of section 115WB. The next issue is regarding driver salaries. The driver salaries in the present case cannot be subject matter of provisions of section 115WB because salary paid to a driver is taxable in his hands under the head Salary income and thus tax is paid or payable in respect of the same. According to us, the provisions of section 115WB was wrongly invoked with respect to this expenditure.

11. In the result, the appeal of the assessee is disposed of as indicated above.