[1.0] As common question of law and facts arise in this group of Special Civil Applications as well as Tax Appeals, all these Special Civil Applications and Tax Appeals are decided and disposed of together by this common judgement and order.
[2.0] Special Civil Application Nos.21124/2005, 21125/2005, 21768/2005 and 21770/2005 have been preferred by the Gujarat Chamber of Commerce and Industries and others for an appropriate writ, direction and order to quash and set aside the Circular No.8/2005 dated 29.08.2005 (hereinafter referred to as “impugned circular”) issued by the Central Board of Direct Taxes (hereinafter referred to as “CBDT”) and restrain the respondents from enforcing the impugned circular or applying the impugned circular to the employers who are made liable for FBT (hereinafter referred to as “FBT”) under the provisions of Chapter XIIH of the Income Tax Act, 1961 (hereinafter referred to as “Act”).
[2.1] Feeling aggrieved and dissatisfied with the impugned judgement and order dated 25.10.2013 passed by the learned Income Tax Appellate Tribunal, Ahmedabad Bench, Ahmedabad (hereinafter referred to as “Tribunal”) in ITA No. 3269/Ahd/10 for AY 2006- 07 by which the learned Tribunal has allowed the said appeal preferred by the respondent assessee and has deleted the levy of FBT on Rs. 1,11,61,364/, which was levied by the Assessing Officer and confirmed by the learned CIT(A) in respect of sales promotion expenditure, conveyance, tour and travel expenditure, miscellaneous repairs and maintenance, other allowances, telephone expenses, the Revenue has preferred the present Tax Appeal No.474/2014 with the following substantial questions of law.
“A. Whether the Appellate Tribunal has substantially erred in deleting the addition of Rs. 1.11 crores to the value of Fringe Benefit despite the fact that these expenses were deemed Fringe Benefits provides to employees as per the provisions of Section 115WB(2) Clause A to Q of the I.T.Act, 1961?
B. Whether the Appellate Tribunal has not appreciated the fact that there was no question of estimation by the Assessing Officer since 20% of such expenses are to be treated as Fringe Benefits as per Section 115 WC(1) of the Act?
[2.2] Feeling aggrieved and dissatisfied with the impugned common judgment and order dated 03.03.2014 passed by the learned Tribunal in ITA Nos.3086 to 3088/Ahd/10 for AY 200607, AY 200708 and 2008-09, by which the learned Tribunal has allowed the said appeals preferred by the respondent assessee – Intas Pharmaceuticals Limited and has deleted the levy of the FBT levied by the AO confirmed by the learned CIT(A) on expenditure towards conference, sales promotion, conveyance, hotel boarding and lodging, repairs and maintenance of motor car and maintenance of guest house, the Revenue has preferred the present Tax Appeal No. 1155/2014 to 1157/2014 to consider the following substantial question of law.
“Whether the Appellate Tribunal has substantially erred in deleting the addition of respective amounts to the value of Fringe Benefit despite the fact that these expenses were deemed Fringe Benefit provided to employees as per provision of Section 1 15WB(2) clause A to Q of the Income Tax Act, 1961?”
[2.3] Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Tribunal in ITA No.179/Ahd/20 11 for AY 200607 by which the learned Tribunal has allowed the said appeal preferred by the respondent assessee – Cadila Healthcare Limited and has partly allowed the said appeal by deleting the levy of FBT on the expenses incurred by the assessee on seminar and conference expenses, sales promotion, cost of free samples given to Doctors, gift to business associates, medical expenses and club membership fees, the Revenue has preferred the present Tax Appeal No.888/2015 to consider the following substantial question of law.
“A. Whether the Appellate Tribunal has substantially erred in law in its interpretation that for applicability of provisions of section 115WB(2), the expenses necessarily are required to be incurred directly for the benefit of the employees?
B. Whether the Appellate Tribunal on the above basis is right in deleting the additions towards seminar and conference expenses aggregating to Rs. 10,89,19,812, Sales promotion expenses aggregating to Rs. 20,34,43,795 and cost of free samples aggregating to Rs. 7,24,41,000?
C. Whether the Appellate Tribunal is justified in law in deleting the addition to the extent of 50% in respect of expenditure on gifts to business associates aggregating to Rs. 17,33,767 and club membership fees aggregating to Rs. 72,450 without any justifiable basis?
D. Whether the Appellate Tribunal is justified in law in deleting the addition in respect of reimbursement of medical expenses aggregating to Rs. 3,36,74,477 and whether the Tribunal’s interpretation of section 1 15WB(3) r.w. proviso (v) to Section 17(2) is correct in law?”
[3.0] For the sake of convenience, Special Civil Application No. 21124/2005 which has been preferred by the Gujarat Chamber of Commerce and Industries and another is treated as a lead matter. [4.0] The Finance Act, 2005 introduced a new levy, namely, FBT on the valuation of certain fringe benefits. The provisions relating to levy of this tax are contained in Chapter XIIH (Sections 115W to 1 15WL) of the Act. Sections 115W to 115WL of the Act are reproduced hereinafter.
[4.1] The statement and objects to levy the FBT so stated at the time of introduction of new levy by Finance Act, 2005 are as under:
“2.1 The taxation of perquisites or fringe benefits is justified both on grounds of equity and economic efficiency. When fringe benefits are undertaxed, it violates both horizontal and vertical equity. A taxpayer receiving his entire income in cash bears a higher tax burden in comparison to another taxpayer who receives his income partly in cash and partly in kind, thereby violating horizontal equity. Further, fringe benefits are generally provided to senior executives in the organization. Therefore, undertaxation of fringe benefits also violates vertical equity. It also discriminates between companies which can provide fringe benefits and those which cannot thereby adversely affecting market structure. However, the taxation of fringe benefits raises some problems primarily because
(a) all benefits cannot be individually attributed to employees, particularly in cases where the benefit is collectively enjoyed:
(b) of the present widespread practice of providing perquisites, wherein many perquisites are disguised as reimbursements or other miscellaneous expenses so as to enable the employees to escape / reduce their tax liability; and
(c) of the difficulty in the valuation of the benefits.
2.2 In India, prior to assessment year 199899, some perquisites/fringe benefits were included in salary in terms of section 17 and accordingly taxed under section 15 of the Incometax Act in the hands of the employee and a large number of fringe benefits were taxed by the employer based dis allowance method where the quantum of the dis allowance was estimated on a presumptive basis.
In practice, taxation of fringe benefits by the employer based dis allowance method resulted in large scale litigation on account of ambiguity in defining the tax base. Therefore, the taxation of fringe benefits by the employer based dis allowance method was withdrawn by the Finance Act, 1997.
However, the withdrawal of the provisions relating to taxation of fringe benefits by the employer based dis allowance method resulted in significant erosion of the tax base. The Finance Act, 2005 has introduced a new levy, namely, the FBT as a surrogate tax on employer, with the objective of resolving the problems enumerated in para 2.1 above, expanding the tax base and maintaining equity between employers.”
[4.2] The tax base for the purposes of FBT is the value of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year. The determination of the tax base comprises of three elements viz.
(a) the scope of the term ‘fringe benefits provided’;
(b) the scope of the term ‘fringe benefits deemed to have been provided’; and
(c) the basis of valuation of (a) and (b).
It is based on a presumptive method applied to certain heads of expenditure as a measure / indicator of fringe benefits.
After the introduction of new Chapter XIIH of the Act and sections 115W to 1 15WL of the Act brought on the statute under which the FBT was levied, number of issues / questions arose. Therefore, the CBDT ultimately came out with the impugned circular in the form of question – answers. By the impugned circular the CBDT has clarified that the FBT is leviable on the expenses incurred by the employer in respect of entertainment; provision of hospitality; conference excluding the fee from participation by the employees in any conference; sales promotion including publicity but excluding specified expenditure on advertisement; conveyance, tour and travel (including foreign travel); use of hotel, boarding and lodging facilities; repair, running (including fuel) and maintenance of motor cars and the amount of depreciation thereon; maintenance of any accommodation in the nature of guest house other than accommodation used for trading purposes; festival celebrations; use of any other club facilities, gifts and scholarships etc. and consequently the FBT is being levied on the expenses incurred by the employer on the aforesaid. Hence, the petitioner – Chamber of Commerce and others have preferred the present Special Civil Applications challenging the impugned circular issued by the CBDT and consequently to restrain the respondents from enforcing the impugned circular or applying the impugned circular to the employer who are made liable for FBT under the provisions of Chapter XIIH of the Act.
[5.0] Shri Mukesh Patel, learned Advocate and Shri S.N. Soparkar, learned Senior Advocate have appeared on behalf of the respective petitioners and respective assessees and Shri M.R. Bhatt, learned Senior Advocate has appeared on behalf of the Revenue.
[6.0] Shri Mukesh Patel, learned Advocate appearing on behalf of the respective petitioners has vehemently submitted that the levy of FBT on the expenses incurred by the concerned employer but not relatable to the employees, as sought to be levied and clarified by the CBDT in the impugned circular is absolutely illegal and contrary to the object and purpose to levy the FBT. It is vehemently submitted by Shri Patel, learned Advocate appearing on behalf of the respective petitioners that as such there is no justification to levy the FBT on the expenses incurred by the concerned employer with respect to the services not relatable to its employees.
[6.1] It is vehemently submitted by Shri Patel, learned Advocate appearing on behalf of the respective petitioners that as such there is no nexus to levy the FBT on the expenses incurred by the concerned employer with respect to sales promotion expenditure; conveyance; tour and travel expenditure; miscellaneous repairs and maintenance; other allowances; telephone expenses etc. and more particularly as clarified by the CBDT in the impugned circular with any of the services provided to its employees.
[6.2] It is submitted that as per the reasons as elaborated by the Finance Minister while introducing the FBT, while presenting the Union Budget, it was stated 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. It is submitted that it was also stated that the transport services for workers and staff and canteen services in their office and factory will be outside the tax net. It is submitted that it was also stated that the tax is not a new tax.
[6.3] It is further submitted that even in the Memorandum to the Finance Act, 2005 and in the explanatory note in relation to FBT it was stated that the taxation of perquisites provided by an employer to its employees, in addition to the cash salary or wages paid, is subject to varying treatment in different countries. It is further stated that the said benefits are either taxed in the hands of the employees themselves or the value of such benefit is subject to a “FBT” in the hands of the employer. It is submitted that it was stated that the rationale for levying FBT on the employer lies in the inherent difficulty of isolating the “personal element” where there is a collective enjoyment of such benefits and attributing the same directly to the employee. It is submitted that it was further stated that where the employer directly reimburses the employees for expenses incurred, it becomes difficult to collectively capture the true extent of the perquisite because of the problem of cash flow in the hands of the employer.
[6.4] It is further submitted that even in the interview to the Economic Times on 02.03.2005, the Finance Minister assured that perquisites which are disguised as Fringe Benefits only will be taxed and no legitimate business expenditure will be taxed. It is submitted that a similar statement was made by Honourable The Finance Minister while addressing Rajya Sabha on 05.05.2005 and it was made clear that only those expenditures which are otherwise really a perquisite or a Fringe Benefit, which has escaped taxation, the FBT shall be levied.
[6.5] It is submitted that therefore right from very beginning the object and purpose to levy the FBT was in respect of the expenditure incurred by the concerned employer relatable to its employees, which may be termed as perquisites. It is submitted that on no other expenditure which had no direct relation and/or connection with the employer – employee, the FBT is leviable. It is submitted that the ostensible and overt object of FBT as declared in the statement and object of introducing Chapter XIIH by Finance Act, 2005 and as declared by Honourable Finance Minister in his speeches as well as statement made by him on the floor of Rajya Sabha, was to tax such Fringe Benefits received by the employees in the hands of employer, where for practical reasons they cannot be individually attributed or where they pose difficulty in valuation.
[6.6] It is submitted that the impugned circular issued by the CBDT runs counter not only to the basic concepts for levy of income tax, but also to the fundamental purpose and objective for levy of FBT which was to levy FBT on the employer to tax such Fringe Benefits received by the employees, where for practical reasons they cannot be individually attributed or where they pose difficulty in valuation.
[6.7] It is submitted that by and in the impugned circular issued by the CBDT, the CBDT has clarified that the FBT shall be levied on expenditure which is totally connected with the employees, former employees or their families.
[6.8] It is submitted that by the impugned circular it is clarified by the CBDT that the expenditure made by the employer on traveling, hotel etc. the expenditure incurred by the employer for any of the purposes enumerated in clauses (A) to (P) of subsection (2) of section 115WB, the FBT is leviable, which is absolutely contrary to the object and purpose to levy the FBT, as the expenses incurred by the employer for any one of the purposes enumerated in clauses (A) to (P) of subsection (2) of section 115WB are not relatable to the employees and therefore, the FBT is not leviable on such expenses.
[6.9] It is submitted that therefore, the impugned circular is substantially running beyond the legislative intent underlying Chapter XIIH. It is submitted that the circular issued by the CBDT, in exercise of powers under Section 119 of the Act are always in the aid of the main section and cannot be contrary to the legislative intent.
[6.10] It is further submitted by Shri Patel, learned Advocate appearing on behalf of the respective petitioners that as held by the Honourable Supreme Court in the case of K.P. Varghese vs. Income Tax Officer & Anr. reported in (1981) 131 ITR 597 (SC), 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.
[6.11] It is further submitted by Shri Patel, learned Advocate appearing on behalf of the respective petitioners that Section 1 15WB(2) gives an impression that even if the expenses mentioned in that section have no connection with the employees, Fringe Benefit shall be deemed to have been provided to employees on incurring of such expenses. It is submitted that that is how the CBDT circular interprets section 115WB (2). It is submitted that however, such an interpretation cannot be accepted. It is submitted that the charging Section 115WB(a) creates charge in respect to Fringe Benefit provided or deemed to have been provided by an employer to its employees. It is submitted that section 115W(a) is a charging section and it must be construed strictly.
[6.12] It is submitted that deeming provision under Section 115WB(2) is for deemed Fringe Benefits to employees if there are expenses which have some connection with the employees.
[6.13] It is submitted that section 115WB(1) exhaustively defines the term “Fringe Benefit” and for a benefit to fall within the said charging section, employer – employee nexus is precondition because the definition refers to a consideration for employment. It is submitted that CBDT has also accepted in its circular that employer – employee relationship is a prerequisite for a levy of FBT. However, the expenses to fall within the definition of “Fringe Benefit” given in section 115WB(1) will need to result into benefit to employees.
[6.14] It is submitted that definition of “Fringe Benefit” in section 115WB(1), which requires employer – employee nexus, is for the purpose of the entire Chapter XIIH and therefore, the term “Fringe Benefit” in section 115WB(2) is also covered by the definition of “Fringe Benefit” under Section 115WB(1).
[6.15] It is submitted that in the case of CIT vs. Hindustan Petroleum Corporation Limited reported in (1991)197 ITR 1, the Bombay High Court has held that a legal fiction has to be carried to its logical conclusion but only within the parameter of the purpose for which the fiction is created. It is submitted that it is held that as far as possible, the legal fiction should not be given a meaning so as to cause injustice.
[6.16] It is submitted that in the case of CIT vs. Vadilal Lallubhai reported in (1972)86 ITR 2 (SC), the Honourable Supreme Court has held that the legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field.
[6.17] It is vehemently submitted that in the case of K.P. Varghese (Supra), the Hon’ble Supreme Court has observed and held that the CBDT circulars are aid in construction of statute. The circulars issued by the CBDT are in the nature of contempovanea expositio and they furnish legitimate aid in construction of statutory provision. It is submitted that it is further observed by the Honourable Supreme Court in the said decision that the task of interpretation of statutory enactment shall not be a mechanical one. It is submitted that it is more than mere reading of mathematical formula. It is submitted that while interpreting any statute an attempt shall be made to discover the legitimate interest from the language used and the interpretation shall not be solely based on purely literal reading. It is submitted that it is further observed and held that plain literal interpretation of statutory provision, if it results in absurd and unreasonable consequence, not in consonance with legislative intent, it must be avoided. It is submitted that such avoidance is necessary to arrive at the obvious intention of the legislature and to produce rationale construction. It is further submitted that it is further observed and held by the Honourable Supreme Court in the said decision that it is a well settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or do some violence to it, so as to achieve the obvious intention of the legislature and produce a rationale construction. It is submitted that it is further observed that the Court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision.
[6.18] It is further submitted by Shri Patel, learned Advocate appearing on behalf of the respective petitioners that as observed by the Honourable Supreme Court in the case of New India Assurance Co. Ltd. vs. Nusli Naveli Wadia reported in 2007(14) Scale 556; Tanna and Modi vs. CIT reported in 2007(8) Scale 511 and Udai Singh Dagar and Ors. vs. Union of India reported in 2007(7) Scale 278 and even as observed by the Honourable Supreme Court in the case of R & B Falcon (A) PTY Ltd. vs. Commissioner of Income Tax reported in (2008)301 ITR 309 (SC), a statute should ordinarily be given a purposive construction.
[6.19] It is further submitted by Shri Patel, learned Advocate appearing on behalf of the respective petitioners that as held by the Honourable Supreme Court in the case of Kerala Financial Corporation vs. CIT reported in (1994) 210 ITR 129 (SC), when section 119 of the Income Tax Act has empowered the CBDT to issue order, instructions, directions for “proper administration” or for such other purposes specified in subsection (2) of section 119 and such an order, instruction or direction cannot overwrite the provisions of the Act; that would be destructive of all the known principles of law, as the same would really amount to giving power to a delegated authority to even amend the provision of law enacted by the Parliament.
[6.20] It is further submitted by Shri Patel, learned Advocate appearing on behalf of the respective petitioners that in the case of Commissioner of Income Tax (LTU) Vs. Tata Consultancy Services Ltd. reported in (2015) 60 Taxmann.com 332 (Bombay), the Bombay High Court has observed that while levying the FBT the legislature always had in mind a relationship of employer – employee and by virtue of which, these benefits are admissible to the employees. It is submitted that after taking note of the Budget speech of the Minister of Finance while presenting the budget for the year 2005- 06, the Explanatory Notes and the circulars, it is observed and held that the basis of tax is the benefits or perquisites which emanate out of an employer employee relationship. It is held that there is a perquisite for levy of FBT. It is submitted that in the said decision the Bombay High Court confirming the order passed by the learned Tribunal quashed and set aside the levy of FBT on the expenses incurred by the assessee Company towards sales promotion expenses.
[6.21] Shri Patel, learned Advocate appearing on behalf of the respective petitioners has also relied upon some of the decisions of the Tribunals taking the view that for the expenses incurred by the employer not relatable to the employee, the FBT is not leviable.
Making above submissions and relying upon above decisions, it is requested to quash and set aside the impugned circular issued by the CBDT and consequently restrain the Revenue from levying FBT on the expenses incurred by the employer not relatable to the employees at all more particularly the expenses incurred for the purposes mentioned in clause (A) to (P) of section 115WB(2) of the Act.
[7.0] Shri S.N. Soparkar, learned Senior Advocate appearing on behalf of the respective assessees – employers has, in addition to the above submissions made by Shri Patel, learned Advocate appearing on behalf of the respective petitioners, submitted that as held by the Hon’ble Supreme Court in the case of Commissioner of Income Tax, Bangalore vs. J.H. Gotla reported in 156 ITR 323 (SC) (Paras 46 and 47) and in the case of C.W.S. (India) Limited Vs. Commissioner of Income Tax reported in 208 ITR 649 (SC) (Para 10), when literal interpretation leads to absurd result, the statute must be interpreted in such a manner that absurdity arising by literal interpretation is avoided.
[7.1] Shri Soparkar, learned Senior Advocate appearing on behalf of the respective assessees relying upon the decision of the Hon’ble Supreme Court in the case of Commissioner of Incometax vs. Gwalior Rayon Silk Mfg. Co. Ltd. reported in (1992) 196 ITR 149 (Para 5) and in the case of Commissioner of Income Tax vs. National Taj Traders reported in 121 ITR 535 (SC) (Para 10) has vehemently submitted that as held by the Hon’ble Supreme Court in the aforesaid decisions, the Court should interpret the Statute so as to achieve the object of the statute by reading the statute as a whole.
[7.2] It is further submitted by Shri Soparkar, learned Senior Advocate appearing on behalf of the respective assessees that if two interpretations are possible, one which upholds the validity of the statute must be adopted. It is submitted that this must be so even when the validity of the statute is not in question because interpretation of a statutory provision will not depend upon the nature of legislation before the Court. In support of his above submissions, Shri Soparkar, learned Senior Advocate has heavily relied upon the decision of the Honourable Supreme Court in the case of Assam Company Limited vs. State of Assam reported in 248 ITR 567 (Para 8) and the decision of the Honourable Supreme Court in the case of K.P. Varghese (Supra) (Paras 5, 6 and 8).
[7.3] It is further submitted by Shri Soparkar, learned Senior Advocate appearing on behalf of the respective assessees that Rule of construction as laid down in Heydon’s case may be applicable to the facts and circumstances of the present case.
