DCIT, Mangalore V. M/s MESCOM, Mangalore

ITA 1178/BANG/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5279 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 28-04-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 14-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREETHI GARG CITIII
• Assessee Lawyers: B P SACHIN KUMAR
• Keywords: Business expenditure

Judgement Text

PAGE 1 OF 9 ITA NO.1178/BANG/2009 1 IN THE INOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SMT. P MADHAVI DEVI, J.M. AND SHRI A MOHAN ALANKAMONY, A.M. ITA NO.1178/BANG/2009 (ASST. YEAR 2006-07) THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-2(1),MANGALORE. -APPELLANT VS M/S MESCOM, PARADIGM PLAZA, A B SHETTY CIRCLE, PANDESWAR,MANGALORE. - RESPONDENT APPELLANT BY : SMT. PREETHI GARG, CIT-III RESPONDENT BY : SHRI B P SACHIN KUMAR, C.A. O R D E R PER P MADHAVI DEVI : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST T HE ORDER OF CIT(A), MANGALORE DATED 16.10.2009. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 2) THE LEARNED CIT(A) ERRED IN ALLOWING RELIEF TO T HE ASSESSEE IN RESPECT OF RS.68,90,438/- BEING VEHICLE HIRE EXPENSES FOR ARRIVING AT VALUE OF FBT. 3) THE LEARNED CIT(A) ERRED IN ALLOWING THE RELIEF WIT HOUT CONSIDERING PARA-82 OF THE CIRCULAR 8/2005 ISSUED B Y THE CBDT DATED 29.8.2005 WHICH STIPULATES THAT THE RENT PAID OR PAYABLE ON LEASE OF MOTOR CAR IS EXPENDITURE FOR THE PURPOSES OF CONVEYANCE, TOUR AN D PAGE 2 OF 9 ITA NO.1178/BANG/2009 2 TRAVEL AND SHALL BE TREATED AS EXPENDITURE WITHIN T HE SECTION 115WB(2)(F). 4) THE LEARNED CIT(A) HAS ERRED IN ALLOWING RELIEF TO THE ASSESSEE TO THE EXTENT OF RS.68,90,438/- FOR FBT PURPOSE WHEN THE ASSESSEE HAS NOT PROVED THAT THESE EXPENSES ARE INCURRED ON DIVISIONS OR AGENCIES OF T HE ASSESSEE. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, AN ELECTRICITY SUPPLY COMPANY, FILED THE RETURN OF INCOME ON 27.11 .2006 DECLARING NIL INCOME AND BOOK PROFIT OF RS.27,86,58,020/- U/S 115 JB OF THE I T ACT. THE A.O. ASSESSED THE INCOME AT RS.32,33,81,280/- AFTER MAKING CERTAIN DISALLOWANCES AND ADDITIONS. THE ASSESSEE ALSO FIL ED THE RETURN OF FRINGE BENEFIT U/S 115WE OF THE I T ACT ON 30.11.2006 DECL ARING TOTAL VALUE OF FRINGE BENEFITS AT RS.11,55,82,989/-. A NOTICE U/S 115WE(2) OF THE ACT WAS ISSUED TO THE ASSESSEE ON 6.8.2008 CALLING FOR THE DETAILS OF THE FRINGE BENEFITS. THE ASSESSEE FURNISHED THE DETAILS AND D URING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASS ESSEE COMPANY HAS CLAIMED RS.3,57,93,880/- TOWARDS CONVEYANCE AND TRA VEL EXPENSES IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE WAS ASKED TO FURNISH THE BREAK UP OF THESE EXPENSES. THE ASSESSEE VIDE LETTER DATED 15. 12.2008 FURNISHED THE DETAILS, ACCORDING TO WHICH, THE VEHICLE HIRE EXPEN SES WERE OF RS.1,02,05,805/- AND THE ASSESSEE STATED THAT THE V EHICLES WERE HIRED BY THE COMPANY TO BE USED BY THE OFFICERS EXCLUSIVELY FOR THE OFFICIAL PURPOSE AND NOT USED FOR ANY TOURS AND TRAVEL AND REQUESTED NOT TO INCLUDE THE VEHICLE HIRING EXPENSES FOR COMPUTATION OF FBT. THE AO WAS HOWEVER NOT SATISFIED WITH THE ASSESSEES EXPLANATION AND HELD THAT THIS IS A FACILITY PROVIDED BY THE ASSESSEE COMPANY TO ITS EMPLOYEES/O FFICERS FOR CONVEYANCE PURPOSE AND THEREFORE, IT IS COVERED BY SECTION 115WB(F) OF PAGE 3 OF 9 ITA NO.1178/BANG/2009 3 THE I T ACT IN RESPECT OF FRINGE BENEFIT. HE ALSO RELIED UPON THE CIRCULAR ISSUED BY THE CBDT IN THIS REGARD AND ADDED 20% OF THE VEHICLE HIRING CHARGES I.E. RS.20,41,161/- TO THE TOTAL VALUE OF T HE FRINGE BENEFITS RETURNED BY THE ASSESSEE COMPANY. 4. AGGRIEVED BY THE ORDER OF THE AO RELATING TO TH E FRINGE BENEFITS, THE ASSESSEE FILED AN APPEAL BEFORE THE C IT(A). 5. THE CIT(A), ON VERIFYING THE COMPANYS BOOKS OF ACCOUNTS AND FROM THE DETAILS THEREIN, HE OBSERVED THAT THE EXPENDITURE INCURRED ON HIRING OF VEHICLES CONSISTED OF AMOUNTS PAID FOR VE HICLES ENGAGED BY DIFFERENT DIVISIONS AND AGENCIES OF THE COMPANY AND THE PURPOSES FOR WHICH VEHICLES WERE HIRED WERE AS FOLLOWS:- I) 24-HOUR CONSUMER COMPLAINT AND SERVICE STATIONS RS.31,79,094/- II) THEFT DETECTION VIGILANCE SQUADS RS.10,29,869/- III) CONSUMER METER TESTING DIVISION RS.26,81,475/- IV) MEETINGS, INSPECTIONS AND OTHER OFFICI AL FUNCTIONS RS.33,15,367 TOTAL RS.1,02,05,805/- AFTER CONSIDERING PROVISIONS OF SUB-SECTION 2 OF SE CTION 115WB AND THE CIRCULAR NO.8/2005 DATED 29.8.2005 ISSUED BY THE CB DT, THE CIT(A) CAME TO THE CONCLUSION THAT THE WORD PURPOSES USED IN SUB-SECTION 2 REFERS TO THE PROXIMATE PURPOSE AND NOT THE DISTANT PURPOSE A ND THAT THE PROXIMATE PURPOSE OF EXPENSES IS FOR CONVEYANCE OF EMPLOYEES WITHIN THE MEANING OF CLAUSE (F) OF SECTION 115WB(2) OF THE I T ACT AND T HE PROXIMATE PURPOSE OF EXPENSES MENTIONED IN CLAUSE (III) OF PARAGRAPH 5 IS FOR CONVEYANCE OF EMPLOYEES WITHIN THE MEANING OF CLAUSE (F) OF SECTI ON 115WB(2) AND FURTHER, IN TERMS OF PARAGRAPH 15 OF THE CIRCULAR, THE WHOLE OF THE VEHICLE HIRE EXPENSES INCURRED FOR EMPLOYEES TO ATTEND MEET INGS, CARRY OUT PAGE 4 OF 9 ITA NO.1178/BANG/2009 4 INSPECTIONS, OR DISCHARGE OTHER OFFICIAL FUNCTIONS SHOULD BE TAKEN AS THE TAXABLE VALUE OF THE FRINGE BENEFIT AND THERE IS NO REQUIREMENT TO SEGREGATE THE EXPENSES BETWEEN THOSE INCURRED ON EMPLOYEES AN D THOSE ON OTHERS. HE THEREAFTER HELD THAT THE A.O. WAS RIGHT IN INCLU DING VEHICLE HIRE CHARGES AS THE TOTAL VALUE OF FRINGE BENEFITS TO THE EXTENT OF RS.33,15,367/- REPRESENTING CONVEYANCE PAID INDIRECTLY TO EMPLOYEE S AND DIRECTED THE AO TO RESTRICT THE ADDITION TO 20% OF THE SAME WHICH W ORKS OUT TO RS.6,63,073/-. AS REGARDS TO THE REMAINING ADDITIO N, HE DELETED THE SAME, AS THESE ARE THE EXPENSES INCURRED FOR AGENCIES OTH ER THAN EMPLOYEES AND ARE THEREFORE, OUTSIDE THE SCOPE OF THE DEEMING PRO VISION OF SECTION 115WB(2) OF THE I T ACT. 6. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE I S IN APPEAL BEFORE US. 7. THE LEARNED DR SUBMITTED THAT THE FACILITY OF C ONVEYANCE GIVEN TO THE EMPLOYEES IS COVERED BY CLAUSE (F) OF SUB-SECTION 2 OF SECTION 115WB OF THE I T ACT AND THERE IS NO DISCRETION LEF T TO THE AO IN MAKING ANY EXCEPTION TO THE RULE. IT IS SUBMITTED THAT TH E CIT(A) HAS NO JURISDICTION TO BIFURCATE THE AMOUNTS INTO DIFFEREN T CATEGORIES AND GRANT RELIEF. THE LEARNED DR FURTHER SUBMITTED THAT THES E FRINGE BENEFITS WERE EARLIER BEING TAXED AS PERQUISITES IN THE HANDS OF THE EMPLOYEES AND IT IS ONLY TO TAKE CARE OF EXCESSIVE BENEFITS GIVEN TO TH E EMPLOYEES IN THE GARB OF BUSINESS EXPENDITURE THAT THE FRINGE BENEFIT TAX HAS BEEN INTRODUCED IN THE ACT AND IT IS ONLY 25% OF THE BENEFITS WHICH AR E BEING TAXED TO TAKE CARE OF THE PERSONAL NATURE OF THE BENEFITS GIVEN T O THE EMPLOYEES. THUS, ACCORDING TO HER, THE ENTIRE AMOUNT NEEDS TO BE TAK EN AS FRINGE BENEFITS AND PAGE 5 OF 9 ITA NO.1178/BANG/2009 5 VEHICLE HIRING CHARGES IS TO BE TAKEN AS FRINGE BEN EFIT AND TAXED ACCORDINGLY. 8. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, SUBMITTED THAT THE ENTIRE AMOUNT IS FOR THE PURPOSE OF RUNNING ITS BUSINESS AND IS PART AND PARCEL OF BUSINESS EXPENDITURE. HE FURTHER RELIED UPON THE ORDER OF THE CIT(A) TO THE EFFECT THAT THE EXPENDIT URE COVERED BY THE THREE ITEMS WHICH ARE DELETED, THE BENEFIT IS NOT DERIVED BY THE EMPLOYEES BUT IS BY THE AGENCIES, WHO ARE NOT COVERED BY THE PROVISI ONS OF CLAUSE (F) OF SUB-SECTION 2 OF SECTION 115WB OF THE I T ACT. IN ADDITION, HE ALSO PLACED RELIANCE ON THE DECISION OF THE SINGLE MEMBER CASE OF THIS TRIBUNAL IN THE CASE OF M/S GOVARDHAN ASSOCIATES IN ITA NO.1094/BAN G/2009 FOR THE ASST. YEAR 2007-08 WHEREIN IT HAS BEEN DECIDED THAT WHERE THERE ARE NO EMPLOYEES, THE EXPENDITURE CANNOT BE TREATED AS FO R THE PURPOSE OF FRINGE BENEFIT TAX UNDER THE PROVISIONS OF SECTION 115WE( 3) OF THE I T ACT. A COPY OF THE SAID ORDER IS PLACED BEFORE US AND THE SAME IS TAKEN ON RECORD. 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS, WE FIND THAT THE CHAPTER XIIH HAS BEEN INTRODUCED BY THE FINANCE ACT OF 2005 WITH EFFECT FROM 1/4/2006. THI S CHAPTER CONTAINS SECTIONS 115WB (A) TO (L) WHICH PROVIDES FOR THE LE VY OF ADDITIONAL INCOME TAX ON FRINGE BENEFITS. SECTION 115WA(1) PR OVIDES THAT IN ADDITION TO THE INCOME TAX CHARGED UNDER THIS ACT, THERE SHA LL BE CHARGED FOR EVERY ASST. YEAR COMMENCING ON OR AFTER THE 1 ST DAY OF APRIL, 2006, ADDITIONAL INCOME TAX (IN THIS ACT, REFERRED TO AS FRINGE BEN EFIT TAX) IN RESPECT OF THE FRINGE BENEFITS PROVIDED OR DEEMED TO HAVE BEEN PRO VIDED BY AN EMPLOYER TO HIS EMPLOYEES (EMPHASIS PROVIDED BY US) DURING THE PREVIOUS YEAR . PAGE 6 OF 9 ITA NO.1178/BANG/2009 6 SECTION 115WB DEFINES THE FRINGE BENEFITS AS TO MEA N, ANY CONSIDERATION FOR EMPLOYMENT PROVIDED BY WAY OF - (A) ANY PRIVILEGE, SERVICE, FACILITY OR AMENITY, D IRECTLY OR INDIRECTLY, PROVIDED BY AN EMPLOYER, WHETHER BY WAY OF REIMBURSEMENT OR OTHERWISE, TO THIS EMPLOYEES (INCLUDING FORMER EMPLOYEE OR EMPLOYEES); (B) ----- (C) ---- 9.1 115WB(2) PROVIDES THAT THE FRINGE BENEFITS SH ALL BE DEEMED TO HAVE BEEN PROVIDED BY THE EMPLOYER TO HIS EMPLOY EES, IF THE EMPLOYER HAS, IN THE COURSE OF HIS BUSINESS OR PROFESSION (I NCLUDING ANY ACTIVITY WHETHER OR NOT SUCH ACTIVITY IS CARRIED ON WITH THE OBJECT OF DERIVING INCOME, PROFITS OR GAINS) INCURRED ANY EXPENSE ON O R MADE ANY PAYMENT FOR, THE FOLLOWING PURPOSES, NAMELY - (A) ENTERTAINMENT (B) --- (C) CONFERENCE EXPLANATION FOR THE PURPOSES OF THIS CLAUSE, ANY EXPENDITURE ON CONVEYANCE, TOUR AND TRAVEL (INCLUDI NG FOREIGN TRAVEL) ON HOTEL OR BOARDING AND LODGING IN CONNECTION WITH ANY CONFERENCE SHALL BE DEEMED TO B E EXPENDITURE INCURRED FOR THE PURPOSE OF CONFERENCE; (D) ----- (E) ---- (F) CONVEYANCE (G) TO ((P) ------ (Q) TOUR AND TRAVEL (INCLUDING FOREIGN TRAVEL) 9.2 115WB(3) PROVIDES THAT FOR THE PURPOSES OF SU B-SECTION (1), THE PRIVILEGE, SERVICE, FACILITY OR AMENITY DOES NO T INCLUDE PERQUISITES IN RESPECT OF WHICH TAX IS PAID OR PAYABLE BY THE EMPL OYEE [OR ANY BENEFIT OR PAGE 7 OF 9 ITA NO.1178/BANG/2009 7 AMENITY IN THE NATURE OF FREE OR SUBSIDIZED TRANSPO RT OR ANY SUCH ALLOWANCE PROVIDED BY THE EMPLOYER TO HIS EMPLOYEES FOR JOURN EYS BY THE EMPLOYEES FROM THEIR RESIDENCE TO THE PLACE OF WORK OR SUCH P LACE OF WORK TO THE PLACE OF RESIDENCE]. 9.3 AS SEEN FROM THE ABOVE PROVISIONS, ANY FORM OF CONVEYANCE PROVIDED BY THE EMPLOYER TO THE EMPLOYEES WOULD BE FRINGE BENEFITS, TAXABLE IN THE HANDS OF THE EMPLOYER. DURING THE P REVIOUS YEAR RELEVANT TO ASST. YEAR 2006-07, THE CLAUSE (F) INCLUDED THE WOR DS CONVEYANCE, TOUR AND TRAVEL (INCLUDING FOREIGN TRAVEL), WHILE THE W ORDS TOUR AND TRAVEL (INCLUDING FOREIGN TRAVEL) WERE OMITTED BY FINANCE ACT OF 2006 W.E.F. 1/4/2007 AND HAS BEEN INSERTED INTO CLAUSE (Q) W.E. F. 1/4/2007; THEREFORE, IN THE RELEVANT ASST. YEAR, THE WORDS CONVEYANCE, TOUR AND TRAVEL (INCLUDING FOREIGN TRAVEL) HAVE TO BE READ TOGETHER. TO UNDE RSTAND THE MEANING OF THESE WORDS AND WHETHER THEY INCLUDED ANY TYPE OF E XPENDITURE BY THE EMPLOYER ON CONVEYANCE, TOUR AND TRAVELS ETC. UNDER THE PROVISION OF FRINGE BENEFITS, IT IS NECESSARY TO GO THROUGH THE EXPLANA TORY MEMORANDUM OF THE FINANCE BILL OF 2005, WHICH HAS BEEN REPRODUCED IN 273 ITR (ST.) 196 & 197, WHEREIN IT IS EXPLAINED AS UNDER:- THAT THE TAXATION OF PERQUISITES OR FRINGE BENEFIT S PROVIDED BY AN EMPLOYER TO HIS EMPLOYEES, IN ADDITI ON TO THE CASH SALARY OR WAGES PAID, IS SUBJECT TO VAR YING TREATMENT IN DIFFERENT COUNTRIES AND THESE BENEFITS ARE EITHER TAXED IN THE HANDS OF THE EMPLOYEES THEMSELV ES OR THE VALUE OF SUCH BENEFITS IS SUBJECT TO A FRIN GE BENEFIT TAX IN THE HANDS OF THE EMPLOYER. THE RAT IONALE FOR LEVYING A FRINGE BENEFIT TAX ON THE EMPLOYER LI ES IN THE INHERENT DIFFICULTY IN ISOLATING THE PERSONAL ELEMENT WHERE THERE IS COLLECTIVE ENJOYMENT OF SUC H BENEFITS AND ATTRIBUTING THE SAME DIRECTLY TO THE PAGE 8 OF 9 ITA NO.1178/BANG/2009 8 EMPLOYEE. THIS IS SO ESPECIALLY WHERE THE EXPENDIT URE INCURRED BY THE EMPLOYER IS OSTENSIBLY FOR PURPOSES OF THE BUSINESS BUT INCLUDES, IN PARTIAL MEASURE, A BE NEFIT OF A PERSONAL NATURE. MOREOVER, IN CASES WHERE THE EMPLOYER DIRECTLY REIMBURSES THE EMPLOYEE FOR EXPEN SES INCURRED, IT BECOMES DIFFICULT TO EFFECTIVELY CAPTU RE THE TRUE EXTENT OF THE PERQUISITE PROVIDED BECAUSE OF T HE PROBLEM OF CASH FLOW IN THE HANDS OF THE EMPLOYER. 9.4 IN ORDER TO UNDERSTAND THE ABOVE EXPLANATORY M EMORANDUM ON FRINGE BENEFIT TAX AND ALSO THE INTENTION OF THE LE GISLATURE, IT IS ALSO NECESSARY TO LOOK INTO THE FINANCE MINISTERS SPEEC H, WHICH IS REPRODUCED IN 276 ITR PAGE 3 (STATUTES), IS REPRODUCED AS UNDE R:- 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. NEITH ER THE EMPLOYER NOR THE EMPLOYEE PAYS ANY TAX ON THESE BENEFITS WHICH ARE CERTAINLY OF CONSIDERABLE MATERI AL 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. HOWEVER, TRANSPORT SERVICES FOR WORKERS AND STAFF AND CANTEE N SERVICES IN AN OFFICE OR FACTORY WILL BE OUTSIDE TH E TAX NET. THE TAX IS NOT A NEW TAX, ALTHOUGH I AM OBLIG ED TO CALL IT BY A NEW NAME, NAMELY, FRINGE BENEFIT TAX. THE RATE WILL BE 30 PER CENT ON AN APPROXIMATELY DEFINE D BASE (2005) 273 ITR (ST.) 56). 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. I N THE CASE BEFORE US, ITEMS PAGE 9 OF 9 ITA NO.1178/BANG/2009 9 1, 2 AND 3 CONSIDERED BY THE CIT(A) ARE FOR THE PUR POSES 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 TH E EMPLOYEES FOR ATTENDING THE MEETINGS, INSPECTIONS AND OTHER OFFIC IAL FUNCTIONS. FROM THE READING OF THE PROVISIONS OF SECTION 115WB(2), IT I S CLEAR THAT THE BENEFITS GIVEN TO AN EMPLOYEE DIRECTLY OR INDIRECTLY ONLY WO ULD 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 115W B(2). THEREFORE, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF T HE CIT(A). 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED ON 19 TH .. DAY OF MAY, 2010 AT BANGALORE SD/- SD/- (A MOHAN ALANKAMONY) (P MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL ME MBER COPY TO : 1) THE ASSESSEE (2) THE REVENUE (3) TH E CIT(A) CONCERNED. (4) THE CIT CONCERNED. (5) THE DR (6) GUARD FILE. (7) GUARD FILE, NEW DELHI. MSP/17.5 BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.