GRINDWELL NORTON LTD, MUMBAI V. ADDL CIT 1(1), MUMBAI

ITA 6551/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6618 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 10-04-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 28-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G C DAXINI
• Section: 15

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL G B ENCH, MUMBAI , , ! , ' #$ % % % % & '( #$ ) BEFORE SHRI N.K. BILLAIYA, AM AND SHRI AMIT SHUK LA, JM ./ I.T.A. NO.6551/MUM/2011 ( * * * * / ASSESSMENT YEAR :2007-08 M/S. GRINDWELL NORTON LTD., C/O KALYANIWALLA & MISTRY, ARMY & NAVY BLDG., 3 RD FLOOR, 148, MAHATMA GANDHI ROAD, FORT, MUMBAI-400 001 / VS. THE ACIT-1(1), AAYAKAR BHAVAN, MUMBAI-400 020 $+ ' ./ , ./ PAN/GIR NO. : AAACG 8725B ( +- / APPELLANT ) .. ( ./+- / RESPONDENT ) +- 0 / APPELLANT BY: SHRI AKRAM KHAN ./+- 1 0 / RESPONDENT BY: SHRI G.C. DAXINI 1 &2' / DATE OF HEARING : 10.04.2014 34* 1 &2' / DATE OF PRONOUNCEMENT :23.04.2014 #' / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST T HE ORDER OF THE LD. CIT(A)-1, MUMBAI DT.15.7.2011 PERTAINING TO A. Y. 2007-08. 2. THE SOLE GRIEVANCE OF THE ASSESSEE IS THAT THE L D. CIT(A) ERRED IN HOLDING THAT SALARY PAID TO EMPLOYEES IN THE FORM O F MEDICAL ITA NO. 6551/M/2011 2 REIMBURSEMENT AGGREGATING TO RS. 50,52,962/- WAS L IABLE TO THE LEVY OF FRINGE BENEFIT TAX. 3. DURING THE COURSE OF THE FRINGE BENEFIT TAX ASSE SSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS NOT OFFERED MEDICAL REIMBURSEMENT/ALLOWANCE TO THE EXTE NT OF RS. 15,000/- PER EMPLOYEE EXEMPT IN THE HANDS OF THE EMPLOYEES F ROM TAXATION. WHEN QUESTIONED REGARDING THE SAME, THE ASSESSEE SUBMITT ED AS UNDER: WE HAVE NOT CONSIDERED 20% OF EXEMPT MEDICAL ALLOW ANCE AMOUNTING TO RS. 50,52,962/- FOR THE PAYMENT OF FRI NGE BENEFIT TAX (FBT). FBT HAS BEEN INTRODUCED IN ORDE R TO TAX PERQUISITES, WHICH ESCAPED TAXATION EARLIER, AND NO T TO TAX SPECIFIC ALLOWANCES AND PERQUISITES, WHICH WERE SPE CIFICALLY EXEMPT FROM TAXATION IN THE HANDS OF THE EMPLOYEES. IN OTHER WORDS, FBT HAS NOT BEEN INTRODUCED IN ORDER TO TAX THOSE ITEMS WHICH WERE SPECIFICALLY EXEMPT UNDER OTHER PR OVISIONS OF THE ACT. MEDICAL REIMBURSEMENT UPTO RS. 15,000/ - ARE SPECIFICALLY EXEMPT IN THE HANDS OF THE EMPLOYEE BY VIRTUE OF PROVISO (V) BELOW SECTION 17(2). HENCE, THE SAME C ANNOT BE TAXED IN THE HANDS OF THE EMPLOYER AS THE PURPOSE O F FBT WAS NEVER TO TAX SUCH EXEMPT PERQUISITES. 4. THE SUBMISSION OF THE ASSESSEE DID NOT FIND FAVO UR WITH THE AO WHO , RELYING UPON THE CBDT CIRCULAR NO. 8/2005 DT. 29.8.2005 , WAS OF THE OPINION THAT 20% OF THE AMOUNT OF RS. 50,52,962 /- DESERVES TO BE ADDED TO THE VALUE OF FRINGE BENEFIT. HE ACCORDING LY ADDED RS. 10,10,593/- AS FRINGE BENEFIT RELATING TO MEDICAL A LLOWANCE. 5. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) BUT WITHOUT ANY SUCCESS. THE LD. CIT(A) OBSERVED THAT SINCE TH E MEDICAL REIMBURSEMENT HAS NOT BEEN TREATED AS SALARY IN TH E HANDS OF THE EMPLOYEES, THE SAME IS TAXABLE AS FBT. DRAWING SUP PORT FROM THE ITA NO. 6551/M/2011 3 CIRCULAR OF THE CBDT (SUPRA), THE LD. CIT(A) CONFIR MED THE ADDITIONS MADE BY THE AO. 6. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. T HE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN SUBMITTED BEF ORE THE LOWER AUTHORITIES. IT IS THE SAY OF THE LD. COUNSEL THAT SEC. 115WB(3) STATES THAT SEC. 115WB(1)(A) DOES NOT INCLUDE SUCH PERQUIS ITES IN RESPECT OF WHICH TAX IS PAID OR PAYABLE BY THE EMPLOYEES. THE LD. COUNSEL FURTHER SUBMITTED THAT MEDICAL REIMBURSEMENT IS TAXABLE BUT FOR THE EXEMPTION PROVIDED IN PROVISO-(V) TO SEC. 17(2) OF THE ACT. THEREFORE, SPECIFIC ITEM OF PERQUISITE WHICH IS NORMALLY TAXABLE IN THE HAND S OF THE INDIVIDUAL EMPLOYEE CANNOT SUBJECT TO FBT ONLY FOR THE REASON THAT THE SAME IS EXEMPT IN THE HANDS OF THE EMPLOYEE. TO SUBSTANTIA TE, THE LD. COUNSEL RELIED UPON THE DECISION OF THE TRIBUNAL, MUMBAI BE NCH IN THE CASE OF GODREJ PROPERTIES LTD VS ACIT 135 TTJ 426, BANGALO RE BENCH , IN THE CASE OF VIJAYA BANK IN ITA NO. 1066/BANG/2010. TH E LD. COUNSEL ALSO RELIED UPON THE SPEECH OF THE FINANCE MINISTER MADE WHILE PRESENTING THE FINANCE BILL 2005. 7. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. IT IS THE S AY OF THE LD. DR THAT SINCE THERE ARE VARIED DECISIONS OF THE TRIBUNAL ON THIS ISSUE, THE MATTER MAY BE REFERRED TO A SPECIAL BENCH. 8. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOWE R AUTHORITIES AND THE RELEVANT MATERIAL EVIDENCE BROUGHT ON RECORD AN D THE JUDICIAL DECISIONS RELIED UPON BY BOTH SIDES. THE OBJECTIVE BEHIND THE INTRODUCTION OF THE LEVY OF FRINGE BENEFIT TAX ON T HE VALUE OF CERTAIN ITA NO. 6551/M/2011 4 FRINGE BENEFIT WAS EXPLAINED BY THE CBDT IN ITS CIR CULAR NO. 8/2005 DT. 29.8.2005 WHICH READ AS UNDER: 2.1 THE TAXATION OF PERQUISITES OR FRINGE BENEFITS IS J USTIFIED BOTH ON GROUNDS OF EQUITY AND ECONOMIC EFFICIENCY. WHEN FRI NGE BENEFITS ARE UNDER-TAXED, IT VIOLATES BOTH HORIZONTAL AND VE RTICAL EQUITY. A TAXPAYER RECEIVING HIS ENTIRE INCOME IN CASH BEARS A HIGHER TAX BURDEN IN COMPARISON TO ANOTHER TAXPAYER WHO RECEIV ES HIS INCOME PARTLY IN CASH AND PARTLY IN KIND, THEREBY VIOLATIN G HORIZONTAL EQUITY. FURTHER, FRINGE BENEFITS ARE GENERALLY PROV IDED TO SENIOR EXECUTIVES IN THE ORGANIZATION. THEREFORE, UNDER-TA XATION OF FRINGE BENEFITS ALSO VIOLATES VERTICAL EQUITY. IT ALSO DIS CRIMINATES BETWEEN COMPANIES WHICH CAN PROVIDE FRINGE BENEFITS AND THO SE WHICH CANNOT THEREBY ADVERSELY AFFECTING MARKET STRUCTURE . HOWEVER, THE TAXATION OF FRINGE BENEFITS RAISES SOME PROBLEMS PR IMARILY BECAUSE- (A) ALL BENEFITS CANNOT BE INDIVIDUALLY ATTRIBUTED TO EMPLOYEES, PARTICULARLY IN CASES WHERE THE BENEFIT IS COLLECTI VELY ENJOYED; (B) OF THE PRESENT WIDESPREAD PRACTICE OF PROVIDING PERQUISITES, WHEREIN MANY PERQUISITES ARE DISGUISED AS REIMBURSE MENTS OR OTHER MISCELLANEOUS EXPENSES SO AS TO ENABLE THE EM PLOYEES TO ESCAPE/REDUCE THEIR TAX LIABILITY; AND (C) OF THE DIFFICULTY IN THE VALUATION OF THE BENEF ITS. 2.2 IN INDIA, PRIOR TO ASSESSMENT YEAR 1998-99, SOME PERQUISITES/FRINGE BENEFITS WERE INCLUDED IN SALARY IN TERMS OF SECTION 17 AND ACCORDINGLY TAXED UNDER SECTION 15 O F THE INCOME- TAX ACT IN THE HANDS OF THE EMPLOYEE AND A LARGE NU MBER OF FRINGE BENEFITS WERE TAXED BY THE EMPLOYER-BASED DISALLOWA NCE METHOD WHERE THE QUANTUM OF THE DISALLOWANCE WAS ESTIMATED ON A PRESUMPTIVE BASIS. IN PRACTICE, TAXATION OF FRINGE BENEFITS BY THE EMP LOYER-BASED DISALLOWANCE METHOD RESULTED IN LARGE-SCALE LITIGAT ION ON ACCOUNT OF AMBIGUITY IN DEFINING THE TAX BASE. THEREFORE, T HE TAXATION OF FRINGE BENEFITS BY THE EMPLOYER-BASED DISALLOWANCE METHOD WAS WITHDRAWN BY THE FINANCE ACT, 1997. HOWEVER, THE WITHDRAWAL OF THE PROVISIONS RELATING TO TAXATION OF FRINGE BENEFITS BY THE EMPLOYER-BASED DISALLOWANCE METHOD RESULTED IN SIGNIFICANT EROSION OF THE TAX BASE. TH E FINANCE ACT, ITA NO. 6551/M/2011 5 2005 HAS INTRODUCED A NEW LEVY, NAMELY, THE FBT AS A SURROGATE TAX ON EMPLOYER, WITH THE OBJECTIVE OF RESOLVING TH E PROBLEMS ENUMERATED IN PARA 2.1 ABOVE, EXPANDING THE TAX BAS E AND MAINTAINING EQUITY BETWEEN EMPLOYERS. 9. A PERUSAL OF THE OBJECTIVES CLEARLY SUGGESTS THA T THERE ARE CERTAIN BENEFITS WHICH CANNOT BE INDIVIDUALLY ATTRIBUTED TO EMPLOYEES PARTICULARLY WHEN SUCH BENEFITS ARE ENJOYED COLLECTIVELY. SECON DLY, MANY PERQUISITES ARE DISGUISED AS REIMBURSEMENT OR OTHER MISCELLANEO US EXPENSES SO AS TO ENABLE THE EMPLOYEES TO ESCAPE OR REDUCE THE TAX LI ABILITY. THE HONBLE FINANCE MINISTER IN ITS BUDGET SPEECH AT THE TIME O F INTRODUCTION OF FBT PROVISION HAS STATED THAT PERQUISITES/BENEFITS WHIC H ARE FULLY/DIRECTLY ATTRIBUTABLE TO THE EMPLOYEES WOULD CONTINUE TO BE TAXED UNDER THE EXISTING PROVISIONS OF SEC. 17(2) OF THE ACT. HOWEV ER, IN CASES WHERE THE BENEFITS ARE ENJOYED COLLECTIVELY BY THE EMPLOYEES AND CANNOT BE ATTRIBUTED TO AN INDIVIDUAL EMPLOYEE, THEY SHALL BE TAXED IN THE HANDS OF THE EMPLOYER. 9.1. IT IS NOT IN DISPUTE THAT THE MEDICAL EXPENSES ARE DIRECTLY ATTRIBUTABLE TO EACH EMPLOYEE DISTINCTLY AND IT IS NOT IN THE NATURE OF COLLECTIVE BENEFIT ENJOYED BY THE EMPLOYEES. THE M EDICAL REIMBURSEMENT IS DEFINITELY A PERQUISITE AS PER SEC. 17(2) OF THE ACT , THOUGH A THRESHOLD LIMIT OF EXEMPTION IS PROVIDED UNDER CLAUSE (V) AT RS. 15,000/-, NEVERTHELESS MEDICAL REIMBURSEMENT EXPENDITURES ARE TAXABLE AS PERQUISITES. THE CIRCULAR NO. 8 ISSUED BY CBDT AP PEARS TO BE IN CONTRADICTION TO THE LEGISLATIVE INTENT ON THIS SP ECIFIC ISSUE. THE CO- ORDINATE BENCH OF THE TRIBUNAL, BANGALORE IN ITA NO . 1407/BANG/2008 IN THE CASE OF BOSCH LTD., HAS CONSIDERING A SIMILAR I SSUE, HAS HELD THAT SUCH PAYMENTS DO NOT ATTRACT FRINGE BENEFIT TAX IN THE L IGHT OF THE BUDGET SPEECH OF THE HONBLE FINANCE MINISTER ON THE FLOOR OF PARLIAMENT. A ITA NO. 6551/M/2011 6 SIMILAR VIEW WAS TAKEN BY THE CO ORDINATE BENCH, MU MBAI IN THE CASE OF GODREJ PROPERTIES 135 TTJ 426 WHEREIN THE TRIBUNAL HELD AS UNDER: IN THE CASE ON HAND, TAX IS PAYABLE ON MEDICAL ADV ANCE AND IN CERTAIN CASES TAX HAS BEEN PAID. ONLY WHERE BIL LS HAVE BEEN PRODUCED BY THE EMPLOYEE TO THE EMPLOYER IT WAS A C ASE OF REIMBURSEMENT AND TO THE EXTENT OF THE BENEFIT GIVE N IN SEC. 17(2) PROVISO (V) THE EMPLOYEE NEED NOT PAY TAX. THIS IS NOT A CASE WHERE THE ATTRIBUTION OF PERSONAL BENEFITS DIRECTLY TO AN EMPLOYEE POSES PROBLEM OR A CASE WHERE IT IS NOT FEASIBLE TO TAX T HE BENEFIT IN QUESTION IN THE HANDS OF THE EMPLOYEE. IT IS ONLY A CASE WHERE A BENEFIT ABOVE A CERTAIN SPECIFIED AMOUNT ONLY IS LI ABLE TO BE TAXED IN THE HANDS OF THE EMPLOYEE. SUCH CASE, IN OUR HU MBLE OPINION, DOES NOT CONSTITUTE FRINGE BENEFIT AS DEFINED IN S. 115WB OF THE ACT. THUS WE AGREE WITH THE SUBMISSIONS OF MRS. SONALEE GODBOLE AND ALLOW THIS APPEAL OF THE ASSESSEE. 10. CONSIDERING THE FACTS IN TOTALITY IN THE LIGHT OF THE LEGISLATIVE INTENT, IN OUR CONSIDERED VIEW, REIMBURSEMENT OF MEDICAL EX PENDITURE DOES NOT CONSTITUTE FRINGE BENEFIT AS DEFINED IN SEC. 115WB OF THE ACT. WE, ACCORDINGLY REVERSE THE FINDINGS OF THE LD. CIT(A) AND ALLOW THE APPEAL. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD APRIL, 2014 . #' 1 4* ' 5 6#7 23.4.2014 4 1 8 SD/- SD/- (AMIT SHUKLA ) (N.K. BILLAIYA) #$ /JUDICIAL MEMBER ' #$ / ACCOUNTANT MEMBER MUMBAI; 6# DATED 23.4.2014 . . ./ RJ , SR. PS ITA NO. 6551/M/2011 7 #' #' #' #' 1 11 1 .& .& .& .& 9*& 9*& 9*& 9*& / COPY OF THE ORDER FORWARDED TO : 1. +- / THE APPELLANT 2. ./+- / THE RESPONDENT. 3. : ( ) / THE CIT(A)- 4. : / CIT 5. ;8 .& , , / DR, ITAT, MUMBAI 6. 8< = / GUARD FILE. #' #' #' #' / BY ORDER, /& .& //TRUE COPY// > >> > / ? ? ? ? (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI