Employer has to rely on employees, if he wants to employ people and run the business - this is equally applicable for TDS matters- employer can rely on declarations of employees about reimbursements.

[C.A. DEV KUMAR KOTHARI]

Judgment of the Supreme court:

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 993 OF 2005 with Civil Appeal No. 992 OF 2005

Decided On: 21.01.2009

Commissioner of Income Tax & Anr

Vs.

M/s. Larsen & Toubro Ltd.

Hon'ble Judges: S.H. Kapadia and Aftab Alam, JJ.

ORDER

1. A short question which arises for determination in these Civil Appeal (s) is - whether the assessee(s) was under statutory obligation under Income Tax Act, 1961, and/or the Rules to collect evidence to show that its employee(s) had actually utilized the amount(s) paid towards Leave Travel Concession(s)/Conveyance Allowance?

2. It may be noted that the beneficiary of exemption under Section 10(5) is an individual employee. There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the Declaration to be submitted by an employee(s).

3. For the above reasons there is no merit in the Civil Appeals and the same are dismissed with no order as to costs.

In the above judgment the Supreme Court found no merit in civil appeal filed by the Commissioner of Income Tax and dismissed the same. As a result, employer is not required to collect evidence of payments made by employees while claiming LTC/ LTA, and employer can rely on declaration of employee. It is unfortunate that the income-tax department is taking un-business like attitude and demanding tax from employers and also disallowing impugned expenditure under section 40 for alleged  no deduction or short deduction of TDS after several years from the point of time of TDS. The best course, if at all required is to assessee employees, if the department has reason to believe that the employee had made extra bucks from reimbursement by claiming larger amount than actual expenditure. This will save employers also, because if the revenue ask them to furnish details and supporting, they will not have a bad feeling against employer. This will put a check, on dishonesty, if any , adopted by employees while claiming reimbursements.

In this write-up author discusses ground realities of business.

Human Resources:

Human Resources in nature of loyal and competent employees are very important assets. To maintain such resources, the employer has to respect honesty and integrity of employees. A simple question is, when an employer rely on employees for larger stakes while the employee work for them, how employer can doubt about claims of petty sums which are paid to employee as allowance or re-imbursement. In such cases even self made vouchers or claims of employees have to be honored by the employer. As a matter of policy to maintain reasonable record, with internal check and control and to avoid unnecessary paper work, declarations from employees are considered reasonable supporting documents, as a sound business practice. This is also required to avoid wastage of productive time and to maintain good relations with employees, particularly employees who hold responsible and higher positions. Many times it may not be possible for the accounts department to ask senior officers to furnish minute details of expenses and to furnish documentary evidences. In such cases if the employer acts in a bonafide and reasonable manner, he should not be blamed for short TDS. If the income tax department considers that the employee has spent lesser amount and saved out of re-imbursements or allowances and should pay tax, then the income tax department should preferably ask the employee to furnish details and evidence. However, practicality requires that if there is substantial voluntary compliance and tax payment, the income tax authorities should not indulge in practice to harass assesses, tax deductors and others presuming that there is some tax evasion.

The revenue officials must also take an overall practical view and must appreciate about substantial tax paid and should not pass nasty remarks and statements in orders damaging goodwill of assessee.

Recently the Supreme court has held that an employer can rely on declaration of employees and need not to ask for supporting documents about allowance (or re-imbursement) made to him. The Rules also does not require such documentation. Therefore, the employer cannot be blamed for short deduction of tax, in case employee has made an excessive claim and saved some amount which can be considered his income.  

Practical aspects:

For the purpose of TDS from salaries paid / payable to employees, on many issues the employer can and has to rely on declarations filed by the employee. The employer has to respect honesty and integrity of employees. General presumption is that the employee will act honestly and in interest of employer. Because, if the employer has no such feelings he cannot employ any person if he has a presumption or prejudice that the employee is dishonest.

In case of employees who hold responsible positions (which every one holds, even a peon is a responsible and respectable for his position and work) and where rate of attrition is quite high, the employer cannot afford to ask senior or even junior  employees to furnish evidences of petty expenses etc, because this will cause ill-feeling and situation of doubts, will  impair relations and working environment. In practice we find that the employer (rather say the accounts department on behalf of the employer) many times is not in a position to ask the employee to provide minute details and evidence for each and everything.  He had to rely on declarations provided by employees. In practice we find that even in case of an efficient peon, the cashier cannot make much enquiry about claim of his petty expenses, whereas an inefficient peon can be confronted by the cashier even for difference of expenses for bus fair in a general bus or a mini bus. These are real practical aspects in connection with engagement of people and to get work done from them. In such a situation, the cashier or accountant has to generally rely on declarations made by employees.

Typical declarations:

Following are typical examples of declarations obtained from employees to ascertain amount of TDS: 

(a) House rent paid by employee to seek relief in support of house rent paid or house rent allowance. Sometimes, the employee also provided some receipts from the landlord and the employer reasonably rely on the same and the employer is not required to investigate the same. Suppose, the rent receipt is inflated or is not genuine, the employer is not supposed to investigate the same unless he has serious doubts.

(b) Investments made or likely to be made during the year.

(c) Allowable expenditure to employee for medical expenses, conveyance expenses, traveling expenses, entertainment expenses, expenses on papers and magazines, and other business related expenses etc.

(d) Leave travels and expenses for the same.

In such cases the employer rely on declaration filed by the employee and the accounts department usually checks that the expenses claimed are as per rules of the employer and are within the limits prescribed for such expenses and for the particular class of employee.  If an excess claim is found that is denied and the reimbursement are made as per rule based on declaration. In case any amount is found taxable, then such amount is included in taxable income.

Goodwill and bonafide:

As per earlier discussion, the accounts department has some limitations to ask minute details and evidence from senior personnel and therefore, the declaration by the officers is accepted to make reimbursement within the prescribed limits.  If an employee claims higher amount than what he has actually spent, the employer can not do any thing because as per terms he makes payment within the prescribed limit on the basis of declaration of employee in good faith and without any doubt. Suppose an employee has availed second class journey in a train but has claimed reimbursement for first class AC fare as per permissible rule and the employer relies on his declaration and makes reimbursement, in such case the employer acts in bona fide manner and rely on employee and the employee also makes claim as permissible to him.  In such a case if at all, it is the duty of employee to include the difference between amount received as reimbursement and actual expenses incurred by him as his income from salary / other sources in his return and the employer should not be called upon to pay tax on such amount.

Ground realities:

Just like in case of family relations, good faith and mutual trust is also necessary between employer and employees. Therefore, practical approach is required to maintain such faith and goodwill. Therefore, upper limit up to which reimbursement are allowed to different type of employees are fixed. The employer also expect that the employees shall incur expenses as per permissible limit and claim such expenses. Therefore, so far an internal check and control is concerned the employer has laid down suitable policies and procedure to ensure proper claims. The claims are examined by accounts department and they follow the guidelines and allow reimbursement. The employer can not adopt an investigative practice to examine each and every claim with the suspicion in his mind.

Employer has to carry business and not to act as an investigator:

Good faith and reliance on employees is placed for major business decisions, spending therefore how it can be ignored for petty reimbursements. An executive who is authorized to deal on behalf of employer for crores of rupees or to sign cheque for crores of rupees can not be doubted about petty reimbursement claims made by him. If the accounts department take an investigative approach it is likely that the concerned accounts officer will lose his job or in case he has powerful lobby of trade union, the senior executive may have to leave the job, if he is doubted by accounts department of employer. Suppose the employer extend heavy support to the accounts officer and starts interrogation / investigation from the executive, it is likely that the executive may leave the job. Even if he continue in the employment he will feel demoralized. The employer cannot afford loss of competent persons on such petty issues. Therefore, in such circumstances as per general practices and customs in trade and industry and the limitations in the organization structure the declaration by executives is considered sufficient.

Delhi high court on issue of TDS:

In Commissioner of Income-tax v. HCL Info System Ltd. [2008 -TMI - 9519 - DELHI High Court] the matter for deduction of tax at source from salary  vis a vis  exemption for reimbursement of leave travel allowance and conveyance allowance was under consideration. It is very practical that provisions for deduction of tax at source are to be read with exemption provisions. This means that if employee is eligible for some exemption, it is to be considered. The assessee estimated income of employee for deduction of tax at source based on bona fide assumption that employee's declaration of leave travel and conveyance expenses was in accordance with company policy and assessee relied on such declaration while computing amount of tax deductible. In a survey the Assessing Officer found that expenses on account of leave travel concession and traveling expenses were reimbursed on the basis of declaration of employees and there were no supporting documents. The Assessing Office doubted declaration and asked the assessee for further amount of TDS alleged to be short deducted due to exemption considered by employer merely based on declaration of employee. However the Assessing officer did not ask for supporting documents to ascertain veracity of employees' claim nor he establish that declarations were for excessive expenses. The Commissioner (Appeals) and Tribunal held that estimation by assessee for TDS purpose was bona fide. On appeal by revenue the high court held that intention of assessee in arriving at the estimated income of employee for purpose of deduction of tax at source is a question of fact and any  substantial question of law  does not arise. The high court rejected the appeal on due consideration of provisions of the Income-tax Act, 1961, including inter alia sections 10(5), 192, 201(1) and 260A. The honorable high courts observations and decision are summarized as follows:

(a) if the Assessing Officer was not satisfied with the declarations furnished by the employees, he could have asked the assessee  to produce the supporting documents before him to establish actual expenditure claimed by employees.

(b) Having not asked so the opinion expressed by the Officer was not substantiated by any material.

(c) the provisions of section 10(5) granted an exemption in respect of travel concession granted by the employer. The provisions of section 192 of the Act were to be read in conjunction with the provisions of section 10(5) of the Act for proper appreciation and application for computing total income liable to tax and consequential liability to deduct tax at source.

(d) the Commissioner (Appeals) and the Tribunal had accepted the bona fides of the assessee.  This was a question of fact.

(e) the estimated income reflected by the employer thus was based on bona fide estimation and on this ground alone more particularly in the absence of any specific direction of the Assessing Officer there was no fault in the concurrent findings recorded by the Commissioner (Appeals) and the Income-Tax Appellate Tribunal.

(e) In the facts and circumstances of the case, no question of law arose for consideration of the court.

(f) The following cases were referred to :

CIT v. Nestle India Ltd. 2000 -TMI - 15273 - (DELHI High Court).

CIT v. Oil and Natural Gas Corporation Ltd. [2008 -TMI - 12852 - GUJARAT High Court]

CIT v. S. R. Fragnances Ltd. [2008 -TMI - 10970 - DELHI High Court]

ITO v. Gujarat Narmada Valley Fertilizers Co. Ltd. 1999 -TMI - 14633 - (GUJARAT High Court)

Rajagopal (P.V.) v. Union of India 1998 -TMI - 16905 - (ANDHRA PRADESH High Court).

Technical aspects and reality:

In the above case of HCL there were  three very important technical aspects for rejection of the appeal namely: 

(a) A.O. did not ask to produce evidence of actual expenditure,

(b) Concurrent finding as to bonafide of assessee by the two appellate authorities and

(c) That there was no substantial question of law.

However, even if we consider a situation that the A.O. asked for actual expenditure and the assessee could not furnish the same, the A.O. cannot ask the employer for payment of short tax deduction of tax. Because, as discussed in earlier paragraph, the employer has to rely on declarations furnished by employees. In case employee has earned any taxable income from such reimbursement, then he can be assessed for the same.

The Revenue's Option - to tax in hands of employee:

It is well known that TDS is a mode of easy collection of tax, Tax deducted is tax paid on account of person from whose income tax has been deducted. The ultimate liability for payment of tax remains on the person who earned income. The revenue is free to assess the recipient of income and demand tax.

 In case an employee has claimed more than what he incurred then it is his duty to consider the surplus money generated by excessive claims as his income and to disclose the same. If it is doubted that some executives of big company have not disclosed such surplus as their income the Income Tax Department can enquire into and treat such surplus as income of employees. It will be wrong and unjust on the part of the Income-tax Department to ask the employee to make deduction of tax on such surplus of employees.   

Recent decision of ITAT while considering  reimbursement of expenses claimed by employee as income in hands of employee:

As per a report in the Economic Times of May 3, 2006 ( page 9) the Mumbai Tribunal has in case of an employee of SCI namely Madanlal Mohan lal Narang, held that if the expenditure claimed by the employee is reasonable considering his job, salary and nature of expenses, the income tax department will have to consider the word of employee that he has actually spent the expenses and even if some bills or receipts in support of such expenses are not produced, the amount cannot be added in the income of employee. The department cannot insist on details of expenses on food, laundry and others unless it is very high. A practical approach has been considered that it is not always possible for busy persons to keep and preserve all supporting documents for petty expenses incurred over a period of time.

The Tribunal relied and quoted from a CBDT circular dated 21.04.1955 in which it was clarified that "Special allowances or benefit being reasonable and not disproportionately high. No details of expenses actually incurred need be asked for the purpose of granting exemption under section 4 (3) of the 1922 Act."  

Judgment of the Supreme Court:

The revenue preferred appeal before the Supreme Court on the issue of TDS from salaries in case of  Larsen & Toubro Ltd and ITI Ltd. [2009 -TMI - 32229 - SUPREME COURT] being civil Appeal No. 993 OF 2005 with Civil Appeal No. 992 OF 2005. The Supreme court decided On 21.01.2009 the issue in favor of employers. The Hon'ble Judges  S.H. Kapadia and Aftab Alam, JJ. Passed the following order:

"1. A short question which arises for determination in these Civil Appeal (s) is - whether the assessee(s) was under statutory obligation under Income Tax Act, 1961, and/or the Rules to collect evidence to show that its employee(s) had actually utilized the amount(s) paid towards Leave Travel Concession(s)/Conveyance Allowance?

2. It may be noted that the beneficiary of exemption under Section 10(5) is an individual employee. There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the Declaration to be submitted by an employee(s).

3. For the above reasons there is no merit in the Civil Appeals and the same are dismissed with no order as to costs."

Analysis and comments:

The Supreme Court has emphasized that there is no circular or Rule requiring the employer under section 192 to collect evidence to show that employee has actually incurred expenses. Therefore, the appeal of the revenue was dismissed.

Whether conditions can be imposed:

In earlier paragraph we found that in one case The Tribunal relied and quoted from a CBDT circular dated 21.04.1955 in which it was clarified that "Special allowances or benefit being reasonable and not disproportionately high. No details of expenses actually incurred need be asked for the purpose of granting exemption under section 4 (3) of the 1922 Act."  

Therefore, we find that about fifty four years ago the Board has taken a practical approach on this aspect and instructed that no details of expenses actually incurred need be asked for the purpose of granting exemption. However, it appears that the revenue authorities have ignored this circular, though it was binding and carried the matter upto the Supreme Court.

What we can hope:

The Supreme Court has allowed claim of assessee and dismissed appeal of revenue on very technical approach that in absence of circular or rule the employer is not required to ask employees to furnish details or evidences etc. The Circular of 1955 was not considered by the Supreme court.

In view of stand taken by the Board in the year 1955, let us hope that the Board will not change its stand and decisions and direct the authorities to follow the instructions of 1955, in future. Therefore, in all fairness the Board should not issue new circular or frame new rules to ask employer to obtain evidences of expenses from employees.

Tendency of revenue authorities and conclusion:

It is clear from the above referred judgments that a practical approach is desirable considering ground realities. It is true that one should make correct declaration of income. In some cases true declarations may not be made but there is not much impact on revenue. As a matter of policy the government has also placed heavy reliance on voluntary compliance, that is why a major part of income tax returns are accepted and this has increased compliance and revenue collection.

Therefore, if a reasonable estimate of income is made and there is voluntary compliance, the revenue authorities should not stretch investigation beyond reasonable limits.

Unfortunately, in our country we find that the people who pay substantial taxes are chased to pay more taxes, appreciation and credit is not bestowed for hefty amount of taxes paid but tax payer is charged for defrauding revenue for certain small additions and disallowances made by the A.O. One can find many assessment orders in which the assessee has voluntarily paid crores of rupees as tax, but the assessing officers pass remarks for some petty items of expenses disallowed by him or some petty additions of income made by him and makes statements like " …. to defraud the revenue" , has shown bogus expenses/ purchase … etc. The author (or for that matter any practioners) can  recall many incidents in which assesses had paid substantial amount as tax, voluntarily still  the A.O. demanded few lakhs more, and for recovery of those petty sums ( even during pendency of appeals) the A.O. calls the managing Director of company for personal appearance and also attaches bank accounts. For small additions and disallowances made penalty proceedings are initiated and nasty remarks are made in assessment orders and penalty orders showing very bad and ill treatment given to assessee.

For example in case of minor children who filed returns of income and paid taxes the A.O. made additions in income of minor grand child for gifts made  long ago by grand parents, who could not be produced due to death in the meanwhile. And the A.O. also makes statement like to defraud revenue gifts have been shown as received from …… while doing so learned A.O. do not even consider status of the child assessee, his parents, grand parents etc. This shows very high handed approach of the authorities who assume that gift from grand parent is shown to introduce unexplained income of minor child. While doing so they many times disregard that the assessee has volunteered and paid substantial tax. Similar is situation in case of scrutiny of  many TDS returns where no appreciation is made for substantial amounts paid but harassment is made for some small likely short deductions. This practice by revenue officials is not conducive for healthy relations. In such circumstances it would not be wrong if some one say "CHORO KO SARE NAJAR AATE HAIN CHOR".