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TMI Blog2012 (6) TMI 484X X X X Extracts X X X X X X X X Extracts X X X X ..... Promotion Rs. 2,66,50,000. ii) Conveyance, tour and travel Rs. 29,08,593 iii) Gifts Rs. 31,79,519. According to the assessee, the above expenditure was neither incurred for the benefit of employees nor was it paid to them, the provisions of fringe benefit tax was not attracted once there is no employer -employee relationship. The auditors of the assessee-company had stated the following in Annexure II to Form No.3CD i.e. Statement of particulars required to be furnished under section 44AB of the Income Tax Act, 1961 (herein after referred as 'the Act') for the relevant period : " Notes : 1. The company contends that Fringe Benefit Tax is not applicable where there is no employee-employer relationship and accordingly following expenditures/payment have not been included above : Sl. No. Nature of expenditure Section under which chargeable in Fringe Benefit Tax Amount of expenditure incurred 1. Sales Promotion [115WB(2)(D)] 26,650,000 2. Conveyance, Tour and Travel [115WB(2)(F)] 2,908,593 3. Gifts [115WB(2)(O)] 3,179,517 32,738,110 2. The company contends that expenditures/payment aggregating to Rs. 23,775,428 incurred on souven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit of employees nor paid to employees are not liable to FBT. Explaining the scope of the deeming fiction under section 115WB(2), the assessee submitted that (a) the deeming fiction cannot be interpreted so as to cause injustice and (b) the principle of equity and justice should not be lost sight of in interpreting the deeming fiction. The assessee relied on the co-ordinate bench decision of this Tribunal in the case of Govardhan Associates (ITA No.1094/Bang/2009) dt.15.1.2010 in support of its contention. As regards the reliance placed by the Addl. CIT, LTU on CBDT Circular No.8 of 2005, the assessee submitted that they cannot override the provisions of law. 2.4 In respect of the proposal to treat expenditure incurred on Souvenirs to employees on the occasion of decennial celebration of the company as 'Gifts', the assessee submitted that these Souvenirs were intended to motivate its employees by providing a sense of belonging to the company resulting in better efficiency and productivity. It was submitted that these expenses were classified as 'employee welfare' expenses in the books of account and that they should therefore not be regarded as 'Gifts'. The assessee also furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciple is applicable to the present case and is binding on Revenue authorities. The assessee also submitted that, in any case, the matter is capable of two reasonable interpretations and hence the view favorable to the assessee is to be accepted. 2.7 The Addl. CIT, LTU, Bangalore passed the order under section 115WE(3) for Assessment Year 2008-09 on 27.8.2010 in which it was concluded that as per section 15WB(2) and CBDT Circular No.8 of 2005, FBT is leviable even though there is no employer-employee relationship. It was stated in the order that Circular NO.8 of 2005 clarifies various aspects of FBT and hence it cannot be ignored. The Addl. CIT, LTU relied on the decisions in the cases of K.P. Varghese Vs. ITO 131 ITR 37 (SC) and CIT Vs. B M Edward India Sea Foods 119 ITR 334 (Ker) in support of the proposition that CBDT Circulars are in the nature of contemporaneous exposition furnishing legitimate aid in the construction of the statute and courts are bound to take notice of and give due weight to the interpretations put upon such statute by those who are entrusted with the task of constructing, executing and applying it. The Addl. CIT, LTU also held that the decision of M/s. Gova ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was therefore submitted that the order passed by the Addl. CIT, LTU is bad in law and liable to be quashed. The assessee placed reliance on the decisions in the cases of Dr. Nalini Mahajan Vs. DIT (Inv) (2002) 257 ITR 123 (Del), Microfin Securities P. Ltd. Vs. Addl. CIT (2005) 94 TTJ 767 (Lucknow) and Bridal Apparels Ltd (2006) 104 TTJ 950 (Del) in support of the proposition that the order passed by the Addl. CIT, LTU is bad in law. 3.3 The learned CIT(A) disposed the appeal by order dt.30.11.2010. The learned CIT(A) did not accept the assessee's contention that the order passed by the Addl. CIT, LTU was bad in law holding that if the intention of legislature was to segregate 'Joint Commissioner' from 'Additional Commissioner', the reference to 'Additional Commissioner' in the definition of the term 'Joint Commissioner' should have been deleted with the introduction of the definition of the term 'Additional Commissioner'. The learned CIT(A) distinguished the decisions relied on by the assessee, and rather relied on the decision in the case of Shyam Sundar Behl Vs. Addl CIT reported in 99 TTJ 1147 in support of the conclusion that the powers and functions of the Joint Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax, LTU, Bangalore has erred in assessing expenses incurred under the head 'sales promotion', 'conveyance, tour and travel' and 'Gifts' to FBT and the learned CIT(A) -LTU has erred in confirming the same. 3.2 The lower income tax authorities have erred in : i) stating that employer-employee relationship is not a pre-requisite for levying FBT. ii) relying on a CBDT circular, which is not binding, in support of the impugned conclusion. iii) not appreciating that expenses bereft of employer-employee relationship are not liable for FBT. iv) not appreciating that the impugned expenses were not incurred in relation to employees or paid for / to employees. 3.3 The lower income tax authorities have erred in not appreciating that the jurisdictional ITAT has held that expenses not incurred in relation to employees or paid for / to employees are not chargeable to fringe benefit tax. 3.4 At any rate and without prejudice, the extent of addition is very very excessive. 3.5 On facts and in the circumstances of the case and law applicable, expenses incurred under the head 'sales promotion', 'conveyance, tour and travel' and 'Gifts' are not liable for fringe benefit tax. 4.1 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer to his employees by reason of their employment. Referring to the Finance Minister's speech in Lok Sabha on 2.5.2005 (page 7 of compilation of relevant decision / material) it was submitted that the intention was to tax that part which is clearly a perquisite or benefit but which is going untaxed both in the hands of the employer and the employee. Referring to the Finance Minister's speech in Rajya Sabha on 5.5.2005 (page 11 of compilation of relevant decisions / material), it was submitted that the legislature itself has excluded legitimate business expenditure which cannot be categorized as fringe benefits from the purview of FBT. The learned Authorised Representative drew our attention to the following extracts from the interview of the Finance Minister with Economic Times (pages 15 & 19 of compilation of relevant decisions / material) in support of the argument that expenditure not resulting in any benefit to employees are outside the scope of FBT. " Q. There is an uproar over the taxing of fringe benefits. A. The fringe benefit tax is based on the universal principle that you must tax CTC. A number of perquisites that are attributable to the employees are taxed in the han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deeming fiction could include the obvious, the uncertain and even the impossible. Nevertheless, equity and justice cannot be lost sight of as they have a crucial role to play in interpreting deeming provisions. In case of fiction of law, interpretation should be guided by law and equity. The deeming fiction should be interpreted in such a manner as would not work injustice to the party. The decision of CIT Vs. Bina Rai (58 ITR 100) (Guj) and Nathimal Gaya Lal (89 ITR 190) (All) were relied upon for the said proposition. (iv) It is a settled principle that fiction created for a particular purpose cannot be extended beyond the purpose of which it is intended. Legal fictions are created for definite purposes and are limited for the purposes for which they are created and should not be extended beyond the purpose for which it has been created. [See M.D. Jindal V. CIT (1987) 164 ITR 28 (Cal), Rajputana Trading Co. Ltd. V. CIT (1969) 72 ITR 286 (SC), CIT V. Bai Vina (1965) 58 ITR 100 (Guj), CIT V. Elphinstone Spinning and Weaving Mills Co. Ltd. (1960) 40 ITR 142 (SC), Bengal Immunity Co. Ltd. Vs. State of Bihar (1955) 6 STC 446 (SC) and CIT Vs. P.K. Badiani (1970)76 ITR 369 (Bom)]. (v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osch Ltd Vs. DCIT, LTU in ITA No.1407/Bang/2010 dt.7.10.2011 and Vijaya Bank Vs. JCIT, LTU in ITA No.1066/Bang/2010 Dt.26.8.2011 in support of the contention that FBT is not leviable in the absence of collective enjoyment of benefits by its employees. The decisions of the co-ordinate bench of this Tribunal in the cases of DCIT Vs. MESCON in ITA No.1178/Bang/2009 dt.19.5.2010 and M/s. Govardhan Associates in ITA No.1094/Bang/2009 dt.15.1.2010 was relied on in support of the proposition that payment to third parties were not liable for FBT. 7.5 The learned Authorised Representative relied on the Finance Minister's speech delivered in the Rajya Sabha on 5.5.2005 and submitted that once the Chartered Accountant certifies the particulars of fringe benefits, as has been done in the instant case, the Assessing Officer had no discretion but to accept the tax audit certificate and hence was wrong in making the adjustment he did. Lastly, the learned Authorised Representative submitted that when an issue is capable of two interpretations, the view favourable to the assessee ought to be adopted. 8. The learned Departmental Representative submitted that in view of the deemin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of the assessee is that expenditure which is neither paid to employees nor incurred for the benefit of employees is outside the scope of FBT. The Assessing Officer and the learned CIT(A) have given a concurrent finding that FBT provisions are attracted even if there is no employeremployee relationship. At pages 6 and 7 of the order of assessment the Assessing Officer has referred to the break up of the sales promotion expenses wherein one item is explained as expenditure towards employee referral scheme gift of Rs. 73,000 and has stated thereon as under : " However, as seen above the assessee has incurred Rs. 73,000 towards employee referral scheme gift, which contradicts the statement that there is no employeremployee relationship in incurring the above expenses." Thus the Assessing Officer, apart from holding that non-employee related expenditure is liable for FBT, had also held that the expenditure towards employee referral scheme has employer-employee relationship and is therefore liable for FBT. The learned CIT(A) has confirmed the views and stand taken by the Assessing Officer. During the hearing, we sought a clarification from the learned Authorised Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 115W to 115WL was inserted by the Finance Act, 2005 w.e.f. 1.4.2006. The relevant extract of the Finance Minister's speech while introducing FBT provisions is as under : " 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. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material 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." (emphasis supplied by us). 10.3.2 The relevant extracts from the Memorandum explaining FBT provisions is as under : " The rationale for bringing fringe benefit tax on the employer lies in the inherent difficulty in isolating the 'personal element' where there is collective enjoyment of such benefits and attributing the same directly to the employee. This is so especially where the expenditure incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduction of FBT provisions is to tax a benefit which is enjoyed collectively by the employees which was hitherto untaxed in the hands of the employees and in respect of which the employer was claiming deduction. If the benefit is attributable to employees individually or separately, the question of levying FBT does not arise. This is clear from the Finance Minister's speech and the Memorandum explaining the provisions of the Finance Bill. Likewise, in our opinion, an expenditure which does not result in any benefit to an employee would not be liable for FBT. FBT is leviable only in a case where expenditure is incurred by the employer ostensibly for the purpose of business but includes in partially a benefit of a personal nature which cannot be attributed or is difficult to attribute. The legislature itself has excluded legitimate business expenditure from the purview of FBT as seen from the Finance Minister's speech in the Rajya Sabha on 5.5.2005, the relevant extract of which is as under : " .... Even under the fringe benefit, as amended by the Lok Sabha, we have taken care to exclude what I realized would be legitimate business expenditure and perhaps not amenable to the categor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be idle to expect every statutory provision to be "drafted with divine prescience and perfect clarity". We can do no better than repeat the famous words of judge Learned Hand when he said : " it is true that the words used, even in their literal sense, are the primary and ordinary the most reliable source of interpreting the meaning of any writing; be it a statue, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to 'remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning." We must not adopt a strictly literal interpretation of s. 52, sub-s. (2), but we must construe its language having regard to the object and purpose which the Legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which s. 52, sub-s.(2), appears, because, as pointed out by judge Learned Hand in the most felicitous language : " .... the meaning of a sentence may be more than that of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fringe benefit which is enjoyed by the "employee/recipient" but it is an expenditure incurred for the purpose of business and the payment is income earned by the third party. In the hands of the said recipient the expenditure is taxable as income earned." 10.7 The co-ordinate bench of this Tribunal in the case of DCIT Vs. MESCOM in ITA No. 1178/Bang/2009 dt.29.5.2010 has held that payments to third parties are not liable for FBT. The relevant portion of the decision at para 9.5 is reproduced hereunder : " 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. In the case before us, items 1, 2 and 3 considered by the CIT(A) are for the purposes 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 the employees for attending the meetings, inspections and other official functions. From the reading of the provisions of section 115WB(2), it is clear that the benefits given to an employee directly or indirectly only would be taxable under Chapter XIIH. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egitimate field or purpose for which it has been created. The decisions in the cases of Bengal Immunity Co. Ltd.Vs. State of Bihar (1955) 6 STC 446 (SC), CIT Vs. Elephinstore Spinning & Weaving Mills Co. Ltd. (1960) 40 ITR 142 (SC), M.D. Jindal Vs. CIT (1987) 164 ITR 28 (Cal), Rajputana Trading Company Ltd Vs. CIT (1969) 72 ITR 286 (SC) and CIT Vs. Bai Vina (1965) 58 ITR 100 (Guj) confirm the above principle. It is also a settled principle that deeming fiction is to be strictly construed. 11.3 The Finance Minister's speech and the memorandum explaining the FBT provisions provides the rationale for levying FBT on the employer lies in the inherent difficulty in isolating the 'personal element' when there is no collective enjoyment of such benefits and in attributing the same directly to the employee. It further provides that where attribution of the personal benefit poses problems, or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as FBT on the employer on the value of such benefits provided or deemed to have been provided to the employees. Thus, the intention of creation of a deeming fiction under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer for adjudication afresh, we direct the Assessing Officer to apply the proposition of law as interpreted by us while determining the value of fringe benefit. On the issue of expenditure incurred on conference and meetings, the A.O. shall consider bifurcation submitted to him with respect to the expenditure incurred on the agents and brokers and pass appropriate orders. "Fringe benefit" cannot arise when expenditure is incurred on persons who are not employees. On the issue of club membership fee, the payments made to LIMRA and Actuarial Society of India, are to be excluded as they are not payments to clubs. With these observations, we restore the issue back to the file of Assessing Officer for adjudication afresh. 12. The Commissioner (Appeals) held that the expenditure incurred on office telephones is not considered for employment. We uphold the conclusion of the Commissioner (Appeals), vide para 13 of his order which is reproduced below, holding that no benefit flows to the employee by reason of his employment as far as expenditure on office telephone is concerned. " 13. In the light of the above background I am constrained to conclude, even within the framework of dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot liable for FBT. 11.5 The Assessing Officer, the learned CIT(A) and the learned Departmental Representative have relied on various question and answers of CBDT Circular NO.8 of 2005 in support of the proposition that expenditure even if not resulting in any benefit to employees is liable for FBT. The income tax authorities have relied on the decisions in K.P. Varghese (supra), Addl CIT Vs. SRY Ankineedu Prasad (115 ITR 78) (AP) and CIT Vs. B.M. Edward India Sea Foods (119 ITR 334) (Kerala) in support of proposition that - (i) CBDT circulars are in the nature of contemporanea expositio furnishing legitimate aid in construction of the statute. (ii) Courts are to give due weight to the interpretation put upon such statute by those who are entrusted with the task of construing, executing and applying it. (iii) provisions of the statute may be considered in the light of the CBDT, circular when the language of the section does not clearly bear the legislative intent. (iv) Since circulars are binding on the assessing authority, who are statutorily required to follow them, the Courts are also bound to take note of such circulars in that light. 11.6 In the case of K.P. Varghese (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at expenditure as a result of payment to third parties is also liable for FBT. In Answer to Q.No.14, it is stated that no segregation of expenses incurred on employees and expenses incurred on others is permissible under section 115WB(2). In Answer to Q.No.15, it is stated that there is no requirement to segregate the various expenses referred to in section 115WB, between those incurred for official purposes and personal purposes. For instance in Answer to Q.No.57, it is stated that expenditure on brand or brand ambassador or celebrity endorsement is liable to FBT. In Answer to Q.No.67, it is stated that expenditure for the purpose of boarding and lodging or travel of customers / clients would be liable for FBT. There are some of the instances where the Board has taken a view that appears to be not in tandem with legislative intention. The Hon'ble Apex Court in the case of State of Madhya Pradesh and Another vs. G.S. Dall & Flour Mills (187 ITR 478) held that executive instructions can supplement a statute or cover areas to which the statute does not extend but they cannot run contrary to statutory provisions or whittle down their effect. 11.8 Even otherwise, it is settled princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the particular case cannot partake of the colour of a law of general application so as to bind a whole class of taxpayers and providing them a cause of action for coming before this court seeking interference under the writ jurisdictions." In view of the above discussion, we are of the opinion that the Circular No.5 of 2008 cannot be relied upon to the disadvantage of the assessee in support of the conclusion that the expenditure in the present case is liable for FBT. 11.9 In the result, the grounds raised at S.Nos. 3.1 to 3.5 of the assessee's appeal is allowed. 12. Ground No. 4.1 relates to challenging the charging of interest under section 234D of the Act is consequential in nature and no separate adjudication is called for thereon. ITA No.88/Bang/2011 13.1 Now, we will take up Revenue's appeal in ITA No.88/Bang/2011. 14.1 In the order passed under section 115WE(3) on 27.8.2010, the expenditure incurred on distribution of Souvenirs to employees on the occasion of decennial celebration of the company amounting to Rs. 2,37,75,428 was treated as 'Gifts.' It was stated that Souvenirs and items or mementos which have only significance of display / decoration and has no employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yees by providing a sense of belonging to the company resulting in better efficiency, productivity and as a token of its appreciation at the decennial event. Hence, it is submitted that the impugned expenditure was correctly classified by the assessee. 14.5 We have heard the arguments of both sides and have carefully considered the material on record. There is no dispute with regard to the fact that during the course of assessment proceedings the assessee explained the reason why the impugned expenditure are in the nature of 'employee welfare' and that they have been classified in the books of account as such. The term 'Employee Welfare' is one of wide import and it is difficult to draw a boundary as to the ways and means of employee welfare. It is not the case of Revenue that it can dictate as to how and in what manner the assessee is to incur expenditure on employee welfare. In the instant case, the distribution of Souvenirs was made in consideration of and to recognize the efforts and contribution of employees. Thus in our view, the said expenditure cannot be regarded as 'Gifts.' We are therefore of the opinion that the expenditure incurred for distribution of Souvenirs to empl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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