Special Civil Application Nos. 21124, 21125, 21768, 21770 of 2005, Tax Appeal Nos. 474, 1155 to 1157 of 2014 and 888 of 2015. Case: Gujarat Chamber of Commerce & Industry and Ors. Vs Union of India and Ors.. Gujarat High Court

Case Number:Special Civil Application Nos. 21124, 21125, 21768, 21770 of 2005, Tax Appeal Nos. 474, 1155 to 1157 of 2014 and 888 of 2015
Party Name:Gujarat Chamber of Commerce & Industry and Ors. Vs Union of India and Ors.
Counsel:For Appellant: K.H. Kaji and Mukesh M. Patel, Advocates and For Respondents: Devang Vyas and P.Y. Divyeshvar, Advocates
Judges:M.R. Shah and B.N. Karia, JJ.
Issue:Income Tax Act, 1961 - Sections 10, 115WC(1), 115W, 115WL, 115W(a), 115WB, 115WB(1), 115WB(2), 115WB(2)(A), 115WB(2)(P), 115WB(2)(D), 115WB(3), 115WB(a), 115WC, 115WD, 115WD(1), 115WD(3), 115WE, 115WE(1), 115WF, 115WG, 115WH, 115WJ, 115WJ(1), 115WK, 115WKA, 115WKB, 115WL, 119, 12AA, 139, 142, 15, 150, 153, 17, 17(2), 234A; Representation of the...
Judgement Date:March 17, 2017
Court:Gujarat High Court
 
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Judgment:

M.R. Shah, J.

  1. 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 judgment and order.

  2. 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 XII-H of the Income Tax Act, 1961 (hereinafter referred to as "Act").

    2.1 Feeling aggrieved and dissatisfied with the impugned judgment 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 2006-07, AY 2007-08 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 115WB(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/2011 for AY 2006-07 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 115WB(3) r.w. proviso (v) to Section 17(2) is correct in law?

  3. 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. 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 XII-H (Sections 115W to 115WL) 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 under-taxed, 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, under-taxation 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 1998-99, some perquisites/fringe benefits were included in salary in terms of section 17 and accordingly taxed under section 15 of the Income-tax Act in the hands of the employee and a large number of fringe benefits were taxed by the employer-based disallowance method where the quantum of the disallowance was estimated on a presumptive basis.

    In practice, taxation of fringe benefits by the employer-based disallowance 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 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. 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 XII-H of the Act and sections 115W to 115WL 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 XII-H of the Act.

  5. Shri Mukesh Patel, learned Advocate and Shri S.N. Soparkar, learned Senior Advocate have...

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