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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Hon’ble Shri M.Balaganesh, AM ]
ORDER Per M.Balaganesh, AM
This appeal by the Assessee arises out of the order of the Learned Commissioner of Income Tax (Appeals)-7, Kolkata [in short the ld CITA] in Appeal No. 740/CIT(A)- 7/Cir-11/14-15 dated 30.10.2015 against the order passed by the DCIT, Circle-11, Kolkata[ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 28.10.2010 for the Assessment Year 2008-09.
The assessee has raised following grounds of appeal:
1. For that on the facts and in the circumstances the Learned Commissioner of Income Tax (Appeals) wrongly and arbitrarily confirmed the addition of Rs.7,91,147 [being 113 (one third) of the total expenditure of Rs. 23,73,442/-] as 'not being incurred for business".
2 A.N. Pharmacia Laboratories Pvt. Ltd. A.Yr.2008-09 2. For that the Learned Commissioner of Income Tax (Appeals) further erred in not considering the fact that the value of Fringe Benefit Tax [FBT] of Rs. 7,03,886/- [comprising 20% of Rs. 16,09,447/- and 50% of Rs. 7,63,995/-] was disclosed in the return under the head Sales Promotion and Gift and offered for tax accordingly.
3. For that on the fact and in the circumstances the Learned Commissioner of Income Tax (Appeals) while confirming the addition of Rs. 7,91,147/- failed to consider that i) the appellant had already paid tax under FBT on the value computed on the total expenditure under Sales Promotion and Gift so much so that there was double taxation on the quantum of disallowance of Rs. 7,91,147/- and ii) in Assessment year 2007-08, the Learned Assessing Officer had taken out of FBT the disallowed amount" as for FBT only allowable expenses are to be taken into consideration".
4. For that the Learned Commissioner of Income Tax (Appeals) was wrong in not taking out the 1/3rd disallowance of Rs. 7,63,995/- for computation of Fringe Benefit Tax and thereby denied the relief of Rs. 234,628/- in the computation of FBT.
5. The appellant craves leave to add to and/or alter, amend, modify or rescind the grounds hereinabove before or at the time of hearing of the appeal.
The brief facts of this appeal is that in the ITR-6 filed by the assessee company under the specific heading of Fringe Benefit Tax (FBT), the assessee had disclosed the following as FBT and also offered the same for tax: Sl. Nature of Expenditure Amount of Percentage Value of FBT NO. Expenditure as per Return as per Return 6 Sales Promotion 1,609,447 20% 321,889 17 Gifts 763,995 50% 381,997 Total 2,373,442 703,886 2 The Ld. AO observed that the assessee has debited a sum of Rs. 16,09,447/- and Rs. 7,63,995/- in its profit and loss account on account of sales promotion expenses and gift and presentation articles to doctors respectively. The assessee was asked to furnish the details of the same together with justification for claiming the same as business expenditure. The assessee could not file the details properly before the ld. AO. The assessee instead filed ledger extracts to show that certain gift articles were purchased by it to serve its purpose towards so-called sales promotion expenses and gift and presentation articles to doctors. Sample bills were also produced for verification of the ld. AO. The Ld. AO observed that the assessee did not give any details of the end beneficiaries or ultimate beneficiaries nor it could explain as to how the gift articles were used for the purpose of business. The Ld. AO observed that these expenses relate to various expensive items for personal or domestic use and they were ranging from few hundreds to few thousands rupees, and accordingly, concluded that these items cannot be said to have been given as an incentive for sale. Accordingly the Ld. AO concluded that the assessee has not been able to prove as to whether the said expenditure were incurred wholly and exclusively for the purpose of business of the assessee. The Ld. AO accordingly sought to disallow 1/3rd of the total expenditure of Rs. 23,73,442/- amounting to Rs. 7,91,147/- in the assessment. Before the Ld. CIT(A), the assessee stated that the entire sales promotion expenses and gift articles were duly considered by the assessee in the FBT return filed by it and the same has been accepted by the AO as such. Accordingly, it was pleaded that when an item of expenditure is covered by FBT, then the same would have to be allowed as an expenditure u/s 37 of the Act. Alternatively, the assessee pleaded to reduce the amount of Rs. 7,91,147/- from the ambit of FBT, being the sum which was disallowed by the Ld. AO in the assessment. The Ld. CIT(A) observed that the ld. AO disallowed the expenditure holding that the expenditure was not laid out wholly and exclusively for the purpose of business and that it was not disallowed on the ground that the expenditure was representing fringe 3
4 A.N. Pharmacia Laboratories Pvt. Ltd. A.Yr.2008-09 benefits. Accordingly, he dismissed the primary and alternative argument of the assessee and upheld the action of the ld. AO. Aggrieved, the assessee is in appeal before us.
The Ld. AR fairly pleaded that when a particular item of expenditure has been disallowed by the Ld. AO as not incurred wholly and exclusively for the purpose of business u/s 37 of the Act, then the same should not be subjected to levy of fringe benefit tax i.e. FBT in the FBT computation. He fairly pleaded that what is to be considered in the FBT computation is only allowable business expenses of the assessee. He placed reliance on the CBDT Circular No. 8/2005 dated 29.08.2005 in this regard apart from placing reliance on the assessment order framed on the very same lines for the assessment year 2007-08 in the case of the assessee.
In response to this, the Ld. DR vehemently relied on the order of the Ld. CIT(A).
We have heard the rival submissions. We find that the Ld. AO has fairly pleaded only for exclusion of the amount disallowed in the sum of Rs. 7,91,147/- from the computation of fringe benefit tax which, in our considered opinion, is just and fair. We find that CBDT Circular No. 8/2005 dated 29.08.2005 had in response to Frequently Asked Questionnaire (FAQ) has clarified the same. For the sake of convenience, the same is reproduced hereunder: Finance Act, 2005- Explanatory Notes on the Provisions relating to Fringe Benefit Tax Circular No. 8/2005 dated 29.08.2005 The Finance Act, 2005 has introduced a new levy, namely, Fringe Benefit Tax(hereinafter referred to as FBT) on the value of certain fringe benefits. The provisions relating to levy of this tax are contained in Chapter XII-H(Sections 115W to 115WL) of the Income Tax Act, 1961. This circular seeks to provide a harmonious, purposive and contextual interpretation of the provisions of the Finance Act, 2005 relating to the FBT so as to further the objective of this levy.
5 A.N. Pharmacia Laboratories Pvt. Ltd. A.Yr.2008-09 Whether expenses disallowed under section 37 of the Income Tax Act on the plea that the expenses are personal in nature, would also be liable to FBT? 35. Section 37 of the Income Tax Act provides that any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head profits and gains of business or profession. Accordingly, any expenditure that is incurred for personal purposes is not allowable as deduction. Sub-section (2) of section 115WB provides for a levy on fringe benefits estimated on a presumptive basis using certain expenses as a measure. To the extent the expenses incurred by the employer are personal in nature and have, therefore, been disallowed under section 37 of the Income Tax act, such disallowance would not be liable to FBT. For example, let us assume a firm, being an employer, has incurred an expenditure of Rs. 100 towards tour and travel, of which Rs. 40, is personal in nature. Therefore, the amount of Rs. 40, being personal in nature, will be disallowed under section 37 of the Income Tax Act, and FBT will be levied on 20% of the amount of Rs. 60 (Rs. 100 – Rs. 40).
Whether expenditure identified as bogus expenditure in income tax assessment will be liable to FBT? 36. Sub-section (2) of section 115WB provides that fringe benefits shall be deemed to have been provided by the employer to his employees if the employer incurs any expense on or makes any payment for the purposes referred to in clauses (A) to (P) of the said sub-section. If an expenditure is found to be bogus on the plea that it has not been actually incurred, the same is not allowed as a deduction under section 37 of the Income Tax Act. Accordingly, FBT will be levied only on such expenditure as is actually incurred for the purposes referred to in sub-section (2) of section 115WB. For example, if an employer has incurred Rs. 1000 towards travel, of which Rs. 200 is disallowed under section 37 of the Income Tax Act on the plea that it is bogus, FBT will be payable on 20% of Rs. 800 (Rs. 1000 minus Rs. 200).
We find that the similar exclusion from FBT has been done properly by the Ld. AO in the assessment proceedings of assessment year 2007-08. From the facts narrated above we find that this sum of disallowance of expenditure of Rs. 7,91,147/- had been subjected to FBT. Hence, we direct the ld. AO to re-compute the FBT as under: Sl. Amount of Disallowed Allowable FBT FBT Relief as @ 1/3rd Expenditure Expenditure Value as Value @ per earlier per Return 20% on years allowable assessment Exp order (i) (ii) (iii) (iv) (v) (vi) (vii) [v-vi] 5
6 A.N. Pharmacia Laboratories Pvt. Ltd. A.Yr.2008-09 1 16,09,447 5,36,482 10,72,965 3,21,889 2,14,593 1,07,296 2 7,63,995 2,54,665 5,09,330 3,81,998 1,01,866 2,80,132 Total 23,73,442 7,91,147 15,82,295 7,03,887 3,16,459 3,87,428 (1+2)
In view of the aforesaid facts and findings, we are inclined to accept the alternative plea of the Ld. AR that the disallowed sum of Rs. 7,91,147/- is to be excluded from the computation of FBT as worked out in the aforesaid table. Hence, we direct the ld. AO to re-compute the FBT computation as directed above. Accordingly, grounds raised by the assessee are allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes as per the directions contained hereinabove.
Order pronounced in the Court on 07.02.2018