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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
Per Sunil Kumar Yadav, Judicial Member
This appeal is preferred by the assessee against the order dated 12.03.2013 of the Commissioner of Income Tax passed u/s. 263 of the Income-tax Act, 1961 [hereinafter called “the Act”] having formed a belief that the assessment order passed u/s. 115WE(3) of the Act is erroneous in so far as it is prejudicial to the interests of the revenue.
2. The grounds raised by the assessee assailing the order of the CIT inter alia are as under:-
“1.1 The learned Commissioner of Income tax. LTU, Bangalore has erred in passing the order under section 263 in the mariner passed by him. The conditions precedent for exercise of jurisdiction wider section 263 not having been satisfied, the order passed under section 263 is bad in law and liable to be quashed.
2.1 The learned Commissioner of Income tax. LTU Bangalore has erred in passing the order under section 263 without satisfying as to how the order Passed under section 143(3) is erroneous in so far it is prejudicial to the interest of the revenue. The order so passed is bad in law and liable to be quashed.
3.1 Without prejudice, the learned Commissioner of Income tax, LTU, Bangalore has erred in passing the order under section 263 dated 12.3.2013 in respect of such matters as had been considered and decided by the learned CIT(A) vide order dated 30.11.2010 for the same assessment year i.e AY 2008-09. The order so passed under section 263 being contrary to the provisions of Explanation (c) to section 263(1) is bad in law and liable to be quashed.
4.1 The learned Commissioner of Income tax, LTU Bangalore has erred in concluding that medical reimbursements, dealer training expenses, conference expenses, business promotion expenses and sales promotion expenses are liable for FBT.
4.2 The learned Commissioner of Income tax, LTU Bangalore has erred in making various impugned conclusions which are incorrect, contrary to facts, bad in law and liable to be quashed.
5.1 In view of the above and other grounds to be adduced at the time of hearing, the order passed under section 263 be quashed or in the alternative, medical reimbursements, dealer expenses, conference expenses, business promotion expenses and sales promotion expenses be held as not liable for FBT. The appellant prays accordingly.”
3. During the course of hearing, the ld. counsel for the assessee has contended that the CIT has issued show cause notice on the following points:-
“1. An amount of Rs.8,97,920/- being the medical reimbursement expenses have not been added back to the return of Fringe Benefits.
The dealer training expenditure of Rs.6,45,32,648/- has not been offered to FBT. As per the CBDT’s Circular 8/2006, this expenditure is not exempt from FBT.
Conference expenses shown in the return of income is Rs.230,64,748/- whereas the expenses offered for FBT is Rs.80,30,131/-. As per P/L account the conference expenses is RS.3,31,21,677/-. Hence the balance amount needs to be brought to tax.
4. Business Promotion Expenses of Rs.66,33,731/- has not been offered for FBT.
5. Expenses of RS.1,76,97,334/- shown under the head Sales Promotion has not been offered to FBT.”
The CIT having formed a belief that omission to bring to tax all these items has resulted in short computation of the fringe benefit thereby rendering the assessment erroneous in so far as it is prejudicial to the interests of revenue. The ld. counsel for the assessee has invited our attention to the queries issued by the AO and the replies filed by the assessee in response thereto, with the submission that the AO has raised the queries in respect of items pointed out by the CIT in his show cause notice and the assessee has filed the reply explaining the details as sought by the AO. He has filed the reconciliation statements to explain the discrepancies pointed out by the AO during the course of assessment proceedings. In support thereof, he has invited our attention to the documents appearing at page Nos. 42 to 75 of the compilation of the assessee.
The ld. counsel for the assessee further submitted that once the AO has applied his mind and examined all the issues pointed out by the CIT, no revision u/s. 263 of the Act is possible on account of change of opinion.
It was further contended that it is settled position of law that the AO is not required to adjudicate by passing a speaking order on all issues on which he is satisfied with the explanation of the assessee. Therefore, the CIT has not exercised his jurisdiction u/s. 263 properly and his order deserves to be set aside. In support of his contentions, he has placed reliance upon the judgment of the Hon’ble High Court of Karnataka in the case of Sun Micro Systems India Pvt. Ltd. in of 2009; CIT v. Saravana Developers in ITA No.68/2014 c/w 67/2014.
Per contra, the ld. DR has emphatically contended that CIT has exercised his jurisdiction u/s. 263 of the Act with respect to the 5 points on which the AO has not applied his mind. He further placed reliance upon the order of the CIT passed u/s. 263 with the submission that the CIT has made a reference to Instruction No.8/2005 while holding that certain reimbursements are fringe benefits subject to tax. The ld. DR further contended that reimbursement of medical expenses, dealers training expenditure and conference expenses were not at all examined or discussed by the AO, either in his order or during the course of assessment proceedings. He simply made an observation with respect to business promotion expenses and sales promotion expenses, that too, was not adjudicated in accordance with the law. The ld. DR further contended that since the AO has not applied his mind to certain reimbursements, which according to Instruction No.8/2005 are fringe benefits, the CIT has rightly exercised his jurisdiction u/s. 263 of the Act as the assessment order in which certain reimbursements are fringe benefits as per Instruction No.8/2005 and were not subjected to tax, resulting the assessment order erroneous and prejudicial to the interests of revenue. He further placed reliance upon the judgments of the Hon’ble High Court of Karnataka in the case of CIT v. Infosys Technologies Ltd. [2012] 17 taxmann.com 203 (Kar.) and the order of the Tribunal in the case of ICICI Prudential Life Insurance Co. Ltd. v. ACIT [2013] 37 taxmann.com 222 (Mumbai – Trib.) in which it has been held that as per sub-section (2) of section 115WB, fringe benefit tax is chargeable even if employer incurs any expenditure mentioned therein for benefit of a person, not being an employee, in the course of business or profession. Reliance was also placed upon the judgment of the Hon’ble Supreme Court in the case of R & B Falcon (A) Pty Ltd. v. CIT, 301 ITR 309 (SC).
Having given a thoughtful consideration to the rival submissions and from a careful perusal of the orders of the authorities below and documents placed on record, we find that the CIT has revised the assessment order having invoked the jurisdiction u/s. 263 of the Act on certain points illustrated in para No.3 hereinabove. We have carefully examined the assessment order as well as the queries raised by the AO during the course of assessment proceedings and reply of the assessee filed in response thereto and we find that the queries raised by the AO are available at page Nos.42, 43 & 51 and in these query letters, besides general enquiry with regard to fringe benefits, a query was raised with respect to expenditure incurred in connection with sales promotion, conveyance, tour and travel and gifts only. No query was raised with respect to an amount of Rs.8,97,920 for medical reimbursement expenses, an amount of Rs.6,45,32,048 for dealer training expenses and the conference expenses shown at Rs.230,64,748. With respect to business promotion expenses and sales promotion expenses, it can be said that a specific query was raised by the AO through his letter dated 19.4.2010.
We have also carefully examined the assessment order and find that in the assessment order also, the AO has made great deliberations on sales promotion expenses, conveyance, tour & travel and gift, but no deliberation has been made with respect to the reimbursement of medical expenses, dealer training expenditure and the conference expenses.
During the course of hearing of the appeal also, a specific query was raised, whether any query was raised with respect to the medical reimbursement expenses, dealer training expenditure and conference expenses, but no satisfactory reply was offered on behalf of the assessee.
In the light of the documents placed on record, we have no hesitation to conclude that the issue with regard to reimbursement of medical expenses, dealer training expenditure and conference expenses are the fringe benefits and are required to be subjected to tax. On this issue, the CIT has observed in his order that the Instruction No.8/2005 clarifies the confusion and answered the questions raised by the public with respect to certain items of reimbursement of the expenditures. With regard to medical reimbursement, it was clarified by the Board through Instruction No.8/2005 dated 29.8.2005 vide question No.69 that if any sum is paid by the employer for expenditure actually incurred by the employee for medical treatment in an unapproved hospital and it exceeds Rs.15,000 during the year, such sum is “salary’’ as defined in clause (1) of section 17 of the Income-tax Act and liable to income-tax in the hands of the employee.
There is no change in this position. Since such sum is taxable in the hands of the employee, the same is not liable to FBT. However, if any sum is payable by employer for expenditure actually incurred by employee for medical treatment in an unapproved hospital and it does not exceed Rs.15,000 during the year, such sum does not fall under the head “salary” as defined in clause (1) of section 17 of the Income-tax Act and not liable to income-tax in the hands of the employee. Since such sum is not taxable in the hands of employee, the same is liable to FBT.
In light of the above clarification issued by the CBDT on 29.8.2005, the AO was required to examine the details of medical reimbursement to employees, whether the expenditure is incurred for the medical treatment in unapproved hospital and it exceeds Rs.15,000 or not. If it does not exceed Rs.15,000, the entire reimbursement of expenditure would be fringe benefit in the hands of the employer and subjected to FBT. Since the AO has not applied his mind to reimbursement of medical expenses to the employees, his order is erroneous and prejudicial to the interests of revenue and we therefore do not find any infirmity in the order of the CIT in exercising his jurisdiction u/s. 263 of the Act.
So far as dealer training expenditure of Rs.6,45,32,648 is concerned, we find that through question No.10 of Instruction No.8/2005, the Board has clarified that section 115WB defines “fringe benefits” and sub-section (1) refers to the specific fringe benefits provided by the employer to the employees, whereas sub-section (2) 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 enumerated in clauses (A) to (P); meaning thereby, if the assessee incurs certain expenditure on dealers training, etc., the expenditure incurred would be the fringe benefits in the hands of the assessee. It has also been made clear by the Tribunal through its order in the case of ICICI Prudential Life Insurance Co. Ltd. v. ACIT (supra) by holding that the language of section 115WB is clear, unambiguous and straight and there is no place for insertion or subtraction or substitution of any word into it. A careful reading of the entire section reveals without any doubt that sub-section (2) is an independent section and is not controlled by sub-section (1) and both sub-section (1) and sub-section (2) operate in a different field. Any inference that sub-section (2) is controlled by sub- section (1) and any expenditure which is not a consideration for employment as mentioned under different heads of sub-section (2), cannot be considered as fringe benefit, will lead most of the provisions of sub- section (2) as redundant , otiose or meaningless. It was further held that a simple and plain reading of section 115WB(2) reveals that if the employer incurs any of the expenditure as mentioned in clause (A) to (Q), though may or may not have been incurred by the employer, but also for benefit of any third person, but in the course of business or profession, is deemed to have been provided by the employer to the employees. With this deeming provision, the scope of fringe benefit tax has been expanded covering those expenses which have been mentioned in sub-section (2), even though the employee-employer relationship may or may not be present or even though any benefit is derived out or not to the employees. In the case of R & B Falcon (A) Pty Ltd. v. CIT, 301 ITR 309 (SC), the Hon’ble Apex Court has categorically held that sub-sections (1) & (2) of section 115WB must be held to be operating in different fields.
In light of the observations of the Tribunal and clarification given by the CBDT, the AO should have examined the nature of expenditure incurred on dealers training, but he did not make any query from the assessee in this regard. Therefore, the AO has not at all applied his mind to the expenditure incurred on dealers training and non-application of mind to a particular issue which results into loss to the revenue makes the assessment order to be erroneous and prejudicial to the interests of revenue.
While adjudicating the scope of section 263 of the Act, the Hon'ble jurisdictional High Court in the case of CIT v. Infosys Technologies Ltd. [2012] 17 taxmann.com 203 (Kar.), Their Lordships have held that the submission of the assessee could not be accepted that the materials had been placed before the assessing authority and therefore there should be a conclusion that the authority has applied his mind to the same and there was no question of the Commissioner interfering by taking a different view.
Their Lordships have held that assessing authority performs a quasi-judicial function and the reasons for his conclusion and findings should be forthcoming in the assessment order. Though it is urged by the assessee that reasons should be spelt out only in a situation where the assessing authority passes an order against the assessee or adverse to the interest of the assessee and there is no need for the assessing authority to spell out reasons when the order is accepting the claim of the assessee, to accept a submission of this nature would be to give a free hand to the assessing authority just to pass order without reasoning and to spell out reasons only in a situation where the finding is to be against the assessee or any claim put forth by the assessee is denied. Their Lordships further held that there cannot be any dichotomy of this nature as every conclusion and finding by the assessing authority should be supported by reasons, however, brief it may be, as in a situation where it is only a question of computation in accordance with relevant articles of a Double Taxation Avoidance Agreements, it should be clearly indicated in the order of the assessing authority, whether or not the assessee had given particulars or details of it.
It is the duty of the assessing authority to do that and if the assessing authority had failed in that, more so in extending a tax relief to the assessee, the order definitely constitutes an order not merely erroneous but also prejudicial to the interest of the revenue and, therefore the Commissioner was justified in exercising the jurisdiction under section 263 of the Act.
In light of the judgment of the Hon'ble jurisdictional High Court, we are of the view that where as per the provisions of the Act and clarification issued by the CBDT through Instruction No.8/2005, the dealers training expenses would be the fringe benefits and subjected to tax in the hands of the assessee, the AO is required to at least examine the nature of dealers training expenditure. Since he did not examine this aspect, we have no hesitation to hold that the assessment order is erroneous and prejudicial to the interests of revenue in this regard.
Similar is the position with respect to conference expenses. The AO has not examined this aspect also either in the assessment order or by raising a specific query in this regard; whereas as per Q.No.55 & 56 of the Instruction No.8/2005, it has been clarified by the Board that the expenditure in the nature of fee for participation by the employees in any conference is not liable to FBT, but if the participation fee includes any expenditure of the nature referred to in clauses (A), (B) and (D) to (P) of sub-section (2) of section 115WB, such expenditure will be liable to FBT. It was also clarified in response to a question i.e., whether FBT will apply to the expenditure incurred for the purposes of conferences of the agents or dealers or development advisors, that in terms of the provisions of clause (C) of sub-section (2) of section 115WB, any expenditure incurred for the purposes of conference is liable to FBT irrespective of whether the conference is of agents or dealers or development advisors or any other persons. Therefore, the expenditure incurred for the purposes of agents or dealers or development advisors is liable to FBT. When the Board has clarified that certain conference expenses are subject to FBT, the AO ought to have examined the nature of conference expenses. But, he did not raise any query in this regard, what to say about the discussion in the assessment order. For similar reasons as discussed in the foregoing paragraphs, we are of the view that the assessment order is also erroneous and prejudicial to the interests of revenue for non-consideration of the issue of conference expenses by the AO.
So far as sales promotion expenses and business promotion expenses are concerned, we find that a specific query was raised by the AO in this regard and the assessee has filed a detailed reply in response thereto. Not only in the course of assessment proceedings, the AO has also examined this issue in the assessment order in para Nos. 2 to 3, after making a detailed discussion with respect to the relevant provision and the nature of this expenditure. Out of a total claim of Rs.2,66,50,000, a sum of Rs.1,58,9,000 was charged to FBT. On a careful perusal of the assessment order, we find that the AO has examined this issue and assessed to FBT an amount of Rs.1,58,95,000 out of total claim of Rs.2,66,50,000. Though the CIT may not agree with the conclusions and the findings of AO, but in any case, the AO has applied his mind to the issue and the CIT cannot thrust upon his opinion upon the AO. Therefore, in this regard, we are of the view that since the AO has applied his mind and examined the issue, the CIT has no jurisdiction to revise the order u/s. 263 of the Act. Therefore, on this issue, we set aside the order of CIT.
Accordingly, the appeal is disposed of and we confirm the order of CIT with respect to reimbursement of medical expenses, dealers training expenditure and conference expenses.
In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on this 17th day of June, 2016.