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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
O R D E R Per N.V. Vasudevan, Judicial Member
This appeal viz., 22.7.2014 of the CIT(Appeals)-V, Bangalore relating to assessment year 2010-11.
SP 258/Bang/2014 Page 2 of 14
The issue that arises for consideration in this appeal is as to whether order u/s. 201(1) and 201(1A) of the Act treating the assessee as an assessee in default for not deducting tax at source and levying interest on tax not deducted at source respectively can be sustained?
The brief facts are that the assessee who is Registrar of Indian Institute of Science ( IISc), Bangalore and person responsible for deduction of tax at source on payments made by IISc can be said to have not deducted tax at source on the salary paid to the employees. The main grievance is that while determining the income under the head 'salary', the assessee had valued perquisites in respect of residential accommodation provided to the employees by not treating the employees as falling within Sl.No.1 of clause (1) of Table 1 of Rule 3(1) of the I.T. Rules.
The assessee is a premier research institution engaged in imparting higher learning and carrying on advanced research of science and technology. The employees of the Assessee are allotted unfurnished quarters. The value of the perquisite in the form of providing accommodation to its employees had to be computed by the Assessee.
After such valuation the Assessee has to include the value of perquisite in the income under the head salaries and deduct tax at source as employer.
While determining the value of perquisites the Assessee applied Sl.No.1 of Table-1 of Rule 3 of the Income Tax Rules, 1962 (Rules). According to the Revenue Sl.No.1 of Table-1 of Rule 3 of the Rules is not applicable to the SP 258/Bang/2014 Page 3 of 14 Assessee as they cannot be considered to be employees either holding office or post in connection with the affairs of the Union or of such State. The relevant table and Rule-3 is as follows:- “Rule-3: Valuation of perquisites
For the purpose of computing the income chargeable under the head Salaries, the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub-rules, namely :
(1) The value of residential accommodation provided by the employer during the previous year shall be determined on the basis provided in the Table below: TABLE I Sl. Circumstances Where Where accommodation is No. accommodation is furnished unfurnished (1) (2) (3) (4) (1) Where the License fee The value of perquisite as accommodation is determined by the determined under column provided by the Central (3) and increased by 10% Central Government or any per annum of the cost of Government or any State Government furniture (including State Government in respect of television sets, radio sets, to the employees accommodation in refrigerators, other either holding office accordance with the household appliances, air- or post in rules framed by conditioning plant or connection with the such Government as equipment) or if such affairs of the Union reduced by the rent furniture is hired from a or of such State. actually paid by the third party, the actual hire employee. charges payable for the same as reduced by any charges paid or payable for he same by the employee during the previous year.
SP 258/Bang/2014 Page 4 of 14 (2) Where the accommodation is provided by any other employer and (a) where the accommodation is owned by the employer, or (i) 15% of salary in The value of perquisites as cities having determined under column population (3) and increased by 10% exceeding 25 lakhs per annum of the cost of as per 2001 census; furniture (including television sets, refrigerators, other (ii) 10% of salary in cities having household appliances, air- population conditioning plant or exceeding 10 lakhs equipment or other similar but not exceeding appliances or gadgets) or if such furniture is hired from 25 lakhs as per 2001 a third party, by the actual census; hire charges payable for the same as reduced by any (iii) 7.5% of salary in other areas, charges paid or payable for the same by the employee during the previous year. in respect of the period during which the said accommodation The value of perquisite as was occupied by the determined under column employee during (3) and increased by 10% the previous year as per annum of the cost of reduced by the rent, furniture (including if any, actually paid television sets, radio sets, by the employee. refrigerators, other household appliances, air- conditioning plant or (b) where the equipment or other similar accommodation is appliances or gadgets) or if taken on lease or such furniture is hired from Actual amount of rent by the a third party, by the actual lease rental paid or employer. hire charges payable for the payable by the same as reduced by any employer or 15% of charges salary whichever is paid or payable for the SP 258/Bang/2014 Page 5 of 14 lower as reduced by same by the employee the rent, if any, during the previous year. actually paid by the employee. (3) Where the Not applicable 24% of salary paid or accommodation is payable for the previous provided by the year or the actual charges employer specified paid or payable to such in serial number (1) hotel, which is lower, for or (2) in a hotel the period during which (except where the such accommodation is employee is provided as reduced by the provided such rent, if any, actually paid or accommodation for payable by the employee: a period not exceeding in aggregate fifteen days on his transfer from one place to another)
Provided that nothing contained in this sub-rule shall apply to any accommodation provided to an employee working at a mining site or an on-shore oil exploration site or a project execution site, or a dam site or a power generation site or an off-shore site— (i) which, being of a temporary nature and having plinth area not exceeding 800 square feet, is located not less than eight kilometers away from the local limits of any municipality or a cantonment board; or (ii) which is located in a remote area : Provided further that where on account of his transfer from one place to another, the employee is provided with accommodation at the new place of posting while retaining the accommodation at the other place, the value of perquisite shall be determined with reference to only one such accommodation which has the lower value with SP 258/Bang/2014 Page 6 of 14 reference to the Table above for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both such accommodations in accordance with the Table. Explanation : For the purposes of this sub-rule, where the accommodation is provided by the Central Government or any State Government to an employee who is serving on deputation with any body or undertaking under the control of such Government,— (i) the employer of such an employee shall be deemed to be that body or undertaking where the employee is serving on deputation; and (ii) the value of perquisite of such an accommodation shall be the amount calculated in accordance with Sl. No. (2)(a) of Table I, as if the accommodation is owned by the employer.”
If Sl.No.1 of Table-1 of Rule 3 of the Rules is not applicable then value of perquisite has to be computed in accordance with Sl.No.2 of Table-1 of Rule 3 of the Rules and if so done then the value of perquisite will be much more and consequently the amount of tax that has to be deducted by the Assessee as an employer on the income under the head salaries paid by the Assessee will be much higher. The Assessee had consequently deducted less tax at source on the income under the head salaries paid to its employees. The ITO(TDS) therefore initiated proceedings u/s.201(1) of the Act and treated the Assessee as Assessee in default u/s.201(1) of the Act in respect of tax short deducted at source and SP 258/Bang/2014 Page 7 of 14 also levied interest thereon u/s.201(1A) of the Act. The CIT(A) confirmed the action of the ITO(TDS). Hence these appeals by the Assessee before the Tribunal.
According to the AO, the perquisite value of accommodation provided to employees working in autonomous bodies/undertakings under the control of State/Central Government and semi Government organizations, is required to be computed in accordance with the amended provisions of Rule-3 of IT Rules, 1962, consequent to amendment of Rule- 3 w.e.f. 01-04-2001. Circular issued by the Central Board of Direct Taxes, New Delhi vide No.13/2002 dated 23-12-2002 gives the background of the Amendment which is as follows:
"Extraction from Circular No.l13/2002 dated 23-12-2002
The Rules for valuation of perquisite are as under:
Accommodation- Under the Old Rule-3 for purpose of valuation of the perquisite of unfurnished accommodation all employees were divided into three categories: (i) Central and State Government employees, (ii) Employees of public sector undertaking and semi-government organization and (iii) Others including private sector employees. Under the new Rule for the purposes of valuation of perquisite of accommodation, employees are divided into two categories: (i) Central & State Government employees: and (ii) Others.
For employees of the Central and State Government the value of perquisite shall be equal to the license
SP 258/Bang/2014 Page 8 of 14 fee charged for such accommodation. For all i.e. others, those salaried taxpayers not n employment of the Central Government and the State Government, the valuation of perquisite in respect of accommodation would be at prescribed rates. The rate is 10% of ‘salary’ in cities having population exceeding four lakhs as per the 1991 census. For other places, the perquisite value would be 7.5% of salary.”
According to the AO in the light of the aforesaid background in which the amendment to the rules were made, the AO initiated the proceedings u/s.201(1) of the Act. The contention of the assessee was that they are autonomous bodies/undertakings. The employees of these organizations have been agitating over the fact that the perquisite value should be worked out considering them on par with Government employees.
The AO rejected the contentions of the assessee and held that valuation of perquisites had to be done by the assessee by taking 15% of the salary as value of perquisites under Sl.No.2 of Table 1 of Rule 3 of the I.T. Rules. The AO rejected the contention of assessee that the assessee was a Central Govt. providing accommodation to its employees.
On appeal by the assessee, the CIT(A) confirmed the order of AO. Hence this appeal by the assessee before the Tribunal.
At the time of hearing of the appeal, it was pointed out that this Tribunal in the case of CFTRI v. ITO, TDS in to SP 258/Bang/2014 Page 9 of 14 1611/Bang/2011 for the A.Ys. 2007-08 to 2011-12 by order dated 4.7.2014 holding that CFTRI is not a Central Govt. and therefore value of perquisites cannot be made on the basis of licence fee paid to the Govt. for accommodation provided by Govt. and that 15% of the salary will be the valuation of perquisites.
The facts and circumstances of the assessee's case are identical to the case decided by the Tribunal referred to above and therefore the grievance of the assessee projected in this appeal to the extent already decided by the Tribunal in the aforesaid case cannot be accepted.
The ld. counsel for the assessee, however, submitted that in the appeal before the CIT(A), a specific ground was raised viz., ground No.2.4 wherein the assessee had specifically stated that the estimate of income under the head 'salaries' of employees by the assessee was bona fide and that under the provisions of section 192 of the Act which casts obligation on the assessee to deduct tax at source while making payment of salary to the employees, is only to make a bona fide estimate of the income under the head 'salaries'.
The ld. counsel for the assessee further pointed out that though Rule 3 of the Rules has been amended from 1.4.2001, the assessee has been entertaining a bona fide belief that it was Central Govt. and therefore perquisites will have to be valued in accordance with Sl.No.1 of the Table
SP 258/Bang/2014 Page 10 of 14 under Rule 3 of the I.T. Rules. It was also submitted by him that even in this appeal, the assessee believed that it was a Central Govt. as the entire control and rules & regulations applicable to the employees of Central Govt. being applicable to the assessee also, which all led to the belief that assessee was instrumentality of Central Govt. It was further pointed out by him that assessee has been deducting tax at source as it has been doing prior to the amendment of law and even after the amendment of law from A.Ys. 2001-02 to 2010-11 and even thereafter. The Revenue has taken proceedings only in the A.Y. 2010-11 against the assessee. The impugned proceedings having started only on 25.2.2013 by issue of a show cause notice by the DCIT, TDS, Central 16(2), Bangalore. It was his submission that whenever there is a bona fide estimation of income under the head 'salary', there cannot be any liability u/s. 200(1) of the Act. In this regard, our attention was drawn to the following decisions:-
CIT v. Nestle India Ltd., 243 ITR 435 Gwalior Rayon Silks v. CIT, 140 ITR 832 MP
Besides the above, decision of the Bangalore Bench of the Tribunal in ACIT v. Infosys BPO Ltd. 150 ITD 132 was also cited on behalf of the assessee. In all the aforesaid decisions, the view expressed is that the assessee’s obligation is only to make an estimate of income under the head ‘salaries’ and such estimate has to be a bona fide estimate.
SP 258/Bang/2014 Page 11 of 14 15. The law on the issue as explained in the decision of ITAT Bangalore in the case of Infosys BPO is as follows:-
26. It is no doubt true that TDS is to be made at the time of payment of salary and not on the basis of salary accrued. Sec.192(3) of the Act permits the employer to increase or reduce the amount of TDS for any excess or deficiency. We have already noticed that the fact that bills/evidence to substantiate incurring of expenditure on medical treatment up to Rs.15,000/- and the availing of the LTC by the employees and the fulfilment of the conditions contemplated by Sec.10(5) of the Act for availing exemption by the employees so availing LTC, have not been disputed by the AO. Even assuming the case of the AO, that at the time of payment the Assessee ought to have deducted tax at source, is sustainable; the Assessee on a review of the taxes deducted during the earlier months of the previous year is entitled to give effect to the deductions permissible under proviso (iv) to Sec.17(2) or exemption u/s.10(5) of the Act in the later months of the previous year. What has to be seen is the taxes to be deducted on income under the head ‘salaries’ as on the last date of the previous year. The case of the AO is that LTC and Medical reimbursement should be paid at the time the expenditure is incurred or after the expenditure is incurred by way of reimbursement and not at an earlier point of time. If it is so paid, then, even though the payment would not form part of taxable salary of an employee, the employer has to deduct tax at source treating it as part of salary, is contrary to the provisions of Sec.192(3) of the Act and cannot be sustained. The reliance placed by the AO on the expression “actually incurred found in Sec.10(5) of the Act and proviso (iv) to Sec.17(2) of the Act, in our view cannot be sustained. In any event, the interpretation of the word “actually paid” is not relevant while ascertaining the quantum of tax that has to be deducted at source u/s.192 of the Act. As far as the Assessee is concerned, his obligation is only to make an ”estimate” of the income under the head “salaries” and such estimate has to be a bonafide estimate.
The primary liability of the payee to pay tax remains. Section 191 confirms this. In a situation of honest difference of opinion, it is not the deductor that is to be proceeded against but the payees of the sums. To reiterate, the payment towards
SP 258/Bang/2014 Page 12 of 14 medical expenditure and leave travel is made keeping in view the employee welfare. The exclusion in respect of payment towards medical expenditure and leave travel is considered after verifying the details and evidence furnished by the employees. No exemption is granted in the absence of details and/or evidence. The exemption in respect of medical expenditure is restricted to expenditure actually incurred by the employees, or Rs. 15,000/- whichever is lower. The exemption is granted even if the payment precedes the incurrence of expenditure. The requirements/conditions of section 10(5) and proviso to section 17(2) are meticulously followed before extending the deduction/ exemption to an employee. No tax can be recovered from the employer on account of short deduction of tax at source under section 192 if a bona fide estimate of salary taxable in the hands of the employee is made by the employer, is the ratio of the following decisions. CIT vs. Nicholas Piramal India Ltd (2008) 299 ITR 0356 (BOMBAY); CIT v. Semiconductor Complex Ltd [2007] 292 ITR 636 (P&H) CIT vs. HCL Info System Ltd. [2006] 282 ITR 263 (Del) CIT v Oil and Natural Gas Corporation Ltd [2002] 254 ITR 121 (Guj) ITO v Gujarat Narmada Valley Fertilizers Co. Ltd [2001] 247 ITR 305 (Guj) CIT v Nestle India Ltd (2000) 243 ITR 0435 (DEL) Gwalior Rayon Silk Co. Ltd. v. CIT [1983] 140 ITR 832 (MP) ITO v G. D. Goenka Public School (No. 2) [2008] 306 ITR (AT) 78 (Del) Usha Martin Industries Ltd. V. ACIT (2004) 086 TTJ 0574 (KOL) Nestle India Ltd. v. ACIT (1997) 61 ITD 444 (Del) Indian Airlines Ltd. v ACIT (1996) 59 ITD 353 (Mum)”
The ld. counsel for the assessee accordingly prayed that the orders u/s. 201(1) and 201(1A) be cancelled.
The ld. DR relied on the orders of the revenue authorities. According to him, the constitutional validity of Rule 3 was challenged in SP 258/Bang/2014 Page 13 of 14 Ashok Kumar & Ors. v. UOI & Ors., 286 ITR 89 (SC). In the decision rendered on 15.9.2006, the Hon'ble Apex Court held that amendment to Rule 3 by the Income Tax 22nd Amendment Rules, 2001 was valid. According to him, after rendering of the aforesaid decision, the assessee could not have entertained a bona fide belief that it was a Central Govt.
The ld. counsel for the assessee in reply pointed out that the constitutional validity of Rule 3 alone was in dispute in the case of Ashok Kumar (supra) and the question as to whether the assessee was a Central Govt. or not was never in dispute and the bona fide belief entertained by the assessee cannot be found fault with.
We have considered the rival submissions. In our view, the plea of the assessee that it made a bona fide estimate of employees salary by valuing the perquisites in the form of residential accommodation provided to the employees by valuing the same as if employees were employees of Central Govt. has to be accepted. In this regard, it is clear from the records that the position with regard to the assessee not being a Central Govt. was brought to its notice by the department only in the proceedings initiated in 2013. Even thereafter, the assessee has been taking a stand that its employees are employees of Central Govt. As held in several decisions referred to by the ld. counsel for the assessee, the obligation of the assessee is only to make a bona fide estimate of the salary. In our view, in SP 258/Bang/2014 Page 14 of 14 the facts and circumstances of the present case, assessee has made such an estimate. The assessee's obligation u/s. 192 is therefore properly discharged and hence proceedings u/s. 201(1) & 201(1A) of the Act have to be quashed and are hereby quashed.
In the result, the appeal of the assessee is allowed. 20.
S.P. No.258/Bang/2014
In view of the disposal of the appeal, the stay petition is dismissed 21. as infructuous.
Pronounced in the open court on this 27th day of February, 2015.