2014 (7) TMI 1118 - HC - Income Tax

Court applies Rule 8 to compute fringe benefits under Income-tax Act

The court held that Rule 8 of the Income-tax Rules, 1962 applies to the computation of fringe benefits under Chapter XII-H of the Income-tax Act. The ... Applicability of rule 8 of the Income-tax Rules, 1962 in arriving at a valuation of the fringe benefits under Chapter XII-H - ITAT rejected the contention of the assessee on applicability of rule 8 - Held that:- Taking assistance of the illustration given in Commr. of Income Tax, Dibrugarh Versus Doom Dooma India Ltd. & Assam Co. Ltd. [2009 (2) TMI 9 - SUPREME COURT] to resolve the issue the other expenses in illustration A amounting to ₹ 300 include ₹ 100 spent by the employer on account of fringe benefits made available to its employees. In that case, 40 per cent. of the aforesaid sum of ₹ 100 would also be includible in illustration B. Therefore, the question posed before us has really been answered by the illustration given by the apex court in the aforesaid judgment. It cannot be disputed that the amount of expenditure incurred by the assessee in extending fringe benefits to its employees was not solely for the purpose of business. The expenditure incurred is both for the purpose of business and for the purpose of agriculture. The submission made by Mrs. Gutgutia that the expenditure on account of fringe benefits has already been taken into account is not correct. The net profit and loss of the business has to be arrived at after deducting all the expenses as indicated in illustration A in the case of Doom Dooma (supra). Once that is done 40 per cent. of the net profit and loss has to be worked out which shall be chargeable to tax. Once this is done the expenditure on account of fringe benefits would automatically stand reduced to 40 per cent. as would appear from illustration B in the case of Doom Dooma (supra). The Revenue is interested in contending as would appear from the impugned orders that the expenditure on account of fringe benefit cannot be reduced to 40 per cent. for the purpose of computing fringe benefit tax. If that is done, the result would be that the agricultural income itself would become liable to tax, which is not permissible under sub-section (1) of section 10 of the Income-tax Act. The provisions contained in Chapter XII-H of the Income-tax Act have to be read subject to section 10 of the Income-tax Act. For the aforesaid reasons, we are of the opinion that the judgment of the learned Tribunal cannot be sustained. - Decided in favour of assessee. Issues Involved:1. Applicability of Rule 8 of the Income-tax Rules, 1962 for computing the valuation of fringe benefits under Chapter XII-H of the Income-tax Act.2. Interpretation of Section 115WA, 115WB, and 115WE of the Income-tax Act.3. Analysis of judicial precedents relevant to the application of Rule 8.Issue-wise Detailed Analysis:1. Applicability of Rule 8 of the Income-tax Rules, 1962:The core issue is whether Rule 8 applies to the computation of fringe benefits under Chapter XII-H of the Income-tax Act. The Tribunal had rejected the contention that Rule 8 is relevant for this purpose, relying on an earlier judgment involving the same assessee. The Tribunal reasoned that fringe benefit tax (FBT) is not levied on the income of the assessee but on the fringe benefits provided to employees. Therefore, Rule 8, which pertains to the computation of income from the sale of tea, was deemed inapplicable.2. Interpretation of Section 115WA, 115WB, and 115WE of the Income-tax Act:Section 115WA imposes a tax on fringe benefits provided by an employer to its employees, even if no income tax is payable on the employer's total income. The appellant argued that since FBT is an additional income tax, the rules for assessing income tax should also apply to FBT. The appellant cited the Supreme Court's judgment in CIT v. Doom Dooma India Ltd., which held that Rule 8 applies to the computation of depreciation for tea companies, as an analogous situation.3. Analysis of Judicial Precedents:The appellant referenced several judgments to support their argument:- CIT v. Doom Dooma India Ltd.: The Supreme Court ruled that income from tea, computed as business income under Rule 8, includes proportionate depreciation. This was used to argue that Rule 8 should similarly apply to FBT.- Jayshree Tea and Industries Ltd. v. Union of India: A Division Bench of the Calcutta High Court held that Rule 8 applies to additional income tax under Section 115-O, supporting the appellant's stance that Rule 8 should apply to FBT as well.- Hindustan Unilever Ltd. v. Deputy CIT: The Bombay High Court ruled that Rule 8 applies to losses incurred by tea companies, reinforcing the argument that Rule 8 should be applied consistently.Revenue's Counterarguments:The Revenue argued that Chapter XII-H is a complete code for FBT and that Rule 8 does not apply. They emphasized that the expenditure on fringe benefits has already been considered in computing the total taxable income and that applying Rule 8 would lead to double counting. They also contended that the judgments cited by the appellant were not relevant to the issue of FBT.Court's Analysis and Conclusion:The court analyzed the illustrations provided in the Doom Dooma judgment, which demonstrated that applying Rule 8 results in a consistent taxable income regardless of the method used. The court concluded that the expenditure on fringe benefits should be proportionately reduced to 40% when computing FBT, as failing to do so would effectively tax agricultural income, contrary to Section 10 of the Income-tax Act.The court found that the Tribunal's judgment could not be sustained and that the appellant's arguments were valid. The question of whether Rule 8 applies to the computation of FBT was answered in the affirmative, in favor of the assessee. The appeal was allowed.