2016 (7) TMI 610 - AT - Income Tax

Business-Only Car Expenses Exempt from Fringe Benefit Tax

Deputy Commissioner of Income-tax, Circle-4, Kolkata Versus M/s. Mercury Car Rentals ltd.

The Tribunal upheld that expenses for motor cars used exclusively for business, not by employees, were not subject to fringe benefit tax. The revenue's ... Addition of consideration of tax depreciation of 5% on motor cars used exclusively for hire for the purpose of fringe benefit tax - CIT(A) deleted the addition - Held that:- We find that the assessee has paid FBT in respect of expenses incurred for vehicles which are used for office purposes as well as the expenses incurred for cars used by employees in the course of their performance of duties. However, with regard to the expenses incurred wholly and exclusively for maintenance and running of tourist cars for car rental business , no FBT is paid as the said cars were never used by the employees. In this regard, it would be relevant to understand the intention behind introduction of provisions of FBT u/s 115W to 115WL w.e.f. 1.4.2006 by the Finance Act, 2005. We find that the said provision were introduced where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees then the same shall be taxed in the hands of the employer. In the memorandum explaining the bill , it has been pointed out that the rationale for levying FBT on the employer lies in the inherent difficulty in isolating the personal element where there is collective enjoyment of such benefits and attributing the same directly to the employee. We find that the car expenses incurred for the transport business, the maintenance of such cars are separately accounted for as those car expenses have no nexus or relation to any benefit which can be even said to have been collectively enjoyed by the employees and therefore the expenses incurred on such account do not attract the levy of FBT. It is not the case of the revenue that the employees were allowed to enjoy any benefit directly or indirectly from such transport services. We find from the observations of ld CITA supra that the assessee had duly bifurcated the motor cars used for hire and that not used for hire separately in the depreciation schedule itself. - Decided against revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether depreciation (and value) attributable to motor cars used exclusively for hire forms part of fringe benefit taxable under section 115WB(2)(H) when the employer is in the business of carriage of passengers or goods by motor car. 2. Whether expenses (running, repair, maintenance and depreciation) on motor cars used wholly and exclusively in a commercial car-rental/transport business - and not made available to employees for personal or official use - can be exigible to fringe benefit tax (FBT) as collective employee benefit. 3. Whether the Assessing Officer, by treating motor cars shown in the depreciation schedule as used for hire nonetheless as providing fringe benefits to employees, was justified in rectifying the FBT assessment under section 154 to add 5% of depreciation on such cars. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether depreciation on cars used exclusively for hire is taxable as FBT under s.115WB(2)(H) Legal framework: Section 115WB(2)(H) deems fringe benefits to have been provided by an employer to employees where the employer, in the course of business, incurs expenses on repair, running (including fuel), maintenance of motor cars and the amount of depreciation thereon. The FBT provisions (ss.115W-115WL) were introduced to tax benefits that are collectively enjoyed by employees and not easily attributable to individuals. Precedent treatment: The Tribunal followed the reasoning in a coordinate bench decision concerning cars used for test drives (treated as business vehicles) which distinguished vehicles meant for employees from those used for business purposes by third parties (potential customers). Interpretation and reasoning: The Court analyzed the statutory purpose: FBT targets benefits arising from employer-employee relationship and collective enjoyment by employees. Where motor cars are used wholly and exclusively for commercial carriage/hire and are not available to employees (no finding by AO that such cars were used by employees), there is no employer-employee benefit nexus. The depreciation and related running/maintenance expenses of such cars are accounted separately in the assessee's books and subject to income-tax depreciation rules (different rates for cars for hire v. not for hire), and that bookkeeping distinction was accepted in income tax assessment. The AO did not establish use by employees or any benefit to employees from those hire-cars; accordingly, the statutory prerequisite (expense incurred 'for' the purpose of providing benefit to employees) was not met. Ratio vs. Obiter: Ratio - Where vehicles are demonstrably and exclusively used for commercial hire and not made available to employees, expenses including depreciation do not constitute fringe benefits under s.115WB(2)(H) because the requisite employer-employee benefit nexus is absent. Obiter - Reference to the explanatory circular indicating a 5% rate for employers engaged in carriage of passengers/goods was discussed but applied only where the vehicles are within the scope of FBT (i.e., used by employees). Conclusions: Depreciation on motor cars used exclusively for hire is not exigible to FBT absent evidence that such cars were used by employees or made available to them; the CIT(A)'s deletion of the AO's addition is justified. Issue 2 - Whether FBT applies when cars are used for business and employee-use cars are separately accounted for Legal framework: FBT applies to expenditures which result in provision of fringe benefits to employees; where benefits are collectively enjoyed and cannot be attributed to individuals, taxability in employer's hands is intended. Accounting segregation and applicable depreciation rates under Income Tax Rules distinguish use categories (e.g., cars for hire v. cars for employee use). Precedent treatment: The Tribunal relied on and respectfully followed a co-ordinate bench decision which held that cars used for business (test drives) are not to be treated as fringe benefits unless shown to be for employee benefit; where the assessee segregates vehicle usage and corresponding expenditure, AO must examine details and evidence before treating such expenditure as FBT. Interpretation and reasoning: The Court emphasized the factual requirement of establishing that vehicles classified as for hire were in fact used by employees or provided for employee benefit. The mere existence of depreciation or lower percentage prescribed in CBDT explanatory note does not automatically render business-use car expenses taxable as FBT. The department's contention that no segregation can be made in running/maintenance and depreciation between guest and employee usage was rejected where accounts and depreciation schedules clearly segregate fleets and AO made no contrary finding after scrutiny. Ratio vs. Obiter: Ratio - Proper accounting segregation and absence of evidence of employee use prevent application of FBT to business-use vehicles. Obiter - The Court noted the CBDT circular's categorization but applied it only within the statutory scope where cars benefit employees. Conclusions: Where an assessee demonstrates segregation of vehicle fleets and corresponding expenses, and the AO does not establish employee use of the business fleet, expenditure on vehicles used wholly for hire does not attract FBT. Issue 3 - Validity of AO's rectification under s.154 to add 5% depreciation as FBT Legal framework: Section 154 permits rectification of mistake apparent from record. AO sought to rectify by adding 5% depreciation on motor cars used for hire as fringe benefit, relying on CBDT explanatory circular which indicates a lower FBT rate for employers in carriage business. Precedent treatment: The Tribunal treated rectification as impermissible where the rectification would impose tax contrary to the factual record and accepted accounting classification unless AO could show error in the original factual finding or that a legal mistake apparent from record existed. Interpretation and reasoning: The Court found no mistake apparent from record justifying section 154 action: the original order accepted return figures and the assessee's depreciation schedule clearly separated hire and non-hire cars; AO did not find that cars shown as for hire were actually used by employees. Rectification to impose FBT on exclusively business-use cars would change a factual conclusion without any basis in record or fresh finding. The circular relied upon does not override the factual requirement of employee-benefit nexus for s.115WB application. Ratio vs. Obiter: Ratio - Section 154 cannot be used to convert properly classified business expenses into fringe benefits absent a demonstrable mistake apparent from record or contrary factual finding; AO's unilateral recharacterization without evidence is unsustainable. Obiter - The CBDT explanatory note guides interpretation but cannot supplant statutory and factual prerequisites. Conclusions: The AO's rectification under s.154 to include 5% depreciation of hire cars in FBT was not justified; the CIT(A)'s deletion of the addition was correct and the rectification order was rightly disallowed.