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No Fringe Benefit Tax leviable on expenditure for non-employees like entertainment, sales promotion, etc.

    Taxpayers will recall the highly controversial levy of Fringe Benefit Tax (FBT) imposed by Finance Minister P. Chidambaram in 2005 and the grave protests voiced against the mischievous interpretations of the deeming provisions as contained in the circulars on the subject issued by the Central Board of Direct Taxes (CBDT). Tax professionals of Gujarat pioneered the crusade against FBT and your columnist was privileged to be at the helm and also plead the PIL against FBT filed before the Gujarat High Court. The High Court, appreciating the merits of the writ petition, granted an unprecedented interim relief directing that all taxpayers of Gujarat could in protest, instead of paying the disputed FBT to the exchequer, deposit the same in an earmarked bank account in their own name.

    Several writ petitions challenging FBT and its illogical interpretations by the CBDT came to be filed in various High Courts across the country and the Supreme Court directed that the Delhi High Court may undertake a consolidated hearing of all such petitions. The same is still pending as on date. However, soon after the changeover of FM, from PC to Pranabda in 2009, the four year old FBT came to be finally abolished and taxpayers finally heaved a sigh of relief.


The main plea of taxpayers against FBT, that items of business expenditure, which have been incurred only with relation to non-employees and do not relate in any manner to the employees, are clearly beyond the scope and levy of FBT, came to be recently examined by the Pune Bench of the Income-tax Appellate Tribunal (ITAT), when your columnist had occasion to represent the case for the taxpayer company ‘Desai Brothers Ltd.’ In its well reasoned and elaborate speaking order, the ITAT accepted the above plea of the taxpayer and held that, “we do not subscribe to the interpretation sought to be placed by the Revenue on Section 115WB(2) of the I.T. Act.”

While analysing the case, the Tribunal noted that, “the moot point before us is whether the mere incurrence of the expenditure listed in Clauses (A) to (Q) of Section 115WB(2) is enough to trigger the deeming prescription contained in the section or that it is further required to be established that specified expenditure has been incurred on account of consideration for employment so as to attract levy of FBT contemplated in section 115WA(1) of the Act.”

The ITAT has held that the overriding condition of the incurrence of expenditure in consideration for employment as prescribed under Section 115WB(1) is even relevant for the purposes of assessing or ascertaining fringe benefits, which are deemed to have been provided by the employer to its employees in terms of Section 115WB(2) also. Therefore, ‘fringe benefits’ can be deemed to have been provided by an employer to his employees, only in cases where the prescribed expenditure is incurred in consideration for employment.

In the case before the ITAT, the company had contended that the business expenditure relating to entertainment, hospitality, sales promotion, gifts and travelling of auditors did not pertain in any manner to its employees and therefore, the same should not attract the levy of FBT. This contention has come to be accepted by the ITAT.

Referring to the reliance placed by the Revenue on the CBDT Circular, the ITAT commented that, “ostensibly, the clarification issued by the CBDT vide Question No. 14 in Circular No. 8 of 2005 seeks to enlarge the scope of levy of FBT, which is not supported by the language of the statute. The Hon’ble Supreme Court in the case of Kerala Financial Corporation v. CIT 210 ITR 129 (SC) has clearly opined that the Circulars issued by CBDT cannot override the provisions of the Act. In any case, it is quite well-settled that an executive instruction/circular cannot create any additional liability on the assessee.”

The Tribunal observed that it is also to be appreciated that the stand of the Revenue is not in consonance with the legislative intent. The import and intent of introducing Chapter XII-H was to tax such benefits which are collectively enjoyed by the employees and cannot be attributed to any individual employee. Such benefits escape taxation as perquisite in the hands of the individual employees, as they are not attributable to any individual employee. Therefore, such benefits were sought to be taxed in the hands of the concerned employer. Though the speech of the Hon’ble Finance Minister may not be a decisive test, so however, it is indeed a relevant and contemporaneous exposition of the legislative intent and can be relied upon, as propounded by the Hon’ble Supreme Court in the case of K P Varghese v. ITO 131 ITR 597 (SC). “Considered in that light too, we find that the interpretation sought to be made out by the Revenue, with regard to the meaning of the expression ‘fringe benefits’ for the purposes of section 115WB(2) of the Act is quite misplaced.”

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