Calcutta High Court
Principal Commissioner Of Income ... vs Mcleod Russel India Ltd on 30 November, 2021
OD - 9
IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION (INCOME TAX)
ORIGINAL SIDE
IA NO: GA/2/2017
(OLD NO. GA/3682/2017)
IN
ITAT/378/2017
PRINCIPAL COMMISSIONER OF INCOME TAX-2, KOLKATA
VS.
MCLEOD RUSSEL INDIA LTD.
BEFORE :
THE HON'BLE JUSTICE T.S. SIVAGNANAM
AND
THE HON'BLE JUSTICE HIRANMAY BHATTACHARYYA
Date: November 30, 2021.
Appearance :
Mr. P. K. Bhowmik, Adv.
Mr. Soumen Bhattacharjee, Adv.
... for the appellant
Mr. Asim Chaudhury, Adv.
...for the respondent
The Court : This appeal by the Revenue filed under Section
260A of the Income Tax Act, 1961 (the Act, in brevity) is against the
order dated 8th October, 2015 passed by the Income Tax Appellate
Tribunal "C" Bench, Kolkata in ITA Nos. 262 & 263/Kol/2013 for the
Assessment Years 2008-09 and 2009-10.
The Revenue has raised the following substantial questions
of law for consideration:
1. Whether on the facts and in the circumstances of
the case, the Learned Income Tax Appellate
Tribunal "C" Bench, Kolkata erred in law in holding
that for the purpose of computation of Fringe
Benefits Tax, the expenses incurred by the employer
towards payment of Fringe Benefit to its employees
in case of Tea Company is subjected to Rule 8 of the
Income Tax Rules?
2. Whether on the facts and in the circumstances of
the case, the Learned Income Tax Appellate
Tribunal "C" Bench, Kolkata erred in giving relief at
40% of the taxable value of the Fringe Benefit as
against 100% by allowing the benefit of Rule 8 of the
Income Tax Rules which has no relevance at all in
computing the Fringe Benefit Tax?
We have heard Mr. P. K. Bhowmik, learned senior standing
counsel for the appellant/Revenue and Mr. Asim Chaudhury, learned
counsel for the respondent/Assessee.
It is not disputed that the identical substantial questions
though slightly differently framed decided by this Court in the
assesse's own case for the assessment year 2006-07 in ITAT 147 of
2011 and for the assessment year 2007-08 in ITA No. 75 of 2012. The
Hon'ble Division Bench followed an earlier decision of this Court in
the case of M/S. APEEJAY TEA LTD. -VS- COMMISSIONER OF
INCOME TAX, CENTRAL-I & ANR. in ITA No.165 of 2013 dated 3rd
July, 2014. The operative portion of the judgement for the assessment
year 2007-08 is as follows:
The subject matter of challenge in this appeal is a
judgment and order dated 26th June, 2013 by which the
learned income tax appellate tribunal rejected the contention
of the assessee that Rule 8 of the Income Tax Rules has any
application in arriving at a valuation of the fringe benefits
under Chapter XII H. The learned tribunal as a matter of fact
in rejecting the contention of the assessee relied on an earlier
judgment in the case of the assessee itself in ITA
No.557/Kol/2010 wherein the following view was expressed:
"7. We have carefully considered the submissions
of the Ld. Representatives of the parties and the orders of the
authorities below. We have also considered the relevant
provisions i.e. Section 1125WA, 115WB & 115WE of the
Income Tax Act. We observe that an employer assessee is
liable to pay Fringe Benefit Tax u/s. 115WA of the Income Tax
Act, in relation to Fringe Benefits provided by him to its
employees, Sub-section (2) of Section 115WA starts with a non
obstante clause and states that notwithstanding that no
income-tax is payable by an employer to its total income
computed in accordance with the provisions of the Act, the tax
on Fringe Benefits shall be payable by such an employer.
Therefore, an employer is liable to pay Fringe Benefit Tax
even when no income-tax is payable by an employer on his
total income computed in accordance with the provisions of
the Income Tax Act. Therefore, the contention of the Ld.
Authorised Representative for the assessee that value of
Fringe Benefit should be computed by applying Rule 8 of the
Income Tax Rule has no merit as Fringe Benefit Tax is not
payable on the income of the assessee but only Fringe
benefits provided by an employee to its employees. In view of
the above, we agree with the Ld. Departmental Representative
that the contention of the Ld. Authorised Representative for
the assessee has no merit and accordingly, we uphold the
order of the Ld. CIT(A) by rejecting grounds of appeal taken by
the assessee."
Aggrieved by the aforesaid order of the learned
tribunal the present appeal has been preferred. The sole
question for consideration is "whether Rule 8 is applicable
for the purpose of computing valuation of the fringe benefits
for the purpose of Chapter XII H of the Income Tax Act?"
Rule 8 provides as follows:
"8. (1) Income derived from the sale of tea
grown and manufactured by the seller in India
shall becomputed as if it were income derived
from business, and forty per cent of such
income shall be deemed to be income liable to
tax.
(2) In computing such income an allowance
shall be made in respect of the cost of planting
bushes in replacement of bushes that have died
or become permanently useless in an area
already planted, if such area has not previously
been abandoned, and for the purpose of
determining such cost, no deduction shall be
made in respect of the amount of subsidy
which, under the provisions of Clause (30) of
Section 10, is not includible in the total income."
Mr. Majumdar, learned advocate appearing in support of
the appeal submitted that fringe benefit tax is an additional income
tax as would appear from Section 115WA. Therefore, the rules
applicable for the purpose of assessing income tax would also be
applicable for the purpose of arriving at a valuation of the fringe
benefits. Before tax can be assessed, taxable income has to be arrived
at. Similarly before fringe benefit tax can be assessed the valuation of
the fringe benefits has to be arrived at. When the fringe benefit tax is
an additional income tax, there can hardly be any doubt, according to
him, that Rule 8 shall apply with full force. He, in support of his
submission, drew our attention to a judgment of the Apex Court in the
case of CIT Vs. Doom Dooma India Limited reported in 310 ITR
392(SC) wherein the question cropped up as to whether the assessee
was entitled to apply Rule 8 for the purpose of claiming depreciation.
The Supreme Court answered the question as follows:
"16. In our view, in cases where rule 8
applies, the income which is brought to tax as "business
income" is only 40 per cent of the composite income and
consequently proportionate depreciation is required to be
taken into account because that is the depreciation "actually
allowed." Hence we find no merit in the civil appeals filed by
the Department."
The next judgment cited by Mr. Majumdar in the
case of Jayshree Tea and Industries Limited vs. Union of
India reported in 285 ITR 506 (Cal) wherein a Division Bench
of this Court held that Rule 8 was applicable to the additional
income tax payable under Section 115-O. The Division Bench
clarified its opinion by the following illustration:
"If a tea company has a net income of
Rs.100, Rs.40 would be liable to income tax at the
prescribed rate and the assessee would be
assessed accordingly. By virtue of Section 115-O if
the company declares Rs.50 for distribution
amongst the shareholders it would have a
proportionate liability. It is true that in case of
company decides to distribute a part of the income
it would be impossible to find out whether that
part of the income included the whole of the
agricultural income or a part of it. This exercise
now, in our view, is not at all relevant in view of
the provision of rule 8 of the Income-tax Rules. In
such event the company would be charged on
Rs.40 for income-tax and on Rs.50 for additional
income-tax on proportionate basis."
The third judgment relied upon by Mr. Majumdar
is in the case of Hindustan Unilever Ltd. vs. Dy. Commissioner
of Income-tax(1), Mumbai, reported in 325 ITR 102 (Bom). The
question which cropped up for consideration in the aforesaid
case was whether Rule 8 was applicable to the losses suffered
by a tea company. The question was answered in the
affirmative. The view expressed by Bombay High Court to be
precise is as follows:
" 13. Now, what rule 8 postulates is the process
of segregating the income derived from the sale of tea
upon its computation as if it were income derived from
business. Rule 8 creates a legal fiction, as a result of
which the income which is derived from the sale of tea
which is grown and manufactured by the assessee is
to be computed as if it were income derived from
business. It needs no line of elaborate reasoning to
state the well-settled position in law that once a legal
fiction is created by the Legislature or, as in this case,
in subordinate legislation, the legal fiction has to be
given force and effect so as to operate within the area
in which it was intended to operate. In applying a legal
fiction, it is trite law that one cannot allow the
imagination to boggle. A legal fiction has to be carried
to its logical conclusion. In computing the income from
the sale of tea as if it was income derived from
business, for the purposes of rule 8, it is impossible to
comprehend as to how the expenditure incurred by an
assessee, wholly and exclusively, for the purposes of
business should be disregarded. Obviously, the
expenditure cannot be disregarded. The principle which
must govern is well-settled and only a brief reference to
authority on the subject would be necessary.
14. In CIT v. Harprasad & Co. (P). Ltd. [1975]
99 ITR 118 (SC), the question which came up before the
Supreme Court was whether a capital loss could be
determined and carried forward, in accordance with
the provisions of section 24 of the Act of 1922, when
the provisions of section 12B were not applicable
during the course of assessment year 1955-56. The
Supreme Court held that from the charging provisions
of the Act it is discernible that the words 'income' or
'profits and gain' should be understood as including
losses also, so that, in one sense 'profits and gains'
represent 'plus income' whereas losses represent
'minus income'. The Supreme Court observed as
follows:-
"From the charging provisions of the Act, it is
discernible that the words "income" or "profits and
gains" should be understood as including losses also,
so that, in one sense "profits and gains" represent
"plus income" whereas losses represent "minus
income". In other words, loss is negative profit. Both
positive and negative profits are of a revenue
character. Both must enter into computation,
wherever it becomes material, in the same mode of the
taxable income of the assessee. Although section 6
classifies income under six heads, the main charging
provision is Section 3 which levies income-tax, on the
"total income" of the assessee as defined in Section
2(15). An income in order to come within the purview
of that definition must satisfy two conditions. Firstly,
it must comprise the "total amount of income, profits
and gains referred to in section 4(1)". Secondly, it
must be "computed in the manner laid down in the
Act." If either of these conditions fails, the income will
not be a part of the total income that can be brought
to charge."
The Supreme Court held that if the capital was
not chargeable to tax during the period between 1-4-
1948 to 1-4-1957, the assessee did not possess an
independent right to carry forward his capital loss
even if it could not be set off, owing to the non-
taxability of the capital gains, against profits in
subsequent years. The decision of the Supreme Court
emphasizes that under the charging provisions of the
Act, income must be comprehensively understood as
including a loss. The principle that income would
include a loss has also been re-affirmed in a
subsequent judgment of the Supreme Court in CIT v.
J.H. Gotla [1985] 156 ITR 323.
15. In the present case, the Assessing Officer,
while issuing a notice for re-opening the assessment
observed that the provisions of rule 8 are applicable
"only in the case of income" and the claim of the
assess to set off 40 per cent of losses against normal
business profits could not be allowed. On the basis,
the Assessing Officer has formed the opinion that the
loss of Rs.10.84 crores attributable to the business
activity of the assessee involving the manufacture and
sale of tea was liable to be disallowed. It must be
noted here that it is not the contention for the Assessing
Officer that the loss which has been computed by the
assessee by applying the proportion of 40 per cent is
not a fair estimate of the actual loss sustained, by the
assessee in its business operations. On the contrary, it
is on the basis of rule 8 that the Assessing officer seeks
to postulate that the loss attributable to the business
activity of the assessee would have to be disregarded
on the ground that is not allowable expenditure. The
inference which is sought to be drawn by the Assessing
Officer is contrary to the plain meaning of the charging
provisions of the Act; and to rule 8, besides being
contrary to the position in law laid down by the
Supreme Court. The assessee was lawfully entitled to
adjust the loss which arose as a result of the business
activity under rule 8."
Mr. Majumdar concluded by saying that the judgment
and order under challenge should be reversed and the question
formulated above should be answered in favour of the assessee.
Ms. Gutgutia, learned advocate appearing for the
revenue, submitted that -
(a) Chapter XII H is a complete code in itself in the
matter of taxation on fringe benefits. She drew
our attention to sub-section 2 of Section 115
WA and contended that the sub-Section
starting with a non-obstente clause makes it
clear that the provisions contained in the
aforesaid Chapter are applicable to fringe
benefits made available to the employees by an
employer. She contended that no concession
has been made in the statute for applicability
of Rule 8. It is, therefore, not possible to hold
that Rule 8 would be applicable in assessing
the fringe benefit tax.
(b) She submitted that the expenditure incurred
by the assessee in providing fringe benefits to
the employees has already been taken into
account for the purpose of arriving at the total
taxable income. There is as such no reason
why the apportionment should once again be
allowed by applying Rule 8.
(c) The judgments cited by Mr. Majumdar are not
applicable. The judgments cited by Mr.
Majumdar are with respect to topics other than
the question with which we are concerned in
this appeal. Therefore, those judgments have
no manner of application.
(d) She contended that there is no question of any
double taxation and in support of her
submission she drew our attention to
paragraph 18 of the judgment in the case of R
& D Falcon (A)_ Pvt. Ltd. vs. C.I.T., reported in
AIR 2008 SCW 4096.
We have considered the rival submissions advanced
by the learned advocates. For the purpose of resolving the disputes,
we would like to refer to the illustration appearing from the judgment
of the Apex Court in the case of CIT vs. Doom Dooma India Ltd.
(supra). The illustration in paragraphs 12 and 13 of the judgment
reads as follows:
"12. Be that as it may, we can give the
following illustration(s) which will give an example of how the
"written down value" needs to be computed:-
Illustration 'A'
Rs.
Income from sale of tea 1000 Less : Expenses-
Depreciation (100)
Others (300)
Income subject to charge under the
Income-tax Act by application of
Rule 8 (40% of 600)
Illustration 'B'
Rs.
Income from sale of tea (40% of 1000) 400
Less:Expenses -
Depreciation (40)
Others (40% of 300) (120)
Business Profit subject to charge of
240 Income-tax (40% of 600)
13. Analysing the above two charts, we find that
at the end of computation the income chargeable to tax by applying
rule 8 comes to Rs.240. Under Illustration 'A', the normal depreciation
is Rs.100 which is deductible from Rs.1,000 being the income from
sale of tea. On the other hand, under Illustration 'B', we have taken
40 per cent of each of the items, namely, income from sale of tea,
depreciation and other expenses. Accordingly, on comparison it may
be noted that whereas income from sale of tea is Rs.1,000 under
Illustration 'A', proportionately it comes to Rs.400 under Illustration
'B'. Similarly, depreciation under Illustration 'A' which is normal
depreciation is Rs.100 whereas in Illustration 'B' at 40 per cent the
pro rata depreciation is 40. What is important to be noted is that at
the end of computation under both the Illustrations, the Income
taxable by applying rule 8 comes to Rs.240 in both the cases. The
only difference is that in Illustration 'B' we have gone by pro rata
basis."
The question for consideration before Their Lordships
was whether deduction on account of depreciation is allowable
from the business income arrived at after applying Rule 8. This
question was answered by Their Lordships in the affirmative.
From illustration (a) it would appear that business profit after
taking into account the expenses was computed at Rs.600/-.
Applying the Rule 8 taxable income on account of business was
computed at Rs.240/-, that is to say, 40% of Rs.600/-. From
illustration (b) it would appear that 40% of the total income from
sale of tea was taken into account. From illustration (a) it would
appear that total depreciation is Rs.100/-. For the purpose of
computing business Profit & Loss of 40% of the total depreciation
was taken into account. From illustration (a) it would appear that
other expenses were computed at Rs.300/- and illustration (b)
would show that other expenses were computed at Rs.120/-, in
other words, 40% of Rs.300/- had been taken into account.
We shall take assistance of the illustration to resolve
the issue. Let us assume that the other expenses in illustration
(a) amounting to Rs.300/- include Rs.100/- spent by the
employer on account of fringe benefits made available to its
employees. In that case, 40% of the aforesaid sum of Rs.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% 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% 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% 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 Section10
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. The
submissions advanced by Ms. Gutgutia naturally do not help the
revenue. The judgment cited by her was with regard to the
question as to whether fringe benefit tax amounts to double
taxation. That question was answered by Their Lordships in the
negative. Before us, the question of double taxation has not
arisen for consideration.
The question formulated above is, therefore, answered
in the affirmative and in favour of the assessee.
The appeal is, therefore, allowed."
Thus, following the aforesaid decision, the appeal filed by the
Revenue is dismissed and the substantial questions of law are
answered against the Revenue.
(T. S. SIVAGNANAM, J.)
(HIRANMAY BHATTACHARYYA, J.)
pkd/sp3
