Commissioner Of Income Tax (Tds v. Director, Delhi Public School

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 662 of 2008 Date of Decision: 11.7.2011 Commissioner of Income Tax (TDS) Versus Director, Delhi Public School ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Yogesh Putney, Standing Counsel,for the appellant. Mr. Parvesh Saini, Advocate for Mr. Mukesh Verma, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This order shall dispose of a bunch of six appeals bearingITA Nos. 662, 663, 753 of 2008 filed by the revenue and ITA Nos. 835,836 and 837 of 2008 filed by the person responsible for deduction of taxat source (hereinafter referred to as “the assessee”) arising from theorder of the Tribunal dated 25.6.2007 whereby the appeals of therevenue and the cross-objections filed by the assessee were dismissed.For brevity, the facts are being extracted from ITA No. 662 of 2008 filedby the revenue and ITA No. 835 of 2008 preferred by the assesseerelating to the assessment year 2003-04. ITA No. 662 of 2008 2.These appeals have been preferred by the revenue and theassessee under Section 260A of the Income Tax Act, 1961 (in short“the Act”) against the order dated 25.6.2007 passed by the Income TaxAppellate Tribunal, Delhi Bench “H”, New Delhi (hereinafter referred toas “the Tribunal”) in ITA No. 2384/D/2006 and cross-objection No. 283(Del)/2006, relating to the assessment year 2003-04. 3.In appeal Nos. 662, 663 and 753 of 2008 filed by therevenue, the following substantial question of law has been raised:- “Whether on the facts and circumstances of the case,the Hon'ble ITAT has erred in providing a differentmethod of calculating the perquisite when theperquisite value calculated by the assessee was notdisputed by the AO and when the only grievance ofthe assessee against the order of ITO was regardingreduction of Rs.1,000/- P.M. from the perquisite valueclaimed by the assessee?” 4.The substantial questions of law as claimed by theassessee in appeal Nos. 835, 836 and 837 are as under:- (1)Whether ITAT was justified in the eyes of lawin disallowing the benefit to the assessee,which has been provided to him under Rule 3(5) of Income Tax Rules, 1962?in disallowing the benefit to the assessee,which has been provided to him under Rule 3(5) of Income Tax Rules, 1962? (2)Whether ITAT was correct in law in passing theimpugned judgment, after misinterpreting theprovisions of law provided under Rule 3(5) ofIncome Tax Rules, 1962? (3) Whether it is correct in the eyes of law to levythe value of the perquisite which has beenexempted under the law? (4) Whether ITAT was correct in law in consideringthe “cost of education” of the wards of theemployees equal to the price of educationcharged from the students of the school (whichincludes other expenses) in or the nearbyvicinity under the provisions of law under Rule3(5) of Income Tax Rules, 1962? (5) Whether ITAT was justified in the eyes of lawto impose tax on the value of the perquisites inthe hands of the assessee when the said valueshall be determined with reference to the costof the education of his ward in a similarinstitution in or nearby vicinity and the cost ofsuch education is less than Rs.1000/- and,therefore, exempted by the proviso to Rule 3(5)of Income Tax Rules, 1962?” 5.Briefly stated, the facts necessary for adjudication asnarrated in the appeal are that the assessee is running a public schooland was liable to deduct tax at source from salary and remunerationpaid to its teaching staff. The person responsible (the assessee herein)is the director of the School who filed the return of salaries on28.11.2003. At the time of checking of Form 12BA annexed along withForm No.16 relating to various employees, it was found that the 5.Briefly stated, the facts necessary for adjudication asnarrated in the appeal are that the assessee is running a public schooland was liable to deduct tax at source from salary and remunerationpaid to its teaching staff. The person responsible (the assessee herein)is the director of the School who filed the return of salaries on28.11.2003. At the time of checking of Form 12BA annexed along withForm No.16 relating to various employees, it was found that the assessee had been providing free/concessional educational facilities tothe wards of teachers and other staff members of the school. However,while calculating the amount of perquisite taxable in the hands ofteachers/staff qua free/concessional educational facilities provided totheir wards, the assessee had been allowing a deduction of Rs.1000/-per month per child from the total amount of educational facilitiesprovided free of cost to them. The Assessing Officer held that theassessee had wrongly allowed a deduction of Rs.1000/- per month perchild while calculating the amount of taxable perquisite and added anamount of Rs.12,000/- per annum per child to the value of perquisiteson account of free educational facilities provided to the wards of theemployees/staff of the school and calculated short deduction to thatextent and treated the assessee to be in default. The Assessing Officeralso charged interest. Accordingly, during the assessment year 2003-04, the demand was raised at Rs.3,93,586/- (i.e. short deduction of taxat Rs.2,97,606/- plus Rs.95,980/- as interest). Feeling aggrieved, theassessee filed an appeal before the Commissioner of Income Tax(Appeals) [in short “the CIT(A)”]. The CIT(A) vide order dated26.4.2006 made the average monthly cost of education per student atRs.1553.23 by taking into account the total expenditure claimed by theassessee in P&L account at Rs.6,33,90,432.30 and dividing it bynumber of students, i.e. 3401. The CIT(A) directed the AssessingOfficer to adopt the said value for working out short deduction of tax andthereafter charge interest under Section 201(1A) of the Act. Against theorder of the CIT(A), the department filed an appeal whereas theassessee filed cross-objections. The Tribunal vide order dated 25.6.2007 held that proviso to Rule 3(5) of the Income Tax Rules, 1962(in short the “1962 Rules”) was not applicable. The Tribunal furtherheld that while computing total cost both direct and indirect expenseshave to be taken into account to work out the cost per child. As the costcomputed by the CIT(A) was different from the cost or perquisite valuedeclared by the assessee to the Assessing Officer, the liberty was givento the assessee to point out any error involved in the computation ofperquisite value to the Assessing Officer who would objectively considersuch objections and pass an appropriate order. Hence, these appeals. 6.The point for consideration in these appeals is relating tothe correct interpretation of Rule 3(5) of the 1962 Rules anddetermination of the valuation of the free/concessional educationalfacility provided to the wards of teachers/staff of the assessee-school. 7.Learned counsel for the revenue submitted that accordingto Rule 3(5) of the 1962 Rules, the value of perquisites in the form offree education to the wards of its teachers and other staff membersexceeded Rs.1,000/- per month per child and, therefore, the entireamount was perquisite in the hands of the employee and the assesseewas liable to deduct tax at source thereon. Learned counsel elaboratingthe scope of Sections 201(1) and 201(1A) of the Act, placed relianceupon the judgment of the Apex Court in Commissioner of Income-tax v. M/s Eli Lilly & Company (India) Pvt. Ltd., JT 2009(5) SC 78 insupport of his submission. The method of valuation of the perquisitedifferent from the one adopted by the Assessing Officer was alsoassailed. 8.On the other hand, learned counsel for the assessee 7.Learned counsel for the revenue submitted that accordingto Rule 3(5) of the 1962 Rules, the value of perquisites in the form offree education to the wards of its teachers and other staff membersexceeded Rs.1,000/- per month per child and, therefore, the entireamount was perquisite in the hands of the employee and the assesseewas liable to deduct tax at source thereon. Learned counsel elaboratingthe scope of Sections 201(1) and 201(1A) of the Act, placed relianceupon the judgment of the Apex Court in Commissioner of Income-tax v. M/s Eli Lilly & Company (India) Pvt. Ltd., JT 2009(5) SC 78 insupport of his submission. The method of valuation of the perquisitedifferent from the one adopted by the Assessing Officer was alsoassailed. 8.On the other hand, learned counsel for the assessee submitted that in terms of proviso to Rule 3(5) of the 1962 Rules, thevalue of the perquisite relating to free educational facility provided to thewards of the employees/staff of the school had to be on the basis ofvalue of such facility in a comparable case and if it exceeded Rs.1000/-per month per child, then the amount of Rs.1000/- per month per childhad to be reduced from the perquisite value and tax deducted at sourceon the remaining amount, if any. The cost of education for determiningthe value of free/concessional educational facility was also challenged.Strong reliance was placed on the judgment of the Delhi High Court inCommissioner of Income Tax (TDS) v. Delhi Public School [2009]318 ITR 234 (Delhi). Special Leave Petition against the said decisionwas dismissed on 23.3.2009. 9.Support was also gathered from the followingpronouncements:-pronouncements:- 1.Commissioner of Income Tax v. Nestle India Ltd.[2000] 243 ITR 435 (Del);[2000] 243 ITR 435 (Del); 2.Commissioner of Income Tax v. Kannan DevanHill Produce Co. Ltd. [1986] 161 ITR 477 (Ker);Hill Produce Co. Ltd. [1986] 161 ITR 477 (Ker); 3.Gwalior Rayon Silk Co. Ltd. v. Commissioner ofIncome-Tax [1983] 140 ITR 832 (MP);Income-Tax [1983] 140 ITR 832 (MP); 4.Income Tax Officer v. Gujarat Narmada ValleyFertilizers Co. Ltd. [2001] 247 ITR 305.Fertilizers Co. Ltd. [2001] 247 ITR 305. 10.We have given our thoughtful consideration to therespective submissions of learned counsel for the parties and do notfind any merit in the contention of learned counsel for the assessee. 11.It would be expedient to refer to Rule 3(5) of the 1962 Rules which reads thus:- “5.The value of benefit to the employee resultingfrom the provision of free or concessional educationalfacilities for any member of his household shall bedetermined as the sum equal to the amount ofexpenditure incurred by the employer in that behalfor where the educational institution is itselfmaintained and owned by the employer or where freeeducational facilities for such member of employees'household are allowed in any other educationalinstitution by reason of his being in employment ofthat employer, the value of the perquisite to theemployee shall be determined with reference to thecost of such education in a similar institution in ornear the locality. Where any amount is paid orrecovered from the employee on that account, thevalue of benefit shall be reduced by the amount sopaid or recovered: Provided that where the education institution itself ismaintained and owned by the employer and freeeducational facilities are provided to the children ofthe employee or where such free educationalfacilities are provided in any institution by reason ofhis being in employment of that employer, nothingcontained in this sub-rule shall apply if the cost ofsuch education or the value of such benefit per child does not exceed one thousand rupees per month.” 12.From a bare perusal of the rule, it is clear that valuation offree or concessional educational facility to the ward of an employee is tobe calculated in the following manner:- Provided that where the education institution itself ismaintained and owned by the employer and freeeducational facilities are provided to the children ofthe employee or where such free educationalfacilities are provided in any institution by reason ofhis being in employment of that employer, nothingcontained in this sub-rule shall apply if the cost ofsuch education or the value of such benefit per child does not exceed one thousand rupees per month.” 12.From a bare perusal of the rule, it is clear that valuation offree or concessional educational facility to the ward of an employee is tobe calculated in the following manner:- (a)the actual amount of expenditure incurred by theemployer in that behalf; or employer in that behalf; or (b)where the educational institution is maintained andowned by the employer or free educational facilitiesare allowed in any other educational institution, thenthe value of perquisite shall be with reference to thecost of such education in a similar institution in ornear the locality;owned by the employer or free educational facilitiesare allowed in any other educational institution, thenthe value of perquisite shall be with reference to thecost of such education in a similar institution in ornear the locality; (c)In case any amount is paid or recovered from theemployees towards free or concessional educationalfacility, the value of benefit shall stand reduced bythe amount so paid or recovered.employees towards free or concessional educationalfacility, the value of benefit shall stand reduced bythe amount so paid or recovered. 13.However, in view of the proviso to Rule 3(5) of the 1962Rules, such rule is not applicable where the educational institution itselfis owned by the employer and free educational facilities are provided tothe children of the employee or such facilities are provided in anyinstitution by reason of employment of that employee if the cost of suchfree education or concessional educational facilities does not exceedRs.1000/- per month per child. 14.In other words, on plain reading of sub-rule (5) of Rule 3 ofthe 1962 Rules, it emerges that where the value of the perquisite offree/concessional educational facility arises to an employee and the valuation thereof exceeds Rs.1000/- per month, then the entire amountis added and is liable to be taxed in the hands of the recipient.However, an exception has been carved out in the proviso attached tothis sub-rule whereunder the sub-rule has no applicability in a situationwhere the cost of such education or value of such benefit per child doesnot exceed Rs.1000/- per month. It no where provides that whiledetermining the value of the perquisite wherever it exceeds Rs.1000/-per month then the amount of Rs.1000/- per month has to be reducedfrom the value of such perquisite. Thus, the value of the benefit of freeeducation to the wards of the employees shall be quantified as thevalue of the perquisite in the hands of the employer without anyreduction of Rs.1000/- per month per child. 15.The Assessing Officer while adjudicating the issue againstthe assessee had specifically held that the tuition fee in the case of thestudents of the assessee school was more than Rs.1000/- per month asthe assessee had deducted tax at source from the salary of theemployees including valuation of perquisite after reducing Rs.12000/-per annum per child. Once the value of the perquisite exceededRs.1000/- per mensem, Rule 3(5) of 1962 Rules applied and provisothereto had no applicability. 16.Adverting to the judgment of Delhi High Court in DelhiPublic School's case (supra) on which strong reliance has beenplaced, in that the conclusion on facts was that the value of perquisite offree education to the employee was Rs.902.27 per child per monthwhich was less than Rs.1000/-. The proviso to Rule 3(5) of 1962 Ruleswas, thus, fully applicable. The issue under consideration was not 16.Adverting to the judgment of Delhi High Court in DelhiPublic School's case (supra) on which strong reliance has beenplaced, in that the conclusion on facts was that the value of perquisite offree education to the employee was Rs.902.27 per child per monthwhich was less than Rs.1000/-. The proviso to Rule 3(5) of 1962 Ruleswas, thus, fully applicable. The issue under consideration was not relating to exemption/deduction of Rs.1000/- per month in respect ofeach child of an employee where cost/value of perquisite wasevaluated to be exceeding Rs.1000/-. The said decision does notadvance the case of the assessee. Further, Nestle India Ltd.,Kannan Devan Hill Produce Co. Ltd., Gwalior Rayon Silk Co. Ltd.and Gujarat Narmada Valley Fertilizers Co. Ltd's cases (supra) alsodo not come to the rescue of the assessee being based on individualfact situation involved therein. 17.Referring to the decision of the Apex Court in M/s Eli Lilly& Company (India) Pvt. Ltd's case (supra), it would be advantageousto read para 34, where while discussing the scope of Sections 201(1)and 201(1A) of the Act, it was held as under:- “34.A perusal of Section 201(1) and Section 201(1A) shows that both these provisions are withoutprejudice to each other. It means that the provisionsof both the sub-sections are to be consideredindependently without affecting the rights mentionedin either of the sub-sections. Further, interest underSection 201(1A) is compensatory measure forwithholding the tax which ought to have gone to theexchequer. The levy of interest is mandatory and theabsence of liability for tax will not dilute the default.The liability of deducting tax at source is in the natureof a vicarious liability, which pre-supposes existenceof primary liability. The said liability is a vicariousliability and the principal liability is of the person who is taxable. A bare reading of Section 201(1) showsthat interest under Section 201(1A) read with Section201(1) can only be levied when a person is declaredas an assessee-in-default. For computation ofinterest under Section 201(1A), there are threeelements. One is the quantum on which interest hasto be levied. Second is the rate at which interest hasto be charged. Third is the period for which interesthas to be charged. The rate of interest is provided inthe 1961 Act. The quantum on which interest has tobe paid is indicated by Section 201(1A) itself. Sub-section (1A) specifies “on the amount of such tax”which is mentioned in sub-section (1) wherein, it isthe amount of tax in respect of which the assesseehas been declared in default. The object underlyingSection 201(1) is to recover the tax. In the case ofshort deduction, the object is to recover the shortfall.As far as the period of default is concerned, theperiod starts from the date of deductibility till the dateof actual payment of tax. Therefore, the levy ofinterest has to be restricted for the above statedperiod only. It may be clarified that the date ofpayment by the concerned employee can be treatedas the date of actual payment.” 18.Necessary conclusion that follows is that the assessee hadshort deducted tax at source from the salary paid to its employees. The assessee having made short deduction of tax at source would, thus, beliable under Sections 201(1) and 201(1A) of the Act. 18.Necessary conclusion that follows is that the assessee hadshort deducted tax at source from the salary paid to its employees. The assessee having made short deduction of tax at source would, thus, beliable under Sections 201(1) and 201(1A) of the Act. 19.Further, the Tribunal referring to the method ofdetermination of the cost of the perquisite had noted that both direct andindirect expenses incurred in the running of the school excludingdepreciation where education was being imparted to the children had tobe taken into consideration for determination of the cost/value of theperquisite being granted to an employee. The Tribunal had remandedthe matter to the Assessing Officer for recomputation of cost/value ofperquisite to an employee by providing an opportunity to the assesseeto point out any difference in the valuation as made by the AssessingOfficer and the CIT(A). No error or perversity could be pointed out inthe approach of the Tribunal. 20.In view of the above, the substantial question of law in theappeal of the revenue and the questions of law claimed by theassessee are answered accordingly. The appeals filed by the revenueand the assessee stand disposed of. (AJAY KUMAR MITTAL) JUDGE July 11, 2011gbs (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE ITA No. 662 of 2008 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 663 of 2008 Date of Decision: 11.7.2011 Commissioner of Income Tax (TDS) Versus Director, Delhi Public School ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Yogesh Putney, Standing Counsel,for the appellant. Mr. Parvesh Saini, Advocate for Mr. Mukesh Verma, Advocate for the respondent. AJAY KUMAR MITTAL, J. For orders, see ITA No. 662 of 2008 (Commissioner of Income Tax (TDS) v. Director, Delhi Public School). (AJAY KUMAR MITTAL) JUDGE July 11, 2011gbs (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 753 of 2008 Date of Decision: 11.7.2011 Commissioner of Income Tax (TDS) Versus Director, Delhi Public School ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Yogesh Putney, Standing Counsel,for the appellant. Mr. Parvesh Saini, Advocate for Mr. Mukesh Verma, Advocate for the respondent. AJAY KUMAR MITTAL, J. For orders, see ITA No. 662 of 2008 (Commissioner of Income Tax (TDS) v. Director, Delhi Public School). (AJAY KUMAR MITTAL) JUDGE July 11, 2011gbs (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE ITA No. 662 of 2008 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 835 of 2008 (O&M) Date of Decision: 11.7.2011 Director, Delhi Public School Versus Commissioner of Income Tax ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Parvesh Saini, Advocate for Mr. Mukesh Verma, Advocate for the appellant. Mr. Yogesh Putney, Standing Counsel,for the respondent. AJAY KUMAR MITTAL, J. For orders, see ITA No. 662 of 2008 (Commissioner of Income Tax (TDS) v. Director, Delhi Public School). (AJAY KUMAR MITTAL) JUDGE July 11, 2011gbs (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE ITA No. 662 of 2008 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 836 of 2008 (O&M) Date of Decision: 11.7.2011 Director, Delhi Public School Versus Commissioner of Income Tax ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Parvesh Saini, Advocate for Mr. Mukesh Verma, Advocate for the appellant. Mr. Yogesh Putney, Standing Counsel,for the respondent. AJAY KUMAR MITTAL, J. AJAY KUMAR MITTAL, J. For orders, see ITA No. 662 of 2008 (Commissioner of Income Tax (TDS) v. Director, Delhi Public School). (AJAY KUMAR MITTAL) JUDGE July 11, 2011gbs (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE ITA No. 662 of 2008 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 836 of 2008 (O&M) Date of Decision: 11.7.2011 Director, Delhi Public School Versus Commissioner of Income Tax ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Parvesh Saini, Advocate for Mr. Mukesh Verma, Advocate for the appellant. Mr. Yogesh Putney, Standing Counsel,for the respondent. AJAY KUMAR MITTAL, J. For orders, see ITA No. 662 of 2008 (Commissioner of Income Tax (TDS) v. Director, Delhi Public School). (AJAY KUMAR MITTAL) JUDGE July 11, 2011gbs (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE ITA No. 662 of 2008 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 837 of 2008 (O&M) Date of Decision: 11.7.2011 Director, Delhi Public School Versus Commissioner of Income Tax ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Parvesh Saini, Advocate for Mr. Mukesh Verma, Advocate for the appellant. Mr. Yogesh Putney, Standing Counsel,for the respondent. AJAY KUMAR MITTAL, J. For orders, see ITA No. 662 of 2008 (Commissioner of Income Tax (TDS) v. Director, Delhi Public School). (AJAY KUMAR MITTAL) JUDGE July 11, 2011gbs (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE