Principal Commissioner Of Income Tax-2, Kolkata v. Mcleod Russel India Ltd

OD – 9 IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE IA NO: GA/2/2017(OLD NO. GA/3682/2017)INITAT/378/2017 PRINCIPAL COMMISSIONER OF INCOME TAX-2, KOLKATAVS.MCLEOD RUSSEL INDIA LTD. BEFORE :THE HON’BLE JUSTICE T.S. SIVAGNANAMA N DTHE HON’BLE JUSTICE HIRANMAY BHATTACHARYYADate: November 30, 2021. Appearance :Mr. P. K. Bhowmik, Adv.Mr. Soumen Bhattacharjee, Adv.… for the appellantMr. Asim Chaudhury, Adv.…for the respondent The Court : This appeal by the Revenue filed under Section260A of the Income Tax Act, 1961 (the Act, in brevity) is against theorder dated 8[th] October, 2015 passed by the Income Tax AppellateTribunal “C” Bench, Kolkata in ITA Nos. 262 & 263/Kol/2013 for theAssessment Years 2008-09 and 2009-10. The Revenue has raised the following substantial questionsof law for consideration: 1.Whether on the facts and in the circumstances ofthe case, the Learned Income Tax AppellateTribunal “C” Bench, Kolkata erred in law in holdingthat for the purpose of computation of FringeBenefits Tax, the expenses incurred by the employertowards payment of Fringe Benefit to its employeesin case of Tea Company is subjected to Rule 8 of theIncome Tax Rules?the case, the Learned Income Tax AppellateTribunal “C” Bench, Kolkata erred in law in holdingthat for the purpose of computation of FringeBenefits Tax, the expenses incurred by the employertowards payment of Fringe Benefit to its employeesin case of Tea Company is subjected to Rule 8 of theIncome Tax Rules? 2.Whether on the facts and in the circumstances ofthe case, the Learned Income Tax AppellateTribunal “C” Bench, Kolkata erred in giving relief at40% of the taxable value of the Fringe Benefit asagainst 100% by allowing the benefit of Rule 8 of theIncome Tax Rules which has no relevance at all incomputing the Fringe Benefit Tax?the case, the Learned Income Tax AppellateTribunal “C” Bench, Kolkata erred in giving relief at40% of the taxable value of the Fringe Benefit asagainst 100% by allowing the benefit of Rule 8 of theIncome Tax Rules which has no relevance at all incomputing the Fringe Benefit Tax? We have heard Mr. P. K. Bhowmik, learned senior standingcounsel for the appellant/Revenue and Mr. Asim Chaudhury, learnedcounsel for the respondent/Assessee. It is not disputed that the identical substantial questionsthough slightly differently framed decided by this Court in theassesse’s own case for the assessment year 2006-07 in ITAT 147 of2011 and for the assessment year 2007-08 in ITA No. 75 of 2012. TheHon’ble Division Bench followed an earlier decision of this Court inthe case of M/S. APEEJAY TEA LTD. -VS- COMMISSIONER OF INCOME TAX, CENTRAL-I & ANR. in ITA No.165 of 2013 dated 3[rd]July, 2014. The operative portion of the judgement for the assessmentyear 2007-08 is as follows: The subject matter of challenge in this appeal is ajudgment and order dated 26[th] June, 2013 by which thelearned income tax appellate tribunal rejected the contentionof the assessee that Rule 8 of the Income Tax Rules has anyapplication in arriving at a valuation of the fringe benefitsunder Chapter XII H. The learned tribunal as a matter of factin rejecting the contention of the assessee relied on an earlierjudgment in the case of the assessee itself in ITANo.557/Kol/2010 wherein the following view was expressed: INCOME TAX, CENTRAL-I & ANR. in ITA No.165 of 2013 dated 3[rd]July, 2014. The operative portion of the judgement for the assessmentyear 2007-08 is as follows: The subject matter of challenge in this appeal is ajudgment and order dated 26[th] June, 2013 by which thelearned income tax appellate tribunal rejected the contentionof the assessee that Rule 8 of the Income Tax Rules has anyapplication in arriving at a valuation of the fringe benefitsunder Chapter XII H. The learned tribunal as a matter of factin rejecting the contention of the assessee relied on an earlierjudgment in the case of the assessee itself in ITANo.557/Kol/2010 wherein the following view was expressed: “7. We have carefully considered the submissionsof the Ld. Representatives of the parties and the orders of theauthorities below. We have also considered the relevantprovisions i.e. Section 1125WA, 115WB & 115WE of theIncome Tax Act. We observe that an employer assessee isliable to pay Fringe Benefit Tax u/s. 115WA of the Income TaxAct, in relation to Fringe Benefits provided by him to itsemployees, Sub-section (2) of Section 115WA starts with a nonobstante clause and states that notwithstanding that noincome-tax is payable by an employer to its total incomecomputed in accordance with the provisions of the Act, the taxon 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 histotal income computed in accordance with the provisions ofthe Income Tax Act. Therefore, the contention of the Ld.Authorised Representative for the assessee that value ofFringe Benefit should be computed by applying Rule 8 of theIncome Tax Rule has no merit as Fringe Benefit Tax is notpayable on the income of the assessee but only Fringebenefits provided by an employee to its employees. In view ofthe above, we agree with the Ld. Departmental Representativethat the contention of the Ld. Authorised Representative forthe assessee has no merit and accordingly, we uphold theorder of the Ld. CIT(A) by rejecting grounds of appeal taken bythe assessee.” Aggrieved by the aforesaid order of the learnedtribunal the present appeal has been preferred. The solequestion for consideration is “whether Rule 8 is applicablefor the purpose of computing valuation of the fringe benefitsfor the purpose of Chapter XII H of the Income Tax Act?”Rule 8 provides as follows: “8. (1) Income derived from the sale of teagrown and manufactured by the seller in Indiashall becomputed as if it were income derivedfrom business, and forty per cent of suchincome shall be deemed to be income liable to tax. (2) In computing such income an allowanceshall be made in respect of the cost of plantingbushes in replacement of bushes that have diedor become permanently useless in an areaalready planted, if such area has not previouslybeen abandoned, and for the purpose ofdetermining such cost, no deduction shall bemade in respect of the amount of subsidywhich, under the provisions of Clause (30) ofSection 10, is not includible in the total income.” Mr. Majumdar, learned advocate appearing in support ofthe appeal submitted that fringe benefit tax is an additional incometax as would appear from Section 115WA. Therefore, the rulesapplicable for the purpose of assessing income tax would also beapplicable for the purpose of arriving at a valuation of the fringebenefits. Before tax can be assessed, taxable income has to be arrivedat. Similarly before fringe benefit tax can be assessed the valuation ofthe fringe benefits has to be arrived at. When the fringe benefit tax isan additional income tax, there can hardly be any doubt, according tohim, that Rule 8 shall apply with full force. He, in support of hissubmission, drew our attention to a judgment of the Apex Court in thecase of CIT Vs. Doom Dooma India Limited reported in 310 ITR392(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 8applies, the income which is brought to tax as “businessincome” is only 40 per cent of the composite income andconsequently proportionate depreciation is required to betaken into account because that is the depreciation “actuallyallowed.” Hence we find no merit in the civil appeals filed bythe Department.” The next judgment cited by Mr. Majumdar in thecase of Jayshree Tea and Industries Limited vs. Union ofIndia reported in 285 ITR 506 (Cal) wherein a Division Benchof this Court held that Rule 8 was applicable to the additionalincome tax payable under Section 115-O. The Division Benchclarified its opinion by the following illustration: “If a tea company has a net income ofRs.100, Rs.40 would be liable to income tax at theprescribed rate and the assessee would beassessed accordingly. By virtue of Section 115-O ifthe company declares Rs.50 for distributionamongst the shareholders it would have aproportionate liability. It is true that in case ofcompany decides to distribute a part of the incomeit would be impossible to find out whether thatpart of the income included the whole of theagricultural income or a part of it. This exercisenow, in our view, is not at all relevant in view ofthe provision of rule 8 of the Income-tax Rules. Insuch event the company would be charged onRs.40 for income-tax and on Rs.50 for additionalincome-tax on proportionate basis.” The third judgment relied upon by Mr. Majumdar is in the case of Hindustan Unilever Ltd. vs. Dy. Commissionerof Income-tax(1), Mumbai, reported in 325 ITR 102 (Bom). Thequestion which cropped up for consideration in the aforesaidcase was whether Rule 8 was applicable to the losses sufferedby a tea company. The question was answered in theaffirmative. The view expressed by Bombay High Court to be precise is as follows: “ 13. Now, what rule 8 postulates is the processof segregating the income derived from the sale of teaupon its computation as if it were income derived frombusiness. Rule 8 creates a legal fiction, as a result ofwhich the income which is derived from the sale of teawhich is grown and manufactured by the assessee isto be computed as if it were income derived frombusiness. It needs no line of elaborate reasoning tostate the well-settled position in law that once a legalfiction is created by the Legislature or, as in this case,in subordinate legislation, the legal fiction has to begiven force and effect so as to operate within the areain which it was intended to operate. In applying a legalfiction, it is trite law that one cannot allow theimagination to boggle. A legal fiction has to be carriedto its logical conclusion. In computing the income fromthe sale of tea as if it was income derived frombusiness, for the purposes of rule 8, it is impossible tocomprehend as to how the expenditure incurred by anassessee, wholly and exclusively, for the purposes ofbusiness should be disregarded. Obviously, theexpenditure cannot be disregarded. The principle whichmust govern is well-settled and only a brief reference toauthority 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 theSupreme Court was whether a capital loss could bedetermined and carried forward, in accordance withthe provisions of section 24 of the Act of 1922, whenthe provisions of section 12B were not applicableduring the course of assessment year 1955-56. TheSupreme Court held that from the charging provisionsof the Act it is discernible that the words ‘income’ or‘profits and gain’ should be understood as includinglosses also, so that, in one sense ‘profits and gains’represent ‘plus income’ whereas losses represent‘minus income’. The Supreme Court observed asfollows:- 14. In CIT v. Harprasad & Co. (P). Ltd. [1975]99 ITR 118 (SC), the question which came up before theSupreme Court was whether a capital loss could bedetermined and carried forward, in accordance withthe provisions of section 24 of the Act of 1922, whenthe provisions of section 12B were not applicableduring the course of assessment year 1955-56. TheSupreme Court held that from the charging provisionsof the Act it is discernible that the words ‘income’ or‘profits and gain’ should be understood as includinglosses also, so that, in one sense ‘profits and gains’represent ‘plus income’ whereas losses represent‘minus income’. The Supreme Court observed asfollows:- “From the charging provisions of the Act, it isdiscernible that the words “income” or “profits andgains” should be understood as including losses also,so that, in one sense “profits and gains” represent“plus income” whereas losses represent “minusincome”. In other words, loss is negative profit. Bothpositive and negative profits are of a revenuecharacter. Both must enter into computation,wherever it becomes material, in the same mode of thetaxable income of the assessee. Although section 6classifies 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 Section2(15). An income in order to come within the purviewof that definition must satisfy two conditions. Firstly,it must comprise the “total amount of income, profitsand gains referred to in section 4(1)”. Secondly, itmust be “computed in the manner laid down in theAct.” If either of these conditions fails, the income willnot be a part of the total income that can be broughtto charge.” The Supreme Court held that if the capital wasnot chargeable to tax during the period between 1-4-1948 to 1-4-1957, the assessee did not possess anindependent right to carry forward his capital losseven if it could not be set off, owing to the non-taxability of the capital gains, against profits insubsequent years. The decision of the Supreme Courtemphasizes that under the charging provisions of theAct, income must be comprehensively understood asincluding a loss. The principle that income wouldinclude a loss has also been re-affirmed in asubsequent 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 theassess to set off 40 per cent of losses against normalbusiness profits could not be allowed. On the basis,the Assessing Officer has formed the opinion that theloss of Rs.10.84 crores attributable to the businessactivity of the assessee involving the manufacture andsale of tea was liable to be disallowed. It must benoted here that it is not the contention for the AssessingOfficer that the loss which has been computed by theassessee by applying the proportion of 40 per cent isnot a fair estimate of the actual loss sustained, by theassessee in its business operations. On the contrary, itis on the basis of rule 8 that the Assessing officer seeksto postulate that the loss attributable to the businessactivity of the assessee would have to be disregardedon the ground that is not allowable expenditure. Theinference which is sought to be drawn by the AssessingOfficer is contrary to the plain meaning of the chargingprovisions of the Act; and to rule 8, besides beingcontrary to the position in law laid down by theSupreme Court. The assessee was lawfully entitled toadjust the loss which arose as a result of the businessactivity under rule 8.” Mr. Majumdar concluded by saying that the judgment and order under challenge should be reversed and the questionformulated above should be answered in favour of the assessee.Ms. Gutgutia, learned advocate appearing for therevenue, submitted that - Mr. Majumdar concluded by saying that the judgment and order under challenge should be reversed and the questionformulated above should be answered in favour of the assessee.Ms. Gutgutia, learned advocate appearing for therevenue, submitted that - (a)Chapter XII H is a complete code in itself in thematter of taxation on fringe benefits. She drewour attention to sub-section 2 of Section 115WA and contended that the sub-Sectionstarting with a non-obstente clause makes itclear that the provisions contained in theaforesaid Chapter are applicable to fringebenefits made available to the employees by anemployer. She contended that no concessionhas been made in the statute for applicabilityof Rule 8. It is, therefore, not possible to holdthat Rule 8 would be applicable in assessingthe fringe benefit tax.matter of taxation on fringe benefits. She drewour attention to sub-section 2 of Section 115WA and contended that the sub-Sectionstarting with a non-obstente clause makes itclear that the provisions contained in theaforesaid Chapter are applicable to fringebenefits made available to the employees by anemployer. She contended that no concessionhas been made in the statute for applicabilityof Rule 8. It is, therefore, not possible to holdthat Rule 8 would be applicable in assessingthe fringe benefit tax. (b)She submitted that the expenditure incurredby the assessee in providing fringe benefits tothe employees has already been taken intoaccount for the purpose of arriving at the totaltaxable income. There is as such no reasonwhy the apportionment should once again beallowed by applying Rule 8.by the assessee in providing fringe benefits tothe employees has already been taken intoaccount for the purpose of arriving at the totaltaxable income. There is as such no reasonwhy the apportionment should once again beallowed by applying Rule 8. (c)The judgments cited by Mr. Majumdar are notapplicable. The judgments cited by Mr.Majumdar are with respect to topics other thanthe question with which we are concerned inthis appeal. Therefore, those judgments haveno manner of application.applicable. The judgments cited by Mr.Majumdar are with respect to topics other thanthe question with which we are concerned inthis appeal. Therefore, those judgments haveno manner of application. (d)She contended that there is no question of anydouble taxation and in support of hersubmission she drew our attention toparagraph 18 of the judgment in the case of R& D Falcon (A)_ Pvt. Ltd. vs. C.I.T., reported inAIR 2008 SCW 4096.double taxation and in support of hersubmission she drew our attention toparagraph 18 of the judgment in the case of R& D Falcon (A)_ Pvt. Ltd. vs. C.I.T., reported inAIR 2008 SCW 4096. We have considered the rival submissions advancedby the learned advocates. For the purpose of resolving the disputes,we would like to refer to the illustration appearing from the judgmentof the Apex Court in the case of CIT vs. Doom Dooma India Ltd.(supra). The illustration in paragraphs 12 and 13 of the judgmentreads as follows: “12. Be that as it may, we can give thefollowing 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)Business Profit & Loss A/c.600 Income subject to charge under theIncome-tax Act by application of Rule 8 (40% of 600) Illustration ‘B’ Rs. Income from sale of tea (40% of 1000) 400Less:Expenses –Depreciation(40)Others (40% of 300) (120)Business Profit subject to charge of240 Income-tax (40% of 600) 13. Analysing the above two charts, we find that “12. Be that as it may, we can give thefollowing 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)Business Profit & Loss A/c.600 Income subject to charge under theIncome-tax Act by application of Rule 8 (40% of 600) Illustration ‘B’ Rs. Income from sale of tea (40% of 1000) 400Less:Expenses –Depreciation(40)Others (40% of 300) (120)Business Profit subject to charge of240 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 applyingrule 8 comes to Rs.240. Under Illustration ‘A’, the normal depreciationis Rs.100 which is deductible from Rs.1,000 being the income fromsale of tea. On the other hand, under Illustration ‘B’, we have taken40 per cent of each of the items, namely, income from sale of tea,depreciation and other expenses. Accordingly, on comparison it maybe noted that whereas income from sale of tea is Rs.1,000 underIllustration ‘A’, proportionately it comes to Rs.400 under Illustration‘B’. Similarly, depreciation under Illustration ‘A’ which is normaldepreciation is Rs.100 whereas in Illustration ‘B’ at 40 per cent thepro rata depreciation is 40. What is important to be noted is that at the end of computation under both the Illustrations, the Incometaxable by applying rule 8 comes to Rs.240 in both the cases. Theonly difference is that in Illustration ‘B’ we have gone by pro ratabasis.” The question for consideration before Their Lordshipswas whether deduction on account of depreciation is allowablefrom the business income arrived at after applying Rule 8. Thisquestion was answered by Their Lordships in the affirmative.From illustration (a) it would appear that business profit aftertaking into account the expenses was computed at Rs.600/-.Applying the Rule 8 taxable income on account of business wascomputed at Rs.240/-, that is to say, 40% of Rs.600/-. Fromillustration (b) it would appear that 40% of the total income fromsale of tea was taken into account. From illustration (a) it wouldappear that total depreciation is Rs.100/-. For the purpose ofcomputing business Profit & Loss of 40% of the total depreciationwas taken into account. From illustration (a) it would appear thatother expenses were computed at Rs.300/- and illustration (b)would show that other expenses were computed at Rs.120/-, inother words, 40% of Rs.300/- had been taken into account. We shall take assistance of the illustration to resolvethe issue. Let us assume that the other expenses in illustration(a) amounting to Rs.300/- include Rs.100/- spent by theemployer on account of fringe benefits made available to itsemployees. In that case, 40% of the aforesaid sum of Rs.100/- We shall take assistance of the illustration to resolvethe issue. Let us assume that the other expenses in illustration(a) amounting to Rs.300/- include Rs.100/- spent by theemployer on account of fringe benefits made available to itsemployees. In that case, 40% of the aforesaid sum of Rs.100/- would also be includible in illustration (b). Therefore, the questionposed before us has really been answered by the illustration givenby the Apex Court in the aforesaid judgment. It cannot bedisputed that the amount of expenditure incurred by the assesseein extending fringe benefits to its employees was not solely for thepurpose of business. The expenditure incurred is both for thepurpose of business and for the purpose of agriculture. Thesubmission made by Mrs. Gutgutia that the expenditure onaccount of fringe benefits has already been taken into account isnot correct. The net profit and loss of the business has to bearrived at after deducting all the expenses as indicated inillustration ‘A’ in the case of Doom Dooma (supra). Once that isdone 40% of the net profit and loss has to be worked out whichshall be chargeable to tax. Once this is done the expenditure onaccount of fringe benefits would automatically stand reduced to40% as would appear from illustration “B” in the case of DoomDooma [supra]. The revenue is interested in contending as wouldappear from the impugned orders that the expenditure onaccount of fringe benefit cannot be reduced to 40% for thepurpose of computing fringe benefit tax. If that is done, the resultwould be that the agricultural income itself would become liableto tax, which is not permissible under sub-Section 1 of Section10of the Income Tax Act. The provisions contained in Chapter XII Hof the Income Tax Act have to be read subject to Section 10 of theIncome Tax Act. For the aforesaid reasons, we are of the opinion that thejudgment of the learned Tribunal cannot be sustained. Thesubmissions advanced by Ms. Gutgutia naturally do not help therevenue. The judgment cited by her was with regard to thequestion as to whether fringe benefit tax amounts to doubletaxation. That question was answered by Their Lordships in thenegative. Before us, the question of double taxation has notarisen for consideration. The question formulated above is, therefore, answeredin the affirmative and in favour of the assessee. The appeal is, therefore, allowed.” Thus, following the aforesaid decision, the appeal filed by theRevenue is dismissed and the substantial questions of law areanswered against the Revenue. (T. S. SIVAGNANAM, J.) (HIRANMAY BHATTACHARYYA, J.)