TAXAP/415/2008 1/16 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No.415 of 2008 To TAX APPEAL No.420 of 2008 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA Sd/- HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Sd/- =================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2 To be referred to the Reporter or not ? YES 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5 Whether it is to be circulated to the civil judge ? NO =================================================== THE COMMISSIONER OF INCOME TAX(TDS) - Appellant(s) Versus RELIANCE INDUSTRIES LTD. - Opponent(s) =================================================== Appearance : MR MANISH R BHATT, SENIOR STANDING COUNSEL, with MRS MAUNA M BHATT for Appellant(s) : 1 MR SN SOPARKAR, SENIOR ADVOCATE, with MRS SWATI SOPARKAR for Opponent(s) : 1, =================================================== CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Date : 11/09/2008 COMMON ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) TAXAP/415/2008 2/16 JUDGMENT (1) All these six appeals are taken up for hearing together as they emanate out of a common order dated 22.06.2007 made by the Income-tax Appellate Tribunal, Ahmedabad in various cross-appeals filed by the appellant-revenue and the respondent-assessee in the following circumstances. (2) The facts, as briefly stated by the Tribunal, are that “the assessee viz. M/s.Reliance Industries Ltd., (“RIL” for short) distributed free food / meal coupons as per companies policy to its employees for purchase of meal. For this purpose, the assessee company had entered into an agreement with M/s.Accor Radha Krishna Services Pvt. Ltd. (“Accor” for short). The employees at Hazira, Surat were provided with coupons of “Accor” of Rs.1300/- per month at the rate of Rs.50/- per day. The total amount paid by the assessee company to “Accor” under the agreement for the meal coupon for the period April 2003 to 31.03.2004 TAXAP/415/2008 3/16 JUDGMENT was Rs.3.12 Crores. The assessee company claimed that amount paid to “Accor” food meal coupons made to the employees was not taxable perquisite within the meaning of Rule 3(7) (iii) of the I.T. Rules. It, therefore, did not deduct the tax at source on this amount. AO, however, on the strength of the provisions of Rule 3(7)(iii) of the I.T. Rules and facts gathered by him during the course of survey and other inquiries conducted by him, concluded that the employees had in fact utilized coupons worth of Rs.11,42,080/- and Rs.23,56,000- only for purchasing food and meals at the canteen and coupons worth Rs.1,42,55,120/- and Rs.2,88,00,000/- were not utilized for purchasing meals at an eating joints but were used to purchase grocery items, cosmetics items etc. from shops/super stores selling such items.” (3) The Assessing Officer thus framed four orders, two under Section 201 of the Income-tax Act, TAXAP/415/2008 4/16 JUDGMENT 1961 (the Act) and two under Section 201(1A) of the Act in relation to the first period from April 2003 to November 2003 and the second period from December 2003 to March 2004. Furthermore, two orders under Section 271C of the Act were also framed levying penalties for non-compliance with requirement of deducting tax at source by the respondent- assessee under Section 192 of the Act. According to the Assessing Officer, in light of Rule 3(7)(iii) of the Income-tax Rules, 1962 (the Rules) the value of free meals provided by an employer to an employee had to be treated as perquisite within the meaning of Section 17(2) of the Act for being taxed under the head “salaries”, but the amount had to be reduced if any amount against such expenditure incurred by the employer was recovered from the employee concerned. That the Proviso under the said clause (iii) of sub-rule (7) of Rule 3 provided for an exception but the respondent-assessee was not entitled to claim TAXAP/415/2008 5/16 JUDGMENT benefit of the Proviso because, according to the Assessing Officer, the coupons had been misused by some of the employees. The Assessing Officer, therefore, estimated certain amount as being taxable perquisite in hands of the employees and initiated proceedings under Sections 201, 201(1A) and 271C of the Act for such violation and for this purpose worked out that 90% value of the coupons issued by the contracting party in agreement with the employer-assessee having been misused by the employees, the assessee had failed to discharge statutory liability of deducting tax at source under Section 192 of the Act. (4) The assessee carried the matter in appeal before Commissioner (Appeals) who accepted the stand of the assessee in principle. The Commissioner (Appeals) came to the conclusion that the assessee and the contracting party, namely Accor had taken sufficient steps to TAXAP/415/2008 6/16 JUDGMENT prevent misuse and complied with the requirement of the relevant Rule but if some of the employees misused the facility by using the coupons for some other purpose, other than for obtaining tea, snacks or meals during working hours, the assessee cannot be liable for such misuse. However, thereafter Commissioner (Appeals) estimated 30% value of the coupons as having been misused and treated the assessee-company in default for levy of interest towards short deduction of tax and levy of penalty. (5) The assessee carried the matter in second appeal before the Tribunal against retention upto 30% value of the coupons; while the revenue challenged the order of Commissioner (Appeals) on merits and to the extent of relief granted. All the appeals were heard by the Tribunal together and the Tribunal came to the conclusion that the assessee could not be considered to have defaulted in any manner in TAXAP/415/2008 7/16 JUDGMENT light of the evidence which has come on record. The findings in this relation have been recorded by the Tribunal in Paragraph No.18 of its order. (6) The second issue relates to applicability or otherwise of non-deduction of tax at source on payment made to the employees by way of reimbursement of conveyance expenses which, according to the Assessing Officer, was a taxable perquisite as the relevant conditions stipulated by the Explanation below Section 17(2)(iii)(c) of the Act are violated. According to the Assessing Officer, such reimbursement was required to be included in the taxable perquisite for computing the income taxable under the head “salaries” in hands of the employees and the employer- assessee having failed to deduct tax at source was liable under Sections 201, 201(1A) and 271C of the Act. (7) The assessee carried the matter in appeal before Commissioner (Appeals) and succeeded. TAXAP/415/2008 8/16 JUDGMENT On reading the Explanation it was held by Commissioner (Appeals) that the only requirement was providing of a vehicle by the employer and there was no prescription that the vehicle in question had to be owned either by the employer or a third party, but if the vehicle was owned by the employee concerned the reimbursement would become taxable. (8) The revenue carried the matter in second appeal before the Tribunal on this count. The Tribunal, after hearing both sides concurred with the view expressed by Commissioner (Appeals). (9) The following common question has been raised in Tax Appeal Nos.415 of 2008 and 420 of 2008: “Whether the Appellate Tribunal is right in law and on facts in canceling the penalty levied u/s. 271C of the Act?” (10) The following two identically worded questions have been raised in Tax Appeal Nos.416 of 2008, 417 of 2008, 418 of 2008 and 419 of TAXAP/415/2008 9/16 JUDGMENT 2008: A) “Whether the Appellate Tribunal is right in law and on facts in holding that when the perquisites were given by the assessee, the assessee was acting bonafide and its claim was covered by Rule 3(7)(iii) to be treated as tax perquisites in request of food / meal coupon scheme and thereby holding that in respect of meal coupon, the assessee cannot be treated in default and not liable for TDS?” B) “Whether the Appellate Tribunal is right in law and on facts in holding that reimbursement of conveyance allowance paid by the assessee was tax free perquisite and, therefore, the assessee was not required to deduct TDS in this behalf?” (11) In so far as the first issue is concerned, the relevant Proviso under Rule 3(7)(iii) of the Rules reads as under: “Provided that nothing contained in this sub-rule shall apply to free meals provided by the employer during office hours at office or business premises or through paid vouchers which are not transferable and TAXAP/415/2008 10/16 JUDGMENT usable only at eating joints if the value thereof in either case is upto Rs.50 per meal or to tea or snacks provided during office hours or to free meals during working hours provided in a remote area or an offshore installation.” (12) On a plain reading it can be seen that the value of free meals provided by an employer to an employee shall not be taxed as perquisite in hands of the employee if during office hours at office or business premises free meals are provided by the employer; alternatively, the employer can issue paid vouchers having value upto Rs.50/- per meal with a further condition that such vouchers are not transferable and are usable only at the specified eating joints, again to be used during office hours. (13) Admittedly, in the present case, it is an accepted position between the parties that the respondent-assessee had distributed such meal coupons pursuant to an agreement with Accor TAXAP/415/2008 11/16 JUDGMENT and such coupons were to be used by the employees only at the specified eating joints, including canteen at the Hajira premises of the respondent-assessee, such coupons were not transferable, and the value of each coupon did not exceed the specified monetary limit. In this context both Commissioner (Appeals) and the Tribunal have concurrently found that the assessee had taken all necessary steps to comply with the requirement of the provisions and no default could be ascribed to the assessee merely because some employees misused the facility provided. (14) Learned Senior Standing Counsel appearing for the appellant had contended in this context that for the first period, namely, April 2003 to November, 2003 the inquiries had been undertaken on 25.09.2003 and, therefore, even if the findings of the appellate authorities that the assessee had acted bona fide were to be accepted yet for the second period, covering December 2003 to March 2004, the TAXAP/415/2008 12/16 JUDGMENT assessee became liable as the assessee could not thereafter claim any bona fides. (15) The said contention proceeds on a misconception as to the relevant provisions stipulated by the Rule in question. The assessee at the time of issuance of coupons cannot envisage as to which of the employees would misuse the coupons because the liability to deduct tax at source is co-related with the taxability of the amount in hands of a particular employee and there can be no case of estimation on percentage basis. The primary liability to offer the amount for tax is that of the employee concerned and it is only by a prescribed mode of recovery that the employer is required to deduct tax at source. Needless to state that such deduction has to be specifically employee-wise and the employer cannot be called upon to presume that a particular percentage of employees, out of the total workforce, shall misuse the facility so TAXAP/415/2008 13/16 JUDGMENT as to warrant deduction of tax at source. Furthermore, correspondingly such tax deducted at source has to be given credit of to the employee concerned in the assessment of the employee and unless and until the tax deduction certificate specifies the employee concerned there can be no corresponding credit given to the employee. (16) In the circumstances, it is not possible to accept the stand of the appellant-revenue that the Tribunal has committed any error in law so as to warrant interference giving rise to a substantial question of law, qua the first issue. (17) In so far as the second issue is concerned it has concurrently been found by both Commissioner (Appeals) and the Tribunal that under the relevant Explanation any expenditure incurred by the employer for journey by the employee from residence to the office or other TAXAP/415/2008 14/16 JUDGMENT place of work, and from office or other place of work to the residence of the employee, such amount of expenditure shall not be regarded as benefit or amenity granted or provided to the employee free of cost or at a concessional rate for the purpose of including such amount as taxable perquisite in hands of the employee. The provision, therefore, envisages that the expenditure is in relation to use of any vehicle provided by the employer. There is no qualification as to the nature of the vehicle or as to ownership of the vehicle. In fact the Assessing Officer also accepts that if the vehicle is owned by the employer or hired by the employer the amount of expenditure cannot be treated as perquisite in hands of the employee. Once this is the position it is not possible to read any further prohibition as the revenue wants, namely, if the vehicle is owned by the employee the expenditure is not allowable and has to be taxed as perquisite in hands of the TAXAP/415/2008 15/16 JUDGMENT employee. (18) Both the appellate authorities, namely, Commissioner (Appeals) and the Tribunal have rightly read the provision which is primarily relatable to an employee i.e. perquisite which is required to be included for being taxed under the head “salaries” in the hands of the employee and cannot be read so as to fasten a liability on the employer unless and until a specific finding in hands of the employee is recorded that the same is taxable as a perquisite. Hence, even on the second issue the approach of the appellate authorities cannot be faulted and the impugned order of the Tribunal does not give rise to any question of law, much less a substantial question of law. (19) As a consequence the Tribunal has rightly come to the conclusion that the assessee is neither liable to pay interest either under Section 201 or Section 201(1A) of the Act, nor can the TAXAP/415/2008 16/16 JUDGMENT assessee be held liable to penalty under Section 271C of the Act. (20) In the result, these six appeals are dismissed in absence of any substantial question of law arising from the impugned order of the Tribunal. (21) Registry to place a copy of this order in connected matters. Sd/- [D. A. MEHTA, J] Sd/- [BANKIM N. MEHTA,J] *** Bhavesh*