TDS not to be deducted on Uniform Allowance given to Employees for use while on duty
Fact and Issue of the case
By this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), the appellant – Commissioner of Income Tax (TDS) has called in question the order dated 16.3.2018 passed by the Income Tax Appellate Tribunal, Surat Bench, Surat (hereinafter referred to as “the Tribunal”) in ITA No.2436/Ahd/2014/SRT for assessment year 2010-11.
By an order dated 9.10.2018, this court had issued notice for final disposal to consider the following substantial question of law:
“Whether the Income Tax Appellate Tribunal was right in law in confirming the order of the Income Tax Appellate Tribunal (sic. Commissioner of Income Tax (Appeals)) deleting the additions made by the Assessing Officer under section 201(1) of the Income Tax Act, 1961, and consequential interest charged by the Assessing Officer in relation to the assessee’s payments to its employees under the head of uniform allowance?”
On 22.11.2010, a survey was conducted at the office premises of the assessee – Oil and Natural Gas Corporation Limited. During the course of the survey, it was noticed that the assessee had made payments under the head “uniform allowance”; however, the deductor had neither included this allowance to the total salary payments nor had he deducted tax at source (TDS) on such income. On these issues, additions were made in the immediately preceding financial year 2009- 10 under section 201(1) read with section 201(1A) of the Act. The Assessing Officer noted that there was no provision for granting exemption on the basis of self certification. He further noticed that reimbursement of uniform allowance was not being treated as taxable for the assessment year and the assessee had disclosed in writing that out of around 790 to 800 employees at Hazira, 752 employees had taken this reimbursement on the basis of self-certification and thus, it has not been included in the gross salary chargeable to TDS under section 192 of the Act for the financial year in question presuming that since the employees had given self certification, they might have incurred or would be incurring such expenditure.
Therefore, no further check had been observed by the deductor as to whether they had actually incurred such expenditure or not and original/genuine and real bills and vouchers to this effect were not taken at the relevant point of time during the relevant financial year or thereafter. According to the Assessing Officer, there is no direct provision under which such exemption can be provided on the basis of self certification. He also found that all the 752 employees were given a sum of Rs.52,364/- uniformly in the year and this system of self certification was prevalent from years together unhindered. The Assessing Officer noted as to how all the employees would uniformly incur such expenditure irrespective of their post and necessity and as to how an employee would be in need of uniforms costing Rs.52,364/- every year and odd figures and that no direct proof had been taken by the employer and instead a simple format has been devised and all the employees were indiscriminately putting their claims of such huge cost of uniforms and their maintenance which was not possible per employee even after use all the time and day and night. According to the Assessing Officer, such huge expenditure was not feasible and was highly disproportionate and that there was no justification on the part of the employer in incurring such huge expenditure. That even after paying such huge amounts, the Drawing Disbursing Officer (DDO) was treating this segment of income for the employees as exempt and holding these reimbursements as exempt. He further observed that the DDO had not called for bills and vouchers to examine the veracity of the claim of uniform allowance and had accepted the self certification given by the employees.
The Assessing Officer noticed that section 10(14)(i) of the Act provides that any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specially granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed to the extent to which such expenses are actually incurred for that purpose. According to the Assessing Officer, such allowances firstly become part of the salary and exempt to the extent of spending, but the assessee had not included these allowances as part of the salary and had not examined the aspect of actual expenditure and instead had taken self certification at the beginning of the financial year from all employees without verification of the claim to ascertain whether such expenditure had actually been incurred for the purpose. He further noted that section 192 of the Act casts a responsibility on the employer to deduct proper TDS from the salary of the employee. Salary includes allowances/ reimbursements which are conditionally exempt. It is the responsibility of the employer to ascertain the correctness of the claim of exemption of any allowance before allowing it as exempt. If the employer finds the claim of the employee to be correct, he can consider such claim while computing the taxable income and tax thereon; whereas in this case, the employer has allowed the blanket exemption to its employees without any verification. None of the employees on his own has added the allowances received to his own income in his individual income tax return and has claimed exemption under section 10(14)(i) of the Act, which shows that the government has lost revenue to that extent due to non-deduction of TDS by the employer.
On behalf of the assessee, it was contended that such reimbursement is exempt under rule 2BB (1)(f) of the Income Tax Rules, 1962 (hereinafter referred to as “the rules”) read with section 10(14)(i) of the Act. However, the Assessing Officer was of the view that such reimbursement was completely out of the provisions of rule 2BB of the rules read with section 10(14)(i) of the Act. He, accordingly, treated reimbursement of Rs.3,92,67,843/- for 752 employees as taxable whereon TDS was not deducted by the DDO in the financial year 2010 and held that the same is required to be taxed now.
The assessee carried the matter in appeal before the Commissioner (Appeals). Before the Commissioner (Appeals) the assessee placed reliance upon CBDT Circular No.15 dated 8.5.1969 and submitted that similar issue, that is, reimbursement of uniform allowance on the basis of declaration by the employees had been decided in favour of the assessee in its own case for its Baroda Division by the Income Tax Appellate Tribunal ‘D” Bench, Ahmedabad in ITA No.184-185 and 1066 and 609 -611/Ahd/2010 for assessment year 2009-10. It was submitted that similar issue was decided in favour of the assessee in its own case by a decision dated 11.1.2013 in Tax Appeal No.152 to 154, 156 to 158, 283 to 286 and 329 to 331 of 2012 following the decision in the case of ONGC, Baroda.
The Commissioner (Appeals) held that there exists a circular of the Board enabling non-deduction of tax from the reimbursement of allowances on the strength of certificate of utilisation from the employees. He further observed that in any case the matter was decided in favour of the assessee in its own case for earlier years. Following the said decisions, the Commissioner (Appeals) has held that there was no liability for deduction of tax from the payments made to employees as uniform allowance on the strength of the certificate given by the employees for utilisation of the same. He, accordingly, held that the assessee cannot be said to be as assessee in default within the meaning of section 201(1) read with section 201 (1A) of the Act and deleted the payment of Rs.1,60,21,247/- raised under section 201(1) and 201(1A) of the Act.
The revenue preferred an appeal before the Tribunal. Before the Tribunal, it was contended on behalf of the revenue that the specified allowances under section 10(14)(i) of the Act are exempt to the extent these are actually incurred for that purpose; that uniform allowance had been allowed ignoring the fact that such claim had been allowed without fulfilling the conditions as laid down under section 10(14)(i) of the Act.
Observation of the Court
The Tribunal, after considering the submissions advanced on behalf of the respective parties, observed that the uniform given to an employee for using the same during his duty hours is presumed to be used for the purpose of employment only. When there was a circular of CBDT enabling the assessee for non-deduction of tax from the reimbursement of allowances on the basis of utilisation certificate of the employee, there was no liability on the part of the assessee for deduction of tax from payments made to the employees as uniform allowance. The Tribunal was of the opinion that the conclusion drawn by the Commissioner (Appeals) is correct and accordingly dismissed the appeal.
Mr. M.R. Bhatt, Senior Advocate, learned counsel for the appellant submitted that during the fringe benefit tax regime, the assessee treated uniform allowance as a perquisite; therefore, such uniform allowance cannot cease to be a perquisite. It was submitted that the fringe benefit tax provisions have been omitted from the assessment year commencing from the 1st day of April, 2010, that is, from assessment year 2010-11 vide Finance (No.2) Act, 2009 with effect from 1.4.2009, accordingly, the reimbursement of uniform allowance made by the assessee for assessment year 2010-11 was not governed by the provisions of section 115WB(E) of the Act and hence, the decision of the Tribunal in ITA No.184-185 and 1066 and 609-611/Ahd/2010 in the assessee’s own case for assessment year 2009-10 is not applicable in the case of the assessee for assessment year 2010-11 and hence, the Tribunal was not justified in placing reliance upon the said decision. It was submitted that the Commissioner (Appeals) has placed reliance upon the decisions of the Tribunal which were carried to the High Court in Commissioner of Income tax v. Oil and Natural Gas Corporation Limited, (2015) 61 taxmann.com 105 (Guj.), and the issue was decided in favour of the assessee. It was submitted that the said decision had been rendered in the context of fringe benefit tax (uniform allowance) in the context of provisions of section 17(2)(vi) and section 115 WB(2)E of the Act; whereas in the facts of the present court, the court is concerned with the exemption clause contained in section 10(14)(i) of the Act read with rule 2BB of the rules. It was submitted that, therefore, the said decision would have no applicability to the facts of the present case.
As regards the applicability of Circular No.15 dated 8.5.1969, it was submitted that the circular is clear, namely that self certification is permissible. It was submitted that in case of an individual employee, the Assessing Officer of the concerned employee can examine the validity of the claim of exemption under section 10(14)(i) of the Act qua the uniform allowance if the self certification is found to be doubtful. It was submitted that insofar as the employer is concerned, he is only concerned with deduction of tax at source, provided the income is taxable. If the employee concerned, certifies that he has incurred expenditure towards uniform allowance, which is exempt under section 10(14)(i) of the Act read with clause (f) of rule 2BB(1) of the rules, such self certification is good enough for the employer not to deduct tax at source, though it does not grant immunity to the employee if the claim is incorrect. In support of such submission, the learned counsel placed reliance upon the decision of this court in Commissioner of Income-tax v. Oil & Natural Gas Corporation Ltd.,  254 ITR 121 (Guj.), reference to which shall be made subsequently.
Thus, in the facts of that case, it was the specific case of the revenue that as no uniform was prescribed by the ONGC, the uniform allowance granted by it was not exempt under section 10(14)(i) of the Act.
With reference to Section 10 of the Act , if any allowance has been granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties during the course of employment, it is covered by the exemption clause contained in section 10(14)(i) of the Act.
In the present case, while passing the order under section 201(1) read with section 201(1A) of the Act, it is not the case of the Assessing Officer that no uniform has been prescribed by the assessee for its employees and, therefore, the amount paid towards uniform allowance is not exempt section 10(14)(i) of the Act. According to him, the requirements of section 10(14)(i) of the Act have not been satisfied as the assessee has not proved that the expenses claimed by it are actually incurred for that purpose as the assessee has placed reliance upon self certification on the part of the employees without actual proof of such expenditure having been produced by them.
On behalf of the appellant, the learned counsel has contended that the entire facts are inbuilt, even with regard to the uniform not being prescribed, and that the Tribunal had erred in going into the aspect of self certification without going into the issue of non-prescription of uniform.
The facts have been extensively referred to hereinabove. A perusal thereof makes it evident that the sole issue raised by the Assessing Officer was that the assessee had claimed expenditure incurred towards uniform allowance as exempt section 10(14)(i) of the Act on the basis of self-certification by the concerned employees without calling for any proof in the nature of bills, vouchers etc. regarding such expenditure having been actually incurred and without due verification. No ground has been raised to the effect that as no uniform had been prescribed, no claim towards uniform allowance could have been allowed.
Before the Tribunal, the appellant had contended that the specified allowances under section 10(14)(i) of the Act are exempt to the extent these are actually incurred for that purpose; and that the Commissioner (Appeals) had erred by allowing uniform allowance without considering whether such claim fulfilled the conditions as laid down in section 10(14)(i) of the Act. Therefore, the scope of the present appeal is also limited to these issues only.
On behalf of the revenue, it has been contended that the second ground raised before the Tribunal would take within its fold the requirement of prescription of a uniform, and that the expenditure had to be incurred towards such prescribed purpose; whereas in the facts of the present case, the Tribunal, without deciding the basic issue as to whether uniform had in fact been prescribed, dismissed the appeal by following its earlier decisions which related assessment years when the fringe benefit tax regime was in force.
As can be seen from the impugned order, on behalf of the revenue only two grounds as referred to hereinabove had been raised and the learned Departmental Representative had submitted that the Commissioner (Appeals) had erred in allowing the uniform allowance ignoring the fact as to whether such claim fulfilled the conditions laid down in section 10(14)(i) of the Act. In fact a perusal of the entire record of the case including the orders of the Assessing Officer as well as the Commissioner (Appeals) shows that nowhere has any issue been raised regarding uniform not having been prescribed by the assessee. The only question before the authorities was that the assessee had claimed exemption towards uniform allowance under section 10(14)(i) of the Act on the basis of self-certification given by the employees without verifying whether such expenditure had actually been incurred. Under the circumstances, the decision of this court in the case of Oil and Natural Gas Corporation Ltd. v. Assistant Commissioner of Income tax (TDS), 73 taxmann.com 273, would not be applicable to the facts of the present case, the same having been rendered in the context of totally different facts. In the absence of any factual foundation with regard to there being no prescription of uniform by the assessee having been laid in the present case, such question does not arise out of the impugned order of the Tribunal, and hence, it is not permissible for the appellant to raise such plea at this stage.
The order of the Tribunal may, therefore, be tested on the basis of the facts as emerging from the record. As is evident on a perusal of the order of the Commissioner (Appeals), on behalf of the assessee, reliance was placed upon Circular No.15 dated 8.5.1969 issued by the CBDT enabling the assessee for non-deduction of tax from the reimbursement allowance on the basis of utilisation certificate of the employee
In terms of the Circular No.15 dated 8.5.1969, for the purpose of calculation of tax deductible at source under section 192, self-certification on the part of the employee that the conveyance was owned by him and being used by him for the purposes of employment was adequate. The present case relates to uniform allowance, which as noticed earlier is exempt from tax under section 10(14)(i) of the Act read with rule 2BB(1)(f) of the rules to the extent to which such expenses are actually incurred for that purpose. Under the Act, the liability to the employer is to deduct tax at source to the extent of the taxable income of the employee. If any part of such income is exempt, there is no liability to deduct tax at source from such income. Since liability to pay tax under the Act is of the individual employee and the liability on the part of the employer is only to deduct tax at source, Circular No.15 dated 8.5.1969 provides that self certification on the part of the employee is sufficient for the disbursing officer for calculation of the tax deductible at source. While the said circular relates to conveyances, the underlying principle can well be applied even in the case of uniform allowance. Therefore, if an employee gives a certificate certifying that he had incurred certain expenditure towards uniforms and maintenance thereof, insofar as the disbursing officer is concerned, that would be adequate while calculating the tax deductible at source. If the Assessing Officer has any doubt about the claim made by any individual employee, he can always take upon the issue during the course of assessment proceedings of such employee, inasmuch as, as rightly submitted by the learned counsel for the respondent, self certification is good enough for the employer not to deduct tax at source, it does not grant any immunity to the employee if the claim is incorrect. As held by this court in Commissioner of Income-tax v. Oil & Natural Gas Corporation Ltd.,  254 ITR 121 (Guj.), whether an employee actually incurs such amount for official purposes is relevant for assessment of such employee because the exemption operates in his terms and conditions of availing such exemption that is to be fulfilled by him. Whether the employee is able to substantiate his claim to exemption has no bearing on the estimate of income liable to tax to be made by the employer. Under the circumstances, there is no legal infirmity in the impugned order passed by the Tribunal in placing reliance upon the above circular for holding that self certification on the part of the employees was adequate for the assessee not to deduct tax from the reimbursement allowance towards expenditure incurred for uniforms.
This court is of the view that the impugned order passed by the Tribunal does not suffer from any legal infirmity warranting interference. The substantial question framed by this court while issuing notice is answered in the affirmative, that is, in favour of the assessee and against the revenue. The Income Tax Appellate Tribunal was right in law in confirming the order of the Commissioner of Income-tax (Appeals) deleting the additions made by the Assessing Officer under section 201(1) of the Income Tax Act, 1961, and consequential interest charged by the Assessing Officer in relation to the assessee’s payments to its employees under the head of uniform allowance. The appeal, therefore, fails and is accordingly dismissed with no order as to costs.Commissioner-of-Income-Tax-TDS-Vs-Oil-And-Natural-Gas-Corporation-Ltd.-Gujarat-High-Court-1