2007 (1) TMI 293 - AT - Income Tax

Summary

Issues involved:
The appeal against the order of the CIT(Appeals) confirming additions made by the Assessing Officer u/s 143(3) of the Income-tax Act, 1961 for the assessment year 2000-01, regarding the disallowance of audit fee paid for US GAAP work.

Issue 1: Validity of CIT(Appeals) order confirming additions made by Assessing Officer

The assessee, a banking company, appealed against the disallowance of the payment of audit fee for US GAAP work by the Assessing Officer. The CIT(Appeals) upheld the disallowance stating that the expenditure was not wholly and exclusively for the business operation of the Indian Branch, as there was no legal requirement in India for US GAAP audit.

Issue 2: Allowability of expenditure under sections 36 and 37 of the Income-tax Act

The Appellate Tribunal considered the nature of the expenditure incurred by the assessee for US GAAP audit. It was observed that the branch, as part of a foreign banking company, was required to report its financial results compliant with US GAAP to the head office for management information system reporting. The Tribunal noted that expenditure voluntarily incurred for commercial expediency, even if not under legal obligation, is allowable as business expenditure. Citing relevant case law, it was established that expenditure incurred for the purpose of business, including alignment of branch accounts with head office under US GAAP, qualifies as allowable expenditure. The genuineness of the audit fee expenditure was not in question.

Conclusion:
The Appellate Tribunal allowed the appeal of the assessee, quashing the disallowance of expenses amounting to Rs. 2,53,825 paid for the audit fee to M/s. Lovelock & Lewes for conducting US GAAP Audit. The Tribunal found that the expenditure was incurred for commercial expediency and in furtherance of the business operations, aligning with the requirements of the foreign banking company's reporting obligations.