TMI Blog2010 (6) TMI 475X X X X Extracts X X X X X X X X Extracts X X X X ..... TMI - 32211 - BOMBAY HIGH COURT) - Held that reimbursement of expenses cannot be the subject matter of disallowance u/s. 40(a)(i) of the Act - In the result, appeal by the assessee is partly allowed The necessary approval from Reserve Bank of India had been obtained and the amount was utilized for the purpose of clearing the outstanding liabilities that the assessee had and to meet its overhead expenses - In the result, appeals by the Revenue are dismissed while appeal by the assessee is partly allowed - ITA Nos. 7277/Mum/2008, 632/Mum/2009 & 4505/2009 - - - Dated:- 11-6-2010 - A.L. GEHLOT ACCOUNTANT MEMBER J. N.V. VASUDEVAN JUDICIAL MEMBER J. Assessee by : Shri S. Venkatraman Department by : Shri Narendra Singh ORDER PER N.V. VASUDEVAN, JM :- ITA No. 5095/Mum/06 is an appeal by the assessee against the order dated 28.7.2006 of learned CIT(A)-II, Mumbai relating to A.Y. 2002- 03. ITA No. 7277/Mum/08 is an appeal by the revenue against the order dated 12.9.2008 of learned CIT(A)-II, Mumbai relating to A.Y. 2003- 04. ITA No. 632/Mum/09 is an appeal by the revenue against the order dated 26.11.2008 of learned CIT(A)-II, Mumbai relating to A.Y. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation expenditure : S.No Name and address of the supplier Amount (Rs.) Purpose 1 Shree Om Furniture 154,520 Labour charges (carpentry work) 2 Classic marble 142,855 Cost of marble slabs 3 Shree Jalaram Timber Depot P. Ltd. 389,365 Timber, Plywood, Fevicol etc. 4 Vimina 111,379 Labour charges for cutting, fixing, polishing etc. of marble and granite 5 Meher Dubhash 116,504 Professional fee for interior design work 6 Kismat 68,185 Supply of hardware items 7 Manoj Glass House 26,728 Cost of glass clear and design 8 J.M. Trading Co. 426,920 Black jet granite and tiles for flooring 9 Shakti Trading Co. 716,935 Plywood and materials supplied for making tables, partitions etc. 10 J.K. Enterprises 198,172 Labour charges for making door frames, partition, storage cabinet etc. 11 Associated Electrical Services 69,405 Supply of electrical mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Following were the relevant observations :- There is no doubt that the expenditure incurred represented capital expenditure as the entire office had been done up and renovated incurring this huge expenditure of Rs. 30.94 lakhs. The examination of details clearly showed the nature of expenditure professional fee for interior design itself was Rs. 1.16 lakhs, granite and tiles for flooring was Rs. 4.26 lakhs, plywood itself was Rs. 7.16 lakhs, marble was Rs. 1.42 lakhs, timber was Rs. 3.89 lakhs, etc. There is no doubt that this is a one time expenditure bringing in enduring benefit to the assessee. As per the provisions, the assessee is entitled to claim depreciation on the same. And by implication the assessee is not entitled to claim the expenditure as on current repairs. I therefore, uphold the action of the Assessing Officer in treating the sum of Rs. 30,94,066/- as representing capital expenditure . 7. Aggrieved by the order of learned CIT(A), the assessee has raised ground No. 1 2 before the Tribunal. 8. Learned counsel for the assessee submitted that Explanation 1 to section 32(1) can be invoked only when the expenditure is capital in nature. He drew our attention to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Hi Line Pens Pvt. Ltd., 306 ITR 182 (Del); wherein Hon'ble Delhi High Court has held that where repairs to rental premises are claimed as a deduction, the same need not be in the nature of current repairs and expenditure on any repair has to be allowed as a deduction. 9. Learned DR relied on the order of learned CIT(A). It was submitted by him that without seeing individual items of expenditure, one has to see cumulative effect of the expenses incurred and ultimate result. According to him, by reason of incurring expenses, the assessee gets an advantage of enduring nature and therefore expenditure was capital expenditure. 10. We have considered the rival submissions. We have already listed items of expenses incurred by the assessee. Perusal of the same reveals that the assessee has not made any construction of structure or carried out any work in the form of renovation or extension, improvement of the building. The building that was taken on lease remained intact. What has been done was only to create a better working environment. In this regard, we also notice that the assessee is an associateof La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under s. 30(a) (i). The question of disallowing such an expenditure and relegating the assessee to claim depreciation under s. 32 does not arise. 11. In the aforesaid decision, nature of expenses were renovation of rental premises by having false ceiling, fixing tiles, replacing glasses, wooden partitions, replacement of electric wiring, earthing, replacement of GI pipes etc. We are of the view that the expenditure incurred by the assessee in the present case is revenue expenditure and has to be allowed as a deduction. Ground No. 1 2 raised by the assessee is accordingly allowed. 12. Ground No. 3 4 raised by the assessee read as follows :- 3) On the facts and circumstances of the case and in law, learned CIT(A) erred in confirming the disallowance of bad debt of Rs. 75,56,400. 4) On the facts and circumstances of the case and in law, the assessee submitted that the bad debt of Rs. 75,56,400 being written off as irrecoverable is an allowable deduction u/s. 36(1)(vii) of the Income Tax Act, 1961 and the learned CIT(A) erred in not allowing the same. 13. On perusal of the profit and loss account, the Assessing Officer noticed that the assessee has debited a sum of Rs.87, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zard India Pvt. Ltd. therefore hold that the revenue authorities were not justified in disallowing the claim of the assessee for deduction on the ground that the assessee failed to establish that the debt has in fact become bad. The addition made by the Assessing Officer in this regard is directed to be deleted. Ground No. 3 4 raised by the assessee are accordingly allowed. 17. Ground No. 5 was not pressed, the same is dismissed as not pressed. 18. Ground No. 6 7 read as follows :- 6) On the facts and circumstances of the case and in law, learned CIT(A) erred in confirming the disallowance of Rs. 1,17,26,209 being reimbursement of expenses to the parent company by erroneously invoking the provisions of section 40(a)(i) of the I.T. Act, 1961. 7) On the facts and circumstances of the case and in law, the assessee was not liable to deduct tax at source on the reimbursement to its parent company and consequently the learned CIT(A) erred in confirming the disallowance made by the Assessing Officer under section 40(a)(i) of the I.T. Act, 1961. 19. The Assessing Officer noticed that the assessee had debited a sum of Rs. 1,17,26,209/- as reimbursement of the expenses to parent co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - 32,049.00 2,225,350.52 August 2001 to October 2001 552 PR 978A 32,049.00 2,225,350.52 - - 32,049.00 2,225,350.52 November 2001 to December 2001 591 PR 1270 51,606.79 3,551,063.22 - - 51,606.79 3,551,063.22 January 2002 617 PR 1271 9,883.00 680,049.23 14,251.23 980,627.14 24,134.23 1,660,676.37 February 2002 633 PR 1369 9,883.00 687,066.16 - - 9,883.00 687,066.16 March 2002 667 PR 1496 9,883.00 686,670.84 (175.00) (12,159.00) 9,708.00 674,511.84 170,113.02 11,726,250.07 In support of the fact that these were reimbursement of expenses incurred by the parent company in UK, the assessee submitted invoices raised by the Lazard Company Services Limited. Copies of these invoices are at page No. 15 to 24 of the assessee s pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Pvt. Ltd. 23. We have heard the submissions of learned counsel for the assessee. The learned counsel for the assessee submitted that provisions of section 40(a)(i) will not be applicable in the case of reimbursement of actual expenses. It was further submitted by him that the Assessing Officer did not dispute the fact that the payments in question were reimbursement of expenses. The Assessing Officer made the disallowance on the ground that this would be other sum chargeable to tax under the Act . It was submitted by him that reimbursement of expenses can never be chargeable to tax. In this regard, our attention was drawn to the decision of Hon'ble Bombay High Court in the case of CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom); wherein it was held that reimbursement of expenses are not taxable in India. The Hon'ble Bombay High Court followed the decision of Hon'ble Delhi High Court in the case of CIT Vs. Industrial Engineering Projects Pvt. Ltd., 202 ITR 1014 (Del) and Hon'ble Calcutta High court in the case of CIT Vs. Dunlop Rubber Co. Ltd., 142 ITR 493 (Cal). He further drew our attention to the decision of Hon'ble Special Bench of ITAT Mumbai in the case of Mahindr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be sufficient and in the circumstances the disallowance made by the Assessing Officer should be sustained. 25. The learned counsel for the assessee, in rejoinder submitted that that in the A.Ys. 2003-04, 2005-06 2006-07, the learned CIT(A) has allowed claim of the assessee for deduction on identical facts treating the payment outside India as reimbursement of expenses. It was therefore submitted by him that contentions of learned DR are without any merits. 26. We have considered the rival submissions. Perusal of the order of the Assessing Officer shows that he has not disputed that payment outside India by the assessee to Lazard Co. Services Ltd., UK was reimbursement of expenses. In fact, before the Assessing Officer, the assessee has filed statement of reimbursement of expenses and invoice raised by the Lazard Co. Services Ltd., UK. Descriptions of services M/s. Lazard India Pvt. Ltd. incurred by the parent company have been given in this invoice. Invoice clearly mentions the fact that it is recharge of cost incurred by the parent company. The Assessing Officer did not called upon the assessee to furnish any further evidence. It was also stated by learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange fluctuation. 2) Learned CIT(A) failed to appreciate that the above loss had not arisen in the current year. 3) Learned CIT(A) erred in not taxing Rs. 13,00,000/- earned by the assessee on account of gain on foreign exchange fluctuation in respect of External commercial Borrowings (ECB) loans, during the current year. 31. The Assessee had reflected an aggregate net exchange loss of Rs. 3,94,711/- in the profit and loss account. This net exchange loss was based on three transactions, which are as follows:- 1) Exchange loss on professional fees/out Rs. 4,75,309 of pocket expenses 2) Exchange loss on revenue charges by way Rs.12,19,402 of insurance premium/WAN facility Rs.16,94,711 3) Less : Exchange gain on ECB loan (Rs. 13,00,000) Rs. 3,94,711/- 1) Exchange loss on profession fees/out of pocket expenses: The assessee company renders services to its overseas clients on whom it raises an invoice towards professional services and out of pocket expenses. These invoices are accounted for in Rupees based on the exchange rate prevailing on the date of the invoice. On account of exchange fluctuation, the amount actually received in Rupees differs from the amount accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.16,94,711 3) Less : Exchange gain on ECB loan (Rs. 13,00,000) Rs. 3,94,711/- 32. The Assessing Officer accepted the fact that since the ECB loan was utilized for working capital, the exchange loss is to be allowed as revenue expenditure. However, he was of the opinion that since the liability to remit the ECB loan had not arisen in the assessment year under appeal, a notional entry in the books of account as per Accounting Standard to reflect the true picture of outstanding payable would not enable the assessee to be allowed such loss. He relied on the decision of Hon'ble Madras High Court in Indian Overseas Bank Vs. CIT, 246 ITR 206 and disallowed the gross exchange loss of Rs. 16,94,711/-. By so doing, he in effect disallowed the net exchange loss of Rs. 3,94,711/- that was claimed by the assessee in its profit and loss account as well as taxed the exchange gain of Rs. 13,00,000/-. 33. The learned CIT(A), however, following the decision of the Tribunal in assessee s own case in A.Y. 1999-2000 2001-02 deleted the addition of Rs. 16,94,711/- made by the Assessing Officer and allowed net foreign exchange loss claimed by the assessee as a deduction. 34. Aggrieved by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 9,68,785/- u/s. 40(a)(i) even though no TDS had been deducted at the time of reimbursement of non-resident. 2) Learned CIT(A) failed to appreciate that reimbursement as referred to in the Income Tax order falls under the other sum payable outside India and therefore provisions of section 40(a)(i) of the I.T. Act is attracted. 3) For these and other grounds that may be urged at the time of hearing, the decision of learned CIT(A) may be set aside and that of the Assessing Officer restored. Grounds in ITA No. 4505/Mum/2009 1) Learned CIT(A) erred in allowing payment of Rs. 27,17,176/- disallowed u/s. 40(a)(i) since no tax had been deducted at the time of reimbursement of non-resident. 2) Learned CIT(A) failed to appreciate that reimbursement as referred to in assessment order falls under the other sum payable outside India and therefore provisions of section 40(a)(i) of the I.T. Act is attracted. 3) For these and other grounds that may be urged at the time of hearing, the decision of learned CIT(A) may be set aside and that of the Assessing Officer restored. 40. These grounds are identical to ground No. 6 7 raised by the assessee in A.Y. 2002-03. For the re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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