2010 (5) TMI 841 - AT - Income Tax

Tribunal upholds CIT(A) decisions on reimbursement expenses under Income Tax Act for AY 2006-07

Asstt. Commissioner of Income Tax, Central Circle 17 & 28, Mumbai Versus J.B. Boda Surveyors Pvt. Ltd.

The Tribunal upheld the decisions of the ld. CIT(A) in deleting the disallowance of reimbursement expenses under section 40(a) of the Income tax Act, 1961 ... Addition u/s 40(a)(ia) - Disallowance on payments made to parent company - reimbursement of expenses - TDS was not deducted as per provisions of section 40(a) - HELD THAT:- We find that the facts are not in dispute inasmuch as the payment was made to parent company M/s. J.B. Boda & Co. Pvt. Ltd. as payment of reimbursement expenses on the basis of cost sharing arrangement. This arrangement was entered into for more effective cost management. The common expenses are incurred for and on behalf of everyone in the group. All the group companies reimbursed the expenses to M/s. J.B. Boda & Co. Pvt. Ltd. on an equitable basis determined in earlier years by the management consultant. There is no material on record to show that the assessee has made payments to the contractor or sub-contractor or actual service provider. Therefore, the payments made to M/s. J.B. Boda & Co. Pvt. Ltd. do not fall within the purview of section 40(a)(ia). In the absence of any distinguishing feature brought on record by the revenue, we hold that the assessee is not liable to deduct TDS on the reimbursement of expenses and accordingly we are inclined to uphold the finding of the ld. CIT(A) in deleting the disallowance made by the AO. ''The ld. CIT(A) while observing that the expenses reimbursed by the group company to the flagship company does not constitute income in the hands of the later and does not partake the nature of commission, held that there is no liability to deduct tax on part of the appellant company and accordingly deleted the disallowance made by the AO.'' The grounds taken by the revenue are therefore, rejected. Issues:Appeals against separate orders dated 24.4.2009 passed by the ld. CIT(A) for the Assessment Year 2006-07 regarding disallowance of reimbursement expenses under section 40(a) of the Income tax Act, 1961.Analysis:The appeals involved two assessees, and the revenue challenged the orders passed by the ld. CIT(A) regarding the disallowance of reimbursement expenses under section 40(a) of the Income tax Act, 1961 for the Assessment Year 2006-07. The ld. CIT(A) had deleted the disallowance made by the Assessing Officer, stating that the expenses reimbursed by the group company to the flagship company did not constitute income in the hands of the latter and did not partake the nature of commission. The assessee argued that the parent company had been deducting tax at source, and if the deduction was made by the assessee, it would result in double deduction. The Tribunal observed that the payments made to the parent company as reimbursement expenses did not fall within the purview of section 40(a)(ia) of the Act. It was noted that the parent company acted as an agent for making payments on behalf of the assessee and getting reimbursement, which did not constitute an expenditure in the hands of the assessee. The Tribunal upheld the finding of the ld. CIT(A) in deleting the disallowance made by the Assessing Officer, as there was no evidence to suggest that the payment was subject to tax deducted at source under Chapter XVII-B of the Act.The Tribunal further emphasized that the payment made to the parent company was on account of personal account in terms of accounting principles, where the expenditure incurred was related to the party who made the original payment. The Tribunal held that section 40(a)(ia) applied only in cases of expenditure subject to TDS, which was not applicable in this scenario. The Tribunal also highlighted that the Assessing Officer did not disallow the claim in the subsequent year for Assessment Year 2007-08, even after raising queries. Therefore, the Tribunal found no infirmity in the order of the ld. CIT(A) and rejected the grounds taken by the revenue. The Tribunal dismissed the revenue's appeals, as the facts and issues were similar to the case of M/s. J.B. Boda Surveyors Pvt. Ltd. The Tribunal upheld the findings and orders in favor of the assessee based on the principles discussed in the previous case.In conclusion, the Tribunal upheld the decisions of the ld. CIT(A) in deleting the disallowance of reimbursement expenses, as the payments made to the parent company were considered as reimbursement and not subject to TDS under the relevant provisions of the Income tax Act, 1961.