1992 (7) TMI 38 - HC - Income Tax

Reimbursements Not Taxable Revenue When Expenses Wholly Incurred; Revenue's s.37 r.6D Challenge Fails, Application Dismissed

HC upheld the Tribunal's finding that the arrangement between the assessee and M/s ETAG was not a device to evade income tax provisions and that amounts ... Disallowances u/s 37(2A) and rule 6D - out of expenses incurred on entertainment and travelling - Whether, considering the terms of the agreement between the assessee and M/s. ETAG in its entirety, the Tribunal is right in law in concluding that the arrangement was not a device to defeat certain provisions of the income tax law ? - HELD THAT:- Our attention has been drawn to the judgment of the Supreme Court in the case of CIT v. Tejaji Farasram Kharawalla Ltd. [1967 (7) TMI 6 - SUPREME COURT]. In this case, part of the commission which was payable to the assessee was 5% which was in lieu of contingency expenses which the assessee had to meet such as commission to dyeing masters, agents, etc. This 5%, out of the total selling agency commission, was claimed to be exempt from tax. The Supreme Court, however, held that only that portion of 5% of the selling agency commission received by the respondent was exempt from tax which was wholly and necessarily incurred in the year of account in the performance of the duties of the respondent as selling agent. The Supreme Court clearly held that to the extent of the receipt representing reimbursement of the expenses the same were not taxable. It is only when there was surplus that the same should be taxed. In the present case, the Tribunal has held that the assessee received no sums in excess of the expenses incurred by the assessee under the agreement. Mr. Gupta has contended that, in fact, there was no proof of the expenses having been incurred by the assessee. It is not open to counsel for the petitioner to raise this contention as this was not raised before the Tribunal and furthermore the disallowance by the Income-tax Officer was also not on the basis that the expenses had not been incurred but was on the premise that the expenditure was in excess of what was permissible under the provisions of section 37, read with rule 6D, of the Income-tax Act. In our opinion, in view of the aforesaid judgment of the Supreme Court, reimbursement of expenses can, under no circumstances, be regarded as revenue receipt and, therefore, even though the question involves the interpretation of the agreement, the answer to the proposed question is self-evident and covered by the aforesaid judgment of the Supreme Court while question is clearly a question of fact. This application is, therefore, dismissed. Issues Involved:The judgment addresses the following Issues:1. Interpretation of an agreement between the assessee and a Swiss company regarding reimbursement of expenses.2. Disallowance of expenses under section 37(2A) of the Income-tax Act and rule 6D of the Income-tax Rules related to entertainment and travelling expenses.Interpretation of Agreement:The petitioner sought reference on whether the arrangement between the assessee and the Swiss company was a device to avoid income tax provisions. The agreement stipulated that the assessee would receive a minimum sum per year, with certain costs and expenses reimbursed for services rendered. The Income-tax Appellate Tribunal concluded that the reimbursement of expenses did not constitute income and no disallowance was necessary as the expenses were incurred on behalf of the Swiss company.Legal Disallowance of Expenses:The Income-tax Officer and the Commissioner of Income-tax Appeals disallowed some entertainment and travelling expenses exceeding permissible limits. The Tribunal's decision was based on the premise that the expenses were in excess of what was allowed under section 37 and rule 6D. The Tribunal's interpretation aligned with a Supreme Court judgment stating that reimbursement of expenses should not be considered as revenue receipt unless there was a surplus. The Tribunal found that the assessee did not receive sums exceeding the expenses incurred, thus no disallowance was warranted.Judicial Analysis and Dismissal:Referring to the Supreme Court case law, the High Court emphasized that reimbursement of expenses cannot be treated as revenue receipt. The Court dismissed the petitioner's application, stating that the answer to the second proposed question was evident based on the Supreme Court's judgment. The Court deemed the first question as a matter of fact, leading to the dismissal of the application. The judgment highlighted the importance of distinguishing between revenue receipts and expense reimbursements in tax assessments.