2019 (2) TMI 153 - AT - Income Tax

Tribunal rules expenses reimbursement not income, overturns Assessing Officer decision

The Tribunal ruled in favor of the appellant, holding that the reimbursement of expenses incurred on behalf of another company should not be considered as ... TDS u/s 194C - reimbursement of expenses as claimed to be on account of payment of freight, cartage, conveyance, telephone etc. - Held that:- Assessee earned the commission income from M/s Unifruitti India (P) Ltd. and also received the expenses which were incurred by it for the said company. In this regard, the company M/s Unifruitti India (P) Ltd. furnished a certificate. The said certificate was not produced before the AO, however, the assessee furnished the same before the CIT(A) who admitted the said fact and also mentioned that the said certificate was undated but the facts mentioned in the said certificate resembled with the details furnished by the assessee. The figure of the Tax Deducted at source u/s 194C on the said expenses was same which was in the TDS certificate and the amount of reimbursement of expenses was claimed to be on account of payment of freight, cartage, conveyance, telephone etc. The assessee also furnished the details of the expenses reimbursed by M/s Unifruitti India (P) Ltd.. In our opinion, the reimbursement of expenses cannot be considered as the income of the assessee. The assessee was earning commission income as well as incurring the expenses on behalf of M/s Unifruitti India (P) Ltd. Those expenses incurred by the assessee were reimbursed by the said company, therefore, the reimbursed expenses cannot be considered as income of the assessee. In that view of the matter, we delete the impugned addition sustained by the ld. CIT(A). - Decided in favour of assessee. Issues Involved:1. Addition of Rs. 24,27,721/- to the income of the appellant.2. Nature of transactions and authenticity of reimbursement of expenses.3. Absence of written agreement and reliance on verbal agreements.4. Genuineness of expenses recorded under 'Unifruitti Reimbursement A/c.'5. Treatment of reimbursement of expenses as revenue receipts.6. Admissibility of reimbursement of expenses and relevant case laws.Issue-Wise Detailed Analysis:1. Addition of Rs. 24,27,721/- to the Income of the Appellant:The primary grievance of the assessee was the addition of Rs. 24,27,721/- made by the Assessing Officer (AO) on account of reimbursement of expenses. The AO observed that the assessee had received this amount from M/s Unifruitti India (P) Ltd., on which TDS of Rs. 55,012/- was deducted, but this amount was not shown as receipt in the profit and loss account. The AO treated this amount as contract payment and added it to the income of the assessee.2. Nature of Transactions and Authenticity of Reimbursement of Expenses:The AO questioned the authenticity of the reimbursement of expenses in the absence of a written agreement. The assessee contended that in the fresh fruits business, verbal agreements are a usual trade practice, and the expenses incurred on behalf of M/s Unifruitti India (P) Ltd. were genuine and recorded in the books of account. The AO, however, rejected this claim due to the lack of a written agreement and the absence of a timely response from M/s Unifruitti India (P) Ltd. to the notice issued under section 133(6) of the Income Tax Act.3. Absence of Written Agreement and Reliance on Verbal Agreements:The assessee argued that the absence of a written agreement should not lead to adverse inferences about the conduct of the business. The AO and the CIT(A) were not convinced by this argument, emphasizing the need for written documentation to substantiate the claims. The CIT(A) noted the lack of detailed business terms and conditions for different periods and the absence of proper documentation for the claimed expenses.4. Genuineness of Expenses Recorded under 'Unifruitti Reimbursement A/c':The assessee maintained that the expenses incurred on behalf of M/s Unifruitti India (P) Ltd. were genuine and recorded under 'Unifruitti Reimbursement A/c.' The CIT(A) questioned the genuineness of these expenses, noting the lack of bills, item-wise segregation, and proper details. The CIT(A) concluded that the assessee was unable to justify the genuineness of the claimed expenses, leading to the addition being sustained.5. Treatment of Reimbursement of Expenses as Revenue Receipts:The assessee contended that the reimbursement of expenses should not be treated as revenue receipts. The CIT(A) and the AO treated the reimbursement as income, citing the TDS certificate which indicated the payment as contract payment. The assessee argued that the TDS was deducted under section 194C for safety, and the reimbursement should not be considered income.6. Admissibility of Reimbursement of Expenses and Relevant Case Laws:The assessee cited several case laws to support the claim that reimbursement of expenses is not taxable as income:- CIT vs. Tejaji Farasram Kharwalla Ltd. (1967 SCR (3) 876): The Supreme Court held that reimbursement of expenses is not taxable unless there is a surplus.- CIT vs. Industrial Engineering Projects (1993) 202 ITR 1014 Delhi: The Delhi High Court ruled that reimbursement of expenses cannot be regarded as revenue receipts.- Director of Income Tax (International Taxation) vs. Krupp Udhe GMBH: The Bombay High Court held that charges towards reimbursement of expenses cannot be included in income.Conclusion:The Tribunal concluded that the reimbursement of expenses incurred by the assessee on behalf of M/s Unifruitti India (P) Ltd. could not be considered as income. The Tribunal relied on the aforementioned case laws and the certificate provided by M/s Unifruitti India (P) Ltd., which confirmed the nature of the payments. Consequently, the addition of Rs. 24,27,721/- was deleted, and the appeal of the assessee was allowed.