1987 (10) TMI 98 - AT - Income Tax

Appellate court limits taxable receipt to 5% of operating cost for appellant company. Reimbursement not income.

The appellate court partially allowed the appeal in favor of the appellant company, directing the tax authority to consider only 5% of the actual ... Assessable As Income, Non-resident Company, Actual Operating Cost Issues Involved:1. Determination of Trading Receipt of the Appellant Company.2. Consideration of Reimbursement of Expenditure as Taxable Receipt.3. Applicability of Income-tax Act Provisions to the Expenditure Incurred.Summary:1. Determination of Trading Receipt of the Appellant Company:The primary issue revolves around the trading receipt of the appellant company for the assessment year 1982-83. The Indian Company contended that its trading receipt was only 5% of the gross expenditure incurred on behalf of the English Company, while the IAC (Asstt.) considered the entire remittance, including actual operating costs plus 5% remuneration, as the taxable receipt. The agreement dated 1st July 1979 defined the service fee as 105% of the actual operating costs incurred.2. Consideration of Reimbursement of Expenditure as Taxable Receipt:The appellant argued that the reimbursement of expenses incurred on behalf of Rolls Royce Limited, U.K., did not constitute income or trading receipts. They cited judicial precedents such as Morley (Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 (CA) and other Indian cases to support their claim that such reimbursements are not income. The IAC (Asstt.) ruled out this objection, maintaining that the subsequent memorandum could not alter the nature of the original agreement.3. Applicability of Income-tax Act Provisions to the Expenditure Incurred:The IAC (Asstt.) scrutinized the expenses incurred on behalf of the English Company and made several disallowances, raising the total income. The appellant contended that since the expenses were incurred on behalf of the English Company and were fully reimbursed, they should not be considered as the appellant's own expenses, and thus, the provisions of the Income-tax Act regarding disallowances should not apply.Judgment:Judicial Member's View:The learned Judicial Member held that the trading receipt of the appellant company was only 5% of the actual operating cost, as clarified by the memorandum dated 20th May 1980. The reimbursement of expenses did not constitute income as it was incurred on behalf of Rolls Royce Limited, U.K. The agreement dated 20th May 1980 reiterated that the remuneration payable was 5% of the total expenses incurred on behalf of Rolls Royce Limited, U.K.Accountant Member's View:The learned Accountant Member disagreed, holding that the entire amount received, including the reimbursement of expenses, constituted the trading receipt of the appellant company. He emphasized that the appellant company was an independent entity and the expenses incurred were its own. Thus, the provisions of the Income-tax Act regarding disallowances applied.Third Member's Opinion:The Third Member agreed with the Judicial Member, concluding that the reimbursement of expenses incurred on behalf of Rolls Royce Limited, U.K. did not constitute the appellant's income. The service fee was only 5% of the actual operating costs, and the entire expenditure was incurred for and on behalf of Rolls Royce Limited, U.K. The provisions of the Income-tax Act regarding disallowances did not apply as the expenses were not incurred by the appellant on its own.Final Decision:The appeal was partly allowed in favor of the appellant, directing the IAC (Asstt.) to adopt the remuneration of 5% of the actual operating cost as the taxable receipt and proceed to make the assessment accordingly. The other grounds relating to disallowances were not adjudicated as they were not pressed by the appellant.