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Commissioner Of Income-Tax v. Industrial Engineering Projects Pvt. Ltd.
Factual and Procedural Background
The petitioner sought reference of two questions relating to the legal correctness of the Income-tax Appellate Tribunal's conclusions concerning an agreement between the assessee and M/s. ETAG, a Swiss company. The agreement involved the assessee rendering services to M/s. ETAG and receiving a minimum sum of Rs. 1,20,000 per year, which included reimbursement of certain costs and expenses. The Income-tax Officer and the Commissioner of Income-tax Appeals disallowed some expenses incurred by the assessee on entertainment and travelling, on the ground that these exceeded permissible limits. The Income-tax Appellate Tribunal held that the reimbursement of expenses did not constitute income and therefore disallowance was not justified. The petitioner challenged this conclusion by seeking reference on specific legal questions.
Legal Issues Presented
- Whether, considering the facts and the terms of the agreement between the assessee and M/s. ETAG, the Income-tax Appellate Tribunal was correct in law in concluding that the arrangement was not a device to defeat provisions of the income tax law?
- Whether the Income-tax Appellate Tribunal was legally correct in deleting disallowances under section 37(2A) of the Income-tax Act and rule 6D of the Income-tax Rules relating to expenses incurred on entertainment and travelling?
Arguments of the Parties
Petitioner’s Arguments
- The petitioner contended that the Income-tax Appellate Tribunal erred in law by concluding that the arrangement was not a device to defeat income tax provisions.
- It was argued that there was no proof of expenses actually incurred by the assessee, challenging the Tribunal’s conclusion that reimbursements did not constitute income.
Assessee’s Arguments
- The assessee claimed that the amounts received were reimbursements of expenses and thus not taxable income.
- The assessee relied on the Tribunal’s interpretation that the reimbursement did not constitute income and that the expenses were legitimately incurred on behalf of M/s. ETAG, negating any basis for disallowance.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Tejaji Farasram Kharawalla Ltd., [1968] 67 ITR 95 | Reimbursement of expenses is not taxable income; only surplus over expenses is taxable. | The Court relied on this precedent to hold that reimbursements received by the assessee did not constitute taxable income, affirming the Tribunal’s conclusion. |
Court's Reasoning and Analysis
The Court analyzed the terms of the agreement and the nature of the sums received by the assessee, focusing on whether these sums constituted taxable income or mere reimbursements of expenses. It noted that the Income-tax Officer and Commissioner disallowed expenses on the basis that they exceeded permissible limits, not on the ground that expenses were not incurred. The Court referenced the Supreme Court’s ruling in CIT v. Tejaji Farasram Kharawalla Ltd., which established that reimbursements for expenses wholly and necessarily incurred are not taxable, and only surplus amounts should be taxed. Applying this principle, the Court found no legal error in the Tribunal’s decision that the reimbursements did not constitute income. The Court rejected the petitioner’s contention regarding lack of proof of expenses, as this was not raised before the Tribunal and was inconsistent with the basis of disallowance. Ultimately, the Court held that the first question raised was a question of fact and the second question was answered by existing Supreme Court precedent, leading to dismissal of the application.
Holding and Implications
The application is dismissed.
The Court’s decision affirms that reimbursements of expenses, when supported by the agreement and incurred in the course of rendering services, do not constitute taxable income. The ruling directly affects the parties by upholding the Tribunal’s deletion of disallowances under section 37(2A) and rule 6D of the Income-tax Act. No new precedent was established, as the decision relies on settled Supreme Court authority.
1. The petitioner seeks reference of the following two questions:
“1. Whether, on the facts and in the circumstances of the case and considering the terms of the agreement between the assessee and M/s. ETAG in its entirety, the Income-tax Appellate Tribunal is right in law in concluding that the arrangement was not a device to defeat certain provisions of the income tax law?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is legally correct in deleting the disallow ances under section 37(2A) of the Income-tax Act and rule 6D of the Income-tax Rules, out of expenses incurred by the assessee on entertainment and travelling?”
2. In our opinion, no question of law arises.
3. Briefly stated, the facts are that the assessee had an agreement with M/s. ETAG which was a Swiss company. Some services were to be rendered by the assessee to the said Swiss company and the terms of the agreement, inter alia, provided that the assessee would receive a sum of Rs. 1,20,000 minimum per year. It was further provided that, for the purpose of reckoning the minimum remuneration of Rs. 1,20,000 per annum, certain costs and expenses incurred by the assessee while rendering services to M/s. ETAG will be reimbursed.
4. The Income-tax Officer as well as the Commissioner of Income-tax Appeals disallowed some of the expenses incurred which were in the nature of entertainment and travelling expenses. The disallowance was on the basis that they were more than the permissible limit.
5. The claim of the assessee was that the amounts received were reimbursement of expenses and the question of these being taxed will not arise. The Income-tax Appellate Tribunal interpreted the agreement and came to the conclusion that the reimbursement of expenses did not constitute income and as the expenses were incurred on behalf of M/s. ETAG, the question of making any disallowance did not arise.
6. Our attention has been drawn to the judgment of the Supreme Court in the case of CIT v. Tejaji Farasram Kharawalla Ltd., [1968] 67 ITR 95. 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.
7. 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.
8. 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 No. 2 is self-evident and covered by the aforesaid judgment of the Supreme Court while question No. 1 is clearly a question of fact. This application is, therefore, dismissed.
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