2005 (11) TMI 382 - AT - Income Tax

Reimbursement of actual cost incurred - Income from advisory services - DTAA between India and USA - HELD THAT - We have gone through the aforesaid Tribunal order in the assessee s own case for assessment year 1996-97. The same issue, as is before us, was also considered by the Tribunal in the aforesaid order for the immediately two preceding assessment years. The Tribunal held that the question as to whether the reimbursement of actual cost incurred by the assessee could be considered as the income of the assessee, was squarely covered by the judgment of the Hon ble Delhi High Court in the case of CIT v. Industrial Engg. Products (P.) Ltd. 1992 (7) TMI 38 - DELHI HIGH COURT , wherein it has been held that the reimbursement of expenses cannot be considered as the assessee s income. The Tribunal, as such, held in favour of the assessee. However, the factual aspects needing verification, the Assessing Officer was directed to delete the amount of reimbursement of actual expenses incurred by the assessee after verification. The facts involved in the assessment year under consideration indubitably being pari materia with those present in assessment years 1996-97 and 1997-98, the aforesaid Tribunal decisions for these years is squarely applicable for this year also. Therefore, respectfully following the said Tribunal order, in the assessee s own case, for this year also, it is held that reimbursement of expenses cannot be considered as the income of the assessee. The Assessing Officer is directed to delete the amount of reimbursement of actual expenses incurred by the assessee, after verification. As a result, the appeal is partly allowed, as indicated.

Summary

Issues:
1. Challenge to the CIT(A) order
2. Applicability of section 44D
3. Protective assessment grounds
4. Communication regarding agreement under section 90
5. Violation of principles of natural justice
6. Evidence submission in remand proceedings
7. Predetermined order by CIT(A)
8. Consideration of irrelevant material
9. Interpretation of Double Tax Avoidance Agreement (DTAA)
10. Levy of interest and penalty

Challenge to CIT(A) Order:
The appellant challenged the CIT(A) order on various grounds, including the non-application of mind, holding that section 44D applied, and failure to consider crucial developments. The appellant argued that the CIT(A) erred in not adjudicating on protective assessment grounds, leading to a substantial miscarriage of justice. The appellant contended that the order was in violation of natural justice, as no opportunity was given post-receipt of the remand order.

Applicability of Section 44D:
The appellant, based on a mutual agreement procedure between the US and India, argued that section 44D of the Income Tax Act was not applicable to their case. The appellant sought to withdraw contentions related to section 44D applicability. The Tribunal allowed the withdrawal of certain grounds, leading to only specific grounds surviving for consideration.

Protective Assessment Grounds:
Regarding the specific ground related to income from advisory services, the appellant contended that under the DTAA, only a mark-up on actual costs incurred should be considered as taxable income. The Assessing Officer disagreed, leading to an appeal to the CIT(A) who upheld the decision. However, based on previous Tribunal decisions, reimbursement of expenses was held not to be considered as income, leading to a direction to delete the amount of reimbursement.

Communication Regarding Agreement under Section 90:
The appellant argued that the CIT(A) erred in holding that there was no communication regarding the applicability of a decision reached under section 90 for the assessment year. The appellant claimed that the decision-making process was flawed, and the order should be set aside.

Levy of Interest and Penalty:
The issue of interest under sections 234B and penalty under section 201 was also raised. The Tribunal directed the Assessing Officer to give consequential effect to the decision on these matters.

This judgment highlights the complexities of tax assessments, interpretation of international agreements, and the importance of following due process and natural justice principles in legal proceedings.