2016 (9) TMI 597 - AT - Income Tax

Reimbursement received from Holding company of the expenses with respect to salaries and other related costs thereto w.r.t. CFG management employees - Expenses allowance against only interest income on FD and escrow balance - assessee is a wholly owned subsidiary of AIG Capital Corporation USA(AIGCC) and registered with the Reserve Bank of India as non-deposit taking non-banking financial companies Held that - The assessee is entitled for deduction as revenue expenditure with respect to the claim of expenses in the instant assessment year 2009-10 as the said expenses were duly incurred towards salary and other expenses related there to CFG Management employees in the impugned assessment year 2009-10 wherein the said liability being an ascertained and accrued liability got crystallized and fastened against the assessee on accrual basis in the instant assessment year 2009-10 itself and the assessee following mercantile system of accounting rightly debited the same as an revenue expenditure being an accrued and ascertained liability and claimed the same as deduction while filing return of income with the Revenue for the assessment year 2009-10 . It is not the case of the Revenue that the assessee has not incurred the aforesaid expenses of Rs. 3, 12, 27, 390/-. The assessee entered into an expenses reimbursement agreement with parent company AIGCC for reimbursement of the salary and other expenses with respect to CFG Management employees at cost without any mark up subsequently on 13-05-2010 albeit the said expenses reimbursement agreement was effective from 01-04-2008 meaning thereby right to receive reimbursement of expenses from parent company AIGCC got vested and accrued in favour of the assessee only when the said expenses reimbursement agreement was entered into by the assessee on 13- 05-2010 albeit to claim reimbursement w.e.f.01-04-2008 but that does not mean that the assessee liability to pay these expenses towards salary and other expenses related thereto CFG management employees did not get fastened and accrued against the assesssee in the previous year ended 31-03- 2009 itself rather in-fact it was assessee who was liable to pay said CFG management employees salaries and other expenses related thereto of it own account in the previous year ended 31-03-2009 and it is an subsequent event happening on 13-05-2010 wherein expenses reimbursement agreement was entered into with AIGCC which entitled assessee to claim reimbursement of said CFG management employees salaries and other related costs from AIGCC under expenses reimbursement agreement dated 13-05-2010 as the right to receive reimbursement of said CFG management employees salaries and other related costs from parent company AIGCC got vested in favour of the assessee only on signing of expenses reimbursement agreement on 13- 05-2010. The assessee has rightly offered as income the reimbursement received from AIGCC of the expenses with respect to salaries and other related costs thereto w.r.t. CFG management employees received in the previous ended 31-03-2010 for taxation in the return of income filed with Revenue for assessment year 2010-11. In our considered view the said expenditure of Rs. 3, 12, 27, 390/- towards salaries and other expenses related thereto w.r.t. CFG management employees incurred by the assessee during the previous year ended 31-03-2009 is an allowable revenue expenditure for the assessment year 2009-10 which is hereby directed to be allowed as revenue expenditure for the assessment year 2009-10 subject to verification by the A.O. that the assessee has duly offered the reimbursement of the aforesaid expenses to the tune of Rs. 3, 12, 27, 390/- received from AIGCC as income for taxation in the return of income filed with the Revenue for assessment year 2010-11 . Chargeability of interest income on fixed deposit under the head income from profit and gain of business or profession - Held that - As observed that the assessee is contending that it is engaged in the business of NBFC whereby it is engaged in activities of financing as an NBFC and hence interest income received on FD should be brought to tax as income under the head profit and gains of business or profession . In our considered view this claim of the assessee that it is engaged in business of financing as an NBFC needs verification and accordingly we set aside and restore this ground to the file of the A.O. for de-novo determination of the issue after verification of the claim of the assessee that the assessee is an NBFC engaged in the business of financing. Needless to say that the assessee may be given proper and sufficient opportunity of being heard in accordance with principles of natural justice in accordance with law and the relevant evidences and explanations submitted by the assessee will be admitted by the AO before de-novo determination of the issue on merits.

Summary

Issues Involved:
1. Disallowance of salary expenditure amounting to Rs. 31,227,390.
2. Characterization of interest income from fixed deposits amounting to Rs. 1,262,666.

Issue-wise Detailed Analysis:

1. Disallowance of Salary Expenditure:
The assessee, an investment holding company, incurred salary expenses of Rs. 31,227,390 during the financial year ending 31 March 2009. The Assessing Officer (AO) disallowed this expenditure, reasoning that it was not incurred for the business purposes of the assessee but for its parent company, AIG Capital Corporation, USA (AIGCC). The AO noted that these expenses were reimbursed by AIGCC in the subsequent financial year, and since the assessee follows the mercantile system of accounting, the expenses should have been offered as income in the assessment year 2009-10. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the expenses were not for the assessee's business purposes but for AIGCC, and thus, the AO was justified in disallowing the expenses.

Upon appeal, the Tribunal observed that the expenses were indeed incurred by the assessee during the relevant financial year and were later reimbursed by AIGCC based on an agreement effective from 1 April 2008 but signed on 13 May 2010. The Tribunal held that the liability for these expenses accrued in the financial year 2008-09, making them deductible for that year. The Tribunal directed the AO to allow the deduction of Rs. 31,227,390 as revenue expenditure for the assessment year 2009-10, subject to verification that the reimbursement was offered as income in the assessment year 2010-11.

2. Characterization of Interest Income:
The assessee earned interest income of Rs. 1,262,666 from fixed deposits during the financial year ending 31 March 2009. The AO categorized this income under 'Income from Other Sources' instead of 'Profits and Gains from Business and Profession,' as claimed by the assessee. The CIT(A) upheld this categorization, asserting that earning interest from fixed deposits was not part of the assessee's primary business activities.

The Tribunal noted that the assessee is registered as a Non-Banking Financial Company (NBFC) and is engaged in investment activities. The Tribunal found merit in the assessee's claim that the interest income should be treated as business income, given the nature of its business activities. However, the Tribunal remanded this issue back to the AO for verification of the assessee's claim that it is engaged in the business of financing as an NBFC. The AO is to determine afresh whether the interest income from fixed deposits should be taxed under 'Profits and Gains from Business and Profession' after proper verification.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the AO to allow the salary expenditure as a deduction for the assessment year 2009-10, subject to verification. The issue regarding the characterization of interest income was remanded back to the AO for fresh determination after verifying the nature of the assessee's business activities.