2017 (7) TMI 914 - AT - Income Tax

Addition as income earned in foreign country as undisclosed income - Held that - There is no doubt that the income in question has suffered taxation in the USA, being derived from a place of business in the USA and activities carried out therefrom, and that too at the US tax rate of 48.35%. Hence, the assessee, as per the provisions of Article 25(2)(a) of the DTAA, would be allowed a deduction from tax on the income which has been taxed in the USA, an amount equal to the income tax paid in the USA, whether directly or by deduction. Hence, if the income was to be added in the taxable income of the assessee, there would be no tax payable, as credit has to be allowed for taxes deducted in the USA. After considering all the above facts, and the provisions of law, Ld. CIT(A) has rightly held that the addition of ₹ 1,16,12,023/- was not justified, therefore, the Ld. CIT(A) has rightly deleted the addition - Decided against revenue Disallowance of 25% of foreign travel expenses - Held that - The details of expenditure incurred which are claimed to have been provided to the Assessing Officer vide submission dated 29.12.2009. The assessee has also produced details of purchases made from companies in the countries visited. Considering the purchases made of ₹ 4,27,88,689/-, the travel expenditure of ₹ 14,01,331/- does not appear excessive. Moreover, the Assessing Officer has not pointed out any defects in the bills/vouchers relating to travel, or found that it was in the nature of personal expenditure. Therefore, the Ld. CIT(A) has observed that no cogent material exists for disallowance of 25% of the expenditure claimed. Therefore, the Ld. CIT(A) has rightly deleted the addition - Decided against revenue Disallowance of business promotion expenses - Held that - The assessee has submitted that these items were purchased for festival gifting to clients, which were necessary in the interest of promotion of his business, and were normal business expenditure. Hence, it is apparent that the expenditure concerned has not created capital assets, and the numbers of items purchased indicate that they are intended for gifts. Considering the explanation offered by the assessee, the expenditure was rightly held as revenue in nature, and the addition was rightly deleted by the Ld. CIT(A). - Decided against revenue Disallowance u/s 40A(3) of payment made in cash to a club - Held that - The assessee has produced the details of payment by cheque no. 940406 dated 29.08.2006 drawn on Citibank for the club membership. Disallowance u/s 40A(3) was clearly not called for, and in any case, could only have been made at 20% of the payment, and not of the entire amount. The assessee has explained that the club membership was a necessary business expenditure for purposes of meeting and entertaining his clients and foreign suppliers. Therefore, the Ld. CIT(A) has rightly observed that the addition u/s 40A(3) was found unfounded and without merit, and was rightly deleted.- Decided against revenue

Summary

Issues Involved:
1. Deletion of addition on account of income earned in foreign country as undisclosed income.
2. Deletion of addition on account of foreign travelling allowance.
3. Deletion of addition on account of expenses for purchase of microwave and mobile phone expenses being capital in nature.
4. Deletion of addition under section 40A(3) being payment made to club in cash.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Income Earned in Foreign Country as Undisclosed Income:
The Revenue contended that the CIT(A) erred in deleting the addition of ?1,16,12,023/- as undisclosed income earned in a foreign country, arguing that an Indian resident taxpayer is taxable in India on a global income basis. The Assessing Officer (AO) had added the income, asserting that the taxpayer's stay in the USA was less than 90 days, thus making his global income taxable in India. The CIT(A) found that the taxpayer carried on business in the USA through a limited liability partnership (LLP) with a 99% share, and the income was earned and taxed in the USA. The CIT(A) determined that the LLP had a "permanent establishment" in the USA as per Article 5 of the India-USA DTAA, and the taxpayer was entitled to protection from double taxation. The Tribunal upheld the CIT(A)'s decision, noting that the income in question had been taxed in the USA at a rate of 48.35%, and as per Article 25(2)(a) of the DTAA, the taxpayer was entitled to a deduction from tax on the income taxed in the USA.

2. Deletion of Addition on Account of Foreign Travelling Allowance:
The Revenue challenged the deletion of ?3,50,332/- being 25% of the total expenses of ?14,01,331/- on account of foreign travelling allowance. The AO had disallowed the expenses for lack of documentary evidence and details of the purpose of the visit. The CIT(A) observed that the taxpayer had provided details of expenditures and purchases made from companies in the countries visited, and the travel expenditure did not appear excessive considering the purchases made. The Tribunal agreed with the CIT(A), noting that the AO had not pointed out any defects in the bills or vouchers and found no cogent material for the disallowance of 25% of the expenditure.

3. Deletion of Addition on Account of Expenses for Purchase of Microwave and Mobile Phone Expenses Being Capital in Nature:
The Revenue contended that the CIT(A) erred in deleting the addition of ?74,152/- made on account of expenses for the purchase of a microwave and mobile phones, which the AO deemed capital in nature. The CIT(A) found that the items were purchased for festival gifting to clients, which were necessary for business promotion and were normal business expenditures. The Tribunal upheld the CIT(A)'s decision, noting that the expenditures did not create capital assets and were rightly considered revenue in nature.

4. Deletion of Addition under Section 40A(3) Being Payment Made to Club in Cash:
The Revenue challenged the deletion of ?50,000/- made under section 40A(3) for payment made to a club in cash. The CIT(A) observed that the taxpayer had produced details of payment by cheque for the club membership, and the disallowance under section 40A(3) was not warranted. The Tribunal agreed with the CIT(A), noting that the payment was made by cheque and the club membership was a necessary business expenditure for meeting and entertaining clients and foreign suppliers.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order on all issues. The Tribunal found that the CIT(A) had rightly deleted the additions in dispute, and there was no need for interference. The appeal filed by the Revenue was dismissed.