2018 (6) TMI 1267 - AT - Income Tax

Head Office Expenditure disallowance - undisclosed markup on the cost incurred by the Head Officer in UK - claim u/s 44C - Held that - So far as addition made by the Assessing Officer on account of undisclosed markup on the cost incurred by the Head Office in UK is concerned, we are of the opinion that the income, if any that accrues on account of expenditure incurred by the Head Office, it will be the income of the Head Office and not the Indian Branch Office in view of the decision of the Delhi Bench of the Tribunal in the case of Education Australia Limited ( 2012 (11) TMI 89 - ITAT DELHI). For disallowance on account of section 44C Mumbai Bench of the Tribunal in the case of British Bank of Middle East (2005 (6) TMI 476 - ITAT MUMBAI) under similar circumstances has held that non-debiting of the expenditure in the books of account of India operations is not relevant for allowability of the same in the light of the law laid down in the case of Kedarnath Jute Mills Co. Ltd. (1971 (8) TMI 10 - SUPREME COURT). It has been held that as long as the expenditure is really incurred and is otherwise deductible, the deduction cannot be declined on the ground that it has not been debited in the books of account. Since in the instant case there is no dispute to the fact that the head office has incurred the expenditure for the Branch office, the genuineness of which has not been doubted and since the assessee has claimed the deduction u/s 44C of the I.T. Act in the computation statement, therefore, Assessing Officer is not justified in disallowing the claim merely for not debiting the same in the Profit & Loss Account - direct the Assessing Officer to allow the claim of expenditure u/s 44C and delete the addition on account of undisclosed mark up on the costs incurred by the HO in UK - Decided in favour of assessee

Summary

Issues Involved:
1. Deduction under Section 44C of the I.T. Act.
2. Addition on account of undisclosed markup on costs incurred by the Head Office.
3. Refund of determined refundable amount.
4. Initiation of penalty proceedings under Section 271(1)(c) of the I.T. Act.

Detailed Analysis:

1. Deduction under Section 44C of the I.T. Act:

The assessee, a branch office of a foreign company, claimed a deduction of ?24,86,617/- under Section 44C of the I.T. Act for the assessment year 2012-13. The Assessing Officer (AO) disallowed this deduction on the grounds that the expenses were not debited in the Profit & Loss Account of the Indian branch office. The assessee argued that the expenses, though not debited in the books, were incurred by the Head Office (HO) and are allowable under Section 44C, which permits a deduction of up to 5% of the adjusted total income for general administrative expenses incurred outside India. The Tribunal found merit in the assessee's argument, citing the decision in the case of British Bank of Middle East vs. JCIT, which held that non-debiting of expenditure in the books does not preclude its deductibility if genuinely incurred. Consequently, the Tribunal directed the AO to allow the deduction under Section 44C.

2. Addition on account of undisclosed markup on costs incurred by the Head Office:

The AO added ?21,39,012/- to the assessee's income, representing an undisclosed markup on the costs incurred by the HO in the UK. The assessee contended that its income was computed based on a markup on costs incurred by the Branch Office (BO) in India, in line with transfer pricing regulations. The Tribunal agreed with the assessee, noting that any income accruing from HO expenses would be the income of the HO, not the Indian BO, referencing the decision in Education Australia Limited vs. DDIT. Thus, the Tribunal directed the deletion of the addition on account of undisclosed markup.

3. Refund of determined refundable amount:

The assessee claimed that the AO erred in not granting a refund of ?1,273,586/- determined as refundable. Although this issue was raised, the Tribunal's order primarily focused on the deductions and additions related to Section 44C and the undisclosed markup. The Tribunal's decision to allow the appeals implies that any consequential relief, including refunds, must be processed in accordance with the revised assessments.

4. Initiation of penalty proceedings under Section 271(1)(c) of the I.T. Act:

The AO initiated penalty proceedings under Section 271(1)(c) for alleged concealment of income or furnishing inaccurate particulars. The assessee argued that it had not concealed any income or disclosed incorrect particulars. Given that the Tribunal allowed the assessee's claims regarding deductions and additions, the basis for penalty proceedings under Section 271(1)(c) would be undermined. The Tribunal's order implicitly suggests that the initiation of penalty proceedings may not be justified if the primary adjustments are overturned.

Separate Judgments for Assessment Years 2012-13 and 2013-14:

For the assessment year 2013-14, the issues and grounds of appeal were identical to those for 2012-13. The Tribunal applied the same reasoning and allowed the appeals for 2013-14 as well, directing the AO to allow the deductions under Section 44C and delete the addition on account of undisclosed markup.

Conclusion:

The Tribunal allowed the appeals for both assessment years, directing the AO to allow the deductions under Section 44C and delete the additions on account of undisclosed markup on costs incurred by the HO. The Tribunal's decision underscores the principle that genuine expenses incurred by the HO, even if not debited in the BO's books, are deductible under Section 44C, and any income from such expenses should be attributed to the HO, not the BO.