2006 (2) TMI 220 - AT - Income Tax

Chargeable to tax - reimbursement of expense - disallowance u/s 40(a)(i) - Payment of administrative fee - whether the consideration paid or payable by the assessee to M/s. HIAI under the ASA is chargeable to tax in the hands of M/s. HIAI, in India? - additional evidence - discrepancies in the stock statements - HELD THAT - The decision of the Hon'ble Supreme Court in the case of Associated Cement Co. Ltd. 2001 (1) TMI 248 - SUPREME COURT relied upon by the ld. DR is in a different context. In the said case the Court held that the purpose of grant of an approval by the RBI for remittance is from the view point of the implications of Foreign Exchange out-flow and that it had no impact on the adjudication under the Customs Act as to whether the payment for which permission was granted by the RBI was for rendering services or for import of goods. Considering the law laid down in the aforesaid judicial pronouncements, relied upon by the ld. counsel for the assessee we are of the view that the claim of the assessee that the expenses for the period 1-1-2000 to 31-3-2000 accrued as a liability to the assessee only during the previous year and the action of the revenue authorities holding that it is a prior period expenses cannot be sustained. The expenditure claimed for this period is therefore directed to be allowed as a deduction. Though the assessee did not receive any bill for this period from M/s. HIAI it had made an estimate of the amount payable to M/s. HIAI for this period on the basis of the bill that it had received from M/s HIAI for the period1-1-2000to31-12-2000. This was a reasonable basis on which the assessee could claim liability as having accrued. The liability of the assessee in the present-case has therefore to be held as accrued and arisen during the previous year relevant to assessment year 2001-02 and therefore, the claim made by the assessee for deduction deserves to be accepted. The Assessing Officer is directed to allow the same. We, therefore, hold that the claim of the assessee for deduction of the entire sum being administrative fee paid to M/s. HIAI should be allowed as a deduction. The Assessing Officer is directed to allow the deduction accordingly. The third ground of appeal of the assessee is allowed, to the extent and on the basis indicated above. Expenditure incurred for leasehold improvements - A similar issue had come up for consideration in assessee's own case in the assessment years 1999-2000 and 2000-01. This Tribunal on identical facts had held that the claim for deduction made by the assessee had to be allowed. The Tribunal held that these expenditure were necessary for day-today working of the assessee smoothly and it was necessary and was to facilitate the carrying on the business of the assessee. In view of the above the disallowance made by the revenue authorities cannot be sustained, the same is directed to be deleted. Foreign exchange fluctuation loss - This issue has been considered by the Special Bench of the ITAT in the case of ONGC Ltd. v. Dy. CIT 2002 (8) TMI 802 - ITAT DELHI . The said Bench has held that in the case where an assessee consistently follows a system of accounting by which the fluctuation in foreign exchange currency is duly accounted for at the end of the accounting year, the same cannot be said to be notional and it cannot be said that the assessee could claim the fluctuation loss or gain only in the year when the loan was actually repaid. The Tribunal held that the loss was not a notional loss and was to be allowed as deduction. The Tribunal also referred to the Accounting Standard-II of the Institute of Chartered Accountants of India (the assessee in the present case follows such an accounting standards). In view of the above the loss on account of foreign exchange claimed by the assessee deserves to be allowed. The 5th ground of appeal is accordingly allowed. Obsolete/damaged inventory - Additional evidence - discrepancies in the stock statements - In the instant case, we find that the entire dispute had arisen when the Assessing Officer started the verification exercise of the write-off of obsolete damaged stocks claimed by the assessee. The stocks record maintained was found to be unreliable for the same being unreconciled. In the entire exercise, there is no material or evidence that the assessee has carried out any sales outside the books of account. Thus, in the interest of justice and to plug leakage of revenue, it would be appropriate if an addition of Rs. 3 crores be made to the income of the assessee to cover the impact on profits on account of unverifiable discrepancies in stock records. The order of the CIT(A) is accordingly modified. The assessee partly succeeds on this count. In the result, the appeal of the assessee is partly allowed.

Issues Involved:
1. Disallowance of administrative fee expenditure.
2. Applicability of section 40(a)(i) of the Income-tax Act.
3. Treatment of prior period expenses.
4. Allowability of expenses for the period 1-1-2001 to 31-3-2001.
5. Nature of leasehold improvement expenses.
6. Allowability of foreign exchange fluctuation loss.
7. Reliability of books of account and lump sum addition.

Issue-wise Detailed Analysis:

1. Disallowance of Administrative Fee Expenditure:
The assessee claimed an expenditure of Rs. 5.83 crores as administrative fee paid to M/s. Herbalife International of America Inc. (HIAI) under an Administrative Services Agreement (ASA). The revenue authorities disallowed this expenditure, arguing it was not deductible due to non-deduction of tax at source under section 40(a)(i) of the Income-tax Act. The assessee contended that the payment was a reimbursement of expenses and not "fees for technical services." The Tribunal examined whether the payment was chargeable to tax in India and concluded that the payment was indeed a reimbursement of expenses and not taxable under the DTAA between India and the USA.

2. Applicability of Section 40(a)(i) of the Income-tax Act:
The Tribunal considered whether the administrative fee paid to HIAI was deductible under section 40(a)(i) of the Act, which disallows deductions for payments outside India on which tax has not been deducted. The Tribunal referred to Article 26(3) of the DTAA between India and the USA, which mandates non-discrimination in deductibility of expenses. It concluded that section 40(a)(i) could not be applied due to the DTAA provisions, allowing the deduction of the administrative fee.

3. Treatment of Prior Period Expenses:
The Tribunal addressed whether the expenditure for the period 1-1-2000 to 31-3-2000 could be claimed in the assessment year 2001-02. The assessee argued that the liability accrued only when the RBI granted permission on 30-6-2000. The Tribunal agreed, citing judicial precedents, and allowed the expenditure as a deduction for the assessment year 2001-02.

4. Allowability of Expenses for the Period 1-1-2001 to 31-3-2001:
The Tribunal examined the allowability of expenses for this period. The assessee had estimated the expenditure based on previous bills and argued that under FEMA, 1999, no RBI permission was required. The Tribunal found the estimation reasonable and allowed the deduction, emphasizing that the liability had accrued during the relevant period.

5. Nature of Leasehold Improvement Expenses:
The assessee claimed a deduction for Rs. 53,63,731 incurred on leasehold improvements. The revenue authorities treated these as capital expenses. The Tribunal reviewed the nature of the expenses, which included interior work, electrical fittings, and renovations, and concluded that they were revenue in nature, facilitating the business's day-to-day operations. The Tribunal allowed the deduction, referencing a similar decision in the assessee's case for earlier years.

6. Allowability of Foreign Exchange Fluctuation Loss:
The assessee claimed a foreign exchange fluctuation loss of Rs. 5,97,184. The revenue authorities disallowed this, arguing that such losses should be recognized only upon actual remittance. The Tribunal referred to a Special Bench decision allowing the recognition of such losses at the end of the financial year if consistently followed. The Tribunal allowed the deduction, noting the assessee's consistent accounting practice.

7. Reliability of Books of Account and Lump Sum Addition:
The Assessing Officer found discrepancies in the stock records and made a lump sum addition of Rs. 5 crores, questioning the reliability of the books. The assessee admitted discrepancies but attributed them to software issues and sought to reconcile through additional evidence. The Tribunal acknowledged the discrepancies but found the lump sum addition excessive. It reduced the addition to Rs. 3 crores, considering the lack of evidence for sales outside the books and the need to address revenue leakage.

Conclusion:
The Tribunal allowed the assessee's appeal in part, permitting the deduction of the administrative fee, leasehold improvement expenses, and foreign exchange fluctuation loss. It also allowed prior period expenses and expenses for the period 1-1-2001 to 31-3-2001. However, it sustained a reduced addition of Rs. 3 crores for discrepancies in stock records.

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