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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI RAMIT KOCHAR
सुनवाई क" तार"ख /Date of Hearing : 15-6-2016 घोषणा क" तार"ख /Date of Pronouncement : 12-09-2016 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
1. This appeal, filed by the assessee company, being 28th February, 2013 passed by learned Commissioner of Income Tax (Appeals)- 14, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2009-10, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 27-10-2011 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called “the Act”).
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2. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-
“Aggrieved by the order passed by the Commissioner of Income-tax (Appeals) - 14, Mumbai [hereinafter referred to as 'the learned CIT(A)'], under section 250 of the Income-tax Act, 1961 (Act) and based on the facts and circumstances of the case, Pinebridge Investments Capital India Private Limited (PICIPL) (hereinafter referred to as 'the Appellant') respectfully submits that the learned CIT(A) erred in upholding the order of the Assistant Commissioner of Income-tax, Circle 6(1) (hereinafter referred to as 'the learned Assessing Officer'). In passing the aforementioned order, the learned CIT(A) erred on the following grounds:
1. In disallowing the salary expenditure amounting to Rs 31,227,390 incurred by the Appellant during the financial year ended 31 March 2009, inter alia on the basis that the same was not incurred for the business purposes of the Appellant but for and on behalf of AIG Capital Corporation, USA (AIGCC).
Further, and without prejudice to the above, the learned CIT(A) erred in not appreciating the fact that salary expenditure was reimbursed by AIGCC and the said reimbursement amount was offered to tax based on mercantile system of accounting while calculating the total income for the assessment year 2010-11.
In failing to appreciate that the Appellant was in the business to promote, acquire or invest by way of capital or otherwise, in any non-banking financial activities including investments in fixed deposits and therefore, erring in characterizing the interest income earned from such fixed deposit amounting to Rs 1,262,666 as 'Income from Other Sources' instead of 'Profits and Gains from Business and Profession' during the said assessment year.”
The Brief facts of the case are that the assessee is an investment holding company of the AIG Group in India. The assessee is a wholly owned subsidiary of AIG Capital Corporation, USA(AIGCC) and registered with the ITA 4355/Mum/2013 3 Reserve Bank of India as non-deposit taking non-banking financial companies. The principal business of the assessee is to promote, acquire or invest by way of capital or debt in securities of any body corporate, trusts, societies etc. . During the previous year under consideration , the assessee earned interest income on fixed deposits amounting to Rs. 12,62,666/- and interest income from escrow balance amounting to Rs. 17,46,737/-. The assessee has incurred major expenses on account of employee cost amounting to Rs. 40,622,512/- out of which an amount of Rs. 7,587,585/- had been disallowed by the assessee for various reasons. The assessee was asked to explain why expense of Rs. 3.12 crores should be allowed against only interest income on FD and escrow balance.
In reply, the assessee submitted that the assessee has only five employees. The assessee had incurred employee costs towards salary, bonus, allowances etc. amounting to Rs. 40,622,512/- for which summary of the employee cost was given. Further an amount of Rs. 7,587,585/- was disallowed by the assessee for the financial year ended 31st March, 2009. It was submitted that for the financial year relevant to assessment year 2010-11 assessee’s parent company namely AIG Capital Corporation, USA (AIGC) reimbursed salary costs and other expenses pertaining to certain personnel employed by the assessee for the financial year ended 31st March 2009 and 31st March, 2010 in accordance with the reimbursement agreement between AIGCC and the assessee. It was submitted that out of the total reimbursement received of Rs. 78,324,357/-, an amount of Rs. 31,227,390/- was received by AIGCC towards salary for the financial ended 31st March, 2009 pertaining to the salary cost and other expenses such as staff welfare expenses, routine administrative expenses incurred for the employees such as traveling, conveyance of employees of the assessee. It was submitted that the total amount of Rs. 78,324,357/- has been included in the total income chargeable to tax in the return of income filed by the assessee for the assessment year ITA 4355/Mum/2013 4 2010-11. Thus, the assessee submitted that total amounting to Rs. 31,227,390/- was reimbursed by AIGCC to the assessee in the subsequent financial year ended 31st March, 2010 which has been included in the total income for the assessment year 2010-11 and suffered taxation. It was observed by the A.O. that the expenses incurred were not in connection with the business activity of the assessee as the same was reimbursed to the assessee by the parent company i.e. AIGCC in the subsequent year. The A.O. disallowed expenses amounting to Rs. 31,227,390/- by holding that the expenses are not allowable expenses as the same were not incurred for the business purpose of the assessee but for business purposes of others i.e. AIGCC and hence same were reimbursed by AIGCC. It was held that the reimbursement of expenses were pertaining to the assessment year 2009-10 and assessee is following the mercantile system of accounting hence the same was required to be offered as income for the assessment year 2009-10 only. Thus, the AO disallowed an amount of Rs.3,12,27,390/- claimed as an employee cost for assessment year and added the same to the income of the assessee vide assessment order dated 27-10-2011 passed u/s. 143(3) of the Act.
Further it was held by the A.O. that the interest income on fixed deposit of Rs. 12,62,666/- and income from escrow balance amounting to Rs. 17,46,737/- should be charged to tax under the head income from other sources and not under the head income from business or profession as claimed by the assessee which is not acceptable as held by the AO vide assessment order u/s 143(3) of the Act dated 27th October, 2011.
Aggrieved by the assessment order dated 27-10-2011 passed by the A.O. u/s 143(3) of the Act, the assessee filed first appeal before the ld. CIT(A).
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Before the ld. CIT(A) the assessee submitted that the A.O. without appreciating the nature of the expenses incurred and also without granting sufficient opportunity to the assessee to show cause as to why salary costs should not be disallowed sought to disallow the salary expenditure and other administrative expenses amounting to Rs 31,227,390/- incurred by the assessee during the financial year ended 31 March, 2009 which was reimbursed by the AIGCC during the financial year ended 31 March 2010. It was submitted that the asessee was incorporated on 25 April 2006 and started its business operation as an NBFC subsequent to its registration with the RBI in October, 2006. The assessee had made its first strategic investment in AIG Global Asset Management Company (India) Private Limited in December 2006 and also thereafter made investment in other AIG group of companies in India. It was submitted that during the financial year ended 31 March 2009 the assessee had incurred salary expenses amounting to Rs 40,622,512/- and administrative and other expenses amounting to Rs 5,752,345 for conducting its business activities and has claimed the same as deduction under section 37(1) of the Act. The assessee submitted that the salary and administrative expenses incurred by the assessee during the financial year ended 31 March 2009 was incurred in the normal course of its business activities and were neither capital in nature nor personal in nature. The assessee submitted that it is an undisputed position that the assessee is engaged in business of investing in Indian companies since assessment year 2007-08 which is accepted by Revenue. It was submitted that AO has failed to appreciate the facts of this case and erroneously concluded that the expenses were incurred for the activities of the assessee’s parent company i. e. AIGCC. The salary expenses and other administrative expenditure incurred by the assessee which were later reimbursed by AIGCC were incurred for the purpose of conducting the business activity of the assessee and not for the business purposes of AIGCC and hence should be allowed as deductible under section 37(1) of the Act in computing the total income of the assessee.
ITA 4355/Mum/2013 6 It was also submitted that the A.O. has erred in holding that the assessee is following mercantile system of accounting and the reimbursement amount pertaining to financial year 2008-09 should be offered to tax in the said financial year and not in financial year 2009-10, the year in which the reimbursement was received. It was submitted that the reimbursement agreement was entered into only on 13th May 2010, though effective from 1st April 2008 and therefore the assessee received the reimbursement amount for the assessment year 2009-10 in the assessment year 2010-11, hence the right to receive the reimbursement only arose in financial year 2009-10 and therefore the assessee has offered the said amount of Rs 31,227,390 to tax in the return of income of the assessment year 2010-11 and not in the assessment year 2009-10. Thus the assessee contended that the employee cost and other expenses related thereto amounting to Rs 31,227,390/- reimbursed by AIGCC to the assessee pertain to the business activities of the assessee and should be allowed as a deduction under section 37(1) of the Act.
The ld. CIT(A) rejected the contentions of the assessee whereby the learned CIT(A) held that the assessee is a wholly-owned subsidiary company of AIGCC. The purpose for which the reimbursement was claimed by the assessee was on account of certain managerial persons(‘CFG management employees’) which were employed for and on behalf of the parent company i.e. AIGCC. Thus, right from the beginning i.e. from 1st April, 2008 from which date ‘expense reimbursement agreement’ was entered into by the assesseee with AIGCC, it was clear to the assessee that the expenses incurred in respect of such ‘CFG management employees’ employed on behalf of the parent company i.e. AIGCC were not for its own business purposes and shall eventually be reimbursed to the assessee by its parent company. It was held that the assessee is following mercantile system of accounting and was not entitled to claim these expenses whether or not they were reimbursed by AIGCC in the current year as the said ‘expenses reimbursement agreement’ ITA 4355/Mum/2013 7 was effective from 01-04-2008 due to which such salaries and other expenses became reimbursable to the assessee w.e.f. 01-04-2008 and hence the A.O was justified in disallowing the same and accordingly the action of the A.O. in disallowing the expenses of Rs. 3,12,27,390/- was confirmed by the learned CIT(A) vide appellate order dated 28-02-2013. With regard to the treatment of the interest income on Fixed Deposit amounting to Rs. 1,262,666/- which was brought to tax by the AO under the head ‘income from other sources’ instead of claim of the assessee to bring the same to tax under the head ‘income from profit and gains of business or profession’ , the assessee submitted before the ld. CIT(A) that the assessee was an NBFC registered with the RBI undertaking investment activities and was engaged in the business of making investments. The assessee had, inter- alia, earned interest income on fixed deposits amounting to Rs 1,262,666/- for the previous year ending 31-03-2009. It was submitted that interest income of Rs.12,62,666/- on fixed deposits was earned in the normal course of business of the assessee and the same was offered to tax as business income which is chargeable to tax under the head income from profits and gains from business or profession in accordance with the provisions of section 28 to 44C of the Act. The assessee submitted that during the previous year ended 31st March 2009, it was registered as an NBFC and was in the business to promote, acquire or invest by way of capital or debt in securities of any body corporate, trusts, societies or partnerships, in shares, government bonds, money market instruments and other types of securities. It was submitted that as per the object clause in the Memorandum of Association of the assessee company , the principal business of the assessee is to promote, acquire or invest by way of capital or debt in securities of any body corporate, trusts, societies etc. engaged or proposed to be engaged in any non-banking financial service activity such as asset management, consumer finance, leasing and financing and in trusteeship of mutual funds, ITA 4355/Mum/2013 8 offshore funds, pension funds, etc. It was submitted that assessee had made investment in various AIG group of companies . It was submitted that the assessee is an NBFC registered with the RBI , undertaking investment activities and its business was that of making investments including fixed deposits hence, the income from such investments is required to be computed under the provisions of section 28 of the Act as it is earned in normal course of its business of making investments. The assessee relied on the following decisions:-
Delhi Tribunal in the case of ACIT v. Vashulinga Finance P. Ltd. (ITA No. 5464/Del/2011).
2. The Hon’ble Calcutta High Court decision in the case of CIT v. Eveready Industries India Ltd.(2009) 323 ITR 312. 3. The Hon’ble Calcutta High Court in the case of CIT v. Tirupati Woolen Mills Ltd. [1992], 193 ITR 252 4. The Madras High Court in the case of CIT v. Tamil Nadu Dairy Development Corporation Ltd. [1995] 216 ITR 535 5. Supreme Court in the case of CIT v. Nagpur Engineering Co Ltd. 245 ITR 806 6. Bombay High Court in the case of CIT v. Paramount Premises (P) Ltd. 190 ITR 259 7. Karnataka High Court in the case of CIT v. Chinna Nachimuthu Constructions , 297 ITR 70. Thus the assessee prayed that interest income earned from placing fixed deposit be considered to be income from profits and gains from business or profession and not income from other sources.
The ld. CIT(A) rejected the contentions of the assessee and held that this activity is not covered in the main objects of the business of the assessee hence it is in the nature of income from other sources vide appellate order dated 28-02-2013 passed by the learned CIT(A).
ITA 4355/Mum/2013 9
Aggrieved by the appellate order dated 28-02-2013 passed by the ld. CIT(A), the assessee is in appeal before the Tribunal.
The ld. Counsel for the assessee submitted that the assessee has incurred salary expenses and other expenses related thereto during the year amounting to Rs. 31,227,390/- which has been correctly claimed as expenses for the previous year ended 31-03-2009. The learned counsel submitted that the parent company AIGCC has reimbursed such cost of salary and expenses related thereto w.r.t. ‘CFG management employees’ on cost basis without markup vide agreement dated 13-05-2010 and the said amount was received in financial year 2009-10 and offered for taxation in the assessment year 2010-11. It was submitted that the assessee entered into an expenses reimbursement agreement with AIGCC on 13th May, 2010 and the assessee received the reimbursement amount for the assessment year 2009-10 only in the assessment year 2010-11 which was offered for taxation by the assessee in the return of income filed with the Revenue for assessment year 2010-11. The copy of the said expenses reimbursement agreement is placed on record vide paper book page No. 109 to 114. The agreement was w.e.f. 1.4.2008 and the parent company has agreed to reimburse the salary and other expenses incurred in connection with assessee’s employment of ‘CFG management employees’ w.e.f. 01-04-2008 at cost and without mark up, and the same was offered for taxation in the assessment year 2010-11. Thus the assessee has rightly claimed the expenses in the impugned assessment year 2009-10 keeping in view factual matrix of the case. The ld. Counsel further submitted that direction may be given to the A.O. for limited verification with regard to the fact that it has offered for taxation the said reimbursement of expenses of Rs. 31,227,390/- received from AIGCC in terms of expenses reimbursement agreement dated 13-05-2010 in the assessment year 2010-11. The ld. Counsel also relied on the decision of Hon’ble Bombay High Court in the case of Shrikant Textiles v. CIT, 1970-(BOI)-GJX-0035-Bom. With respect to the ITA 4355/Mum/2013 10 other ground, it was submitted that assessee has earned interest on FD amounting to Rs.1,262,666/- wherein it was submitted that the assessee is engaged in making investments in AIG group of companies and is an NBFC registered with RBI engaged in activities such as asset management, consumer finance, leasing and: financing and in trusteeship of mutual funds, offshore funds, pension funds, etc. It was submitted that the matter may be set aside to the file of the A.O. for verification that the assessee is engaged in the business of NBFC as a financing company.
The ld. D.R. relied on the order of the ld. CIT(A).
We have considered the rival contentions and also perused the material available on record. We have observed that the assessee is a wholly owned subsidiary of AIG Capital Corporation, USA and registered with the Reserve Bank of India as NBFC being non-deposit taking non-banking financial companies. We have observed that the assessee has incurred salary and other expenses relating to ‘CFG management employees’ amounting to Rs. 3,12,27,390/- for the previous year ended 31-03-2009. The assessee has claimed the said expenditure as deduction as revenue expenditure in the return of income filed with the Revenue for the assessment year 2009-10 , while the said expenses was reimbursed to the assessee vide ‘Expenses reimbursement agreement’ dated 13th May, 2010 entered into between the assessee and the parent company AIGCC effective w.e.f. 01-04-2008 wherein the parent company agreed to reimburse the ‘CFG management employeess’ salaries and other expenses in connection thereto incurred by the assessee w.e.f. 01-04-2008 . The reimbursement of said expenses was stated to be received by the assessee in the previous year ended 31-03-2010(page 9/Pb) and the same was stated to be offered for taxation in the assessment year 2010-11. . The assessee has also placed copy of balance sheet for the assessment year 2010-11 wherein the said amount of reimbursement of ITA 4355/Mum/2013 11 expenses to the tune of Rs. 3,12,27,390/- for the previous year ended 31-03- 2009 had been reflected in the P&L account for the year ended 31.3.2010(pb/page9) as income earned by the assessee. The reimbursement of said expenses which has been elaborated vide Schedule 13 in the audited financial statement which is as under:-
Reimbursement of expenses The Company entered into an Expense Reimbursement Agreement, as executed on April 26, 2010 with effect from April 1, 2008 with AIG capital Corporation (AIGCC), being the holding company holding 99% of its shares, whereby AIGCC reimbursed expenses on account of salary and other expenses of certain managerial personnel employed by the Company for the sole purpose of managing and administering its consumer finance subsidiaries with effect from April 1, 2008. The agreement was approved by the Board of Directors in their meeting held on March 26, 2010. The amount of reimbursement for the year April 1, 2008 to March 31., 2009 aggregating to Rs 31,227,390 (Previous year Rs. Nil) has been disclosed in the Profit and Loss Account under the head 'Income' and the amount for the year April 1, 2009 to March 31, 2010 aggregating to Rs. 47,096,967 has been disclosed in Schedule 9 as annexed to Profit and loss account as a reduction from expenses.
In our considered view , the assessee is entitled for deduction as revenue expenditure with respect to the claim of afore-stated expenses of Rs. 3,12,27,390/- 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 ITA 4355/Mum/2013 12 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 afore- said 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 decision of Hon’ble Bombay High Court in the case of Shrikant Textiles v. CIT, 1970-(BOI)-GJX-0035-Bom squarely applies to the instant case of the assessee and supports the assessee’s contentions. Thus in our considered view, the assessee has rightly offered as income the ITA 4355/Mum/2013 13 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 afore- said 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 . We order accordingly.
With regard to the contention of the ld. Counsel for the assessee with respect to chargeability of interest income on fixed deposit of Rs.12,62,666/- under the head income from profit and gain of business or profession , we have 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. We order accordingly.
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In the result, appeal filed by the assessee in 2009-10 is allowed as indicated above. .