Benefits Under Section 28(iv) Cannot be Taxed if Received in Cash: ITAT upholds SC’s Order

The Income Tax Appellate Tribunal (ITAT), Bangalore, deleted tax additions towards the disallowance issues related to foreign exchange loss reimbursement and service fees.

The company, Informatica Business Solutions, challenged additions and disallowances made by the Assessing Officer (AO) under various sections of the Income Tax Act in an assessment order for FY 2014-15. The AO had determined the company’s income at Rs 603,863,180, higher than what the company declared in its return at Rs 429,874,310.

The first issue was regarding the Foreign Exchange Loss Reimbursement. The Assessing Officer had added this amount as income under section 28(iv) of the Income Tax Act, saying that it was a benefit or perquisite. The company contended that it was a reimbursement for a loss that was previously disallowed and is not taxable income. The company argued that when the reimbursement for the realised foreign exchange loss was received in FY 2013-14, it was reduced from the taxable income. This was because the unrealised losses were already disallowed in earlier years, treating them the same as capital expenses, and taxing the reimbursement would result in double taxation.

The main issue before the Tribunal was whether the reimbursement of loss received by the assessee from its associated enterprises can be taxed under 28 (iv) of the Income Tax Act. The Tribunal referred to the decision of the Karnataka High Court in the case of IG Petrochemicals Ltd v ITAT (2023) 155 taxmann.com 45 (Karnataka), where the High Court had upheld the Supreme Court’s ruling, which stated that the benefits under section 28(iv) should not be taxed if they are in the form of money. As the reimbursement of Rs 48,845,724 was in cash, it cannot be taxed under the relevant section. Therefore, the Tribunal directed the AO to delete the addition.

The second issue was regarding the disallowance of Rs 3,768,805 under Section 40(a)(iii). The assessee company had sent some employees to Indonesia and entered into a contract with the Indonesian entity to enable the employees to obtain a work permit. During the Financial year 2013-14, the assessee was liable to pay a service fee of Rs 3,768,805 to the Indonesian entity. Since the assessee did not withhold any taxes on this amount, the AO disallowed this. However, the company contended no tax was due, as it had no employer-employee relationship with the entity.

The Tribunal noted that when the DRP ignored the agreement and the explanations submitted by the assessee company. Therefore, the Tribunal restored this issue back to the assessing officer, directing him to prove his point by submitting the agreement and invoices and also establishing the nature of the relationship between the employees and the assessee company.

The third issue was regarding the disallowance of Rs 941,162 under Section 37 of the Act. The assessee had made a provision of Rs 2,826,912 towards the professional and contractors’ charges on which TDS was not deducted. From this provision, the assessee used Rs 1,887,750 to incur its expenses, on which TDS was deducted and remitted. The remaining provision was reversed during the year. The AO disallowed this, saying that the TDS was not deducted on this reversal amount. The ITAT held that the above income was not subject to TDS as the original claim of the expenditure was disallowed by the assessee. Therefore, this appeal was allowed. Other grounds related to penalty and interest were dismissed or considered premature.