Loading judgment…
No AI summary yet for this case.
% 22.02.2012
This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 (Act, for short) relates to assessment year 2002-03 and arises out of the order of the Income Tax Appellate Tribunal (tribunal, for short) dated 11th February, 2011 in ITA No. 3895/Del/2010. 2. Pursuant to the order passed by the Commissioner of Income Tax (Appeals) under Section 263 of the Act, the Assessing Officer passed an order dated 30th July, 2007 holding that the royalty payment of Rs.108.64 lacs was capital 2012:DHC:1214-DB
ITA No. 1069/2011 Page 2 of 7
expenditure, inter alia, for acquisition of a capital asset.
The CIT(Appeals) deleted the said addition. The said order has been affirmed by the tribunal.
We reproduce the reasoning given by the Assessing Officer to make the said addition:
“3. The assessee vide his letter dated 23.07.2007 has submitted that royalty of Rs.108.64 cannot be considered as capital as it is not for acquisition of any capital asset (trade mark). It is only for „user‟ thereof and is payable every year, based on the sales in the year.
The arguments of the assessee cannot be accepted as the expenditure is in the nature of capital and give enduring benefit to the assessee. In view of the Supreme court deicision in the case of Southern Switch Gear Ltd. 232 ITR 359, it cannot be allowed and is therefore disallowed and added to the income of the assessee.”
The order passed by the Assessing Officer is cryptic and non-reasoned. It does not explain and state why and on what ground the payment of royalty in the present case was to be treated as a capital expenditure and was not a revenue expense. The payment of royalty as per the assessment order was for use of trade mark and was payable for user and quantum dependent upon the sales in the year. 2012:DHC:1214-DB
ITA No. 1069/2011 Page 3 of 7
The CIT(Appeals) examined the agreement in question and found that it was for use of technology and technical information. The CIT(Appeals) referred to the terms of the agreement and has recorded that the assessee had not secured any exclusive privilege to either manufacture or sell the products. The right to use technology and technical information was for prescribed period and not perpetual. No benefit or right accrued in perpetuity.
The tribunal in the impugned order has accepted the reasoning given by the CIT(Appeals).
The aforesaid conclusion of the tribunal is in accord with the decision of the Supreme Court in CIT versus Ciba of India Limited, (1968) 69 ITR 692 (SC) and their subsequent decision in the Commissioner of Income Tax versus I.A.E.C. (Pumps) Limited, (1998) 232 ITR 316 (SC). Referring to these decisions, a Division Bench of this Court in Commissioner of Income Tax versus G4S. Securities System (India) (P) Limited, (2011) 338 ITR 46, has held as under:- “9. From the terms of the agreement it is noticed that this arrangement was for a period of 5 years, which may be extended by another period of 5 years unless either party gives 6 months notice to the other party prior to the end of such 5 years period. The 2012:DHC:1214-DB
ITA No. 1069/2011 Page 4 of 7
payment of commission @ 1% was based on the net sales and not lumpsum. On the termination of expiration of the sub license agreement, the assessee was to return all G4F knowhow obtained pursuant to the said agreement. Not only that, the assessee was not even entitled to make use of the trade mark name or G4F knowhow and was forthwith to change its‟ corporate and/or trade names. All rights and knowhow, therefore, continued to vest in G4F and it was only the right to use the knowhow that was made available to the assessee and that too based on its net sales. That means all the royalty paid in the shape of 1 % of net 2012:DHC:1214-DB
ITA No. 1069/2011 Page 5 of 7 consequently dismiss all the three appeals.”
In light of the aforesaid legal position, we do not find any substantial question of law arises on this aspect. 2012:DHC:1214-DB
ITA No. 1069/2011 Page 6 of 7
The second issue raised by the Revenue is in respect of addition of Rs.66,86,974/- made by the Assessing Officer disallowing the entry made by the assessee in books towards doubtful debts/advances. The Assessing Officer disallowed the said claim holding as under:- “ The claim of the assessee cannot be allowed as no details regarding these expenses have been filed, whether these were actually trade debts incurred in the course of business, what steps were taken to recover the amount and why these have been written off. Hence the amount of Rs.66,86,974/- is disallowed and added to the income of the assessee.”
The aforesaid findings given by the Assessing Officer are cryptic and devoid of any reasoning. The CIT(Appeals) had asked for a remand report in view of the facts stated by the assessee that they had given advance of Rs.66,68,000/- to Doshi Plastic Industries for supply of packaging material and there were other small amounts/petty balances payable by other third parties. Application filed under Rule 46A by the assessee was allowed. The CIT (Appeals) after examining the facts and material brought on record deleted the addition of Rs.66,68,000/-. He, however, confirmed the balance addition of Rs.18,974/- for lack of evidence. 2012:DHC:1214-DB
ITA No. 1069/2011 Page 7 of 7
The tribunal has dismissed the appeal of the Revenue against the said deletion. We may notice that the tribunal has referred to Section 36(1)(vii) of the Act, which is not applicable in the factual background. However, we are not inclined to admit any substantial of law on the said aspect, in view of the findings of fact, which have been recorded by the CIT(Appeals) and affirmed by the tribunal regarding the said claim. The said claim was admissible under Section 37 read with Section 28 of the Act.
In view of the aforesaid reasoning, no substantial question of law arises in the present appeal and the same is dismissed.
SANJIV KHANNA, J.
R.V. EASWAR, J.
FEBRUARY 22, 2012 VKR 2012:DHC:1214-DB