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Income Tax Appellate Tribunal, DELHI BENCH: ‘C’ NEW DELHI
Before: MS SUCHITRA KAMBLE, & SHRI B. R. R. KUMAR
Date of Hearing 13.08.2020 Date of Pronouncement 24.08.2020 ORDER
PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against the order dated 22/08/2019 passed by CIT(A)-44, New Delhi for Assessment Year 2015-16.
The grounds of appeal
are as under:- “Based on the facts and circumstances of the case, the Appellant respectfully craves leave to prefer an appeal against the Order dated August 22, 2019 passed by the Learned Commissioner of Income-Tax, (Appeal)-44, New Delhi [‘Ld. CIT(A)’] under Section 250(6) of the Income Tax Act, 1961 (‘the Act’) and by the Learned Deputy Commissioner of Income Tax Circle-12(l) [‘Ld. AO’] under Section 143(3) of the Act, on the following grounds, which are without prejudice to each other:
1. The Ld. AO has grossly erred in facts and in law in exceeding his jurisdiction in making huge disallowances on issues which were not the basis for initiating Limited Scrutiny and consequently the order passed is bad in law and void ab-initio.
1.1 The Ld. AO has grossly erred in facts and in law in converting the assessment in a Complete Scrutiny without seeking prior approval of the Principal Commissioner of Income Tax/ Commissioner of Income Tax as directed in the Board’s Instruction No. 5/2016 in respect of “CASS” assessment, and the order passed in violation of Board’s instructions is bad in law and void ab-initio. 2 The Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in making/ sustaining various disallowances of Rs. 83,28,736/- to the returned income of the Assessee of Rs. 1,98,88,800/-. 3 The Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in disallowing the trademark fee amounting Rs.45,52,624/- paid to the M/s India Inc., a proprietorship, for using the name ‘Indian Inc’. 3.1 The Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in not taking into account the agreement entered into by the Appellant with M/s. Indian Inc in respect of the use of trademark. 3.2 The Ld. CIT(A)/Ld.AO has grossly erred on facts and in law in assuming that royalty, as defined in Explanation to 9(l)(vi) of the Act, can be paid only in respect of registered trademark and not taking into consideration that there is no such stipulation and even the meaning of trademark as defined under The Trade Marks Act, 1999 envisages an unregistered trademark. 3.3 The Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in not appreciating the fact that growth in the business of the Appellant over the years was due to the usage of the trademark. 3.4 The Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in disallowing the trademark fee merely on the basis that there existed no agreement either for use of trademark or for payment of royalty since 2002 till year 2013. 3.5 Without prejudice, the Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in not appreciating that the payee has offered the said amount of trade mark fee in her return on which tax was paid at the rate of 33.99 % while the tax rate applicable for the Assessee company was 31.50%.
4 The Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in disallowing the depreciation of Rs. 34,17,232/- claimed on the new office building, even though the Assessee had demonstrated the ownership and usage of the said building. 4.1 The Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in disallowing the depreciation by arriving at a conclusion that the property was not fit for business purpose, merely on the basis of the Assessee’s letter to the builder highlighting the shortcomings in the common facilities in the building. 4.2 The Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in disallowing the depreciation by erroneously taking the date of registration of the building as 20.03.2017 instead of20.03.2015. 5 The Ld. CIT(A)/Ld. AO has grossly erred on facts and in law in disallowing on an ad-hoc basis 10% of the travelling expenses amounting to Rs. 3,58,880 incurred through credit card by conjecturing that the same could be in the nature of personal expenses, even after stating that books of accounts of the Assessee are duly audited and no adverse remarks have been made by the auditor. 5.1 The Ld. CIT(A)/Ld.AO has grossly erred on facts and in law in failing to take into consideration the documentary evidences submitted by the Appellant in respect of travel expenses and thus has failed to appreciate that all the expenses were incurred for the purpose of business only. 5.2 The Ld. CIT(A) has grossly erred on facts and in law in disallowing the travel expenses on an ad- hoc basis even though she has herself acknowledged the fact the business of the Appellant requires frequent travel by the Appellant’s employees to different parts of the world.”
ADDITIONAL GROUNDS 1. The Ld. A.O has grossly erred in facts and in law in exceeding his jurisdiction in making huge disallowance son issues which were not be basis for initiating Limited Scrutiny and consequently the order passed is bad in law and void ab-initio.
1.1 The Ld. A.O has grossly erred in facts and in law in converting the assessment in a Complete Scrutiny without seeking prior approval of the Principal Commissioner of Income tax as directed in Board’s Instruction No. 5/2016 in respect of “CASS” assessment and the order passed in violation of Board’s instruction is bad in law and void-ab-initio.
During the year, the assessee company was engaged in the business of “Buying agency” and rendering services to overseas buyers for sourcing of export products from India. The assessee company filed its return of income on 27.09.2015 declaring total income at Rs. 1,98,88,800/-. The case was selected for limited scrutiny under CASS and the notice u/s 143(2) of the Income Tax Act, 1961 was issued and served upon the assessee.
The limited scrutiny was under following points:
During the course of proceedings, the Assessing Officer observed that the assessee debited trade mark fee of Rs. 45,52,624/- and in the note 21.1, it was mentioned that trade mark fee has been paid for the use of trade mark “Indian Inc.” which is owned by M/s Indian Inc., a proprietary concern owned by a director of the company. Further, on perusal of the details filed u/s 40(A)(2b) of the Act, it was noticed that assessee had not mentioned the above transaction. The Assessing Officer after verifying the evidence and submissions filed by the Assessee, held that the said trade mark is unregistered which can be used by any other entity /individual. Therefore, the Assessing Officer inferred that when it was required to give extra monetary benefit to its Director then it has been tried to formalize it by entering into an agreement between the two entities. Thus, the Assessing Officer observed that whole exercise has been devised to provide monetary benefit in the guise of Royalty payment as trade mark fee which is not allowable. Thus, the Assessing Officer disallowed Rs. 45,52,624/- u/s 37 of the Act.
Further the Assessing Officer observed that the assessee claimed depreciation of Rs. 34,17,232/- on purchase of a new office at Noida and the possession of the said office was on 20.03.2017. Therefore, the assessee was asked to furnish credible evidences to prove that the building was put to use in F.Y. 2014-15. In response, the assessee submitted reply that the assessee started using the property from June, 2014 upon signing of the maintenance agreement, hence property was already in the occupation of assessee prior to the registration of the sale deed/issue of possession letter in March 2015 issued by Stellar Ventures Pvt. Ltd. The Assessing Officer held that the assets was not put to use for business operation by the assessee till 31.03.2015 due to which the pre-condition for claiming the depreciation on this property is not satisfied. The Assessing Officer also rejected the claim of the assessee that it is using the premise since June, 2014 as then it would have claimed depreciation at full rate as then period after put to use would have been more than 180 days. However, the assessee claimed the depreciation at half rate which means period after put to use as claimed by assessee is less than 180 days. Thus, the Assessing Officer disallowed the depreciation of Rs. 34,17, 232/-.
Further, the Assessing Officer observed that the assessee debited amount of Rs. 35,88,804/- on account of credit card payments. Therefore, the assessee was asked to substantiate the said expenses and prove that entire of these expenses were wholly and exclusively for business purposes. In response, the assessee furnished a chart of payments made through credit card. The Assessing Officer held that the entire of the expenses cannot be allowed as claimed. Hence to cover such leakage expenditure amounting to Rs. 5,38,320/- (20% of Rs. 35,88,804/-) was disallowed by the Assessing Officer.
Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.
Firstly, the Ld. AR submitted in respect of additional ground that the Assessing Officer grossly erred in exceeding his jurisdiction in making huge disallowances on issues which were not the basis for initiating Limited Scrutiny and consequently the order passed is bad in law and void ab initio. The Ld. AR submitted that the assessment order dated 16.11.2017 mentions that the case was selected for limited scrutiny under CESS and notice u/s 143(3) dated 6/4/2016 was issued. Similarly another notice dated 03.11.2016 also clearly states that the case was limited scrutiny. The Ld. AR further submitted that the assessee was also not made aware as to whether the assessment was converted into a completed scrutiny by seeking prior approvals as directed in Boards Instruction No. 5/16. In such a scenario, the Assessing Officer exceeded his jurisdiction by making disallowance in respect of matters which were not identified for doing the limited scrutiny. As such, the impugned assessment order passed in violation of Boards Instructions is bad in law and void ab initio. The Ld. AR relied upon the Tribunals decision in case of Vinay Kumar Vs. ITO Assessment Year 2014-15.
The Ld. DR submitted that the first two issues wherein the additions made by the Assessing Officer are within the scope of the Limited Scrutiny Assessment. Therefore, the Assessment Order is properly passed. Therefore, the Ld. DR submitted that the additional grounds should not be entertained.
We have heard both the parties and perused all the relevant material available on record. From the perusal of Assessment order, it can be seen that the Limited Scrutiny was conducted for the following reasons:-
I) Depreciation claimed at higher rates/higher additional depreciation claimed II) Mismatch in amount paid to related persons u/s 40A(2)(b) reported in Audit Report and ITR.
Thus, the scope of limited scrutiny was properly taken into consideration by the Assessing Officer while making addition in respect of the above mentioned reasons. Therefore, the additional ground taken by the assessee does not sustain. As the scope of assessment order does not override the reasons mentioned in the limited scrutiny, additional ground taken by the assessee is dismissed. As regards to the Ground Nos. 1 and 1.1 are concerned the same are related to additional ground, hence dismissed.
On merit, as regards to Ground Nos. 3, 3.1, 3.2, 3.3, 3.4 & 3.5, the Ld. AR submitted that Indian Inc. is a sole proprietorship firm of Ms. C.E. Rai was set up in the year 1989. The said firm was carrying on the business of Buying Agency and Running Services to overseas buyers for sourcing of merchandise from India. The sole proprietorship carried on the said business till the year 2002 and the business profit were tax in the hands of Ms. C.E. Rai. In the year 2002 with a view to operate in a corporate structure considering that business was growing and employees strength was also increasing, the operations were carried on by the assessee company in which Ms. C.E. Rai was the majority share holder and Managing Director. Since, the assessee company had just taken over the operations and there was a need to ensure continuity with the customers and vendors, Ms. Rai permitted the use of Logo/trade name “Indian Inc.” on a royalty free basis to the assessee company. This was an informal understanding and no written agreement in this context was entered into in 2002. An oral agreement also equivalent as per the decision of the Hon’ble Delhi High Court in case of Nanak Builders and Investor Pvt. Ltd. Vs. Vinod Kumar Alag AIR 1993 Delhi 315. Being a commercial decision between private parties, the charging or non-charging or a fee cannot be question by a tax authorities, more so when the provisions of the Act did not maintains such an action/imputation. The trade name “Indian Inc.” is an integral part of the identity of the assessee company and is used extensively in its correspondence and internal documents. The Assessing Officer has also no disputed assessee’s use of the trade mark “Indian Inc.” for identifying itself in the business fraternity. The Website of the company is www.indianinc.com which also unequivocal indicates that for the external world the identity of the company is with this name only. Considering that the turnover of the assessee increased manifold from Financial Year 2002-03 to Financial Year 2014-15, it was decided that Ms. C.E. Rai be compensated for the use of the trade mark which had contributed significantly for the growth of business. Indian Inc and assessee entered into a formal License Agreement on July 22, 2014, pursuant to a Board Resolution dated April, 11, 2014 by the assessee for a period of 5 years and decided to pay royalty at the rate of 2% of net revenue of the assessee. The Assessing Officer on the basis, of the definition of royalty under Explanation 2 to Section 9 (1) (vi) of the Act observed that an instrument for usage of rights of trade mark must be present. The Assessing Officer completely ignored the documents filed during the course of the assessment proceedings thus grossly erred in observing that no documentary evidence regarding the uses have been furnished. The assessee has duly deducted TDS on all royalty payments paid to Ms. C. E. Rai for the use of trade mark. The same royalty income had been offered to tax in personal return of Ms. C. E. Rai. This aspect was brought to the notice of the Assessing Officer. The Ld. AR submitted that the payment made by the assessee for non exclusive use of logo based on turnover and not on lump sum payment has been held to be allowable as revenue expenditure as held in case of Shriram Transport Finance Company Ltd. (ITA No. 1744/MDS/2012(Chennai Tribunal). The Assessing Officer as a basis to disallow the fee /royalty, has given a finding in the assessment order that the existence of Indian Inc. should have come to an end. The Ld. AR submitted that Indian Inc. is proprietorship firm of Ms. Rai and has an existence till she wishes. The Ld. AR relied upon the decision of the Hon’ble Punjab & Haryana High Court in case of Pr. CIT Vs. Mobisoft Tele Solutions Pvt. Ltd (2016) 65 taxmann.com 214. The Ld. AR further submitted that the Assessing Officer observed that the trade mark is unregistered and can be used by any other entity. The Ld. AR submitted that such an argument is devoid of substances and merit. It is well settled that in the absence of any definition of trade mark in the Income Tax Act, reference should be taken for the definition from Trademarks Act, 1999. The word ‘royalty’ is defined in Explanation 2 to Section 69(1) (vi) of the Income Tax Act, 1961. The word ‘trade mark’ includes registered trademarks as well as unregistered trademarks. Unregistered marks are defined as marks which are not registered in relation to goods or services (i.e. names, marks or logos) used in relation to a business, under the Trademarks Act. Though u/s 27 of the Trademarks Act, 1999, no action for infringement is allowed for unregistered trademarks it can still be protected by means of common laws of tort of passing off. Once it is established that unregistered mark has comparable goodwill or reputation in connection with the product, services or business with which it is used, one can avail protection. Thus, the finding of the Assessing Officer that trade mark being unregistered can be easily used by any other person is not valid. Ms. C.E. Rai has assigned right to use her trademark for the use of the assessee company. Compensating her, as an owner/inventor of the logo, cannot be said to be providing in monetary benefit to a Director. The fact that she also happens to be director and share holder of the company cannot be the basis to deny her claim of royalty for the use of tradename/logo. It is not the case of the Assessing Officer that the payments are excessive in terms of Section 40A (2b) of the Act. The Assessing Officer simplicitor disallowed the entire amounts without establishing that fair value of use of logo/tradename was Nil. The Ld. AR relied upon the decision of the Delhi Tribunal in case of DCIT Vs. Nestle India Ltd. (2011) 16 taxmann.com 218. Further, it is well settled that it is not open to the Department to adopt a subjective standard of reasonableness and disallow business expenditure as being unreasonably large or decide what type of expenditure, the assessee should incur and in what circumstances as held in the case of CIT vs. Oracle India (P) Ltd [2011] taxmann.com 139 (Delhi). Thus, the jurisdiction of the Assessing Officer is only confined to decide ‘profits and gains of business or profession’, i.e. whether expenditure claimed was actually and factually expended or not and whether it was wholly and exclusively for the purposes of business. Without prejudice to the aforesaid contentions, the Ld. AR further submitted that the Assessing Officer ignored the fact that by payment of the royalty, there was no loss to the revenue since, the tax rate at which Ms. C. E. Rai has been charged (33.99%) is more than the rate at which the company would have been charged (32.45%). In light of these circumstances, the Ld. AR prayed that the entire disallowance of royalty expenditure deserves to be deleted.
The Ld. DR submitted that the Assessing Officer as well as the CIT(A) has given a categorical findings as to why the disallowance is made. First of all there is no agreement between the parties and the explanation offered by assessee is not proven by any documentary evidence on record. Thus, the CIT(A) rightly confirmed this addition.
We have heard both the parties and perused all the relevant material on record. From the perusal of the findings given by the CIT(A) it emerges that the transaction under reference was a commercial arrangement between two parties which was entered into during AY 2015-16. No royalty was paid till a license agreement dated 22.07.2014 was entered into between the assessee and the proprietor ship concern of Ms. Rai, namely Indian Inc. As per the agreement, a payment of 2% of net revenue was to be made by the assessee to Indian Inc. on account of royalty for the use of the name “Indian Inc.”. The tax was duly deducted at source and deposited under Section 194J of the Income Tax Act, 1961. Besides this, Ms. C.E. Rai had offered the said amount in here individual income tax return where she was taxed at the rate of 34.61% whereas the tax rate applicable for the company was 33.06%. All these factual aspects were not at all disputed by the Revenue authorities. Merely on the ground that trademark was earlier i.e. prior to present assessment year not registered cannot be the ground for making disallowance. In fact, in the earlier assessment years, the said expenditure was allowed by the Revenue. Thus, the Assessing Officer as well as the CIT(A) was not correct in disallowing the said claim of business expenditure in respect of payment of royalty under Section 37 of the Income Tax Act, 1961. Thus, Ground Nos. 3, 3.1, 3.2, 3.3, 3.4 and 3.5 are allowed.
As regards Ground Nos. 4, 4.1 and 4.2 relating to disallowing depreciation on the new office building, the Ld. AR submitted that during the Assessment Year 2015-16, the assessee has started using the new office situated at Noida. The booking amount and the purchase consideration for the same office was paid in year 2013 and 2014. Allotment letter was dated 29/6/2013. Maintenance Agreement of the premises was executed on 24/6/2014. Tripartite Sub-Lease Deed of property got registered on 20.03.2015. The assessee started using the new office as a warehouse and also for the purpose of display of samples through the visits of overseas buyers. Letter requesting deferring of maintenance charges was written highlighting deficient common facility services but the same indicated that the facility was indeed being used. As the property was being used and the ownership was also formally transferred within March 2015, claim of 50% depreciation by the assessee company was justified and disallowance of the same by the Assessing Officer merely based on misinterpreted of a letter by him was unwarranted.
The Ld. DR submitted that the property was not used for business purpose during the relevant assessment year, therefore, the assessee cannot claim depreciation on the said office. Besides that the assessee was very well aware of the fact that the said property was not used and that’s why claimed only half of the depreciation. Therefore, the Assessing Officer was right in disallowing the said claim of the assessee. The Ld. DR relied upon the Assessment Order and the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. The fact remains that property was not fit for business purposes till March, 2015. In fact the letter dated 23.03.2015 was addressed to the builder stated that basic amenities was not completed such as Lift and other facilities. Besides this the assessee has not supported by any documents on record its contention that the assessee started using the new office as a warehouse and also for the purpose of display of samples through the visits of overseas buyers. So the contention of the assessee that the property was in use, does not survive. The Assessing Officer rightly rejected the claim of depreciation to the assessee. Thus, Ground Nos. 4, 4.1 and 4.2 are dismissed.
As regards disallowance in respect of travel expenses, the Ld. AR submitted that the assessee incurred a sum of Rs. 77,92,185/- towards domestic travel expenses. Out of the said expenditure, Rs. 28,64,289/- was incurred through corporate credit card of the assessee. The Assessing Officer disallowed Rs. 5,38,320/- on an ad-hoc basis on a pure surmises that the same could be personal in nature and not related to business even though relevant bills and documentary evidences were produced before him and the same was acknowledge by him. The CIT(A) restricted the disallowance to 10% of expenses even after acknowledging that such expenses were in relation to the needs of the business.
The Ld. DR relied upon the Assessment Order and the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the disallowance in respect of travel expenses was made by the Assessing Officer on ad-hoc basis. The CIT(A) also notes that there is travel expenses for business purposes. From the perusal of the records it can be seen that all the relevant evidence was brought on record by the assessee before the Assessing Officer as relates to the said expenses was done for business purpose only. Thus, the Assessing Officer as well as the CIT(A) was not right in disallowing the travel expenses. Ground Nos. 5, 5.1 and 5.2 are allowed.
In result, appeal of the assessee is partly allowed.