2004 (7) TMI 652 - AT - Income Tax

Tribunal decisions on royalty, expenses, and assessment legality upheld with prior period expenses remanded.

Shaw Wallace Distilleries Ltd. Versus Assistant Commissioner Of Income Tax

The Tribunal allowed the assessee's appeals concerning the disallowance of royalty payments, deferred revenue expenditure, and repair and maintenance ... - Issues Involved:1. Disallowance of royalty under Section 35A or 40A(2)2. Disallowance of deferred revenue expenditure3. Disallowance of prior period expenses4. Disallowance of repair and maintenance expenses5. Legality of assessment orders issued to a non-existent entityIssue-wise Detailed Analysis:1. Disallowance of Royalty under Section 35A or 40A(2):The primary issue involved the disallowance of royalty payments made by the assessee to Shaw Wallace & Co. Ltd. (SWC). The Assessing Officer (AO) disallowed 13/14th of the royalty payments under Section 35A, treating them as capital expenditure, and also under Section 40A(2), considering them excessive and unreasonable. The CIT(A) had differing views across the assessment years, with the CIT(A) for AY 1998-99 allowing the deduction, while the CIT(A) for AY 1997-98 and 1999-2000 disallowed it.The Tribunal held that the royalty payments were for day-to-day business activities and not for acquiring any capital asset. It was stated that the royalty was paid for various services provided by SWC, such as quality control, procurement of raw materials, marketing support, and financial assistance, which were necessary for the business operations. The Tribunal also noted that there was no evidence to show that SWC had a substantial interest in the assessee's business as per the requirements of Section 40A(2). Thus, the royalty payments were allowed as revenue expenditure.2. Disallowance of Deferred Revenue Expenditure:The AO disallowed the deferred revenue expenditure of Rs. 1,73,440, arguing that there is no provision for allowing deferred revenue expenditure under the Income Tax Act. The CIT(A) upheld this disallowance, stating that the expenditure should be claimed in the year it was incurred.The Tribunal, however, allowed the deferred revenue expenditure, noting that the expenditure was incurred for advertisement and was decided to be written off over five years. The Tribunal cited past history and relevant case law to support the allowance of such expenditure on a deferred basis.3. Disallowance of Prior Period Expenses:The AO disallowed Rs. 3,19,553 on account of prior period expenses, stating that the assessee did not furnish evidence to prove that the expenditure was crystallized during the year. The CIT(A) upheld this disallowance due to the lack of evidence.The Tribunal agreed with the CIT(A) that the expenditure should be allowed in the year it was crystallized. However, it noted that the assessee had incurred the expenditure and it should be allowed either in the current year or the prior year. The Tribunal remanded the matter back to the AO to examine the evidence and determine the correct year for the allowance of the expenditure.4. Disallowance of Repair and Maintenance Expenses:The AO disallowed Rs. 91,320 claimed as repair and maintenance expenses, considering them as capital expenditure. The CIT(A) upheld this disallowance.The Tribunal, after considering the relevant material, directed that the expenses be allowed as there was no evidence to indicate that they were capital in nature.5. Legality of Assessment Orders Issued to a Non-existent Entity:The assessee raised an additional ground during the appeal, contending that the assessments were illegal and void as they were made on a non-existent entity, M/s VRV Breweries & Bottling Industries Ltd., which had merged with M/s Shaw Wallace Distilleries Ltd. The Tribunal rejected this additional ground as it was not raised during the course of the appeal and the merits of the case had already been decided.Conclusion:The Tribunal allowed the appeals of the assessee regarding the disallowance of royalty payments, deferred revenue expenditure, repair and maintenance expenses, and remanded the issue of prior period expenses back to the AO for further examination. The Tribunal dismissed the appeals of the Revenue and rejected the additional ground raised by the assessee regarding the legality of the assessment orders.