2013 (1) TMI 83 - AT - Income Tax

Tribunal upholds CIT (A) on royalty disallowance, business loss; orders fresh examination on stale cheques, professional tax

The Tribunal upheld the CIT (A)'s decisions on the deletion of royalty payment disallowance and the allowance of business loss due to non-receipt of TDS ... Royalty payment - AO disallowed 25% of payment treating it as an intangible asset following the decision of Southern Switch Gear [1997 (12) TMI 105 - SUPREME COURT] - CIT(A) deleted the addition - Held that:- The assessee company was granted only a non-exclusive and non-transferable right to use the intangibles. The ownership remained with the licensor and are continued during the currency of the agreement. The basis for payment of the amount was of net sales. No lump-sum payment was made for the right to use the intangibles. The licence acquired during the agreement was not to establish manufacturing base. Assessee is engaged in service industry. It was only in providing staffing and recruitment services which is a service industry. Thus the assessee had not acquired any enduring benefit. The agreement was also for a limited period. In view of these facts, no fault in the order of CIT (A) - the facts of the Southern Switchgear Ltd. are distinguishable from the facts of assessee’s company as the right of the assessee in the case of Southern Switchgear Ltd. was granted exclusive licence to manufacture, use and sell the scheduled products within India. While in assessee’s case, the assessee was granted non-transferable intangibles acquiring no ownership or proprietary right in the intangibles - in favour of assessee. Addition towards stale cheques issued to ex-employees - CIT(A) deleted the addition - Held that:- The original cheques of ₹ 31,74,343/- issued to the ex-employees and the same were pertaining to the financial year 2006-07 and 2007-08. Out of these, only cheques of ₹ 1,85,519/- were encashed. All other cheques became outdated on account of not claiming the same from the bank of the assessee. CIT (A) entertained the statement of stale cheques filed before him and observed that ₹ 4,62,883/- were encashed after the close of financial year. CIT (A) has also granted the relief relying on the audited accounts of the assessee. Such approach of CIT (A) is not as per law. The cheques issued are barred by limitation and became not payable by operation of law. CIT (A)’s observation that as soon as assessee reaches it conclusion that the liability of stale cheques have come to end the necessary right back to take place in the year of such conclusion is not based on any evidence. On what basis this finding has been recorded by CIT (A) is not clear. How these cheques remained uncashed for almost two years is not clear. CIT (A) was not justified in granting the relief to the assessee, thus remit the issue to the file of the AO for deciding afresh - in favour of revenue for statistical purposes. Disallowance of loss arising on account of non-receipt of TDS certificates - CIT(A) deleted addition - Held that:- As decided in Shreyans Industries case [2006 (11) TMI 187 - PUNJAB AND HARYANA HIGH COURT] the assessee had offered gross amount of interest including TDS to tax in the assessment year 1992-93. It is also a fact that the assessee was not allowed credit for the TDS for want of TDS Certificates & in spite of best efforts, the assessee could not obtain TDS certificates. Thus, it was a case of loss which has arisen to the assessee during the course of its business. In the case of Sutlej Cotton Mills Ltd. v. CIT (1978 (9) TMI 1 - SUPREME COURT), Hon'ble Supreme Court has held that what is material is the factors or the circumstances which cause loss & if the loss occurred during the course of carrying on the business, it is incidental to it and, hence, allowable. Admittedly, in this case, the assessee suffered loss during the course of carrying on its business therefore, same is allowable - as the issue involved is having the similar facts as involved in the case of CIT vs. Shreyans Industries Limited, the order of the CIT (A) on this issue sustained - in favour of assessee. Disallowance of professional tax not paid before the due date of filing the return of income - CIT(A) deleted of addition made by AO u/s 43B - Held that:- Certain facts are not clear which are necessary to decide the issue. What is the salary debited by the assessee in the profit & loss account whether it was net of professional tax or it was the gross amount including the professional tax. This fact has not been brought on record. In absence of this, it cannot be said that the amount of professional tax has not been debited in profit & loss account while computing the total income of the assessee. Secondly, under the Professional Tax Act, whether the assessee was liable to deduct the tax from the salary or it was deducted on the instruction of the employees to meet their obligation. This aspect also requires examination to decide whether it is covered u/s 43B or not - remit the issue to the file of the AO to bring correct facts on record. Issues Involved:1. Deletion of disallowance of 25% of total royalty payment.2. Addition towards stale cheques issued to ex-employees.3. Disallowance of business loss due to non-availability of TDS certificates.4. Disallowance under Section 43B for professional tax.Issue-wise Analysis:1. Deletion of Disallowance of 25% of Total Royalty Payment:The Assessing Officer (AO) treated 25% of the royalty payment of Rs. 26,34,296/- as capital expenditure, citing the Supreme Court's decision in Southern Switchgears Ltd. v. CIT. The AO argued that the assessee derived an enduring benefit from the rights under the agreement. However, the CIT (A) found that the agreement granted only non-exclusive and non-transferable rights to use intangibles, with ownership remaining with the licensor. The CIT (A) held that the royalty payment was linked to turnover and thus was revenue in nature. The Tribunal upheld the CIT (A)'s decision, noting that the facts of the assessee's case differed significantly from Southern Switchgears Ltd., as the assessee was engaged in providing staffing and recruitment services, not manufacturing.2. Addition Towards Stale Cheques Issued to Ex-employees:The AO added Rs. 29,88,824/- towards stale cheques issued to ex-employees, arguing that the liability had ceased to exist. The CIT (A) deleted the addition, stating that the liability had not ended as per statutory audit and company law requirements. However, the Tribunal found the CIT (A)'s approach flawed, noting that the cheques were barred by limitation and became non-payable by law. The Tribunal set aside the issue to the AO for fresh consideration, emphasizing the need for a detailed examination of the facts and reconciliation of outstanding balances.3. Disallowance of Business Loss Due to Non-availability of TDS Certificates:The AO disallowed Rs. 11,12,816/- shown as business loss, arguing that TDS is a form of prepaid tax and not an allowable expense. The CIT (A) allowed the deduction, citing judicial precedents where losses due to non-receipt of TDS certificates were considered allowable. The Tribunal upheld the CIT (A)'s decision, referencing the Punjab & Haryana High Court's ruling in CIT v. Shreyans Industries Ltd., which supported the allowance of such losses incurred during the course of business.4. Disallowance under Section 43B for Professional Tax:The AO disallowed Rs. 7,49,074/- under Section 43B, arguing that professional tax collected should form part of turnover and be allowed only on actual payment. The CIT (A) deleted the disallowance, stating that the professional tax was not claimed as a deduction in the profit and loss account. The Tribunal found that certain facts were unclear, such as whether the salary debited included professional tax and whether the tax was deducted under the Professional Tax Act. The issue was set aside to the AO for fresh examination to determine the real character of the professional tax and its coverage under Section 43B.Conclusion:The Tribunal upheld the CIT (A)'s decisions on the deletion of royalty payment disallowance and the allowance of business loss due to non-receipt of TDS certificates. However, it set aside the issues of stale cheques and professional tax disallowance for fresh examination by the AO, emphasizing the need for a detailed factual analysis. The appeal of the revenue was partly allowed for statistical purposes.