2015 (9) TMI 898 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on capitalization, fee disallowance, and IT Act provisions

The Tribunal dismissed all three appeals of the Revenue, affirming the CIT(A)'s decisions on all grounds related to capitalization of license fee and ... Capitalization of license fee and royalty expenditure - CIT(A) deleted the addition - Held that:- The ratio laid down in case of G4S Securities India Pvt. Ltd. [2011 (7) TMI 65 - DELHI HIGH COURT] is clearly applicable in the present case wherein held the expenditure incurred by the assessee as royalty is revenue expenditure and is therefore, relatable under Section 37 (1) of the Act. In the case of Empire Jute Co. Ltd. v. CIT, (1980 (5) TMI 1 - SUPREME Court) observed that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the cost of enduring benefit may break down. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The license fee and the royalty fee to the Government of India is on a year to year basis and this fact was never disputed by the Revenue at any point of time and thus the same has to be held as revenue in nature keeping in mind the decisions of the Supreme Court as well as the Delhi High Court. - Decided against revenue. Non deduction of TDS - royalty paid to the Government of India - CIT(A) deleted the disallowance - Held that:- As per Section 196 of the Act, no deduction of tax shall be made by any person from any sums payable to government. In this regard the AO has overlooked the provisions of Section 196 of the Act and CIT(A) has rightly allowed the deduction to the assessee in this regard.- Decided against revenue. Invoking Section 41 (1) - AR submitted that he was was contractually liable to pay consultancy fee AMSIPL for various services as received by it from AMSIPL the amount was contractually and legally payable in full to AMSIPL by the assessee and hence Section 41 (1) could not be invoked - Held that:- since profits were not generated the company could not pay to the creditor and creditor could also not enforce the payment of date till profits and generated. However, the agreement does not prescribe any time limit beyond which the appellant will be free from discharge the liability to the said party and, therefore, it is not correct to assume that such liability has seized to exist. Such liability remained unpaid does not amply that it has seized to exist in view of Limitation Act 1963. The aforesaid liability exist in the books of accounts of both the debtor and the creditor. The Hon’ble Supreme Court in case of Mahabir Cold Storage Vs. CIT [1990 (12) TMI 3 - SUPREME Court ] held that the entries in the books of account of the assessee would amount to an acknowledgment of the liability within the meaning of section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt. Thus, the CIT(A) has rightly deleted this addition.- Decided against revenue. Capitalization of brand development expenditure - Held that:- Even that the assessee made for classified part of advertisement as Brand Development Expenses the real nature is no more than a normal advertisement expenses as it includes expenses on hoardings, pamphlets, advertisement behind buses expenses relating to promotional events etc. The Hon’ble Delhi High Court in the case of CIT Vs. Casio India Ltd [2011 (5) TMI 511 - Delhi High Court] and CIT Vs. CITI FINANCIAL CONSUMER FIN. LTD. [2011 (3) TMI 622 - Delhi High Court ] hold that the expenditure on publicity and advertisement is to be treated as Revenue in nature allowable fully in the year in which it was incurred. - Decided against revenue. Issues Involved:1. Capitalization of license fee and royalty expenditure.2. Disallowance of fees held as capital.3. Disallowance under Section 40(a)(ia) of the IT Act.4. Addition under Section 41(1) of the IT Act.5. Capitalization of brand development expenditure.Issue-Wise Detailed Analysis:1. Capitalization of License Fee and Royalty Expenditure:The Revenue challenged the deletion of an addition of Rs. 37,25,225/- made by the Assessing Officer (AO) on the grounds that the license fee and royalty expenditure were capital in nature. The AO had treated these expenditures as capital expenses, allowing 25% depreciation and adding the remaining amount to the income. The CIT(A) held that the license fee and royalty were revenue expenses, as they were non-exclusive, non-transferable rights with no permanent transfer of rights. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's observation in Empire Jute Co. Ltd. v. CIT and the Delhi High Court's ruling in CIT Vs. G4S Securities India Pvt. Ltd., which clarified that expenditures facilitating trading operations without affecting fixed capital are revenue in nature.2. Disallowance of Fees Held as Capital:For Assessment Year 2008-09, the Revenue appealed against the deletion of Rs. 81,29,043/- on account of fees held as capital. This issue was resolved in favor of the assessee in the earlier Assessment Year 2007-08, and thus, the Tribunal dismissed this ground of appeal.3. Disallowance under Section 40(a)(ia) of the IT Act:The AO disallowed Rs. 1,08,000/- under Section 40(a)(ia) due to non-deduction of TDS on royalty payments to the Government of India. The CIT(A) reversed this disallowance, stating that TDS was not required as per Section 196 of the IT Act. The Tribunal agreed, emphasizing that Section 40(a)(ia) does not apply to sums payable to the government, thus dismissing this ground of appeal.4. Addition under Section 41(1) of the IT Act:The AO added Rs. 1,23,94,225/- under Section 41(1), arguing that the liability to M/s AMSIPL had ceased to exist as it was barred by limitation. The CIT(A) found that the liability was acknowledged by both debtor and creditor, thus it had not ceased to exist. The Tribunal supported this view, referencing the Supreme Court's decision in Mahabir Cold Storage Vs. CIT, which held that book entries could extend the limitation period for liability discharge. Consequently, this ground of appeal was dismissed.5. Capitalization of Brand Development Expenditure:For Assessment Year 2009-10, the AO capitalized Rs. 5,54,170/- of brand development expenditure, treating it as an intangible asset. The CIT(A) reversed this, classifying it as normal advertisement expenses. The Tribunal upheld this decision, citing precedents from the Delhi High Court and the Gujarat High Court, which held that advertisement expenses are revenue in nature and fully allowable in the year incurred. Thus, this ground of appeal was dismissed.Conclusion:The Tribunal dismissed all three appeals of the Revenue, affirming the CIT(A)'s decisions on all grounds. The order was pronounced on 08th September 2015.