2016 (7) TMI 1658 - AT - Income Tax

Tribunal Decision: Expense Disallowance Upheld, Royalty Payment Allowed as Revenue Expenditure

The Tribunal upheld the disallowance of expenses under section 14A while allowing the royalty payment as a revenue expenditure. The disallowance under ... Disallowance u/s 14A r.w.r. 8D - necessity of recording satisfaction - objection of the assessee is that no satisfaction was recorded by the Assessing Officer for the purpose of making disallowance under Rule 8D - HELD THAT:- Either sec. 14A or Rule 8D does not prescribe any form for the purpose of recording satisfaction. The satisfaction has to be inferred from the observation made by the AO in the computation made. When the Assessing Officer found there was a direct expenditure relating to earning of the exempted income and the assessee has not computed the disallowance under Rule 8D, this Tribunal is of the considered opinion that the AO was not satisfied with regard to the claim made by the assessee. Therefore, the Assessing Officer has to recompute the disallowance by applying the procedure prescribed under Rule 8D. Either sec. 14A or Rule 8D does not prescribe any form for the purpose of recording satisfaction. The satisfaction has to be inferred from the observation made by the Assessing Officer in the computation made. When the Assessing Officer found there was a direct expenditure relating to earning of the exempted income and the assessee has not computed the disallowance under Rule 8D, this Tribunal is of the considered opinion that the Assessing Officer was not satisfied with regard to the claim made by the assessee. Therefore, the Assessing Officer has to recompute the disallowance by applying the procedure prescribed under Rule 8D. Nature of expenditure - royalty payment - assessee has paid to Shriram Ownership Trust for using their logo in the assessee’s business - AO treated the payment as capital in nature and allowed depreciation @ 12.5% - According to the ld. DR, the payment made by the assessee was in the nature of capital, therefore, the CIT(A) ought not to have allowed the expenditure as revenue - HELD THAT:- Shriram Ownership Trust is a Trust by itself, therefore, its logo cannot be used by any other concern. The object of the Trust is not to do business. The assessee-company was established for the purpose of business. When the assessee-company used the logo belongs to Shriram Ownership Trust, this Tribunal is of the considered opinion that for the purpose of using the logo, the assessee has to necessarily make the payment. In the case before us, the payment was made on turnover basis, therefore, the same has to be allowed as revenue expenditure u/s 37(1) of the Act. This Tribunal do not find any reason to interfere with the order of the CIT(A) and accordingly, the same is confirmed. Issues:1. Disallowance of expenses under section 14A.2. Disallowance of royalty payment for using a logo.Issue 1: Disallowance of expenses under section 14A:The assessee's appeal challenged the disallowance of Rs. 2,51,498 under section 14A. The counsel argued that the Assessing Officer did not record satisfaction in the assessment order for the disallowance under Rule 8D. It was contended that Rule 8D's application is not automatic and the AO must record satisfaction based on findings that the assessee's claim is incorrect. The Departmental Representative, on the other hand, justified the disallowance based on the Profit & Loss Account and the application of Rule 8D. The Tribunal held that the AO's satisfaction need not be in a specific form and must be inferred from the computation. As the AO was not satisfied with the claim made by the assessee, the disallowance under Rule 8D was upheld by the CIT(A) and confirmed by the Tribunal.Issue 2: Disallowance of royalty payment for using a logo:The Revenue's appeal concerned the disallowance of royalty payment amounting to Rs. 83,85,459. The Departmental Representative argued that the payment to Shriram Ownership Trust for using their logo was capital in nature, treated as such by the AO, and depreciation was allowed. The Counsel for the assessee contended that the payment was for using the logo on a turnover basis and should be considered a revenue expenditure. The Tribunal noted that the Trust's logo could only be used by the assessee and the payment was made on a turnover basis. Therefore, it was considered a revenue expenditure under section 37(1) of the Act. The Tribunal upheld the CIT(A)'s decision to allow the claim, dismissing both the appeals of the assessee and the Revenue.In conclusion, the Tribunal upheld the disallowance under section 14A and allowed the royalty payment as a revenue expenditure, confirming the decisions of the CIT(A) in both cases.