ITAT Rules in Favor of Assessee on Commission, Ex-Gratia, and Royalty Disallowance

The ITAT ruled in favor of the assessee in a case concerning the disallowance of commission and ex-gratia amount paid to directors as part of their remuneration, citing previous decisions and approval at the annual general meeting. Additionally, the disallowance of 25% of royalty paid was overturned as it was considered a revenue expenditure for providing technical services, not a capital expenditure. The subsequent assessment year saw similar outcomes, with disallowances being deleted and penalties canceled. All appeals by the assessee were allowed, with decisions pronounced on 10.05.2016.

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Issues:
1. Disallowance of commission and ex-gratia amount paid to directors as part of their remuneration.
2. Disallowance of 25% of royalty paid on the ground of being capital expenditure.

Issue 1: Disallowance of Commission and Ex-gratia Amount:
The appeal challenged the confirmation of disallowance of commission and ex-gratia amount paid to directors as part of their remuneration. The ITAT found the issue covered in favor of the assessee by its previous decision for assessment years 2004-05 and 2005-06. The ITAT held that the remuneration paid to directors was approved at the annual general meeting, following the decision of the Jurisdictional High Court in a similar case. The ITAT concluded that the disallowance under section 36(1)(ii) was not justified and deleted the same for the current assessment year.

Issue 2: Disallowance of 25% of Royalty Paid:
The appeal contested the disallowance of 25% of royalty paid on the grounds of being capital expenditure. The ITAT noted that the agreement was for the use of technology, not its transfer, and the ownership remained with the other party. Relying on the decision of the Jurisdictional High Court in a similar case, the ITAT held that the payment of royalty was for providing technical services and not for the transfer of technology. Therefore, the royalty payment was treated as a revenue expenditure, and the disallowance made by the Assessing Officer was deleted.

Additional Appeals and Penalty:
In the subsequent assessment year 2007-08, the same grounds were raised by the assessee, and the disallowances were deleted following the same reasoning as in the previous year. The penalty levied under section 271(1)(c) for the disallowances was also cancelled since the additions themselves were deleted. Consequently, all the appeals of the assessee were allowed, and the decisions were pronounced in open court on 10.05.2016.

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