Franchise Fees Treated as Revenue Expenditure Upheld, Travel Expenses Disallowed

The ITAT upheld the treatment of franchise fees as revenue expenditure, dismissing the revenue's appeal. The disallowance of travelling expenses for players' family members was upheld, while the adhoc disallowance of hospitality expenses was deleted. The order was pronounced on 13-02-2019.

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Issues Involved:
1. Treatment of Franchise Fees as Revenue or Capital Expenditure.
2. Disallowance of Travelling Expenses for Family Members of Players.
3. Adhoc Disallowance of Hospitality Expenses.

Issue 1: Treatment of Franchise Fees as Revenue or Capital Expenditure

The revenue's appeal questioned whether the franchise fees paid by the assessee to BCCI for IPL participation rights should be treated as revenue expenditure or capital expenditure. The assessee argued that the franchise fees, paid annually, were revenue in nature as they were periodic payments necessary for business operations. The AO treated these fees as capital expenditure, citing enduring benefits and the ability to sell or transfer franchise rights. The CIT(A) reversed this, treating the fees as revenue expenditure, referencing past ITAT decisions in similar cases. The ITAT upheld the CIT(A)'s decision, emphasizing that the fees were annual payments without conferring perpetual rights, thus qualifying as revenue expenditure deductible under Section 37(1) of the Income-tax Act, 1961.

Issue 2: Disallowance of Travelling Expenses for Family Members of Players

The assessee's appeal contested the disallowance of Rs. 20,64,019 in travelling expenses for players' family members, arguing these expenses were business-related. The AO and CIT(A) disallowed the expenses, deeming them personal and unrelated to business. The ITAT referenced a prior decision for AY 2011-12, where similar expenses were disallowed, concluding the necessity of such expenses was unproven. The ITAT upheld the disallowance, maintaining that the expenses were not wholly and exclusively for business purposes.

Issue 3: Adhoc Disallowance of Hospitality Expenses

The assessee also appealed against the disallowance of Rs. 31,47,064, being 10% of hospitality expenses. The AO made this disallowance on an adhoc basis, suggesting personal use elements. The CIT(A) upheld this decision. The ITAT, however, referenced multiple judicial precedents establishing that a company, being an artificial person, cannot incur personal expenses. The ITAT concluded that the disallowance was unfounded and directed the AO to delete the addition, noting that any personal benefit should be taxed in the hands of the individual receiving it, not the company.

Conclusion:

The ITAT dismissed the revenue's appeal, affirming the treatment of franchise fees as revenue expenditure. The assessee's appeal was partly allowed, with the disallowance of travelling expenses upheld and the adhoc disallowance of hospitality expenses deleted. The order was pronounced on 13-02-2019.

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