2020 (7) TMI 518 - AT - Income Tax

Franchisee Fee Ruled as Revenue Expenditure; AO to Review Travel Expenses; Penalty Proceedings Dismissed as Premature.

The ITAT partly allowed the assessee's appeal, holding the Franchisee Fee as revenue expenditure. The AO was directed to re-examine disallowances ... Nature of expenditure - Payment of ‘Franchisee fee’ - whether capital or revenue in nature? - HELD THAT:- The Tribunal vide order [2018 (12) TMI 1820 - ITAT MUMBAI] by placing reliance on the earlier order of the Tribunal for AY 2009-10 [2018 (1) TMI 786 - ITAT MUMBAI] decided the issue in favour of the assessee holding ‘Franchisee Fee’ as revenue expenditure. The facts in the assessment year under appeal are identical. The ‘Franchisee Fee’ has been paid in pursuance to agreement dated 04/04/2008, which has been examined by the Tribunal in the very first year of assessment. No contrary material has been placed on record by the revenue. Thus, respectfully following the decision of Co-ordinate Bench, we hold ‘Franchisee Fee’ paid by the assessee is revenue in nature. Adhoc disallowance of air fare and travelling expenditure - AO held that the expenditure includes travelling expenditure incurred for VIPs and Celebrities and, hence, not allowable u/s 37(1) - contention of the assessee is that the expenditure is necessary for the business, as VIPs and Celebrities are invited to attract more crowd and add glamour to the sporting event - HELD THAT:- As decided in own case [2018 (1) TMI 786 - ITAT MUMBAI] keeping in view the fact that as observed by the CIT(A) that the assessee had failed to place before him any evidence e.g air tickets, details of vehicles, name of service providers, details of persons utilizing these services and their nexus with business etc, therefore, as per him the possibility of the expenditure partly having been incurred for non business purposes could not be ruled out, and the fact that the assessee too had submitted before us that sufficient opportunity was not allowed to it at the time when such adhoc disallowance of expenses was made, therefore, in all fairness restore the matter to the file of the A.O for making necessary verifications on the basis of documentary evidence as regards the entitlement of the assessee towards the claim of the aforesaid expenses. A.O shall in the backdrop of our aforesaid observations make necessary verifications as regards the aforesaid claim of expense of the assessee booked under the said respective heads, viz. airfare expenses, travelling expenses and vehicle hiring charges. Adhoc disallowance of expenditure relating to Boarding and Lodging and Food and Nutrition - HELD THAT:- The Tribunal relying on the decision for 2009-10 in assessee’s own case [2018 (1) TMI 786 - ITAT MUMBAI] restored the issue to AO for fresh adjudication. Since the facts in the impugned assessment year are identical, we deem it appropriate to restore this issue back to the file of Assessing Officer with similar directions. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT:- Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited [2020 (5) TMI 359 - ITAT MUMBAI] Issues Involved:1. Nature of Franchisee Fee: Capital vs. Revenue.2. Adhoc disallowance of air fare and travel expenses.3. Adhoc disallowance of boarding, lodging, and food expenses.4. Double taxation of sponsorship rights income.5. Levy of interest under section 234D.6. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Nature of Franchisee Fee: Capital vs. Revenue:The primary issue was whether the Franchisee Fee paid by the assessee to BCCI for operating Kolkata Knight Riders (KKR) in the IPL was capital or revenue in nature. The assessee claimed it as revenue expenditure, while the Assessing Officer (AO) treated it as a capital expenditure, allowing depreciation at 25%. The Tribunal had previously adjudicated similar issues for assessment years 2009-10 and 2010-11, holding the Franchisee Fee as revenue expenditure. The Tribunal reiterated that the Franchisee Fee facilitated participation in the league for the specific year without creating an enduring benefit or asset. Thus, the Tribunal held the Franchisee Fee as revenue expenditure for the current assessment year as well, allowing grounds No. 2 and 3 of the appeal.2. Adhoc Disallowance of Air Fare and Travel Expenses:The assessee claimed air fare and travel expenses of Rs. 1,03,85,544/-, which the AO disallowed by 25% on the grounds that these expenses included costs for VIPs and celebrities, not related to the business. The Tribunal noted that similar disallowances were made in previous years and restored the issue back to the AO for de-novo adjudication, emphasizing the need for proper verification of the expenses. Grounds No. 5 and 6 were allowed for statistical purposes.3. Adhoc Disallowance of Boarding, Lodging, and Food Expenses:The assessee claimed expenses for boarding and lodging amounting to Rs. 95,85,836/- and food and nutrition expenses of Rs. 18,61,320/-. The AO disallowed 33% of these expenses arbitrarily. The Tribunal observed that similar issues were restored to the AO in previous years for fresh adjudication. Following the same approach, the Tribunal restored this issue back to the AO for verification. Grounds No. 7 and 8 were allowed for statistical purposes.4. Double Taxation of Sponsorship Rights Income:The assessee had filed a rectification petition under section 154 of the Act regarding the double taxation of sponsorship rights income. The AO passed a rectification order granting the necessary relief. Consequently, ground No. 9 was rendered infructuous and dismissed.5. Levy of Interest under Section 234D:The Tribunal noted that the charging of interest under section 234D is mandatory and consequential. Hence, ground No. 11 was dismissed as it lacked merit.6. Initiation of Penalty Proceedings under Section 271(1)(c):The challenge to penalty proceedings under section 271(1)(c) at this stage was deemed premature by the Tribunal. Therefore, ground No. 12 was dismissed.Conclusion:The appeal of the assessee was partly allowed. The Tribunal directed the AO to re-examine the disallowances related to air fare, travel, boarding, lodging, and food expenses, while the Franchisee Fee was held as revenue expenditure. The issues of double taxation and penalty proceedings were dismissed as either resolved or premature. The order was pronounced beyond the usual 90-day period due to the COVID-19 lockdown, following the precedent set by the Tribunal in similar circumstances.