2009 (1) TMI 299 - AT - Income Tax

Tribunal ruling on trade mark payment & Cenvat credit valuation under IT Act

The Tribunal upheld the capital nature of the trade mark payment, dismissing the assessee's claim of it being revenue expenditure. Regarding the inclusion ... Capital expenditure - revenue expenditure - trade mark as capital asset - enduring benefit - registration of trade mark - intangible asset - valuation under s.145A - deduction under s.43BCapital expenditure - revenue expenditure - trade mark as capital asset - enduring benefit - registration of trade mark - Whether the payment of Rs. 3 crores made to M/s L&T for permission to use its trade mark (and to prepare and register a combined trade mark) is capital or revenue in nature. - HELD THAT: - The Tribunal upheld the conclusion that the payment is capital in nature. The agreement conferred on the assessee the right to prepare a combined trade mark using L&T's and DET's marks, to apply for registration and thereafter to use the newly registered combined trade mark exclusively. The combined trade mark was registered and intended for indefinite use; L&T's termination rights were limited to breaches or certain conditions and do not render the right ephemeral. The assessee thereby acquired a new asset - a trade mark having an independent identity and affording enduring benefit in the business - and the expenditure was incurred for creating and acquiring that asset. The Tribunal distinguished decisions cited by the assessee as relating to limited, time-bound or merely permissive uses and not to the creation and registration of a new trade mark giving the assessee an exclusive asset. The assessee's accounting treatment as capital and allowance of depreciation in the books reinforced (but did not by itself determine) the finding that the cost was capital expenditure. Having regard to these findings, the disallowance of the claimed revenue deduction was sustained. [Paras 4, 5, 6, 9, 10]Payment of Rs. 3 crores for evolving and registering the combined trade mark is capital expenditure; Ground No.1 dismissed.Valuation under s.145A - deduction under s.43B - Whether the value of closing stock and purchases requires adjustment to include Cenvat/ excise element under s.145A and the consequences for assessment computation, and whether deduction under s.43B is available. - HELD THAT: - The Tribunal held that adjustments mandated by s.145A (to include taxes, cesses or fees incurred in bringing goods to their condition and location on the date of valuation) must be made by the assessing officer when computing income under the head 'Profits and gains of business or profession'. The assessee's choice of exclusive or inclusive accounting method does not negate the statutory requirement to make the prescribed adjustments; care must be taken to avoid double adjustments as noted in Hawkins Cookers, but that decision does not excuse compliance with s.145A. The Tribunal therefore directed remand to the AO to compute income after making s.145A adjustments to purchases, sales and inventory; any deduction under s.43B for excise duty actually paid after year end but before filing the return is to be allowed if the conditions of s.43B are satisfied. [Paras 11, 12, 15]Matter remitted to the AO for recomputation in accordance with s.145A; entitlement to deduction under s.43B to be considered on fulfilment of statutory conditions.Final Conclusion: Appeal partly allowed: the Tribunal sustained the capitalisation of the payment for creation and registration of a combined trade mark (disallowing the claimed revenue deduction), and remitted the assessment to the AO for recomputation to give effect to statutory adjustments under s.145A and, where applicable, deduction under s.43B for the asst. yr. 2001-02. Issues Involved:1. Disallowance of payment for use of trade mark as capital expenditure.2. Inclusion of Cenvat credit in closing stock valuation u/s 145A of the IT Act.Summary:Issue 1: Disallowance of Payment for Use of Trade Mark as Capital ExpenditureThe assessee contested the CIT(A)'s confirmation of the AO's disallowance of Rs. 3 crores paid for the use of a trade mark, which was treated as capital expenditure. The assessee, a newly incorporated company, had entered into an agreement with M/s L&T to use its trade mark, paying Rs. 3 crores, which it claimed as revenue expenditure for tax purposes. The AO argued that the payment was for creating a new trade mark, thus capital in nature, citing s. 32(1)(ii) of the IT Act. The CIT(A) upheld this view, stating that the payment resulted in a new trade mark providing enduring benefits, thus a capital asset.The Tribunal examined the agreement clauses and concluded that the payment was indeed for acquiring a new trade mark, making it a capital expenditure. The Tribunal referenced various case laws but found them irrelevant as they pertained to different contexts. The Tribunal upheld the CIT(A)'s decision, dismissing the assessee's ground.Issue 2: Inclusion of Cenvat Credit in Closing Stock Valuation u/s 145AThe assessee challenged the CIT(A)'s direction to include Cenvat credit in the closing stock valuation, enhancing its income. The AO had noted a discrepancy in the excise duty element and directed an adjustment, which the CIT(A) upheld. The assessee argued that it followed an exclusive method of accounting, which should result in no net impact on profits.The Tribunal emphasized the mandatory nature of s. 145A, requiring adjustments for taxes in the valuation of inventory. It cited the Delhi High Court's decision in CIT vs. Mahavir Aluminium Ltd., supporting strict adherence to s. 145A. The Tribunal remitted the matter back to the AO for recomputation, ensuring compliance with s. 145A and allowing deductions u/s 43B if conditions were met.Conclusion:The appeal was partly allowed, with the Tribunal upholding the capital nature of the trade mark payment and remitting the Cenvat credit valuation issue back to the AO for proper adjustment.