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 Or Revenue Expenditure 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.