Revenue expenditure and bad debt claims upheld for trademark royalty use and chit default write-offs

Royalty paid for limited, non-exclusive and non-transferable use of a parent company's logo or trademark was treated as revenue expenditure because it did not involve transfer of ownership or acquisition of an enduring asset, and the deduction was therefore allowable rather than depreciation under section 32(1)(ii). Amounts written off for defaulting chit subscribers were also held deductible, because the foreman's statutory and contractual obligation to cover defaults created a business-linked debtor-creditor relationship, and a write-off in the accounts was sufficient to claim bad debt; in any event, the sums qualified as business loss. The deductions were accordingly upheld.

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Issues: (i) Whether royalty paid for use of logo or trademark under a non-exclusive and non-transferable licence was revenue expenditure or capital expenditure and therefore deductible under the Income-tax Act; (ii) Whether the amount written off in relation to defaulting chit subscribers was allowable as bad debt or business loss.

Issue (i): Whether royalty paid for use of logo or trademark under a non-exclusive and non-transferable licence was revenue expenditure or capital expenditure and therefore deductible under the Income-tax Act.

Analysis: The royalty was paid for use of the parent company's logo under a renewable licence that conferred only a restricted right to use, without transfer of ownership or proprietary interest. The arrangement was non-exclusive and non-transferable, and the benefit obtained was not of an enduring or permanent character. Applying the settled distinction between capital and revenue expenditure, and the principle that mere user of an intellectual property right for a limited purpose or period does not amount to acquisition of an asset, the payment fell in the revenue field.

Conclusion: The royalty expenditure was revenue expenditure and was allowable as deduction, not capital expenditure attracting depreciation under section 32(1)(ii).

Issue (ii): Whether the amount written off in relation to defaulting chit subscribers was allowable as bad debt or business loss.

Analysis: Under the Chit Funds Act, the foreman was under a statutory and contractual obligation to make good defaults so that the chit cycle could continue. The amounts advanced to cover defaults formed part of the business transactions, and the relationship generated a debtor-creditor character for the unpaid sums. In view of the statutory framework and the settled rule that a debt written off as irrecoverable in the accounts is sufficient, the claim was properly deductible. The amount was also connected with the business and could be regarded as business loss.

Conclusion: The defaulted chit amounts were allowable as bad debt and, in any event, as business loss.

Final Conclusion: The substantial questions of law were answered for the assessee, and the revenue's challenge to the deductions failed.

Ratio Decidendi: A payment for limited, non-exclusive use of an intellectual property right without transfer of ownership is revenue expenditure, and amounts irrecoverable in the course of a statutory business obligation may qualify as bad debt or business loss when written off in the accounts.

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