TaxTMI 
TaxTMI 
2019 (3) TMI 693
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....nd subsequently selected for scrutiny. Accordingly notice under section 143(2) of the Act was issued. In response to statutory notices, representative of assessee appeared before Ld. AO and case was discussed. 2.1.Ld.AO observed that assessee is engaged in business of manufacturing and sale of tractors, shockers, railway equipment etc. and other trading activity. 2.2.After calling for various details and information and considering the same, Ld. AO made following additions in hands of assessee: Sl. No. Additions made Amount-Rs. Amount-Rs. 1. Premium on SPNs 22,54,277/- 2. Upfront fee 3,69,25,000/- 3. Prototype development 78,56,810/- 4. Cost of software Less: Depreciation 699,38,000/- 41,62,800/- 27,75,200/- 5. Prior Period expenses 4,89,44,610/- 6. Unutilised MODVAT credit 1,75,00,000/- 7. Commission & discount 1,18,94,891/- 8. Interest expenses 16,55,00,000/- 9. Expenses attributable u/s 14A 2,19,36,390/- 10. Interest free loan 4,56,00,000/- 11. Write off of inventory 4,73,69,355/- 12. Loss on diminution of assets 28,56,250....
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....'not pressed', and accordingly said ground stands dismissed as 'not pressed'. 4. Ground No. 3 raised by assessee is in respect of disallowance of prior period expenses amounting to Rs. 4,59,928/-. 4.1.Ld.Counsel submitted that Ld.Assessing Officer (Ld.A.O.) disallowed a sum of Rs. 21,51,466/- on account of prepaid expenses incurred for purposes of business. He submitted that Ld.A.O. computed expenses disallowed under the head 'prior period expenses'. It has been submitted that these are routine business expenses which are allowable. He submitted that Ld.CIT(A) restricted disallowance to Rs. 4,59,928/-, which was crystallised during year under consideration and therefore deserves to be allowed. 4.2. On the contrary Ld.Sr.DR submitted that Ld.CIT(A) upon verifying supporting documents like bills etc. had allowed claim of assessee partly. He submitted that assessee had not filed any supporting documents regarding remaining payments to establish that expenditure had crystallised during the year. He thus placed reliance upon order passed by Ld.CIT(A). Ld.Sr.DR also placed reliance upon order dated 09/03/18 passed by this Tribunal in assessee's own case for A.Y. 2005-06 in ITA No. 423....
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....of Rs. 45.9 crores to Escotel a subsidiary of assessee during Financial Year 1997-98 and interest as per agreed terms were charged on such loans. He submitted that since Escotel is an infrastructure capital company as per provisions of section 10 (23G) of the Act, and approved by Government of India for said purposes, interest income earned by assessee on said loan was claimed exempt under the provisions. He submitted that no expenses could be attributed towards earning of this interest income from Escotel and like dividend income. He further submitted that, dividend has been earned from investment in shares, which were made in earlier years, and not during year under consideration. He submitted that Ld. AO was not right in estimating the proportionate disallowance at 25% of administrative expenses to be attributable to earning of such income. 6.2. On the contrary Ld.Sr.DR submitted that assessee has made investments during year as per order of Ld.CIT(A) which has yielded dividend income also. He submitted that it cannot be accepted that no expenditure could be attributable for earning of exempt income as section 14 A is triggered the moment there is exempt income earned during ye....
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....f manufacturing unit which cannot be related to earning of exempt income. Under such circumstances allocation of personal expenses towards earning of exempt income should not have been made. We therefore grant further relief to assessee by excluding personal expenses amounting to Rs. 16,85,000/-, from disallowance computed under section 14 A. We thus direct Ld.AO to restrict the disallowance at Rs. 17,47,239/-. Accordingly this ground raised by assessee stands allowed partly. 9. Ground No. 5 is regarding disallowance of Rs. 4,73,69,355/- being amount of inventory written off during the year. 10. Ld.Counsel submitted that assessee had telecommunication division which was acquired from Escort Communication Ltd. It was submitted that telecommunication division of assessee company was hived off and was taken over by a 100% subsidiary of assessee company i.e. Escorts Communication Ltd. w.e.f. 01/10/1994. Ld.Counsel submitted that during financial year 2000-2001 M/s L.G.Information and Communication Ltd., bought business of WLL, and old business of manufacture and sale of EPPBX, Key telephone system, etc. was purchased by assessee as per agreement dated 20/12/2000. He further submitt....
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....Ltd. It has been submitted that, these were doubtful of recovery, and hence provision was made in the financial year 1999-2000. Ld.Counsel submitted that Registrar of Companies, Singapore dissolved Escorts Overseas Pvt. Ltd., on 23/09/20 01 and therefore the same has been claimed as a loss. 12.2. Ld.Sr.DR submitted that profit and loss on investment are dealt with in accordance with provisions of section 45 to section 55A of the Act. It has been submitted that these sections clarify that loss on investment can be allowed only on sale or transfer of investment. Ld.Sr.DR submitted that assessee in present case has not sold or transferred investments. He placed reliance upon orders of authorities below. 13. We have perused submissions advanced by both sides in light of records placed before us. 13.1. Assessee placed reliance upon page 197 of paper book which is issued by the Registrar of Companies and Business. It is observed that assessee is a shareholder which is apparent from page 199. There is a categorical observation by Ld.CIT (A) that assessee has neither transferred shares, nor has sold and therefore loss arising on this transaction cannot be allowed under the Act. Ld. CIT ....
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....ces of the case and law. the Ld.CIT(A) has erred in deleting disallowance of Rs. 16,91,538/- made by the A.O.. on account of prior period expenses ignoring that the assessee company was following the mercantile system of accounting and as such prior period expenses could not be allowed as deduction in computation of assessee's total income for the instant A.Y. 2002-03. 5. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of expenses of Rs. 1,18,94,891/- made by the A.O., on account of expenses claimed under the head commission, discount and brokerage on sales made to Government parties ignoring the provisions of Explanation to subsection( T) of section 37 of the I.T. Act. 1961. 6. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting disallowance of Rs. 4,56,00,000/- on account of interest on interest free loan given by the erstwhile Escorts Tractor Ltd. to its subsidiary company M/s Escortac Finance & Investment Ltd., prior to its amalgamation with the assessee company in F.Y. 1995-96. 7. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting disallowa....
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.... could not controvert findings of Ld.CIT(A). 17. We have perused submissions advanced by both sides in light of records placed before us. 17.1. It is observed that identical issue has been decided by this Tribunal consistently in year 1998-99 as well as assessment year 2001-2002. Copy of the order of this Tribunal in ITA No. 1841/Del/02 for assessment year 1998-99 and ITA No. 567/Del/2005 and 1562/Del/2005 for assessment year 2001-02 has been referred to in the order for assessment year 1999-2000 in ITA No. 3581/Del/02 and CO no. 245/Del/06 in assessee's own case as under: "Having considered the rival stands and the fact situation, the issue, in our view is squarely covered by the decision of the Hon'ble Supreme Court in the case of madras Industrial Corporation Ltd. (supra). The assessee has raised funds by way of issuance of SPNs which are redeemable at a premium partly at the end of 4th, 5th, 6th and 7th year. There is no dispute that the funds so raised have been utilised by the assessee for the purposes of its business as we do not find any finding or even the allegation by the revenue to the contrary. Thus, the liability to pay the premium amount over and above the face v....
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....e products. 19.1.Assessee submitted before Ld.AO that, these were in the nature of R&D expenses. Ld.Sr.DR submitted that in P&L account R & D expenses of capital nature has been separately claimed by assessee and expenditure incurred on development of prototype is not part of R&D expenses. He submitted that since these expenses have given rise to increase in knowledge, benefiting assessee. He thus submitted that such expenses should be capitalized, as they gave rise to enduring benefit to assessee. 19.2. On the contrary, Ld.Counsel submitted that on identical facts, Ld.CIT (A) in preceding assessment years allowed claim of assessee. He placed reliance upon observations of Ld. CIT (A) in deleting the addition. 20. We have perused submissions advanced by both sides in light of records placed before us. 20.1. It is observed that Ld.CIT(A) deleted addition by observing as under: "5.3. There is no dispute about the fact that the expenditure incurred by the appellant company of Rs. 78,56,810 has been incurred by the appellant company for R&D activities related to the business of manufacture of the appellant. As per the provisions of Section 35 of the Act, the capital expenditure re....
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....Rs. 1,18,94,891/- has been paid to 3rd parties by assessee related to sales made to government. It has been submitted that Ld.AO rightly disallowed commission, as there is no middlemen and commission agents permitted to operate in purchases or perky procurement made by government. Thus he emphasised that only business expenses can be allowed under section 37 (1) of the Act incurred by assessee. 22.2. On contrary Ld.Counsel placed reliance upon categorical observations by Ld. CIT(A). 23. We have perused submissions advanced by both sides in light of records placed before us. 23.1. Following were factual observations by Ld.CIT(A) regarding disallowance made by Ld. AO: "9.2. During the course of appellate proceedings, the appellant counsel submitted that complete details of payment along with addresses and PAN were filed during the course of assessment proceedings, therefore, the observation made by the AO that PAN and places of assessment were not furnished is incorrect. It was further mentioned that the details, confirmation and copies of appointment letters along with PAN as filed before the AO are being enclosed. It was further mentioned that identical expenditure has been cl....
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....a particular fashion. Without telling the appellant company what is further required, the AO has wrongly not considered the confirmations filed by the appellant company. 9.3.1. The AO had relied on the judgment of the Hon'ble Supreme Court in the case of Madivenkak Ram & Co. (supra) for disallowing the expenditure. The facts and the reasons for disallowing the expenditure claimed in the above mentioned case are noted below: Facts: The assessee, to start with, was a partnership consisting mostly of family members. In 1965, it was converted into a private limited company to carry on the business of export of tobacco. The first directors appointed at the time of incorporation were to hold office during their lifetime or until they resigned voluntarily. On the basis of the information received, a search was conducted by the Enforcement Directorate in the assessee's business premises. A number of letters and other documents were seized which disclosed that the assessee had indulged in transactions in violation of the provisions of the Foreign Exchange (Regulation) Act. Issue: Whether the expenses in carried in transactions carried out in violation of the provisions of FERA ....
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....tters of the agents along with confirmation in respect of the entire payment of Rs. 64,95,097 were filed before the AO. (iii) The AO has wrongly observed in the preceding years that the expenses has been disallowed while the fact is that the AO himself in AY 1999-00 have allowed all the expenses and there is no disallowance. 10.3. Taking into consideration the above facts as the appellant has filed full details along with confirmation before the AO, there was no reason with the AO to disallow the expenditure when specifically in earlier years the disallowance has only been made in respect of the confirmations not filed by the appellant company. In fact, in AY 1999- 00, the appellant company was able to file confirmation in respect of the entire expenses and no disallowance was made by the AO. In view of the above, the addition made by the AO is deleted." 9.3.3. The AO while disallowing the expenditure has presumed that this commission has been paid to middlemen for procuring the orders from the Government while there is no proof or evidence in support of the same. Before coming to this conclusion, the AO has not given any opportunity or show cause to the appellant company ....
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....ssessee. It is for this reason that Ld.CIT (A) deleted addition. Ld.CIT (A) observed that, for assessment year 2001-02, identical addition was deleted on similar facts, which is not challenged by revenue. 25.2. Under such circumstances we uphold the view taken by Ld.CIT (A). Accordingly this ground raised by revenue stands dismissed. 26. Ground No. 7 is on account of partial relief granted by Ld.CIT (A) while computing disallowance under section 14 A of the Act. We have already considered this issue while deciding ground No. 4 of appeal filed by assessee. Following our view taken hereinabove we dismiss this ground raised by revenue. Accordingly this ground raised by revenue stands dismissed. In the result appeal filed by revenue stands dismissed. Assessment year 2003-04 ITA No. 2350/Del/10 (revenue's appeal) 28. Revenue has raised following grounds for year under consideration. At the outset both parties submit that Ground Nos. 5, 6, 7 stands covered with the view taken in revenues appeal for assessment year 2002-03. 1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of expenses of Rs. 2,65,46,151/- made by the A....
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....ns to deleting disallowance of a sum of Rs. 2, 65, 46, 151/-out of commission expenditure. 29.1. Referring to the assessment order Ld.Sr.DR submitted that assessee was being commissioned to 3rd parties in respect of sales made to Indian Railways from its railway equipment division. He submitted that there was no role of a middleman in the whole process of award of orders by government and there was no scope for any private party to render any services for earning commission thereof. Accordingly learned AO called for assessee to produce the employee of company who deals with the sales et cetera in the railway equipment division. Assessee in compliance to the direction of learned AO produced one Mr Ajay Razdan Sr.Manager Commercial, whose statement was recorded, which Ld.Sr.DR referred to in assessment order at para 2.9. He submitted that on the basis of statement, learned AO took the view that there had been no role of a third party in procuring orders, payment of commission was not justified. He also took note of the fact that one of the commission agent was located at Haryana and other two were based at Kanpur, whereas bills revealed that business came to assessee from all over I....
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....rement and payment realization. Mr Razdan has further submitted in an answer to one of the questions, that the agents are involved in realization of payments and promotion of new products of the company and they are also involved in submission of bills and making good any deficiencies in the documents. The Assessing Officer has picked certain sentences from the statement of Mr. Razdan which according to him show that there is no role of a third party in the whole process of procuring business. As regards the role of third party in the evaluation of offers by Railways, it is true that the evaluation of offers is made by the Railways independently but that does not mean that the agent/third party appointed is only for the purpose of getting the orders evaluated. The evaluation of offers is a technical process/matter which is sole prerogative of the Railways. In the Remand Report dated 09/03/2007 the Assessing Officer has not made any adverse comments on the evidence filed in respect of the commission payments, but he has relied heavily on the statement of Mr.Razdan. 29.7. The issue according to the learned counsel is fully covered by the various judgments of the I.T.A.T. and the CIT....
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....amounting to Rs. 13.52 crores, by adopting interest rate of 12%, which according to him was reasonable, and which assessee could have saved by using such funds for its own purposes. 33.2. On the contrary, Ld.Counsel placed reliance upon submissions made by assessee before Ld.CIT (A). For the sake of convenience we are reproducing the submissions advanced by Ld. Counsel before Ld.CIT (A) as under: 33.3. The sum of Rs. 112.62 crores subjected to the disallowance contained brought forward opening balance of Rs. 108.67 crores, which could not be taken into account for the said purpose. In case of Escorts Construction Equipment Ltd., fresh advance made during the year under consideration was to the tune of Rs. 5.96 crores, whereas in case of Escotel Mobile Communications Ltd., there was a reduction in lent funds of around Rs. 2crores during the year. 33.4. Submissions in other words were that in so far as Escotel Mobile Communications Ltd., was concerned, there could be no disallowance and in respect of Escorts Construction Equipment Ltd., the fresh advances had come out of non-interest bearing funds, and details of which had been provided to Assessing Officer during the course of as....
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.... Assessing Officer have also been taken into account in deciding the present ground along with the counter comments of the appellant. 6.3. As rightly contended by the learned counsel, the Assessing Officer has not made any adverse observation in the remand report dated 27.7.2009 and it may be mentioned as a matter of record that in the remand proceedings the appellant placed on record detailed bank accounts, bank certificates, extracts m audited accounts and funds flow statement in the proceedings conducted y the Assessing Officer in response to the directions given to him in the order dated 3.10.2008 passed u/s 250(4) of the Act. 6.4. In my opinion the disallowance of Rs. 13.52 crores is neither justified on facts nor in law since the advances to group/subsidiary companies have been given on grounds of commercial expediency and a substantial portion thereof consists of brought forward opening balances which have no nexus with the funds borrowed during the year under consideration on which interest has been paid. In the case of one of the companies, namely Escotel Mobile Communication Limited there is a reduction of aroundRs.2 crores out of the opening balance itself and no f....
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....oceedings, various submissions were made, which were placed on record, and copies thereof were forwarded to Ld.AO for his comments. Ld.Counsel submitted that disallowance had been made without confronting assessee during the course of assessment proceedings, which tentamounted to violation of principles of natural justice. On merits Ld.Counsel submitted that, no funds borrowed on interest had been utilized for purchase of shares of group companies/subsidiaries either in the past, or in the year under appeal. It was submitted that in none of the preceding assessment years Assessing Officer held such investments in shares as being for non business purposes, and in fact he had not even recorded any finding in the year under consideration. 36.4.Ld.Counsel submitted that out of total investments of Rs. 602.66 crores in shares of group/subsidiary companies as on 31.3.2003, there was an opening balances on 1.4.2002 to the tune of Rs. 516.18 crores. Ld.Counsel submitted that Ld.AO recorded a finding that investments in question namely, sum of Rs. 602.66 crores, did not result in any income to assessee, and in case funds had been utilized by assessee for business purposes, then burden of i....
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.... submitted that, assessee furnished complete details of fresh investments made during the period ending 31.3.2003 in shares amounting to Rs. 168.36 crores, and had also furnished fund flow statement for the proposition that during previous year under consideration, funds generated by sale of shares of certain companies amounting to Rs. 251.42 crores along with dividend income of Rs. 68 crores, aggregating to Rs. 319.42 crores, fully covers fresh investment of Rs. 168.36 crores. 36.7. As regards issue of interest bearing funds having invested in acquisition of shares of group companies during preceding years Ld.Counsel referred to letter dated 10.11.2008 addressed to Ld.AO, wherein it is categorically asserted that, no interest bearing funds are invested even in preceding assessment years for making investments in shares of group companies. Ld.counsel further asserted that, these investments were made out of funds available in business from time to time, by way of sale of investments, dividend received, interest on loans given, and fresh issue of share capital at a premium, and aggregate of such funds in each year were more than adequate, to enable assessee to make investments in s....
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....poses then the burden of interest expenditure would have been lower. The material on record clearly nullifies the first observation since the investments are in shares of group companies and dividend income to the tune of Rs. 68 crores have been subjected to tax on these investments as appearing at page 7 of the assessment order. Further, capital gains on some investments sold during the year to the tune of Rs. 94.25 crores have also been subjected to tax. It was not the case of the Assessing Officer that Section 14-A was applicable and which was also the observation in the remand report, pursuant to the order passed u/s 250(4) on 3.10.2008. 7.9 In not bringing on record the relevant and correct facts the Assessing Officer has further included the opening balance of Rs. 516.80 crores being the investment in shares of group companies made in several preceding assessment years whereas there could possibly be no nexus between the interest expenditure in AY 2003-04 and the shares acquired before the beginning of relevant previous year, i.e. 1.4.2002. In my opinion the opening balance could not have been the subject matter of the adhoc disallowance. 7.10 The investment in shares o....
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....ies And Power Limited and a judgment of the Ahmadabad Bench of the I.T.A.T. in the case of Pinnacle Project And Infrastructure Pvt., reported in 290 ITR (AT) 45, the said decision also dealing with interest borrowed money being utilized for purchase of shares in group companies. 7.12 I have considered the aforesaid judgments and do hold that these are squarely applicable to the facts of the appellant's case more so when the Assessing Officer has not been able to establish any nexus between the funds borrowed during the period under consideration on interest and the investments made in the shares of group companies either in the AY 2003-04 or in any of the preceding assessment years. 7.13 As regards the stand of the Assessing Officer that the funds if utilized for business purposes and not invested in shares of group companies would have resulted in a lower interest burden, the argument does not hold good in the light of the view taken that the investments are clearly for business purposes. 7.14 In conclusion, I would hold that the Assessing Officer was not justified in making the adhoc disallowance of Rs. 72,32,00,000/- both on facts and in law in as much as the investment....
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....ribunal for Assessment Year 2001-02, which we followed in forgoing paragraphs, while deciding revenue's appeal for assessment year 2002-03. According to Ld.Counsel, there is no change in facts and issue stands squarely covered as contended therein. It was emphasized that Ld.AO in remand report dated 09.03.2007 had not made any comments on written submissions filed by assessee vide letter dated 31.05.2006. 39.2.Ld.Sr.DR placed reliance on order of Ld.AO, however, he could not controvert submissions of Ld.Counsel. 40. We have perused submissions advanced by both sides and perused records placed before us 40.1. It is observed that, Ld.CIT(A) decided this issue as under: "9.2. After considering the statement of the learned counsel and perusing the material on record, I am of the view that the issue is squarely covered by the order of Tribunal for the Assessment year 2001-02 and in the absence of any change in facts or any adverse comments by the AO the addition of Rs. 35,75,330/- is deleted." We have upheld the view of Ld.CIT(A) on this issue for A.Y:2002-03, which has been consistent in preceding assessment years. Accordingly this ground raised by revenue stands dismissed. 4....
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....apital nature and have to allowed as revenue expense. Accordingly, the addition of Rs. 7,92,67,976/- deleted." 42.2.We uphold view of Ld.CIT(A), which is based on remand report by Ld.AO. Accordingly this ground raised by revenue stands dismissed. 43. Ground no.7 raised by revenue pertains to deleting addition of Rs. 28,07,055/- on account of prior period expenses. 43.1.Ld.Counsel stated that, although accounts were being maintained on mercantile basis, there were certain items of expenses from year to year, which were booked in the accounts, only after due verification and approval process is completed. It was pointed out that expenditure was revenue in nature, being personnel expenditure, purchase/consumption of raw material and major chunk being sales and administrative expenses to the tune of Rs. 24,30,991/- out of total disallowance. A reference was made to pages 159 to 198 of Paper Book with further submissions that verification for payment had taken place during assessment year 2003-04, although bills pertain to preceding assessment year. It was further submitted that, considering huge quantum of volume of business of assessee, it was quite normal for some expenditure i....
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....IT(A)-XX, New Delhi being contrary to the facts on record and the settled position of law, be set aside and that of the A.O.be restored." 46.1. Ground No.1 raised by revenue pertains to deleting addition of Rs. 22 crores, made out of interest expenses. 46.2. Ld.CIT.DR submitted that said amount was on account of interest computed by Ld.AO. Placing reliance on observations of Ld.AO, he submitted assessee made investments of Rs. 7.66 Crores and Rs. 175.74 crores in Escorts Agri Machinery Incorporated, USA and M/s Idea Mobile Communications Ltd., respectively without charging any interest during the year. Ld.AO observed that assessee debited interest and finance charges to Profit & Loss Account for Rs. 94.32 crores and Rs. 16.71 crores respectively, during the year. Ld.AO observed that assessee had sufficient own funds but had borrowed heavily and paid high interest and bank/charges. Ld.AO was of opinion that assessee made above deposits without any interest. Ld.Sr. DR thus submitted that assessing officer was right in computing notional interest of Rs. 22 Crores in the hand of assessee at the rate of interest at 12% on the above investments. 46.3. On the contrary, Ld.Counsel subm....
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....lly owned subsidiary company, the appellant has explained that the same has been made to supplement its existing investment. Respectfully following the decision of the Ld. CIT(A)-III for AY 2003-04, the AO is directed to delete the addition of Rs. 22 Crores on account of notional interest. This ground of appeal is allowed" 47.2. We have upheld view of Ld.CIT(A) on this issue for A.Y:2002- 03, which has been consistently followed in preceding assessment years. Accordingly this ground raised by revenue stands dismissed. 48. Ground 2 raised by revenue pertain to disallowance of 25% of royalty amounting to Rs. 3.93 crores made to Harprasad & Company Pvt.Ltd., being deleted. Learned senior DR submitted that assessee was found to have debited Rs. 3.90 crores towards royalty during relevant year. Learned AO following the decision of Hon'ble Supreme Court in case of M/s Southern Switchgear Ltd versus CIT reported in (1997) 232 ITR 359 disallowed 25% of the expenditure and added back to the income. He submitted that assessing officer was right in treating 25% of the expenditure as capital nature and the same is to be upheld. 48.1.On the contrary, Ld.Counsel submitted that, assessee wa....
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....imilar to the facts of the case of M/s. Southern Switchgear Ltd. (supra). In this case, Hon'ble Supreme Court affirmed the order of Hon'ble Madras High Court wherein on the finding of fact recorded by tow appellate authorities to the effect that duration of the agreement though of five years, assessee could use technical know-how even after expiry thereof which amounted to acquisition of know-how of enduring nature, part payment of technical know-how fee was held to be capital in nature. However, the facts in the instant case are distinguishable wherein only during the period of agreement, the assessee was having the right to use the trademark, which did not give any right of enduring nature and since the annual payment of royalty for use of trademark was based on turnover, the expenditure was essentially in the nature of revenue expenditure and not capital expenditure In view of above discussion, we can safely conclude that royalty payment was revenue in nature and no party of it was liable to be disallowed by considering the same as capital expenditure." In AY 2006-07 the Ld. CIT(A) has also deleted the addition on account of royalty payment. Respectfully following the decision o....
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....apital expenditure. On the other hand, Hon'ble Jurisdictional High Court in the case of J.K. Synthetics - 309 ITR 371 held that payment made for acquisition of know-how which facilitated day to day operation of its business, without transfer of any ownership in such know-how or transfer of patent or trademark was allowable as revenue expenditure. In the instant case also, the right to use the trademark was also limited without transfer of any ownership over the trademark. Thus, the expenditure on royalty which is recurring in nature being paid every year, cannot be said to be capital expenditure. As per our considered view, expenditure incurred towards initial outlay of business would normally be in the nature of capital expenditure, however if the expenditure is incurred while the business is going on, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or an advantage of enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. However, on the other hand, if the expenditure is for running the business or working it, with a view to produce profits, it would be in the nature of revenue....