TaxTMI 
TaxTMI 
2024 (11) TMI 646
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....ount of bad debts amounting to Rs.22,93,94,972/-.' 2. As regards questions 1 and 2 relating to the allowability of expenditure spent towards royalty, parties cite a decision of the Division Bench of this Court in the case of the very assessee before us in TCA.Nos.755 of 2009 and batch dated 30.06.2022. The discussion and conclusions are as follows: 'Royalty 7.1. The assessee companies claimed royalty paid to the holding company M/s.Shriram Chits and Investments Pvt Ltd as revenue expenses. The assessing officer disallowed the royalty amount and allowed depreciation at 25% by holding that the expenditure incurred is for acquiring intangible asset and would thus amount to capital expenditure. However, the CIT(A) directed the assessing officer to allow the royalty payment in full as revenue expenditure, which was also affirmed by the Tribunal. Feeling aggrieved, the Revenue preferred the appeals viz., TCA Nos.622/2013, 360 & 361/2014 and 913/2014. Whereas, in the case of Shriram Transport Finance Co. Ltd relating to AY 2014-15, the assessee claimed royalty amount of Rs.20,93,93,838/- paid to shriram Ownership Trust, which was disallowed, after allowing depreciation @ 25....
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....ding Counsel, the expenditure incurred by the assessee companies in this regard, has to be treated as capital expenditure and they are entitled to claim depreciation alone. In other words, the royalty payment being acquiring an intangible asset, the assessee companies are entitled only for depreciation under Section 32 of the Act and the depreciation table expressly provides for 25% depreciation and therefore, the assessee companies cannot claim it to be revenue expenditure and get 100% deduction. It is also submitted that the license to use the trademark is given only to two companies and hence, the claim of the assessee companies that it is not an exclusive use, is liable to be rejected; and the further contention of the assessee companies that the agreement is only for one year, is also liable to be rejected, as the said agreement is being renewed for several years. Placing reliance on the decision of the Apex Court in Honda Siel Cars (India) Limited v. CIT [(2017) 8 SCC 170], the learned senior standing counsel ultimately submitted that without applying the test as to whether the investment on licence to use trade name and trade mark is capital or revenue in nature, in the ligh....
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....ndia Ltd. [(1968) 2 SCR 696]. With these averments, the learned senior counsel submitted that the royalty expenditure is revenue in nature and the same cannot be included in taxable income. 7.4. The learned senior counsel for the assessee companies also pointed out certain instances, wherein the department accepted the plea of the assessees and treated the royalty payment as revenue expenditure, viz., (i)in the case of Shriram Chits Tamil Nadu Private Limited for the assessment year 2001-02, the CIT dropped the proceedings under section 263 accepting the objections raised to treat the royalty payment as capital expenditure; and for the assessment years 2004-05 and 2005-06, the CIT(A) accepted the claim of the company by holding the expenditure as revenue in nature, which was also accepted by the department and no further appeal was filed before the ITAT; (ii)in the case of Shriram City Union Finance Limited, for the assessment years 2004-05 & 2005-06, the assessing officer accepted the claim of deduction in respect of royalty expenditure and did not add the same in the respective assessment orders; and (iii)in the case of Shriram Transport Finance Company for the assessment year....
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....is made for acquisition of intangible assset; and the mode, methodology and duration of payment is irrevalent. Accordingly, the claim of the assessee companies under the head 'royalty' was disallowed and depreciation at 25% was allowed. However, following the earlier orders of the Tribunal as well as the decision of the Hon'ble supreme court in CIT v. Wavin (India) Ltd (supra), the CIT(A) allowed the claim of the assessee companies, which was affirmed by the Tribunal as well. Therefore, the appeals viz., TCA Nos.622/2013, 360 & 361/2014 and 913/2014 at the instance of the Revenue. 7.7. It is an admitted fact that the assessee companies had entered into licence agreement with the parent company viz., M/s.Shriram Chits & Investments Pvt. Ltd., for use of its logo, on payment of royalty based on turnover and the same is renewable. As already stated, it is the claim of the assessee companies that the license agreement confers the right to use the logo with restrictions viz., nontransferable and non-exclusive; there is no acquisition and there is only the right to use and not ownership; and therefore, the royalty payment which is revenue in nature, falls within the genera....
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....upreme court in CIT v. Wavin (I) Ltd. (supra) which was referred to by the Tribunal, while passing the orders impugned herein and it was held by the Hon'ble Supreme court as follows: "The expenditures were incurred to obtain benefit of research and development made by the foreign company. The technical information given to the Indian company was "non-exclusive" and "non-transferable". In other words, this is not an out and out sale of technical know-how. The assessee was merely given a nonexclusive and non-transferable right of user of the technical information. Expenditures in these facts cannot be said to be for acquisition of any asset at all." 7.10. Furthermore, in the judgment of the Supreme Court in Honda Siel Cars India Ltd v. CIT (supra), it was held that while deciding, whether royalty payment for technical know-how is capital or revenue expenditure, the enduring benefit test has to be applied; and the conditions to be satisfied for treating the expenditure under technical collaboration, as capital in nature, are (i)there is no existing business and (ii)agreement is crucial for setting up a new manufacturing plant. The relevant passage of the said judgment of the....
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....nsferred, but on field complete assistance was given pursuant to the joint venture agreement. Further, in that case, the very same business was set up by the transferee company. However, in the present case, it is not the case. The grant of licence to use the intellectual property of the parent company for limited purpose, cannot be treated as transfer of ownership or title. Though the licence is renewed periodically, it by itself does not guarantee the renewal. Similarly, the parent company is always at liberty to not only cancel the license, but also grants such rights to any other organization. Further, the findings of the Apex Court in the above judgment that when the intellectual property right is not transferred, but permitted to be utilized for a particular period, would have to be treated as revenue expenditure, on application to the facts of this case, tilts the balance in favour of the assessees. Every expenditure incurred to acquire some right over intangible asset, cannot be ipso facto termed as capital expenditure. The nature of the assets, right, information or technical know-how that is transferred, must be such that without which the transferee could never commence ....
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....ere the prize subscriber does not collect the prize amount in respect of any instalment of a chit within a period of two months from the date of the draw, it shall be open to the foreman to hold another draw in respect of such instalment. The Section also provides that the foreman may appropriate to himself the interest accruing on the amount deposited under the second proviso to sub-section (1), for which he is entitled. 12. As far as the balance sheet of the company is concerned, Section 24 enumerates what is required to be stated in the balance sheet. The Rules therein provide for the format of the balance sheet. A reading of the schedule, as against the assets side, shows loans and advances to subscribers as well as the liabilities as relatable to non-prized subscribers. The assets side also contains receipt of interest and such other amount which can be transferred to fall under the caption of assets. In terms of the provisions thus prescribed in Section 24, the balance sheet and profit and loss account clearly showed the amount intimated by the company as against the default committed by the chit holders and the balance sheet was also audited by the Chartered Accountant qu....
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.... for the purpose of allowance according to the provisions of the Act depending upon how the money was utilised by the subscriber." 15. The subsequent clarification issued on 25.03.1992, which had been extracted in the order of the Tribunal relating to the assessment years 1990-91 and 1991-92, merits to be extracted hereunder:- "Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes 25th March 1992 The Chief Commissioner of Income tax II New Delhi. Sir, Subject : CBDT Instruction No.1175 dated May 16, 1973 Liability to assessment Profits made by subscriber of chit funds Question regarding 1. I am directed to refer to your Letter F.No.66(II)/HO/Proposal under section 263/91- 92/4101, dated November 15, 1991 on the above mentioned subject. 2. The issues raised by you have been carefully examined by the Board. In this regard, I am directed to say, that Board are of the view that Instruction No.1175 issued in consultation with M.O.L. cannot be withdrawn on the basis of decision of Punjab & Haryana High Court in case of soda Silicate & Chemical Works (supra). The Board's Instruction stands. 3. Regarding proce....
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....e of payment made, the claim has to be considered as intimately connected with the business, resulting as a case of a bad debt. Hence, apart from Section 36, the same merited to be considered as falling under Sections 28 and 37 in the business expenditure resulting in a loss. As already pointed out, when the Revenue went on appeal as against the view of the Commissioner of Income Tax (Appeals) challenging that it would amount to a bad debt, apparently, no claim was made on the side of the Revenue to dispute the view of the Commissioner of Income Tax (Appeals) that the claim might also fall under the head of business loss under Section 28. Thus, when the Tribunal rejected the Revenue's appeal, it clearly pointed out that it confirmed the view of the Commissioner of Income Tax (Appeals) as stated above that the claim is allowable not only as a bad debt, but could also be considered as a case of business loss under Section 28. The question raised before this Court thus is relatable to one part of the Tribunal's order as to whether the defaulted amount paid by the assessee could be treated as a bad debt. 19. It is not denied by the Revenue that the payment made in the course....