Lyka Hetero Health Care (Merged with Hetero Drugs Ltd), Hyd, Hyderabad V. DCIT Central Circle-4, Hyderabad

ITA 1131/HYD/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69765 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2003-2004
• Appeal Filed On: 10-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V MADHUVANI
• Assessee Lawyers: S RAMA RAO
• Keywords: Capital asset; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 32; 37; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1131/HYD/2011 ASSESSMENT YEAR: 2003-04 LYKA HETERO HEALTH CARE, -V- DCIT, CC-4, HYDERABAD. HYDERABAD. PAN:AAACL7255P (APPELLANT) (RESPONDENT) ITA NO.1132 AND 1133/HYD/2011 ASSESSMENT YEARS: 2003-04 & 2004-05 DCIT, CC-4, -V- LYKA HETERO HEALTH CARE, HYDERABAD. HYDER ABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S. RAMA RAO DEPARTMENT BY : SMT. V. MADHUVANI DATE OF HEARING : 19-6-2013 DATE OF PRONOUNCEMENT: 30 -8-2013 ORDER PER SAKTIJIT DEY, J.M: THESE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AG AINST SEPARATE ORDERS OF CIT (A) VII, HYDERABAD PERTAININ G TO ASSESSMENT YEARS 2003-04 TO 2004-05. SINCE COMMON I SSUE IS INVOLVED IN ALL THESE APPEALS, THESE ARE TAKEN UP T OGETHER AND DISPOSED OF BY THIS COMBINED ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.1131/HYD/2011 . 2 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. 2. THE ONLY ISSUE ARISING IN THIS APPEAL OF THE AS SESSEE IS WITH REGARD TO THE CIT (A) DISALLOWING 25% OUT OF THE TO TAL EXPENDITURE CLAIMED ON ACCOUNT OF ADVERTISEMENT AND PUBLICITY AND INTEREST. 3. BRIEFLY THE FACTS ARE THE ASSESSEE A JOINT VENTU RE OF M/S LYKA LABS LTD.., AND M/S HETRO DRUGS LIMITED WITH A SHARE HOLDING OF 49% AND 51% RESPECTIVELY. FOR THE IMPU GNED ASSESSMENT YEAR, THE ASSESSEE FILED ITS RETURN OF I NCOME DECLARING LOSS OF RS.9,75,44,926. IN COURSE OF ASSESSMENT PR OCEEDINGS, THE ASSESSING OFFICER AFTER EXAMINING THE BOOKS OF ACCO UNTS AND THE AUDITED STATEMENT OF ACCOUNTS NOTICED THAT THE ASSE SSEE HAD CLAIMED RS.2,67,98,508/- TOWARDS ADVERTISEMENT AND PUBLICITY. WHEN THE ASSESSING OFFICER ASKED THE ASSESSEE TO FU RNISH THE DETAILS OF SUCH EXPENDITURE, THE ASSESSEE SUBMITTED THAT THE BILLS AND VOUCHERS RELATING TO THE AFORESAID EXPENDITURE WERE DESTROYED IN FLOOD ON 26 TH JULY, 2005. IN THIS CONTEXT, THE ASSESSEE SUBMITTED A FIR BEFORE THE POLICE AUTHORI TIES. THE ASSESSING OFFICER ON EXAMINING THE FIR NOTICED THAT THE ASSESSEE HAS STATED THAT THE STAFF BOOK, ACCOUNT BOOKS ETC., KEPT IN AND OUT BOOK FOR MEDICINE KEPT IN GODOWN HAVE BEEN LOS T. HOWEVER, THE ASSESSEE HAD NOT PRODUCED ANY INVENTORY FOR THE BOOKS KEPT IN THE GO-DOWN. THE ASSESSEE ALSO SUBMITTED COPIES FOR THE ADDITION MADE TO THE FIXED ASSETS DURING THE YEAR. THE ASSESSING OFFICER THEREFORE WAS OF THE VIEW THAT WHEN THE ASS ESSEE COULD SUBMIT THE BILLS AND VOUCHERS RELATING TO ADDITION MADE TO FIXED ASSETS HOW THE BILLS AND VOUCHERS RELATING TO EXPEN DITURE HAVE BEEN DESTROYED IN FLOODS. HE THEREFORE CAME TO A C ONCLUSION THAT THE ASSESSEE HAD DELIBERATELY NOT PRODUCED THE DOCU MENTS AND ACCORDINGLY DISALLOWED THE ENTIRE EXPENDITURE CLAI MED OF RS.2,67,98,508/- AND ADDED BACK TO THE TOTAL INCOME . 3 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. 4. THE ASSESSING OFFICER FURTHER NOTICED THAT THE A SSESSEE HAD CLAIMED AN AMOUNT OF RS.2,81,31,134/- AS INTEREST O N TERM LOAN RECEIVED FROM IDBI BANK AND M/S. RABO (INDIA) FINA NCE PVT. LIMITED. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY THE EXPENSE CLAIMED TOWARDS INTEREST PAYMENTS SHOUL D NOT BE TREATED AS CAPITAL EXPENDITURE, THE ASSESSEE IN ITS REPLY SUBMITTED THAT THE INTEREST PAID OF RS.2,81,80,134/- WAS ON THE LOAN TAKEN FOR ACQUIRING THE ASSETS AND WORKING CAPITAL WHICH CANNOT BE INCLUDED IN THE COST OF THE AFORESAID ASSET AS PER THE PROVISIONS OF SECTION 36(1)((III) READ WITH SECTION EXPLANATIO N 8 TO SEC. 43 OF THE IT ACT, 1961. THE ASSESSING OFFICER HOWEVER D ID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE BY OBSERVING THAT T HE LOAN WAS TAKEN FOR THE PAYMENT TOWARDS ACQUISITION OF BRAND AND TRADEMARK AND THE INTEREST PAID THE LOAN IS NOTHIN G BUT CAPITAL EXPENDITURE IN THE HANDS OF THE ASSESSEE COMPANY. HE OBSERVED THAT EXPLANATION-8 TO SECTION 43 IS NOT APPLICABLE TO SUCH PAYMENT AS IT SAYS THAT ACTUAL COST SHOULD NOT INCLUDE THE INTEREST IN CONNECTION WITH THE AMOUNT BORROWED FOR ACQUISITION OF ASSETS FOR THE PERIOD AFTER THE ASSET IS FIRST PUT TO USE. BUT THE ASSESSEE HAS NEVER DISCLOSED THE ACTUAL COST OF THE TRADEMARK AN D BRANDS AND FURTHER THE AGREEMENT FOR FINANCE WITH THESE COMPAN IES SHOWED THAT THE AMOUNT WAS BORROWED ONLY FOR THE FINANCING OF THE TRADE MARK AND BRANDS. THE ASSESSING OFFICER OBSERVED TH AT THOUGH IN DIRECTORS REPORT, IT IS MENTIONED THAT THE FULL FL EDGED OPERATION OF THE ASSESSEE COMPANY HAS STARTED, BUT THE ASSESSEE COMPANY HAS NOT FILED THE COMMENCEMENT CERTIFICATE. WITH TH E AFORESAID OBSERVATION, THE ASSESSING OFFICER DISALLOWED THE I NTEREST PAYMENT BY TREATING IT AS CAPITAL EXPENDITURE. THE ASSESSEE CHALLENGED THE AFORESAID DISALLOWANCE BY PREFERRING AN APPEAL BEFORE THE CIT (A). 4 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. 5. THE CIT (A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE RESTRICTED THE DISALLOWANCE TO 25% OF THE TOTAL EXPENDITURE CLAIMED UNDER BOTH THE HEADS I.E., ADVE RTISEMENT AND PUBLICITY AND INTEREST PAYMENT. 6. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES ON THIS ISSUE AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AS WELL AS MATERIALS ON RECORD. SO FAR AS EXPENDITURE INCURRE D TOWARDS ADVERTISEMENT AND PUBLICITY IS CONCERNED, THE ASSES SING OFFICER HAS DISALLOWED THE SAME ONLY ON THE GROUND THAT THE ASSESSEE WAS NOT ABLE TO PRODUCE ANY BILLS OR VOUCHERS RELA TING TO SUCH EXPENDITURE. HOWEVER, ONLY BECAUSE THE ASSESSEE WA S NOT ABLE TO PRODUCE ANY BILLS OR VOUCHERS THE ENTIRE EXPENDITUR E CLAIMED TOWARDS ADVERTISEMENT AND PUBLICITY CANNOT BE DENIE D WHEN THERE IS NO MATERIAL BROUGHT ON RECORD TO SHOW THAT THE A SSESSEE HAD NOT AT ALL INCURRED ANY EXPENDITURE UNDER THE AFORE SAID HEADS. IN THESE CIRCUMSTANCES, THE ENTIRE EXPENDITURE CLAIM C ANNOT BE DISALLOWED. AT THE SAME TIME THE ASSESSEE HAS ALSO NOT MAINTAINED BILLS AND VOUCHERS FOR THE ENTIRE EXPEND ITURE. IN AFORESAID VIEW OF THE MATTER, TO THAT EXTENT, WE AG REE WITH THE FINDING OF THE CIT (A). HOWEVER, DISALLOWANCE OF E XPENDITURE AT 25% ACCORDING TO US, IS ON THE HIGHER SIDE. WE THE REFORE CONSIDERING THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE, DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALL OWANCE TO 15% OF THE TOTAL EXPENDITURE CLAIMED. 7. SIMILARLY, SO FAR AS EXPENDITURE CLAIMED ON ACCO UNT OF INTEREST PAYMENT IS CONCERNED, WE AGREE WITH THE CO NCLUSION OF THE CIT (A) THAT THE ENTIRE INTEREST PAYMENT CANNOT BE DISALLOWED. HOWEVER, IN THIS CASE ALSO, WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO 15% OF THE TOTAL EXPEN DITURE CLAIMED. 8. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. 5 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. ITA NO.1132/HYD/2011 (DEPARTMENTAL APPEAL) 9. IN COURSE OF SCRUTINY PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE COMPANY HAD ENTERED INTO AN AGREEMENT WITH M/S. LYKA LABS LTD., ON 12-3-2002 F OR PURCHASE OF THE FOLLOWING ARTICLES OR THINGS PARTICULARS AMOUNT (RS.) IN CRORES REFELCTED TECHNICAL KNOW-HOW 7.40 FIXED ASSETS (RS.RS.7,79,96,000/- I.E., RS.7.40 CRORES PLUS 5.40% SALES TAX) BRAND, TRADEMARKS & PATENTS 25.00 FIXED ASSETS (RS.26,35,00,000/- I.E. RS.25.00 CRORES PLUS 5.40% SALES TAX) MARKET INFORMATION & CONSULTANCY CHARGES 7.40 MISC. EXPENDITURE NON COMPETE FEES 10.00 MISC. EXPENDITURE TOTAL 49.80 ON FURTHER VERIFICATION, THE ASSESSING OFFICER NOTI CED THAT ON THE TECHNICAL KNOW-HOW AND BRAND/ TRADEMARKS AND PATENT S, THE ASSESSEE COMPANY HAS CLAIMED DEPRECIATION WHEREAS I N RESPECT OF MARKET INFORMATION AND CONSULTANCY CHARGES AND NO C OMPETE FEE BOTH HAVE BEEN CONSIDERED AS DEFERRED REVENUE EXPEN DITURE BY THE ASSESSEE AND DURING THE YEAR, THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.40 LAKH AS NON COMPETE FEES AND RS.29, 60,000/- AS MARKETING AND CONSULTANCY CHARGES. WHEN THE ASSES SING OFFICER ASKED THE ASSESSEE TO EXPLAIN, IT WAS SUBMITTED THA T THESE EXPENDITURES HAVE BEEN TREATED AS DEFERRED REVENUE EXPENDITURE 6 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. TAKING INTO CONSIDERATION THE LIFE EXPECTANCY OF T HESE ITEMS. IT WAS SUBMITTED THAT IN ORDER TO PROTECT THE BRAND IN TEREST AND SALES OF EXISTING BRANDS BY THE ASSESSEE, IT WAS MU TUALLY AGREED THAT M/S LYKA LABS LTD. WILL NOT INTRODUCE THE SAM E MOLECULE WITH A NEW BRAND NAME SO THAT THE BUSINESS OF THE A SSESSEE COMPANY WILL NOT BE ADVERSELY AFFECTED. HENCE THE EXPENDITURE HAS BEEN CLAIMED U/S 37 OF THE ACT. 10. THE ASSESSING OFFICER HOWEVER DID NOT AGREE WIT H THE CONTENTION OF THE ASSESSEE AND HELD THAT THE EXPENS ES WERE DIRECTLY RELATED TO THE BRAND NAME OF THE ASSESSEE COMPANY. HE FURTHER OBSERVED THAT AS PER THE AGREEMENT WITH M/ S LYKA LABS LTD., THE VALUE OF THE ENTIRE PACKAGE WAS RS.49.80 CRORES BUT THE BASIS FOR THE VALUATION OF THE ITEMS HAVE NOT BEEN DISCLOSED. HE FURTHER NOTED THAT THE ASSESSEE HAS TREATED BRANDS /TRADEMARKS AND TECHNICAL KNOW-HOW AS ASSETS AND NON COMPETE FEES AND MARKETING CHARGES AS DEFERRED REVENUE EXPENSES. HE FURTHER NOTED THAT DEFERMENT OF EXPENSES PROVES THAT THE AS SESSEE HAS CONSIDERED THESE EXPENSES AS CAPITAL EXPENDITURE ON LY. THE ASSESSING OFFICER RELYING UPON THE DECISION OF HON BLE MADRAS HIGH COURT IN CASE OF CHELPARK CO. LTD. VS. CIT (1 91 ITR 249) WHEREIN IT WAS HELD THAT THE EXPENDITURE TO WARD OF F COMPETITION IS FOR ACQUISITION OF ENDURING NATURE AND IS CAPITA L. THOUGH THE ASSESSING OFFICER HELD THAT THE EXPENDITURE IS CAPI TAL IN NATURE, HE HOWEVER DID NOT ALLOW DEPRECIATION BY HOLDING THAT THESE ITEMS ARE NOT COVERED U/S 32 OF THE ACT. THE ASSESSEE BE ING AGGRIEVED OF THE DISALLOWANCE MADE, PREFERRED AN APPEAL BEF ORE THE CIT (A). 11. IN COURSE OF HEARING BEFORE THE CIT (A), THE AS SESSEE CONTENDED THAT THE ASSESSEE HAD PAID RS.10 CRORES A S NO COMPETE FEES TO M/S LYKA LABS LIMITED AND FOR THE ASSESSMEN T YEAR UNDER 7 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. DISPUTE, IT HAS WRITTEN OFF 4% OF THE SAID COST A ND DEBITED TO PROFIT & LOSS A/C. IT WAS SUBMITTED THAT THE ASSES SEE HAS TREATED IT AS DEFERRED REVENUE EXPENDITURE AS IT WAS OF THE VIEW SUCH BENEFIT MAY ENDURE FOR A LONG PERIOD. THE ASSESSEE RELYING UPON THE DECISION OF THE HONBLE SUPREME COURT IN CA SE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT (225 ITR 798) SUBMITTED THAT IT IS PERMISSIBLE TO THE ASSESSEE TO DEFER THE REVENUE ITEMS OF EXPENDITURE OVER A PERIOD OF TIME AND CLAIM THE SAME AT A PARTICULAR PERCENTAGE. IT WAS THUS SUBMI TTED THAT THERE IS NO JUSTIFICATION FOR DISALLOWING THE EXPEN DITURE CLAIMED ON ACCOUNT OF NON COMPETE FEE AS THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT THE EXPENDITURE WAS INCURRED FOR THE BUSINESS PURPOSES. IT WAS FURTHER CONTENDED BY THE ASSESSEE THAT IF AT ALL THE EXPENDITURE WAS TREATED AS CAPITAL IN NATURE, THEN THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION ON THE S AME AS PER SECTION 32 OF THE IT ACT, 1961 APPENDIX-1 TO IT R ULES AS APPLICABLE TO THE IMPUGNED ASSESSMENT YEAR. SO FAR AS THE EXPENDITURE INCURRED TOWARDS PAYMENT OF MARKET INFO RMATION AND CONSULTANCY CHARGES AMOUNTING TO RS.29,60,000/- IS CONCERNED, THE ASSESSEE SUBMITTED THAT AS PER THE AGREEMENT EN TERED INTO WITH M/S LYKA LABS LIMITED, LYKA HAS DEVELOPED EXP ERTISE IN MARKETING FORMULATIONS AND AGREED TO TRANSFER SUCH FORMATIONS TO THE ASSESSEE FOR TOTAL CONSIDERATION OF RS.7.40 CRO RES. OUT OF THE SAID AMOUNT RS.1.48 CRORES WAS PAID BEFORE EXECUTIN G THE AGREEMENT AND THE BALANCE OF RS.5.92 CRORES WAS PA ID ON 30-4- 2002. IT WAS THEREFORE SUBMITTED THAT SINCE THE ASS ESSEE ACQUIRED EXPERTISE IN THE MARKETING OF FORMATIONS IT HAS TO BE CONSIDERED AS EXPENDITURE FOR THE PURPOSE OF BUSINESS AND ACC ORDINGLY TREATED AS DEFERRED REVENUE EXPENDITURE AND DEBITED ONLY 4% OF THE AMOUNT FOR THE IMPUGNED ASSESSMENT YEAR AS ACC ORDING TO THE ASSESSEE THE BENEFIT OF OBTAINING TECHNICAL KNO WLEDGE CAN BE 8 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. ENJOYED FOR A LONGER TIME. THE CIT (A) AFTER CONSI DERING THE SUBMISSIONS ALLOWED THE CLAIM OF THE ASSESSEE. BEI NG AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 12. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELYING UPON THE OBSERVATION MADE BY THE ASSESSING OFFICER SUBMITTED THAT THE EXPENDITURE CLAIMED ARE PURELY CAPITAL IN NATURE AN D HENCE THE CIT (A) WAS NOT JUSTIFIED IN ALLOWING THE SAME BY T REATING IT AS REVENUE EXPENDITURE. 13. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE A SSESSEE, ON THE OTHER HAND, REFERRING TO THE AGREEMENT ENTERED WITH M/S LYKA LABS LIMITED AT PAGE-57 OF THE PAPER BOOK SUBMITTED THAT THE EXPENDITURE INCURRED BY WAY OF PAYMENT OF NON COMPE TE FEE WAS NOT FOR ACQUIRING ANY ASSET OF ENDURING NATURE BUT WAS FOR THE PURPOSE OF PROTECTING THE BUSINESS ACTIVITY OF THE ASSESSEE AND THEREFORE SHOULD BE CONSIDERED TO HAVE BEEN INCURRE D FOR THE PURPOSES OF BUSINESS AND THEREFORE A REVENUE EXPEND ITURE. IN SUPPORT OF SUCH CONTENTION, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE RELIED UPON DECISIONS OF THE HON BLE SUPREME COURT IN CASE OF MADRAS INDUSTRIAL INVESTMENT LTD. VS. CIT (225 ITR 802), TAPARIA TOOLS LTD. VS. CIT (260 ITR 102) , S.M. HOLDING & FINANCE PVT. LTD. (264 ITR 370), CIT VS. EICHER LTD. (302 ITR 249 (DEL.). 14. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PAR TIES AND PERUSED THE MATERIAL ON RECORD INCLUDING THE ORDERS OF THE REVENUE AUTHORITIES. ON PERUSAL OF THE AGREEMENT EN TERED WITH M/S LYKA LABS LIMITED WHICH IS AT PAGE-57 OF THE PA PER BOOK SUBMITTED BY THE ASSESSEE, IT BECOMES CLEAR THAT T HE AMOUNT PAID TOWARDS NON COMPETE FEE FOR ACQUIRING BENEFIT TECHNICAL INFORMATION AND CONSULTANCY CHARGES WERE NOT FOR A CQUIRING OF ENDURING NATURE BUT ONLY TO PROTECT THE BUSINESS IN TEREST OF THE 9 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. ASSESSEE AND FOR ENHANCING PROFIT BASE OF THE COMPA NY. HENCE, CONSIDERING THE AFORESAID FACTS IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IS A CAPITAL EXPENDITURE. THE HONBLE DELHI HIGH COURT IN CASE OF CIT VS. EICHER LTD. (SUPRA) W HILE ALLOWING THE ASSESSEES CLAIM OF NON COMPETE FEES AS REVENU E EXPENDITURE, FOLLOWED VARIOUS DECISIONS OF HONBLE SUPREME COURT INCLUDING THE DECISION IN CIT VS. MADRAS AUTO SER VICES (P) LTD.(233 ITR 468) HELD AS UNDER:- 17. APPLYING ALL THESE PRINCIPLES TO THE PRESENT C ASE, A FEW FACTS STAND OUT QUITE CLEARLY. THE ASSESSEE DI D NOT ACQUIRE ANY CAPITAL ASSET BY MAKING THE PAYMENT OF NON COMPETE FEE. IT MERELY ELIMINATED COMPETITION IN T HE TWO WHEELER BUSINESS, FOR A WHILE. FROM THE RECORD, IT IS NOT CLEAR HOW LONG THE RESTRICTIVE COVENANT WAS TO LAST , BUT IT WAS NEITHER PERMANENT NOR EPHEMERAL. IN THAT SENSE , THE ADVANTAGE WAS NOT OF AN ENDURING NATURE. THERE IS ALSO NOTHING TO SHOW THAT THE AMOUNT OF RS. 4 CRORES WAS DRAWN OUT OF THE CAPITAL OF THE ASSESSEE. ON A CUMULATIV E APPRECIATION OF THESE FACTS, IT MUST BE HELD THAT T HE CIT (A) AND THE TRIBUNAL DID NOT ERR IN CONCLUDING THAT THE PAYMENT OF NON COMPETE FEE BY THE ASSESSEE WAS A BUSINESS EXPENDITURE AND NOT A CAPITAL EXPENDITURE. THE HONBLE DELHI HIGH COURT AGAIN IN CASE OF CIT VS. CAREER LAUNCHER INDIA LTD. (SUPRA) HELD THAT AN EXPENDITUR E INCURRED FOR A LIMITED PERIOD SHOULD BE HELD TO BE REVENUE EXPE NDITURE AND NOT CAPITAL EXPENDITURE. THEREFORE, CONSIDERED IN THE LIGHT OF THE RATIO LAID DOWN AS ABOVE, WE DO NOT FIND ANY INFIRM ITY IN THE CONCLUSION ARRIVED AT BY THE CIT (A) IN TREATING TH E EXPENDITURE INCURRED TOWARDS PAYMENT OF NON COMPETE FEE AND MAR KING CONSULTANCY CHARGES AS REVENUE IN NATURE AND ALLOWI NG THE SAME AS EXPENDITURE. THIS IS MORE SO AFTER INSERTION OF SEC. 28(VA) OF 10 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. THE ACT. ACCORDINGLY, THE ORDER OF THE CIT (A) ON THESE ISSUES ARE UPHELD AND THE GROUNDS RAISED BY THE DEPARTMENT ARE DISMISSED. 15. THE NEXT ISSUE IN GROUND NO.6 RELATES TO CIT (A ) ALLOWING ASSESSEES CLAIM OF EXPENDITURE TOWARDS PAYMENT OF ROYALTY. 16. BRIEFLY, THE FACTS ARE IN COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT AN AMOUNT OF RS. 1,33,68,784/- AS ROYALTY PAYMENT. WHEN ASKED TO EXPLAIN THE ASSE SSEE SUBMITTED THAT IN RESPECT OF SALE OF BRANDED GOODS AND TRADE MARKS THE ROYALTY PAYMENT WAS AS PER THE AGREEMENT WITH M/S LYKA LABS LIMITED AND FOR USING THE LYKA LOGO ON THE PACKING MATERIALS OF THE ASSESSEE COMPANY. HENCE, THE ROYA LTY WAS PAID IN TERMS WITH THE AGREEMENT ENTERED WITH LYKA LABS LIMITED AND IS LINKED WITH THE SALES EFFECTED. IT WAS SUBMITTE D THAT SINCE THE ROYALTY IS ALWAYS PAID ON SALES IT HAS TO BE TREAT ED AS REVENUE EXPENDITURE. THE ASSESSING OFFICER HOWEVER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE IN THIS REGARD. THE ASS ESSING OFFICER WAS OF THE VIEW THAT AFTER EXECUTION OF AGREEMENT, OWNERSHIP OF BRAND/TRADE MARK GETS TRANSFERRED TO THE ASSESSEE, HENCE THERE IS NO QUESTION OF PAYING FURTHER PAYMENT IN THE NAME O F THE ROYALTY. THE ASSESSING OFFICER FURTHER OBSERVED THAT AS THE ROYALTY PAYMENT WAS FOR THE OWNERSHIP OF BRAND/TRADEMARK IT SHOULD BE TREATED AS CAPITAL EXPENDITURE AND ACCORDINGLY DISA LLOWED THE EXPENDITURE CLAIMED BY THE ASSESSEE. THE ASSESSEE CHALLENGED THE DISALLOWANCE BY PREFERRING AN APPEAL BEFORE THE CIT (A). 17. THE CIT (A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE ALLOWED THE EXPENDITURE CLAIMED TOWARDS ROYALTY PAY MENT. 18. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PAR TIES AND PERUSED THE MATERIAL ON RECORD. ON PERUSAL OF THE AGREEMENT WITH M/S LYKA LABS LIMITED, IT IS SEEN THAT AS PER THE TERMS OF 11 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. THE AGREEMENT, THE ASSESSEE HAS TO MAKE PAYMENT OF ROYALTY AT THE RATE OF 4% OF THE TURNOVER, ACHIEVED WITH REGAR D TO THE SALE OF BRANDED GOODS AND FOR USING LYKA LOGO ON THE MAT ERIAL. AS CAN BE SEEN THE PAYMENT OF ROYALTY IS DIRECTLY LINKED W ITH THE SALES AFFECTED AND IS AS PER THE TERMS OF THE AGREEMENT. HENCE, IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IS NOT FOR THE PURPOSE OF BUSINESS. THAT BESIDES THE CONCLUSION O F THE ASSESSING OFFICER TO THE EFFECT THAT IT IS CAPITAL EXPENDITURE IS ALSO NOT CORRECT AS THE PAYMENT MADE IS NOT FOR ACQUIRIN G ANY ASSET OF ENDURING NATURE. SINCE THE ENTIRE EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF BUSINESS, THERE IS JUSTIFICATION FOR ALLOWING THE SAME. ACCORDINGLY, WE UPHOLD THE ORDER OF THE CIT (A) AND DISMISS THE GROUND RAISED. 18. GROUND NO.7 RELATES TO THE DIRECTION OF THE CI T (A) RESTRICTING THE DISALLOWANCE OF EXPENDITURE CLAIMED TOWARDS ADVERTISEMENT AND PUBLICITY TO THE EXTENT OF 25% OF THE TOTAL EXPENDITURE CLAIMED. IN VIEW OF OUR FINDING IN ASS ESSEES APPEAL IN ITA NO.1131/HYD/2011, WE DISMISS THE GROUND RAIS ED BY THE DEPARTMENT. 19. IN GROUND NO.8, THE DEPARTMENT HAS CHALLENGED THE ORDER OF THE CIT (A) IN DELETING THE ADDITION MADE OF AN AM OUNT OF RS.2,20,000 BEING THE FEES PAID TO REGISTRAR OF COM PANIES. 20. BRIEFLY THE FACTS ARE DURING THE ASSESSMENT PRO CEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD INCUR RED A SUM OF RS.11,5000/- AS INCIDENTAL EXPENDITURE ON ACCOUNT O F INCREASE IN SHARE CAPITAL OUT OF WHICH THE ASSESSEE HAD DEBITED 1/5 TH AMOUNTING TO RS.2,20,000/- AS MISC. EXPENDITURE IN PROFIT & LOSS A/C. THE ASSESSING OFFICER DISALLOWED THE SAME BY HOLDING THAT FEE PAID TO REGISTRAR OF COMPANIES FOR INCREASING THE AUTHORISED CAPITAL IS CAPITAL EXPENDITURE AND HENCE TO BE DIS ALLOWED. IN THIS 12 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. RESPECT, THE ASSESSING OFFICER RELIED UPON A DECISI ON OF HONBLE SUPREME COURT IN CASE OF BROOK BOND INDIA LIMITED VS. CIT (225 ITR 798). WHEN THE ISSUE WAS CARRIED IN APPEAL BEFO RE THE CIT (A), HE ALLOWED THE EXPENDITURE CLAIMED BY HOLDING IT TO BE AN ALLOWABLE EXPENDITURE U/S 35D OF THE ACT. 21. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PAR TIES AND PERUSED THE MATERIAL ON RECORD. SECTION 35D(1) OF T HE ACT PROVIDES FOR AMORTISATION OF CERTAIN EXPENDITURE AS ENUMERATED IN SUB-SECTION (2) OF SAID SECTION BEFORE THE COMMENCE MENT OF ITS BUSINESS OR AFTER THE COMMENCEMENT OF ITS BUSINESS IN CONNECTION WITH EXTENSION OF UNDERTAKING OR IN CONNECTION WITH ITS SET UP OF A NEW UNIT. THE ALLOWABLE EXPENDITURE AS ENUMERATED UNDER SUB- SECTION (2) OF SECTION 35D ARE AS UNDER:- (2) THE EXPENDITURE REFERRED TO IN SUB-SECTION (1) SHALL BE THE EXPENDITURE SPECIFIED IN ANY ONE OR MORE OF THE FOL LOWING CLAUSES, NAMELY:- (C)WHERE THE ASSESSEE IS A COMPANY, ALSO EXPENDITUR E- (I) BY WAY OF LEGAL CHARGES FOR DRAFTING THE MEMORA NDUM AND ARTICLES OF ASSOCIATION OF THE COMPANY; (II)ON PRINTING OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION; (III)BY WAY OF FEES FOR REGISTERING THE COMPANY UND ER THE PROVISIONS OF THE COMPANIES ACT, 1956 (1 OF 1956); (IV) IN CONNECTION WITH THE ISSUE, FOR PUBLIC SUBSC RIPTION, OF SHARES IN OR DEBENTURES OF THE COMPANY, BEING UNDERWRITING COMMISSION, BROKERAGE AND CHARGES FOR DRAFTING, TYPING, PRINTING AND ADVERTISEMENT OF THE PROSPECTUS; (D) SUCH OTHER ITEM S OF EXPENDITURE (NOT BEING EXPENDITURE ELIGIBLE FOR ANY ALLOWANCE OR DEDUCTION UNDER ANY O THER PROVISIONS OF THIS ACT) AS MY BE PRESCRIBED. AS PER SUB-CLAUSE (C)(III) OF SUB-SECTION(2) OF SEC TION 35D, FEE FOR REGISTERING THE COMPANY UNDER THE PROVISIONS OF COM PANIES ACT IS 13 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. AN ALLOWABLE EXPENDITURE. SIMILARLY UNDER SUB-CLAU SE (C) (IV) EXPENDITURE BEING IN THE NATURE OF UNDERWRITING COM MISSION, BROKERAGE AND CHARGES FOR DEVELOPING, PRINTING, ADV ERTISEMENT OF PROSPECTUS ETC., IN CONNECTION WITH THE ISSUE FOR PUBLIC SUBSCRIPTION OF SHARES OR DEBENTURES OF THE COMPANY ARE ALLOWABLE EXPENDITURE. HOWEVER, IN THE PRESENT CAS E, AS CAN BE SEEN FROM THE FINDING OF THE CIT (A), THE EXPENDI TURE IS INCURRED TOWARDS INCREASE IN AUTHORISED CAPITAL OF THE COMPA NY AND HENCE IT CANNOT BE SAID TO BE AN ALLOWABLE EXPENDITURE AS ENUMERATED UNDER SUB-SECTION (2) OF SECTION 35D OF THE ACT. T HE HONBLE SUPREME COURT IN CASE OF BROOK BOND INDIA LIMITED ( 225 ITR 798) HAS HELD THAT FEE PAID TO THE REGISTRAR OF COMPANIE S FOR EXPANSION OF CAPITAL BASE OF THE COMPANY IS DIRECTLY RELATED TO THE CAPITAL EXPENDITURE INCURRED BY THE COMPANY AND HENCE CANN OT BE ALLOWED AS A REVENUE EXPENDITURE. IN VIEW OF THE A FORESAID RATIO LAID DOWN BY THE HONBLE SUPREME COURT, IN OUR VIEW , THE EXPENDITURE INCURRED AMOUNTING TO RS.2,20,000 CANNO T BE ALLOWED AS IT WAS INCURRED TOWARDS INCREASING THE AUTHORISE D CAPITAL OF THE COMPANY. WE THEREFORE SET ASIDE THE ORDER OF THE C IT (A) ON THIS ISSUE AND UPHOLD THE VIEW OF THE ASSESSING OFFICER. 22. IN THE RESULT, THE REVENUES APPEAL IS ALLOWED IN PART. ITA NO.1133/HYD/2011 (DEPARTMENTAL APPEAL) 23. GROUND NOS. 2 AND 3 ARE SIMILAR TO GROUND NOS. 2,3,4,5, AND 6 RAISED IN ITA NO.1132/HYD/2011. IN VIEW OF THE DEC ISION TAKEN WITH REGARD TO GROUNDS RAISED BY THE REVENUE IN ITA NO.1 132/HYD/2011 (SUPRA), THESE GROUNDS ARE DISMISSED. 24. IN GROUND NO.4 RELATES TO ALLOWANCE OF FEE PAID TO ROC OF RS.2,20,000/- IN VIEW OF OUR DECISION IN GROUND NO. 8 RAISED IN ITA NO.1132/HYD/11 (SUPRA), WE ALLOW THE GROUND OF THE DEPARTMENT. 14 ITA NS. 1131 TO 1133 OF 2011 LYKA HETCRO HEALTH CARE,HYD. 25. IN THE RESULT, ALL THE APPEALS I.E. ITA NO.113 1/HYD/2011 (ASSESSEES APPEAL) AND OTHER TWO APPEALS OF THE DE PARTMENT I.E., ITA NOS. 1132 AND 1133/HYD/2011 ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 8-2013. SD/- ( CHANDRA POOJARI) ACCOUNTANT MEMBER SD/- (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 30 TH AUGUST, 2013 COPY TO:- 1) C/O SRI S. RAMA RAO, ADVOCATE, FLAT NO.102, SHRI YAS ELEGANCE, ROAD NO.9, HIMAYATNAGAR, HYDERABAD. 2) DCIT, CENTRAL CIRCLE-4, HYDERABAD. 3)CIT(A) VII, HYDERABAD. 4) CIT(CENTRAL), HYDERABAD. 5.THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERA BAD. JMR*