The ITO, Ward-8(2), Ahmedabad V. M/s. Simurg Appliances Pvt.Ltd., Ahmedabad

ITA 1881/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 85681 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 12-02-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 27-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MK SINGH
• Assessee Lawyers: KALPEN SHAH
• Keywords: Gift; Depreciation; Revenue expenditure
• Section: 32

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD 00 , ! ' #$, % & BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER !./ ITA NO. 1881/AHD/2011 % ) *)/ ASSESSMENT YEAR: 2008-09 ITO, WARD - 8(2) AHMEDABAD. VS SIMURG APPLIANCES P. LTD. B/6, SHREE KRISHANA CENTRE NAVRANGPURA, AHMEDABAD. PAN : AACCS 7857 A +, / (APPELLANT) -. +, / (RESPONDENT) REVENUE BY : SHRI M.K. SINGH, SR. DR. ASSESSEE(S) BY : SHRI KALPEN SHAH / DATE OF HEARING : 12/02/2015 / DATE OF PRONOUNCEMENT: 13/02/2015 // O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER O F INCOME-TAX (APPEALS)-XIV, AHMEDABAD DATED 27.5.2011. 2. THE SOLE GROUND RAISED BY THE REVENUE IN THIS AP PEAL READS AS UNDER: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACT S IN DELETING THE DISALLOWANCE OF RS.49,64,673/- MADE BY THE AO O N ACCOUNT OF RECURRING ROYALTY/FEE. 3. BRIEF FACTS OF THE CASE ARE THAT THE AO ON PERUS AL OF THE PROFIT & LOSS ACCOUNT NOTICED THAT THE ASSESSEE HAS DEBITED RS.66,19,564/- UNDER THE HEAD RECURRING ROYALTY/FEE. THE AO OBS ERVED THAT IDENTICAL ISSUE HAD COME UP DURING THE COURSE OF AS SESSMENT ITA NO.1881/AHD/2011 2 PROCEEDINGS IN ASSTT.YEAR 2006-07 AND 2007-08, AND FOR THE REASONS ELABORATELY DISCUSSED THEREIN, THE CONTENTION OF TH E ASSESSEE THAT THE EXPENDITURE DEBITED IN THE PROFIT & LOSS ACCOUNT WA S REVENUE IN NATURE, WAS REJECTED, AND THE ASSESSEES CLAIM FOR REVENUE EXPENDITURE WAS DISALLOWED. HE OBSERVED THAT ON PERUSAL OF THE SUB MISSION MADE BY THE ASSESSEE IN THE YEAR UNDER APPEAL SHOWS THAT THE AS SESSEE HAS MADE VERY SAME SUBMISSIONS, WHICH WERE MADE DURING THE C OURSE OF ASSESSMENT PROCEEDINGS FOR THE ASSTT.YEAR 2006-07 A ND 2007-08, AND AS THERE IS NO CHANGE IN THE SET OF FACTS IN THE AS SESSMENT YEAR INVOLVED I.E. ASSTT.YEAR 2008-09, THE CLAIM OF THE ASSESSEE FOR REVENUE EXPENDITURE AT RS.66,19,564/- DEBITED IN THE PROFIT & LOSS ACCOUNT UNDER THE HEAD RECURRING ROYALTY/FEE (FRANCHISEE FEE) I S REJECTED FOR THE REASONS THAT SUCH EXPENDITURE IS CAPITAL IN NATURE, LIKE PATENT, COPYRIGHT, TRADEMARK ETC. HE OBSERVED THAT THE ASS ESSEE WAS ELIGIBLE FOR DEPRECIATION AT 25% ON RS.66,19,564/- WHICH WOR KS OUT TO RS.16,54,891/-. HE, THEREFORE, DISALLOWED THE BALA NCE AMOUNT OF RS.49,64,673/-. 4. ON APPEAL, THE CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE BY FOLLOWING CONSOLIDATED ORDER OF THIS BENCH OF THE T RIBUNAL IN THE CASE OF THE ASSESSEE ITSELF IN ITA NO.998/AHD/2010, 2056/AH D/2009 AND 2782/AHD/2010 FOR A.Y.2005-06 TO 2007-08 ORDER DATE D 21.4.2011, WHEREIN IT WAS HELD AS UNDER: 6. HEARD BOTH THE SIDES. CASE RECORDS PERUSED. CERT AIN UNDISPUTED FACTS ARE THAT THE ASSESSEE IS CARRYING ON THE BUSINESS UNDER THE BRAND-NAME CROSSWORD AT THE DESIGNATED PLACE FOR RESALE OF BOOKS, MUSIC-CD, STATIONERY, TOYS & GIFTS , MAGAZINES, ETC. UNDER THE SAID BRAND-NAME. THE RETAIL OF ALL T HESE GOODS WERE UNDISPUTEDLY UNDER THE EMBLEM OF CROSSWORD. AS FA R AS THE IMPUGNED DISALLOWANCE OF FRANCHISE FEES WAS CONCE RNED, FACTS OF THE CASE HAVE REVEALED THAT THE ASSESSEE IS REQU IRED TO CALCULATE THE SAID FEES AT THE RATE OF 2% ON THE NE T SALES. TERMS OF THE AGREEMENT HAVE SPECIFICALLY REVEALED THAT ON THE EXPIRY OF EVERY MONTH, THE FRANCHISEE I.E. ASSESSEE SHALL C OMPUTE THE GROSS TURNOVER FOR THE SAID MONTH AND AFTER REDUCIN G THE SALES ITA NO.1881/AHD/2011 3 RETURNS, IF ANY, COMPUTE THE NET SALES FOR THE CALC ULATION OF THE SAID FEES. THE SALES WERE ALSO TO BE ACCOUNTED FOR ON ACCRUAL BASIS. ONCE IT WAS AN ACCEPTED FACTUAL POSITION THA T THE PAYMENT OF IMPUGNED FEES WAS NOT A ONE-TIME PAYMENT, BUT IT WAS A RECURRING PAYMENT DEPENDING UPON THE DAILY SALES OF THE ASSESSEE, THEREFORE, ITS NATURE CANNOT BE TERMED AS A ONE TIME EXPENDITURE OF CAPITAL IN NATURE. AS PER THE TERMS OF THE MEMORANDUM, WHICH WERE DULY PLACED BEFORE THE AUTHO RITIES BELOW, IT WAS EVIDENT THAT THE ASSESSEE HAS NOT ACQ UIRED ANY PATENT RIGHT TO BE USED ON ANY OF THE ASSESSEES PR ODUCT. ON THE OTHER HAND, FACTS OF THE CASE HAVE REVEALED THAT TH E ASSESSEE WAS SIMPLY RE-SELLING THE PRODUCT UNDER THE SAID BRAND NAME ON RETAIL BASIS. IT HAS ALSO BEEN VEHEMENTLY ARGUED THAT THE SAID TRADE- NAME CROSSWORD HAS NOT AT ALL BEEN ACQUIRED BY TH E ASSESSEE ON MAKING THE IMPUGNED PAYMENT. THE MONTHLY PAYMENT COULD NOT BE SAID TO BE THE COST FOR OBTAINING A FRANCHI SE TO BE USED AS AN EMBLEM CROSSWORD EITHER FOR SALE OR TO DIST RIBUTE THE PRODUCT MANUFACTURED BY THE ASSESSEE. THEREFORE, FA CTS OF THE CASE HAVE THUS ESTABLISHED THAT THOUGH THE TERM FR ANCHISE MIGHT HAVE BEEN USED IN THE AGREEMENT BUT IT WAS A MISNOMER, PARTICULARLY IN THE CONTEXT OF THE PROVISIONS OF TH E SECTION 32 OF THE ACT ARE CONCERNED. 7. THE DECISION OF HONBLE HIGH COURT OF MADRAS IN THE CASE OF INDIA MANUFACTURERS (P) LTD. VS. CIT(SUPRA) AS CITE D BY THE LD.DR IS IN THE CONTEXT OF FRANCHISE WHICH WAS OBTAINED TO SELL THE PRODUCT OF THE COMPANY. FACTS OF THAT CASE HAVE REV EALED THAT THE CONSIDERATION WAS PAID FOR ACQUIRING THE DISTRIBUTI ON RIGHTS BY THE ASSESSEE. THE ASSESSEE HAS NOT ONLY OBTAINED THE DI STRIBUTORSHIP RIGHT IN RESPECT OF THE ARTICLES MANUFACTURED BUT A CQUIRED THE FRANCHISE OF THE PRODUCT. ON THOSE FACTS, THE HONB LE MADRAS HIGH COURT HAS HELD THAT THE ACQUISITION OF RIGHT WAS EN DURING IN NATURE HENCE CAPITAL IN NATURE. FACTS OF THAT CASE BEING N OT IDENTICAL WITH THE CASE IN HAND, THEREFORE, WRONGLY CITED. LIKEWIS E, THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TECHNO SHARES & STOCKS LTD. & ORS. (SUPRA) WAS IN RESPECT OF LICENSE GRANTED TO OBTAIN STOCK EXCHANGE MEMBERSHIP CARD. W HILE DEALING WITH THE SAID ISSUE HONBLE BOMBAY HIGH COU RT HAS CLARIFIED THAT THE EXPRESSION LICENSES HAS TO BE CONSTRUED RESTRICTIVELY ONLY TO APPLY IN RELATION TO ACQUISIT ION OF INTELLECTUAL RIGHTS AND SECTION 32 RESTRICTS THE CATEGORIES OF I NTANGIBLE ASSETS AS SPECIFICALLY ENUMERATED THEREIN AND NOT TO BE AP PLIED TO ALL INTANGIBLE ASSETS. THE CASE LAWS CITED BY THE LD.DR , THUS, DO NOT APPLY IN THE PRESENT CONTEXT. 8. AS HELD IN THE CAS E OF RAM BAHADUR THAKUR LTD. VS. CIT REPORTED AT (2003) 261 ITR 390 (KER.)[FB] AN EXPENDITURE IS ALLOWABLE IF IT IS INC URRED DURING THE ACCOUNTING PERIOD AND IT IS IN RESPECT OF BUSINESS CARRIED ON BY THE ITA NO.1881/AHD/2011 4 ASSESSEE. IT SHOULD NOT BE A PERSONAL EXPENDITURE A ND IT SHOULD BE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MUST NOT BE INCURRED TO ACQUIRE ANY CAP ITAL ASSET. IN THE PRESENT CASE, THE ASSESSEE HAS NOT ACQUIRED THE FRANCHISE OF THE TRADE-MARK CROSS WORD TO BE USED AS A HALLMAR K FOR ITS OWN PRODUCTS. BUT THE ASSESSEE IS SELLING THE DESIGNATE D PRODUCTS OF THE SAID OWNER OF THE HALLMARK AND USING THAT VERY TRADE NAME AND GIVING COMMISSION ON FIXED PERCENTAGE ON MONTHL Y SALE BASIS. IN THE CASE OF EMPIRE JUTE CO. VS. CIT REPORTED AT (1980) 124 ITR 01(SC), THE HONBLE SUPREME COURT HAS OPINED THAT W HAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE. IF THE ADVANTAGE IS IN THE CAPITA L FIELD, THEN SUCH AN EXPENDITURE WOULD BE DISALLOWABLE. IF THE A DVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEES TRAD ING OPERATIONS, THEN THE EXPENDITURE IS ON REVENUE ACCOUNT. EVEN IF IT RESULTS INTO MORE PROFITABILITY BUT LEAVING THE FIXED CAPITAL UN TOUCHED, THEN THOUGH THE ADVANTAGE MAY BE FOR AN INDEFINITE FUTUR E THE SAME IS ON REVENUE ACCOUNT. AN INTERESTING FACT HAS ALSO BE EN BROUGHT ON RECORD THAT UNDER THE MAHARASHTRA STATE LAW THE SAI D FRANCHISE FEES IS TREATED AS PAYMENT TOWARDS LEASE AND A LEA SE-TAX AT THE RATE OF 4% IS LEVIED BY THE STATE GOVERNMENT. IN TH E SAID CONTEXT, IT WAS MENTIONED THAT THOUGH THE LEASE IS PAID IN P ERPETUITY BUT IT WAS REVENUE PAYMENT AS HELD IN THE CASE OF SINGAREN I COLLIERIES CO.LTD. VS. CIT REPORTED AT (1967) 66 ITR 553 (A.P. ). TWO DECISIONS OF HONBLE GUJARAT HIGH COURT; NAMELY CIT VS. ASHOKA MILLS LTD. (218 ITR 526) AND OF CIT VS. GUJARAT CAR BON LTD. (254 ITR 294) HAS ALSO BEEN CITED FOR THE PROPOSITION TH AT THE PAYMENT OF ROYALTY TO THE COLLABORATORS BEING BASED UPON TH E AMOUNT OF SALES, THEREFORE, IT WAS A RECURRING EXPENDITURE AN D THE AGREEMENT MERELY UNABLE THE ASSESSEE TO MARKET THE PRODUCT AND NOT ACQUISITION OF ANY RIGHT OF PERMANENT CHARACTER . UNDER THE TOTALITY OF THE DISCUSSION MADE HEREINABOVE AS ALSO RESPECTFULLY FOLLOWING THE DECISIONS CITED ABOVE, WE ARE OF THE VIEW THAT THE EXPENDITURE IN QUESTION WAS REVENUE IN NATURE, HENC E, RIGHTLY ALLOWED BY THE LD.CIT(A). GROUNDS RAISED BY THE REV ENUE HAVE NO FORCE, HENCE DISMISSED. 5. DR RELIED ON THE ORDER OF THE AO. 6. WE FIND THAT THE CIT(A) HAS ALLOWED THE DEDUCTIO N FOR EXPENDITURE INCURRED ON ACCOUNT OF RECURRING ROYALTY/FEE (FRANC HISEE) BY FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF THE ASSESS EE IN THE ASSTT.YEAR 2005-06 TO 2007-08. DR COULD NOT POINT OUT ANY DIS TINGUISHING FEATURES IN THE ORDER UNDER APPEAL. HE ALSO COULD NOT BRING ANY MATERIAL ON ITA NO.1881/AHD/2011 5 RECORD TO SHOW THAT THE ORDER OF THE TRIBUNAL IN TH E CASE OF THE ASSESSEE PASSED IN ASSTT.YEAR 2005-06 TO 2007-08 WAS VARIED IN APPEAL BY ANY HIGHER AUTHORITY. HENCE, FACTS BEING IDENTICAL, WE FIND NO GOOD REASON TO INTERFERE WITH THE ORDER OF THE CIT(A), WHICH IS CONFIRMED AND THE GROUND OF THE APPEAL OF THE REVENUE IS DISMISSED. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE COURT ON FRIDAY THE 13 TH FEBRUARY, 2015 AT AHMEDABAD. SD/- SD/- (KUL BHARAT) JUDICIAL MEMBER ( N.S. SAINI) ACCOUNTANT MEMBER AHMEDABAD; DATED 13/02/2015