The ACIT, GNR Circle, Gandhinagar V. Multimedia Frontiers Ltd., Gandhinagar

ITA 3814/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5646 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 05-07-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 05-10-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GAAURAV BATHAM
• Assessee Lawyers: M K PATEL
• Keywords: Bad and doubtful debts; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD D BENCH BEFORE SHRI G.D. AGARWAL, VICE-PRESIDENT (AZ) AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.3814/AHD/2007 [ASSTT.YEAR: 2004-05] ACIT, GANDHINAGAR CIRCLE -VS- MULTIMEDIA FRONTIERS LTD. BLOCK NO.14, 4 TH FLOOR, C-6, GIDC, SECTOR, 25, UDHYOG BHAVAN, SECTOR-II, GANDHINAGAR GANDHINAGAR PAN NO.AARCM2994D (APPELLANT) (RESPONDENT) REVENUE BY : SHRI GAAURAV BATHAM, DR ASSESSEE BY: SHRI M.K. PATEL , AR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THIS APPEAL BY REVENUE IS ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX(APPEALS), GANDHINAGAR, IN APPEAL NO. CIT (A)/GNR/147/2006-07 DATED 28-07-2007. THE ASSESSMENT WAS FRAMED BY ACIT, GAND HINAGAR CIRCLE U/S.143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO A S THE ACT) VIDE HIS ORDER DATED 04-12-2006 FOR ASSESSMENT YEAR 2004-05. 2. THE FIRST ISSUE IN THIS APPEAL OF REVENUE IS AGA INST THE ORDER OF CIT(A) IN TREATING THE ROYALTY EXPENDITURE AS CAPITAL IN NATU RE. FOR THIS, REVENUE HAS RAISED THE FOLLOWING GROUND NO.1 :- (1) THE LEARNED CIT (APPEALS) HAS ERRED IN LAW AND ON FACTS IN ALLOWING THE EXPENDITURE OF RS.47,57,980 BEING ROYALTY TREATED A S CAPITAL EXPENDITURE AS AGAINST THE CLAIM OF THE ASSESSEE AS REVENUE EXPEND ITURE. 3. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT ASSESSEE HAS DE BITED A SUM OF RS.47,57,981/- ITA NO.3814/AHD/2007 A.Y. 2004-05 ACIT GNG V. MULTIMEDIA FRONTIERS LTD. PAGE 2 TO PROFIT & LOSS ACCOUNT AS ROYALTY. THE ASSESSING OFFICER ON VERIFICATION OF DETAILS, NOTED THAT THE PAYMENT WAS MADE AS ROYALTY TO M/S. PHILIPS ENTERPRISES FOR PATENTS RELATING TO PRODUCTION OF VIDEO CD AND DVD SYSTEMS. THE PAYMENT WAS MADE FOR VCD AND DVD PATENTS LICENSE AND ROYALTY WAS FIXED O N THE BASIS OF SALES OF VCD AND DVD. SINCE THE PAYMENT WAS MADE FOR ROYALTY TO PRODUCE VCD AND DVD PATENTS, THE ASSESSEE DERIVED BENEFIT OF ENDURING N ATURE. ACCORDING TO ASSESSING OFFICER ASSESSEE HAS PAID THE ROYALTY FOR OBTAINING PATENT RIGHT FROM M/S. PHILIPS ENTERPRISES AND PATENT RIGHT OBTAINED BY ASSESSEE A LLOWED THE ASSESSEE TO PRODUCE VCD AND DVD SYSTEMS UNDER THE LICENSE OF PHILIPS AN D ACCORDING TO HIM, THE NATURE OF PAYMENT IS CAPITAL SINCE THE ASSESSEE HAS OBTAIN ED A PATENT RIGHT WHICH IS OF ENDURING NATURE. FURTHER ACCORDING TO HIM, IT IS OF LITTLE RELEVANCE WHETHER THE PAYMENT IS MADE IN LUMP SUM OR ON THE BASIS OF TURN OVER BUT THE ENDURING BENEFIT HAS TO BE THE GUIDING FACTOR WHILE DECIDING WHETHER THE PAYMENT IS CAPITAL OR REVENUE IN NATURE. IN REGARD TO THE SAME, HE RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCH GEAR LTD. V. CIT (1998) 232 ITR 359 (SC), WHEREIN IT IS HELD THAT TECHNICAL FEE AND ROYALTY IS CAPITAL E XPENDITURE. FINALLY, THE ASSESSING OFFICER DECIDED THAT THE CONSIDERATION PAID BY THE ASSESSEE BY WAY OF ROYALTY TO THE FOREIGN COLLABORATOR FOR GETTING TECHNICAL AID AND INFORMATION IN THE MANUFACTURING OF VCD AND DVD AND FOR OBTAINING RIGHT TO MANUFACTURE AND SELL THE PRODUCT IN INDIA IS ATTRIBUTABLE TO EXCLUSIVE AND ENDURING ADVANTAGE AN D HE DISALLOWED RS.47,57,981/-. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 4. THE CIT(A) ALLOWED THE CLAIM OF ASSESSEE BY GIVI NG FOLLOWING FINDING IN PARA- 2.2 :- 2.2 THE FACTS AND THE SUBMISSIONS HAVE BEEN CONSID ERED. APPELLANT HAD ENTERED INTO AGREEMENT WITH M/S. PHILIPS ENTERPRISE , A FOREIGN COMPANY FOR PRODUCTION OF CD AND DVD SYSTEMS. THE PATENTS FOR M ANUFACTURING AND SELLING SUCH SYSTEMS WERE OBTAINING AS PER AN OPEN LICENCE POLICY SCHEME OF THE FOREIGN COMPANY. ROYALTY WAS PAID AT RATES MUTU ALLY AGREED UPON AND LINKED TO SALES. APPELLANT WAS ONLY ONE AMONG COMPA NIES IN INDIA WHO ENTERED INTO SUCH PATENTS AGREEMENTS. NO EXCLUSIVE RIGHTS OR PRIVILEGES WERE RECEIVED. THE AGREEMENT WAS IN EXISTENCE FOR A SPEC IFIED PERIOD AND THE COMPANY WAS NOT TO GET ANY RIGHTS OR ASSETS AFTER T HE TERMINATION OF THE AGREEMENT. AS SUCH, NO ENDURING BENEFIT WAS OBTAINE D BY THE APPELLANT- COMPANY AND THE ROYALTY PAYMENT WAS ONLY A SIMPLE R EVENUE OUTGO. IN THE ABOVE CONTEXT AND AS EXPLAINED BY THE APPELLANT THE DECISION OF HONBLE SUPREME COURT CITED BY THE ASSESSING OFFICER DO NOT APPLY TO THE FACTS OF THE ITA NO.3814/AHD/2007 A.Y. 2004-05 ACIT GNG V. MULTIMEDIA FRONTIERS LTD. PAGE 3 CASE. THE FINDING OF THE ASSESSING OFFICER THAT THE EXPENDITURE CONSTITUTED CAPITAL EXPENDITURE IS INCORRECT. THE ADDITION IS D IRECTED TO BE DELETED. 5. WE FIND THAT EVEN THE ASSESSING OFFICER HAS RECO RDED A FACT THAT THE PAYMENT OF ROYALTY FOR ACQUIRING RIGHT TO PRODUCE VCD AND D VD SYSTEMS UNDER THE LICENCE OF PHILIPS IS ON THE BASIS OF TURNOVER AND PAYMENT IS ON YEARLY BASIS. WE FIND THAT M/S. PHILIPS ENTERPRISE N.V. NETHERLAND OWNS PATENTS REL ATING TO VCD AND DVD SYSTEMS AND THE ASSESSEE AS A MANUFACTURE HAD SHOWED FOR TH E LICENCE UNDER PHILIPS PATENTS AND ACCORDINGLY ENTERED INTO PATENTS LICENC E AGREEMENT WHEREUPON ROYALTY @ US $ .0175 FOR VCD AND US $ 0.375 FOR DVD IS REQU IRED TO BE PAID ON THE BASIS OF SALES TURNOVER. THE ASSESSEE HAS PAID THE ROYALTY EVERY YEAR OUT OF ITS REVENUE ON THE BASIS OF TURNOVER COMPUTATION. IN VIEW OF THES E FACTS, WE ARE OF THE CONSIDERED VIEW THAT THE CIT(A) HAS RIGHTLY DELETED THE ADDITI ON AND WE CONFIRM THE SAME. THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED. 6. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) DELETING THE ADDITION OF CESSATION OF LIABILITY U/S .41(1). FOR THIS, REVENUE HAS RAISED GROUND NO.2 :- (2) THE LEARNED CIT (APPEALS) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.9,43,217 TREATED AS CESSATION OF LIA BILITY. 7. AFTER HEARING THE RIVAL CONTENTIONS AND GOING TH ROUGH THE FACTS OF THE CASE, WE FIND THAT ASSESSING OFFICER ON VERIFICATION OF THE ACCOUNTS OF THE ASSESSEE, NOTED THAT THE ASSESSEE HAS CLAIMED BAD DEBTS/SUNDRY BALANCES WRITTEN OFF TO THE TUNE OF RS.25,81,688/-. HOWEVER, NO SUCH DETAILS WERE FILED REGARDING THEE SUNDRY CREDITORS AND IN VIEW OF THE SAME, DETAILS WERE CALLED FOR TH E SUNDRY CREDITORS OUTSTANDING FOR MORE THAN THREE YEARS AND WHERE NO TRANSACTIONS WER E CONDUCTED IN THE LAST THREE YEARS. THE ASSESSEE WAS ASKED VIDE SHOW CAUSE NOTI CE DATED 30-10-2006 AS TO WHY THE SUNDRY CREDITORS OUTSTANDING FOR MORE THAN THREE YEARS AND WITH WHOM NO TRANSACTION HAS BEEN CONDUCTED IN THE LAST THREE YE ARS SHOULD NOT BE TREATED AS CESSATION OF LIABILITY. THE ASSESSEE HAS REPLIED TO THE SAME VIDE LETTER DATED 07-11- 2006. THE AGGREGATE AMOUNT OUTSTANDING IN SUNDRY CREDITO RS ACCOUNT, FOR MORE THAN 90 DAYS IS RS.64.43 LACS OUT OF WHICH ONLY RS. 9.43 LACS IS OUTSTANDING FOR MORE THAN THREE YEARS. DUE TO THE ABOVE FACT, WE HA VE NOT WRITTEN BACK THE ITA NO.3814/AHD/2007 A.Y. 2004-05 ACIT GNG V. MULTIMEDIA FRONTIERS LTD. PAGE 4 LIABILITIES. WE ARE ENCLOSING HEREWITH THE LIST OF CREDITORS OUTSTANDING FOR MORE THAN THREE YEARS FOR YOUR PERUSAL. THE ASSESSING OFFICER HAS NOT BELIEVED THE EXPLANAT ION OF THE ASSESSEE DISALLOWED THE CREDITORS TREATING THE SAME AS CESSATION OF LIA BILITY VIDE PARA-4.2 OF HIS ASSESSMENT ORDER:- 4.2 IT IS SEEN THAT THE ASSESSEE IS REGULARLY WRIT ING OFF SUNDRY DEBTORS OUTSTANDING FOR LONG PERIODS. HOWEVER, THE ASSESSEE IS NOT WRITING OFF SUNDRY CREDITORS WHO NEED NOT BE PAID OR ARE NO MORE EXIST ENT. AS PER THE ABOVE LIST, ALL THE SUPPLIERS HAVE OUTSTANDING AMOUNTS FOR MORE THAN THREE YEARS AND WITH WHOM NO TRANSACTION HAS BEEN CONDUCTED WITH THEM AR E OF SUCH CATEGORY. THIS ONLY GOES TO SHOW THAT THE SUNDRY CREDITORS NE ED NOT BE PAID OR ARE NOT TRACEABLE. SINCE THE ASSESSEE HAS WRITTEN OFF SUNDR Y DEBTORS SIMILAR WRITE OFF SHOULD BE MADE FOR SUNDRY CREDITORS ALSO. IN VIEW O F THE SAME, THE SUNDRY CREDITORS OUTSTANDING FOR MORE THAN THREE YEARS WIT H WHOM NO FURTHER TRANSACTION HAS BEEN CONDUCTED OR ARE NOT TRACEABLE ARE DISALLOWED TREATING THEM AS CESSATION OF LIABILITY. THE DISALLOWANCE CO MES TO RS.9,43,217/-. 8. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT( A). THE CIT(A) DELETED THE ADDITION BY GIVING FOLLOWING FINDING IN PARA-3.2 OF HIS APPELLATE ORDER:- 3.2 THE FACTS OF THE CASE AND THE SUBMISSIONS HAVE BEEN CONSIDERED. ASSESSING OFFICER DID NOT CONSIDER THE EXPLANATION FURNISHED BY THE APPELLANT AS PER LETTER DATED 13/12/2006. IT WAS POINTED OUT THAT CERTAIN CREDIT BALANCES AS PER COMPANYS ASSESSMENT HAD ALREADY WRITTEN OFF . THE REMAINING CREDITORS COULD NOT HAVE BEEN WRITTEN OFF AS THE CO MPANY WAS STILL LIABLE TO DISCHARGE SUCH LIABILITIES. SINCE THERE WAS NO MATE RIAL TO SUGGEST THAT THE LIABILITIES HAD CEASED TO EXIST, THE ASSESSING OFFI CER WAS INCORRECT IN TREATING THE LIABILITIES AS INCOME. THE ADDITION IS DIRECTED TO BE DELETED. 9. WE FIND FROM THE ABOVE FACTS THAT THE ASSESSEE H AS NOT WRITTEN OFF THE LIABILITIES AND THOSE ARE OUTSTANDING IN THE BOOKS OF ACCOUNT. WE FIND THAT THERE IS NO MATERIAL WITH THE REVENUE WHICH SUGGESTS THAT THE L IABILITIES HAD SEIZED TO EXIST. ONCE THE LIABILITY IS OUTSTANDING, THE CESSATION OF LIABILITY U/S.41(1) OF THE ACT CANNOT BE INVOKED. ACCORDINGLY, WE CONFIRM THE FINDINGS O F CIT(A) ON THIS ISSUE. 10. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED ON THIS DAY OF 9 TH JULY,2010 SD/- SD/- ( G.D.AGARWAL ) ( MAHAVIR SINGH ) (VICE PRESIDENT) (JUDICIAL MEMBER) AHMEDABAD, DATED : 09/07/2010 ITA NO.3814/AHD/2007 A.Y. 2004-05 ACIT GNG V. MULTIMEDIA FRONTIERS LTD. PAGE 5 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD