DCIT, New Delhi V. Sh. Arvind Kumar Tusele, Uttar Pradesh

ITA 834/DEL/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4243 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 11-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS ANUSHA KHURANA
• Keywords: Depreciation; Royalty expenses; Capital expenditure
• Section: 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : A NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT AND SHRI RAJPAL YADAV, JUDICIAL MEMBER I.T.A NO. 834/DEL/11 ASSTT. YEAR : 2005-06 DCIT, CENTRAL CIRCLE 23, ROOM NO. 359, E-2, ARA CENTRE, JHANDEWALAN EXTN., NEW DELHI. VS. ARVIND KUMAR TUSELE, G-22, PANKI INDUSTRIAL AREA, SITE-1, KANPUR, UTTAR PRADESH ABQPT9607F (APPELLANT) (RESPONDENT) APPELLANT BY: MRS. ANUSHA KHURANA, SR. DR RESPONDENT BY: NONE ORDER PER RAJPAL YADAV : JM THE REVENUE IS IN APPEAL BEFORE US AGAINST THE ORD ER OF LD. CIT(A) DATED 20 TH SEPTEMBER, 2010 PASSED FOR ASSTT. YEAR 2005-06. IN THE SOLITARY GROUND OF APPEAL, IT IS PLEADED BY THE REV ENUE THAT LD. CIT (A) HAS ERRED IN DELETING THE DISALLOWANCE OF ` 20,29,753/-. 2. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HA S FILED HIS RETURN OF INCOME ON 29.10.2005 DECLARING TOTAL INCOME OF ` 6,83,246/-. THE RETURN ITA NO. 834/DEL/11 ASSTT. YEAR 2005-06 2 WAS PROCESSED U/S 143(1) OF THE INCOME TAX ACT. THE AO HAS REOPENED THE ASSESSMENT BY ISSUANCE OF A NOTICE U/S 148 ON 2 5 TH MARCH, 2008. HE WAS OF THE VIEW THAT ASSESSEE HAD CLAIMED DEDUCTION OF ` 20,29,753/-, AS ROYALTY EXPENSES. THIS AMOUNT IS OF A CAPITAL NA TURE WHICH IS NOT ALLOWABLE TO THE ASSESSEE. ON THE BASIS OF THIS OPI NION, HE REOPENED THE ASSESSMENT. THE AO HAS SUPPLIED THE REASONS TO THE ASSESSEE. THE ASSESSEE FILED OBJECTION. HE HAS REJECTED THOSE OBJ ECTIONS. HE DISALLOWED THE CLAIM OF ASSESSEE BY OBSERVING AS UN DER:- IN VIEW OF THE HONBLE KERALA HIGH COURTS DECISIO N IN THE CASE OF CIT VS POLYFORMALIN (P) LTD. (1986) 61 ITR 36 WHERE IT WAS HELD THAT PAYMENT OF ROYALTY ON TRANSFER OF TECHNICAL KNOW-HOW AND RIGHT TO USE THE TRADE MARK WAS A CAPITAL EXPENDITURE AND ALSO IN THE CASE OF RAM K UMAR PHARMACEUTICAL WORKS VS CIT (1979) 119 ITR 33 WHEREIN HONBLE HIGH COURT HAD HELD THAT AN ACQUIRED OWNERSHIP OF KNOW-HOW AND DATE FOR USE BY IT IN FUTURE WITHOUT ANY LIMIT OF TIME. PAYMENT FOR MUCH KNOW-HOW WAS TO BE TREATED AS CAPITAL EXPENDITURE. THE ASSESSEE VIDE NOTE SHEET ENTRY DATED 31.10.08 W AS ASKED TO EXPLAIN AS TO WHY THE ROYALTY PAYMENT OF RS. 20,29, 753/- MAY NOT BE TREATED AS CAPITAL EXPENDITURE . 3. THE ASSESSEE VIDE HIS REPLY HAD SUBMITTE D THE FOLLOWING FACTS REGARDING THE PAYMENT OF ROYALTY. 1) THE ROYALTY WAS NOT PAID IN LUMP-SUM 2) THE ROYALTY WAS NOT PAID ONCE AND FOR ALL 3) THE OWNERSHIP OF TRADE MARKS AT ALL POINTS OF TI ME REMAINED WITH SHRI Y.C. KURELE AND NEVER BECAME THE PROPERTY OF T HE ASSESSEE 4) THE ROYALTY WAS DIRECTLY RELATED WITH AND DEPEND ENT UPON THE SALE OF FINISHED STOCK I.E. GUTKHA. 5) THE PAYMENT OF ROYALTY WAS NOT TO OBTAIN RIGHT OF ENDURING NATURE 6) THE PAYMENT OF ROYALTY WAS NOT TO ACQUIRE TECHNI CAL KNOW-HOW, DRAWINGS, DESIGNS, MANUFACTURING PROCESS ETC. 7) THE PAYMENT OF ROYALTY WAS NOT TO ACQUIRE A CAPI TAL ASSETS. THIS IS MERELY FOR PAYMENT OF USE OF TRADE MARK. 8) THE USE OF TRADE MARKS WAS DIRECTLY DEPENDENT AN D RELATED WITH PAYMENT OF ROYALTY. ITA NO. 834/DEL/11 ASSTT. YEAR 2005-06 3 9) ON NON-PAYMENT OF ROYALTY, ASSESSEE COULD NOT US E TRADE MARK. IN HIS SUPPORT ASSESSEE HAD ALSO CITED SOME JUDICI AL DECISIONS OF HONBLE SUPREME COURT THE PROVISIONS OF SECTION 32(1)(II) AND EXPLANATION 3 (B) DESCRIBES THAT INTANGIBLE ASSETS BEING KNOW-HOW, PA TENTS, COPY RIGHTS, TRADE MARKS, LICENSES, FRANCHISES OR ANY OTHER BUSI NESS OR COMMERCIAL RIGHT OF SIMILAR NATURE WOULD BE ASSETS AND DEPRECI ATION AT THE PRESCRIBED RATES WOULD BE ALLOWED. SINCE THE ABOVE PROVISIONS CLEARLY INDICATES THAT THE PAYMENT FOR USE OF TRADE MARK IS A PAYMENT TOWA RDS THE IN TANGIBLE ASSETS AND DEPRECIATION SHOULD BE ALLOWED, THEREFOR E, THE PAYMENT MADE TOWARDS THE USE OF TRADE MARK IS A CAPITAL EXPENDIT URE AND COULD NOT BE DEBITED IN TRADING AND PROFIT & LOSS A/C AS DONE BY THE ASSESSEE. THE PAYMENT OF ROYALTY OF RS. 20,29,733/- IS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE. (ADDITION: 20,29,733/-) 3. LD. CIT (A) HAS ALLOWED THE CLAIM OF ASSESSEE ON THE GROUND THAT SIMILAR ROYALTY PAYMENT WAS MADE IN EARLIER YEARS A ND THE DISALLOWANCE MADE BY THE AO HAS BEEN DELETED BY ITAT. THE LD. FI RST APPELLATE AUTHORITY HAS NOT MADE ANY ELABORATE DISCUSSION IN RESPECT OF THE FACTS. HER OBSERVATION AVAILABLE IN PARAGRAPH 3.1 READ AS UNDER :- 3.1 THE HONBLE ITAT IN THE APPEAL FOR A.Y. 2003- 04 BEING ITA NO. 653(LUCK)/07 VIDE ORDER DATED 07.11.2008, PARA NO. 8 HAVE ALLOWED THE DEDUCTION ON ACCOUNT OF ROYALTY PAYMENT . THE NATURE AND CIRCUMSTANCES OF THE TRADE BEING THE SAM E IN A.Y. 2003-04, 04-05 & A.Y. 05-06, RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS OF THE HONBLE ITAT (IN THE APPELLANTS O WN CASE ON THE SAME ISSUE), I HEREBY DIRECT THE A.O. TO ALLOW THE DEDUCTION ON ACCOUNT OF ROYALTY PAYMENT. 4. WITH THE ASSISTANCE OF LD. DR, WE HAVE GONE THRO UGH THE RECORD CAREFULLY. NEITHER THE AO HAS DISCUSSED THE FACTS N OR LD. CIT(A). HOWEVER, WE FIND STATEMENT OF FACTS FILED BEFORE TH E LD. CIT(A), WHEREIN ASSESSEE HAS DISCLOSED NATURE OF HIS BUSINESS AND H OW HE HAS CLAIMED THE ROYALTY EXPENSES. FROM THE STATEMENT OF FACTS, IT REVEALED THAT ITA NO. 834/DEL/11 ASSTT. YEAR 2005-06 4 ASSESSEE IS MANUFACTURING GUTKHA. HE HAS ENTERED WI TH AN AGREEMENT WITH SHRI YOGENDRA CHANDRA KURELE, WHO WAS HAVING A TRADE MARK (BRAND) OF Y.C. KURELE. THE GUTKHA MANUFACTURED BY THE ASSESSEE HAS BEEN SOLD WITH THAT TRADE MARK. THE ASSESSEE PAID R OYALTY ON THE SALES OF GUTKHA @ 2% OF ASSESSABLE VALUE OF GUTKHA. THE A SSESSEE HAS POINTED OUT BEFORE THE LD. FIRST APPELLATE AUTHORIT Y THAT AO HAS RELIED UPON TWO CASE LAWS REPORTED IN 61 ITR 36 AND 119 IT R 33. THE FACTS IN THESE TWO DECISIONS ARE QUITE DIFFERENT THAN THE FA CTS OF THE ASSESSEES CASE. IN THE CASE OF CIT VS. POLYFORMALIN PRIVATE L IMITED, THERE WAS TRANSFER OF TECHNICAL KNOW-HOW FOR THE PURPOSE OF M ANUFACTURING AND RIGHT TO USE A TRADE MARK. ACCORDING TO THE ASSESSE E IN HIS CASE, HE HAS NOT ACQUIRED ANY TRADE MARK. THE TRADE MARK WAS ONL Y USED. THE ASSESSEE FURTHER REFERRED THE JUDGMENT OF HONBLE S UPREME COURT IN THE CASE OF COMMISSIONER OF INCOME TAX, BOMBAY CIT 1 V. CIBA OR INDIA LTD. 69 ITR 692 WHEREIN ROYALTY PAID FOR USER OF TRADE M ARK WAS ALLOWED TO THE ASSESSEE. 5. WE DO NOT FIND ANY MERIT IN THIS APPEAL FOR TWO REASONS. FIRSTLY, LD. CIT(A) HAS JUST FOLLOWED THE ORDER OF ITAT PASSED I N ASSTT. YEAR 2003-04. THE NATURE AND CIRCUMSTANCES OF THE EXPENSES IN ASS TT. YEAR 2003-04 UPTO 2005-06 IS SIMILAR. THE DEDUCTION HAS BEEN ALL OWED IN THOSE YEARS. THE SECOND REASON IS THAT IN THE ASSTT. ORDER, AO H AS NOT POINTED OUT AS ITA NO. 834/DEL/11 ASSTT. YEAR 2005-06 5 TO HOW THIS EXPENDITURE IS OF IN CAPITAL NATURE. HE HAS JUST REFERRED TWO DECISIONS AND THEN DISALLOWED THE CLAIM AS DISCERNA BLE IN THE FINDING EXTRACTED SUPRA. HE HAS NOT DISCUSSED WHAT IS THE N ATURE OF ASSESSEES BUSINESS, WHAT THE CAPITAL RIGHT HE HAS ACQUIRED ET C. ON THE BASIS OF THIS FINDING, DISALLOWANCE CAN NOT BE MADE. IN VIEW OF T HE ABOVE DISCUSSION, WE DO NOT FIND ANY MERIT IN THIS APPEAL OF REVENUE, IT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST APRIL, 2011. SD/- SD/- [G.E.VEERABHADRAPPA] [RAJPAL YADAV] VICE PRESIDENT JUDICIAL MEMBER DATED: 21.4.2011 VEENA COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT, DELHI BENCHES