2012 (9) TMI 973 - AT - Income Tax

Disallowance of interest u/s. 36(1)(iii) - Held that - It is not disputed that the assessee firm has a total capital of 212 crores. It is also an undisputed fact that for the year under consideration the net profit available for appropriation was to the tune of 30.41 crores whereas the amount given as interest free loan is only to the tune of 21.95 crores. In our considerate view the ratio laid down by the Hon ble Jurisdictional High Court in the case of Reliance Utilities & Power Ltd., (2009 (1) TMI 4 - BOMBAY HIGH COURT) squarely apply on the facts of the case. We therefore reverse the findings of the Ld. CIT(A) and direct the AO to delete the addition Disallowance of expenses as Brand Development expenses and professional fees for Brand Development - Held that - We find that the assessee has not created any tangible or intangible assets of enduring nature by incurring such Brand development expenses. In our considerate view such expense is an integral part of the profit earning process of the assessee firm and not for an acquisition of an asset or a right of permanent in nature. Respectfully following the ratio laid down by the Hon ble Supreme Court in the case of Empire Jute Co. (1980 (5) TMI 1 - SUPREME Court) the Brand development expenses incurred by the assessee firm are revenue in nature therefore we direct the AO to allow the same

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii) of the Act.
2. Disallowance of Brand Development expenses and professional fees.

Analysis:
1. The appellant challenged the disallowance of interest amounting to &8377; 18,26,075 under section 36(1)(iii) of the Act. The Assessing Officer (AO) observed interest-free loans given by the appellant and disallowed the proportionate interest. The AO concluded that the loans were not related to the business of the appellant. The Ld. CIT(A) upheld the AO's decision. However, the appellant argued that the loans were given out of its own capital and net profit, citing the decision in a similar case by the Tribunal. The ITAT reversed the decision, considering the appellant's capital and net profit, directing the AO to delete the addition of interest.

2. The second issue involved the disallowance of Brand Development expenses and professional fees. The AO disallowed &8377; 8,06,509 as Brand Development expenses and &8377; 4,47,732 as professional fees, treating them as capital expenses. The Ld. CIT(A) upheld the disallowance. The appellant contended that these expenses were revenue in nature, citing precedents. The ITAT agreed with the appellant, stating that the expenses were part of the profit-earning process and not for acquiring enduring assets. Relying on Supreme Court decisions, the ITAT directed the AO to allow the expenses as revenue expenditure.

In conclusion, the ITAT allowed the appeal filed by the assessee, reversing the disallowances made by the lower authorities.