2012 (4) TMI 643 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of royalty expense.
2. Disallowance of foreign travel expenses.
3. Disallowance of various other expenses.

Summary:

1. Disallowance of Royalty Expense:
The primary issue was whether the CIT(A) was correct in deleting the disallowance of royalty expenses made by the AO. The AO had disallowed the royalty expenses on the grounds that the assessee did not furnish evidence or the name of the concern to whom the royalty was paid. The CIT(A) allowed the claim, stating that the royalty payment was for the right to use trademarks and know-how for a limited period, and thus, no asset of enduring nature was acquired. This decision was supported by previous rulings from the Hon'ble High Court and ITAT in similar cases involving the same group companies. The Tribunal upheld the CIT(A)'s findings, noting that the ownership rights of the trademark and know-how vested with G4F, and the royalty payment was based on net sales, not a lump sum, making it a revenue expenditure u/s 37(1) of the Act.

2. Disallowance of Foreign Travel Expenses:
The AO disallowed Rs. 5,00,000/- on account of foreign travel expenses due to the lack of details and purpose of the visits. The CIT(A) deleted the disallowance, noting that the actual foreign travel expenditure was Rs. 2,37,648/- and the AO made an ad hoc addition without basis. However, the Tribunal found that the assessee did not furnish necessary details or evidence of the purpose of the visits, and thus, the CIT(A)'s order was not well reasoned. The Tribunal set aside the CIT(A)'s order and remanded the matter for reconsideration, directing the CIT(A) to pass a speaking order after allowing sufficient opportunity to both parties.

3. Disallowance of Various Other Expenses:
The AO disallowed Rs. 2,00,000/- on account of repair and maintenance and legal and professional charges, citing disproportionate expenditure compared to the previous year. The CIT(A) deleted the disallowance, stating that only a small portion of the expenses was paid in cash and the AO's general statement was not substantiated. The Tribunal upheld the CIT(A)'s findings, noting that the AO did not point out any specific item of expenditure that was not incurred wholly and exclusively for business purposes.

Conclusion:
The appeals of the Revenue for the AY 2008-09 were dismissed, while the appeal for the AY 2007-08 was partly allowed for statistical purposes. The Tribunal directed the CIT(A) to reconsider the disallowance of foreign travel expenses and pass a detailed order.