2011 (10) TMI 656 - AT - Income Tax

Allowance of royalty expenses as revenue expenditure - disallowance u/s 14A - disallowance being provision to exgratia - MAT computation

Issues Involved:
1. Treatment of royalty expenses as revenue or capital expenditure.
2. Applicability and extent of disallowance under Section 14A.
3. Allowability of provision for ex-gratia payments.
4. Disallowance of diminution in value of investments.
5. Verification of claims regarding amounts credited to P&L account.
6. Allowability of provision for derivative contracts.
7. Deduction of amounts transferred to Statutory Reserve under RBI Act.
8. Allowability of bad debts written off.
9. Computation of income under Section 115JB.

Detailed Analysis:

1. Treatment of Royalty Expenses:
The Tribunal upheld the CIT(A)'s decision to treat Rs. 79,24,250/- paid as royalty to Shriram Chits & Investments Pvt. Ltd. for using its logo as revenue expenditure. The CIT(A) relied on the Tribunal's earlier order and the Supreme Court decision in CIT vs Wavin (India) Ltd, which clarified that non-exclusive and non-transferable rights of technical information do not constitute acquisition of an asset. The Supreme Court's decision in M/s Jonas Woodhead & Sons (India) Ltd vs CIT was deemed distinguishable due to different facts. Consequently, the appeal on this issue was dismissed.

2. Applicability and Extent of Disallowance under Section 14A:
The CIT(A) restricted the disallowance under Section 14A to Rs. 4,23,548/- from Rs. 6,23,548/- disallowed by the AO, based on the Bombay High Court's ruling in Godrej Boyce Mfg Co, which stated that Rule 8D is applicable from AY 2008-09 onwards. The Tribunal upheld this decision, noting no contrary decision from the Jurisdictional High Court or Supreme Court. The cross-objection by the assessee was allowed to the extent of correcting the disallowance to Rs. 3,73,548/-.

3. Allowability of Provision for Ex-Gratia Payments:
The Tribunal agreed with the CIT(A) that the provision for ex-gratia payments amounting to Rs. 3,38,948/- was an ascertained liability and allowable under Section 37 of the Act. This decision was supported by the Supreme Court ruling in Rotork Controls India P. Ltd vs CIT, which allowed provisions for warranty claims. The appeal on this issue was dismissed.

4. Disallowance of Diminution in Value of Investments:
The CIT(A) restricted the disallowance to Rs. 9,36,400/- from Rs. 15,56,535/- claimed by the assessee. The Tribunal found that government securities held to comply with SLR requirements were to be treated as stock-in-trade, following the Supreme Court's decision in UCO Bank and Chainrup Sampathram. The remaining amount was disallowed as it did not qualify as stock-in-trade.

5. Verification of Claims Regarding Amounts Credited to P&L Account:
The CIT(A) directed the AO to verify the assessee's claim that Rs. 1,69,96,159/- credited to the P&L account was already taxed in earlier years. The Tribunal upheld this direction, citing the Delhi High Court's decision in CIT vs Industrial Finance Corporation of India Ltd, which allowed such claims. The Supreme Court's decision in Goetz (India) Ltd vs CIT was noted to apply only to the AO, not the Tribunal.

6. Allowability of Provision for Derivative Contracts:
The Tribunal upheld the CIT(A)'s decision to allow Rs. 15,02,237/- as provision for derivative contracts, considering them as hedge transactions and revenue loss. The Delhi High Court's decision in CIT vs Industrial Finance Corporation of India Ltd supported this view. The Tribunal rejected the Revenue's reliance on Goetz (India) Ltd vs CIT, noting the CBDT Circular No.14XL-35 of 1955, which mandates assisting taxpayers in claiming due reliefs.

7. Deduction of Amounts Transferred to Statutory Reserve under RBI Act:
The Tribunal followed its earlier orders in the assessee's own cases, allowing the deduction of amounts transferred to the Statutory Reserve under Section 45 IC of the RBI Act. The CIT(A)'s disallowance was reversed, noting that the transfer was mandatory and not an application of income.

8. Allowability of Bad Debts Written Off:
The Tribunal allowed the assessee's claim for bad debts written off, citing the Supreme Court's decisions in Vijaya Bank vs CIT and TRF Ltd vs CIT, which clarified that actual write-off in the books suffices for deduction under Section 36(1)(vii). The CIT(A)'s disallowance was reversed.

9. Computation of Income under Section 115JB:
The Tribunal allowed the assessee's claim for deduction of amounts transferred to the Reserve Fund under Section 115JB, following its earlier orders in the assessee's own cases. The CIT(A)'s disallowance was reversed, noting that the amounts did not form part of the real income.

Conclusion:
The appeals by the Revenue were dismissed, and the cross-objections and appeals by the assessees were allowed. The Tribunal's decisions were based on established precedents and legal principles, ensuring compliance with judicial rulings and statutory provisions.

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