2008 (12) TMI 771 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition on account of undisclosed sales of defective shoes.
2. Deletion of disallowance by restricting the claim for depreciation on lasts and moulds.
3. Treatment of royalty paid to Nike International Ltd. as capital expenditure.

Summary:

Issue 1: Deletion of Addition on Account of Undisclosed Sales of Defective Shoes

The Revenue challenged the deletion of Rs. 43,24,615/- made by the AO on account of undisclosed sales of defective shoes. The Tribunal noted that an identical issue had been previously considered in the case of the same assessee, where it was restored to the AO for re-examination. The Tribunal emphasized that the AO had not justified the valuation of defective goods at a 30% or 40% discount and that the entire defective material worth Rs. 31 lacs being destroyed was unconvincing. The Tribunal, following its earlier decisions, set aside the CIT(A)'s order and restored the issue to the AO for fresh decision, allowing Ground No. 1 for statistical purposes.

Issue 2: Deletion of Disallowance by Restricting the Claim for Depreciation on Lasts and Moulds

The Revenue contested the deletion of Rs. 8,12,110/- disallowed by the AO by restricting the depreciation claim on lasts and moulds from 40% to 25%. The Tribunal observed that the issue had been previously decided in favor of the assessee for AY 2003-04, where it was established that the moulds and lasts were used for manufacturing Nike footwear, thus qualifying for a higher depreciation rate. The Tribunal upheld the CIT(A)'s order, dismissing Ground No. 2 of the Revenue's appeal.

Issue 3: Treatment of Royalty Paid to Nike International Ltd. as Capital Expenditure

The Revenue disputed the deletion of Rs. 90,62,600/- added by the AO by treating the royalty paid to Nike International Ltd. as capital expenditure. The AO had argued that the royalty was for the use of technical know-how, thus qualifying as capital expenditure. However, the CIT(A) found that the royalty was a revenue expenditure, as it was related to the sales of Nike products during the relevant year and did not provide any enduring advantage to the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the findings were well-reasoned and not effectively countered by the Revenue. Ground No. 3 of the Revenue's appeal was rejected.

Conclusion:

The appeal filed by the Revenue was partly allowed for statistical purposes, with the Tribunal restoring the issue of undisclosed sales of defective shoes to the AO for fresh consideration, while upholding the CIT(A)'s decisions on the depreciation claim and the treatment of royalty expenditure.

Order pronounced in the Open Court on 18.12.2008.