2016 (5) TMI 1340 - AT - Income Tax

Disallowance of royalty expenditure - Held that - Referring to assessee s submission since the above stated product Hercon and Impress were newly added products and that it was a commercial decision of the assessee company to sell the said products on no profit basis so as to attract more customers. It has also been submitted that in the subsequent assessment year 2011-12 the parent company i.e. M/s. Hercules INC USA has waived off the entire royalty payable by the assessee and that the assessee has not paid any royalty to the parent company and the entire amount has been offered to tax by the assessee company for A.Y. 2011- 12. It has therefore been contended that the disallowance made for the assessment year under consideration would result in double taxation of the same income. Considering the above contentions we do not find any infirmity in the order of the Ld. CIT(A) while deleting the disallowance of royalty expenditure. The appeal of the Revenue is therefore dismissed. - Decided in favour of the assessee Disallowance on account of travelling expenses made on adhoc basis at the rate of 15% - Held that - The assessee had claimed the travelling expenses incurred for business purpose of the assessee which were covered by clause 9.6 of the agreement of the assessee with CBC Ltd. Respectively following the findings of the Tribunal given in the own case of the assessee in the earlier assessment year we delete the adhoc disallowance made by the lower authorities on account of travelling expenses of the employees. This ground is accordingly decided in favour of the assessee. Addition under section 69C - Held that - The assessee has specifically pleaded that it has not made any payment except 54, 70, 621/- through multiple payments to the American Express Bank which fact has also been confirmed by the said bank. Under such circumstances the burden shifts upon the AO to prove that the assessee has made payments in excess of what has been claimed by the assessee as the assessee is not supposed to prove the negative. Since there is no other evidence available of any such payments made by the assessee except the AIR information alone hence in our view the additions solely on the basis of AIR information are not sustainable in the eyes of law. This ground of the assessee s appeal is therefore allowed and the additions confirmed by the Ld. CIT(A) in relation to the above issue are hereby ordered to be deleted.

Summary

Issues Involved:
1. Disallowance of royalty expenditure.
2. Disallowance of travelling expenses.
3. Addition under section 69C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Royalty Expenditure:
The Assessing Officer (AO) disallowed ?23,66,000/- of royalty expenditure claimed by the assessee, arguing that the royalty expenses debited were higher than the 5% rate agreed upon with the parent company, M/s. Hercules INC, USA. The assessee contended that an amended agreement with Connell Brothers Company (India) Pvt. Ltd. (CBC Ltd.) specified different royalty rates for different products (5% for 'Hercon and Impress' and 14% for others). The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's explanation and deleted the disallowance, noting that the amended agreement was valid and that the AO should not question the business decision of the assessee. The ITAT upheld the CIT(A)'s decision, finding no infirmity in the deletion of the disallowance.

2. Disallowance of Travelling Expenses:
The AO disallowed 50% of the travelling expenses amounting to ?29,74,525/- on an ad-hoc basis, citing insufficient details and a clause in the agreement with CBC Ltd. that required CBC Ltd. to bear all sales-related expenses. The CIT(A) confirmed this disallowance. However, the ITAT referenced a previous Tribunal decision for the assessment year 2007-08, which had deleted a similar disallowance. The ITAT found that the travelling expenses were covered under clause 9.6 of the agreement, which allowed the assessee to incur such expenses to promote CBC Ltd.'s business. Consequently, the ITAT deleted the adhoc disallowance of travelling expenses.

3. Addition under Section 69C of the Income Tax Act:
The AO added ?60,98,920/- as unexplained expenditure under section 69C based on AIR information, which included payments to American Express Bank that the assessee denied making. During remand proceedings, the assessee provided confirmations and bank statements showing multiple payments totaling ?54,70,220/- for travelling expenses. The AO accepted this but recommended confirming the disallowance of the remaining ?6,28,700/-. The CIT(A) upheld this recommendation. The ITAT, however, found that the addition based solely on AIR information without supporting evidence was unsustainable. It referenced previous Tribunal decisions stating that additions cannot be made merely on AIR information. The ITAT deleted the addition of ?6,28,700/- under section 69C.

Conclusion:
The ITAT dismissed the Revenue's appeal and allowed the assessee's appeal, thereby deleting the disallowances of royalty expenditure and travelling expenses and the addition under section 69C. The judgments were delivered collectively without specifying individual judges.