2016 (8) TMI 1309 - AT - Income Tax

Nature of expenditure - expenditure to acquire know-how - revenue or capital expenditure - Held that - Referring to direction has been followed by the Tribunal in the AY 2003-04 also. Now, it has been informed by the Ld. Senior Counsel that in pursuance of the Tribunal order, the AO after detailed examination has allowed this expenditure as revenue expenditure. Even in the latest assessment order, no such disallowance has been made. Thus, this issue stands covered in favour of the assessee by the final finding arrived at in the earlier years by the AO and accordingly, we direct the AO that on similar lines, the expenditures aggregating to ₹ 41,68,896/- made to various parties, which has been disputed before us should be allowed as revenue expenditure . Accordingly, ground no.1 to 1.4 is treated as allowed. Disallowance u/s 14A - Held that - So far as enhancement made by the Ld. CIT(A) in the disallowance made under section 14A by invoking Rule 8D, the same is not maintainable, because, now it is settled law by the Hon ble Jurisdictional High Court in Godrej & Boyce Manufacturing Co. Ltd. vs. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT , that Rule 8D is applicable from assessment year 2008-09 and from the earlier years. So far as quantum of disallowance is concerned, it has to be seen that on the facts whether some reasonable disallowance is called for or not. Looking to the facts and circumstances of the case, we find that the Tribunal in the earlier years has upheld the disallowance of 5% of the dividend income, therefore, following the same precedence, we also hold that, disallowance under section 14A should be restricted to 5% of the dividend income. Disallowance of payment on account of registration of patents being capital in nature - Held that - Tribunal in the AY 2000-01 had set aside similar issue to the file of the AO to decide the issue after considering the material on record as well as agreement under the head intellectual property rights . In pursuance of said direction, the AO has allowed the said expenditure as revenue expenditure passed under section 143(3) / 254. Thus, following the earlier years precedence, which is applicable on the facts of the present year also, we direct the AO to allow the same as revenue expenditure in line with earlier years. Disallowance of travelling and motor car expenses by treating the same for non-business and personal in nature - Held that - We find that, assessee is a corporate entity and the expenditure debited are in the nature of travelling and motor car expenses which are, admittedly for the employees of the assessee company. Once the expenditure are incurred by the employees then, so far as company is concerned, it cannot be held that it is in personal in nature or non-business-purpose. Thus, we do not find any merit in any such ad-hoc disallowance on such ground. The AO is accordingly is directed to delete the said disallowance. Disallowance being 10% of the expenditure incurred on printing and stationery, business meetings and conferences etc - non business purposes - Held that - We find no reason to upheld such ad-hoc disallowance, firstly, expenditure on printing, stationery, on business meetings /conferences and for selection and training of employees cannot be held for non-business purpose, especially for the company like assessee nor it can be held that, they do not have any nexus with the business of the assessee. These are routine and regular business expenditure in a corporate setup, who are carrying out full-fledged business activities; secondly, what is absence of nexus between the expenses and the business has not been specified by the AO, therefore, on this reasoning such disallowance cannot be upheld. Accordingly, we direct the AO to delete the ad-hoc disallowance

Issues Involved:
1. Classification of payments for collaborative projects as capital or revenue expenditure.
2. Disallowance under section 14A of the Income-tax Act.
3. Classification of payment for registration of patents as capital or revenue expenditure.
4. Disallowance of traveling and motor car expenses as non-business or personal in nature.
5. Ad-hoc disallowance of expenses on printing, stationery, business meetings, and training.

Detailed Analysis:

1. Classification of Payments for Collaborative Projects:

The first issue revolves around whether payments made for collaborative projects should be classified as capital expenditure or revenue expenditure. The assessee argued that these payments were made for research services in the normal course of business and should be deductible as revenue expenditure under section 37(1). The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] classified these payments as capital expenditure, citing previous assessments where similar payments were treated as acquiring know-how, an intangible asset, and thus capital in nature. The Tribunal, however, noted that in earlier years, the AO had allowed these expenditures as revenue expenditure following a detailed examination. Consequently, the Tribunal directed the AO to allow the disputed expenditures of ?41,68,896/- as revenue expenditure, aligning with the decisions in earlier years.

2. Disallowance Under Section 14A:

The second issue concerns the disallowance of ?3,50,000 under section 14A related to tax-free dividend income. The AO made an ad-hoc disallowance of 10% of the dividend income due to the lack of separate accounts for dividend income and relatable expenditure details. The CIT(A) enhanced this disallowance to ?12,93,000 by applying Rule 8D, relying on the Special Bench decision in Daga Capital Management Pvt Ltd. The Tribunal, referencing the jurisdictional High Court's decision in Godrej & Boyce Manufacturing Co. Ltd. vs. CIT, ruled that Rule 8D is applicable from the assessment year 2008-09 onwards. For the quantum of disallowance, the Tribunal followed the precedent of 5% of the dividend income as reasonable, thus restricting the disallowance to 5%.

3. Classification of Payment for Registration of Patents:

The third issue pertains to the classification of ?27,33,325/- spent on patent registration as capital expenditure. The assessee argued that these expenses were recovered from Unilever with a markup, thus should be treated as revenue expenditure. The AO and CIT(A) classified these expenses as capital expenditure but allowed depreciation. The Tribunal noted that in earlier years, similar issues were set aside for fresh examination, and the AO eventually allowed them as revenue expenditure. Following this precedent, the Tribunal directed the AO to treat the patent registration expenses as revenue expenditure.

4. Disallowance of Traveling and Motor Car Expenses:

The fourth issue involves the disallowance of ?9,44,174/- for traveling and motor car expenses, deemed non-business or personal by the AO due to the lack of specific purpose and logbook maintenance. The CIT(A) upheld this disallowance. The Tribunal, however, noted that these expenses were incurred by employees and thus should not be considered personal or non-business for the company. The Tribunal directed the AO to delete this disallowance.

5. Ad-hoc Disallowance of Expenses on Printing, Stationery, Business Meetings, and Training:

The fifth issue concerns the ad-hoc disallowance of ?2,49,100/- for expenses on printing, stationery, business meetings, and training. The AO made this disallowance due to the lack of detailed purpose and business nexus. The CIT(A) upheld this disallowance. The Tribunal found no merit in such ad-hoc disallowance, noting that these are routine business expenses in a corporate setup and directed the AO to delete the disallowance.

Conclusion:

Both appeals of the assessee were partly allowed, with the Tribunal directing the AO to treat collaborative project payments and patent registration expenses as revenue expenditure, restrict disallowance under section 14A to 5% of dividend income, and delete the ad-hoc disallowances for traveling, motor car, and other business expenses.

← Previous Next →