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 Rs. 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 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 Rs. 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 Rs. 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 Rs. 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 Rs. 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 Rs. 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 Rs. 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.

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