2010 (5) TMI 532 - AT - Income Tax

Addition of income - AO noted that assessee company has paid royalty of Rs. 8,22,773/- @ 3% of the net value of the electrical yarn cleaner & classikin - There was an agreement between Shri Rajan Patwa and RJK Industries to allow PKE to exploit the device commercially on payment of royalty - The ld. AR submitted that in the past no disallowance of royalty paid has been made - Ld. DR in rejoinder submitted that merely maintenance or development or upgradation of technology used by an assessee company cannot be made equivalent to a patent or any intellectual property right entitling the assessee company to make the payment of royalty The claim of royalty as such cannot be allowed except to the extent of maximum permissible remuneration Disallowance of 1/3 motor car and depreciation expenses & telephone expenses On the basis of the decision in ITA No.55/Ahd/2002 for Asst. Year 1997-98 - In the result, appeal of Revenue is allowed for statistical purposes and the appeals of assessee are partly allowed for statistical purposes

Summary

Issues Involved:
1. Disallowance of royalty expenses under Section 40(A)(2).
2. Reopening of assessment under Section 147.
3. Disallowance of motor car expenses and depreciation.
4. Disallowance of telephone expenses.

Detailed Analysis:

1. Disallowance of Royalty Expenses under Section 40(A)(2):

The main issue across the appeals was the disallowance of royalty expenses paid to Mr. Rajan Patwa. The Revenue argued that the royalty payments were unjustified and unreasonable, as Mr. Patwa was not the patent holder and the patent had expired. The CIT(A) had previously allowed the royalty claim, considering the contractual obligation and the valuable services provided by Mr. Patwa. However, the Tribunal noted that the patent had expired, and thus, Mr. Patwa no longer held exclusive rights over the invention. Consequently, the payments could not be considered as royalty but could be treated as remuneration for technical services rendered by Mr. Patwa as Managing Director. The Tribunal directed the AO to calculate the allowable remuneration under the Companies Act and allow the claim to that extent.

2. Reopening of Assessment under Section 147:

In ITA No.934/Ahd/2006 for the Asst. Year 1998-99, the assessee challenged the reopening of the assessment. However, this ground was not pressed by the assessee and was dismissed as not pressed.

3. Disallowance of Motor Car Expenses and Depreciation:

The assessee contested the disallowance of 1/3 motor car expenses and depreciation. The Tribunal allowed this ground in favor of the assessee, following its earlier decision in ITA No.55/A/02 for the Asst. Year 1997-98.

4. Disallowance of Telephone Expenses:

The assessee also contested the disallowance of Rs.13,600/- out of telephone expenses. The Tribunal allowed this ground in favor of the assessee, following its earlier decision in ITA No.55/A/02 for the Asst. Year 1997-98.

Conclusion:

The Tribunal allowed the Revenue's appeal for statistical purposes and partly allowed the assessee's appeals for statistical purposes. The AO was directed to re-examine the royalty payments as remuneration and allow the claim to the extent permissible under the Companies Act. The disallowances of motor car expenses, depreciation, and telephone expenses were decided in favor of the assessee.