2012 (11) TMI 384 - AT - Income Tax

Applicability of Section 263 condition payment of royalty capital or revenue Held that - If royalty has been paid on turnover basis, the same will be treated as revenue expenditure - royalty in the present case is based on turnover - Tribunal has clearly given the direction that if royalty has been paid on turnover basis, the same will be treated as revenue expenditure. Since the fact that royalty is paid on turnover basis is not disputed by the Assessing Officer in the order dated 30th December, 2009, issue is covered in favour of the assessee - payment of royalty by the assessee has to be considered in field of revenue - CIT has wrongly exercised his power u/s 263 and his order is liable to be quashed and is accordingly quashed in favor of assessee

Issues Involved:
1. Legality of the CIT's order revising the assessment order.
2. Classification of royalty payment as capital or revenue expenditure.
3. Applicability of the principle of res judicata in income-tax proceedings.
4. Adequacy of inquiries made by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Legality of the CIT's Order Revising the Assessment Order:
The assessee challenged the CIT's order dated 20th March 2009, which revised the assessment order passed by the Assessing Officer (AO) on 27th December 2006 for the Assessment Year 2004-05. The grounds of appeal included that the CIT's order was "grossly erred in law, on facts and in the circumstances of the case" and was beyond the powers granted under Section 263 of the Income Tax Act. The Tribunal found that the CIT's order was not justified as the original assessment order was not erroneous, which is a prerequisite for invoking Section 263.

2. Classification of Royalty Payment as Capital or Revenue Expenditure:
The CIT directed the disallowance of Rs. 194.03 lakhs claimed as running royalty, treating it as capital expenditure based on the Supreme Court's decision in Southern Switchgear Ltd. The assessee argued that the royalty was paid based on sales turnover and did not result in acquiring any asset of enduring nature. The Tribunal noted that the royalty payments were linked to sales and were not lump sum payments. It referred to the Tribunal's decision for Assessment Year 2006-07, which held that if royalty is paid on a turnover basis, it should be treated as revenue expenditure. The Tribunal concluded that the royalty payments in the present case were revenue in nature and should not be disallowed.

3. Applicability of the Principle of Res Judicata in Income-Tax Proceedings:
The CIT argued that the principle of res judicata does not apply to income-tax proceedings, meaning that acceptance of an issue in earlier years does not prevent the revenue from raising the issue in the current year. The Tribunal did not dispute this principle but emphasized that the nature of the royalty payments had been consistent and treated as revenue expenditure in previous years. Therefore, the CIT's revision on this ground was not justified.

4. Adequacy of Inquiries Made by the Assessing Officer:
The CIT held that the AO's failure to disallow the royalty payment without making necessary inquiries rendered the assessment order erroneous and prejudicial to the revenue's interest. The Tribunal noted that the AO had considered the agreements and the nature of royalty payments, which were based on turnover. The Tribunal emphasized that the AO had not disputed the turnover-based nature of the royalty payments in the subsequent order dated 30th December 2009. Therefore, the Tribunal concluded that the AO had made adequate inquiries, and the original assessment order was not erroneous.

Conclusion:
The Tribunal quashed the CIT's order under Section 263, holding that the original assessment order was not erroneous or prejudicial to the revenue's interest. The royalty payments based on turnover were rightly treated as revenue expenditure, and the CIT's revision was unjustified. The appeal filed by the assessee was allowed.

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