2013 (5) TMI 192 - AT - Income Tax

Royalty Expenses Accrual - matching principle - Only a part of the income was accounted for during the year on the ground that the fee in question relates to two Financial years. Similarly on matching principle, a part of the expense was accounted for proportionately during the year. The assessee paid royalty to its holding company M/s HITJEE @ 20% of the fee received. However as far as expenses on account of royalty is concerned, the entire amount was claimed during the current year itself without apportioning the same in two years. - according to the assessee the royalty @ 20% of the gross course fee received was paid to the licensor, as per the terms of the agreement and that as per the agreement, royalty becomes due as soon as a student is enrolled Held that - In our considered opinion, First Appellate Authority has rightly applied the ratio of this judgement of the Jurisdictional High Court in CIT vs. Citi Financial Consumer Finance Ltd. 2011 (3) TMI 622 to the facts of this case. The First Appellate Authority also noted that in the subsequent AY i.e. 2008-09, no disallowance has been made. Thus even on the ground of consistency, we agree with the Ld.CIT(A). Hence we uphold the order of the CIT(A) - Decided against the revenue.

Summary

Issues:
1. Addition of royalty on unaccounted receipts
2. Linkage of royalty payment with income spreading over

Issue 1: Addition of royalty on unaccounted receipts

The appeal filed by the Revenue challenged the deletion of an addition of Rs.80,87,520 on account of royalty on unaccounted receipts for the Assessment Year 2007-08. The assessee received fees from students enrolled in a two-year program, accounting for only a part of the income during the year due to the fee spanning two financial years. The assessee paid royalty to its holding company at 20% of the fee received, claiming the entire amount as an expense in the current year without apportioning it over two years. The AO disallowed the royalty expenses, contending that it should be spread over two years as per the accounting policy. The First Appellate Authority upheld the claim of the assessee based on the License agreement clauses and the decision of the Delhi High Court in a similar case. The agreement stated that royalty becomes due upon student enrollment, irrespective of fee realization, which was the basis for the Authority's decision. The ITAT concurred with the Authority's findings, citing relevant case laws and upheld the order, dismissing the Revenue's appeal.

Issue 2: Linkage of royalty payment with income spreading over

The second issue revolved around the linkage of royalty payment with the spreading over of income received from student fees. The AO contended that the royalty expenses should be disallowed in proportion to the income spread over two years. However, the assessee argued that royalty was due upon student enrollment as per the agreement terms, regardless of fee realization or accrual. The First Appellate Authority analyzed the License agreement clauses and previous court decisions, concluding that the royalty payment was linked to student enrollment and fee chargeable, not to income offered in the profit and loss account. The ITAT supported this view, emphasizing the nexus between expenditure and business operations, allowing the entire expenditure in the year it was incurred. The ITAT upheld the Authority's decision based on consistency and relevant legal precedents, dismissing the Revenue's appeal.

In conclusion, the ITAT upheld the First Appellate Authority's decision in both issues, emphasizing the contractual terms, legal precedents, and the nexus between expenditure and business activities. The appeal filed by the Revenue was dismissed, affirming the deletion of the addition of royalty on unaccounted receipts and the linkage of royalty payment with income spreading over.