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2014 (4) TMI 532 - AT - Income TaxNature of Income Income from PGBP or from other sources - Whether income from receipt of services fee assessable under the head Profits and Gains of Business or to be treated as income from other sources Held that - The decision in Yum Restaurants (India) P. Ltd. Versus Additional Commissioner of Income-tax 2011 (5) TMI 852 - ITAT DELHI followed - the word business is one of wide import and which means an activity carried out continuously and systematically by a person by the application of his labour and skill with a view to earn income - the assessee is receiving the income from parent company i.e. YRI and not making payment to it the AO miserably failed to appreciate the facts and circumstance - The assessee has been offering income from consultancy etc. as a business income - It has duly been accepted by the department since 1998-99 - The AO without assigning any valid reason concluded that it is an income from other sources the First Authority has considered this issue in right perspective Decided against Revenue. Disallowance of Royalty expenses Held that - The decision in Yum Restaurants (India) P. Ltd. Versus Additional Commissioner of Income-tax 2011 (5) TMI 852 - ITAT DELHI followed - The AO has misread the approvals granted by the Govt. of India while arriving at a conclusion that assessee has not been remitting the payment as per the approvals - In the approval SIA has used expression royalty as well as fee for technical services loosely and interchangeably - Apart from all these things, the tax rate for remitting a royalty as well as fee for technical service is 15% plus the research and development cess - The assessee has paid both these amounts while remitting the payment - The expense is directly related to its business - It has been incurred wholly and exclusively for running the franchises within India Decided against Revenue. Deletion on account of administrative expenses Held that - The decision in Yum Restaurants (India) P. Ltd. Versus Additional Commissioner of Income-tax 2011 (5) TMI 852 - ITAT DELHI followed -The CIT(A) deleted the disallowance - YRMPL was incorporated on 8th June, 1999 - It is a 100% owned subsidiary of the assessee - It has been incorporated to carry out advertisement, marketing and promotion activities of the assessee as well as various franchise - The assessee had entered into a tripartite agreement with its franchise and YRMPL - As per this agreement, the franchise shall pay AMP contribution to YRMPL and assessee may not pay a separate contribution - YRMPL was to carry out the activities on no profit no loss basis - The AO has disallowed the expenses which are attributable to YRMPL but in fact, he ought to have not disallowed any such amount because ultimately it is the assessee who has to contribute for all these sums - The assessee can bear the cost of administrative expenses to be incurred by YRMPL or it can separately remitted the amount to YRMPL towards such cost - it is the assessee or its franchise who has to contribute this amount - CIT(A) has rightly deleted the disallowance Decided against Revenue. Disallowance of part depreciation Held that - The decision in Yum Restaurants (India) P. Ltd. Versus Additional Commissioner of Income-tax 2011 (5) TMI 852 - ITAT DELHI followed - The AO has highlighted certain discrepancies in the maintenance of WDV of the assets as well as identification of each asset - There may be some shortcomings but that does not mean that assessee was not having any assets and they were not used for the purpose of business - AO ought to have identified each item and find out how that item is treated in the block of assets, if it is established that those assets were not used for the purpose of the assessee s business then he should make out a care for disallowance of depreciation - By making general observation, he cannot deny the total claim of the depreciation of the assessee - CIT(A) has already directed the AO to give effect outcome of 1999-2000 - The depreciation disallowed in asstt. year 1999- 2000 would be considered for disallowance in this year also Decided against Revenue. Deletion on account of excess provision Provision for marketing expenses made Merchantile system followed - Held that - The decision in Yum Restaurants (India) P. Ltd. Versus Additional Commissioner of Income-tax 2011 (5) TMI 852 - ITAT DELHI followed - CIT(A) rightly held that the assessee has made the provision by keeping in view past experience and the possibility of certain expenses - It has filed the details exhibiting the nature of intending expenses - It is a separate issue that such occasion did not arise to incur those expenses but that does not mean that when provision was made it was not bonafide - If some amount remained unutilized it will be offered for tax in the next asstt. Year Decided against Revenue. Disallowance of software expenses Capital expenses or Revenue Held that - The expenditure of Rs.18,000/- for purchase of coral draw software and Rs.77,400/- for GIS Engine Map Info Software (single user license) were made but it is not clear whether the same was for an upgradation or it was for acquisition of a new software thus, the matter ir remitted back to the AO for fresh adjudication Decided in favour of Revenue. Disallowance of R&D expenses Held that - The decision in Yum Restaurants (India) P. Ltd. Versus Additional Commissioner of Income-tax 2011 (5) TMI 852 - ITAT DELHI followed - In its day to day operations, assessee is experimenting new dishes, where it incurred expenses on food items and spices etc. - On many of occasions, the flavor may not come to the expectation for commercialized use - Thus, these are the routine research work carried out by the assessee and no capital assets came into existence - DRP has erred in treating this amount as a capital expenditure Decided against Revenue. Disallowance u/s 40A(2)(b) of the Act - Lease rent for free accommodation Addition of notional interest Income on account of security deposits - Held that - The decision in Yum Restaurants (India) P. Ltd. Versus Additional Commissioner of Income-tax 2011 (5) TMI 852 - ITAT DELHI followed -The payments have been made to the persons who are covered under sec. 40A(2)(b) of the Act - It could not be understood as to how a house property giving a rent of Rs.20,000 to the original land owner would immediately fetch a rent at Rs.1,50,000 - This much of rent has been given by the assessee after incurring a huge sum of Rs.22,50,000 on repair which gives an indication that if this sum of Rs.22,50,000 was not incurred then it would not fetch this amount of rent - assessee has extended extra benefit to its managing director the AO is directed to allow payment of rent to the extent of Rs.20,000 per month for the accommodation taken on rent for Shri Sandeep Kohli, the balance has to be disallowed - there is no scope for disallowance of notional rent worked out on the basis of interest free security deposits Decided partly in favour of Assessee. Disallowance of expenses Expenses treated as personal in nature Held that - The expenses were personal expenditure incurred on house maintenance and computer maintenance of the employees The assessee has failed to bring out any material to establish that this expenditure was incurred for business purposes of the assessee thus, it cannot be treated as business expenditure of the assessee Decided against Assessee. Disallowance of expenses Expenses treated as capital expenses Held that - The disallowance has been made by treating the expenditure as capital in nature being integral part of the fixed assets - the expenditure incurred was towards the components which are forming integral part of the fixed assets thus, the expenditure cannot be held to be revenue in nature Decided against Assessee. Upholding of prior paid expenses Held that - The expenditure was disallowed on account of non-furnishing documentary evidence to establish that liability to pay for the expenses incurred and crystallized the assessee has also made an alternate prayer that this expenditure may be allowed in the preceding Assessment Years 2003-04 - The CIT (A) has upheld the disallowance of this expenditure in Assessment Year 2004-05 which is the year under consideration and directed to allow the same in Assessment Year 2003-0 - there is no fault in the order of CIT (A) decided against Assessee. Disallowance of settlement claim Held that - The assessee submitted additional evidence before the CIT (A) - The CIT (A) did not admit the evidence and confirmed the finding of the AO that assessee has entered into a sham transaction and the liability has been falsely created - the CIT (A) was not justified in not admitting the additional evidence when assessee submitted certain documents before Assessing Officer and rest of these documents support the case of assessee - The documents were relevant with regard to the expenditure claimed by the assessee in the return of income wherein even the TDS had been deducted thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee. Interest income treated as income from other sources Held that - The decision in Yum Restaurants (India) P. Ltd. Versus Additional Commissioner of Income-tax 2011 (5) TMI 852 - ITAT DELHI followed - The assessee has nowhere indicated as to how this interest income is linked with its business activity - It has simply surplus fund which has been deposited in the bank giving rise to interest income - DRP has rightly treated this income as income from other sources - interest earned on FDR is not limited to the business of assessee - interest on loan to employees is also not related to assessee s business Decided against Assessee.
Issues Involved:
1. Classification of income from receipt of services fee. 2. Disallowance of royalty expenditure. 3. Deletion of addition out of administrative expenses. 4. Disallowance of part depreciation. 5. Deletion of addition on account of excess provision. 6. Disallowance of software expenses by treating them as capital expenditure. 7. Disallowance of R&D expenses. 8. Disallowance of lease rent paid for rent-free accommodation. 9. Addition of notional interest income on account of security deposits. 10. Disallowance of business expenditure held as personal expenditure. 11. Disallowance of business expenditure held as capital expenditure. 12. Disallowance of business expenditure held as prior period expenditure. 13. Disallowance of arbitration award settlement claim. 14. Treatment of interest income as 'income from other sources'. Issue-wise Detailed Analysis: 1. Classification of Income from Receipt of Services Fee: The core issue was whether the income from receipt of services fee should be assessed under 'Profits and Gains of Business' or 'Income from Other Sources'. The Tribunal found that the assessee provided continuous and systematic franchisee support services since Assessment Year 1998-99, with the intention to earn profits. The ITAT upheld the CIT(A)'s decision that such income should be classified under 'Profits and Gains of Business' and dismissed the revenue's appeal on this ground. 2. Disallowance of Royalty Expenditure: The issue was whether the royalty payments made by the assessee were allowable as business expenditure. The Tribunal noted that the assessee had obtained necessary approvals from the Government of India and the payments were within the prescribed limits. The ITAT, following its earlier decisions, upheld the CIT(A)'s deletion of the disallowance, finding no merit in the revenue's appeal. 3. Deletion of Addition Out of Administrative Expenses: The issue involved the allocation of administrative expenses between the assessee and its wholly-owned subsidiary YRMPL. The Tribunal found that YRMPL was set up to carry out advertising, marketing, and promotion activities for the assessee and its franchisees. It upheld the CIT(A)'s decision to delete the disallowance, following the ITAT's earlier rulings. 4. Disallowance of Part Depreciation: The issue was the disallowance of depreciation on assets used by employees and assets sold but not removed from the books. The Tribunal upheld the CIT(A)'s decision to allow the depreciation, noting that the assets were used for business purposes and the block of assets concept applied, following its earlier decisions. 5. Deletion of Addition on Account of Excess Provision: The issue was the disallowance of excess provision for marketing expenses. The Tribunal found that the provision was made based on past experience and was bona fide. It upheld the CIT(A)'s deletion of the disallowance, following its earlier rulings. 6. Disallowance of Software Expenses by Treating Them as Capital Expenditure: The issue involved the classification of software expenses as capital or revenue expenditure. The Tribunal noted that the assessee agreed to treat the expenditure as capital in nature to avoid further litigation. It remanded the issue to the Assessing Officer for re-examination. 7. Disallowance of R&D Expenses: The issue was whether R&D expenses incurred for developing new food items and flavors should be capitalized. The Tribunal, following its earlier decision, held that these were routine research expenses and should be treated as revenue expenditure. 8. Disallowance of Lease Rent Paid for Rent-Free Accommodation: The issue involved the disallowance of lease rent paid for rent-free accommodation provided to the Managing Director and a Director. The Tribunal upheld the disallowance of excessive rent paid to related parties and remanded the issue of rent paid for the Director's residence back to the Assessing Officer for re-adjudication. 9. Addition of Notional Interest Income on Account of Security Deposits: The issue was the addition of notional interest income on security deposits placed with lessors. The Tribunal, following its earlier decision, held that there should be no disallowance of notional rent worked out on the basis of interest-free security deposits. 10. Disallowance of Business Expenditure Held as Personal Expenditure: The issue involved the disallowance of house and computer maintenance expenses of employees. The Tribunal upheld the CIT(A)'s decision, finding that the expenses were personal in nature and not related to the business. 11. Disallowance of Business Expenditure Held as Capital Expenditure: The issue was whether expenses on computer accessories should be treated as capital expenditure. The Tribunal upheld the disallowance, finding that the expenses were integral to fixed assets and provided enduring benefit. 12. Disallowance of Business Expenditure Held as Prior Period Expenditure: The issue involved the disallowance of prior period expenses. The Tribunal upheld the CIT(A)'s decision, finding that the assessee failed to establish that the liability to pay crystallized in the year under consideration. 13. Disallowance of Arbitration Award Settlement Claim: The issue was the disallowance of an arbitration award settlement claim. The Tribunal remanded the issue back to the Assessing Officer for re-examination, allowing the assessee to submit necessary documents to substantiate the claim. 14. Treatment of Interest Income as 'Income from Other Sources': The issue involved the classification of interest income from fixed deposits, tax refunds, and employee loans. The Tribunal upheld the CIT(A)'s decision to treat the interest income as 'income from other sources', following its earlier ruling. Conclusion: - ITA No.2678/Del/2012: Dismissed. - ITA No.2679/Del/2012: Partly allowed for statistical purposes. - ITA No.2421/Del/2012: Partly allowed for statistical purposes. - ITA No.2422/Del/2012: Partly allowed for statistical purposes.
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