2015 (6) TMI 599 - AT - Income Tax

Justification for claiming Royalty expense as revenue expenditure - Held that - The assessee has received on the job training with the stated aim of improving its efficiency and effectively expand its growth with the enhancement of team efficiency and capability for the growth of the business sphere of the educational institution. The incurring of expenses has not been doubted. No effort let alone a cogent discussion in the order has been made by the AO nor any arguments have been advanced by the Revenue to justify how it has been concluded that the expenses were unreasonable and excessive. In the absence of any justification for making a 5% disallowance of the total expenses for royalty, we find no good reason to vary the finding arrived at in the impugned order. The finding of the CIT(A) in absence of any material to the contrary accordingly is upheld. - Decided against revenue. Similarly qua the advertisement expenses it is seen that the fact on record is that advertisement have been inserted for propagating the business of the assessee is not in doubt. The mere fact that the booking of advertisement expenses has been done through the associate concern instead of the assessee directly by itself does not create any ground for making a disallowance. There is no evidence that in the magazines of the assessee there is a variance in the rates for the assessee as compared to outsiders. There should be some evidence on the basis of which the action of the AO can be held to be justified to show that the expenses are unreasonable or excessive. In the absence of any such evidence, an adhoc disallowance of 5% has rightly been rejected by the CIT(A). Being satisfied by the reasoning and finding, the departmental ground is dismissed.- Decided against revenue. Disallowance of proportionate interest expenditure in respect of the advance made to the sister concern - Held that - admittedly no loan from any bank has been raised by the assessee for advancing loans to its sister concerns as the funds so advanced are generated from assessee s own revenues. These facts are not disputed by the Revenue. Accordingly in the face of these admitted facts, we find that there is no legal precedent on the basis of which the claim of the Revenue can be held to be justified on facts. Infact legal precedent is to the contrary. The purchase of a specific property on instalment payment from which business of the assessee has been conducted is a matter of record. The business purpose of the purchase of the specific property is accepted by the AO as part of the payments towards M/s Anant Raj Industries and only proportionate disallowance is made on the ground that had the amounts not been advanced to the sister concern, the same would have reduced the interest component of the purchase price. The Courts have repeatedly held that the tax authorities cannot sit in the chair of the businessman and dictate how the business is to run. See SA Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance on account of royalty and advertisement expenses under Section 40A(2)(b) of the Income Tax Act, 1961.
2. Disallowance of interest paid to Anant Raj Industries.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance on Account of Royalty and Advertisement Expenses:
The Revenue challenged the deletion of Rs. 50,41,892/- on account of royalty and Rs. 82,85,000/- on account of advertisement expenses. The Assessing Officer (AO) had disallowed these expenses under Section 40A(2)(b) for want of commercial expediency and reasonableness. The AO justified the disallowance by asserting that the payments were excessive and unreasonable, given that both companies were under the same management. The AO made an ad-hoc disallowance of 5% of the expenses claimed.

The CIT(A) reversed the AO's decision, stating that the AO failed to provide evidence that the payments were excessive or unreasonable. The CIT(A) noted that the assessee had provided on-the-job training and consultancy services from Planman Consulting India Pvt. Ltd. (PCIPL) and had paid for advertisements in magazines published by Planman Media Pvt. Ltd. The CIT(A) emphasized that the payments were made for business purposes, and the AO did not bring any material on record to prove otherwise. The CIT(A) also highlighted that the payments were subjected to TDS, and the recipient companies showed these as business income.

The Tribunal upheld the CIT(A)'s decision, agreeing that the AO did not provide sufficient evidence to justify the disallowance. The Tribunal noted that the payments were made for legitimate business purposes and were not excessive or unreasonable. The Tribunal dismissed the Revenue's appeal on this ground.

2. Disallowance of Interest Paid to Anant Raj Industries:
The assessee challenged the disallowance of Rs. 1,00,20,920/- out of interest paid to Anant Raj Industries. The AO disallowed the interest expense, arguing that the assessee had given interest-free advances to its sister concerns, which indicated a diversion of funds. The AO relied on several judicial precedents to support the disallowance.

The CIT(A) upheld the AO's decision, but the assessee argued that the interest was paid on the unpaid amount of consideration for fixed assets, which were used for business purposes. The assessee contended that the advances to sister concerns were made from its own revenue and not from borrowed funds.

The Tribunal agreed with the assessee, noting that the funds advanced to sister concerns were generated from the assessee's own revenues and not from borrowed funds. The Tribunal emphasized that the business purpose of the property purchase was established, and the AO's disallowance was not justified. The Tribunal cited the Supreme Court's decision in SA Builders Ltd. vs CIT, which held that the Revenue cannot dictate how a business should be run and must consider the commercial expediency from the assessee's perspective.

The Tribunal allowed the assessee's appeal on this ground and rejected the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal regarding the deletion of disallowance on account of royalty and advertisement expenses and allowed the assessee's appeal regarding the disallowance of interest paid to Anant Raj Industries. The Tribunal emphasized the importance of commercial expediency and the need for the Revenue to provide concrete evidence when making disallowances under Section 40A(2)(b).