2015 (12) TMI 1761 - AT - Income Tax

Allowance of expenditure as commission - Held that - There was no basis for making any disallowance and the same was solely on ad hoc basis. We are in agreement with the findings of ld. CIT(A) that the AO had not brought any material on record to show that the commission expenditure was either bogus or was not an allowable deduction. It is well settled law that no ad hoc disallowance can be made unless the AO brings any specific detail on record which may call for any disallowance. Advertisement expenditure allowance on product launches and on granty signs - nature of expenses - Held that - Expenditure in question was in fact in furtherance of business of assessee and thus had direct nexus with its business and by putting neon signs and glow signs no assets of permanent nature was created it was an allowable business expenditure - See CIT v. Citi Financial Consumer Fin. Ltd. 2011 (3) TMI 622 - DELHI HIGH COURT . Royalty/WPC expenses - nature of income - as per AO royalty which was paid in order to get the right to use the spectrum was capital in nature and allowed 25% of the amount claimed - Held that - The impugned amount was paid as a protection fee and was not a payment which was necessary for running the business as is in the present case. The assessee could not run the business without making these payments on quarterly basis and therefore by no stretch of reasoning this could be held as capital in nature. The issue is no more res integra in view of the decision of Hon ble Delhi High Court in the case of Fascel Ltd.(2008 (12) TMI 743 - DELHI HIGH COURT) - revenue appeal dismissed.

Summary

Issues:
1. Disallowance of commission expenditure
2. Disallowance of advertisement expenditure
3. Disallowance of Royalty-WPC expenses

Analysis:

Issue 1: Disallowance of Commission Expenditure
The appellant, engaged in providing cellular mobile telephony network services, claimed commission expenses in the P&L account. The Assessing Officer (AO) disallowed 10% of the commission expenses, totaling INR 6,24,87,988, without substantial basis. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal, stating that the AO failed to provide evidence to challenge the genuineness of the expenditure. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing that ad hoc disallowances require specific details for justification.

Issue 2: Disallowance of Advertisement Expenditure
The AO disallowed a portion of the advertisement expenditure, arguing it should have been capitalized due to enduring benefits. However, the CIT(A) overturned this decision, citing precedents that advertising costs are revenue expenditures. The ITAT agreed with the CIT(A), highlighting various judicial decisions supporting the treatment of advertisement expenses as revenue in nature.

Issue 3: Disallowance of Royalty-WPC Expenses
The AO disallowed a significant portion of the claimed royalty/WPC expenses, considering them capital in nature. The appellant justified these expenses as regulatory payments necessary for conducting its telecom business. The CIT(A) supported the appellant's claim, referring to relevant case law. The ITAT concurred with the CIT(A), emphasizing that the expenses were recurring charges essential for business operations and therefore deductible under section 37(1) of the Income Tax Act.

In conclusion, the ITAT dismissed the revenue's appeal on all grounds, affirming the decisions of the CIT(A) regarding the disallowances of commission, advertisement, and royalty/WPC expenses. The judgment highlighted the importance of providing concrete evidence and adhering to legal precedents in determining the nature of business expenditures.