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Issues involved: Disallowance of royalty expenditure as capital in nature, consistency in decision-making by CIT(A), disallowance of depreciation on royalty expenditure considered capital under section 32(1) of the Act.
Disallowance of Royalty Expenditure: The Assessing Officer disallowed the sum of Rs. 3,98,64,546/- as royalty paid by the assessee, deeming it capital in nature. This issue stemmed from previous assessment years, with the current year's assessment holding 25% of the royalty expenditure as capital. The Ld. Authorised Representative cited a favorable decision by ITAT, Pune Bench, in the assessee's own case for A.Ys. 2003-04, 2004-05, and 2005-06. The ITAT observed that the royalty payment was linked to sales turnover, spread over multiple years, and directly related to the sales of the licensed product. Citing precedents, including Climate Systems India Ltd. and Fenner Woodroffe & Co. Ltd., the ITAT concluded that the royalty expenditure was revenue in nature and allowable. Given the consistency in facts, the ITAT upheld that the royalty paid for goods sold domestically constituted a revenue expenditure, directing the Assessing Officer accordingly. Consistency in Decision-Making by CIT(A): The assessee contended that the CIT(A) erred in not following the rule of consistency and deviating from the previous order without any change in facts or law. However, the specific details or reasoning behind this alleged inconsistency were not elaborated upon in the judgment. Despite the lack of explicit details, this issue was raised as a ground for appeal, indicating a perceived inconsistency in the CIT(A)'s decision-making process. Disallowance of Depreciation on Royalty Expenditure: The CIT(A) was criticized for not allowing depreciation on the royalty expenditure considered capital under section 32(1) of the Act. Additionally, the failure to consider the royalty expenditure from previous years, treated as capital expenditure, for depreciation on the written down value was highlighted. This aspect of the judgment emphasized the failure to grant depreciation on the royalty expenditure deemed capital, as well as the omission in accounting for earlier capital expenditure for depreciation purposes. In conclusion, the ITAT Pune ruled in favor of the assessee, allowing the appeal and directing the Assessing Officer to treat the royalty expenditure as a revenue expenditure. The judgment highlighted the linkage of royalty payments to sales revenue and the consistent application of this principle in previous decisions. The issues of consistency in decision-making by the CIT(A) and the disallowance of depreciation on capital royalty expenditure were also addressed in the judgment, underscoring the importance of adhering to legal principles and precedents in tax assessments.
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