2011 (9) TMI 1249 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of know-how fees as capital or revenue expenditure.
2. Disallowance of royalty payments under section 40A(2)(b).
3. Treatment of repairing expenses to plant and machinery as capital or revenue expenditure.
4. Taxability of interest on income-tax refund.
5. Treatment of repairs to building as capital or revenue expenditure.
6. Treatment of software expenses as capital or revenue expenditure.
7. Allowance of bad debts written off.
8. Charging of interest under sections 234B and 234D.
9. Treatment of lease rental payments.
10. Deletion of disallowance on repairs to building.
11. Deletion of disallowance of operating and license fee for SAP R3 software.

Issue-wise Detailed Analysis:

1. Treatment of Know-how Fees as Capital or Revenue Expenditure:
The assessee argued that the know-how fees were linked to the sales and commercial production of the company, thus should be treated as revenue expenditure. The Assessing Officer (AO) considered it as capital expenditure, stating it was for the introduction of new products and upgradation of existing ones. The Commissioner of Income-tax (Appeals) [CIT(A)] confirmed this view but allowed depreciation. The Tribunal held that the know-how was not the property of the assessee and was used for running the business, thus treating the payment of Rs. 43.10 lakhs as revenue expenditure.

2. Disallowance of Royalty Payments under Section 40A(2)(b):
The CIT(A) invoked section 40A(2)(b) and disallowed Rs. 278.78 lakhs on account of royalty paid, considering it excessive. The assessee argued that the royalty rates were revised due to changes in industrial policy and were lower than the rates approved by the Government of India. The Tribunal restored the issue to the AO for de novo adjudication, emphasizing the need for the Revenue to demonstrate the excessiveness of the payment with evidence.

3. Treatment of Repairing Expenses to Plant and Machinery as Capital or Revenue Expenditure:
The AO treated Rs. 46,58,516 and Rs. 2,28,55,484 as capital expenditure due to lack of detailed evidence from the assessee. The CIT(A) affirmed this view. The Tribunal restored the issue to the AO for de novo adjudication, allowing the assessee to furnish full details and evidence to demonstrate the nature of the expenditure.

4. Taxability of Interest on Income-tax Refund:
The AO taxed the interest received on income-tax refund. The CIT(A) upheld this. The Tribunal, following the Special Bench decision in Avada Trading Co. P. Ltd., held that such interest is taxable but directed the AO to include only the interest which has become final.

5. Treatment of Repairs to Building as Capital or Revenue Expenditure:
The AO treated Rs. 15,02,510 as capital expenditure. The CIT(A) allowed part of it as revenue expenditure. The Tribunal held that the expenditure was in the nature of current repairs and directed to allow the claim.

6. Treatment of Software Expenses as Capital or Revenue Expenditure:
The AO treated Rs. 26,95,590 as capital expenditure. The CIT(A) upheld this view. The Tribunal, following precedents, held that the expenditure on software was revenue in nature and allowed the claim.

7. Allowance of Bad Debts Written Off:
The AO disallowed Rs. 7,13,677 as bad debts, stating mere writing off in books did not qualify for deduction. The CIT(A) upheld this. The Tribunal, following the Supreme Court decision in T.R.F. Ltd., allowed the claim.

8. Charging of Interest under Sections 234B and 234D:
The Tribunal noted that the charging of interest under these sections is consequential and not in question.

9. Treatment of Lease Rental Payments:
The AO disallowed Rs. 30.96 lakhs as pre-paid rent. The CIT(A) allowed the claim following past history. The Tribunal, following the Special Bench decision, held the claim against the assessee but allowed the deduction in the relevant year.

10. Deletion of Disallowance on Repairs to Building:
The CIT(A) deleted part of the disallowance on repairs to building. The Tribunal upheld this, stating no new asset was created and the expenditure was current repairs.

11. Deletion of Disallowance of Operating and License Fee for SAP R3 Software:
The CIT(A) allowed the expenditure as revenue in nature. The Tribunal upheld this, following precedents that monthly payments for software usage are revenue expenditure.

Conclusion:
The Tribunal allowed the assessee's appeal partly, restoring some issues to the AO for fresh adjudication and providing relief on others. The Revenue's appeal was also partly allowed, with specific directions for the AO to consider alternate pleas.