2016 (5) TMI 1135 - AT - Income Tax

Disallowance of commission and ex-gratia paid to the Directors claimed u/s 37(1) by wrongly invoking the provisions of Section 36(1)(ii) - Held that - Disallowance of remuneration paid to the directors u/s 36(1)(ii) was not justified. Disallowance of royalty paid - revenue v/s capital expenditure - Held that - The decision of Hon ble Apex Court in the case of Alembic Chemical Works Co.Ltd. (1989 (3) TMI 5 - SUPREME Court) relied upon by the learned counsel also supports the case of the assessee. Respectfully following the same, we direct that the royalty should be treated as a revenue expenditure and, accordingly, we delete the disallowance made by the Assessing Officer by capitalizing 25% of the royalty expenditure.

Summary

Issues:
1. Disallowance of commission and ex-gratia amount paid to directors as part of their remuneration.
2. Disallowance of 25% of royalty paid on the ground of being capital expenditure.

Issue 1: Disallowance of Commission and Ex-gratia Amount:
The appeal challenged the confirmation of disallowance of commission and ex-gratia amount paid to directors as part of their remuneration. The ITAT found the issue covered in favor of the assessee by its previous decision for assessment years 2004-05 and 2005-06. The ITAT held that the remuneration paid to directors was approved at the annual general meeting, following the decision of the Jurisdictional High Court in a similar case. The ITAT concluded that the disallowance under section 36(1)(ii) was not justified and deleted the same for the current assessment year.

Issue 2: Disallowance of 25% of Royalty Paid:
The appeal contested the disallowance of 25% of royalty paid on the grounds of being capital expenditure. The ITAT noted that the agreement was for the use of technology, not its transfer, and the ownership remained with the other party. Relying on the decision of the Jurisdictional High Court in a similar case, the ITAT held that the payment of royalty was for providing technical services and not for the transfer of technology. Therefore, the royalty payment was treated as a revenue expenditure, and the disallowance made by the Assessing Officer was deleted.

Additional Appeals and Penalty:
In the subsequent assessment year 2007-08, the same grounds were raised by the assessee, and the disallowances were deleted following the same reasoning as in the previous year. The penalty levied under section 271(1)(c) for the disallowances was also cancelled since the additions themselves were deleted. Consequently, all the appeals of the assessee were allowed, and the decisions were pronounced in open court on 10.05.2016.