2020 (3) TMI 219 - AT - Income Tax

Disallowance of expenditure incurred by the appellant towards payment on account of running royalty - HELD THAT - We find the AO in the instant case, following the order of his predecessor treated the entire royalty expenses as capital in nature and after allowing depreciation made addition to the total income of the assessee. We find in appeal, the CIT(A), following the order of his predecessor in assessee s own case for assessment year 2011-12, treated 25% of such royalty payment as capital in nature and held the balance amount to be revenue in nature. We find identical issue had come up before the Tribunal in assessee s own case in the immediate preceding assessment year. CIT(A) has allowed only 75% of the royalty payment as revenue in nature, therefore, respectfully following the decision of the Tribunal in assessee s own case in the immediately preceding assessment year, we hold the entire royalty payment as revenue in nature. Accordingly the ground raised by the assessee is allowed and the ground raised by the Revenue is dismissed. Bad debt u/s 36(1)(vii) - CIT(A) sustained the addition made by the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraphs - HELD THAT - We find the assessee is changing its stand from time to time. He has made one statement before the Assessing Officer whereas before the CIT(A) he has come out with another theory. In any case the assessee has not substantiated the reasons for changing its stand before the two lower authorities. It is not coming out from the record as to when and how Maruti Suzuki Ltd. Company has stated or written to the assessee that they are not going to make any more payments against the outstanding balance. Since, nothing is coming out from the record, therefore, considering the totality of the facts of the case and in the interest of justice, we deem it appropriate to restore this issue to the file of the AO with a direction to give one more opportunity of hearing to the assessee to substantiate the claim of deduction. AO shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee are allowed for statistical purposes only. Disallowance of the expenditure incurred by the appellant - staff welfare - expenditure to this extent did not appear to be in accordance with the attendance policy of the appellant - HELD THAT - The reasons of such relief granted by the CIT(A) has already been reproduced in preceding paragraphs and the Revenue is not in appeal against the same. So far as the disallowance of ₹ 8,55,000/- is concerned, assessee brought to our notice the attendance reward policy of the assessee company giving date wise, name wise and department wise, the payment made for the entire year. It is the industry policy that when the staff works for some extra time, different companies give incentives to their employees which the assessee in the instant case has followed. Under such circumstances, we are of the considered opinion that the entire amount should have been allowed as deduction and the Ld. CIT(A) is not justified in sustaining ₹ 8,55,000/-. We, therefore, set-aside the order of the CIT(A) and direct the AO to delete the disallowance. The ground raised by the assessee is accordingly allowed.

Issues Involved:
1. Treatment of royalty payment as revenue or capital expenditure.
2. Disallowance of prior period expenditure claimed as bad debt.
3. Disallowance of staff welfare expenditure.

Issue-Wise Detailed Analysis:

1. Treatment of Royalty Payment as Revenue or Capital Expenditure:

The Revenue contested the CIT(A)'s decision to treat 75% of the royalty payment for technical "know-how" as revenue expenditure, arguing it should be capitalized as defined in Explanation-4 to Section 32(1) of the Income Tax Act, 1961. The assessee also appealed, arguing the entire royalty payment should be treated as revenue expenditure.

The Tribunal noted that the Assessing Officer had treated the entire royalty expense as capital in nature, allowing 25% depreciation and adding the balance to the total income. The CIT(A) had followed the previous year's order, treating 25% as capital expenditure and the rest as revenue expenditure. The Tribunal referred to its prior decision in the assessee's case for the preceding assessment year, where it had allowed the entire royalty payment as revenue expenditure, citing the absence of any enduring benefit to the assessee. Consequently, the Tribunal held the entire royalty payment as revenue in nature, dismissing the Revenue's ground and allowing the assessee's ground.

2. Disallowance of Prior Period Expenditure Claimed as Bad Debt:

The assessee claimed an amount of ?1,17,38,409/- as a bad debt written off, which the Assessing Officer treated as a prior period expenditure and disallowed. The CIT(A) upheld the disallowance, noting the assessee's inconsistent explanations regarding the nature of the expenditure.

The Tribunal observed that the assessee had provided different explanations at various stages, failing to substantiate the claim. Given the lack of clarity and supporting evidence, the Tribunal deemed it appropriate to remand the issue back to the Assessing Officer. The Assessing Officer was directed to provide the assessee with an opportunity to substantiate the claim and decide the issue based on facts and law.

3. Disallowance of Staff Welfare Expenditure:

The Assessing Officer disallowed ?25,74,500/- out of the total staff welfare expenditure of ?1,89,54,834/-, citing lack of satisfactory evidence. The CIT(A) restricted the disallowance to ?8,55,000/-, finding that certain claimed expenses were not in accordance with the company's attendance policy.

The Tribunal reviewed the attendance reward policy and the detailed breakdown of expenses provided by the assessee. It acknowledged that companies often provide incentives for extra work and found the entire expenditure justified. Thus, the Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to delete the disallowance of ?8,55,000/-.

Conclusion:

The appeal filed by the Revenue was dismissed, and the appeal filed by the assessee was allowed for statistical purposes. The Tribunal's decision was pronounced in the open Court on 28/02/2020.

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