2022 (1) TMI 348 - AT - Income Tax

Disallowance of expenditure incurred by the assessee towards legal fees - allowable revenue expenditure - HELD THAT - The assessee is being granted patents for the one of its process in United States. A US based company filed suit against the appellant in July, 2008 for infringement of the patents rights. The assessee was also made a parity to the suit. It impacted adversely sale of assessee s product. Therefore, to defend the suit the assessee engaged a law firm in US. The total fees paid on that account - Ultimately, the patent suit resulted into a settlement agreement and the assessee paid settlement amount to the plaintiff. This sum was also paid by legal firm which in turn was paid to USA entity who filed the suit against the appellant. Further, a sum of ₹ 1,86,118/- is fees paid for routine maintenance of Patents. Therefore, all these above expenditure have been incurred by the assessee for the protection of its business and intellectual rights. These expenditure has been incurred mostly on account of defending the right of the assessee, therefore the same cannot held to be an expenditure which resulted into any endure benefit to the assessee. Any expenditure incurred by the assessee company for protection of IPR rights and for normal maintenance of its intellectual property are revenue expenditure. Further, the increase in the sales resulting into the higher profit could not be the reasons to hold that such expenditure are capital in nature. In fact the better protection of the intellectual property rights of the property would naturally result into higher profits and turnover but that does not make such expenditure as capital expenditure - appeal of AO is dismissed to hold that expenditure incurred by the assessee towards legal fee is Revenue in nature. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of expenditure incurred towards legal fees for Assessment Years 2010-11 and 2011-12.

Analysis:
1. Assessment Year 2011-12:
- The assessee, engaged in manufacturing and trading of Nutraceuticals products, claimed &8377;8,73,34,686/- as legal and professional charges, including expenditure on patents, settlements, and defense of rights.
- The Assessing Officer (AO) disallowed &8377;11,85,24,076/- as capital expenditure, considering the enduring benefit.
- The Commissioner of Income Tax (Appeals) held that the expenditure was revenue in nature, citing it as essential for protecting intellectual property rights and normal maintenance.
- The CIT(A) referred to judicial precedents and deleted the disallowance, emphasizing that the expenditure did not result in enduring benefits.
- The Departmental Representative supported the AO's view, considering the expenditure as capital.
- The authorized representative argued that the expenditure was to safeguard patent rights and maintain intellectual property, hence revenue in nature.
- The Tribunal upheld the CIT(A)'s decision, stating that the expenditure was for protecting business and intellectual rights, not resulting in enduring benefits, and thus, revenue in nature.

2. Assessment Year 2010-11:
- The AO disallowed &8377;3,34,14,989/- as capital expenditure, similar to the decision for 2011-12.
- The CIT(A) followed the same reasoning as in the previous year and deleted the disallowance.
- The Tribunal confirmed the CIT(A)'s decision for 2010-11, dismissing the AO's appeal.

3. Conclusion:
- Both appeals by the AO for Assessment Years 2010-11 and 2011-12 were dismissed by the Tribunal, upholding the CIT(A)'s decisions that the legal fees expenditure was revenue in nature, essential for protecting intellectual property rights and not resulting in enduring benefits.