2022 (9) TMI 1361 - AT - Income Tax

Nature of expenses - R D expenses - expenses of capital nature with enduring benefits OR revenue expenses - HELD THAT - On examination of the details, we find that these expenses are incurred during the normal course of business. The expenditure such as annual technology licence fee, technical support services, assistance in canvassing orders, marketing services which are calculated and paid on the basis of annual sales made by the assessee every year in accordance with the agreement entered between the parties cannot be treated as capital expenditure. AO misread the head R D expenditure which in fact was a manufacturing expenditure. On this issue, we are guided by the judgment of Travancore Sugar and Chemical Ltd. 1966 (9) TMI 44 - SUPREME COURT wherein it was held that whenever an amount is paid based on a percentage of turnover or profit, it would have no relation to the capital value of the assessee. The facts in the instant case reveal that the payments have made for utilization of services on annual basis taking the turnover as baseline for computation and since no augmentation of the capital asset or transfer of technology or any right thereof accrued to the assessee, we hold that the expenditure ought to be treated as revenue in nature. Disallowance of Bad Debts - The payment has been made by the railways after deducting the late delivery charges, and other taxes and provision has been made in the books on account of deduction with regard to late deliveries. The said amount has already been passed through the profit loss account of earlier respective financial years under the head of provisions for bad and doubtful debts and had been disallowed while computing the income of the assessee u/s. 28 of the Act and the assessee has claimed the said amount as deduction directly in the computation of income as the amount was added back directly in the computation of income only in earlier assessment years. The assessee has furnished complete details of deductions made by the railway from the sales bill giving invoice wise deductions and nature of deduction. It is also fact on record that an amount directly shown in the computation of income as transfer from provisions for doubtful debts as the amount has already been debited to the profit loss of the earlier years which has been added back by the assessee while calculating the taxable income. The balance amount pertain to the deduction made by the railways on the invoices raised for the year. Hence, it can be held that the amounts have been duly accounted under sales in the books of accounts, the due provisions have been made and when the recovery from the contractor/supplier have been made and liquidated damages are levied for late deliveries, they cannot be treated as penal in nature. Hence, the appeal of the revenue on this ground is liable to be dismissed. Gift and Presents - details of expenses by the AO that expenses have been incurred on marriage and gifts of personal in nature - We find that the ld. CIT(A) has diligently worked out the details of the gifts and bills and confirmed an amount of Rs. 7,74,238/- out of the disallowance of Rs. 12,35,000/-. The relief given by the ld. CIT(A) was after due verification and corroboration. Hence, we decline to interfere with the order of the ld. CIT(A). Appeal of the Revenue is dismissed.

Summary

Issues:
1. Disallowance of R&D expenses
2. Disallowance of bad debts claimed for late delivery charges deducted by Indian Railways
3. Disallowance of expenses of personal nature

Analysis:

Issue 1 - Disallowance of R&D expenses:
The assessee claimed R&D expenditure as manufacturing expenses, which the AO treated as capital expenditure. The CIT(A) deleted the addition, and the tribunal upheld the decision. The expenses were incurred for technology license fee, marketing services, and technical services, not leading to capital asset augmentation. The tribunal relied on Section 37(1) of the Income Tax Act, holding the expenses as revenue in nature following the Travancore Sugar and Chemical Ltd. case.

Issue 2 - Disallowance of bad debts for late delivery charges:
The AO disallowed bad debts claimed by the assessee for late delivery charges deducted by Indian Railways. The CIT(A) deleted the addition, stating that the amounts were duly accounted for in the books, and provisions were made for doubtful debts. The tribunal found that the deductions were accounted for, and the recovery from suppliers was considered, leading to dismissal of the revenue's appeal.

Issue 3 - Disallowance of personal expenses:
The AO disallowed expenses on gifts and marriage, terming them as personal in nature. The CIT(A) partially confirmed the disallowance. The tribunal upheld the CIT(A)'s decision after verifying the details of expenses, declining to interfere with the relief granted. Consequently, the appeal of the Revenue was dismissed.

In conclusion, the tribunal ruled in favor of the assessee on all issues, upholding the CIT(A)'s decisions to delete the additions made by the AO. The judgment provided detailed analysis of each issue, considering the nature of expenses, provisions made, and relevant legal provisions to determine the tax treatment of the disputed amounts.