2023 (9) TMI 983 - HC - Income Tax

Nature of expenses - payment of royalty - whether towards acquisition of intangible asset and is revenue expenditure? - HELD THAT - Issue is decided in favour of the assessee, by a common judgment 2022 (6) TMI 1428 - MADRAS HIGH COURT the benefit granted by the licensor is not enduring in nature in the present cases. The assessing officer without appreciating the terms of the licence agreement and ascertaining the nature of the expenditure incurred by the assessee companies, disallowed the deduction of royalty payment and allowed the depreciation at 25% treating it as capital expenditure. However, the appellate authorities, while deleting the disallowances made by the assessing officer, have rightly treated the royalty payment as revenue expenditure. Once the payment of royalty is treated as revenue expenditure, automatically, it goes without saying that the assessees would be entitled to 100% deduction. Therefore, we need not interfere with the orders passed by appellate authorities. Accordingly, the substantial questions of law relating to royalty, are answered in favour of the assessee. Disallowance u/s 14A r.w.r. 8D - HELD THAT - As the Hon'ble Supreme Court in the decision in Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT decided the same in favour of the assessee, by holding that Rule 8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007, when this rule was inserted.

Summary

Issues involved:
The issues involved in the judgment are the treatment of royalty payments as revenue or capital expenditure, the applicability of Rule 8D for disallowance calculation, and the nature of expenditure attributable to income not included in total income.

Treatment of Royalty Payments:
The tax case appeals challenged the orders of the Income Tax Appellate Tribunal regarding the treatment of royalty payments. The court considered previous judgments and legal propositions to determine whether the royalty payment for the use of logo or trademark qualified as revenue expenditure. The court emphasized the distinction between capital and revenue expenditure, applying the enduring benefit test. It was concluded that the royalty payment made by the assessee for business improvement qualified as revenue expenditure, as there was no transfer of ownership or title. The court upheld the appellate authorities' decision to treat the royalty payment as revenue expenditure, entitling the assessee to 100% deduction.

Applicability of Rule 8D:
Regarding the applicability of Rule 8D for disallowance calculation, the court referred to a Supreme Court decision stating that Rule 8D is prospective in nature and could not be applied to assessment years before its insertion in 2007. The court decided in favor of the assessee based on this ruling, leading to the dismissal of the appeals filed by the Revenue.

Nature of Expenditure for Income Not Includable:
The court also addressed the nature of expenditure attributable to income not included in total income. Following the submissions made by the appellant/Revenue and considering previous court decisions, the court answered the substantial questions of law in favor of the assessee. Consequently, the Tax case Appeals filed by the Revenue were dismissed, with no costs incurred.