2004 (3) TMI 317 - AT - Income Tax

Deduction u/s 37 - Validity and scope of business expenditure u/s 35A - sham transaction entered into for the purpose of claiming deductions wrongly? - The arrangement is designed to serve the purpose of tax avoidance - HELD THAT - In the present case, both the purport and the effect of the transaction were one and the same, viz., the assessee made a payment of Rs. 6 crores for obtaining the right to use the trademark for a period of ten years. There is no pretence at all involved in this transaction. To demonstrate that a transaction is sham, it will have to be shown that the assessee made a payment of about Rs. 6 crores for some purpose other than it made the payment for trademark for ten years or that he made the payment for no purpose at all. In the absence of this being demonstrated the transaction cannot be considered as sham. It may be useful to refer the Hon'ble Madhya Pradesh High Court was in CIT v. M.B.Umbrella Industries 1982 (10) TMI 18 - MADHYA PRADESH HIGH COURT . In the said case the assessee paid a sum of Rs. 25,001 per year for use of trademark without acquiring the same. The agreement was for a limited period of five years. Hon'ble High Court considering the fact held that the payments are to be treated as revenue in nature and allowed the claim of assessee. The facts before us also are identical. Though the assessee is part of BPL Group of Companies yet the trademark do not belong to it. The two companies are separate legal entities. If the assessee wanted to use the trademark BPL which is otherwise exclusive right of BPL Limited only, the payment has to be made. It is also established that BPL Limited got the trademark registered much prior to allowing the assessee use of the same. In view of our discussion above, we hold that the amount paid is allowable deduction u/s 37 of the Act. In the result the appeal is partly allowed.

Summary

Issues Involved:
1. Validity of business expenditure u/s 35A for payment made to M/s. BPL Limited.
2. Applicability of enhanced depreciation rate u/r III(2)(iii) of Appendix I of the Income Tax Rules, 1962.

Validity of Business Expenditure:
The appeal concerned the validity of a payment made by the assessee to M/s. BPL Limited for the use of the trademark "BPL." The Assessing Officer treated the payment as capital in nature, while the CIT(A) deemed the transaction as a sham arrangement for tax avoidance. The assessee argued that the payment was for a limited period of ten years and should be considered a revenue expenditure. The Tribunal held that the transaction was genuine and not a sham, as it involved a legitimate payment for the right to use the trademark. The Tribunal also emphasized that the transaction did not result in tax avoidance, as the payment led to a higher tax liability for the group as a whole.

Applicability of Enhanced Depreciation Rate:
The issue revolved around the applicability of the enhanced depreciation rate of 40% specified in the Income Tax Rules to certain moulds used by the assessee in manufacturing rubber and plastic goods. Citing a previous decision related to a group concern, the Tribunal held that the moulds used in the manufacturing process qualified for the higher depreciation rate. The Tribunal reasoned that even though the parts were used in composite manufacturing, they were eligible for the higher depreciation rate as per the Income Tax Rules.

Conclusion:
The Tribunal partly allowed the appeal, upholding the validity of the business expenditure for the trademark payment and allowing the enhanced depreciation rate for the moulds used in manufacturing. The ground related to the disallowance of expenditure for debentures was dismissed as the assessee did not press the issue during the hearing.