2012 (2) TMI 354 - HC - Income Tax

Business expenditure Royalty payment Trademark - Capital vs Revenue expenditure dis-allowance of doubtful debts/allowances Held that - CIT(A) observed that payment was for use of technology and technical information. Assessee had not secured any exclusive privilege to either manufacture or sell the products. No benefit or right accrued in perpetuity and was for prescribed period thus payment was not for acquisition of any capital asset (trade mark) but was revenue expenditure. Aforesaid view of CIT(A) & Tribunal is upheld. See CIT vs G4S. Securities System (India) (P) Limited (2011 - TMI - 204608 - Delhi High Court) Doubtful debts/allowances - The said claim was admissible u/s 37 r.w.s. 28 of the Act Decided against the Revenue.

Summary

Issues:
1. Treatment of royalty payment as capital expenditure.
2. Disallowance of entry for doubtful debts/advances.

Issue 1: Treatment of royalty payment as capital expenditure
The case involved an appeal by the Revenue regarding the treatment of a royalty payment as capital expenditure for the assessment year 2002-03. The Assessing Officer initially held the royalty payment of Rs.108.64 lacs to be capital expenditure for the acquisition of a capital asset. However, the CIT(Appeals) and the tribunal disagreed with this classification and deleted the addition. The Assessing Officer's reasoning for treating the payment as capital expenditure was found to be cryptic and non-reasoned. The CIT(Appeals) examined the agreement in question and noted that it was for the use of technology and technical information, with no exclusive privilege granted to manufacture or sell products, and with benefits not accruing in perpetuity. The tribunal upheld the CIT(Appeals) decision, citing relevant legal precedents such as CIT versus Ciba of India Limited and Commissioner of Income Tax versus I.A.E.C. (Pumps) Limited. The tribunal concluded that the royalty payment was of a revenue nature and not capital expenditure, as it was based on net sales and did not confer enduring benefits.

Issue 2: Disallowance of entry for doubtful debts/advances
The second issue in the case pertained to the disallowance of an entry made by the assessee in books towards doubtful debts/advances amounting to Rs.66,86,974. The Assessing Officer disallowed this claim due to lack of details regarding the nature of these expenses, whether they were trade debts incurred in the course of business, steps taken for recovery, and reasons for write-offs. The CIT(Appeals) sought a remand report and, after examination, deleted the major portion of the addition related to advance given to a supplier. The tribunal dismissed the Revenue's appeal against this deletion, noting that the claim was admissible under Section 37 read with Section 28 of the Income Tax Act. Despite a reference to Section 36(1)(vii) by the tribunal, which was deemed inapplicable, the court did not find any substantial question of law arising from the findings of fact recorded by the CIT(Appeals) and affirmed by the tribunal. Consequently, the court dismissed the appeal on this issue as well.