2012 (7) TMI 13 - AT - Income Tax

Franchise fees - revenue or capital expenditure - assessee has been provided with special know how of preparing food and beverages and also been given initial training and on going training in relation to restaurant business - Held that - Since Revenue failed to bring any material on record to show that the assessee had paid any price for acquisition of any capital assets and that the payment as a franchise fee by the assessee was not only a business fee for use of support service like running and up-keeping the restaurant. Hence, order of CIT(A) allowing the same as revenue expenditure is upheld - Decided against The Revenue. Admission of additional evidence by CIT(A) without offering opportunity to Assessing Officer to verify the evidences - legal expenses - Revenue contending same to be capital expenditure on ground of same being incurred before commencement of business - Held that - There was clear violation of Rule-46. Assessing Officer should also have an opportunity of verifying the evidences, which were produced before the CIT (Appeals). Hence, we remand the matter back to the file of the Assessing Officer for re-adjudicating the issue afresh.

Summary

Issues:
1. Deduction of franchise fee as revenue expenditure under Section 37 for Assessment Years 2006-07 and 2007-08.
2. Allowability of legal fees as business expenditure for Assessment Year 2006-07.

Issue 1: Deduction of Franchise Fee as Revenue Expenditure
The appeal concerns the deduction of franchise fees under Section 37 as revenue expenditure for Assessment Years 2006-07 and 2007-08. The Commissioner of Income Tax(A) held that the franchise fees paid by the assessee were eligible for deduction under Section 37. The Assessing Officer initially disallowed the deduction, considering the franchise fee as payment for acquiring a capital asset. However, the Commissioner observed that the franchise fee was paid for services such as special know-how, training, and day-to-day operational support, indicating no transfer of an enduring asset. The Commissioner cited relevant case law to support the deduction of franchise fees as revenue expenditure. Consequently, the Tribunal upheld the Commissioner's decision, allowing the deduction of franchise fees for both assessment years based on a percentage of turnover.

Issue 2: Allowability of Legal Fees as Business Expenditure
The second issue involves the allowability of legal fees as business expenditure for Assessment Year 2006-07. The Commissioner of Income Tax(A) confirmed the disallowance of a portion of legal fees as capital expenditure incurred before the commencement of business. However, the Commissioner found that a specific amount of legal fees was spent on routine professional services after the business had started, making it allowable as business expenditure. The Tribunal noted that the Assessing Officer had not verified the evidence of routine professional services expenditure before the Commissioner's decision. Consequently, the Tribunal set aside the Commissioner's order, remanding the matter back to the Assessing Officer for reevaluation after due verification and a fair opportunity for the assessee. The appeal of Revenue for Assessment Year 2006-07 was partly allowed for statistical purposes, while the appeal for Assessment Year 2007-08 was dismissed.

This judgment by the Appellate Tribunal ITAT, CHENNAI highlights the importance of distinguishing between revenue and capital expenditures, especially concerning franchise fees and legal fees. The decision provides a detailed analysis of the nature of payments, considering factors such as the enduring benefit, services received, and relevant case law. The Tribunal's thorough examination and application of legal principles ensure a fair and just determination of the deductibility of expenses for the respective assessment years.