2012 (9) TMI 91 - HC - Income Tax

Undisclosed income on account of royalty - ITAT deleted the addition as not assessable under Chapter XIV B of the Income Tax Act, 1961 - Held that - The respondent had, in fact, not received any royalty with effect from October, 1999. Indeed, the appellant has not been able to indicate any evidence to the contrary. There is, however, nothing to indicate that the share-holder s agreement dated 17th November, 1999, between the respondent and BIIL was sham and bogus nor is there anything to indicate that the agreement was not implemented. As the trademark stood transferred to Jyothy Laboratories Limited, there would be no question of it continuing to pay royalty to the respondent - there was no undisclosed income and it is not even contended that these agreements were sham or bogus. Nor is it suggested that they were a device to launder money through BILL - no substantial question of law - in favour of assessee. Addition on account of reimbursement of advertisement expenses - Held that - There is no material evidencing a reimbursement of the expenses to the respondent - this is a case where the respondent himself owns a large majority of the equity capital of the company and it would not, therefore, be unnatural for him not to have demanded the payment. Under clause 16(iii), the company was bound to reimburse the respondent only on demand from the respondent. The fact that the respondent s accounts are maintained on a mercantile basis would make no difference. Even assuming that he is entitled to reimbursement of the marketing expenses, the liability of the company to pay him the said would arise only in the event of his having demanded the same - that the primary facts were also disclosed in the books of accounts of the respondent as well as the company and that the AO was, therefore, not justified in making an addition in the block assessment - both the issues would not fall under the purview of Chapter-XIV B of the Act as no evidence was found during the course of search which would warrant their consideration only in the block assessment order - in favour of assessee.

Summary

Issues Involved:
1. Deletion of the addition of Rs.6,58,52,694/- on account of royalty.
2. Deletion of the addition of Rs.39.39 crores on account of reimbursement of advertisement expenses.
3. Applicability of Chapter XIV B of the Income Tax Act, 1961.
4. Definition and scope of "undisclosed income" under Section 158B(b).
5. Interpretation of agreements and their implications on tax liabilities.

Detailed Analysis:

1. Deletion of the addition of Rs.6,58,52,694/- on account of royalty
The respondent had entered into an agreement on 23rd December 1994 with Jyothy Laboratories Limited for the use of the trademark "UJALA," which included a clause for the payment of royalty. The respondent declared royalty income from the assessment years 1996-97 to 1999-2000. However, the payment of royalty ceased from October 1999 due to a "Shareholders Agreement" with Baring India Investment Limited (BIIL) dated 17th November 1999, which resulted in the assignment of the trademark to Jyothy Laboratories Limited. The Tribunal found no evidence that the respondent received any royalty post-October 1999, nor was there any indication that the shareholder's agreement was sham or bogus. The Tribunal concluded that the royalty income was not "undisclosed income" as it was declared in regular assessments and the cessation of royalty payments was a business decision.

2. Deletion of the addition of Rs.39.39 crores on account of reimbursement of advertisement expenses
Under clause 16(iii) of the agreement, the company was bound to reimburse the respondent for marketing expenses on demand. The Tribunal found no material evidence of reimbursement to the respondent, who claimed he had not demanded the reimbursement. Given that the respondent owned a large majority of the equity capital of the company, it was deemed not unnatural for him not to have demanded the payment. The Tribunal held that the liability of the company to pay would arise only upon demand, and the absence of such a demand meant no undisclosed income.

3. Applicability of Chapter XIV B of the Income Tax Act, 1961
The Tribunal emphasized the distinction between regular assessment under Section 143(3) and block assessment under Chapter XIV B, which assesses only the undisclosed income for the block period. The Tribunal found that the Assessing Officer's exercise was not in conformity with the provisions of Sections 132 and 158B, as the facts indicated no undisclosed income. The agreements and cessation of royalty payments were known to the Department during regular assessments.

4. Definition and scope of "undisclosed income" under Section 158B(b)
The Tribunal relied on the distinction between regular assessment and block assessment, highlighting that undisclosed income pertains to income not declared in regular assessments. The Tribunal found that the royalty and advertisement expenses were disclosed in the respondent's and company's books of accounts, and there was no evidence of undisclosed income unearthed during the search.

5. Interpretation of agreements and their implications on tax liabilities
The Tribunal analyzed the agreements and found them to be genuine, with no indication of being sham or bogus. The cessation of royalty payments and the non-demand for reimbursement of advertisement expenses were business decisions. The Tribunal held that the agreements and the primary facts were disclosed during regular assessments, and any remedy for oversight by the Department lay under Sections 147, 148, or 154, not under Section 132 read with Section 158B.

Conclusion:
The Tribunal upheld the deletion of the additions on account of royalty and advertisement expenses, concluding that they were not assessable under Chapter XIV B as undisclosed income. The appeal did not raise a substantial question of law and was accordingly dismissed.