2012 (10) TMI 714 - AT - Income Tax

Payment of Royalty - Revenue v/s capital - Held that - As decided in assessee s own case that the assessee was required to pay royalty @2% of the items manufactured and sold under the agreement determined on the basis of quantity and value of the production. Therefore, the expenditure incurred by the assessee company was essentially of recurring and revenue in nature. AO treated 25% of such payment as capital in nature but these findings are not justified as the assessee company was not deriving any benefit of enduring nature. Accordingly, the expenditure of royalty so claimed by the assessee company on the products manufactured by it was related and computed at 2% of net ex-factory sale price on half yearly basis under the agreement. Admittedly, the assessee company did not make payment of royalty for acquiring process or design or technology which can be utilized by the assessee in the years to come and the assessee company was not deriving any benefit of enduring nature. Thus such expenditure does not fall in the ambit of capital in nature - in favour of assessee. Disallowance of car expenses, advertisement expenses and sales promotion expenses - CIT(A) deleted the addition - Held that - There was no disallowance by the AO related to motor car, advertisement and sales promotion expenses in the earlier assessment year. On bare reading of the assessment order, AO merely held that the personal nature of expenses under these heads cannot be ruled out, therefore, he made estimated disallowance of 10% on account of expenses incurred in this regard & has not brought any evidence or observation that the particular part of this expenditure was incurred to extend personal benefit to any director or employee of the company - the accounts of the assessee company are continuously audited by the Chartered Accountant and there is no adverse reporting in the audit report regarding any personal use of any business asset by the director or employee of the company - as decided in Sayaji Iron & Engg. Co. Ltd. vs. CIT 2001 (7) TMI 70 - GUJARAT HIGH COURT that for the purpose of company, no expenditure shall be deemed to be in the nature of personal expenditure as the company has a separate legal entity - in favour of assessee.

Summary

Issues Involved:
1. Disallowance of payment of royalty.
2. Disallowance of car expenses, advertisement expenses, and sales promotion expenses.

Issue-Wise Detailed Analysis:

1. Disallowance of Payment of Royalty:

The Revenue appealed against the order of the Commissioner of Income Tax (Appeals)-II, New Delhi, which deleted the disallowance of royalty payments made by the Assessing Officer (AO) for the Assessment Years (AY) 2006-07 and 2008-09. The AO had disallowed 25% of the royalty payment, treating it as capital in nature. The Commissioner of Income Tax (Appeals) observed that the assessee company was not deriving any benefit of enduring nature from the royalty payments and thus deleted the disallowance.

The Tribunal noted that the assessee had an agreement with a Japanese company for technical assistance, and the royalty was computed at 2% of the net ex-factory sale price. The Tribunal referred to an earlier judgment in the assessee's own case for AY 2005-06, where it was held that the royalty payment was recurring and revenue in nature, not capital. The Tribunal reiterated that the royalty payment was for the use of technology during the agreement period and did not provide any enduring benefit to the assessee. Therefore, the Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision and dismissed the Revenue's appeal on this ground.

2. Disallowance of Car Expenses, Advertisement Expenses, and Sales Promotion Expenses:

For AY 2008-09, the AO disallowed 10% of the motor car expenses, advertisement expenses, and sales promotion expenses, amounting to Rs. 5,85,033/-, on the grounds that personal use of these expenses could not be ruled out. The Commissioner of Income Tax (Appeals) deleted this disallowance, stating that the AO did not point out any specific instance of personal use and that the company, being a separate legal entity, could not have personal expenses.

The Tribunal observed that the AO made the disallowance based on surmises and conjectures without any specific evidence. The Tribunal noted that the assessee's accounts were regularly audited, and there was no adverse finding regarding personal use of business assets. The Tribunal cited the Gujarat High Court's judgment in Sayaji Iron & Engg. Co. Ltd. vs. CIT, which held that no expenditure of a company could be deemed personal in nature. Therefore, the Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision to delete the disallowance and dismissed the Revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed both appeals of the Revenue, upholding the Commissioner of Income Tax (Appeals)'s order in deleting the disallowances made by the AO for royalty payments and car, advertisement, and sales promotion expenses. The Tribunal emphasized the principles of consistency and the lack of enduring benefit from the royalty payments, and the absence of specific evidence for personal use of the expenses.