2013 (11) TMI 1244 - AT - Income Tax

Disallowance u/s 40A(2)(b) - excessive expenditure paid to related parties - logo fees paid to ATE Enterprises Pvt. Ltd. - Held that - for making payment of logo brand, which was used by the assessee in its business, it is not necessary that the assessee must have windfall income. - merely because the commission was paid to the payee-company for marketing the products of the assessee, it could not be held that the assessee was not liable to pay logo brand charges when such logo was used in the business of the assessee - In the absence of any material before us to show that logo charges paid at the rate of 1% of the sale value was excessive or unreasonable compared to the market rate and keeping in view the facts that similar logo brand charges was allowed as deduction in its entirety during the earlier years to the assessee, we find no reason in disallowing the logo brand charges paid during the year under consideration. - Decided in favor of assessee. Excessive payment of interest on the deposit - Held that - the rate of interest to 14% in respect of unsecured loan cannot be held to be so high as to warrant any disallowance under section 40A(2)(b) of the Act, keeping in view the rate of interest, which is charged by the bank in respect of unsecured loan, and even the rate of interest charged by the income-tax department under certain provisions are of 15% per annum. - Deduction allowed - Decided in favor of assessee. Travel expenses - Held that - it is not necessary that every expenditure incurred by the assessee should result in a corresponding increase in the revenue of the assessee - deduction allowed. Payment made to Advocate for registration of patent rights in foreign countries - revenue or capital in nature - Held that - the fact that a trade mark after registration could be separately assigned, and not as a part of the good will of the business only, does not also make the expenditure for registration a capital expenditure, that is only an addition and incidental facility given to the owner of the trade mark. It adds nothing to the trade mark itself. - deduction allowed - Decided in favor of assessee.

Issues Involved:
1. Disallowance of logo fees under Section 40A(2)(b) of the IT Act.
2. Disallowance of interest on deposit under Section 40A(2)(b) of the IT Act.
3. Disallowance of travel expenses.
4. Disallowance of commission paid.
5. Disallowance of legal fees for patent registration.
6. Disallowance of royalty payment under Section 40A(2)(b) of the IT Act.
7. Disallowance of commission paid to directors under Section 40A(2)(b) of the IT Act.

Detailed Analysis:

1. Disallowance of Logo Fees under Section 40A(2)(b) of the IT Act:
The assessee's appeal contested the disallowance of Rs. 30,88,359/- as logo fees paid to ATE Enterprises Pvt. Ltd. The AO disallowed this expenditure, arguing that the logo was not registered and did not result in significant profit. The CIT(A) upheld this disallowance, but the ITAT found that the payment was genuine, used in business, and consistent with previous years where it had been allowed. The ITAT also noted that the registration status of the logo was irrelevant for the payment's legitimacy. The ITAT deleted the disallowance, emphasizing that the AO failed to prove the payment was excessive or unreasonable.

2. Disallowance of Interest on Deposit under Section 40A(2)(b) of the IT Act:
The AO disallowed Rs. 72,000/- out of interest paid to Mr. Amol P. Bhagwati at 14%, considering it excessive compared to the 8.5% to 9% paid to others. The CIT(A) confirmed this. However, the ITAT found that the loan was taken in 2002 when the interest rates were higher (15%-18%). The ITAT noted that the genuineness of the payment was not in dispute and that the rate of 14% for unsecured loans was reasonable. The ITAT deleted the disallowance.

3. Disallowance of Travel Expenses:
The AO disallowed Rs. 7,84,948/- out of foreign travel expenses, doubting the business purpose of the trips. The CIT(A) deleted the disallowance, noting that the AO did not point out any specific infirmities in the details provided by the assessee. The ITAT upheld the CIT(A)'s decision, stating that it is not necessary for every expenditure to result in increased revenue and that part of the expenditure was already allowed by the AO, indicating its genuineness.

4. Disallowance of Commission Paid:
The AO disallowed Rs. 27,125/- of commission paid to Eastex Trading Co., Taiwan, considering it excessive compared to other cases. The CIT(A) deleted the disallowance, noting that the higher commission was justified as the agent helped fetch higher prices. The ITAT upheld this, finding no material evidence from the Revenue to contradict the assessee's claim of higher realized prices due to the agent's efforts.

5. Disallowance of Legal Fees for Patent Registration:
The AO disallowed Rs. 3,80,764/- paid as legal fees for patent registration, treating it as capital expenditure. The CIT(A) deleted the disallowance, stating that the expenditure did not result in acquiring a new capital asset but was for preserving existing intellectual property rights. The ITAT upheld this, referencing the Gujarat High Court's decision in Cadila Healthcare Ltd., which held that such expenses are revenue in nature.

6. Disallowance of Royalty Payment under Section 40A(2)(b) of the IT Act:
The AO disallowed Rs. 92,144/- paid as royalty to Stovec Industries Ltd., considering it excessive. The CIT(A) deleted the disallowance, noting that the AO did not provide evidence of the payment being excessive or unreasonable. The ITAT upheld this, stating that without material evidence to show the payment was above market value, the disallowance was unjustified.

7. Disallowance of Commission Paid to Directors under Section 40A(2)(b) of the IT Act:
The AO disallowed Rs. 17,09,248/- paid as commission to directors, arguing it was excessive since ATE Marketing Pvt. Ltd. was the sole selling agent. The CIT(A) deleted the disallowance, stating that the AO did not establish how the payment was excessive or unreasonable. The ITAT upheld this, noting that the commission was paid for services rendered and no evidence was provided to show it was excessive.

Conclusion:
The ITAT allowed the assessee's appeal and dismissed the Revenue's appeal, providing detailed reasoning for each disallowance and emphasizing the need for the AO to substantiate claims of excessive or unreasonable payments with concrete evidence.

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