2014 (8) TMI 458 - AT - Income Tax

Disallowance of franchise fee Capital expenses Held that - CIT(A) has considered each and every aspect of the matter before arriving at the conclusion as drawn by him - He has elaborately discussed each and every issue in an appropriate manner specifying all the relevant details - the assessee had acquired only access to the technical information and there was no transfer of ownership with respect to the process and the know-how under the agreement in favour of the assessee - the payment could only be categorized as one made on revenue account Decided against Revenue. 25% advertisement expenses capitalized Held that - Following the decision in Sassoon J. David And Co. Pvt. Limited Versus Commissioner of Income-Tax, Bombay 1979 (5) TMI 3 - SUPREME Court - it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business - expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction even if there was no compelling necessity to incur such expenditure - CIT(A) while considering each and very aspect of the matter has come to a correct conclusion Decided against Revenue. Sundry balance written off Held that - The AO has not examined whether the debt has been written off in accounts of the assessee - When bad debt occurs, the bad debt account is debited and the customer s account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors - Following the decision in TRF. LTD. Versus COMMISSIONER OF INCOME-TAX 2010 (2) TMI 211 - SUPREME COURT - no contrary material or evidence has been furnished nor any infirmity or flaw has been pointed out Decided against Revenue. Employees contribution to ESI u/s 36(1)(va) Amount deposited after due date - Held that - The deduction of payment needed to be allowed to the assessee in the relevant AY - Relying upon CIT vs. AIMIL Ltd. 2009 (12) TMI 38 - DELHI HIGH COURT - CIT(A) while considering and accepting the plea of the assessee has concluded to delete the addition made in this regard - the entire amount of employees contribution to the ESI was deposited by the assessee before the due date of filing of the return under the Act - the employee contribution to ESI, if deposited before the due date of filing of return under the Act must be allowed u/s 36(1)(va) irrespective of whether it was paid before or after the due date in the respective statues - date of payments are part of audited accounts which clearly indicate that payments of ESI contribution have been made before the due date of filing of the return Decided against Revenue. Donation made to CRY Held that - The assessee has requested the CRY and has got the receipt now - for reversal of the order or in alternative matter should be set aside on the file of the AO for re-consideration of the issue - the receipt stated to have been produced before CIT(A) has not been got verified by the AO nor he was associated with appeal proceedings the matter is remitted back to the AO for re-consideration Decided partly in favour of Revenue. Prior paid expenses Held that - The addition mainly on the ground that the assessee has not been able to substantiate its claim and CIT(A) is found to have not only accepted additional material, but also considered the same together part relief to the assessee without having allowed the AO to associate with the proceedings or without calling for the remand report - provisions of Rule 46A have not been complied with, certain document and material has been filed and accepted together relief to the assessee on first appeal stage - there is clear violation of Rule 46A thus, the matter is to be remitted back to the AO for fresh adjudication. Debenture restructuring fees Capital expenses or not Held that - Due to non-availability of finances, assessee was not in a position to negotiate the debentures issue which got matured during the year under consideration - he has arranged the finance by paying ₹ 15 lakhs to M/s Infrastructure Leasing & Financial Services Ltd. - in the absence of any contrary decision or evidence produced or any higher courts orders having been placed to support the plea raised by the department, there was no ground to interfere in the order passed by the CIT(A) Decided against Revenue.

Summary

Issues Involved:
1. Nature of expense (capital vs. revenue)
2. Addition of advertisement expenses
3. Addition on account of sundry balances written off
4. Addition on account of late deposit of ESI Contribution
5. Disallowance of donation to CRY
6. Prior period expenses
7. Store relocation expenses
8. Debenture restructuring fees

Detailed Analysis:

Nature of Expense (Capital vs. Revenue):
- Issue: Whether the franchisee fee should be treated as capital expenditure.
- Judgment: The CIT(A) concluded that the franchisee fee paid by the assessee was revenue in nature as it was a recurring expense linked to the sales and did not provide an enduring benefit. The Tribunal upheld this view, noting that the license was not permanent and that the assessee did not derive any enduring benefit from the arrangement.

Addition of Advertisement Expenses:
- Issue: Whether 25% of the advertisement expenses should be capitalized.
- Judgment: The CIT(A) deleted the addition, relying on various case laws, and concluded that the advertisement expenses were necessary for the business and did not provide an enduring benefit. The Tribunal upheld this decision, noting that the expenses were necessary for the business in a competitive market.

Addition on Account of Sundry Balances Written Off:
- Issue: Whether the sundry balances written off should be allowed as a deduction.
- Judgment: The CIT(A) allowed the deduction, noting that the write-offs were inevitable in the business due to various reasons such as non-payment by customers. The Tribunal upheld this decision, finding no contrary material or evidence from the Revenue.

Addition on Account of Late Deposit of ESI Contribution:
- Issue: Whether the late deposit of ESI contributions should be disallowed.
- Judgment: The CIT(A) deleted the addition, relying on the Delhi High Court decision in CIT vs. AIMIL Ltd., which held that contributions deposited before the due date of filing the return should be allowed. The Tribunal upheld this view, finding no contrary material from the Revenue.

Disallowance of Donation to CRY:
- Issue: Whether the donation to CRY should be allowed as a deduction.
- Judgment: The CIT(A) allowed the deduction based on the receipt provided by the assessee. However, the Tribunal noted a procedural lapse as the Assessing Officer was not given an opportunity to verify the receipt. The matter was remanded back to the Assessing Officer for reconsideration.

Prior Period Expenses:
- Issue: Whether prior period expenses should be allowed as a deduction.
- Judgment: The CIT(A) allowed part of the expenses, noting that the liability for these expenses crystallized in the current year. However, the Tribunal found a procedural lapse as additional evidence was accepted without following Rule 46A. The matter was remanded back to the Assessing Officer for fresh consideration.

Store Relocation Expenses:
- Issue: Whether store relocation expenses should be treated as revenue expenditure.
- Judgment: The CIT(A) allowed the expenses as revenue expenditure, noting that they were incurred in the normal course of business. However, the Tribunal found a procedural lapse as additional evidence was accepted without following Rule 46A. The matter was remanded back to the Assessing Officer for fresh consideration.

Debenture Restructuring Fees:
- Issue: Whether debenture restructuring fees should be treated as capital expenditure.
- Judgment: The CIT(A) allowed the fees as revenue expenditure, relying on various case laws that treated such expenses as revenue in nature. The Tribunal upheld this decision, finding no contrary material or evidence from the Revenue.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, finding no contrary material or evidence from the Revenue. However, on issues involving procedural lapses (donation to CRY, prior period expenses, and store relocation expenses), the Tribunal remanded the matters back to the Assessing Officer for fresh consideration.