9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2015 (2) TMI 17 - HC - Income TaxService income - business income V/S income from other sources - revenue urged that mere earning of some income in a mechanical manner or the accretion of certain sums on a regular basis would not mean that it is business income - Held that - This test of some real, substantial and systematic or organised course of activity or conduct with a set purpose to determine whether an activity was business. In view of this settled position, there is no scope for interference with the findings of the CIT (A) and the ITAT on this aspect. This Court thus holds that the service income declared by the assesse for the relevant years is business income. Disallowance of Royalty - Held that - In examining a claim for deduction on the ground of commercial expediency, what is to be seen is not whether it was compulsory for the assessee to make the payment, but whether it was of commercial expediency. As long as the payment is made for the purposes of the business, and not by way of penalty for infraction of any law, the same would be allowable as a deduction (Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT 1996 (10) TMI 2 - SUPREME Court ). The commercial expediency of a businessman s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure. Such decisions are to be taken from a business point of view and have to be respected by the authorities, regardless of the fact that it may appear, to the latter, to be expenditure incurred unnecessarily or avoidably. In the present case, the ITAT recorded a finding that the royalty was for business purposes and what is more, payable to the assessee s foreign principals. Its character as an expense - collected for payment to the said foreign party-has not been disputed. In the circumstances, the assessee s claim that it was for business purposes alone, and no other reason, could not have been rejected by the AO. - Decided in favour of the assessee. Disallowance out of administrative expenses - Held that - This Court is of the opinion that the findings of the ITAT cannot be faulted. The ultimate effect on the revenue would be the same, whether the assessee bore administrative expenses and costs of YRMPL or it remitted such amount to YRMPL, its wholly owned subsidiary, towards such costs. The final effect is revenue-neutral. Having regard to these circumstances, this court holds that the question of law framed in this regard is to be answered in favour of the assessee. Disallowance on account of non-business use of some specific assets - Held that - The revenue does not dispute the ITAT s finding that as part of its emolument policy, the assessee reimburses expenses incurred by its employees on purchase of furnishings. Such reimbursements are made by the assessee to the employees only to the extent of their entitlement (determined on the basis of their grade or level in terms of their appointment letters). These expenses cannot be, therefore, termed as personal to the assessee s employees, but are for its business purposes. In these circumstances, there is no infirmity with the order of ITAT. - Decided in favour of the assessee. Expenses for food tasting and trials - Whether be capitalized? - Held that - In the present case, it is not disputed that the assessee is engaged in the restaurant business. As part of its commercial activity, it strives to develop new recipes to develop its clientele, or expand it. The amounts expended towards such development are part of its business. Possibly, some recipes may be viable; equally possibly, all of them may be unviable. The mere possibility of the result of such exercise being a popular or long lasting recipe would not make the expenditure capital in nature. As such, it cannot be held that the food tasting development charges would result in a capital advantage of an enduring nature. - Decided in favour of assessee. Provisional liability - such claim was not based on any scientific method or on any reasonable past experience - Held that - In the present case it is evident that the provision made by the assessee was based on past experience. Both the CIT (A) and the ITAT held this method was not objectionable. Besides doubting the estimation, the AO has not stated whether, in fact, such past experience did not constitute a rational basis for making provision. In these circumstances and in the light of the law declared in Bharat Earth Movers (2000 (8) TMI 4 - SUPREME Court), this question has to be answered in favour of the assessee.
Issues Involved:
1. Classification of "service income" as "business income" or "income from other sources." 2. Deductibility of royalty payments under Section 37(1) of the Income Tax Act, 1961. 3. Allocation of administrative expenses between the assessee and its subsidiary. 4. Disallowance of depreciation on assets used by employees. 5. Classification of food tasting and development expenses as capital or revenue expenditure. 6. Validity of provisional liability claims based on past experience. Issue-wise Detailed Analysis: 1. Classification of "Service Income": The court examined whether the Income Tax Appellate Tribunal (ITAT) erred in accepting the assessee's plea that "service income" was "business income" and not "income from other sources." The assessee's primary source of income was service income, also known as stewardship fees, and Supply Chain Management fees, governed by an agreement with Yum Restaurant International SWC. The court noted that the services provided by the assessee were multifarious, systematic, and organized activities, fulfilling the essential parameters of business. The court held that the service income declared by the assessee for the relevant years is business income and affirmed the findings of the CIT(A) and ITAT. 2. Deductibility of Royalty Payments: The court considered whether the assessee's claim for royalty payment deduction was sustainable under Section 37(1) of the Income Tax Act, 1961. The AO had disallowed the royalty payments, terming them as technical fees for which approval had expired. The CIT(A) and ITAT found that the royalty payments were made under a technology license agreement and were directly related to the assessee's business. The court noted that the royalty payments were permitted under the liberalized foreign direct investment regime and were made through normal banking channels. The court held that the royalty payments were for business purposes and deductible under Section 37(1). 3. Allocation of Administrative Expenses: The court examined whether the ITAT was correct in deleting the addition made from administrative expenses related to another company, YRMPL. The AO had allocated 50% of the administrative expenses to YRMPL, a wholly-owned subsidiary of the assessee. The CIT(A) and ITAT found that YRMPL operated on a no-profit-no-loss basis and that the ultimate effect on the revenue would be the same, whether the assessee bore the expenses or remitted them to YRMPL. The court held that the findings of the ITAT were justified and that the question of law was to be answered in favor of the assessee. 4. Disallowance of Depreciation on Assets: The court considered whether the ITAT erred in failing to give direction regarding the disallowance of depreciation on assets used by employees. The AO had disallowed depreciation on assets purchased for employees, but the CIT(A) and ITAT found that the assets were part of the assessee's business and that their individual identity was lost in the block of assets. The court held that the expenses were for business purposes and that the ITAT's findings were sound. 5. Classification of Food Tasting and Development Expenses: The court examined whether the ITAT committed an error in not appreciating that food tasting and development expenses should have been capitalized. The AO had treated these expenses as capital in nature, but the CIT(A) and ITAT found that they were recurring expenses essential for the assessee's business. The court held that the expenses were revenue in nature and could not be classified as capital expenses. 6. Validity of Provisional Liability Claims: The court considered whether the ITAT was correct in upholding the assessee's claim for provisional liability. The AO had disallowed the provision, but the CIT(A) and ITAT found that the provision was made based on past experience and was bona fide. The court held that the provision was valid and based on a rational basis. Conclusion: The court dismissed the appeals of the revenue and answered all the questions in favor of the assessee. The service income was classified as business income, royalty payments were deductible, administrative expenses were correctly allocated, depreciation on assets used by employees was allowed, food tasting and development expenses were revenue in nature, and provisional liability claims were valid.
|
