2015 (2) TMI 493 - AT - Income Tax

Payments during the year to institutions for technical services - payment made on registration of patents - whether capital expenditure? - Held that - As per the Memorandum of Association of the assessee, it is not in dispute that one of the objects of the assessee company is to conduct scientific technical and industrial research. After a careful perusal of the assessment order and the order of the Ld. CIT(A), we find that none of these authorities have discussed the Research agreement dt. 16.11.2000 which is between Unilever PLC and Unilever N.V and the assessee. Under the head scope this agreement clearly provides for the services to be rendered by the assessee to Unilever group of companies for which fees have been provided. We, further find that there is a specific clause in this agreement relating to intellectual property rights . We find that none of the revenue authorities have considered the facts of the case in the light of this agreement of the assessee. The AO is directed to decide this issue afreshn the light of clause (III) in the agreement dt. 16.11.2000 under the head intellectual property rights . - While deciding this issue afresh, the AO is also directed to consider the additional plea of the assessee u/s. 35(1)(ii) and Sec. 35(1)(iv) of the Act as per provisions of law - Decided in favour of assessee for statistical purpose. Disallowance of expenditure for earning tax free dividend income at 5% of the dividend income - Held that - We find that the assessee has not allocated any expenditure for earning the exempt income, therefore, the AO was required to disallow certain expenses relatable to exempt income on proportionate basis for which the AO has disallowed 5% of the dividend income. The disallowance being very reasonable, we do not find any reason to interfere with the findings of the Ld. CIT(A). - Decided against assessee. Chargeability of interest u/s. 234D - Held that - It is now well settled that provisions of Sec. 234D are with retrospective effect. We, therefore, do not find any reason to interfere with the findings of the Ld. CIT(A). - Decided against assessee.

Summary

Issues:
1. Treatment of payments to institutions for technical services as capital expenses.
2. Registration of patents considered as capital expenditure.
3. Disallowance of expenditure for earning tax-free dividend income.
4. Chargeability of interest under section 234D of the Act.

Issue 1: Treatment of Payments to Institutions for Technical Services as Capital Expenses:
The assessee's payments to institutions for technical services were treated as capital expenses by the Assessing Officer (AO) and confirmed by the CIT(A). The AO believed the expenses were for long-term benefits and not revenue expenses. However, the ITAT Mumbai found that the agreements with the parties were not adequately considered. The ITAT directed the AO to reevaluate the issue in light of the specific research agreement dated 16.11.2000 between the assessee and Unilever, emphasizing the need for a fresh decision based on this agreement and the company's objects as per the Memorandum of Association. The ITAT allowed the appeal for statistical purposes and directed consideration of additional pleas under relevant sections of the Act.

Issue 2: Registration of Patents Considered as Capital Expenditure:
Similarly, the AO considered the payment made for the registration of patents as capital in nature. The ITAT directed a fresh assessment, taking into account the intellectual property rights clause in the agreement dated 16.11.2000. The issue was restored to the AO for a reconsideration aligned with the ITAT's directions. The appeal was allowed for statistical purposes.

Issue 3: Disallowance of Expenditure for Earning Tax-Free Dividend Income:
The CIT(A) disallowed expenses related to earning tax-free dividend income based on judicial precedents. The ITAT upheld this decision, noting that the AO had reasonably disallowed 5% of the dividend income as expenses were not allocated for earning the exempt income. The ITAT dismissed the assessee's grievance in this regard.

Issue 4: Chargeability of Interest under Section 234D of the Act:
Regarding the chargeability of interest under section 234D of the Act, the ITAT rejected the assessee's claim that the provisions were not applicable due to the timing of intimation. The ITAT held that section 234D had retrospective effect and upheld the CIT(A)'s decision. The appeal was partly allowed for statistical purposes.

In conclusion, the ITAT Mumbai addressed various issues related to the treatment of expenses, registration of patents, disallowance of expenditure for tax-free dividend income, and chargeability of interest under section 234D of the Act. The judgments provided detailed analysis and directions for fresh assessments, emphasizing the need to consider specific agreements and legal provisions in determining the nature of expenses and income.