2015 (6) TMI 238 - AT - Income Tax

Disallowance on account of additional depreciation - CIT(A) deleted the disallowance - Held that - Since the assessee was engaged in the activities of production/ manufacturing of an article or thing, therefore, was eligible for additional depreciation. - Decided against revenue. Disallowance on account of capitalization of continuing fees/ royalty expenses @ 25% - CIT(A) deleted the disallowance - Held that - Since the facts are identical with earlier years for AYs 2006-07, 2007-08 and 2008-09 therefore, we do not find any reason to interfere with the findings of ld. CIT(A) on this issue, particularly because the assessee got a limited license to use the system for specified outlet only and the assessee did not have any right to transfer the license nor could sublicense. Further, the licensor had the right to entry to safeguard the system licensed to the assessee. Further, the assessee was liable to pay a fixed percentage of its sale as license fee to the licensor. Thus, ld. CIT(A), considering these facts, rightly observed that assessee had not received any permanent or enduring benefit through such license, which was limited to use by the assessee in the prescribed manner and liable to be rescinded by the licensor in certain conditions - Decided against revenue.

Summary

Issues:
1. Disallowance of additional depreciation.
2. Disallowance of capitalization of continuing fees/royalty expenses.

Analysis:

Issue 1 - Disallowance of Additional Depreciation:
The appeal by the Revenue pertains to CIT(A)'s order for the assessment year 2009-10. The assessee declared a loss of Rs. 77,22,083, and the assessment included disallowances of Rs. 3,28,374 for additional depreciation and Rs. 8,12,054 for capitalization of continuing fees/royalty expenses. The CIT(A) allowed the assessee's appeal, prompting the Revenue's appeal. The primary contention was the disallowance of Rs. 3,28,374 for additional depreciation, which the AO had denied but was deleted by the CIT(A). The Tribunal reviewed the manufacturing process of the assessee involving food items like pizzas and pastas, considering the definition of "manufacture" post an amendment in the Finance Act 2009. The ITAT found the process to be systematic and in compliance with specified processes, making the appellant eligible for additional depreciation. The ITAT referenced precedents and held that the assessee's activities qualified as manufacturing, allowing the additional depreciation claim. The Tribunal dismissed the Revenue's appeal on this ground.

Issue 2 - Disallowance of Capitalization of Continuing Fees/Royalty Expenses:
The second issue revolved around the disallowance of Rs. 8,12,054 for capitalization of continuing fees/royalty expenses. The AO had capitalized 25% of the total expenditure, relying on Supreme Court decisions. However, the CIT(A) allowed the claim, considering the expenses as revenue in nature. The Tribunal, following earlier decisions, upheld the CIT(A)'s findings, emphasizing that the license fee/royalty paid was revenue-based. The Tribunal noted that the facts were consistent with previous years, leading to the dismissal of the Revenue's appeal. The limited license terms and lack of enduring benefit to the assessee supported the decision to treat the expenses as revenue. Therefore, the Tribunal upheld the CIT(A)'s order on this issue, resulting in the dismissal of the Revenue's appeal.

In conclusion, the Tribunal dismissed the Revenue's appeal concerning both the disallowance of additional depreciation and the capitalization of continuing fees/royalty expenses, based on the findings related to manufacturing activities and revenue nature of expenses, respectively.