2016 (1) TMI 252 - AT - Income Tax

Penalty levied by the AO u/s 271(1)(c) - disallowance of license expenditure - CIT(A) deleted the penalty - Held that - There is no dispute that the assessee has furnished all the particulars relating to the payment made to M/s GDS. There is also no dispute with regard to the fact that the assessee has already been using the trade mark and technical knowhow for the past several years by payment of annual royalty. By way of an amendment agreement, the assessee has agreed to make a lumpsum payment instead of annual payment. Accordingly, the assessee has entertained the view that the same is allowable as revenue expenditure. However, the AO has taken the view that the same is capital in nature, since the benefit of expenditure has spread for a period of about 50 years. The Ld A.R submitted that the view taken by the assessee finds support from the subsequent decision rendered by the Hon ble Bombay High Court in the case of Essel Propack Ltd (2010 (3) TMI 293 - BOMBAY HIGH COURT). Before us, the assessee also placed reliance on the decisions rendered by Hon ble Supreme Court in the case of Alembic Chemical works Co. Ltd (1989 (3) TMI 5 - SUPREME Court ); Assam Bengal Cement Vs. CIT (1954 (11) TMI 2 - SUPREME Court ), M.K. Bros Vs. CIT (1972 (8) TMI 5 - SUPREME Court ). Thus, we notice that the assessee has made a claim on the basis of certain judicial pronouncements and the same was not acceptable to the AO. Thus, the impugned issue becomes debatable issue. Accordingly, we are of the view that, merely because the claim of the assessee was not acceptable to the tax authorities, the disallowance made on that basis will not give rise to concealment of particulars of income or furnishing of inaccurate particulars of income. Accordingly, we uphold the view taken by Ld CIT(A). - Decided in favour of assessee.

Summary

Issues:
Challenge to cancellation of penalty under section 271(1)(c) of the Act by Ld CIT(A).

Analysis:
The appeal pertains to the assessment year 1999-2000 where the revenue contested the decision of Ld CIT(A) canceling the penalty imposed by the AO under section 271(1)(c) of the Act. The assessee, a company engaged in manufacturing pharmaceutical and agro chemical products, had its assessment reopened and various additions were made. The AO disallowed a technical know-how fee claimed as revenue expenditure, treating it as capital expenditure. The Tribunal confirmed this disallowance, leading to a penalty of Rs. 66,20,000 being levied by the AO. However, the Ld CIT(A) deleted this penalty citing the decision of the Hon'ble Supreme Court in the case of Reliance Petroproducts Pvt Ltd (322 ITR 158), which the revenue challenged.

The background of the claim made by the assessee reveals agreements with M/s G.D. Searle & Co (GDS) granting rights to use the name "SEARLE," trademarks, and technical assistance. The AO treated a lump sum payment made by the assessee for these rights as capital expenditure, allowing depreciation. The Ld CIT(A) upheld this view. The revenue argued that the enduring benefit of the expenditure justified its treatment as capital, asserting that the assessee knowingly claimed it as revenue. In contrast, the Ld A.R contended that the payment was for a license, not a purchase, and was treated as deferred revenue expenditure in the books. The assessee's claim was supported by judicial decisions, including the Hon'ble Bombay High Court in the case of CIT Vs. Essel Propack Limited (325 ITR 185) and other case laws.

Upon hearing both parties, the Tribunal found merit in the Ld A.R's contentions. It acknowledged that the assessee had disclosed all relevant details and had been using the rights for years. The change to a lump sum payment was a business decision, not indicative of concealment. The Tribunal noted the debatable nature of the issue, supported by legal precedents cited by the assessee. Consequently, it upheld the Ld CIT(A)'s decision to delete the penalty, dismissing the revenue's appeal.

In conclusion, the Tribunal's decision centered on the treatment of a lump sum payment for rights as revenue or capital expenditure. The Tribunal found the assessee's claim justifiable based on legal precedents and business practices, ultimately ruling in favor of the assessee and dismissing the revenue's appeal.