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2016 (3) TMI 368 - AT - Income TaxDisallowance of royalty payments on account of the same being treated as capital expenditure - Held that - Royalty payment is based on the percentage of quantum sales and it is an annual charge to be considered as business expenditure in respect of assessment year 2007-08 as held by Co-ordinate Bench in the case of India Nippon Electricals Ltd., 2016 (3) TMI 237 - ITAT CHENNAI . It is a lump sum payment towards royalty and as such in that circumstance it was held that it is an capital expenditure and depreciation was granted. - Decided in favour of assessee Disallowance of the capital work in progress written off - Held that - In this case, assessee incurred an expenditure towards setting up a factory at Singur in West Bengal. Due to unrest and protest by the local people, assessee had abandoned the said project , and claimed it as a revenue expenditure as a business expenditure. A perusal of Sec.30 to Sec.38 of the Act shows that neither sections will apply to this case and the assessee will not be able to claim the benefit u/s.28 of the Act. The expenditure incurred by the assessee is not for the purpose of carrying on its business, but on the other hand it is incurred for the purpose of setting up of new business which is in capital filed. Had the expenditure incurred for carrying on business which is an outgoing and assessee could claim as deduction from the profit of the business. The law has evolved considerably as a result of acceptance of the crucial principle that the distinction between capital and revenue expenditure should be determined from the practical and business view point and in accordance with sound accountancy principles, eschewing the legalistic approach. The expenditure incurred to set up a project at Singur in West Bengal is not an expenditure wholly and exclusively incurred for the purpose of carrying on business of the assessee or incidental o the carrying on the business of the assessee and it is an expenditure incurred in the capital field and it also cannot be allowed u/s.37 of the Act. Thus the loss in respect of discarded project had written off by the assessee during the previous year is not allowable expenditure as business deduction and it cannot be allowed. Being so, we are of the opinion that lower authorities are justified in rejecting the claim of the assessee. - Decided against assessee
Issues Involved:
1. Disallowance of royalty payments treated as capital expenditure. 2. Disallowance of capital work-in-progress written off. Detailed Analysis: 1. Disallowance of Royalty Payments: The first common ground in both appeals pertains to the disallowance of royalty payments, which were treated as capital expenditure by the Assessing Officer (AO). The assessee company had debited amounts of Rs. 1,04,10,665/- and Rs. 78,89,750/- under the head 'royalty' for the assessment years 2008-09 and 2009-10, respectively. These payments were made to Sango Co. Ltd., Japan, and Emcon Technologies, Germany, for using technical and engineering knowhow. The assessee claimed these payments as revenue expenses, but the AO treated them as capital expenditure and allowed depreciation at 25%, treating them as intangible assets. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed this action. The assessee argued that the royalty was paid based on a percentage of sales made each year, making it a revenue expenditure. The representative cited various judgments, including those of the co-ordinate bench of the Tribunal and the jurisdictional High Court, to support the claim that such payments should be treated as revenue expenditure when they are based on sales and not a one-time upfront payment. The Department Representative (DR) contended that there are two types of royalty payments: one-time upfront payments, which are capital in nature, and annual payments based on sales, which should also be treated as capital expenditure if they provide enduring benefits. The DR relied on the Supreme Court's decision in the case of Southern Switch Gear Ltd., arguing that the royalty payments should be treated as capital expenditure, especially since post-01.04.1998, intangible assets are entitled to depreciation at 25%. The Tribunal concluded that the royalty payments, being based on the percentage of quantum sales, should be considered as business expenditure. The judgment of the jurisdictional High Court in the case of Southern Switch Gear Ltd. was found inapplicable as it involved a lump sum payment towards royalty, which was treated as capital expenditure. Thus, the Tribunal allowed the assessee's claim, treating the royalty payments as revenue expenditure. 2. Disallowance of Capital Work-in-Progress Written Off: The second ground in the appeal for the assessment year 2009-10 concerns the disallowance of capital work-in-progress written off. The assessee had been constructing a factory premises at Singur in West Bengal, which was abandoned due to local unrest and protests. The assessee claimed the expenditure of Rs. 89,89,768/- as a write-off, which the AO disallowed, and the CIT(A) confirmed this disallowance. The assessee argued that the proposed project was in line with its existing business, and the abandonment of the project should allow the capital work-in-progress to be treated as revenue expenditure. The assessee cited various case laws supporting the claim that expenses for abandoned projects should be allowed as revenue expenditure. The DR, however, emphasized that only revenue expenses are allowable deductions under the Income Tax Act, and capital expenses cannot be allowed as revenue expenses. The DR argued that the capital work-in-progress written off is not in the nature of preliminary or pre-operative expenses and thus cannot be considered for allowance against taxable income. The DR also pointed out that the case laws cited by the assessee pertain to preliminary expenses, which are not applicable in this case. The Tribunal held that the expenditure incurred for setting up the factory at Singur was not for carrying on the existing business but for setting up a new business, making it a capital expenditure. The Tribunal noted that the expenses were not wholly and exclusively for the purpose of carrying on the existing business and thus could not be allowed as revenue expenditure. Consequently, the Tribunal dismissed the assessee's claim for the write-off of capital work-in-progress. Conclusion: - The appeal concerning the disallowance of royalty payments (ITA No.1281/Mds./14) was allowed, treating the payments as revenue expenditure. - The appeal concerning the disallowance of capital work-in-progress written off (ITA No.1282/Mds./14) was partly allowed, with the specific ground being dismissed. Order Pronounced: The order was pronounced on Wednesday, the 10th of February, 2016, at Chennai.
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