2017 (2) TMI 792 - AT - Income Tax

Disallowance of license fees claimed - Held that - DR rightly contended that license fee was actually paid by the M/s. Digvijay Chemicals Ltd., however, the fact remains that the liability is/was supposed to be discharged by the assessee company according to MOU. Therefore, on the aforesaid analization, we do not find any hesitation to hold that said liability of 87,50,000/- was the liability of the appellant out of total amount of ₹ 1,27,50,000/- in proportionate from 1966 to 2006. Even otherwise, M/s. Digvijay Chemical Ltd. raised a debt note of ₹ 66,53,000/- and ₹ 20,97,000/-(total ₹ 87,50,000/-) towards renewal and license fee from 1966 to 31st March, 2006 deposited by them. But in fact, this was the liability of the assessee company as per said MOU dated 18.05.2006. Even otherwise the said expenses were accordingly recorded by the appellant in its books of accounts and claimed as deduction on accrual basis for debiting the profit and loss account in the year under consideration. Even otherwise, the liability for business expenditure is admissible in the year, it attends finality as enforceable and under the mercantile system of accounting. The liability is liable in the year of accrual, even it relates to an earlier year and said expenditure of ₹ 87.50 in respect of license fee was the business expenditure which had crystallized , accrued and paid during the financial year under consideration and incurred wholly and exclusively for the business of the assessee.- Decided against revenue

Issues Involved:
1. Deletion of disallowance of license fees claimed at ?87,50,000/-.
2. Validity of the Memorandum of Understanding (MOU) and its impact on liability.
3. Connection between the assessee and the distillery unit regarding the liability.
4. Taxability and allowability of the license fee as a business expenditure.

Detailed Analysis:

1. Deletion of Disallowance of License Fees Claimed at ?87,50,000/-:
The Revenue challenged the deletion of the disallowance of ?87,50,000/- claimed as a license fee by the assessee for the assessment year 2011-12. The Assessing Officer (AO) had disallowed this expense, arguing that the liability was not related to the assessee's current business activities and was improperly claimed. The AO noted that the liability arose from arrears of excise duty from 1966-67 to 2005-06 and was related to M/s. Khalsa Distillery Company, which was not owned by the assessee during the assessment year.

2. Validity of the Memorandum of Understanding (MOU) and Its Impact on Liability:
The CIT(A) allowed the appeal of the assessee, noting that the liability of ?87,50,000/- was a finalized, adjudicated, quantified, and discharged liability. The MOU dated 18-05-2006 between the assessee and M/s. Bagga Millennium Liquor Pvt. Ltd. stated that all debts, liabilities, contingent liabilities, duties, and obligations up to the appointed date (01-04-2006) were to be borne by the assessee. The CIT(A) held that the AO was incorrect in ignoring the MOU and that the liability was not contingent but a crystallized business liability.

3. Connection Between the Assessee and the Distillery Unit Regarding the Liability:
The AO argued that the distillery unit, M/s. Khalsa Distillery Company, had merged with M/s. Digvijay Chemicals Ltd., and thus, the MOU did not survive during the assessment year. However, the CIT(A) found that the liability was related to the period before the merger and was the responsibility of the assessee as per the MOU. The assessee had sold the distillery unit to M/s. Bagga Millennium Liquor Pvt. Ltd., and the liability for the license fee up to the appointed date was to be borne by the assessee.

4. Taxability and Allowability of the License Fee as a Business Expenditure:
The CIT(A) concluded that the expenditure of ?87,50,000/- was incurred "wholly and exclusively" for the purpose of the distillery business run by the assessee over the years. The liability had crystallized and was paid during the financial year under consideration. The CIT(A) relied on judicial precedents, including CIT v. A. Ganpati and Non Such Tea Estate Ltd. v. CIT, which supported the allowability of such liabilities in the year they attain finality as enforceable. The CIT(A) held that the expenditure was a business expense and allowed the deduction.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the liability of ?87,50,000/- was a business expenditure incurred wholly and exclusively for the assessee's business and had crystallized during the financial year under consideration. The appeal filed by the Revenue was dismissed. The Tribunal emphasized that the liability was related to the period before the merger and was the responsibility of the assessee as per the MOU. The expenditure was recorded in the assessee's books of accounts and claimed as a deduction on an accrual basis. The Tribunal found no hesitation in confirming the CIT(A)'s order and dismissed all grounds raised by the Revenue.

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