2017 (3) TMI 526 - AT - Income Tax

Addition u/s 37(1) - processing fees paid to bank in relation to acquiring brand name - Held that - In the instant case, the payment has not been made for acquiring a brand name, but for facilitating for acquisition of the brand name, which in turn made substantial improvement in earning capacity of the appellant s business. The payment is in the form of a brokerage or commission or service charges. (not-withstanding its liability for TDS). Therefore on the facts and in the circumstances of the case in my view the expenditure incurred by the appellant company for the payment made to M/s. Shalini Properties & Developers Pvt. Ltd is a revenue expenditure. One of the positive tests must be attracted and none of the negative tests should be satisfied in order to claim deduction under section 37(1) of the Act. In this case, the expenditure has been incurred with a view to bring profits or monetary advantage either today or tomorrow; the expenditure incurred is such as a wise, prudent, pragmatic and ethical man of the world of business would conscientiously incur with an eye on promoting his business prospects, subject to the expenditure being genuine and within reasonable limits. Therefore, more than one of the positive tests have been proved. Therefore, more than one of the positive tests have been proved. Coming to the negative tests, it may be mentioned again that the Assessing Officer has not brought any material evidence on record that it is a bogus fictitious or sham transaction; it is unreasonable and out of proportion; and that it is an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith. Therefore, none of the conditions of the negative tests has been satisfied in this case. In Sasson J.David & Co.(P)Ltd. Vs. CIT 1979 (5) TMI 3 - SUPREME Court has been held that the assessee can claim deduction under section 37(1) even though there is no compelling necessity to incur such expenditure. In Goodyear India ltd. Vs. ITO 2000 73 ITD 189/68TTJ(Delhi)TM 330, it has been held that expenditure incurred to get right to use licence for limited period (where the assessee company, manufacturing tyres, entered into an agreement with a foreign company for technical know-how for manufacture of radial tyres and the assessee got the right to use the licence for a fixed period of 8 years) is deductible. Thus expenditure incurred by the appellant company in making payment under the head SBLC charges to Shalini Properties and Developers Pvt. Ltd. Is consideration of commercial expediency of the business of the appellant company and is allowable as deduction under section 37(1) - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the payment of ?13,19,24,685/- made to ICICI Bank as "Processing Fees" is allowable under section 37(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Allowability of Processing Fees under Section 37(1):
The primary issue revolves around whether the payment of ?13,19,24,685/- made by the assessee to ICICI Bank as "Processing Fees" qualifies as a deductible business expenditure under section 37(1) of the Income Tax Act, 1961.

Facts and Background:
The assessee filed its return of income for the Assessment Year (A.Y.) 2009-10, declaring a total loss of ?38,420/-. During scrutiny, the Assessing Officer (AO) disallowed the processing fees of ?13,19,24,685/- on the grounds that it was not incurred for earning income from M/s. Ruia Sons Pvt. Ltd. and did not fall under the ambit of section 37(1). The AO relied on a similar decision in the case of M/s. Ruia Sons Pvt. Ltd.

Arguments and Findings:
- The assessee, a substantial shareholder of M/s. Dunlop India Ltd., stood as a guarantor for a loan taken by Wealthsea Pte Ltd., a Singapore-based company, from ICICI Bank. As a guarantor, the assessee incurred charges of ?13,19,24,685/-.
- The AO argued that the transactions were colorable devices to reduce the tax burden, citing decisions in Logitronics Pvt. Ltd. and Kaycee Electricals v. DCIT.
- The CIT(A) observed that the assessee's actions were commercially prudent. The appellant company had entered into an agreement with Dunlop India Ltd. to use the 'Dunlop' brand name, facilitated by M/s. Shalini Properties & Developers Pvt. Ltd., which was a substantial shareholder of Dunlop India Ltd.
- The CIT(A) noted that the income generated from the use of the 'Dunlop' brand name significantly outweighed the expenses incurred for the processing fees, demonstrating commercial expediency.
- The CIT(A) further emphasized that the transactions were not colorable devices but legitimate business expenditures aimed at generating income, supported by Board resolutions and agreements.

Legal Precedents and Principles:
- The CIT(A) referenced several legal principles and judicial decisions, including the Supreme Court's ruling in Union of India vs. Azadi Bachao Andolan, which distinguished between tax avoidance and tax planning.
- The CIT(A) also cited the Supreme Court's decision in SA Builders Ltd vs. CIT, which established that the Revenue cannot dictate the reasonableness of business expenditures from the perspective of a businessman.
- The Gujarat High Court's tests for determining the nature of expenditure (positive and negative tests) were applied, concluding that the expenditure met the positive tests and none of the negative tests.

Conclusion:
The CIT(A) concluded that the expenditure incurred by the appellant company for the payment made to M/s. Shalini Properties & Developers Pvt. Ltd. was a revenue expenditure, allowable under section 37(1) of the Income Tax Act. The CIT(A) deleted the addition made by the AO, holding that the payment was made for commercial expediency and was necessary for the business operations of the appellant company.

Final Judgment:
The ITAT upheld the CIT(A)'s decision, finding no infirmity in the CIT(A)'s detailed examination of the facts and circumstances. The appeal preferred by the Revenue was dismissed, and the relief granted to the assessee by the CIT(A) was sustained.

Order Pronounced:
The judgment was pronounced in the Court on 28.02.2017.