2018 (3) TMI 133 - AT - Income Tax

Disallowance of license fee/royalty paid by the appellant in pursuant to agreement for use of Brand Name ARA LAW - Held that - In the absence of any material to repudiate the Name Licence agreement dated 18.03.2004 or challenge its bona fide, the disallowance is unsustainable. Secondly, the fact that the Annual Accounts have been drawn and in the Profit & Loss Account, the payment of royalty to the founder partner has been claimed as a deduction and such accounts have been adopted by the partners is a factum which demonstrates the consent of the partners to incur such expenditure, which is in consonance with the agreement dated 18.03.2004 between the assessee-firm and the founder partner. Therefore, under these circumstances, we are unable to uphold the disallowance sustained by CIT(A), which is hereby directed to be deleted.- Decided in favour of assessee Ad hoc disallowance of 5% sustained by the CIT(A) out of various expenses, viz., business promotion expenditure, travelling expenditure and telephone expenditure - Held that - We note that in the assessment order as well as in the order of CIT(A), the disallowance has been made on mere surmises without establishing that any particular expenditure has been incurred for non-business purposes. Therefore, the ad hoc disallowance made is hereby directed to be deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of ?53,74,502/- being name license fee/royalty.
2. Ad hoc disallowance of 5% in respect of business promotion, traveling, and telephone expenses.

Detailed Analysis:

1. Disallowance of ?53,74,502/- being name license fee/royalty:

The primary issue in this appeal is the disallowance of ?53,74,502/- representing the license fee/royalty paid by the assessee to its founder partner under a 'Name Licence' agreement dated 18.03.2004. The Assessing Officer (AO) disallowed this expense on the grounds that the royalty was not permitted by the Partnership Deed dated 23.08.2010, which stated that royalty payments were to be made only to the legal heirs of the founder partner after his death. The CIT(A) upheld this disallowance, relying on the judgment of the Hon'ble Supreme Court in Bharat Beedi Works P. Ltd. vs. CIT, which emphasized the necessity of a clear-cut provision for payment of royalty in the Partnership Deed.

The assessee argued that the royalty payment was based on the 'Name Licence' agreement, which allowed the firm to use the name 'ARA Law' and other intellectual property rights. The agreement had been in place since 01.04.2004, and the royalty was paid regularly, including the year under consideration, with necessary tax deductions made under section 194J of the Income Tax Act, 1961. The assessee contended that the disallowance would result in double taxation since the founder partner had already paid taxes on this income in his individual tax return. The assessee also pointed out that the royalty payments had been allowed in previous assessments without disallowance.

Upon review, it was noted that the 'Name Licence' agreement dated 18.03.2004 was indeed referred to in the Partnership Deed, and the royalty payments were justified. The Tribunal found that the lower authorities had misinterpreted the provisions of the Partnership Deed and the 'Name Licence' agreement. It was concluded that the royalty payment was a legitimate business expense under section 37(1) of the Act, and there was no material to challenge the bona fide nature of the 'Name Licence' agreement. Therefore, the Tribunal directed the deletion of the disallowance of ?53,74,502/-.

2. Ad hoc disallowance of 5% in respect of business promotion, traveling, and telephone expenses:

The second issue involved an ad hoc disallowance of 5% of the expenses incurred on business promotion, traveling, and telephone expenses. The CIT(A) sustained this disallowance on the assumption that these expenses were of a personal nature without pointing out specific instances of non-business expenditure.

The Tribunal observed that the disallowance was made on mere surmises without any concrete evidence to establish that the expenses were incurred for non-business purposes. Consequently, the Tribunal directed the deletion of the ad hoc disallowance of 5%.

Conclusion:

The Tribunal allowed the appeal of the assessee, setting aside the order of the CIT(A) and directing the deletion of both the disallowance of ?53,74,502/- under the head 'royalty' and the ad hoc disallowance of 5% of business promotion, traveling, and telephone expenses.