2024 (1) TMI 699 - HC - Income Tax

Nature of expenses - royalty paid by the assessee towards the use of logo - revenue or capital expenditure - Whether royalty is to be treated as intangible asset of capital nature and consequently the royalty payment is a capital expenditure? - HELD THAT - As decided by a common judgment dated 30.06.2022 passed by this court in T.C.A.No.755 of 2009 etc. batch in respect of the assessee's own case 2022 (6) TMI 1428 - MADRAS HIGH COURT . Every expenditure incurred to acquire some right over intangible asset, cannot be ipso facto termed as capital expenditure. The nature of the assets, right, information or technical know-how that is transferred, must be such that without which the transferee could never commence the business. As rightly contented by the learned senior counsel appearing for the assessees, the benefit granted by the licensor is not enduring in nature in the present cases. AO without appreciating the terms of the licence agreement and ascertaining the nature of the expenditure incurred by the assessee companies, disallowed the deduction of royalty payment and allowed the depreciation at 25% treating it as capital expenditure. Appellate authorities, while deleting the disallowances made by the assessing officer, have rightly treated the royalty payment as revenue expenditure. Once the payment of royalty is treated as revenue expenditure, automatically, it goes without saying that the assessees would be entitled to 100% deduction. Therefore, we need not interfere with the orders passed by appellate authorities. Decided in favour of assessee. Expenditure incurred on Employee Stock Option Scheme - Whether allowable as revenue expenditure? - HELD THAT - The issue involved herein is squarely covered by the decision of this court in CIT v. PVP Ventures Ltd. 2012 (7) TMI 696 - MADRAS HIGH COURT which was followed by the Tribunal while passing the orders impugned herein. In the said decision, this court held the order of the Tribunal allowing the deduction of ESOP expenditure, as an ascertained expenditure. Tribunal was correct in holding that the ESOP expenditure is revenue in nature and the assessee is entitled for deduction. Accordingly, the orders passed by the Tribunal in deleting the disallowances of ESOP expenses by the assessing officer, do not require any interference. No substantial questions of law arises.

Summary

Issues Involved:
1. Whether the royalty paid for the use of a logo is to be treated as revenue expenditure or capital expenditure.
2. Whether the expenditure incurred on Employee Stock Option Scheme (ESOP) is allowable as revenue expenditure.
3. Whether the provisions of section 14A read with Rule 8D can be invoked to compute indirect expenditure for earning exempt income.

Summary:

Issue 1: Royalty Payment as Revenue or Capital Expenditure

The court examined whether the royalty paid by the assessee for the use of the logo of Shriram Chits and Investments P Ltd should be treated as a revenue expenditure or capital expenditure. The Tribunal had held that such royalty payments are revenue expenditures. The court referred to several precedents, including CIT v. Ciba of India Ltd and CIT v. Wavin (I) Ltd, which supported the view that payments for the use of logos or trademarks for a particular period should be treated as revenue expenditures. The court emphasized that the license agreement conferred only a right to use the logo, which is non-transferable and non-exclusive, and did not constitute an acquisition of an asset. Therefore, the royalty payment qualified as a revenue expenditure, and the assessee was entitled to a 100% deduction. The court upheld the Tribunal's decision, answering this issue in favor of the assessee.

Issue 2: ESOP Expenditure as Revenue Expenditure

The court considered whether the expenditure incurred on the Employee Stock Option Scheme (ESOP) should be allowable as revenue expenditure. The Tribunal had allowed such expenditure as revenue expenditure. The court noted that ESOP is a voluntary scheme to incentivize employees, and the expenses incurred are aimed at promoting business without creating an enduring benefit or asset for the company. The court referred to the decision in CIT v. PVP Ventures Ltd., which held that ESOP expenses are ascertained liabilities and allowable as revenue expenditure. The court also cited the Karnataka High Court's decision in CIT v. Biocon Ltd., which supported the view that ESOP expenses are definite legal liabilities and deductible under section 37(1) of the Act. Consequently, the court upheld the Tribunal's decision, answering this issue in favor of the assessee.

Issue 3: Invocation of Section 14A read with Rule 8D

The court addressed whether the provisions of section 14A read with Rule 8D could be invoked to compute indirect expenditure for earning exempt income. The Tribunal had held that these provisions could not be invoked as the assessing officer had not expressly recorded specific satisfaction that the said expenses were incurred to earn exempt income. The court did not provide a detailed analysis for this specific issue in the provided judgment text but indicated that the substantial questions of law raised were covered by a common judgment dated 30.06.2022 in a related case of the assessee. Therefore, the court upheld the Tribunal's decision, answering this issue in favor of the assessee.

Conclusion

In conclusion, the court answered all the substantial questions of law in favor of the assessee and dismissed the tax case appeals filed by the Revenue, with no costs.