2024 (9) TMI 1062 - HC - Income Tax

Disallowing the claim for deduction of the cost of trademarks over a three year period - claim for the subsequent years when proportionate expenditure on trademarks referable to the first and second assessment after their acquisition years having been allowed by the Revenue in the preceding two assessment years - HELD THAT - In the present case, it is clear from the factual matrix that the assessee has merely a right to use the trademark for a period of 36 months. Having regard to clear enunciation of law as held in the case Devidas Vithaldas Co 1972 (1) TMI 5 - SUPREME COURT , the orders passed by the authorities are unsustainable. Further, as noticed above, reliance placed by the authorities on Sections 32 (1) and 43 (6) of the IT Act is ex facie untenable and liable to be rejected. As in the case of Jubiliant Foodwork Pvt. Ltd. Order 2014 (8) TMI 353 - DELHI HIGH COURT a coordinate Bench of the Delhi High Court was considering as to whether franchise fees and expenditure incurred on advertisement was a revenue expenditure or a capital expenditure held that CIT(Appeals) and Tribunal have rightly come to the conclusion that; (i) no new asset came into existence on account of payment of franchise fee and (ii) the rights under the agreement were only for the tenure of the agreement and no enduring benefit was derived by the assessee. Further, it was not an expenditure incurred for acquisition of source of profit, but enabled the respondent-assessee to run the business profitably. The fixed assets of the assessee remained untouched and no enduring asset came into existence. As already noted above, the brand or the trademark in question was not owned by the respondent-assessee - Decided in favour of assessee. Disallowing claim for deduction u/s 80JJAA - permanent employees solely employed for less than 300 days during the relevant previous years - HELD THAT - This issue is covered in the case of Texas Instruments India (P) Ltd. 2021 (4) TMI 1049 - KARNATAKA HIGH COURT and said submission is not disputed by Revenue. Hence, substantial question of law answered in favour of the assessee and against the Revenue.

Issues Involved:
1. Disallowance of the claim for deduction of the cost of trademarks over a three-year period.
2. Consistency in allowing proportionate expenditure on trademarks in subsequent years.
3. Disallowance of the claim for deduction under Section 80JJAA of the Income Tax Act for permanent employees employed for less than 300 days.

Issue-wise Detailed Analysis:

Re. substantial questions of law Nos. (i) and (ii):

7. The assessee, a public limited company engaged in the manufacture and sale of automobile components, acquired non-exclusive and indivisible rights to use trademarks from Philips India Ltd. for 36 months for Rs. 75,70,000/-. The assessee proportionately claimed deduction over the 36-month period starting January 2003.

8. The deduction was allowed for AYs 2003-04 and 2004-05 but disallowed for AYs 2005-06 and 2006-07 by the Assessing Officer (AO), who allowed only depreciation under Section 32 (1) instead of the full claimed deduction.

9. The Senior Counsel for the assessee argued that the deduction should not be governed by Section 32 (1) or Section 43 (6) as the assessee did not "own" or "acquire" the trademarks but only had the right to use them for 36 months. He also invoked the "rule of consistency" as the deduction was allowed in previous years.

10. The Revenue contended that the expenditure was not demonstrated as revenue expenditure under Section 37 of the IT Act.

11. The court found that the assessee had acquired only the right to use the trademark for 36 months and had amortized the cost over this period. The deduction was accepted for AYs 2003-04 and 2004-05 but disallowed for AYs 2005-06 and 2006-07.

12. The AO's reliance on Section 32 (1) was deemed incorrect as it requires the assessee to "own" the asset, which was not the case here.

13-14. Section 32 (1) and Section 43 (6) were cited by the AO to justify the disallowance, but the court found them inapplicable as the assessee did not own or acquire the trademarks.

15. The court held that the AO's reliance on these sections was untenable.

16. The Commissioner upheld the AO's decision, stating that the deduction could not be claimed under both Section 32 and Section 37.

17. The Tribunal confirmed the AO's and Commissioner's findings, rejecting the "rule of consistency" argument and distinguishing the judgments relied upon by the assessee.

18-19. The court referred to the Supreme Court's decision in Devidas Vithaldas & Co, which distinguished between acquisition of goodwill (capital expenditure) and the right to use it (revenue expenditure). The court found that the assessee's case fell under the latter.

20-22. The court rejected the Revenue's reliance on Jubiliant Foodwork Pvt. Ltd., finding that the case supported the assessee's position.

23. Substantial questions of law Nos. (i) and (ii) were answered in favor of the assessee.

Re. substantial question of law No. (iii):

24. The Senior Counsel for the assessee argued that this issue was covered by the Karnataka High Court's decision in Commissioner of Income Tax v. Texas Instruments India (P) Ltd.

25. The Revenue did not dispute this submission.

26. Substantial question of law No. (iii) was answered in favor of the assessee.

27. The appeal was allowed, and the order dated 8.9.2016 by the Income Tax Appellate Tribunal, Bangalore Bench "A", Bangalore, in ITA Nos. 671/Bang/2011, 672/Bang/2011, and 1211/Bang/2015, as well as the orders of the authorities, were set aside insofar as they pertained to the substantial questions of law answered in favor of the assessee.

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