9911796707
TMI Blog2018 (2) TMI 1701X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 2000-01 are that the assessee is a company incorporated under the provisions of Companies Act, 1956 and is engaged in the business of franchisee of Pizza Hut and KFC Restaurants for which it appointed various franchisees. For this purpose, the assessee has obtained franchisee rights from KFC International Holdings Inc. and Pizza Hut International LLC for which it pays royalty. Further, the assessee has also entered into service agreement with KFC International Holdings and Pizza Hut International LLC. The assessee is inter al ia required to provide franchisee support service and liaisoning support in respect of franchisees located in India and Indian subcontinent. For this, the assessee is remunerated at agreed upon rates as per the service agreement. Further, the assessee has also established a wholly owned subsidiary under the name of Yum Restaurants Marketing Private Limited which was incorporated with the sole objective of undertaking advertising, media and promotional activities exclusively for the assessee and its franchisees at the national and international level. 2.1 For the year under consideration, the assessee filed its return of income declaring a loss of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,74,92,008/- paid as royalty and treated as being capital in nature by the Assessing Officer. The Ld. Commissioner of Income Tax(A) also allowed the assessee's ground of claim of depreciation amounting to Rs. 1,54,49,696/-. The Ld. Commissioner of Income Tax (A) also allowed the assessee's claim by deleting addition amounting to Rs. 90,812/- on account of prior period expenses. 2.3 Now, both the assessee and the department are before the ITAT and have challenged the action of the Ld. Commissioner of Income Tax(A) and the respective grounds raised by both the parties are as under:- 2.4 The following grounds have been raised by the assessee in ITA No. 964/D/2013:- "1. That on the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) - XXI ['Ld. CIT(A)'] has erred in not adjudicating the Ground No. 2 raised by the appellant challenging the validity of the reassessment proceedings under Section 148 of the Income Tax Act, 1961 ['the Act']. 2. That on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in partly upholding the disallowance of lease rent amounting to Rs. 12,60,000 out of the total lease rent of Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This assessment was completed on 31.03.2004. Subsequently, due to special audit being ordered under the provisions of section 142(2A) of the Act for assessment year 2002-03, the Assessing Officer initiated reassessment proceedings u/s 147 and concluded the reassessment proceedings on 29.12.2006 by computing the income at Rs. 8,64,96,240/- which was then set off against the brought forward business losses and resulted in nil taxable income. In the reassessment, the Assessing Officer made the following adjustments, additions and disallowances:- S.No. Particulars Amount (Rs.) 1 Service income, treated as 'income from other sources ' as against business income ' 9,04,27,842 2 Disallowance of royalty paid to YRAPL 2,33,30,505 3 Disallowance of administrative expenses by hypothetical apportionment to subsidiary company, i.e. YRMPL 3,30,68,187 4 Disallowance of lease rent paid for obtaining rent free accommodation for managing director (Mr. Sandeep Kohli) 15,00,000 5 Addition made on account of notional interest income on security deposits placed for obtaining rent free accommodation for managing director (Mr. Sandeep Kohli) 6,00,000 6 Disallowance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XI ['Ld. CIT(A)'] has erred in not adjudicating the Ground No. 2 raised by the appellant challenging the validity of the reassessment proceedings under Section 148 of the Income Tax Act, 1961 ['the Act']. 2. That on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in partly upholding the disallowance of lease rent amounting to Rs. 12,60,000 out of the total lease rent of Rs. 15,00,000 paid by the appellant to M/s Mezbaan Hoteliers Pvt. Ltd. on account of rent free accommodation obtained for its Managing Director. In doing so, the Ld. CIT (A) has erred in not considering the valuation certificates submitted by the appellant. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the disallowance of business expenditure amounting to Rs. 7,500 by holding the same to be personal in nature. 4. That on the facts and circumstances of the case and in law, the Ld. C1T(A) has erred in upholding the disallowance of business expenditure amounting to Rs. 1,13,279 by holding the same as being capital in nature. In doing so, the Ld. CIT (A) has failed to correctly appreciate the nature of expenses." 3.4 Following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rental in favour of the assessee for assessment years 2002-03, 2003-04 and 2006-07 and the annual rent of Rs. 2,40,000/- had been allowed as fair rent of the property provided to the Managing Director. The Ld. AR submitted that this accommodation was provided in accordance with the employment contract between the assessee company and the MD and tax was duly deducted at source on such payment along with taxing the same as perquisite in the hands of the MD. It was also submitted that the rent recovered from the MD was duly accounted for as income by the assessee in its books of accounts and the same was evident from the order of the Ld. Commissioner of Income Tax (A) for assessment year 2002-03 and 2003-04. 4.2 With respect to ground no. 3 in assessee's appeals for assessment year 2000-01 and 2001-02 pertaining to disallowance of business expenditure by holding the same to be personal in nature, it was submitted that these expenses were incurred to procure car accessories for an employee and that the same were incurred as per company's policy and have been taxed in the hands of the employee as perquisite. It was submitted that these expenses were related to the business and were in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years. 5.2 With respect to ground no. 3 of the department's appeal for assessment year 2000-01 and ground no. 6 for assessment year 2001-02 pertaining to depreciation, the Ld. AR submitted that this issue was also covered in favour of the assessee by the order of the ITAT in assessee's own case for assessment years 2002-03, 2003-04 and 2006-07. It was also submitted that the ITAT followed its earlier orders in assessment years 2004-05, 2005-06, 1999-2000. 5.3 With respect to ground no. 4 in department's appeal for assessment year 2000-01 and ground no. 7 in appeal for assessment year 2001-02 pertaining to prior period expenses, it was submitted that these expenses were disallowed because as per the Assessing Officer, they did not pertain to the assessment years under consideration. The Ld. AR submitted that the invoices pertaining to these expenses were received by the assessee in the years under consideration and, therefore, the liability to pay crystallized only when these invoices were received by the assessee. The Ld. AR placed reliance on the judgment of the Hon'ble Apex Court in the case of Nonsuch Tea Estate Limited vs. CIT reported in 98 ITR 189(SC) for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007 and ITA 5122/Del/2010 wherein, vide order dated 31.05.2011, Coordinate Bench of the ITAT has held in Para 46 that there was no dispute that the payments in this regard had been made to persons who were covered under the provisions of section 40A(2)(b) of the Act. The ITAT in the said order has noted that the assessee has extended extra pecuniary benefit to its MD and, therefore, taking into consideration the overall evidence on record, the Assessing Officer was directed to allow payment of rent to the extent of Rs. 20,000/- per month and the balance had to be disallowed. Thus, the ITAT has ruled that only a rent of Rs. 2,40,000/- per annum was allowable as a deduction in the facts and circumstances of the case. We find that the Ld. CIT has allowed the assessee a deduction of Rs. 2,40,000/- per annum for both the years under consideration and has disallowed the remaining amount i.e. Rs. 12.60 lakh. During the course of proceedings before us, the Ld. AR has only relied on the findings of the ITAT in assessee's own case for earlier years as aforementioned and he has not brought out any new fact or evidence in support of his contention for allowance of an amount exceeding Rs. 2,40, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that partial disallowance was not sustainable even if there was any personal use of the vehicles by the director. However, in the case before us, the impugned expenditure has been incurred on buying car accessories for a vehicle which is not owned by the assessee company but by the employee of the company. Accordingly, we uphold the sustenance of disallowance by the Ld. CIT (A) in both the years under consideration and dismiss ground no. 3 of the assessee's appeals for both the years. 7.3 Ground no. 4 in assessee's appeal for assessment year 2000-01 challenges the upholding of disallowance of Rs. 30,880/- incurred on repair and maintenance of computers whereas in assessment year 2001-02 the amount in dispute is Rs. 1,13,279/-. It has been submitted that no new asset has been created in this regard and the expenditure included amount spent on purchase of RAM, hard disk, laptop battery etc. It is seen that these expenditure/s have been disallowed on the ground that they were capital in nature. However, looking into the facts of the case, we agree with the averments of the Ld. AR that these expenses were incurred to keep the assets of the assessee-company in a running condition an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition on account of royalty expenses. We find that this issue is also covered in favour of the assessee by the order of the ITAT in assessee's own case for earlier assessment years viz. 2002-03, 2003-04 and 2006-07 (supra). The Coordinate Bench of ITAT has discussed the issue in Para 20 of the said order wherein it is noted that the Assessing Officer has misread the approvals granted by the Govt. of India while arriving at the conclusion that the assessee has not been remitting the payment as per the approvals. The ITAT has noted that in the approval, Secretariat of Industrial Assistance (SIA), Govt. of India has used the expression 'royalty' as well as 'Fee for technical services' loosely and interchangeably. It was also noted by the ITAT that these payments were directly related to the business and were incurred wholly and exclusively for running the franchisees within India. This adjudication by the ITAT in assessee's own case also for assessment years 2004-05, 2005-06, 2007-08 and was also upheld by the Hon'ble Delhi High Court. During the course of proceedings before us, department could not point out any legal or factual error in the adjudication so reached by the Ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re received. We find that the Ld. CIT (A), while allowing the claim of the assessee in both the years, has followed his orders for earlier assessment years wherein in similar circumstances, he had allowed identical expenses of earlier years. The department could not bring on record any evidence to distinguish the facts in these two years from the facts in earlier years. Therefore, we find no reason to interfere with the findings of the Ld. CIT (A) on this issue. Accordingly, we dismiss ground no. 4 for assessment year 2000- 01 and ground no. 7 for 2001-02. 9.4 Ground no.3 in department's appeal for 2001-02 challenges the deletion of addition by the Ld. CIT (A) on account of disallowance of 50% of administrative expenses. The controversy arose because the assessee has a wholly owned subsidiary named Yum Restaurant India Pvt. Ltd. whose main job was to carry out marketing, advertising, media and promotional activities. The Assessing Officer observed that the subsidiary company had been operating from the premises of the assessee only and, therefore, all the administrative expenses in connection with advertising, promotional activities, marketing etc. should be allocated to the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -03, the department had contested action of the Ld. CIT (A) in including an income of Rs. 3,01,500/- as taxable in assessment year 2002-03 whereas as per the department, it pertained to assessment year 2001-02. These receipts pertained to Supply Chain Management local fees, Supply Chain Management international fees and reimbursement of general and administrative expenses. The issue arose because in the special audit report, the auditor had pointed out that three receipts accounted by the assessee pertain to earlier assessment years. However, the Ld. CIT (A) was of the view that since the tax rate in both the assessment years was the same, it did not make much difference if these receipts were included in assessment year 2002-03 and he directed the Assessing Officer to tax this income in 2002-03 itself. On appeal, the Coordinate Bench of the ITAT held that the major item appeared to be taxable in assessment year 2002-03 and further, the Ld. CIT (A) had held them to be taxable in assessment year 2002-03 on the ground of the tax rate being similar. The ITAT Coordinate Bench went on to hold that it would create unnecessary complications by excluding these receipts from assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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