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TMI Blog2018 (3) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 - ITA NO. 1889/MUM/2017 - - - Dated:- 5-1-2018 - SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER For The Appellant : Shri A.V. Sonde For The Respondent : Shri Rajesh Kumar Yadav ORDER PER G.S. PANNU, AM : The captioned appeal by the assessee is directed against the order of CIT(A)-5, Mumbai dated 26.12.2016, pertaining to the Assessment Year 2012-13, which in turn has arisen from the order passed by the Assessing Officer, Mumbai dated 27.02.2015 under section 143(3) of the Income Tax Act, 1961 (in short the Act ). 2. In its appeal, assessee has raised the following Grounds of appeal :- 1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in :- Sustaining the disallowance of ₹ 53,74,502/- being name license fee/royalty paid by the appellant in pursuant to agreement dated 18.3.2004 for use of Brand Name ARA LAW and its goodwill by the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was referred to in the Partnership Deed itself. The assessee also pointed out that the disallowance of the said expense would result in double taxation inasmuch as the individual, Shri Rajesh Begur has already offered the said income in his individual tax return and paid taxes thereon. Before the CIT(A), assessee specifically referred to the complete contents of clause (10) of the Partnership Deed to contend that the founder partner of the firm was having sole and exclusive title over the name ARA Law and all intellectual property vested therein, including Trademark, Copyright, etc., and that the royalty was payable to him in terms of the Name Licence agreement dated 18.03.2004 in consideration for allowing the firm to carry on the profession in the name and style of ARA Law . The CIT(A) has affirmed the stand of the Assessing Officer primarily taking the same ground inasmuch, according to him also, there was no provision in the Partnership Deed for payment of royalty to the founding partner, Shri Rajesh Begur. The CIT(A) justified his conclusion by relying on the judgment of Hon'ble Supreme Court in the case of Bharat Beedi Works P. Ltd. vs. CIT, 69 Taxman 453 (SC) to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive stated that the issue before the Hon'ble Supreme Court was completely different and pertained to whether the ceiling on deduction u/s 40(c) of the Act is applicable on royalty paid for use of Trademark by a company, whose Directors were also the partners in the recipient firm. 5. On the other hand, the ld. DR has reiterated the stand of the lower authorities and pointed out that in the absence of any specific provision in the Partnership Deed for payment of royalty, the same has been rightly disallowed. 6. We have carefully considered the rival submissions. Before we proceed to address the controversy, we may briefly recapitulate the relevant facts and the background of the dispute. The assessee before us is a partnership firm engaged in the profession of Advocates and Solicitors in the name and style of ARA Law . The assessee-firm had entered into Name Licence agreement dated 18.03.2004 with its founder partner, Shri Rajesh Begur. The Name Licence agreement prescribes that the founder partner has the sole and exclusive title over the name ARA Law and as per the terms and conditions of the agreement, the founder partner has allowed the firm, the right and lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occurrence of any of the events mentioned in Article 14 below no amount whatsoever shall be payable towards any deemed or notional goodwill to the Retained Partners, and, only the outstanding credit amounts, as reflecting in their respective current accounts, as the case may be, shall be paid. 7. A perusal of the aforesaid clause (10) reveals that in the first portion it is understood that the name, logo, word or mark ARA Law and other intellectual property rights, etc. exclusively belonged to the founder partner, Shri Rajesh Begur. The second portion of the clause recognises the substantial goodwill of such items and all partners other than the founder partner disclaim and waive any and all rights in the aforesaid items even at the time of the death of the founder partner. In fact, the latter portion of the second para also refers to the Name Licence agreement dated 18.03.2004. What we are trying to point out is that it is not a case where the Assessing Officer was oblivious to the Name Licence agreement dated 18.03.2004, which indeed is the basis on which the royalty payments have been made to the founder partner. In fact, the said clause of the partnership deed refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm for use of Trademark. The partners of the firm were also the Directors of the assessee-company, and the royalty paid was claimed as deduction. The same was sought to be disallowed by invoking Sec. 40(c) of the Act, but the Hon ble Court held that in the absence of any finding that the agreement was a mere device or a smoke screen, the deduction for payment of royalty could not be denied. It further observed that payment was a consideration for allowing the assessee-company to use the valuable right which belonged to the recipient firm. The issue before us is on a completely different footing and, therefore, in our view, the CIT(A) clearly erred in denying the claim of the assessee on the basis of the judgment of Hon'ble Supreme Court in the case of Bharat Beedi Works P. Ltd. (supra). Thus, in conclusion, we hereby set-aside the order of CIT(A) and direct the Assessing Officer to delete the addition of ₹ 53,74,502/- made under the head royalty . 9. The only other Ground is the ad hoc disallowance of 5% sustained by the CIT(A) out of various expenses, viz., business promotion expenditure, travelling expenditure and telephone expenditure. We note that in the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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