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TMI Blog2024 (11) TMI 646X X X X Extracts X X X X X X X X Extracts X X X X ..... ital expenditure. However, the 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. Accordingly, the substantial questions of law relating to royalty, are answered in favour of the assessees. Disallowance of bad debts - After a detailed discussion in regard to the the judgment of the Supreme Court in Shriram Chits and Investments Private Limited [ 1993 (7) TMI 338 - SUPREME COURT] which dealt with the vires of the Chit Funds Act, 1982, the issue of bad debts has been discussed and concluded as not denied by the Revenue that the payment made in the course of the business had resulted in a loss of the chit amount which is also allowable under Section 28. Given the above-said fact, we have no hesitation in rejecting the Revenue's appeal on this question. Decided in favour of assessee. - THE HONOURABLE DR. JUSTICE ANITA SUMANTH And THE HONOURABLE M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) decided royalty issue in favour of the assessee, he directed the AO to withdraw the depreciation granted at 25% on the royalty payment. The said finding of the CIT(A) was also confirmed by the Tribunal. Therefore, the assessee is before this court by filing TCA.No.407/2019, raising a substantial question of law, whether the Tribunal was right in not directing the assessing officer to allow depreciation on the royalty amounts disallowed in the earlier years, without prejudice to the ground raised in the earlier years that royalty amount is allowable as revenue expenditure. 7.2. The learned Senior Standing Counsel appearing for the Revenue would contend that the parent company of Shriram Group of Companies is in the trade of finance and investments and they had built a good will and reputation over several years of operation. The parent company also had large data base of its existing and past clients, who had investments and had financial transactions with them. While so, the assessee companies, with the help of the parent company, started business by making investment in land, building etc., and claimed depreciation. In addition, the assessee companies also invested for use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the authorities below. 7.3. Per contra, the learned Senior counsel appearing for the assessee companies would submit that M/s.Shriram Chits Investments Private Limited is the owner of the logo and its absolute ownership can be recognised from the registered trademark. The assessee companies had obtained permission only to use the logo and the permission so granted is non -transferable and non-exclusive. Elaborating further, the learned senior counsel submitted that as per the agreement between the parties, no proprietary or exclusive interest has been acquired by the assessee companies and in the absence of any ownership in respect of the logo covered by the trademark, the provisions of section 32(1)(ii) of the Act are not at all attracted. Further, the document under which the permission was granted to the assessee companies can be terminated for breach of contract by either party by giving 60 days notice. Even the payment made by the companies is not in the capital field and no asset or advantage of an enduring nature has been acquired by them and therefore, the expenditure in the form of payment to the principal is a proper debit in the profit and loss account even after the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, the learned senior counsel appearing for the assessee in TCA No.407/2019, without prejudice to the contention that royalty claimed is allowable as revenue expenditure, submitted that the assessing officer disallowed royalty claimed from AY 2008-09 onwards, treating it as capital expenditure and allowed depreciation in the assessment year in which the royalty payment was disallowed, against which, appeals were filed and are pending at different stages. As such, it is contended that in case royalty paid is not allowed as revenue expenditure, the cumulative payments made in the past years and the amounts payable will constitute the cost of acquisition of the asset and therefore, depreciation is allowable on that sum. However, the assessing officer did not allow depreciation on the written down value (WDV) in the subsequent years, as a result of which, a ground was raised in this regard by the assessee, in the appeal filed relating to the assessment year 2014-15 before the CIT(A). The CIT(A) in his order dated 28.08.2017 dismissed the said ground as infructuous as the issue of royalty was decided in the assessee's favour. The ITAT also did not decide this issue. Therefore, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution for the use of its Indian patents and /or trade marks, in pursuance of an agreement, is an admissible deduction, in favour of the assessee. Such a conclusion was arrived at, after a detailed analysis of the terms of the agreement, nature of the expenditure incurred and the other relevant factors. The following passage extracted from the said judgment is important: In the case in hand, it cannot be said that the swiss company had wholly parted with its Indian business. There was also no, attempt to part with the technical knowledge absolutely in favour of the assessee. The following facts which emerge from the agreement clearly show that the secret processes were not sold by the swiss company to the assessee:(a) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period; (b)the object of the government was to obtain the benefit of the technical assistance for running the business; (c)the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons; (d)the assessee was expressly prohibited from divulging confidential inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue expenditure remains the same, namely, the enduring nature test. It means where the expenditure is incurred which gives enduring benefit, it will be treated as capital expenditure. In contradistinction to the cases where expenditure of concurrent and reoccurring nature is incurred and the later would belong to revenue field. Technical information and know-how are intangible. They have a different and distinct character from tangible assets. When the expenditure is incurred to acquire a tangible asset, determination as to whether the said acquisition of tangible asset is of capital nature or the expenditure is of revenue nature, may not pose a problem. However, in case of technical information and know-how, having regard to their unique characteristic, the questions that need to be posed for determining the nature of such an expenditure are also of different nature. In case where there is a transfer of ownership in the intellectual property rights or in the licences, it would clearly be a capital expenditure. However, when no such rights are transferred but the arrangement facilitates grant of licence to use those rights for a limited purpose or limited period, the Courts have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it as capital expenditure. However, the 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. Accordingly, the substantial questions of law relating to royalty, are answered in favour of the assessees.' 3. In regard to the issue relating to bad debts, that issue has been considered by a Division Bench in TCA.Nos.996 to 998 of 2005 dated 03.04.2012, and decided in favour of the assessee. 4. After a detailed discussion in regard to the the judgment of the Supreme Court in Shriram Chits and Investments Private Limited v. Union of India and others [AIR 1993 SC 2063] which dealt with the vires of the Chit Funds Act, 1982, the issue of bad debts has been discussed and concluded in the following terms: '11. Keeping this declaration of law, when we look into the provisions of the Chit Funds Act, one may note the obligation of the foreman, particularl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 397 (SC) (TRF Limited vs. Commissioner of Income Tax) that after the amendment to Section 36(1)(vii) of the Income Tax Act, with effect from 01.04.1989, it is not necessary for an assessee to establish that the debt, in fact, has become irrecoverable and that it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In the context of the different stand taken by the revenue in the year and the consideration in contradistinction to the earlier years, the terms of the claim of the assessee in earlier years assume significance. 14. It is not denied by the Revenue that in respect of the earlier years 1990-91 and 1991-92, the claim of the assessee for deduction as a bad debt was allowed and in the appeal preferred by the Revenue before the Tribunal, the Tribunal referred to the clarification issued by the Board in F.No.169/21/78/21/78-IT(80) dated 16th May 1997, which reads as follows:- (a) If any person organises Chit Funds and for this purposes brings the members together, administers the Chit Funds and thereby earns commission, etc., profits made by such a person is income from business and if for any special reason there is loss then it is bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above facts, although we are inclined to dismiss the Revenue's appeal, the decision taken by the Commissioner of Income Tax (Appeals) in respect of the above-said claim merits to be noted herein. 17. A perusal of the order of the Commissioner of Income Tax (Appeals) shows as regards the responsibility of the Foreman as listed under the Chit Funds Act. It is admitted by the parties herein that having regard to the obligation under the Chit Funds Act, the assessee had to pump in its own money for the purpose of ensuring that the chit cycle goes on as promised. It is an admitted fact that in respect of shortfall due to non-payment, the company brought in its own money which was utilised for running the chit business and this did not stand in the way of the statutory obligation of the foreman on getting the chit cycles move on as before. Thus with statutory obligation imposed and well in compliance of the said obligation, that the company had to pay its own money to have the successful chit circulated as before, as pointed out by the Apex Court, if there is an obligation under a special contract between the defaulted chit holder and the company, even if the amount due is not trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he liability to pay the brokerage may arise at a point of time anterior to the liability to pay the value of the shares transacted. Nevertheless, it would constitute part of the debt that arises on the same transaction involving the sale or purchase of shares. Since the transactions are part of the same transaction and since both form a component or part of the debt, the requirement of Section 36(2)(i) are fulfilled and the assessee is entitled to treat it as a bad debt. Extending the same logic to the present case herein, going by the obligation of the foreman arising under Sections 21 and 22 of the Chit Fund Act to make good the default to the successful bidder on the subsequent day transaction, the claim was rightly considered by the Tribunal as one allowable under Section 36 of the Act. 21. As far as the reliance placed on the decision reported in [2010] 328 ITR 342 (Commissioner of Income Tax vs. Sahib Chits (Delhi) (P) Ltd.) is concerned, we do not find that the Revenue could draw any assistance from the said decision, since the said decision relates to a totally different situation. A perusal of the above judgment of the Delhi High Court shows that it is more on the question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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