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2015 (2) TMI 17 - HC - Income TaxService income - “business income” V/S “income from other sources” - revenue urged that mere earning of some income in a mechanical manner or the accretion of certain sums on a regular basis would not mean that it is business income - Held that:- This test of "some real, substantial and systematic or organised course of activity or conduct with a set purpose" to determine whether an activity was business. In view of this settled position, there is no scope for interference with the findings of the CIT (A) and the ITAT on this aspect. This Court thus holds that the “service income” declared by the assesse for the relevant years is business income. Disallowance of Royalty - Held that:- In examining a claim for deduction on the ground of commercial expediency, what is to be seen is not whether it was compulsory for the assessee to make the payment, but whether it was of commercial expediency. As long as the payment is made for the purposes of the business, and not by way of penalty for infraction of any law, the same would be allowable as a deduction (Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1996 (10) TMI 2 - SUPREME Court]). The commercial expediency of a businessman’s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure. Such decisions are to be taken from a business point of view and have to be respected by the authorities, regardless of the fact that it may appear, to the latter, to be expenditure incurred unnecessarily or avoidably. In the present case, the ITAT recorded a finding that the royalty was for business purposes and what is more, payable to the assessee’s foreign principals. Its character as an expense - collected for payment to the said foreign party-has not been disputed. In the circumstances, the assessee’s claim that it was for business purposes alone, and no other reason, could not have been rejected by the AO. - Decided in favour of the assessee. Disallowance out of administrative expenses - Held that:- This Court is of the opinion that the findings of the ITAT cannot be faulted. The ultimate effect on the revenue would be the same, whether the assessee bore administrative expenses and costs of YRMPL or it remitted such amount to YRMPL, its wholly owned subsidiary, towards such costs. The final effect is revenue-neutral. Having regard to these circumstances, this court holds that the question of law framed in this regard is to be answered in favour of the assessee. Disallowance on account of non-business use of some specific assets - Held that:- The revenue does not dispute the ITAT’s finding that as part of its emolument policy, the assessee reimburses expenses incurred by its employees on purchase of furnishings. Such reimbursements are made by the assessee to the employees only to the extent of their entitlement (determined on the basis of their grade or level in terms of their appointment letters). These expenses cannot be, therefore, termed as personal to the assessee’s employees, but are for its business purposes. In these circumstances, there is no infirmity with the order of ITAT. - Decided in favour of the assessee. Expenses for food tasting and trials - Whether be capitalized? - Held that:- In the present case, it is not disputed that the assessee is engaged in the restaurant business. As part of its commercial activity, it strives to develop new recipes to develop its clientele, or expand it. The amounts expended towards such development are part of its business. Possibly, some recipes may be viable; equally possibly, all of them may be unviable. The mere possibility of the result of such exercise being a popular or long lasting recipe would not make the expenditure capital in nature. As such, it cannot be held that the food tasting development charges would result in a capital advantage of an enduring nature. - Decided in favour of assessee. Provisional liability - such claim was not based on any scientific method or on any reasonable past experience - Held that:- In the present case it is evident that the provision made by the assessee was based on past experience. Both the CIT (A) and the ITAT held this method was not objectionable. Besides doubting the estimation, the AO has not stated whether, in fact, such past experience did not constitute a rational basis for making provision. In these circumstances and in the light of the law declared in Bharat Earth Movers (2000 (8) TMI 4 - SUPREME Court), this question has to be answered in favour of the assessee.
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