TMI Blog2014 (10) TMI 657X X X X Extracts X X X X X X X X Extracts X X X X ..... Lankan company to the Ceylon Bank - The assessee's liability to pay to the Sri Lankan/ Ceylon Bank arises because the assessee stood as a corporate guarantor for the loan from the Sri Lankan / Ceylon Bank to the Sri Lankan entity - The utilization of the royalty money by the Sri Lankan entity to the Ceylon Bank will not affect the accrual of royalty to the assessee - The subsequent payment thereof of Sri Lankan Bank is only the application of that accrued royalty for and on behalf of the assessee – thus, the addition made by the CIT(A) is upheld – Decided against assessee. Expenses on sundry balance written off – assessee was not able to provide the details of the sale to which the amount relates – expenses on meeting the accident expenses of the employee – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been decided in DCIT, Circle 4(1), New Delhi Versus Jubilant Foodworks Pvt. Ltd. [2014 (8) TMI 458 - ITAT DELHI] - The AO has not examined whether the debt has been written off in accounts of the assessee - When bad debt occurs, the bad debt account is debited and the customer’s account is credited, thus, closing the account of the customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Respondent : S. N. Bhatia, Sr. DR ORDER Per A. T. Varkey, Judicial Member These 3 (three) appeals relating to Assessment Year 2007-08 and 2008-09 involves consideration of common issues have been heard together and therefore disposed off by this consolidated order. 2. We take up first the cross-appeals filed by the assessee and Revenue for Assessment Year 2008-09. The factual matrix in brief is that the assessee is engaged in the business of manufacture and sale of Pizzas and related fast food products and sale of beverage. For the instant year assessee filed return declaring NIL income on 30the July 2008; which was assessed u/s 143(3) on 23rd December 2010, after making certain disallowance. The ld CIT(A), allowed part relief to the assessee and as such, the cross- appeal before us. 3. In ITA No.4626/Del/2012 the assessee has raised the following grounds:- 1. The order passed by the ld Commissioner of Income Tax (appeals) ( Ld. CIT(A) ) under section 250 of the Income Tax Act, 1961 ( the Act ) is bad in law and on facts and circumstances of the case. 2. The ld CIT(A), as well as Ld Assessing officer (hereinafter referred as AO‟) have erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perform up to expectations and hence, had huge loans outstanding from the bank and was not in a position to service/ repay such loans. The appellant decided to exit DPLPL and thus, wanted to get the corporate guarantee released. The bank agreed to restructure the loan and outstanding interest by waiving off a part of its outstanding provided an upfront payment of SLR 15 million was made and further royalty accruals up to an amount of SLR 3.5 Million is assigned in its favour. Originally, as per terms of the agreement DP BVI and DPLPL, DPLPL was required to pay net royalty of 3% on its sales. However, as the right to receive royalty had to be assigned to the bank and DP BVI was getting dissolved, it was decided to have the right transferred to the appellant. As per the agreement with the bank, the appellant assigned the said rights to the bank. Thus, the right to receive royalty accruing in favour of the appellant in the future years came with an obligation to assign those rights in favour of the bank and hence, the appellant never had a clean right to receive royalty. 7. It was submitted that in view of the aforesaid facts, the royalty income was not recognized in the financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 45 million Sri Lankan Rupees from a bank at Sri Lanka. Later on dissolution of the subsidiary company of the appellant company namely M/s. DPBVI, Franchise rights were assigned from DPBVI to the appellant company under a tripartite agreement. However later DPLPL ran into losses as a result thereof, settlement was arrived with the bank under a letter dated 27.01.2004 (PB. 140, 141), contents in brief is as under:- 1. The bank shall waive off SLK 14.78 million owned by DPLPL. 2. DPLPL shall be make an upfront payment of SLR 15 million as a cash settlement. 3. The SLR 3.5 million was to be paid by DPLPL through assignment of royalty accruals due to the assessee in favour of the bank. 4. The aforesaid due of SLR 3.5 million shall be secured by way of execution of lien between DPLPL and the bank on future royalty remittance due to assessee to the extent of SLR 3.5 million. 11. From the contents of the aforesaid letter it is inter-alia evident that appellant assigned the royalty accruals of 3.5 million Sri Lnakan Rupees to the bank. This assignment was done on 27.01.2004 i.e. during the financial year 2004-05 relevant to assessment year 2005-06. There is no dispute t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is rejected. 15. Ground No.4 and 5 is in respect of disallowance of ₹ 2,79,564/-, representing sundry balance written off by the assessee. The AO and the ld CIT(A) have disallowed the claim of the ground that the same is not supported by any evidence regarding the bonafide of the write off by the assessee. It has been held by the ld CIT(A) that the appellant has not filed even the details of the sales which had been written off as bad debts nor any evidences to show that it had been recognized as revenue income in the earlier years. 16. We have heard both the parties and have perused the record of the case. We find that the issue has already been considered by the co-ordinate bench in the assessee's own case for Assessment Year 2003-04 to 2005-06. In the said order the co- ordinate bench upheld the reasoning and finding of the ld CIT(A) who had deleted an identical addition by observing as under:- 15. As regards next issue in relation to deletion of ₹ 8,44,472/- by the Assessing Officer on account of sundry balance written off is concerned, A.O. made the disallowance and before CIT(A), assessee submitted that business of the assessee is that of Domino' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are inevitable in the line of business carried on by the appellant, through a number of outlets ands considering the volume of transactions. Reliance is also placed on the decisions cited by the appellant which clearly lay down the proposition that the decision to treat a debt as bad debt is a commercial or business decision and once the assessee record the debt as bad in his books of account, the same is an allowable expenditure. The writing off has no doubt to be bona fide. The bona fide of the appellant is prime facie evident in the facts of the case. Further, it is not possible for the appellant to keep details of each and every customers. In VIew of the above discussions, the disallowance of ₹ 8,44,462/-made by Assessing Officer on this account is deleted. 16. ............................................................................................ 17. .............................................................................................. 18. We have heard both the sides, considered the material on record and find that sundry balances written off are relatable to business need and CIT(A) while considering the entirety of facts, circumstances and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to explain as to how such huge payment made to M/s Domino's Pizza International, Inc., USA was justified and why the same should not be disallowed, being in the nature of capital expenditure. The assessee contended before the AO that it received only a license to use/ right to use Domino's systems the mark, name and logo was granted, and no trade mark, logo or process was transferred to the assessee. The amount that was paid by the assessee only enabled the assessee to facilitate the manufacturing process but it did not acquire the proprietary right in such mark or logo. Further, the assessee acquired the right to use these mark, name and logo only till the agreement was inforce and not thereafter. 22. In view of the aforesaid facts and as per the terms of the agreement it was contended by the assessee before the AO that it did not derive any benefit of enduring nature, so according to the assessee the expenses are revenue in nature. Dissatisfied by the explanation of the assessee the AO held that 25% of technical fee had to be taken as capital expenditure and as such could not be allowed as revenue expenditure. He, accordingly, disallowed ₹ 7,12,40,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, Domino's name and logo and exclusive license to develop and operate a commissary and to prepare, process, produce and distribute the products throughout the exclusive territory for which a recurring payment, dependent upon the quantum of sales, was to be paid. As per clause 4 of the agreement the appellant is required make two types of payment to the franchisor, (i) technical and consultancy fee of US$ 20,00 which is an one time lump sum payment and (it) Franchisee/marketing fee @3% on appellant s store and 3% on sub- franchisee sore on the basis of quantum of monthly sales. The appellant‟s accordingly capitalized the technical and consultancy fee and is claiming the franchisee fees revenue expenditure. It is clear from the terms of the agreement that the franchisee to be paid by the appellant is based on the sales and is recurring in nature. The appellant was also asked to submit the detailed workings of the franchisee fee and was also asked to reconcile with the turnover of the appellant. As per the working submitted by the appellant the franchisee fee was found to be paid as per the terms of the agreement i.e. 3% of the sales. In the case ofCITvs. Shard a Motor I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any contrary material had been placed on record by the Department nor noticed by this Bench which could convince us to take a different view than taken by Ld. CIT(A). As such, while concurring with the finding and conclusion as drawn by Ld. CIT(A) on the first limb of this issue, we uphold his order and dismiss the appeal of the revenue for the first limb of the issue involved. 26. It has been brought to our notice that the, appeal preferred by the revenue against the order of the Tribunal for Assessment Year 2003-04 has been upheld by the Hon'ble Jurisdictional High court by holding as under:- 3. Similar view was also expressed by the Delhi High Court in Commissioner of Income Tax Versus Salora International Limited, (2009) 308 ITR 199 (Delhi). The commissioner of Income Tax (appeals) and the tribunal has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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