2025 (4) TMI 987 - AT - Income Tax

Disallowance of repairs and maintenance on plant and machinery - assessee failed to produce the copy of high value bills and other details as desired - as contended before the CIT(A) that the expenditure on repairs and maintenance has been incurred for the purpose of business and ledger account etc. has been provided to substantiate the same - HELD THAT - CIT(A) held that it cannot be established that the whole expenditure has been incurred towards repair and maintenance however looking to the various details provided and as verified by AO he deem it fit and proper to restrict the disallowance @10% of the total claim made. CIT(A) restricted the disallowance and the balance amount was allowed and directed to be deleted. CIT(A) has rightly restricted the addition @10% which does not need any interference on our part hence we uphold the decision of the CIT(A) on this issue and reject the ground no. 2 raised by the assessee. Disallowance of royalty expenses treating 25% of the same as capital expenditure and depreciation has been allowed on the same - HELD THAT - In the assessee s case after termination of agreement there is no benefit is available for recording. Hence the royalty paid cannot be said to be capital in nature and same deserve to be treated as revenue in nature and allowable u/s. 37 of the Act. It is also noted that the acceptance of the royalty payments as revenue expenditure in earlier subsequent years i.e. AY 2010-11 and AY 2012-13 indicates that the Revenue has accepted u/s. 143(3) of the Act the nature of royalty payments as revenue in nature and it is well settled law that res-judicata does not apply to the income tax proceedings until there is change in the facts and circumstances and therefore stand cannot be taken to disallow the expenditure as allowed in earlier proceedings. To fortify our aforesaid view we draw support from the decision of EKL Appliances ltd. 2012 (2) TMI 354 - DELHI HIGH COURT wherein by relying on the decision in the case of Lumax Industries Ltd. 2008 (3) TMI 679 - DELHI HIGH COURT held that the payment of licenses fee on year to year basis for acquisition of technical knowledge would not amount to capital expenditure it is revenue expenditure. Thus we hold the royalty payment in the instant case deserves to be held as revenue in nature and therefore the royalty payment in dispute is allowable u/s. 37. Decided in favour of assessee.

Summary

The core legal questions considered in this appeal pertain to the validity and correctness of various disallowances and additions made by the Assessing Officer (AO) in the income assessment of the appellant for the assessment year 2011-12. These issues include:

1. Whether the additions and disallowances made by the AO and sustained by the Commissioner of Income Tax (Appeals) [CIT(A)] are legal and justified.

2. The correctness of the adhoc disallowance of expenses related to repairs and maintenance of plant and machinery.

3. The propriety of the adhoc disallowance of business promotion expenses.

4. The validity of treating 25% of the royalty payments as capital expenditure and allowing depreciation thereon, thereby disallowing that portion as revenue expenditure.

5. Whether the entire royalty payments should be treated as revenue expenditure, especially considering prior years' treatment.

6. The applicability of the Supreme Court decision in Southern Switchgear Ltd. to the facts of the present case.

7. Allegations of violation of principles of natural justice due to lack of proper opportunity of hearing.

8. Whether the AO was justified in not considering all documents due to sufficient cause.

9. Whether the explanations and evidence submitted by the appellant were properly considered and judicially interpreted.

Issue-wise Detailed Analysis:

Repairs and Maintenance Disallowance:

The AO made an addition by disallowing 20% of the repairs and maintenance expenses on plant and machinery, citing the appellant's failure to produce high-value bills and supporting details. The appellant contended that the entire expenditure was incurred wholly for business purposes and had submitted ledger accounts as evidence.

The CIT(A) examined the remand report and noted that several payments related to miscellaneous expenses, including purchases of camera equipment and cash payments, were not supported by proper vouchers. Some expenses did not qualify as repairs under section 31 of the Income Tax Act. Due to lack of documentary evidence and the nature of payments, the CIT(A) held that the entire claim could not be allowed. However, considering the details provided and verification by the AO, the CIT(A) restricted the disallowance to 10% of the total claim, deleting the balance disallowance.

The Tribunal found no reason to interfere with this approach, holding that the CIT(A) had rightly balanced the evidentiary deficiencies with the appellant's submissions, thus upholding the 10% disallowance.

Business Promotion Expenses Disallowance:

The AO disallowed 20% of business promotion expenses, again due to lack of bills and supporting documents, and the suspicion that some expenses were enduring or personal in nature. The appellant argued that these expenses were wholly for business and supported by ledger accounts.

The CIT(A) observed that many payments were made in cash or on self-made vouchers without proper documentary support. The disproportionate increase in business promotion expenses (67.23%) compared to sales turnover growth (18.75%) was unexplained. The CIT(A) concluded that the entire expenditure could not be allowed and restricted the disallowance to 10%, deleting the balance.

The Tribunal upheld the CIT(A)'s decision, finding the restriction to 10% reasonable in light of the facts and lack of vouchers.

Royalty Payments: Capital vs. Revenue Expenditure:

The AO disallowed 25% of the royalty payments amounting to Rs. 57,57,715/- by treating that portion as capital expenditure, allowing depreciation thereon, relying on the Supreme Court decision in Southern Switchgear Ltd. The royalty payments related to licenses for Karaoke Song Royalty paid to three parties. The appellant contended that these payments were revenue in nature, incurred for the use of patented parts and licensed songs under contracts that did not confer any enduring benefit or asset ownership. The licenses were non-exclusive, non-transferable, and terminable, with no rights surviving termination.

The CIT(A) upheld the AO's treatment, holding that the appellant had acquired intangible assets in the form of rights conferring enduring benefits, thus justifying capitalization of 25% of the royalty payments.

On appeal, the appellant submitted detailed written arguments supported by agreements and judicial precedents. They distinguished the facts from Southern Switchgear Ltd., where the licensee retained enduring benefits post-termination. Here, the agreements explicitly required cessation of use upon termination, with no vesting of know-how or goodwill. The appellant also relied on consistent acceptance of royalty payments as revenue expenditure in earlier and subsequent assessment years, invoking the principle of consistency and judicial pronouncements such as Radhasoami Satsang and CIT v. Neo Poly Pack (P) Ltd., which emphasize continuity in tax treatment absent material changes in facts.

Further reliance was placed on Delhi High Court rulings in CIT v. Hero Honda Motors Ltd., CIT v. EKL Appliances Ltd., and CIT v. Modi Revlon (P) Ltd., which held that license fees paid on a year-to-year basis for technical knowledge or know-how that does not vest as an asset are revenue expenditures.

The Tribunal analyzed the agreements, noting clauses mandating immediate cessation of manufacturing, distribution, or use of licensed technology or songs upon termination, confirming no enduring benefit or asset acquisition. The Tribunal held that the facts were materially different from Southern Switchgear Ltd. and that the royalty payments were revenue in nature and allowable under section 37 of the Income Tax Act.

The Tribunal also emphasized the settled principle that res judicata does not strictly apply in income tax proceedings but consistent treatment over years without change in facts warrants continuation of the same view. The Tribunal accordingly deleted the disallowance and allowed the grounds relating to royalty payments.

Natural Justice and Procedural Grounds:

Though raised, the Tribunal did not specifically elaborate on the grounds relating to violation of natural justice or sufficiency of opportunity to produce documents. However, the detailed consideration of evidence and submissions indicates that the appellant was afforded adequate opportunity, and no interference was warranted.

Consideration of Evidence and Judicial Interpretation:

The Tribunal carefully reviewed the evidence, agreements, remand reports, and judicial precedents. It balanced the appellant's documentary deficiencies against the nature of expenses and prior consistent treatment. The approach was reasoned, fact-based, and aligned with settled legal principles.

Significant Holdings:

On the issue of repairs and maintenance expenses, the Tribunal upheld the CIT(A)'s restriction of disallowance to 10%, observing:

"In our considered view, on the facts and circumstances of the case, the Ld. CIT(A) has rightly restricted the addition @10%, which does not need any interference, on our part."

Similarly, on business promotion expenses, the Tribunal held:

"In our considered view, on the facts and circumstances of the case, Ld. CIT(A) has rightly restricted the addition @10%, which does not need any interference, on our part."

Regarding the nature of royalty payments, the Tribunal stated:

"We find that facts of the instant matter are different than Southern Switchgear Ltd., wherein even after the termination of agreement the benefit in the form of manufacturing was available to the assessee. However, in the assessee's case after termination of agreement there is no benefit is available for recording. Hence, the royalty paid cannot be said to be capital in nature and same deserve to be treated as revenue in nature and allowable u/s. 37 of the Act."

It further observed:

"It is also noted that the acceptance of the royalty payments as revenue expenditure in earlier subsequent years i.e. AY 2010-11 and AY 2012-13 indicates that the Revenue has accepted u/s. 143(3) of the Act the nature of royalty payments as revenue in nature and it is well settled law that res-judicata does not apply to the income tax proceedings until there is change in the facts and circumstances and therefore, stand cannot be taken to disallow the expenditure as allowed in earlier proceedings."

And concluded:

"In the background of the aforesaid discussions and respectfully following the precedents, we hold the royalty payment in the instant case deserves to be held as revenue in nature and therefore, the royalty payment in dispute is allowable u/s. 37 of the Act and addition made on this account deserve to be deleted."

The Tribunal thus established the core principle that royalty payments under terminable, non-exclusive licenses conferring no enduring benefit or asset ownership are revenue expenditures, notwithstanding contrary precedents on distinguishable facts. It reinforced the importance of consistency in tax treatment across assessment years in the absence of changed circumstances.

Ultimately, the Tribunal partly allowed the appeal by deleting the disallowance on royalty payments while upholding the limited disallowances on repairs and business promotion expenses.