TMI Blog2019 (3) TMI 693X X X X Extracts X X X X X X X X Extracts X X X X ..... uring Financial Year 1997-98 and interest as per agreed terms were charged on such loans - HELD THAT:- We reject the argument that no expenditure could be attributed to earning of exempt income as section 14 A is automatic and comes into operation without any exception as soon as exempt income is claimed by assessee. As observed that total exempt income claimed by assessee amounts to ₹ 19,26,10,503/-, against which disallowance restricted by CIT(A) is ₹ 34,32,239/-. It is observed that Ld.CIT(A) records that proportionate expenses being considered for disallowance, has been incurred mainly for employees of manufacturing unit which cannot be related to earning of exempt income. Under such circumstances allocation of personal expenses towards earning of exempt income should not have been made. We therefore grant further relief to assessee by excluding personal expenses amounting to ₹ 16,85,000/-, from disallowance computed under section 14 A. We thus direct Ld.AO to restrict the disallowance Disallowance being amount of inventory written off during the year - HELD THAT:- Ld.Counsel was unable to establish market value of stock to be at ‘nil’, and therefore we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (A) and the same is upheld. Addition of prior period expenses - CIT (A) deleted addition in part as assessee had provided certain bills which were relating to year in consideration and was of the opinion that payments crystallised during the year to that extent - HELD THAT:- No infirmity in the factual observations of Ld.CIT(A) which has been verified by Ld.CIT(A) having regards to documents/evidences/bills etc., filed by assessee. There is nothing contrary to these observations that Ld.Sr.DR has been able to place before us and therefore we do not find any infirmity in the observations of Ld. CIT (A) and the same is upheld. Addition on account of commission, discount and brokerage on sales made to government parties - allowable expenditure u/s 37 - HELD THAT:- AO while disallowing the expenditure has presumed that this commission has been paid to middlemen for procuring the orders from the Government while there is no proof or evidence in support of the same. Before coming to this conclusion, the AO has not given any opportunity or show cause to the appellant company why it should not be disallowed invoking Explanation to Section 37(1) of the Act. This commission and dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2002-03. 2. A.Y:2002-03 Brief facts of the case are as under: Assessee is a company and filed its return of income on 31/10/02 declaring business loss of ₹ 53,21,28,126/-and income from capital gain amounting to ₹ 5,48,47,495/-. The case was processed under section 143(1) of the Income Tax Act, 1961 (the Act) and subsequently selected for scrutiny. Accordingly notice under section 143(2) of the Act was issued. In response to statutory notices, representative of assessee appeared before Ld. AO and case was discussed. 2.1.Ld.AO observed that assessee is engaged in business of manufacturing and sale of tractors, shockers, railway equipment etc. and other trading activity. 2.2.After calling for various details and information and considering the same, Ld. AO made following additions in hands of assessee: Sl. No. Additions made Amount-Rs. Amount-Rs. 1. Premium on SPNs 22,54,277/- 2. Upfront fee 3,69,25,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in law in confirming following disallowances made u/s 14A of I.T.Act being alleged expenditure apportioned for earning the dividend and interest income claimed to be exempt u/s 10(33) 10(23G) of the Act respectively:- i. Interest Rs.12,47,239/- ii. Admn. Expenses ₹ 5,00,000/- iii.Personal expenses ₹ 16,85,000/- ------------------------ Rs.34,32,239/- ============= (b) Alternatively, the disallowance is on higher side and a token amount would meet the ends of justice. 5. That on the facts, circumstances and legal position of the case, the Ld.CIT(A) has erred in law in confirming the disallowance of ₹ 4,73,69,355/- being the amount of inventory written off during the year. 6. That on the facts, circumstances and legal position of the case, the Ld.CIT(A) has erred in law in upholding the disallowance of a sum of ₹ 28,56,250/- on account of investments written off. 7. That the appellant craves leave to reserve to itself the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed to substantiate that liability arose and crystallised during year under consideration. 5.2. Before us assessee has not produced any copy of supporting documents in respect of balance payments to establish that expenses had crystallised during year under consideration. We draw support from the order of Coordinate Bench in assessee s own case for A.Y. 2005-06 (supra) in holding that merely because expenditure has been debited in Profit and Loss account during year neither it becomes expenditure pertaining to this year nor it becomes an expenditure pertaining to prior years. It is the duty of assessee to show that this expenditure has crystallised during the year and therefore are incurred during the year. As adequate details have not been produced before Ld.AO as well as before Ld.CIT(A), we do not find any infirmity in the disallowance made by Ld.CIT(A). Accordingly the same is upheld. In the result ground no.3 raised by assessee stands dismissed. 6. Ground No. 4 is in respect of 14 A disallowance. 6.1. Ld.Counsel submitted that assessee had shown exempt dividend income under section 10(33) of the Act amounting to ₹ 8,22,31,262/-, and interest on bonds e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in preceding assessment years. It has been recorded by Ld.CIT(A) that investments made during year under consideration has been partly made out of borrowed funds and interest works out to be ₹ 12,47,239/-. Ld.CIT (A), restricted disallowance for earning exempt income under section 10 (33) of the Act to ₹ 12,47,239/-. Ld.CIT (A) observed that personal expenses cannot be entirely attributed towards earning of exempt income as it includes expenditure incurred on employees of manufacturing unit. He thus restricted proportionate disallowance at ₹ 16.85 Lacs and confirmed addition to the extent of ₹ 34.72 lakhs (Rs.5 lakhs + ₹ 16.85 lakhs + ₹ 12.87). 7.3. Ld.Counsel argued that, disallowance though restricted by Ld.CIT(A) to ₹ 34,32,239/-, is still on higher side. Alternatively, he suggested for disallowance of token amount would meet ends of Justice. 8. We have considered argument alternatively presented by Ld.Counsel, apart from main argument, that no disallowance is to be made under section 14 A. 8.1. At the outset we reject the argument that no expenditure could be attributed to earning of exempt income as section 14 A is auto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inventory relating to that division is not an admissible deduction. He placed reliance upon order passed by Ld.CIT (A) in support of his argument. 11. We have perused submissions advanced by both sides in the light of records placed before us. 11.1. It has been submitted by assessee that once telecommunication division was hived off from assessee, inventory became unusable. 11.2. It is observed that Ld. CIT (A) decided the issue as under: 12.3. It is settled law that the closing stock is to be valued at market price or cost price as decided by the appellant company. In the case of the appellant company, instead of valuing the stock at market or cost price whichever is lower, the appellant company had taken the value at nil more so when the fact that in December 2000 only the appellant company had taken over this inventory of stock from escort s communication Ltd at a value of ₹ 4,73,69,355/-. The cost of the inventory is ₹ 4,73,69,355 and the appellant company has not been able to establish that the market value of the stock has become nil, the AO has rightly disallowed the expenditure. The action of the AO is confirmed. 11.3. Even before us, Ld.Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The same has been rightly disallowed by the AO. The action of the AO is confirmed. 13.2. Assessee before us has not been able to establish how the company was dissolved, and manner in which its assets/liabilities have been dealt with. Before us, assessee has not been able to establish value of shares on or before date of dissolution of company. Even if it has to be considered as capital loss, assessee has not provided any relevant details regarding same. Under such circumstances we do not find any infirmity in order of Ld.CIT(A) and same is upheld. Accordingly ground no.6 raised by assessee stands dismissed. 14. In the result appeal filed by assessee stands partly allowed. 15. ITA No. 84/Del/2006 (Revenue s appeal) Grounds raised by revenue in this appeal are as under: 1. On the facts and circumstances of the case and in law. the Ld.CIT(A) has erred in deleting the disallowance of ₹ 22,54,277/- made by the A.O. on account of redemption of SPNs. 2. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the disallowance of ₹ 3,12,75,000/- being the upfront fee paid to the banks. 3. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards premium payable on SPNs on accrual basis commencing from financial year 1994-95. Assessee claimed expenditure amounting to ₹ 15,57,61,488/- during year on actual payment made. Ld.AO added sum of ₹ 22,54,277/-. It was submitted by assessee that the said sum was never reduced from computation of income and was claimed by way of a note in return of income, and therefore amounts to double addition. It was also submitted that full claim claimed by assessee, becomes infructuous as in previous years, same has been allowed by Ld.CIT (A) on accrual basis as claimed by assessee. 16.2. Upon appeal before Ld.CIT (A), addition was deleted by observing as under: 3.3. The contention of the appellant counsel has been found to be correct that the premium payable on SPNs have been allowed by the CIT(A) on accrual basis. The observation made by the AO that no claim was made is also incorrect as it is found to be correct that the claim for the entire amount was claimed by way of a note in the return of income filed by the appellant company at point No.8 in which all the facts have been disclosed by the appellant company. In any case, during year the SPNs have been redeemed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Madras Industrial Corpn. Ltd. (supra). The assessee, therefore, correctly claimed deduction only in respect of the proportionate premium relatable to the year in question. Respectfully following the decision, this ground raised by revenue stands dismissed. 18. Ground No. 2 raised by revenue is in respect of deleting disallowance of ₹ 3,12,75,000/- being upfront fee paid to banks. 18.1.It is submitted that assessee claimed upfront fees paid to ICICI bank, Bank of India, SBI and IDBI amounting to ₹ 3,69,25,000/- during year under consideration. It is also submitted that the issue has been dealt with by this Tribunal in assessee s own case for preceding assessment years. Assessee has placed before us order passed by this Tribunal in assessee s own case for assessment year 1999-2000 in ITA No. 3581/Del/02 and CO no. 245/Del/06, wherein it has been held as under: 7. Before us it is not in dispute that in the A.Y. 1998-99 the Tribunal had an occasion to decide an identical issue in ITA 1841/Del/02 for A.Y. 1998-99. The Tribunal relied on the decision of Hon ble Supreme Court in case of India Cements Ltd. Vs. CIT, 60 ITR 52 (S.C.) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses on development and prototype is not part of R D expenses. Thus it is clear that Assessing Officer is not disregarding genuineness of expenditure incurred by assessee. Therefore we do not find any infirmity in the observations of Ld. CIT (A) and the same is upheld. Accordingly this ground raised by revenue stands dismissed. 21. Ground No. 4 has been raised by revenue regarding deleting disallowance of ₹ 16,91,538/-, made by Ld.AO on account of prior period expenses. 21.1. It has been submitted that this ground is connected with Ground No.3 in assessee s appeal, which has been dealt hereinabove in paragraphs 4 and 5. It is observed that Ld. CIT (A) deleted addition in part as assessee had provided certain bills which were relating to year in consideration and was of the opinion that payments crystallised during the year to that extent. Ld.Sr.DR placed reliance upon written submissions filed by revenue wherein reliance has been placed on Section 145 (2) of the Act and submitted that as assessee follows Mercantile system of accounting and therefore these expenses cannot be allowed during the year as these are expenses relating to prior period. 21.2. We do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of posting the employees of the assessee company at various places. The job profile of these agents is procurement of orders from the Government departments and also to follow up for the payments after the supplies. The payments made by the assessee cannot be termed as illegal or violation of law. In the judgment relied upon by the AO in the case of Madivenkak Ram and Company (supra) is clearly distinguishable. In that case, the assessee had carried on its business in violation of provisions of FERA and the lordship of the Hon ble Supreme Court rejected the claim for deduction on the ground that assessee was expected to carry on its business in accordance with law and evasion of law could not be a trade pursuit. 9.3. On verification of assessment record, it is found to be correct that the appellant company vide letter dated 13-01-2005 has furnished the details of parties to whom commission has been paid, copies of appointment letters and confirmation from the parties to whom commission has been paid. In the list furnished of the parties at Page No.38 of the letter dated 13-01-2005 are indicated the PAN of the parties. Therefore, the observation made by the AO in the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the assessee for violation of the Act. The expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction. The expenditure in this case cannot, in any way, be allowed as wholly and exclusively laid out for the purpose of the assessee's business. From the decision of the Hon ble Supreme Court, it is clear that the expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion was held to be not allowable as a deduction. 9.3.2. In the AY 2000-01 also, the issue of commission and discount was there and the reasons for which disallowance was made, the submission made by the appellant and why the same was held to be allowable by the undersigned are noted below: ......... 10.1 On going through the assessment order, it is observed that the expenditure on above account has increased from ₹ 11.20 crores to ₹ 21.75 crores. The AO observed that the commission paid to third parties/agents related to sales made to the government has been disallowed by the department, therefore, following the precedent, the commission of ₹ 64,95,097 paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to Section 37(1) of the Act, the disallowance made by the AO is deleted. 23.2. It is also observed that Ld.CIT(A) had observed that facts in Madivenkak Ram Co., reported in 229 ITR 534, decided by Hon ble Supreme Court is different with that of present case. It has been observed that before Hon ble Supreme Court, issue was regarding expenditure incurred for evading provisions of FERA, and penalty levied for such evasion, which was held to be not allowable as a deduction. 23.3. We are therefore of the opinion that Ld.CIT (A) was right in deleting the addition so made and the same is upheld. Accordingly this ground raised by revenue stands dismissed. 24. Ground No.6 is raised by revenue regarding deleting disallowance of ₹ 4,56,00,000/- on account of interest on interest free loan, given by erstwhile Escort Tractors Ltd., to its subsidiary company M/s.Escotract Finance Investment Ltd., prior to is amalgamation with assessee. 24.1. Ld.Sr.DR submitted that assessee had given interest-free loan of ₹ 38.01 crores to M/s.Escotract Finance Investment Ltd. It has been submitted that assessee relied on borrowed funds for its own affairs and granting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onate disallowance of interest of ₹ 13,52,00,000/- on the interest free amounts outstanding against the sister concerns. 3. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting the disallowances of interest payment amounting to ₹ 72,32,00,000/- on account of investment of ₹ 602.66 crs made in shares of group companies. 4. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting the disallowances of ₹ 32,00,000/- paid as upfront fees ignoring the fact that it will be incurred by the assessee company as a one time fees charged by the lending bank at the time of granting of loan. 5. (a). On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting the disallowances of ₹ 35,75,330/- made on account of development of existing products and prototype products ignoring that such expenditure imparted a benefit of enduring nature and as such was of capital nature. (b) On the facts and circumstances of the case and substantial question of law involved, whether the Ld.CIT(A) was correct in law in deletion of addition of ₹ 35,75,330/- on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed by Ld.AO himself in assessment made under section 143 (3) of the Act. It was also pointed out that in certain assessment years disallowances made by Ld.AO has been deleted by Ld.CIT (A) and revenue has either accepted the order, or appeal is pending before the Tribunal. 29.3. Placing reliance upon the submissions made by Ld.Counsel before Ld.CIT (A), it was submitted as under: 29.4. The learned Counsel submitted that complete details of the payment had been filed during the course of assessment proceedings and copies thereof were appended at page 1 to 53 of the Paper Book. It was a matter of record that all payments were made by account payee cheques and at least one party namely R.K. Ispat Ltd. was common to the preceding assessment year where the claim have been allowed. He further submitted that complete details in the form of confirmations along with PAN Nos., names and addresses had also been filed but the AO instead of making a cross verification from the payees, called for and recorded a statement of one of the employee of the company, Mr. Ajay Razdan who was not in a position to give any detailed information since he had gone in a routine manner along with the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the orders of the Tribunal for the AYs 1995-96 to 1998-99, copies thereof being provided during the hearing of appeal. In conclusion it was urged that the addition be deleted. 30. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that Ld. CIT (A) has analysed aforestated submissions of assessee as under: 4.9. I have carefully examined the facts as also the statement of Mr.Ajay Razdan which has been relied upon heavily by the AO. I would tend to agree with the ld.counsel of the appellant that on a reading of the said statement as a whole there would not remain any doubt about the role of the agent/third party in the whole process. This cannot just be limited to getting orders from railways evaluated which in any case is the sole prerogative of the parties who invite the bids. In the earlier A.Ys also the payments of similar nature have been made but mostly allowed by the AO himself or by the CIT(A) in appeals and the ITAT affirming the decisions of 1st appellate authority. Following the same, the addition on account of payment of commission amounting to ₹ 2,65,46,151/- is hereby deleted. 31. We d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adverse comments on assessee s submissions, and in fact accepted that there were brought forward balances in total amounts advanced. Ld.Counsel with reference to remand report contended that, case of Assessing Officer mainly was that, in case funds had not been diverted to group companies, then these could have been utilized by assessee for its own business purposes, and to that extent burden of interest would have been lower. This aspect of matter was countered by Ld.Counsel by relying on following judgements: Amna Bai Hajee Issa vs. CIT (1964) 51ITR 835 (Mad.) Ram Kishan Oil Mills vs. CIT (1965) 56 ITR 186 (MP) CIT vs. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) Caldern Pharmaceuticals Ltd vs CIT (2004) 265 ITR 244 (Cal) 33.5. Ld.Counsel placed reliance on following judgements for proposition that advances to subsidiaries/group companies were to be considered as commercially expedient and for business consideration unless there was a finding that the amount advanced had been misused or that the transaction was not genuine in nature:- S.A. Builders Ltd. vs CIT 288 ITR 1 (SC) C.I.T. vs. Dalmia Cement (Bharat) Ltd., in IT A No.249- 250/1987 pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Equipment Limited there is a fresh infusion of funds advanced to the tune of ₹ 5,76 crores and in respect of which detailed evidence was filed in the remand proceedings which has not been controverted by the Assessing Officer in his remand report dated 27.7.2009. 6.6.Following the judgments relied upon by the learned counsel, I delete the adhoc disallowance of ₹ 13.52 crores with the further observation that it is not the requirement of law that an appellant must further show that the borrowing was necessary for business, so that if at the time of borrowing the appellant had sufficient funds of its own, the deduction could not be allowed. Thus, the view that the appellant could have decreased the extent of his borrowing and the burden of interest cannot be sustained CIT vs. Bombay Samachar Ltd., 74 ITR 723, 731 (BOM)] . 35. We do not find any infirmity in aforestated findings of Ld.CIT (A) which is based on detailed analysis. Accordingly the same is upheld. In the result this ground raised by revenue stands dismissed. 36. Ground no.3 raised by revenue pertains to proportionate disallowance of a sum of ₹ 72,32,00,000/- out of interest paid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Ld.AO were factually incorrect, in as much as, substantial dividend income had resulted from aforesaid investments and duly brought to tax. Further, capital gains arising on sale of some investments in shares had been assessed as capital gains. Ld.Counsel with reference to material and documents placed in paper book contended that dividend income to the tune of ₹ 68 crores on shares in question had been brought to tax, as would be evident from page 7 of assessment order it could be noted that, capital gain to the tune of ₹ 94.25 crores had been brought to tax. Ld.Counsel there after referred to Profit Loss Account for year under consideration, contending that net income to the tune of ₹ 208.63 crores on the investments had been shown in the accounts. According to Ld.Counsel Assessing Officer in his remand report dated 27.7.2009 had accepted the following facts:- That the investments had been made in the shares of subsidiary/group companies. Assesssee had been making investments on regular basis from year to year in the shares of group companies and a detailed fund flow statement of such investments from the AY 1996-97 to AY 2003- 04 had been filed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted that there were sufficient cash profits from business activities, which were deployed for purposes of investments in shares. Ld.Counsel drew attention to page 4 of letter dated 10.11.2008, contending that all aforesaid submissions were duly supported by evidence in the form of fund flow statement, beginning from AY 1996-97 upto AY 2003-04, which according to him were verifiable from the tax returns and the balance sheets which were already available in the records of the Department. 36.8. With reference to aforesaid factual submissions Ld.Counsel referred to remand report dated 27.7.2009, forwarded by Ld.AO contending that there was no adverse comment. In support of his arguments, he placed reliance on the following judgments contending that the disallowance not being maintainable both on facts and in law, the same be deleted: S.A. Builders Ltd. vs CIT 288 ITR 1 (SC) C.I.T. vs. Dalmia Cement (Bharat) Ltd., in IT A No.249- 250/1987 passed by Hon ble Delhi High Court on 24.7.2009 C.I.T. vs. Reliance Utilities And Power Limited (Bom), in IT A No.1398 of 2008 passed by Hon ble Bombay High Court on 9.1.2009. Pinnacle Project and Infrastructure Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup companies made from year to year as also the year under appeal is definitely for in purpose of business and commercial expediency. It has resulted in substantial income to the appellant company in the form of dividend and capital gains which have been subjected tax during the year under consideration as is apparent from the appellant s audited accounts, the income-tax return and the assessment order. The Assessing Officer in the two remand reports has not factually or legally contradicted the evidences material placed by the appellant on record whereby it was shown that the investment in shares even in numerous preceding assessment years had come out of the appellant s own funds and not borrowed funds. The Assessing Officer in his remand report dated 27.7.2009 has not made any adverse comments on the funds flow statement and other documents filed with him by the appellant while accepting at the same time that the investments had been made in the shares of group companies and Section 14A was not applicable since the assessment records showed that there was no tax exempt income during the AY 2003-04. 7.11 The remand report also does not distinguish the numerous judgments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investment in shares of group companies was on grounds of business expediency and commercial considerations. The disallowance is accordingly deleted. We do not find any infirmity in aforestated detailed factual analysis carried out by Ld.CIT (A), based upon which, addition has been deleted. We accordingly uphold the view of Ld.CIT (A). In the result this ground raised by revenue stands dismissed. 38.Ground No.4 raised by revenue pertains to deleting of disallowance amounting to ₹ 32,00,000/- paid as upfront fees. Ld.Sr.DR placed reliance on order of Ld.AO, however, he could not controvert submissions of Ld.Counsel. 38.1. Ld.Counsel placed reliance on order passed by Ld.CIT(A). We have perused submissions advanced by both sides and perused records placed before us It is observed that, Ld.CIT(A) decided this issue as under: 8. Ground no.7 pertains to disallowance of a sum of ₹ 32,00,000/- as upfront fee paid to banks. According to AO the expenditure was capital in nature whereas the case of the appellant was that it was a revenue expenditure and had been accepted in quite a few preceding AYs. The AO in fact followed the order of his predecesso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t years. Accordingly this ground raised by revenue stands dismissed. 41. Ground No.6 raised by revenue, pertains to deleting disallowance on account of professional charges having been incurred to the tune of ₹ 7,92,67,976/- on various projects. 41.1. Ld.Counsel contended that the issue stands squarely covered in favour of assessee, in as much as Ld.AO himself had not made any disallowance in AY 2001-02. Further payments have been made to various professionals for rendering services in many areas such as development of effective distribution net work, developing comprehensive marketing strategies covering products, brands, etc., warehouse management system for overall optimization and cost reduction, as also the designing of sound management information system. The expenditure on these services cannot by any stretch of imagination be called capital in nature. He further contended that benefit of many items of revenue expenses may extend to a period covering more than one accounting year but on that basis such expenses cannot be treated as capital in nature. 41.2.Ld.Counsel submitted that, expenses on account of professional charges were incurred in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her submitted that, considering huge quantum of volume of business of assessee, it was quite normal for some expenditure items to be left out for consideration in the relevant assessment year due to delayed verification and approval being delayed. Ld.Counsel submitted that Ld.AO in his remand report dated 09.03.2007 had not made any adverse comments and that the issue was in fact covered by order of Tribunal for assessment year 2001- 02 in assessee s own case. It was therefore urged that disallowance may be deleted. 43.2.Ld.Sr.DR placed reliance on order of Ld.AO, however, he could not controvert submissions of Ld.Counsel. 44. We have perused submissions advanced by both sides and perused records placed before us 44.1. It is observed that, Ld.CIT(A) decided this issue as under: 11.1.After considering the submissions and perusing the material placed on Paper Book, I am of the view that on the facts of the present case it can be assumed that some expenditure items may not have been booked in accounts under the mercantile system of accounting due to various reasons vis. Pending verification, late receipt of bills, delayed approval etc., but the 7VCN expenses nonetheless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat assessing officer was right in computing notional interest of ₹ 22 Crores in the hand of assessee at the rate of interest at 12% on the above investments. 46.3. On the contrary, Ld.Counsel submitted that investment of ₹ 175.74 Crores in M/s. Idea Mobile Communication Ltd was from sale proceeds of investment in M/s Escotel Mobile Communications Ltd (Escotel) for a sum of ₹ 278.10 crores. It was submitted that, amount realized on sale of investments was far in excess of fresh investments made during the year. It was submitted that assessee had to recover substantial amount from Escotel on account of loan and other recoverable dues aggregating ₹ 175.74 crores. The appellant stated that along with sale of investment in Escotel, recoverable dues were also settled by allotment of unsecured Subordinate Bond of Idea Mobile Communication for a sum of ₹ 175.74 crores and value of the said Bond was reflected under the head investment . The appellant has explained that there was no fresh investment during AY 2005-06 and there was a mere conversion of the existing debt into an investment. As regards investment of ₹ 7.66 crores in share capital of M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7) 232 ITR 359 disallowed 25% of the expenditure and added back to the income. He submitted that assessing officer was right in treating 25% of the expenditure as capital nature and the same is to be upheld. 48.1.On the contrary, Ld.Counsel submitted that, assessee was paying royalty to Harprasad Company Pvt.Ltd. for use of trade name/trade mark Escorts . It has been submitted that this is a recurring issue and this Tribunal for assessment year 2004-05 has deleted the addition which has been followed by Ld.CIT (A) in the year 2006-07. Ld.Counsel submitted that royalty was paid for use of the name Escorts for the purpose of selling its product and there was no acquisition of any technical know-how or any other intangible property by assessee. 49. We have perused submissions advanced by both sides, in light of records placed before us. 49.1.It is observed that learned CIT (A) deleted addition by observing as under: 6.3. The appellant company had debited a sum of ₹ 3.93 crores towards royalty during the year. Following the decision of the Hon ble Supreme Court in the case of Ms. Southern Switch Gear Ltd. Vs. CIT[1997] (232 ITR 359) the AO has treated 25% of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an safely conclude that royalty payment was revenue in nature and no party of it was liable to be disallowed by considering the same as capital expenditure. In AY 2006-07 the Ld. CIT(A) has also deleted the addition on account of royalty payment. Respectfully following the decision of the Hon ble ITAT Delhi for AY 2004-05 and also the order of the Ld. CIT(A) for AY 2006-07, I hold that the royalty payment is allowable as revenue expenditure. Accordingly, the AO is directed to delete the amount of ₹ 98,25,000/- on account of the royalty payment. This ground of appeal is allowed. 49.2. For the sake of convenience ,we shall also reproduce view taken by this Tribunal in assessee s own case for A.Y. 2004-05 as under: 5. We have considered the rival contentions, carefully gone through the orders of the authorities below and also deliberated upon the various case laws cited by the learned AR in the context of factual matrix of the case. From the record, we found that in terms of the agreement executed by the assessee with M/s. Harparshad Co, the assessee was to make recurring payment of royalty every year calculated at the rate of 0.25% of the turnover. Such paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o existence an asset or an advantage of enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. However, on the other hand, if the expenditure is for running the business or working it, with a view to produce profits, it would be in the nature of revenue expenditure. Furthermore, it is the aim and object of the expenditure which would determine its character. The test of once and for all payment i.e. a lump sum payment made, in respect of a transaction is an inconclusive test. In view of above discussion, we can safely conclude that royalty payment was revenue in nature and no party of it was liable to be disallowed by considering the same as capital expenditure. Similar disallowance for assessment year 2006-07 has been deleted by the learned CIT(A). The relevant extract of the order is reproduced below:- 9.3 I have considered the facts of the case. The submissions of the appellant have also been gone through. It is true base on the material submitted by the appellant that the payment of royalty @0.25% of the total turnover is evidenced by Minutes of the Meeting of Board of Directors of Harparshad and Company Pvt. Ltd. hel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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