TMI Blog2021 (1) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... eement - capital expenditure or revenue expenditure - HELD THAT:- We are of the view that the payment in question was owing to commercial expediency and enabled the assessee to avoid payment of future licence fee and thereby reduced the operating cost of the assessee. Such payment cannot be regarded as a capital expenditure. We, therefore, hold that the expenditure in question is revenue in nature and should be allowed as a deduction Eligibility for MAT credit u/s 115JAA arrived at after considering surcharge and cess - AO has not considered surcharge and cess applicable on such MAT credit and allowed MAT credit which has been set off against the tax liability arrived under normal provisions inclusive of surcharge and cess, which has resulted in an increased tax liability - HELD THAT:- In the case of Consolidated Securities Ltd. v. Asstt. CIT [ 2018 (7) TMI 1722 - ITAT DELHI] wherein, it was held that the amount of the MAT tax credit, inclusive of surcharge and education cess etc., if any, should be reduced from the amount of tax determined on the total income after adding surcharge and education cess, etc., and only the resultant amount payable will suffer interest under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity in respect of such business will not be on par with that of an established business. 6. The learned CIT(A) has erred in not appreciating the fact that the lcans at lower interest rates, have been taken by the Appellant during the subsequent years (viz., FY 2010-11) when the Company had established its business and hence, such interest rate is not comparable to the loans taken when the business was at a nascent stage (viz., FY 2005-06 and FY 2006-07) and also, not representative of the fair market value, as required under Section 40A(2)(a) of the Act. 7. The CIT(A) has erred in not appreciating that the reasonableness of an expenditure needs to be adjudged from the point of view of the businessman, as held in various judicial precedents. 8. Without prejudice to the above, The learned CIT(A) has erred in law and on facts by not appreciating the fact that the recipient of interest has offered the entire amount to tax and suffered tax at maximum marginal rate and acccrdingly, this would be revenue neutral for the tax department, as upheld by the Hon'ble Supreme Court in the case of CIT v. Glaxo Smithkline Asia (P) Limited (2010) 195 Taxman 35 and hence, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent did not result into acquisition of any capital asset. 15. The learned CIT(A) has erred, in law and on facts, by not appreciating the fact that the compensation paid towards early termination of license agreement neither brings into existence any new capital asset for the Appellant nor provides any enduring benefit, in the capital field, to the Appellant. 16. The learned CIT(A) has erred, in law and on facts, by not appreciating the fact that license fee that would have been paid had the termination not taken place, would have been revenue expenditure and accordingly, compensation paid for early termination should also be revenue in nature. 17. Further, the learned (CIT(A) has placed incorrect reliance on certain decisions of the Courts in India including the Supreme Court without appreciating that the subject matter in those cases were in the capital field. (IV) Claim of MAT credit under section 115JAA of the Act 18. The learned CIT(A) has erred, in law and on facts, by allowing MAT credit of INR 772,212 (without considering surcharge and cess) against the tax liability (inclusive of surcharge and cess) under normal provisions of the Act thereby re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ramachandra in the Financial Years 2006-07 and there have been borrowings and repayments to these parties. The details of which are as follows: (a) In the case of M/s.Scrips and Scroll Inida Pvt Ltd. The assessee has received loan during the Financial Years 2005-06 (closing balance ₹ 1,59,63,000/- Cr), 200607 (closing balance of ₹ 8,36,68,000/- Cr), 2007-08(closing balance of ₹ 85,68,000/-Cr) and 2008-09 (Nil closing balance amounts squared up), F.Y.2009-10 (assessee company has advanced ₹ 25 lakhs i.e., closing balance ₹ 25,00,000/- Dr) and during F.Y.2010-11 (assessee company received back advances hence closing balance was Nil). (b) In the case of Sri M.Ramachandra the assessee company had received and repaid loans during the F.Yrs. 2006-07, 2007-08, 2009-10 and 2010-11. During the relevant F.Y. i.e., F.Y.2010-11 the assessee owed around a crore of rupees to Sri M. Ramachandra. 4. The assessee paid 15% interest for the outstanding amount from Assessment Years 2006-07 to 2010-11 to M/s. Scripts and Scrolls India Pvt. Ltd., and Shri. M. Ramachandra and the sum paid to these 2 parties was (i) ₹ 1,44,10,427/- to M/s. Scripts and Scr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annexure 'D') V. Minutes of the meeting of Board of Directors of the Appellant Company held on 21 December 2005 (enclosed as Annexure `E') VI. Form No. 16A for the fourth quarter of Financial Year 2010- 11 issued by the Appellant to Apollo in connection with termination fee (enclosed as Annexure 'F') VII. Termination agreement entered into with Apollo Health and Lifestyle Limited ( Apollo ) (enclosed as Annexure `G') VIII. Loan agreement dated 09 July 2010, in connection with secured loan taken by Appellant from Kotak Mahindra Bank (enclosed as Annexure 'H') 7. It has been submitted by the Assessee that the minutes of the meeting of Board of Directors of the Assessee Company held on 21 December 2005 (enclosed as Annexure 'A') would evidence the fact that the Assessee decided to take unsecured loans from directors/corporate for which the interest was to be decided at a later date. Thus rate of interest was decided and paid in AY 2011-12. The Affidavit of Mr.Rachandra, Mr.Kishore Kumr and M/S.Scrips and Scrolls India Ltd., was filed to demonstrate that the payees have filed their return of income disclosing the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ramachandra and Dr. Kishore Kumar to show that they have offered the interest income received from the assessee to tax in the return of income and that there is no loss to the Revenue. 9. After considering the rival submissions, we are of the view that the issue sought to be raised in grounds 4 to 8 which is a disallowance under section 40A(2)(b) of the Act and the issue sought to be raised in grounds 9 to 12 with regard to the question whether interest expenditure of ₹ 1,90,06,180/- crystallized as an liability to the assessee during the previous year relevant to Assessment Year 2011-12 requires fresh consideration by the AO in the light of the additional evidence filed before us by the assessee. We, therefore, remand the aforesaid two issues to the AO for fresh consideration, after affording opportunity of being heard to the assessee. 10. The next issue that requires consideration is with regard to sum of ₹ 1.5 crores which was disallowed by the AO on the ground that the said expenditure was in the nature of capital expenditure. This issue is sought to be raised by the assessee in grounds 13 to 15 of the grounds of appeal filed before the Tribunal. The factual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have heard the rival submissions. Learned Counsel for the assessee while reiterating the submissions made before the lower authorities also placed reliance on certain judicial pronouncements to which we will make reference later. The Learned DR relied on the order of the CIT(A). 14. We have considered the rival submissions and we find that the assessee entered into an agreement with Apollo. Initially the rate of licence fee was agreed at 4% of the Revenue but subsequently it was reduced to 2% since Apollo was not providing adequate support as originally envisaged in the licence agreement. During the previous year, the assessee decided to terminate the agreement due to lack of support extended by Apollo. Because of the earlier termination of the licence agreement, the assessee paid compensation of ₹ 1.5 lakhs to Apollo. This was claimed as a revenue expenditure. The case of the Revenue is that since the brand name (cradle) is a capital asset and the payment is being made for right to use the brand name, it gives the assessee an enduring benefit and has to be regarded as a brand building activity of the assessee. Therefore, the expenditure had to be regarded as a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch larger, the outgoing amount cannot be considered as capital in nature - CIT vs. Pioneer Engg. Syndicate [1988] 38 Taxman 15141989] 175 ITR 93 (Mad.) - It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned. - If expenditure is so related to the carrying on or conduct of the business that it can be regarded as an integral part of the profit carrying process, and not towards acquisition of an asset or a right of permanent character, the possession of which is a condition of carrying on of the business, the expenditure should be regarded as revenue expenditure - Empire Jute Co. Ltd. vs. CIT [1980] 124 ITR 1 (SC)/CIT vs. Hinthisthan Gpneral Flectrical Corpn. Ltd. [1971] 81 ITR 243 (Cal.)/CIT vs. Oblum Electrical Industries (P.) Ltd. [1981] 127 ITR 409 (AP). 15. In the light of the judicial decisions referred to above, we are of the view that the payment in question was owing to commercial expediency and enabled the assessee to avoid payment of future licence fee and thereby reduced the operating cost of the assessee. Such payment cannot be regarded as a capital expenditure. We, therefore, hold that the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surcharge should equally apply to education cess. It was submitted that object and legislative intent on MAT Credit appears to be to neutralize impact of MAT liability paid in year 1 by allowing the assessee to avail MAT Credit thereof in year 2. Where MAT is paid inclusive of surcharge and education cess, on parity of reasoning, MAT credit should also be considered inclusive of surcharge and education cess. Similar to TDS and advance tax, MAT Credit also represents tax actually paid. Thus, if credit for TDS and advance tax is allowed inclusive of surcharge and education cess, there could be no reason to take different view for MAT Credit which is identical in nature. It was submitted that section 115JAA provides for mechanism to ascertain amount of tax credit available. For determining tax credit, law requires to compare tax paid under section 115JB with that of tax payable under normal provisions. Accordingly, tax payable should mean the total tax payable including surcharge and education cess by the assessee with respect to his tax obligation worked out under normal provisions of the Act. The intent of the law is suggestive of comparison of final tax liability including surcharg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount of MAT tax credit available u/s. 115JAA. Secondly, the amount of tax payable for the year is determined after reducing the amount of advance tax, TDS and MAT credit. Thirdly, the resultant amount arrived at after making such deductions is the amount of tax, which the assessee is liable to pay. Fourthly, the amount of interest payable under any provision of this Act is calculated on the resultant amount. This shows that the amount of interest under the Act is liable to be paid on the amount of tax payable determined after deducting, inter alia, the amount of MAT tax credit. 9. We, therefore, hold that the amount of the MAT tax credit, inclusive of surcharge and education cess etc., if any, should be reduced from the amount of tax determined on the total income after adding surcharge and education cess, etc. Only the resultant amount payable will suffer interest under the relevant provisions of the Act. Since the amount of MAT tax credit is uncertain, we set aside the impugned order and remit the matter to the file of the Ld. AO for ascertaining the correct amount of MAT tax credit available with the assessee inclusive of surcharge and education cess etc., if any, an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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