Income Tax Appellate Tribunal - Delhi
Gamma Pizzakraft Pvt. Ltd., New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'C' BENCH
BEFORE SHRI A.N. PAHUJA, AM & SHRI C.M. GARG, JM
ITA No.980/Del/2012
Assessment year: 2007-08
A.C.I.T.,Circle-12(1), V/s. Gamma Pizzakraft Pvt. Ltd.,
New Delhi 303, Mansarover Building, 90,
Nehru Place,
New Delhi
[PAN : AACCG3988 Q]
(Appellant) (Respondent)
Assessee by Shri Suresh Malik,AR
Revenue by Shri Satpal Singh,DR
Date of hearing 13-09-2012
Date of pronouncement 21 -09-2012
ORDER
A.N.Pahuja:- This appeal filed on 27.02.2012 by the Revenue against an order dated 05.12.2011 of the ld. CIT(A)-VII, New Delhi, raises the following grounds:-
1 "Whether ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the disallowance of ``13,85,238/- made by the AO on account of royalty expenses.
2 Whether ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the disallowance of ``5,99,464/- made by the AO on account of additional depreciation.
3 The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of hearing."
2. Adverting first to ground no.1 in the appeal, facts, in brief, as per relevant orders are that return declaring loss of ``16,24,943/- filed on 31.10.2007 2 ITA no.980/Del./2012 by the assessee, was taken up for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') issued on 24.09.2008. Subsequently, return was revised on 23.03.3009, declaring total loss of ``16,09,576/-. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that the assessee claimed deduction for an amount of ``13,85,238/- on account of royalty. The AO was of the opinion that the expenditure was capital in nature. To a query by the AO, the assessee replied that the expenditure being recurring did not bring any enduring benefit and, therefore, was revenue in nature. However, the AO did not accept the submissions of the assessee while relying upon decision of the Hon'ble Apex Court in Southern Gear Pvt. Ltd. Vs. CIT, 232 ITR 359(SC) and Jonas Woodhead and Sons (India) Ltd. Vs. CIT, 224 ITR 342(SC) and accordingly, concluded that 25% of the aforesaid expenditure was capital in nature. However, in the computation of income, the AO disallowed the entire amount,
3. On appeal, the ld. CIT(A) allowed the claim of the assessee in the following terms:-
"4. Grounds of appeal No.2 and 3 relate to the disallowance of ``13,85,238/- on account of continuing fee/royalty expenses by treating it as a capital expenditure. It was submitted on behalf of the appellant inter alia that identical addition as made on similar grounds in assessment year 2006-07 by the Assessing Officer in appellant's own case. The appellant preferred an appeal before learned CIT(A)-XV, New Delhi who has deleted the disallowance made on this ground vide order dated 01.09.2011 for assessment year 2006-07 in Appeal No.63/2008-09. I have perused the order of the learned CIT(A)-XV, New Delhi for assessment year 2006-07 referred to above. As the facts and circumstances of the case are pari materia with the case of the appellant in assessment year 2006-07, for the reasons as discussed in the aforesaid order of CIT(A)-XV, New Delhi, ground of appeal No.2 is allowed."
4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee supported the findings of the ld. CIT(A) and contended 3 ITA no.980/Del./2012 that in the preceding assessment year similar claim had been allowed by the ld. CIT(A).While referring to various clauses in para 3.4, 9, 14.1, 14.2 of the agreement placed at page 26 to 46 of the paper book, the ld. AR added that a similar claim disallowed in preceding assessment year, had been allowed by ld. CIT(A) and the Revenue have not preferred any appeal against the said order.
5. We have heard both the parties and gone through the facts of the case. The issue before us is as to whether royalty paid in terms of the agreement dated 10.12.2005 is revenue in nature. Before proceeding further, we may have a look at the relevant terms and conditions of the agreement., whereunder the licensor is stated to be having a comprehensive restaurant system for retailing a limited menu of uniform and quality food products, emphasizing prompt and courteous service in a clean and wholesome atmosphere for families. The said system is adherence by licensees to standards and policies ,not limited to serving designated food & beverages ,use of only prescribed equipment and building lay out & designs, but strict adherence to designated food and beverage specifications and to prescribed standards of quality, service & cleanliness in restaurants besides compliance of standards & policies in conjunction with trade marks, service marks, trade names etc. In terms of clause 1 of the agreement, licensor granted the right to use system, system's property and marks to the assessee licensee solely in connection with the conduct of business of the outlet, initially for a period of 10 years. In terms of clause 1.3, licensee shall not without the prior written approval of the licensor conduct all or any part of the business at any other location or sublicense the right to use the system, system's property and marks. The licensee has not been granted any exclusive territory, protection or any other rights and licensor reserved the right to use or grant to other parties the right to use system, system's property and marks, in terms of clause 1.4 of the agreement. In terms of clause 2 read with schedule B to the agreement, licensee is required to pay 6.3% of the continuing fee besides initial fee. In terms of clause 3.4, licensor shall lend only one copy of Manuals to licensee and the latter is not authorised to reproduce or part with possession of 4 ITA no.980/Del./2012 the said manual. Clause 9 stipulates confidentiality clause while in terms of clause 14 ,licensee shall not charge, pledge or otherwise create any encumbrance or security ,interest or lien in respect of any interest or right under the agreement nor can transfer or gift the business or the agreement. In the event of termination of the agreement, licensee agreed to discontinue use of marks and system property and dispose of all materials bearing the marks or proprietary supplies. On perusal of various clauses of the agreement , it is apparent that the assessee was merely given a non-exclusive and non- transferable right of user of the system, system's property and marks for the stipulated period. Expenditure in these facts cannot be said to be for acquisition of any asset at all. In fact, all the rights in the system, system's property and marks continued to vest in Yum Restaurants (India) Pvt. Ltd. and it was only the right to use the system, system's property and marks that was made available to the assessee and that too based on its Revenues for a limited period . That means all the royalty paid in the shape of 6.3 % of the Revenues for the use of the system, system's property and marks could not be considered to be of enduring nature and thus, capital expenditure. The expenditure, in our opinion, is revenue nature. In the case of Jonas Wood Hear and Sons Vs. CIT, 117 ITR 55, it was held that the question regarding capital or revenue expenditure depends on the terms of agreement in each case. In the case of CIT Vs. Gujarat Carbon Ltd., 254 ITR 294, it was held that the payment of revenue under the agreement was directly relatable to services which were in the revenue field and were allowable as revenue expenditure. In the case of Goodyear (I) Ltd. Vs. ITO,73 ITD 189 (Delhi), the assessee had not acquired ownership right of technical knowhow but transfer of use of licenses. There was no advantage of enduring nature and hence it was held to be a case of revenue expenditure. In the case of Travancore Sugar and Chemicals Ltd. 62 ITR 566 (SC) it was held that whenever a payment is based on a percentage of turnover profits, it necessarily has no relation to the capital value of the asset, because it cannot be known at the time of the agreement what the turnover or profits will be over a period of years. In another case reported as DCIT Vs. Swaraj Engines Ltd. (2002) 124 Taxman 188, 5 ITA no.980/Del./2012 the Tribunal held that the royalty payment is allowable as revenue expenditure, since it is related to sales and that it is paid for better conduct, efficiency and improvement of the existing business or product manufactured by the assessee. In the case of CIT Vs. Lumax Industries Ltd. (2008) 173Taxman 290 (Delhi), Hon'ble High Court held that the payment of license fee on year to year basis for acquisition of technical knowledge would not amount to capital expenditure, but the revenue expenditure. In view of the foregoing, especially when the ownership rights in the system, system's property and marks throughout vested with the licensor and on the expiration or termination of the agreement the assessee was required to discontinue use of the system, system's property and marks while the payment of royalty is on year to year basis on the Revenues earned by the assessee and at no point of time the assessee was entitled to become the exclusive owner of the system, system's property and marks, we are of the opinion that the expenditure incurred by the assessee as royalty is revenue expenditure and is, therefore, allowable under section 37(1) of the Act. Consequently, in the absence of any basis ,we do not find any infirmity in the conclusion of the ld. CIT(A).Therefore, ground no.1 in the appeal is dismissed.
6. Coming now to ground no.2 relating to disallowance of ``5,99,464/- on account of additional depreciation, during the course of assessment proceedings, the AO noticed that the assessee claimed additional depreciation amounting to ``5,99,464/-. To a query by the AO seeking to disallow additional depreciation, the assessee submitted that claim has been made in accordance with provisions of section 32 (1)(iia) of the Act. However, the AO did not accept the submissions of the assessee and relying upon decision in Indian Hotel Company Ltd. Vs. Income-tax Officer, (2000) 112 Taxman 48 (SC) concluded that cooking food in a hotel does not qualify for additional depreciation. Accordingly, the AO rejected the claim of the assessee.
7. On appeal, the ld. CIT(A) allowed the claim in the following terms:-
6 ITA no.980/Del./2012 "6. Ground of appeal No.4 relates to the grievance of appeal against the action of the Assessing Officer in disallowing depreciation to the extent of ``5,99,464/-. It was submitted on behalf of the appellant inter alia that identical addition was made on similar grounds in assessment year 2006-07 by the Assessing Officer in appellant's own case.
The appellant preferred an appeal before learned CIT(A)- XV, New Delhi who has deleted the disallowance made on this ground vide order dated 1.9.2001 for assessment year 2006-07 in Appeal No.63/2008-09. I have perused the order of the learned CIT(A)-XV, New Delhi for assessment year 2006-07 referred to above. As the facts and circumstances of the case are pari materia with the case of the appellant in assessment year 2006-07, for the reasons as discussed in the aforesaid order of CIT(A)-XV, New Delhi, ground of appeal No.4 is allowed."
8. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied upon the findings of the ld. CIT(A). Inter alia, the ld. AR relied upon decisions in Idandas Vs. Anant Ramchandra Phadke:
1982 AIR 127 (SC); CIT Vs. M.R. Gopal: (1965) 58 ITR 598 (Madras); CIT Vs. East India Hotels Ltd.: (1994) 209 ITR 854 (Calcutta); India Cine Agencies Vs. CIT : 220 CTR 223 (SC) and YFC Projects (P) Ltd. Vs. DCIT: 134 TTJ 167 (ITAT, Delhi) relating to manufacture of an article or thing. The ld. AR added that a similar claim disallowed in preceding assessment year, had been allowed by learned CIT(A) and the Revenue have not preferred any appeal against the said order..
9. We have heard both the parties and gone through the facts of the case. Indisputably a similar claim of additional depreciation disallowed in the preceding assessment year had been allowed by the ld. CIT(A) and the Revenue have not preferred any appeal against the said decision nor the ld. DR stated the reasons for non-filing of the appeal in the preceding assessment year. At the outset, we may have a look at the relevant provisions of sec. 32(1)(iia) of the Act, which read as under:
7 ITA no.980/Del./2012 "(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent, of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii):
Provided that no deduction shall be allowed in respect of -
A. any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person ; or B. any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house ; or C. any office appliances or road transport vehicles ; or D. any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year; "
9.1 The ld. AR on behalf of the assessee while referring to decision in Osnar Chemical Pvt. Ltd. (2012) 276 E.L.T. 162 (SC) contended that manufacture takes place only when there is transformation of raw materials into new and different article, having different identity, characteristic and use. The conclusion arrived at in this decision or in the decisions placed in the paper book relied upon by the ld.
AR ,are not disputed. The various decisions were rendered on peculiar facts and circumstances of their own. However, in the instant case before us, neither the 8 ITA no.980/Del./2012 ld. AR nor the ld. DR explained before us as to which specific products are manufactured by the assessee or what are the ingredients used therein or what is the manufacturing process involved. There is nothing in the impugned order or order of the ld. CIT(A) in the preceding year as to the products manufactured or produced or even the manufacturing process. As regards decision relied upon by the AO in the case of Indian Hotel Company Ltd. Vs. Income-tax Officer (2000) 112 Taxman 48 (SC) holding that catering food is not a manufacturing activity, we find that the ld. CIT(A) in the preceding assessment year while referring to a circular no. 281 dated 22.9.1980 issued in the context of extant provisions of clause (iia) in sec. 32(1) by the Finance(No.2) Act, 1980,allowed the claim of the assessee ,without recording any findings as to whether or not the said decision is applicable. Since the provisions of section 32(1)(iia) inserted by Finance(No.2) Act, 1980 were quite different from the provisions applicable in the year under consideration, we are of the opinion that the ld. CIT(A) without recording his specific findings as to how the conditions stipulated in the aforesaid provisions of sec. 32(1)(iia)of the Act are fulfilled and without even analyzing the manufacturing process involved in various products prepared by the assessee, was not justified in accepting the claim of the assessee for additional depreciation, merely on the basis of aforesaid circular dated 22.9.1980. A mere glance at the impugned order reveals that the order passed by the ld. CIT(A) is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi-judicial body/authority must pass a reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it. The application of mind to the material facts and the arguments should manifest itself in the order. Section 250(6) of the Act mandates that the order of the CIT(A) while disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reasons for the decision. The requirement of recording of reasons and communication thereof by the quasi-judicial authorities has been 9 ITA no.980/Del./2012 read as an integral part of the concept of fair procedure and is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. Hon'ble jurisdictional High Court in their decision in Vodafone Essar Ltd. Vs. DRP,196 Taxman423(Delhi) held that when a quasi judicial authority deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter and further, the same also facilitates appreciation when the order is called in question before the superior forum. W e may point out that a 'decision' does not merely mean the 'conclusion'. It embraces within its fold the reasons forming basis for the conclusion.[Mukhtiar Singh Vs. State of Punjab,(1995)1SCC 760(SC)]. As already observed, the impugned order suffers from lack of reasoning and is not a speaking order on the issue of additional depreciation, disallowed by the AO. In view of the foregoing, especially when the ld. CIT(A) have not passed a speaking order on the issue, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the aforesaid issue, af resh in accordance with law, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the ld. CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act, bringing out clearly as to how the assessee fulfills the conditions stipulated under sec. 32(1)(iia) of the Act.. W ith these observations, ground no. 2 in the appeal is disposed of.
10. No additional ground having been raised in terms of residuary ground no.3 in the appeal, accordingly, this ground is dismissed.
11. No other plea or argument was made before us.
10 ITA no.980/Del./2012
12. In result, appeal is partly allowed but for statistical purposes.
Order pronounced in open Court
Sd/- Sd/-
(C.M. GARG) (A.N. PAHUJA)
(Judicial Member) (Accountant Member)
NS
Copy of the Order forwarded to:-
1. Assessee
2. A.C.I.T.,Circle-12(1),New Delhi
3. CIT concerned
4. CIT(A)-VII, New Delhi
5. DR, ITAT,'C' Bench, New Delhi
6. Guard File.
By Order,
Deputy/Asstt.Registrar
ITAT, Delhi