By TIOL News Service

MUMBAI, DEC 03, 2015: THE issue is - Whether professional fee paid for registration of copyright is capital expenditure and hence entitled for allowance of depreciation. YES is the answer.

Facts of the case - YES: ITAT

A) The assessee is engaged in the business of manufacture and sale of marine and industrial gear boxes, diesel engines, generating sets, Tandem Rollers, Transit Mixture, Vibratory Compactors etc. and also trade in steam traps, pumps, fluid coupling and crucibles etc. During the year under consideration, the assessee had earned various exempt income, namely, dividend income of Rs. 28,56,000/- and interest on tax free bonds of Rs. 21,000/- & Rs. 5,90,825/-. The AO thereafter issued show cause notice as to why the expenditure attributable to earning of such exempt income should not be disallowed. After hearing assessee's contentions, the AO noted that very similar submissions were made by the assessee during assessment proceedings for the AYs 2001-02, 2002-03 & 2003-04, wherein 5% of the exempt income was treated as expenditure disallowable u/s 14A and accordingly, he made the disallowance of Rs. 1,73,364/- being 5% of the total exempt income of Rs. 34,67,285/-. Besides this, he further made disallowance of Demat charges of Rs. 8,25,010/- debited under the head "other sundry expenses" which was a direct expenditure.

B) The assessee during the concerned year had paid professional fees of Rs. 1,18,350/-, to 'Majumdar and Co.' for registration of copy rights of designs and engines, and claimed the same as revenue expenditure during filing of return. The AO during assessment treated the said expenditure to be capital in nature. On appeal, the CIT(A) confirmed the order of AO on the ground that the expenditure had been incurred for getting the designs patented which adds to the value of the new asset which had an enduring benefit.

C) The assessee during the concerned year had made various payments, comprising of 1) Charges towards late payment fee to Chennai Municipal Corporation Rs. 9,650/-; 2) Sales tax charged due to technical error and Stating destination of as Indore even though Consignee's name and address were correctly Written on consignment Rs. 1,22,887/-; 3) Compliance fee per Weights and Measurement Rules Rs. 32,000/-; 4) Amount paid to High Court in pursuance of High Court order on company's stay petition in respect of appeal to HC Rs. 10,00,000/-; thus in toto Rs.11,65,749/-. These payments were disallowed by AO on the ground that these were infraction of law. On appeal, the CIT(A) confirmed the said addition on the ground that these payments were made by the assessee on account of error committed for non-compliance of certain regulations, interest for the delayed statutory payment and also penalty.

Having heard the parties, the Tribunal held that,

Interest expenditure

++ the formula adopted by the CIT(A) for making the disallowance u/s 14A is quite akin to formula laid down in Rule 8D which admittedly cannot be held to be applicable at all in the AY 2004-05. What could be the reasonable basis for disallowance has to be worked out from the nature of expenses debited and overall accounts of the assessee. So far as disallowance of interest expenditure is concerned, in the case of the assessee it is an admitted fact, permeating from the earlier years that the investments which have yielded exempt income were out of assessee's own funds and no interest bearing funds were diverted for making the investments. Once that is so, then in view of the ratio laid down by the HC in the case of CIT vs HDFC Bank, we hold that no disallowance on account of interest can be made in this case. As regards direct expenses are concerned, the AO, has given a categorical finding which has not been rebutted before us, that Demat charges of Rs. 8,25,010/- were directly related to investment made in shares. Accordingly, so far as disallowance of Rs. 8,25,010/- on account of demat charges made by the AO, the same stands confirmed. Regarding balance disallowance, we find that 5% of the exempt income appears to be quite reasonable having regard to the nature of expenses and accounts of the assessee. Accordingly, we uphold the disallowance to the extent of Rs. 9,98,374/- which was made by the AO;

Disallowance of professional fee

++ it is an undisputed fact that payment has been made for getting the engine designs patented, which the assessee produces/manufactures. Such a copyright and patent will only go to enhance the cost of such an intangible asset and accordingly, it has been rightly disallowed as capital expenditure by the AO and CIT(A). However, we agree with the alternate contention of the Counsel that if it is treated as capital expenditure for a capital asset then, depreciation has to be allowed on such an intangible asset, which specifically finds mention u/s 32(1)(ii). Accordingly, we direct the AO to allow depreciation as per relevant rules provisions on such a capital expenditure;

Contribution to employee welfare fund

++ it has been admitted by the Counsel that this issue has been decided against the assessee by the Tribunal in AY 2003-04. On perusal of the Tribunal order for the AY 2003-04. We find that this issue has been dealt in detail by the Tribunal in the following manner: “ The counsel for the assessee has reiterated before us the submissions made before he learned CIT(A) to the effect that most of the contributions having been made by the assessee as per the settlement arrived at with the workers' union, the same are covered by the Industrial Dispute Act, 1947 and provisions of section 40A(9) of the Act cannot be invoked. However, she has not been able to produce any evidence in the form of the copy of agreement with the workers' union to support and substantiate her stand taken on this issue and in the absence of the same, we find no justifiable reason to interfere with the impugned order of the learned CIT(A) confirming the disallowance made by the AO on this issue by invoking the provisions of section 40A(9).” Accordingly, following the earlier years' precedence, this issue is decided against the assessee.

(See 2015-TIOL-1966-ITAT-MUM)