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19-12-2018, ELOFIC INDUSTRIES, Section 260A, 147, 148, HIGH COURT OF DELHI
CM APPL. Nos. 53651/2018, 53652/2018 & ITA 1472/2018
Before issuing notices on the application for condonation of delay of 2 days in filing and 315 days in re-filing, we have deemed it appropriate to first examine the appeal, ITA No. 1472/2018 on merits.
2. This appeal by Revenue under Section 260A of the Income Tax Act, 1961 ('Act', for short) in the case of M/s Elofic Industries Ltd ('respondentassessee', for short) pertains to the Assessment year 2004-05 and arises from the order of the Income Tax Tribunal ('Tribunal', for short) dated 09.08.2017.
3. For Assessment Year 2004-05, the respondent-assessee had filed return declaring an income of Rs. 2,02,01,290/-. After scrutiny assessment under section 143(3) of the Act, total income was determined at Rs.2,34,27,852/-. Subsequently, reassessment notice under Section 147 read with Section 148 of the Act notice was issued and reassessment order dated 23/12/2009 was passed. In the present appeal we are concerned with two additions made vide the reassessment order i.e., (i) Royalty and (ii) Disallowance of expenditure of Rs.5,87,50,440/-.
3.1.1 The reassessment order, after referring to case law relating to capital and revenue expenditure, abruptly without any discussion on the nature and character of royalty payments, held that Rs.1,10,35,840/- was capital expenditure on which depreciation @ 25% of Rs. 27,58,960/-, should be allowed. Accordingly addition/net disallowance of Rs. 82,76,880/- was made.
3.1.2 The addition was deleted by the Commissioner of Income Tax (Appeals) and the Tribunal had affirmed the said decision.
The findings recorded for deleting the disallowance are:
(i). The respondent-assessee had paid Rs. 23,46,814/- to M/s Elofic Industries (India) Ltd. for using their brand name on oil-filters. No technical knowledge was received from M/s Elofic Industries (India) Ltd.
(ii). The respondent-assessee had also paid Rs. 32,49,447/- and Rs. 54,39,580/- to Telco and Mahindra & Mahindra respectively, for using their trademarks and names on the oil-filters.
(iii). The respondent-assessee had not acquired any exclusive rights to manufacture or sell products for which royalty was paid. Royalty was paid for the use of trademarks and names belonging to a third party. Either party could opt out of the said arrangement at anytime. Payments had enabled the respondent-assessee to carry on business more ably and efficiently. Royalty payment had directly contributed to increased turnover, business and profits.
3.1.3 We are surprised that the Revenue has deemed it appropriate to prefer this present appeal in the absence of any discussion and factual findings recorded by the Assessing Officer who had merely referred to the case law.
3.2. Disallowance of expenditure of Rs.5,87,50,440.
3.2.1 The reasoning given by the Assessing Officer for disallowance of Rs. 5,87,50,440 is reproduced herein below:
"2. Regarding verification of purchases of amount Rs. 255890935 made in the year under consideration the assessee was required to file its details which were filed during the course of assessment hearing. On perusal of the same it was found that out of the amount of Rs. 25.58 crores, purchases worth Rs. 2.3 crores have been made from foreign