Whether royalty paid for use of brand names and trade marks is to be treated as capital expenditure?

CIT Vs V. R.V. Breweries & Bottling Industries Ltd. (Delhi High Court)- The observation made in paragraph 58 at page 414 of the aforementioned judgement, on which reliance has been placed by the learned counsel for revenue seeks only to emphasise that the assessee in that case, had only acquired access to technology which was not related to any secret process or patent rights and thus in continuum it is mentioned that not even a right to use the trademark or brand name had inhered in the assessee.

From this, it cannot be concluded, as is sought to be done by the learned counsel for the revenue that any payment made for use of trademark or trade name ipso facto will give colour to the payment as if it is made on capital account. This is in our view is a complete mis-reading of the judgement. It is well settled that a judgement is an authority for what it decides and not what is construed as logically flowing from it. Judgements cannot be read as statutes. A stray sentence picked out of context, cannot be used to turn its ratio around.

Whether the provisions of Sec 40A(2) apply to the payments that had not been made to persons specified u/s 40A(2)(b) for the purpose of disallowing the expenditure as excessive?

the Assessing Officer in the assessment year 1997-1998 after recording that the shares of the assessee were held by six (6) entities goes on to observe that the assessee “became a subsidiary of Shaw Wallace Group of Companies”. There is no finding recorded by the Assessing Officer that SWCL had acquired substantial interest i.e., 20% or more of the share capital with attending voting rights, whether directly or beneficially. If that is so, then the provisions of section 40A(2)(a) could not have got triggered. It is noticed that the CIT (A) in the assessment year 1998-1999 has returned a finding that there were five (5) limited companies apart from two (2) individuals who held shares in the assessee, but none of the entities adverted to, by the Assessing Officer, both in the assessment year 1997-1998 and 1998-1999 is SWCL. As a matter of fact, the CIT (A) in assessment year 1998-1999 records that not a single share in the assessee is held by SWCL. The CIT (A) further records a finding of fact that, on a perusal of list of shareholders, it is clear that even the employees of SWCL did have ownership of a controlling share holding interest in the assessee. CIT(A) records that six (6) individuals held ten (10) shares each in the assessee while, one gentleman by the name of Mr. Suraj P. Gupta held 8,61,610 shares who was neither an employee of the assessee and nor was any payment made to Mr. Suraj P. Gupta or his relative or to a company of which he was a Director. The CIT (A) went on to hold that, in the instant case, payments had not been made to persons specified under section 40A(2)(b) and therefore, the provisions of section 40A(2) were not applicable. Both CIT (A) as well as the Tribunal have also accepted the explanation given by the assessee with regard to difference in payment of bottling charges vis-a –vis  Balbir Industries Limited and the assessee. The reference to which we have already made herein above. We find no perversity in the findings of the Tribunal and those recorded by CIT(A) in assessment year 1998-1999.

CIT Vs V. R.V. Breweries & Bottling Industries Ltd.   

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