Tax Case Appeal No. 1114 of 2009

IN THE HIGH COURT OF JUDICATURE AT MADRAS

DATED : 12.09.2022

CORAM :

THE HON'BLE MR. JUSTICE S.VAIDYANATHAN

AND

THE HON'BLE MR. JUSTICE C.SARAVANAN

T.C.A.No.1114 of 2009

M/s.UC MAS Mental Arithmetic (India) Pvt. Ltd.

Rep. by its Managing Director Mr.Basheer Ahmad,

A-1, 1857, 13th Main Road, VI Avenue,

Anna Nagar,

Chennai 600 040.

.. Appellant

Versus

The Assistant Commissioner of Income Tax

Company Circle III(3), Chennai.

..Respondent

Tax Case Appeal filed under Section 260-A of the Income Tax Act, 1961

against the order of the Income Tax Appellate Tribunal, 'D' Bench, Chennai dated

20.02.2009 passed in I.T.A.No.750(MDS)/08.

For Appellant

: Mr. TC.A.Ramanujam

For Respondent : Mr.V.Pushpa

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Tax Case Appeal No. 1114 of 2009

J U D G M E N T

S.VAIDYANATHAN,J

and

C.SARAVANAN, J

This Tax Case Appeal has been filed by the Assessee, calling in question

the order dated 20.02.2009 passed by the Income Tax Appellate Tribunal,

Madras 'B' Bench, in I.T.A.No.750/(MDS)/08 relating to the Assessment Year

2004-05.

2. By order dated 10.11.2009, TCA No.1114 of 2009 was admitted on the

following substantial question of law :-

"Whether in the facts and in the circumstances of the

case, the income tax Appellate Tribunal is justified in

allowing the commission paid to the Managing Director for

the assessment year 2004-2005 in the assessment of the

appellant company when the appellant company is

following mercantile system of accounting and such method

of accounting has been accepted by the department in all

the other years?"

3. The facts in nutshell placed before this Court are as follows:

(i) The Appellant Company /Assessee was engaged in the business of

imparting mental arithmetic training through images and mental reckoning

methods for fast and accurate calculations. For the Assessment Year 2004-2005,

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Tax Case Appeal No. 1114 of 2009

the Appellant claimed a deduction of Rs.30,45,396/- being the royalty paid to the

Franchisor under the Master Franchise Agreement dated 16.07.2002. The

Assessing Officer disallowed the claim of the Appellant on the basis that the

payments were capital expenditure and came to the conclusion that the Appellant

acquired a benefit of enduring nature and treated the payment of Rs.30,45,396/-

as capital expenditure and also allowed depreciation under Section 32 of the

Income Tax Act, 1961. Aggrieved over the same, the Appellant has preferred an

Appeal before the Commissioner of Income Tax (Appeals)-III, Chennai and the

said Authority taking note of the fact that for the previous Assessment Year, the

Assessee had the benefit of similar payment, which was not treated as Capital

Asset has allowed the Appeal vide order dated 29.01.2008.

(ii) Being aggrieved over the same, the Respondent preferred an Appeal

before the Income Tax Appellate Tribunal (for brevity 'the Tribunal') and the

Tribunal vide order dated 20.02.2009 has allowed the Appeal insofar as it relates

to the payment to the Managing Director, while the royalty payments were

allowed as revenue expenditure. Being aggrieved, the Assessee has preferred

this Appeal.

2. The narrow issue involved in this case is whether or not the payment

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Tax Case Appeal No. 1114 of 2009

made to the Managing Director to the tune of Rs.30 lakhs is to be treated as

deductible expenditure on the basis of the resolution dated 11.12.2003, which

permits to increase the remuneration payable to the Managing Director from

01.04.2003 and to pass commission after approval of the members in the ensuing

Annual General Meeting, which took place on 30.09.2004, wherein the earlier

resolution was ratified. The Assessment Officer did not accept the claim of the

Assesee for the Assessment Year 2005-2006 as the liability ar