2023 (7) TMI 232 - AT - Income Tax

Amortization of variable license fee - Deduction u/s 35ABB or u/s. 37(1) - CIT(A) allowed the same as revenue expenditure - HELD THAT - Hon ble jurisdictional High Court while deciding the appeals for the assessment years 2003-04 2004-05 2006-07 and 2007-08 has upheld assessee s claim of deduction as revenue expenditure. While deciding the assessee s appeal for the assessment year 2009-10 the Tribunal 2016 (11) TMI 1739 - ITAT DELHI has allowed assessee s claim of deduction following the decision of the Hon ble High Court. No infirmity in the decision of learned first appellate authority. Ground raised is dismissed. Nature of expenditure - subscriber verification penalty paid to the Department of Telecommunication - violation of KYC norms - AO treating the payment as penal in character hence not allowable u/s. 37 - HELD THAT - From the facts on record it does not transpire that the violation of KYC norms entails any criminal liability or prosecution. As per the license agreement for violation of any terms of the agreement including KYC norms the assessee is to be visited with penalty of various amounts. As discussed such penalty is imposed as a deterrent measure and not for any offense or due to prohibition of law. It is further necessary to observe the penalty arises because of breach of certain terms and conditions of the license agreement hence in regular course of business. Pertinently in case of Mangal Keshav Securities Ltd. 2015 (11) TMI 111 - ITAT MUMBAI while dealing with more or less identical issue of penalty levied by Stock Exchange for violation of KYC norms has held that payment made towards penalty for violation of KYC norms would not fall within the ambit of Explanation 1 to section 37(1) of the Act. Thus exceptions provided under Explanation 1 to section 37(1) of the Act will not get attracted. Thus we do not find any infirmity in the decision of learned Commissioner (Appeals) in deleting the disallowance. Decided against revenue. TDS u/s 194H - Disallowance u/s. 40(a)(ia) - assessee has provided discounts to pre-paid card distributors - HELD THAT - While dealing with identical issue in assessee s own case for earlier assessment years various Benches of the Tribunal have held that the provisions of section 194H are not attracted to the discounts given to distributors. Hence section 40(a)(ia) would not be applicable. As in the latest order passed for the assessment year 2009-10 the Tribunal in order 2016 (11) TMI 1739 - ITAT DELHI has deleted similar disallowance - provisions of section 194H are not applicable to the discounts given to the distributors - disallowance u/s. 40(a)(ia) deleted.- Decided in favour of assessee.

Summary

Issues Involved:

1. Deletion of addition on account of amortization of variable license fee under Section 35ABB treated as revenue expenditure under Section 37(1) of the Income Tax Act, 1961.
2. Deletion of addition on account of subscriber verification penalty under Section 37(1) of the Income Tax Act, 1961.
3. Deletion of disallowance of free airtime to distributors under Section 40(a)(ia) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Amortization of Variable License Fee:

The primary issue was whether the amortization of the variable license fee should be treated as a revenue expenditure allowable under Section 37(1) of the Income Tax Act, 1961. The assessee, a corporate entity engaged in the business of cellular and landline services, had claimed a deduction for the license fee and spectrum charges as revenue expenditure. The Assessing Officer disallowed this claim, treating the payment as not partaking the character of revenue expenditure, and instead allowed amortization, leading to a disallowance of Rs. 332,57,37,119/-. The Commissioner of Income-tax (Appeals) deleted the disallowance, noting that similar issues in preceding years had been decided in favor of the assessee by both the Tribunal and the Hon'ble jurisdictional High Court. The Tribunal found no infirmity in the decision of the first appellate authority, as the issue was consistently decided in favor of the assessee in earlier years, thus dismissing the Revenue's ground.

2. Subscriber Verification Penalty:

The second issue concerned the deletion of an addition made by the Assessing Officer, treating the payment of Rs. 1,91,48,016/- as penal in nature and not allowable under Section 37 of the Act. The assessee argued that the penalty was not for an offense or prohibited by law but was for a violation of contractual norms, thus allowable as a business expenditure. The Commissioner (Appeals) deleted the disallowance, following a similar decision in the assessee's case for a previous assessment year. The Tribunal, upon reviewing the submissions and materials, agreed with the Commissioner (Appeals), noting that the penalty was compensatory in nature for a breach of contractual obligations and did not entail any criminal liability or prosecution. Therefore, the Tribunal found no error in the decision to delete the disallowance.

3. Free Airtime to Distributors:

The third issue involved the deletion of disallowance of Rs. 14,37,08,678/- under Section 40(a)(ia) of the Act. The Assessing Officer had treated discounts given to pre-paid card distributors as commission, requiring tax deduction at source under Section 194H. Since the assessee did not deduct tax at source, the disallowance was made. The Commissioner (Appeals) deleted the disallowance, citing decisions from the Hon'ble Gauhati High Court favoring the assessee. The Tribunal noted that similar issues in the assessee's case for earlier years were decided in favor of the assessee by various Benches of the Tribunal and the Hon'ble Rajasthan High Court, confirming that Section 194H did not apply to the discounts given to distributors. Consequently, the Tribunal upheld the decision of the first appellate authority in deleting the disallowance.

Conclusion:

The appeal by the Revenue was dismissed in its entirety, with the Tribunal upholding the decisions of the Commissioner of Income-tax (Appeals) on all grounds. The Tribunal found the issues consistently covered in favor of the assessee in previous decisions by higher judicial authorities.