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TMI Blog2023 (7) TMI 232X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the expenditure is totally penal in nature and not allowable as business expenditure u/s. 37 of the I.T. Act, 1961. 3. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is legally justified in deleting the addition of Rs. 14,37,08,678/- made on account of disallowance of free airtime to distributors u/s. 40(a)(ia) of the I.T. Act, 1961 ignoring the fact that the expenditure is in the nature of commission expenses on which TDS was liable to be deducted u/s. 194H of the I.T. Act, 1961." 3. Qua ground No.1, briefly, the facts are, the assessee is a resident corporate entity stated to be engaged in the business of cellular phone and landline services in certain sectors in India pursuant to license granted by the Department of Telecommunication, Government of India. For the assessment year under dispute, the assessee filed its return of income on 26.11.2015 declaring income of Rs. 1644,58,64,360/-. Subsequently, the assessee filed revised return of income on 23.03.2017 declaring income of Rs. 1619,58,64,360/-. In course of assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of Rs. 532,20,27,414/- to the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had debited an amount of Rs. 1,91,48,016/- towards subscriber verification penalty paid to the Department of Telecommunication. Being of the view that the payment made is of penal nature, he called upon the assessee to justify the deduction claimed. In response to the query raised, the assessee submitted that the payment made is not for any offense committed nor is prohibited by law, as it was for violation of contractual norms. Thus, the assessee submitted that the amount is allowable as deduction. The Assessing Officer, however, did not find merit in the submissions of the assessee and accordingly disallowed the deduction claimed. While deciding the issue in appeal, learned Commissioner (Appeals) observed that in assessee's own case in assessment year 2012-13, similar disallowance was deleted. Thus, following the said decision, he deleted the disallowance made in the impugned assessment order. 8. Before us, learned Departmental Representative submitted that the penalty paid to the Department of Communication is not due to violation of any contractual obligation but is for an offense committed in not following the Rules and Regulations issued by the Department of Communica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar disallowance. He submitted, in fact, in assessment year 2009-10, the Assessing Officer himself has allowed such deduction. Thus, he submitted, there is no reason to interfere with the decision of learned Commissioner (Appeals). 10. We have considered rival submissions, decisions relied upon and materials on record. Undisputedly, the disallowance of expenditure made by the Assessing Officer is in relation to penalty paid to the Department of Telecommunication for violation of KYC norms. The issue arising for consideration is, whether the payment of penalty is allowable as business expenditure u/s. 37(1) of the Act. A reading of section 37(1) makes it clear that any revenue expenditure laid out or expended wholly or exclusively for the purpose of business is allowable as deduction while computing the business income. However, Explanation 1 to said section carves out an exception by providing that any expenditure incurred by an assessee for a purpose, which is an offense or which is prohibited by law, shall not be allowed as deduction. Therefore, it needs to be examined whether penalty paid for violation of KYC norms falls within the purview of expenditure incurred towards an off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 37(1) of the Act. Thus, in our view, in the facts of assessee's case, the 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. Ground raised is dismissed. 14. In ground No. 3, Revenue has challenged deletion of disallowance of Rs. 14,37,08,678/- made u/s. 40(a)(ia) of the Act. 15. Briefly, facts are, in course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee has provided discounts to pre-paid card distributors amounting to Rs. 32,61,66,998/- for Rajasthan Circle and Rs. 1,12,40,84,755/- for North East Circle. He observed, free airtime is given as a discount and margin to the distributors on the retail price of start up kits, recharge coupons etc. According to the Assessing Officer, such discount/margin given to the distributors is in the nature of commission. Hence, the assessee was obligated to deduct tax at source in terms of section 194H of the Act. Since, the assessee had not deducted tax at source while allowing such discounts/margins to the distributors, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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