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2009 (5) TMI 561 - AT - Income TaxAllowance or disallowance of amortized license fees - AO disallowed and added ₹ 10,26,667 on the ground that amortization was not permissible under the IT Act, except under ss. 35D, 35DD and 35DDA Assessee needed a license to host and resell the LMS of Sun - The provisions of s. 37(1) are general as well as residual in nature and can be resorted to only when the provisions of ss. 30 to 36 are not applicable in a given case - The matching principle allowing amortization of expenses, in a situation where the Act is silent in this regard, is a Judge-made law - Its application has to be restricted to cases where a revenue expenditure results in a continuing benefit to the business of the assessee over a number of years, and allowing the entire expenditure in the year in which it is incurred is likely to distort the profit of that particular year Disallowance of amortized development fees It was held that claim of the development fee is of the same nature as the licence fee discussed in the previous ground Unearned income - assessee was following mercantile system of accounting - the revenue earned by the assessee from software and consultancy services was recognized on delivery of goods/services the assessee-company was following the AS-9 prescribed by the ICAI which was in conformity with the provisions of s. 145(2) of the Act. The assessee was regularly following the project completion method , which is a recognized method - Revenue s Appeal dismissed
Issues Involved
1. Disallowance of amortized license fee expenditure. 2. Disallowance of amortized development fee expenditure. 3. Addition of unearned income. Detailed Analysis Issue 1: Disallowance of Amortized License Fee Expenditure Facts: The assessee-company entered into an agreement with Sun Microsystems for hosting and distributing their Learning Management System (LMS) Software for three years. The assessee paid Rs. 28,80,000 and amortized this expenditure over the useful life of the license, debiting Rs. 10,26,667 to the Profit & Loss account. Assessment Officer (AO): Disallowed the claim on the grounds that the expenditure did not fall under the revenue field and was not permissible under the IT Act except under specific sections (35D, 35DD, 35DDA). CIT(A): Allowed the claim, observing that the expenditure was for obtaining a license necessary for the business, and the AO did not provide cogent reasons for treating it as capital expenditure. The CIT(A) relied on the Supreme Court decision in Madras Industrial Investment Corporation Ltd. vs. CIT. Tribunal Decision: The Tribunal upheld the CIT(A)'s decision, noting that the expenditure had a direct nexus to the business operations and was an integral part of the profit-earning process. The Tribunal also discussed the 'matching principle' for amortization, which allows spreading the expenditure over the period of benefit to avoid distortion of profits in a single year. Issue 2: Disallowance of Amortized Development Fee Expenditure Facts: The assessee entered into an agreement with Element K India (P) Ltd. for developing and licensing a customized e-learning solution for three years, paying a development fee of US $1,00,000. The assessee amortized this expenditure and claimed Rs. 15,60,000. AO: Disallowed the claim, stating that the expenditure was for a customized product development and did not fall under the revenue field. The AO also reiterated that amortization was not permissible under the IT Act. CIT(A): Allowed the claim, applying the same reasoning as for the license fee expenditure, and relied on the Supreme Court decision in Madras Industrial Investment Corporation Ltd. vs. CIT. Tribunal Decision: The Tribunal upheld the CIT(A)'s decision, noting that the facts were identical to the license fee issue and the expenditure was necessary for the business operations. The Tribunal rejected the AO's objection regarding amortization. Issue 3: Addition of Unearned Income Facts: The AO noticed that Rs. 39,68,208 received during the year was shown as 'unearned income' and carried forward to the next year. The assessee explained that the revenue was recognized based on the delivery of modules developed and delivered, and if not delivered, the amount had to be refunded. AO: Rejected the explanation, stating that under the mercantile system of accounting, the receipt should be recognized once the sales invoice is raised. The AO added the amount as income. CIT(A): Deleted the addition, observing that the assessee followed AS-9 prescribed by ICAI, which was in conformity with section 145(2) of the Act. The revenue was recognized on project completion, and the deferred income was accounted for in the next year. Tribunal Decision: The Tribunal upheld the CIT(A)'s decision, noting that the assessee consistently followed the 'project completion method' and there was no inconsistency in recognizing revenue. The Tribunal found no reason to interfere with the CIT(A)'s conclusions. Conclusion The Tribunal dismissed the appeal filed by the Department, upholding the CIT(A)'s decisions on all three issues.
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