2017 (2) TMI 1394 - AT - Income Tax

Treatment to copyright expenses - nature of expenses - revenue or capital expenditure - Held that - The assessee had claimed copyright expenses and justified the claim stating that the same was paid for the purpose of use of copyright of products like songs images video clips games etc. for development of value added services for the telecommunication companies. ITAT after going through the relevant clauses of the copyright agreement concurred with the assessee and held that the assessee had merely acquired the right to use the copyrights and had not become the owner of the copyrights/license and thus the expenses were revenue in nature. The assessee has merely acquired right to use the copyright. The perusal of the Agreement with M/s Phonographic Performance Ltd. shows that license has been granted only for usage of the copyright. The above clearly shows that license was only for usage of copyright held by the licensor. The assessee has not become the owner of the license. Therefore clearly the payment is of Revenue nature - Decided in favour of assessee. Disallowance of excess depreciation claimed treating the superstructure as temporary structure - Held that - The said opening WDV has been satisfactorily explained by the assessee as having been on account of the fact that part of the expenditure was incurred in the preceding year which was shown as opening WDV of the temporary structure and the assessee has rightly claimed depreciation in the impugned year when the said temporary construction was completed and the asset put to use. Moreover we find that there is no basis with the Revenue to hold that the construction of the said structure was prohibited by law and was an offence as rightly pointed out by the CIT (Appeals). The Ld.CIT(Appeals) has rightly pointed out that even as per the Assessing Officer there was a bar on building/constructing permanent structures in the area where the assessees office was located. The said structure undisputedly was a temporary structure and thus there was no breach of law by the assessee by creating it. Therefore we agree with the CIT(Appeals) that no disallowance could have been made u/s 37 (1) of the Act also. We concur with the CIT (Appeals) that the temporary structure having come into existence in the impugned year and thus put to use in the impugned year the assessee was entitled to depreciation @ 100% on the same and the disallowance made by the Assessing Officer we hold has been rightly deleted by the Ld. CIT (Appeals). Treatment of royalty expenses as revenue in nature has already been settled in favour of the assessee by the Hon ble Punjab & Haryana High Court in appeals pertaining to preceding years. TDS u/s 194A - addition u/s 40(a)(ia) - insertion of second proviso to section 40(a)(ia) - Held that - In the present case it is not disputed that the payees /recipients of the said interest income i.e. M/s Indiabulls Financial Services Ltd. and M/s Bajaj Financial Ltd have included the said income in their return of income and paid taxes on the same. Evidence in the form of Form No.26A as also report of Chartered Accountant was filed. The Revenue has not challenged this fact before us. Thus the assessee had duly demonstrated compliance with the conditions stated in the second proviso to section 40 (a)(ia) which briefly put states that no disallowance is to be made in cases where the recipient of the income reflects the same in its return of income and pays taxes on the same. AO also we find has in her Remand Report after examining the evidences produced by the assessee admitted that the said expenses were allowable in view of the provisions of section 40 (a)(ia) r.w.s. 201 (1) of the Act. In such circumstances since the Assessing Officer has herself admitted that the addition made was unwarranted the addition no longer survives vis- -vis assessment order and there is no reason for the Revenue to have any grievance on the issue. We find that the CIT (Appeals) has rightly followed the proposition laid down by the I.T.A.T. Agra Bench in the case of Rajiv Kumar Aggarwal (2014 (6) TMI 79 - ITAT AGRA) which stated that the second proviso to section 40 (a)(ia) were retrospective in nature w.e.f. 1.4.2005. The said decision has been followed by the Delhi High Court while upholding the above proposition in the case of CIT Vs. Ansal Landmark Township P. Ltd 2015 (9) TMI 79 - DELHI HIGH COURT . - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition by treating copyright expenses as revenue in nature.
2. Deletion of addition on account of disallowance of excess depreciation claimed on temporary structure.
3. Deletion of addition on account of royalty payment treated as capital in nature.
4. Deletion of disallowance under Section 40(a)(ia) for non-deduction of tax at source.

Detailed Analysis:

Issue 1: Deletion of Addition by Treating Copyright Expenses as Revenue in Nature
Facts and Arguments:
- The assessee, engaged in providing value-added services to telecommunication operators, claimed copyright expenses as revenue expenditure.
- The Assessing Officer (AO) treated these expenses as capital in nature, citing that copyrights are intangible assets under the Income Tax Act and allowed depreciation at 25%.
- The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, referencing the ITAT's decision in the assessee's own case for the assessment year 2009-10, where similar expenses were held to be revenue in nature.

Judgment:
- The ITAT upheld the CIT(A)'s decision, noting that the assessee had merely acquired the right to use the copyrights and had not become the owner of the copyrights/license, thus treating the expenses as revenue in nature.
- The ITAT found no differing facts from the previous assessment year and dismissed the Revenue's grounds.

Issue 2: Deletion of Addition on Account of Disallowance of Excess Depreciation Claimed on Temporary Structure
Facts and Arguments:
- The assessee erected a temporary structure for a cafeteria and claimed 100% depreciation.
- The AO disallowed the depreciation, arguing that the structure was created illegally and thus not allowable under Section 37(1) of the Act.
- The CIT(A) deleted the addition, stating that the temporary structure was incidental to the business, and there was no breach of law.

Judgment:
- The ITAT concurred with the CIT(A), noting that the structure was temporary and entitled to 100% depreciation. The ITAT found no evidence of illegality in creating the structure and dismissed the Revenue's grounds.

Issue 3: Deletion of Addition on Account of Royalty Payment Treated as Capital in Nature
Facts and Arguments:
- The AO added ?16,97,769/- to the income of the assessee, treating royalty payments to its Director as capital expenditure.
- The assessee argued that the royalty was for the use of a brand name not transferred in a business sale agreement and referenced ITAT and Punjab & Haryana High Court decisions in preceding years, which treated the expenses as revenue in nature.

Judgment:
- The ITAT upheld the CIT(A)'s decision, noting that the issue had been settled in favor of the assessee by the Hon'ble Punjab & Haryana High Court in preceding years. The ITAT found no distinguishing facts and dismissed the Revenue's grounds.

Issue 4: Deletion of Disallowance under Section 40(a)(ia) for Non-Deduction of Tax at Source
Facts and Arguments:
- The AO disallowed interest payments amounting to ?41,62,580/- under Section 40(a)(ia) for non-deduction of tax at source.
- The assessee provided evidence that the recipients had included the interest in their income and paid taxes. The CIT(A) deleted the disallowance, referencing the ITAT Agra Bench decision and the Delhi High Court's upholding of the retrospective effect of the second proviso to Section 40(a)(ia).

Judgment:
- The ITAT upheld the CIT(A)'s decision, noting that the recipients had paid taxes on the interest income and the AO had admitted the expenses were allowable. The ITAT found no merit in the Revenue's grounds and dismissed them.

Conclusion:
All three appeals filed by the Revenue were dismissed by the ITAT, with the CIT(A)'s deletions of additions being upheld across all issues. The ITAT found no infirmity in the CIT(A)'s orders and concurred with the reasoning provided, referencing previous decisions and the absence of distinguishing facts.