2018 (9) TMI 1548 - AT - Income Tax

Disallowance of expenditure incurred by the assessee towards making of enrollment cards under Rashtriya Swasthya Bima Yojana (RSBY Scheme) - deferred revenue expenditure - Held that - In similar set of facts the Tribunal deleted the addition in assessment year 2010-11 as well. In the assessment year under appeal the ld. DR has failed to point out any distinguishing factor. Since, the nature of expenditure is same, following the order of Tribunal in assessee s own case in preceding assessment years, we hold that ₹ 19,82,32,378/- incurred by the assessee towards making of enrollment cards under RSBY Scheme is an allowable expenditure. Accordingly, ground Nos. 1 to 5 raised in the appeal by the assessee are allowed. Damages paid by the assessee to Microsoft Corporation USA for unauthorized use of software / operating system - Allowable business expenditure - Held that - We find that under similar set of facts in the case of Harbinger Systems (P.) Ltd. Vs. Deputy Commissioner of Income Tax 2016 (12) TMI 1398 - ITAT PUNE the Tribunal held that the payment of such damages is allowable business expenditure u/s. 37(1) of the Act. - Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance of enrollment expenditure under Rashtriya Swasthya Bima Yojana (RSBY Scheme).
2. Treatment of legal expenses as capital expenditure instead of revenue expenditure.

Issue 1: Disallowance of enrollment expenditure under RSBY Scheme:
The appeal challenged the decision of the Commissioner of Income Tax (Appeals) to treat enrollment expenditure of ?19,82,32,378 incurred by the assessee towards RSBY Scheme as deferred revenue expenditure. The appellant argued that there was no long-term benefit as the same Insurance company or Third Party Administrator may not operate in the same district next year. The appellant also highlighted the revenue recognition process post-enrollment and cited the matching principle of accounting. The Tribunal noted that similar expenditure disallowed in previous years was allowed by the Tribunal. Referring to past Tribunal orders, the Tribunal upheld the allowability of the expenditure, emphasizing the revenue earned and the independent nature of smart card issuance business. Thus, the expenditure was considered allowable, and the grounds raised by the appellant were allowed.

Issue 2: Treatment of legal expenses as capital expenditure:
The appeal contested the treatment of ?10,00,000 legal expenses incurred for a suit against the appellant at Delhi High Court as capital expenditure instead of revenue expenditure. The appellant argued that the payment was made to secure business interests and should be considered a revenue expense. The Tribunal referenced a similar case involving compensation paid for unauthorized software use, where the Tribunal allowed the payment as a business expenditure under section 37(1) of the Act. Drawing parallels with this precedent, the Tribunal held that the payment of damages to Microsoft Corporation was an allowable expenditure. As the nature of the payment was deemed similar to the previous case, the Tribunal allowed ground No. 6 raised by the appellant. The alternate request for depreciation on the capitalized expenditure was dismissed as infructuous due to the allowance of the expenditure as revenue. Consequently, the appeal was partly allowed in favor of the assessee.

This judgment primarily revolved around the disallowance of enrollment expenditure under the RSBY Scheme and the treatment of legal expenses as capital expenditure. The Tribunal upheld the allowability of the enrollment expenditure based on past Tribunal decisions and the revenue recognition process. Similarly, the legal expenses were considered a revenue expenditure, following a precedent involving compensation for unauthorized software use. The Tribunal allowed the appellant's grounds related to both issues, resulting in a partial allowance of the appeal.