2013 (1) TMI 64 - HC - Income Tax

License fees paid to holding company - whether an allowable expenditure u/s. 37(1)? - the assessee company had itself amortized the said license fee for a period of ten years and further Section 35ABB was applicable to such payment as license fee - Held that - Operating license fee paid to holding company for the year under consideration, consequently, no enduring benefit is received by the assessee so as to spread the expenditure beyond the period of one year in which the expenditure is incurred. In such a case, there can be no amortization of the expenditure over a period of 10 years. Section 35ABB would have no application in the present case but would apply in respect of the license fee paid by M/s. J.T. Mobiles Ltd. The fact that the respondent-assessee had in its books of accounts spread the expenditure of Rs.115 crores over a period of 10 years and only debited amount of Rs.47.46 crores as expenditure during the year under consideration would not change the nature of the expenditure for the purpose of determining to allow ability of the expenditure for income tax purpose. The Tribunal in the present case has merely followed its earlier order for the assessment year 1997-98 that the entire amount paid as operating license fee was allowed as an expenditure under Section 37(1) which appears to have been accepted by the department as no appeal there from has been preferred by the revenue. In view of the above, no substantial question of law arises. Prior period expenses towards PSTN charges and dealers commission - Revenue v/s Capital - - Held that - The order of the Tribunal dated 29/3/2007 for the assessment year 1997-98 stated that the aforesaid expenses are not pre-operating expenses as the appellant had set up its business much before the commercial launch on 12/1/1998 as evident from the fact that it had started marketing its services, appointing dealers, accepting deposits from subscribers much before the commercial launch. The aforesaid expenses were incurred after setting up of business and allowable as permissible deductions u/s 37 - This order of the Tribunal for assessment year 1997-98 was accepted by the revenue as no appeal there from is filed by the revenue - no substantial question of law arises. Expenditure on foreign travel - Revenue v/s Capital - Held that - CIT(A) and the Tribunal on examination of the facts concluded that the expenses incurred do not give rise to any enduring benefits but only enables the respondent-assessee to efficiently run its business so as to achieve higher profits hence allowable as a revenue expenditure - no substantial question of law arises

Summary

Issues:
1) Allowability of license fees as expenditure under Section 37(1) of the Income Tax Act.
2) Allowability of prior period expenses towards PSTN charges and dealers commission as revenue expenditure.
3) Allowability of foreign travel expenses as revenue expenditure.

Issue 1:
The appellant revenue challenged the Tribunal's decision regarding the allowability of license fees paid by the assessee company to its holding company as an expenditure under Section 37(1) of the Income Tax Act. The Assessing Officer disallowed the expenses, citing the need for amortization over the license's life and the nature of the expenses. However, the Commissioner of Income Tax (Appeals) and the Tribunal allowed the entire amount as revenue expenditure, considering the nature of the payment and the absence of enduring benefit. The Court upheld the Tribunal's decision, emphasizing that the treatment in the books of account does not solely determine taxability, and the expenditure was allowable under Section 37(1) of the Act.

Issue 2:
Regarding prior period expenses towards PSTN charges and dealers commission, the Assessing Officer initially disallowed these expenses as they were incurred before the commercial launch of services. However, the Commissioner of Income Tax (Appeals) allowed the expenses, noting that they were incurred after setting up the business and before the commercial launch. The Tribunal upheld this decision, stating that expenses incurred post-business setup but pre-launch are allowable deductions under Section 37(1) of the Act. The Court found no substantial question of law in this matter.

Issue 3:
The dispute over the allowability of foreign travel expenses as revenue expenditure arose when the Assessing Officer considered the expenses as capital expenditure due to enduring benefits. The Commissioner of Income Tax (Appeals) and the Tribunal, however, deemed the expenses as revenue in nature, enabling efficient business operations. The Court concurred with the lower authorities, emphasizing that the expenses facilitated efficient business operations without conferring enduring benefits. Consequently, no substantial question of law was found in this issue.

In conclusion, the High Court dismissed the appellant revenue's appeal as it did not raise any substantial questions of law for consideration. The Court upheld the Tribunal's decisions on all three issues, emphasizing the factual findings and interpretations made by the lower authorities.