2018 (10) TMI 989 - HC - Income Tax

Nature of Copyright expense - revenue or capital - Nature of expenses - Held that - Identical questions arose in the appeal filed by the revenue in the case of the assessee itself for the assessment year 2009-10 i.e. Principal Commissioner of Income Tax-2, Chandigarh vs. M/s Mobisoft Tele Solutions P. Limited 2018 (2) TMI 1654 - PUNJAB AND HARYANA HIGH COURT where while dismissing the appeal this Court answered the questions against the revenue. It was held that the Tribunal on appreciating the agreement rightly came to the conclusion that only a licence to use the copyright was granted to the assessee company. The assessee company had not acquired the copyright. In such circumstances, licence fee paid was a revenue expenditure. Addition u/s 40(a)(ia) - second proviso to Section 40(a)(ia) of the Act applicability - Held that - The Tribunal has dealt with the factual aspect of the matter and it has been specifically recorded that the assessee has been able to prove that the recipients of the interest income have included the income in their return and paid taxes thereon. The said findings have not been shown to be erroneous in any manner. 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-a-vis assessment order and there is no reason for the Revenue to have any grievance on the issue. - Decided against revenue

Summary

Issues Involved:
1. Treatment of 'copyright expense' as revenue or capital expenditure under the Income Tax Act, 1961.
2. Application of amendments in Section 32(1)(ii) of the Income Tax Act, 1961 to 'copyright expenses.'
3. Classification of 'copyright expense' with enduring benefits as revenue expenditure.
4. Interpretation of the second proviso to Section 40(a)(ia) of the Income Tax Act, 1961.

Analysis:
1. The revenue appealed against the ITAT's order treating 'copyright expense' as revenue expenditure. The appellant argued that copyrights are intangible assets, thus should be capitalized. However, the Court held that the Tribunal correctly concluded that the expense was a revenue expenditure since only a license to use the copyright was granted, not the copyright itself. This decision was consistent with previous rulings.

2. The appellant challenged the ITAT's reliance on the Supreme Court's decision pre-amendments in Section 32(1)(ii) and Rule 5(1) of the Income Tax Rules. The Court upheld the ITAT's decision, emphasizing that the Tribunal correctly considered the nature of the agreement and the absence of copyright acquisition by the assessee, justifying the treatment of the expense as revenue.

3. The Court addressed the issue of 'copyright expense' with enduring benefits, affirming the ITAT's decision in favor of the assessee. The Tribunal's findings, supported by evidence of tax payment by recipients, were deemed valid. The Court emphasized compliance with the second proviso to Section 40(a)(ia) and upheld the allowance of expenses.

4. Regarding the interpretation of the second proviso to Section 40(a)(ia), the Court clarified that the provision, along with the first proviso to Section 201(1), had retrospective application from 01.04.2005. The Court's decision aligned with previous rulings, emphasizing the curative nature of the amendment and its impact on the treatment of expenses for TDS non-compliance.

In conclusion, the Court dismissed the revenue's appeal, ruling in favor of the assessee on all substantial questions of law. The judgment highlighted the importance of factual evidence, compliance with tax regulations, and the retrospective application of relevant provisions in determining the treatment of expenses under the Income Tax Act, 1961.