2023 (7) TMI 232 - AT - Income Tax

Amortization of variable license fee - Deduction u/s 35AAB or u/s. 37(1) - CIT(A) allowed the same as revenue expenditure - HELD THAT - Hon ble jurisdictional High Court, while deciding the appeals for the assessment years 2003-04, 2004-05, 2006-07 and 2007-08, has upheld assessee s claim of deduction as revenue expenditure. While, deciding the assessee s appeal for the assessment year 2009-10, the Tribunal 2016 (11) TMI 1739 - ITAT DELHI has allowed assessee s claim of deduction following the decision of the Hon ble High Court. No infirmity in the decision of learned first appellate authority. Ground raised is dismissed. Nature of expenditure - subscriber verification penalty paid to the Department of Telecommunication - violation of KYC norms - AO treating the payment as penal in character, hence, not allowable u/s. 37 - HELD THAT - From the facts on record, it does not transpire that the violation of KYC norms entails any criminal liability or prosecution. As per the license agreement, for violation of any terms of the agreement including KYC norms, the assessee is to be visited with penalty of various amounts. As discussed, such penalty is imposed as a deterrent measure and not for any offense or due to prohibition of law. It is further necessary to observe, the penalty arises because of breach of certain terms and conditions of the license agreement, hence, in regular course of business. Pertinently, in case of Mangal Keshav Securities Ltd. 2015 (11) TMI 111 - ITAT MUMBAI while dealing with more or less identical issue of penalty levied by Stock Exchange for violation of KYC norms, has held that payment made towards penalty for violation of KYC norms would not fall within the ambit of Explanation 1 to section 37(1) of the Act. Thus exceptions provided under Explanation 1 to section 37(1) of the Act will not get attracted. Thus, we do not find any infirmity in the decision of learned Commissioner (Appeals) in deleting the disallowance. Decided against revenue. TDS u/s 194H - Disallowance u/s. 40(a)(ia) - assessee has provided discounts to pre-paid card distributors - HELD THAT - While dealing with identical issue in assessee s own case for earlier assessment years, various Benches of the Tribunal have held that the provisions of section 194H are not attracted to the discounts given to distributors. Hence, section 40(a)(ia) would not be applicable. As in the latest order passed for the assessment year 2009-10 the Tribunal in order 2016 (11) TMI 1739 - ITAT DELHI has deleted similar disallowance - provisions of section 194H are not applicable to the discounts given to the distributors - disallowance u/s. 40(a)(ia) deleted.- Decided in favour of assessee.

Summary

Issues Involved:

1. Deletion of addition made on account of amortization of variable license fee under Section 35AAB of the Income Tax Act, 1961.
2. Deletion of addition made on account of subscriber verification penalty under Section 37(1) of the Income Tax Act, 1961.
3. Deletion of disallowance of free airtime to distributors under Section 40(a)(ia) of the Income Tax Act, 1961.

Summary:

Issue 1: Amortization of Variable License Fee

The Revenue challenged the deletion of Rs. 332,57,37,119/- made on account of amortization of variable license fee by treating it as revenue expenditure allowable under Section 37(1) of the Income Tax Act, 1961. The assessee, engaged in cellular and landline services, had its deduction disallowed by the Assessing Officer, who allowed only amortization of expenses. The Commissioner (Appeals) deleted the disallowance, noting that similar disputes in preceding years were decided in favor of the assessee by the Tribunal and the Hon'ble Delhi High Court. The Tribunal found no infirmity in the decision of the Commissioner (Appeals) and dismissed the ground raised by the Revenue.

Issue 2: Subscriber Verification Penalty

The Revenue contested the deletion of Rs. 1,91,48,016/- made on account of subscriber verification penalty, which the Assessing Officer deemed penal in nature and not allowable as business expenditure under Section 37(1) of the Act. The Commissioner (Appeals) deleted the disallowance, referencing a similar decision in the assessee's favor for the assessment year 2012-13. The Tribunal examined whether the penalty for violating KYC norms constituted an offense or was prohibited by law under Explanation 1 to Section 37(1). It concluded that the penalty was compensatory for a breach of contractual obligations and not for an offense or prohibited by law. The Tribunal upheld the Commissioner (Appeals)'s decision, dismissing the ground raised by the Revenue.

Issue 3: Disallowance of Free Airtime to Distributors

The Revenue challenged the deletion of Rs. 14,37,08,678/- disallowed under Section 40(a)(ia) of the Act for not deducting tax at source on discounts given to pre-paid card distributors, which the Assessing Officer considered as commission. The Commissioner (Appeals) deleted the disallowance, citing decisions of the Hon'ble Gauhati High Court and various Tribunal Benches in favor of the assessee. The Tribunal, noting that similar issues in earlier assessment years were decided in favor of the assessee, held that Section 194H did not apply to the discounts given to distributors and upheld the Commissioner (Appeals)'s decision, dismissing the ground raised by the Revenue.

Conclusion:

The appeal by the Revenue was dismissed in its entirety, with the Tribunal upholding the decisions of the Commissioner (Appeals) on all three issues.