2023 (7) TMI 927 - AT - Income Tax

Amortization of variable licence fee - addition u/s 35ABB or Allowable revenue expenditure u/s 37(1) or not? - AO show caused the assessee as to why this amount should not be amortized over the remaining period of licence in case of each circle u/s 35ABB of the Act instead of allowing it as revenue expenditure - CIT(A) deleted the same and allowed the expenditure as revenue expenditure by following the decision of Hon ble Jurisdictional High Court in assessee s own case. 2013 (12) TMI 1115 - DELHI HIGH COURT - HELD THAT - We find that since the relief has been granted by the Ld. CIT(A) by following the decision of Hon ble Jurisdicitonal High Court in assessee s own case on the impugned issue, we do not find any infirmity in the order of the Ld. CIT(A). Decided against revenue. Disallowance towards Subscriber Verification Penalty u/s 37(1) - violation of KYC norms - assessee is supposed to follow the Know Your Customer (KYC) norms stipulated by DOT and when there is deficiency in adhering to aforesaid KYC norms, the DOT Enforcement, Resources and Monitoring Cell, after audit of the company, levies penalty on the assessee - HELD THAT - We find that this issue is already settled in favour of the assessee by decision of this Tribunal in assessee s own case for AY 2015-16 2023 (7) TMI 232 - ITAT DELHI 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. Decided in favour of assessee. TDS u/s 194H - Disallowance of expenditure u/s 40(a)(ia) - assessee sells the pre-paid SIM Card with available talk time worth Rs. 100/- at a discounted price of Rs 70 to the distributors - HELD THAT - As decided in assessment year 2015-16 own case 2023 (7) TMI 232 - ITAT DELHI provisions of section 194H are not attracted to the discounts given to distributors. Hence, section 40(a)(a) would not be applicable. Decided in favour of assessee.

Summary

Issues Involved:
1. Amortization of variable license fee as revenue expenditure.
2. Deletion of Subscriber Verification Penalty as business expenditure.
3. Disallowance of expenditure under section 40(a)(ia) of the Income Tax Act, 1961.

Summary:

Issue 1: Amortization of Variable License Fee
The primary issue was whether the Ld. CIT(A) was justified in deleting the disallowance made on account of amortization of variable license fee and treating it as revenue expenditure under section 37(1) of the Income Tax Act, 1961. The assessee argued that the issue was covered in its favor by the decision of the Hon'ble Delhi High Court in its own case. The Ld. AO had disallowed the expenditure as revenue expenditure and allowed amortization in terms of section 35ABB of the Act. The Ld. CIT(A) followed the decision of the Hon'ble Jurisdictional High Court and allowed the expenditure as revenue expenditure. The Tribunal found no infirmity in the order of the Ld. CIT(A) and dismissed the ground raised by the Revenue.

Issue 2: Subscriber Verification Penalty
The second issue concerned the deletion of disallowance of Rs. 13,54,65,160/- towards Subscriber Verification Penalty under section 37(1) of the Act. The Ld. AO treated the penalty as an amount paid for violation of law, thus attracting the provision of Explanation to section 37(1). The assessee contended that the payment was part of a contractual obligation and not for breach of any law. The Ld. CIT(A) deleted the disallowance, following precedents and decisions of various High Courts. The Tribunal upheld this decision, referencing its own earlier ruling that penalties for violation of KYC norms do not fall within the purview of expenditure incurred towards an offense or prohibited by law.

Issue 3: Disallowance under Section 40(a)(ia)
The final issue was whether the Ld. CIT(A) was justified in deleting the disallowance of expenditure under section 40(a)(ia) of the Act. The assessee's relationship with distributors was argued to be that of Principal to Principal, negating the need for tax deduction on discount charges. The Revenue contended it was a Principal-Agent relationship, warranting tax deduction under section 194H. The Ld. CIT(A) followed various High Court decisions and deleted the disallowance. The Tribunal confirmed that the provisions of section 194H are not applicable to discounts given to distributors, thus dismissing the ground raised by the Revenue.

Conclusion:
The Tribunal dismissed both appeals filed by the Revenue for the Assessment Years 2013-14 and 2014-15, upholding the decisions of the Ld. CIT(A) on all three issues. The order was pronounced in the open court on 19th July, 2023.