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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DLEHI
Before: SHRI G.S. PANNU & SHRI SAKTIJIT DEY
This is an appeal by the Revenue against order dated 18.01.2019 of learned Commissioner of Income-tax (appeals)-2, New Delhi, pertaining to the assessment year 2015-16.
The effective grounds raised by the Revenue are as under :
“1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is legally justified in deleting the addition of Rs.332,57,37,119/- made on account of amortization of variable license fee u/s 35AAB of the Act by treating it as revenue expenditure and allowable u/s. 37(1) of the I.T. Act, 1961.
2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is legally justified in deleting the addition of Rs.1,91,48,016/- made on account of subscriber verification penalty u/s. 37(1) of the I.T. Act, 1961 ignoring the fact that the expenditure is totally penal in nature and not allowable as business expenditure u/s. 37 of the I.T. Act, 1961.
3. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is legally justified in deleting the addition of Rs.14,37,08,678/- made on account of disallowance of free airtime to distributors u/s. 40(a)(ia) of the I.T. Act, 1961 ignoring the fact that the expenditure is in the nature of commission expenses on which TDS was liable to be deducted u/s. 194H of the I.T. Act, 1961.”
Qua ground No.1, briefly, the facts are, the assessee is a resident corporate entity stated to be engaged in the business of cellular phone and landline services in certain sectors in India pursuant to license granted by the Department of Telecommunication, Government of India.
For the assessment year under dispute, the assessee filed its return of income on 26.11.2015 declaring income of Rs.1644,58,64,360/-.
Subsequently, the assessee filed revised return of income on 23.03.2017 declaring income of Rs.1619,58,64,360/-. In course of assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of Rs.532,20,27,414/- to the profit and loss account towards payment of license fee and spectrum charges. Being of the view that such payment does not partake the character of revenue expenditure, the Assessing Officer issued a show cause notice to the assessee to explain why the deduction claimed should not be disallowed. In response, the assessee submitted that in the earlier assessment years, the Tribunal and Hon’ble Delhi High Court has decided the issue in favour of the assessee. However, stating that the issue has not reached finality, as the Revenue has filed Special Leave Petition before the Hon’ble supreme Court, which is pending, the Assessing Officer disallowed assessee’s claim of deduction of the payment made as a revenue expenditure. However, he allowed amortisation of expenses.
Thus, the disallowance was restricted to Rs.332,57,37,119/-. Assessee contested the disallowance before learned first appellate authority.
Noticing that identical dispute arising in preceding assessment years have been decided in favour of the assessee, both, by Hon’ble jurisdictional High Court and the Tribunal, learned Commissioner (Appeals) deleted the disallowance.
Before us, it is a common point between the parties that the issue is squarely covered in favour of the assessee by various decisions of the Tribunal and the Hon’ble jurisdictional High court.
Having considered the submissions of the parties, we find, this is a recurring dispute between the parties since the assessment year 2003- 04 onwards. In fact, 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, in order dated 08.11.2016 in has allowed assessee’s claim of deduction following the decision of the Hon’ble High Court. In view of the aforesaid, we do not find any infirmity in the decision of learned first appellate authority.
Ground raised is dismissed.
In ground No.2, the Revenue has challenged the deletion of addition of Rs.1,91,48,016/- made by the Assessing Officer by treating the payment as penal in character, hence, not allowable u/s. 37 of the Act.
Briefly, the facts relating to this issue are, in course of assessment proceedings, the Assessing Officer noticed that the assessee had debited an amount of Rs.1,91,48,016/- towards subscriber verification penalty paid to the Department of Telecommunication. Being of the view that the payment made is of penal nature, he called upon the assessee to justify the deduction claimed. In response to the query raised, the assessee submitted that the payment made is not for any offense committed nor is prohibited by law, as it was for violation of contractual norms. Thus, the assessee submitted that the amount is allowable as deduction. The Assessing Officer, however, did not find merit in the submissions of the assessee and accordingly disallowed the deduction claimed. While deciding the issue in appeal, learned Commissioner (Appeals) observed that in assessee’s own case in assessment year 2012-13, similar disallowance was deleted. Thus, following the said decision, he deleted the disallowance made in the impugned assessment order.
Before us, learned Departmental Representative submitted that the penalty paid to the Department of Communication is not due to violation of any contractual obligation but is for an offense committed in not following the Rules and Regulations issued by the Department of Communication, Govt. of India. She submitted, Know Your Customer (KYC) process was introduced by various government authorities including Reserve Bank of India mandatorily to preventing subversive activities including anti-national activities. She submitted, KYC is an important tool to check illegal activities. She submitted, in the telecom sector, Telecom Regulatory Authority and Department of Telecommunication take the issue of KYC documentation very seriously.
She submitted, the Ministry has set up a specific agency for collation of customer data, its analysis and audit. In this context, she drew our attention to guidelines dated 24.12.2008 issued by the Department of Telecommunication, Government of India regarding financial penalty for violation of terms and conditions of the license agreement. She submitted, various instructions issued by the Department of Telecommunication to telecom companies regarding subscribers verification are in the nature of government regulations/rules, hence, cannot be treated as mere contractual obligations to be followed only for continuation of license. She submitted, ensuring compliance of such instruction is an executive function of the Government and not commercial function. She submitted, the existing instructions have been issued by the Department of Telecommunication in consultation with Ministry of Home Affairs. Thus, she submitted, the payment made by the assessee for violating such rules and regulations is an offense and prohibited by law, therefore, not allowable as deduction u/s. 37 of the Act.
In reply, learned counsel for the assessee submitted that the financial penalty imposed is for a purely technical/operational breach resulting in small irregularity, which does not, in any way, jeopardise the operation of any law. He submitted, the payment is not for any such purpose, which is an offense or prohibited by law. No criminal liability or prosecution will follow for such a breach. He submitted, the circular issued by the Department of Telecommunication makes it clear that it is clearly breach of license agreement, hence, a breach of contractual obligation. Therefore, the payment made is compensatory in nature. He submitted, the payment made was in course of carrying out the trade, hence, allowable as business expenditure. He submitted, in the earlier assessment years, learned Commissioner (Appeals) has deleted similar disallowance. He submitted, in fact, in assessment year 2009-10, the Assessing Officer himself has allowed such deduction. Thus, he submitted, there is no reason to interfere with the decision of learned Commissioner (Appeals).
We have considered rival submissions, decisions relied upon and materials on record. Undisputedly, the disallowance of expenditure made by the Assessing Officer is in relation to penalty paid to the Department of Telecommunication for violation of KYC norms. The issue arising for consideration is, whether the payment of penalty is allowable as business expenditure u/s. 37(1) of the Act. A reading of section 37(1) makes it clear that any revenue expenditure laid out or expended wholly or exclusively for the purpose of business is allowable as deduction while computing the business income. However, Explanation 1 to said section carves out an exception by providing that any expenditure incurred by an assessee for a purpose, which is an offense or which is prohibited by law, shall not be allowed as deduction.
Therefore, it needs to be examined whether penalty paid for violation of KYC norms falls within the purview of expenditure incurred towards an offense or is prohibited by law.
Before us, learned Departmental Representative has furnished certain circulars/guidelines issued by the Department of Telecommunication, Government of India. As could be seen from the documents furnished before us, one of the conditions of the license agreement between the Department of Telecommunication and the service provider/licensee, is that the licensee shall ensure adequate verification of each and every customer before enrolling him as a subscriber and instructions issued by the licensor in this regard, from time to time, shall be scrupulously followed by the licensee. One more condition of the license agreement is, the licensor may also impose financial penalty for violation of terms and conditions of license agreement.
The communication dated 24.12.2008 issued by the Department of Communication, Government of India, further stipulates that if any number is found working without proper verification, a minimum penalty of Rs.1000/- per violation of subscriber number verification shall be levied on the licensee apart from immediate disconnection of the subscriber number by the licensee. It further provides that in case the licensee is not complying with the service verification condition, penalty at graded scales to be imposed after 1st April 2009 as a deterrent measure. However, the issue is, whether the penalty is paid for any offense or is prohibited by law as per Explanation 1 to section
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 already 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. vs. ACIT (2016) 46 ITR(T)458 (Mumbai), the coordinate Bench, 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, in our view, in the facts of assessee’s case, the 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. Ground raised is dismissed.
In ground No. 3, Revenue has challenged deletion of disallowance of Rs.14,37,08,678/- made u/s. 40(a)(ia) of the Act.
Briefly, facts are, in course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee has provided discounts to pre-paid card distributors amounting to Rs.32,61,66,998/- for Rajasthan Circle and Rs.1,12,40,84,755/- for North East Circle. He observed, free airtime is given as a discount and margin to the distributors on the retail price of start up kits, recharge coupons etc. According to the Assessing Officer, such discount/margin given to the distributors is in the nature of commission. Hence, the assessee was obligated to deduct tax at source in terms of section 194H of the Act. Since, the assessee had not deducted tax at source while allowing such discounts/margins to the distributors, the Assessing Officer disallowed an amount of Rs.14,37,08,678/- by invoking provisions of section 40(a)(ia) of the Act. Assessee contested the aforesaid disallowance by filing an appeal before ld. Commissioner (Appeals). Noticing that identical issue has been decided in favour of the assessee by the Hon’ble Gauhati High Court, learned Commissioner (Appeals) deleted the disallowance.
Before us, it is a common point between the parties that the issue stands squarely covered in favour of the assessee by decisions of various Benches of the Tribunal as well as Hon’ble Gauhati High Court.
Having considered rival submissions, we find, 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. Pertinently, the Hon’ble Rajasthan High Court has decided the issue in favour of the assessee in earlier assessment years. In fact, in the latest order passed for the assessment year 2009-10, the Tribunal in order dated 08.11.2016 in has deleted similar disallowance, following the coordinate Bench decision. Facts being identical, respectfully following the decision of the coordinate Benches in assessee’s own cases as well as the Hon’ble Rajasthan High Court, we hold that the provisions of section 194H are not applicable to the discounts given to the distributors. Therefore, we do not find any infirmity in the decision of learned first appellate authority in deleting the disallowance made u/s. 40(a)(ia) of the Act. Ground raised is dismissed.
In the result, appeal is dismissed.
Order pronounced in the open court on 16.06.2023