Pr. Commissioner Of Income Tax-2, Chandigarh v. M/S Mobisoft Telesolutions Private Limited

ITA No.495 of 2017 (O&M) -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.495 of 2017 (O&M) Decided on : 03.10.2018 Pr. Commissioner of Income Tax-2, Chandigarh ....... Appellant Versus M/s Mobisoft Telesolutions Private Limited ...... Respondent CORAM : HON'BLE MR. JUSTICE AJAY KUMAR MITTAL, JUDGEHON'BLE MR. JUSTICE AVNEESH JHINGAN, JUDGEHON'BLE MR. JUSTICE AVNEESH JHINGAN, JUDGE Present :Ms. Urvashi Dhugga, Senior Standing Counselfor the appellant. Ms. Radhika Suri, Sr. Advocate with Ms. M.S.Kanda, Advocatefor the respondent. * * * AVNEESH JHINGAN, J. The revenue has filed the present appeal under Section 260A of Income Tax Act, 1961 (for brevity, 'the Act') against the order of IncomeTax Appellate Tribunal, Chandigarh (hereinafter referred to as 'ITAT')passed in ITA No.1017/Chd/2016 dated 28.02.2017, dismissing the appealof the revenue. 2.Appellant claims following substantial questions of law arise for consideration in the present appeal:- 1) Whether on the facts and in the circumstances of the case andin law, the Hon'ble ITAT was right in treating the 'copyrightexpense' as a revenue expense when the Income Tax Act,in law, the Hon'ble ITAT was right in treating the 'copyrightexpense' as a revenue expense when the Income Tax Act, ITA No.495 of 2017 (O&M) -2- 1961 alongwith the Income Tax Rules, explicitly mentioncopyrights as an intangible asset?copyrights as an intangible asset? 2) Whether on the facts and in the circumstances of the case andin law, the Hon'ble ITAT was right in treating the 'copyrightexpense' as a revenue expense relying on the decisions ofHon'ble Supreme Court in the case of CIT vs. IAEC(pumps) Ltd. 232 ITR 316(SC) which was delivered prior toamendments in Section 32(1)(ii) of the Income Tax Act, 1961and in Rule 5(1) of the Income Tax Rules, 1962, w.e.f. A.Y.1999-2000, whereby intangible assets, inter-alia, copyrightshave been included in the appendix 1 prescribing intangibleassets as a separate block of assets on which depreciation isapplicable @ 25%.in law, the Hon'ble ITAT was right in treating the 'copyrightexpense' as a revenue expense relying on the decisions ofHon'ble Supreme Court in the case of CIT vs. IAEC(pumps) Ltd. 232 ITR 316(SC) which was delivered prior toamendments in Section 32(1)(ii) of the Income Tax Act, 1961and in Rule 5(1) of the Income Tax Rules, 1962, w.e.f. A.Y.1999-2000, whereby intangible assets, inter-alia, copyrightshave been included in the appendix 1 prescribing intangibleassets as a separate block of assets on which depreciation isapplicable @ 25%. 3) Whether on the facts and in the circumstances of the case andin law, the Hon'ble ITAT was right in treating the copyrightexpense with enduring benefits as revenue expenditure?in law, the Hon'ble ITAT was right in treating the copyrightexpense with enduring benefits as revenue expenditure? 4) Whether on the facts and in the circumstances, ITAT wasright in allowing the appeal of the assessee by holding thatthe insertion of second proviso to Section 40(a)(ia) isdeclaratory and curative in nature and has retrospective effectw.e.f. 01.04.2005 whereas the amendment is prospective inoperation w.e.f. 01.04.2013?right in allowing the appeal of the assessee by holding thatthe insertion of second proviso to Section 40(a)(ia) isdeclaratory and curative in nature and has retrospective effectw.e.f. 01.04.2005 whereas the amendment is prospective inoperation w.e.f. 01.04.2013? 4) Whether on the facts and in the circumstances, ITAT wasright in allowing the appeal of the assessee by holding thatthe insertion of second proviso to Section 40(a)(ia) isdeclaratory and curative in nature and has retrospective effectw.e.f. 01.04.2005 whereas the amendment is prospective inoperation w.e.f. 01.04.2013?right in allowing the appeal of the assessee by holding thatthe insertion of second proviso to Section 40(a)(ia) isdeclaratory and curative in nature and has retrospective effectw.e.f. 01.04.2005 whereas the amendment is prospective inoperation w.e.f. 01.04.2013? 3.The facts as transformed from record are that for assessmentyear 2012-13, the assessee filed the original return declaring the income of `31,61,130/-. The return was revised declaring the income of ` 82,93,240/-.The assessment was completed under Section143(3) of the Act vide orderyear 2012-13, the assessee filed the original return declaring the income of `31,61,130/-. The return was revised declaring the income of ` 82,93,240/-.The assessment was completed under Section143(3) of the Act vide order - ITA No.495 of 2017 (O&M) 3- dated 28.11.2014. The income of the assessee was assessed at` 2,35,50,060/-. 4.The Assessing Officer made the following additions :- i) Addition of ` 1,09,55,426/- on account of treating 'copy rightexpenses' as capital in nature and allowing 25% depreciationon the same.expenses' as capital in nature and allowing 25% depreciationon the same. ii) Addition of ` 1,38,812/- on account of depreciation allowedon Computer Kiosk @ 10% against 60% as claimed by theassessee.on Computer Kiosk @ 10% against 60% as claimed by theassessee. iii) Addition of ` 41,62,580/- on account of disallowance ofinterest paid to NBFCs without deduction of TDSu/s 40(a)(ia).interest paid to NBFCs without deduction of TDSu/s 40(a)(ia). 5.Aggrieved of the assessment order, the assessee preferred anappeal. Vide order dated 29.07.2016, Commissioner of Income Tax(Appeals), Chandigarh (for brevity, 'CIT(A)') allowed the appeal of theassessee. 6.Not satisfied with the order passed by CIT(A), revenuepreferred an appeal before the ITAT. In appeal, the contention raised wasthat the “copyright expenses” were wrongly treated as revenue in nature.Further challenge was made to allowing of interest paid to NBFCs (NonBanking Financial Company). The Tribunal vide order dated 28.02.2017dismissed the appeal of the revenue. It is pertinent to note here that theTribunal while deciding relied upon its decision in the appeal of the assesseefiled for assessment year 2008-09. In the decision of the appeal forassessment year 2008-09, Tribunal further relied upon its decision renderedfor assessment year 2009-10. Aggrieved of the dismissal of the appeal by ITA No.495 of 2017 (O&M) -4- the Tribunal, the present appeal has been preferred. 7.The questions No.1 to 3 are answered in favour of the assessee.Identical questions arose in the appeal filed by the revenue in the case of theassessee 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) 404 ITR 203where while dismissing the appeal this Court answeredthe questions against the revenue. It was held that the Tribunal onappreciating the agreement rightly came to the conclusion that only a licenceto use the copyright was granted to the assessee company. The assesseecompany had not acquired the copyright. In such circumstances, licence feepaid was a revenue expenditure. 8.Re: Question No.4 This question is also decided in favour of the assessee. 9.Before proceeding further, it would be appropriate to quotesecond proviso to Section 40(a)(ia) of the Act as was inserted by FinanceAct, 2012 w.e.f. 01.04.2013 : of Income Tax-2, Chandigarh vs. M/s Mobisoft Tele Solutions P. Limited,(2018) 404 ITR 203where while dismissing the appeal this Court answeredthe questions against the revenue. It was held that the Tribunal onappreciating the agreement rightly came to the conclusion that only a licenceto use the copyright was granted to the assessee company. The assesseecompany had not acquired the copyright. In such circumstances, licence feepaid was a revenue expenditure. 8.Re: Question No.4 This question is also decided in favour of the assessee. 9.Before proceeding further, it would be appropriate to quotesecond proviso to Section 40(a)(ia) of the Act as was inserted by FinanceAct, 2012 w.e.f. 01.04.2013 : “Provided further that where an assessee fails todeduct the whole or any part of the tax inaccordance with the provisions of Chapter XVII-Bon any such sum but is not deemed to be anassessee in default under the first proviso to sub-section(1) of section 201, then, for the purpose ofthis sub-clause, it shall be deemed that theassessee has deducted and paid the tax on suchsum on the date of furnishing of return of incomeby the resident payee referred to in the saidproviso.” 10. By introduction of second proviso to Section 40(a)(ia) of the - ITA No.495 of 2017 (O&M) 5- Act fiction has been created that the assessee who had failed to deduct TDSbut is not deemed to be an assessee in default in term of first proviso toSection 201(1) of the Act, in that case it shall be deemed that assessee haddeducted and paid tax on such sum on the date of furnishing of return ofincome by the resident payee referred to in the said proviso. 11.At this stage, it would be appropriate to quote first proviso toSection 201 as inserted by Finance Act, 2012 w.e.f. 01.07.2012:- “Provided that any person, including theprincipal officer of a company, who fails todeduct the whole or any part of the tax inaccordance with the provisions of this Chapteron the sum paid to a resident or on the sumcredited to the account of a resident shall not bedeemed to be an assessee in default in respect ofsuch tax if such resident- (i)has furnished his return of income underSection 139; (ii)has taken into account such sum forcomputing income in such return of income; and (iii)has paid the tax due on the incomedeclared by him in such return of income,and the person furnishes a certificate to thiseffect from an accountant in such form as may beprescribed.” 12.First proviso to Section 201 stipulates that a person who hasfailed to deduct tax in accordance with provisions of Chapter XVII-B of theAct shall not be deemed to be an assessee in default, if a certificate isfurnished from an accountant in a prescribed form to the effect that residenthas furnished return of Income Tax under Section 139 of the Act; has takeninto account the sum received for computing income in the return of income - ITA No.495 of 2017 (O&M) 6- tax and paid tax due on the income declared by him in such return. 13.There is mandatory requirement under Chapter XVII-B of theAct to deduct TDS under certain eventualities and in case of failure to doso, consequences have also been mentioned under Section 201. With theinsertion of second proviso to Section 40(a)(ia) and first proviso to Section201(1) of the Act, an exception has been carved that subject to the fulfilmentof condition as stipulated in first proviso to Section 201 of the Act, theassessee shall not be treated as assessee in default and the expenses soclaimed will be allowed. - ITA No.495 of 2017 (O&M) 6- tax and paid tax due on the income declared by him in such return. 13.There is mandatory requirement under Chapter XVII-B of theAct to deduct TDS under certain eventualities and in case of failure to doso, consequences have also been mentioned under Section 201. With theinsertion of second proviso to Section 40(a)(ia) and first proviso to Section201(1) of the Act, an exception has been carved that subject to the fulfilmentof condition as stipulated in first proviso to Section 201 of the Act, theassessee shall not be treated as assessee in default and the expenses soclaimed will be allowed. 14. This Court inPr. Commissioner of Income Tax-2, ChandigarhVs. Shivpal Singh Chaudhary (ITA No. 558 of 2017) on 05.07.2018,agreeing with the view of Delhi High Court inCIT vs. Ansal Land MarkTownship Private Limited, (2015) 377 ITR 635 (Delhi)held that the secondproviso to Section 40(a)(ia) and first proviso to Section 201(1) of the Actthough inserted by Finance Act, 2012, would be applicable retrospectivelyw.e.f. 01.04.2005. The relevant portion of the decision is quoted below:- “We are in agreement with the view of the Delhi High Court in Ansal Land Mark Township Pvt.Limited’s case (supra) approving the reasoningof the Agra Bench of the ITAT whereby holdingthe rationale behind the insertion of the secondProviso to Section 40(a)(ia) of the Act and that itis merely declaratory and curative and thus,applicable retrospectively with effect from IstApril, 2005.” 15.This Court has held that second proviso to Section 40(a)(ia) ofthe Act is merely declaratory and curative and thus applicableretrospectively w.e.f. 01.04.2005. - ITA No.495 of 2017 (O&M) 7- 16.The Tribunal has dealt with the factual aspect of the matter andit has been specifically recorded that the assessee has been able to prove thatthe recipients of the interest income have included the income in their returnand paid taxes thereon. The said findings have not been shown to beerroneous in any manner. The relevant part of the Tribunal order is extractedbelow:- “ We have heard the rival contentions and find nomerit in the ground raised by the Revenue. In thepresent case, it is not disputed that thepayees/recipients of the said interest income i.e.M/s Indiabulls Financial Services Ltd. and M/sBajaj Financial Ltd. have included the saidincome in their return of income and paid taxeson the same. Evidence in the form No.26A as alsoreport of Chartered Accountant was filed. TheRevenue has not challenged this fact before us.Thus the assessee had duly demonstratedcompliance with the conditions stated in thesecond proviso to Section 40(a)(ia), which brieflyput, states that no disallowance is to be made incases where the recipient of the income reflectsthe same in its return of income and pays taxes onthe same. The Assessing Officer also, we find, has inher Remand Report after examining the evidencesproduced by the assessee, admitted that the saidexpenses were allowable in view of the provisionsof Section 40(a)(ia) r.w.s. 201(1) of the Act. Insuch circumstances, since the Assessing Officerhas herself admitted that the addition made wasunwarranted, the addition no longer survivesvis-a-vis assessment order and there is no reason - ITA No.495 of 2017 (O&M) 8- for the Revenue to have any grievance on theissue.” 17.In view of the above discussion, the substantial questions of law as claimed, are answered against the revenue and in favour of the assessee. 18.Consequently, the appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE October 03, 2018anju (AVNEESH JHINGAN) JUDGE Whether speaking/reasoned: Whether reportable : Yes / NoYes / No