Compensatory interest, zero-exempt-income Section 14A disallowance, 80G CSR deductions, and workforce depreciation are allowed.

“1. The Assessee Company has been running radio stations for the last many years. During the month of December 2006, the assessee company entered into Grant of Permission Agreement (GOPA) with Ministry of Information and Broadcasting (MIB) and from the dates starting thereafter operationalized its 7 radio stations (i.e. Delhi, Mumbai, Kolkata, Amritsar, Jodhpur, Patiala and Shimla).

2. During the current assessment year the Assessee Company has paid renewal fees/license fees and capitalized the said expense in its books of accounts.

3. Based on letter dated 20.04.2017 from MIB it has also, paid interest to MIB as it has made delayed payment of renewal fees/license fees. As the interest has been paid by the Assessee Company on account of delayed payment of license fees and not for making the radio channels operational, hence the interest expense has been treated as revenue expenditure. The calculation of interest of Rs. 13.78 Cr along with copy of MIB letter dated 20.04.2017 raising said demand of interest had already been submitted during assessment proceedings.

4. Brief facts and note/ history of radio business are as under:-

December 2006 The Assessee entered into Grant of Permission agreement (GOPA) with Ministry of Information & Broadcasting (MIB) for making its 7 radio stations operational namely Delhi, Mumbai, Kolkata, Amritsar, Jodhpur, Patiala, and Shimla.

July 2011-MIB notified migration policy from Phase -Il to Phase – III

Dec 2013- MIB notified that all FM radio operators allowed to migrate to Phase-III on or before 30th June 2014

July 2014 MIB notified extension of timeline for migration to phase – III and new date fixed for migration was on or before 31st March 2015

Dec 2014 The assessee entered into agreement with Entertainment Network India Ltd (ENIL) to sell/transfer its all 7 stations. MIB gave permissions to sell /transfer of four stations but denied permission to sell/transfer three radio stations i.e. Delhi, Mumbai, and Kolkata. Thereafter, the assessee sold its four stations i.e. Amritsar, Jodhpur, Patiala, Shimla to ENIL as going concern on slump sale basis on 18th September 2015 after obtaining approval from MIB on 20th July 2015

May 2015 The assessee filed writ petition before Delhi High Court against such denial to sell three radio stations by MIB. MIB has demanded 71.36 Cr towards migration fees from Phase II to Phase III. The assessee obtained interim relief till the disposal of above writ petition.

Jan 2017 – The assessse withdrew above writ petition through which the order of MIB was challenged for denial of the sale of Radio business to ENIL. The assessee filed fresh application with MIB seeking approval for migration of its radio stations to Phase-III regime.

April 2017 The assessee received offer letter from MIB for migration of its three radio stations and demanded Rs 71.37 Cr as migration fees and Rs 13.78 Cr as Interest on delayed migration fees

May 2017 The assessee executed GOPA on 23.05.2017 for its three radio stations. Accordingly the assessee has paid the migration fees of 71.37 Cr along with interest of Rs 13.78 Cr in April and May 2017. The Company now stands migrated to Phase III with effect from 1st April 2015 for 15 years with respect to three radio stations. The assessee has capitalized migration fees of Rs 71.37 Cr in its books of accounts and claimed interest of Rs 13.78 Cr on delayed payment of migration fees as revenue expenditure in its Profit and Loss Account. We would like to further mention that all these radio stations were continued to be operational from April 2015 without any break and carried on broadcasting activities till the date when it paid license fees along with delayed payment of interest

5. As per para 3.3 of Assessment Order dated 30.09.2021, the learned Assessing Officer stated that “the interest of Rs 13.78 Cr , paid by the Company for migration of its three FM radio stations is in the nature of capital expenditure as migration of 3 FM radio stations was conditional upon the , payment of migration fees and interest. ” Here we would like to mention that correct facts have not been stated in the said statement as interest, payment was not conditional for radio station to continue but the interest was paid only since the license fees was not paid by Assessee Company within due time as per MIB. As the interest has been paid by the Assessee Company on account of delayed payment of license fees and not for running the radio channels, hence the interest expense has been treated as revenue expenditure.

6. Based on the judgment given by Delhi High Court in case of “MICROWAVE COMMUNICATIONS LTD (ITA 1738 & 1739/2010)”, the Apex Court has held that interest on delayed payment of license fees is revenue expenditure. Further, In the case of “Bharti Telenet Ltd v. DCIT (ITA Not 3309/Del/05 for AY 2001-02)” Delhi Tribunal has held that upfront fees charged by the banks on process of loan is revenue expenditures.”

7.1 The contention and the related submission of the appellant have been duly perused. It is settled law that the expenditure towards license fee and renewal of license fee is capital in nature Here question arises as whether the expenditure being interest , paid towards delayed payment of license fee is revenue expenditure or capital expenditure. The appellant has narrated in its submission that the license for commencing the operation was given by the MIB through Grant of Permission Agreement in 2006 and the same was required to be renewed. The appellant further stated as to why the interest for delayed payment was made to renew the license for commencing the operation of three radio channels in the phase III. The circumstances were arised for the appellant to close the issue for operation of the channels. The appellant further had made the payment on the basis of the estimation of the interest made by the MIB.

7.2 The undersigned has also gone through the decision of the Hon’ble High Court of Delhi in the Case of MICROWAVE COMMUNICATIONS LTD as relied upon by the appellant. Further, the undersigned has relied upon the decision of jurisdictional Hon’ble High Court ofDelhi in the case of Bharti Hexacom Ltd. in IT APPEAL NOS. 893, 1328, 1333, 1336, 1679 & 1680 OF 2010, 996 OF 2011, 114 & 177 OF 2012 AND 417 OF 2013 in which it was held that the expenditure related to continue the business is revenue in nature as it does not acquire any new assets.

7.3 It is also noticed from the record that the appellant got the license in the year 2006 and the same was being continued on the renewal of the said license in the phase manner like phase I, Phase II and Phase III. Therefore it cannot be said that the appellant acquired any new asset, only the expenditure towards interest paid to run the already established entity. Therefore following the decision of Hon’ble High court, and the discussion made above, the contention of the appellant is hereby accepted and the claim of the appellant in treating the interest , paid for delayed , payment of license fee is revenue in nature is allowed. Accordingly, the Ground No. 1 raised by the appellant is hereby allowed. ”

“25. During the scrutiny proceedings, the AO observed that the assessee has made investments in its subsidiary and associate company and earned exempt income of Rs. 2,34,585/- in the relevant assessment year. The assessee had made a suo moto disallowance of Rs. 29,04,491/ However, the AO proceeded to invoke the provision of Section 14A of the Act r/w Rule 8D of the Income Tax Rules, 1962; computed a disallowance of Rs. 38, 94, 755/- and made an addition of Rs. 9,90,264/-. The CIT (A) reversed the said disallowance and deleted the addition on the ground that the AO has failed to record his satisfaction before invoking the provisions of Section 14 A of the Act and relying upon the decisions of this Court.

26. The ITAT in the impugned order has upheld the finding of the CIT (A) after observing that it is a settled principle of law that disallowance u/s 14A of the Act cannot be more than the exempt income and finding that AO had mechanically invoked the provisions of Section 14A without recording its satisfaction.

27. The learned counsel for the revenue has not disputed that the exempt income earned by the assessee in this assessment year was Rs. 2.34,585/- and the assessee has already made a suo moto disallowance of a sum of Rs. 29,04,491/-under Section 14 A in its computation.

28. As per the law settled by this court in the case of Cheminvest Ltd. v. CIT)  (Del.); and PCIT v. IL & FS Energy Development Company Ltd. reported in 2017 SCC OnLine Del 9893, the disallowance to be made under Section 14A cannot be in excess of the exempt income earned by the assessee. The counsel for the revenue has placed reliance on the CBDT circular 5/2014 to contend that disallowance under Section 14A would be attracted even if corresponding exempt income is not earned during the financial year. The said circular cannot be relied upon since its contrary to the law laid down by this Court.

29. Further, there is no challenge to the finding of the CIT (A) and the ITAT that AO failed to record satisfaction before invoking the provisions of Section 14A of the Act, which is the condition precedent for making the addition. In this view of the matter the additional disallowance of Rs.9,09,264/- made by the AO is impermissible and contrary to law. The ITAT was correct in upholding the order of the CIT(A) deleting the disallowance of Rs.9,09,264/

“5. We have heard the rival contentions and perused the material available on record and also gone through the orders of the authorities below.

5.1 At the time of hearing, Ld. AR for the assessee contended that the issue in dispute is squarely covered by the several case laws of the ITAT. In this regard, he referred to the ITAT decisions dated 28.05.2024 passed in ITA No. 95/Del/2024 (AY 2020-21) in the case of Interglobe Technology Quotient Private Limited; Honda Motorcycle and Scooter India Pvt. Ltd. v. ACIT in ITA No. 1523/Del/2022 (AY 2017-18) dated 22.8.2023; & Ericsson India Global Services (P) Ltd. v. DCIT in ITA No. 1150/Del/2022 (AY 201516) dated 05.03.2024. In view of above, he requested to follow the ratio of the aforesaid Tribunal’s orders and allow the issue in dispute in favour of the assessee raised in the instant appeal.

5.2 Ld. Sr. DR did not controvert the aforesaid proposition made by the Ld. AR, but he supported the orders of the authorities below.

6. Upon careful consideration, we find considerable cogency in the contention of the Ld. AR that identical issue has been dealt by the Coordinate Bench of ITAT, Delhi vide order dated 28.05.2024 passed in ITA No. 95/Del/2024 (AY 2020-21) in the 5 case of Interglobe Technology Quotient Private Limited, wherein the Coordinate Bench has held as under:-

“7. Learned DR has failed to bring forth any decision to the contrary. Thus, we accept the plea of learned counsel on the basis of case law cited, denial of CSR expenditure u/s 37(1) of the Act is not embargo to claim deduction u/s 80G of the Act.

7.1 Further, we like to observe that as a matter of fact as per Section 135 of the Companies Act, 2013 (‘CA 2013), the qualifying Companies as mentioned therein are required to spend certain percentage of profits of last three years on activities pertaining to Corporate Social Responsibility (CSR). The expenditure on CSR, could be by way of expenditure on projects directly undertaken by said companies, such as setting up and running schools, social business projects, etc. Such expenditure would include expenditure otherwise falling for consideration under section 37(1) of the Act. On the other hand, companies, instead of undertaking or participating directly in a project, may choose to give donations to institutions that are engaged in undertaking such projects, which is also a recognized way of compliance of CSR obligation.

7.2 The assessing officer and CIT (A) have relied upon General Circular 14/2021 dated 25.08.2021 issued by MCA and “Explanatory Notes to the provisions of the Finance (No.2) Act, 2014” to hold that donations made as part of CSR expenditure are not allowable as deduction. The foundation of their reasoning being that the donation is voluntary in nature, while CSR expenditures are under statutory obligations.

7.3 As we take notice of the fact that Parliament legislated that CSR expenses would not be eligible for deduction as business expenditure under section 37 of the Act by inserting Explanation 2 to section 37(1) vide the Finance (No.2) Act, 2014 (applicable from the assessment year 2015-16), which provided that any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the CA 2013, shall not be deemed to be an expenditure incurred by an assessee for the purpose of business or profession and shall not be allowed as deduction under section 37(1) of the IT Act. The intent of Parliament in bringing the aforesaid provision is given in the Explanatory Memorandum to the Finance (No.2) Bill, 2014 and is reproduced as under :

“CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business, As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for .computing the taxable income of the company, Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.” (emphasis supplied)

7.4 The aforesaid explanatory memorandum categorically expresses the legislative intent and the rationale of disallowance of CSR expenditure referred to in section 135 of the Companies Act, that such expenditure is application of income and not incurred for the purposes of business. We are of considered view that this in itself justifies the grant of deduction u/s 80G. As CSR 7 expenditure is application of income of the assessee under the Income Tax Act, that means it continues to form part of the Total income of the assessee. Section 80G(1) of the Act provides that in computing the total income of an assessee, there shall be deducted, in accordance with the provisions of this section, such sum paid by the assessee in the previous year as a donation. Further, section 80G(2) lists down the sums on which deduction shall be allowed to the assessee. Section 80G falls in Chapter VIA, which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income, including the Explanation 2 to section 37(1) of the Act. Thus, there is no correlation between suo-moto disallowance in section 37(1) and claim of deduction under section 80G of the Act. 7.5 As with regard to the reasoning that CSR expenditure are not voluntary but mandatory in nature due to penal consequences, we are of considered view that voluntary nature of donation is by nature of fact that it is not on the basis of any reciprocal promise of donee. The CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature. The Act permits deduction of donations as per Section 80G of the Act, even though, assessee is not gaining any benefit out of any reciprocity from donee. Similar is the case of CSR expenditure. Thus, the reasoning of learned Tax Authority, the CSR expenditure is mandatory, does not justify disallowance of these expenditures u/s 80G, if other conditions of section 80G are fulfilled. There is no allegation of Revenue 8 that other conditions of Section 80G are not fulfilled. We, thus sustain the ground.”

7. After perusing the aforesaid findings, we find that the facts of the present case are identical to that of the aforesaid case of other assessee, hence, the issue in dispute involved in the instant appeal is squarely covered in favour of the assessee. Therefore, respectfully following binding precedent (supra), we delete the addition sustained by the Ld. CIT(A) and accordingly, allow the ground of appeal raised by the Assessee.

8. In the result, appeal of the assessee is allowed.”

7. Respectfully following the precedent as aforesaid, we set aside the orders of the authorities below and accordingly decide the issue in dispute in favour of the assessee.

8. In the result, the Assessee’s appeal is allowed.”

“A. Facts of the Case

1. The Appellant is a private limited company engaged in the business of providing IT enabled conversion services, including e-learning solutions, imaging, graphic arts and other related services. It is a wholly owned subsidiary of Aptara Inc., a company incorporated in USA. The Appellant filed its return of income for Assessment Year 2015-16 on 25 November 2015, declaring total income of Rs. 1,66,65,240. The computation of income is enclosed as Annexure-1 of Paper book-1.

2. The return was selected for scrutiny under CASS and a notice u/s 143(2) of the Income-tax Act, 1961 (the Act) was issued to the assessee. Detailed questionnaires were issued during the course of assessment, which were duly responded to by the Appellant. Upon considering the submissions made by the Appellant, an order dated 26 December 2017 was passed u/s 143(3) of the Act, making the following adjustments to the income returned by the Appellant,

(a) In relation to the tax on income of the Appellant, disallowing the Appellants claim for depreciation on goodwill,

(b) In relation to shares bought back by the Appellant, taxing the consideration paid on buyback u/s 115QA of the Act

B. Dis-allowance of depreciation on goodwill

B. 1 Facts relevant to dis-allowance of depreciation

3. The said goodwill arose due to the amalgamation of Maximize Learning Private Limited (MLPL) with the Appellant. MLPL was a wholly owned subsidiary of Aptara Inc., USA. While the Appellant was engaged in the business of publishing services, which entails digitisation of content for third parties, MLPL was engaged in providing e-learning services, rendering services solely to Aptara Inc.

………..

25. Further, the Appellant also took on its payrolls the employees of MLPL, who were highly skilled in the field of e-learning. MLPL had cleared a strong pool of talented free-lancing professionals who were in a position to provide quality development services at a very competitive , price. Development of e-learning portal required the following expertise, and a team of professional

…………

29. Shortly put, the Appellant gained significantly from the amalgamation, in the form of highly skilled employees, increased talent pool, significantly increased revenue, increased client and customer base, additional skills imparted to existing employees, standard templates for providing basic services, etc. apart from the general synergies of amalgamation such as reduced costs, simpler management structure, etc. The observations of the Ld. AO are therefore completely devoid of merit.

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1. Disney Broadcasting (India) (P) Ltd. v. PCIT  (Mumbai-Trib.)

2. Dow Chemical International (P) Ltd. v. DCIT  (Mumbai-Trib.)

3. Padmini Products (P) Ltd. v. DCIT  (Karnataka)

4. Altimetrik India (P) Ltd. v. DCIT  (Bangalore-Trib.)

5. Geodis Overseas Pvt. Ltd. v. DCIT ITA No. 2305/Del/2015 dated 18.05.2020