Amount Paid under Compromise Decree is Deductible from Business Income: ITAT Pune [Read Order]

ITAT allows expenditure on amount paid for settlement of suit on copyright violation to Microsoft Company.

The Pune bench of the Income Tax Appellate Tribunal, in recent case held that the amount paid by the assessee under a compromise decre is allowable as expenditure under section 37(1) of the Income Tax Act, 1961. Deleting the assessment order, the ITAT allowed the expenditure made on amount paid for settlement of suit on copyright violation to Microsoft Company.

In the instant case, the assessee, Harbinger Systems Pvt Ltd, along with other companies, paid around Rs. 35 lakhs to a law Firm in consistent with the compromise decree passed by the Delhi High Court. While filing return for the relevant assessment year, the assessee claimed deduction in respect of the said amount by pointing out that the said amount was neither an offence nor penalty but sum paid in settlement of an action initiated in the Hon’ble High Court against in advertent infringement of copyrights of software. However, the AO completed assessment by observing that expenditure incurred by the assessee was in violation of Indian Copy Right Act, 1957 and where anything was done which was infraction of the law, then Explanation to section 37(1) of the Act is attracted and sum of Rs.35 lakhs was added to the income of the assessee.

The Tribunal noted that the assessee has violated the provisions of the Copyrights Act and the matter was settled by way of Compromise decree, under which, the assessee was allowed to use licenced software after the final settlement which was approved by the Court through the judgment.

The question raised before the Tribunal was that whether the payment made pursuant to the said compromise is for infraction of law or is expenditure which is wholly and exclusively incurred for the purpose of business and is allowable as expenditure in the hands of assessee.

The bench noted that the amount which has been agreed to be paid by the assessee and its group companies to Microsoft Corporation and others is on account of contractual liability. It is not the case of payment of any penalty.

“In any case, the payment on account of penalty would arise where one of the parties is the Government and the connotation of payment of penalty cannot arise when there is an understanding between two private parties. Asfar as payment which is prohibited by law is concerned, then the same refers to speed money, hafta money, etc., but the same is not to be applied in cases where one party agreed to compensate the other party for loss of its business.”

“In the facts of the present case, use of pirated software by the assessee and its group companies which is the property of Microsoft Corporation and others admittedly, resulted in loss of business of Microsoft Corporation. Where because of civil suit between the parties, there was compromise entered into between the parties for payment of compensation for loss of business and also covering the cost of litigation, then such an amount is to be allowed as business expenditure in the hands of assessee under section 37(1) of the Act. The Explanation to section 37(1) of the Act does not apply to such understanding between the two private parties.”

Read the full text of the order below.