By TIOL News Service

PUNE, JAN 10, 2017: THE ISSUE IS - Whether compensation paid for loss of business and also covering the cost of litigation, as a result of compromise entered into between parties to litigation, is an allowable business expenditure in the hands of assessee u/s 37(1). YES IS THE VERDICT.

Facts of the case:

The assessee was engaged in the business of software development. AO noted that assessee had claimed compensation expenses. It was asked to explain and justify the allowability of the said expenditure. In reply, assessee pointed out that such sum was paid to Anand & Anand Lawyer Firm as compensation to Microsoft Corporation, USA and others, pursuant to compromise arrived at and recorded by the order of Delhi HC on 31.08.2009. It was further pointed out that the said amount was shared amongst the group companies involved in the settlement. The AO observed that expenditure incurred by 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) was attracted and sum of Rs.35 lakhs was added to the income of the assessee.

On appeal, the ITAT held that,

++ The assessee had utilized software of Microsoft without any licence / permission and once it came to the knowledge of said concern, a civil suit was filed. The assessee had violated the Copyrights Act. However, ultimately, the matter was settled by way of Compromise decree, under which, the assessee was allowed to use licenced software after the final settlement. The assessee and others undertook to pay sum of Rs.35 lakhs which would cover litigation and other related costs suffered by Microsoft and others. The computer systems seized by CIT was released for the use of assessee and the assessee undertook to delete the hard drives of seized computer systems of all un-licenced software of the Microsoft companies. The said compromise entered into between the parties was approved by HC of Delhi. 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 the facts of 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 u/s 37(1). The Explanation to section 37(1) does not apply to such understanding between the two private parties.

(See 2017-TIOL-23-ITAT-PUNE)