Can the computer software programme be taken under copyright ? Is it treated as capital asset for the purpose of depreciation ?

Answer :
A software programme will probably be more in the nature of copyright. Computer programme was recognised as entitled to copyright in England in 1988. Indian Patents law did not recognise patent protection for computer programme, but Sec. 2(O) of Copyright Act now recognises computer programme and computer data as creative work entitled to copyright protection (see page 80 of B. L. Wadhera’s Law relating to Patent, Trademarks, Copyright Designs & Geographical Indications . It is treated as a capital asset specifically included under Sec. 32(1) for purposes of depreciation, but not so specifically included by name either as computer programme or as a copyright under Sec. 55, so as to justify adoption of nil cost. In the result that, where it is a self-created asset and there is no cost, it should not be assessable at all. If any expenses are claimed as cost, the argument that no cost was incurred and that, therefore, there is no liability to capital gains tax will not be available. But if liability for capital gains is conceded, cost including capital expenditure directly incurred can be claimed.

Deduction of tax by the buyer of the programme on the basis that it is assessee’s professional income is probably because it was understood by the buyer that the assessee is carrying on a profession in computer consultancy. This inference is obviously incorrect. It is understood that the programme is developed as a hobby in the background of knowledge of astrology. If astrology, however, is the profession of the reader, receipt could be treated as incidental to the profession of astrology, so as to be treated as income from astrology.
The inference may essentially depend on facts. Now that tax has been deducted, the only course is to await refund for any excess that might have been deducted at source.

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Sale of computer programme — is it taxable?

Question:
Are capital receipts for sale of computer programmes developed personally as a hobby over a period of about ten years and sold to an Internet dotcom company for Internet use subject to income tax? If so, how are my expenses to be accounted and allowed as deductions? Advance tax has been paid and refund claim is yet to be disposed off. The ITO seems to be in two minds.

Answer:
If there is outright sale of the programme, which has been developed by the reader, not as a professional or as part of business, but as a hobby, such amount is a capital receipt in lieu of the right to copyright of the programme, which is a capital asset. If no cost had been incurred, it may not be liable to tax, since it is established law that, where there is no cost, there is no liability as decided in CIT v B. C. Srinivasa Setty (1981) 128 ITR 294 (SC), but this law is nullified in respect of sale of certain assets by treating the cost to be nil.

In the assessee’s case, the programme could not be treated as a “right to manufacture, produce or process an article or a thing,” brought to tax even if the cost is nil effective from 1998-1999 nor is it a “trade mark or name associated with business” in which case, it is taxable from assessment year 2002-03.

Taxing Crypto currencies in India

With the income tax department slapping tax notices on almost five lakh high net worth individuals transacting in bitcoin, the issue of taxing cryptocurrencies has assumed more importance and urgency in India.

The Centre is reportedly planning to bring in a regulatory framework for crypto currencies in the forthcoming Union Budget. This should clear the air on the status of such digital currencies and how they will be taxed. Meanwhile, here is a look at how transactions in cryptocurrencies, mainly bitcoin, may be taxed under various scenarios.

Currency or capital asset:

Currency, according to the Foreign Exchange Management (FEMA) Act, 1999, includes currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards and other such instruments, as notified by the RBI.
As various entities accept bitcoin as a mode of payment, it appears that it is a currency. But it has not been termed as a currency under the FEMA Act, or as legal tender by the RBI; so, it may not qualify as currency. Whether bitcoin is a currency will remain a matter of dispute until the RBI clears its stand on it. If the RBI declares it to be a currency, any trading in it will be subject to FEMA regulations.

Capital gain or business income:

According to Section 2 (14) of the Income Tax Act, 1961, a capital asset means a property of any kind held by a person, whether or not connected with his business or profession. The term ‘property’ has no statutory meaning, yet it signifies every possible interest that a person can acquire, hold or enjoy.
So, bitcoins could be deemed a capital asset if they are purchased for investment. Any gain arising on transfer of a bitcoin shall be taxable as capital gain. However, if the transactions in bitcoins are substantial and frequent, it could be held that the taxpayer is trading in bitcoins, and the income would be taxable as business income.

Computing capital gains from sale of bitcoins:

If gains arising from transfer of bitcoins are treated as capital gains, their further classification into short-term or long-term gain will depend on the period of holding of bitcoins. If a bitcoin is held for more than 36 months, it will be considered a long-term capital asset. If the period of holding is lower, it will be treated as a short-term capital asset.

Short-term capital gains are taxable according to the slab rates applicable to the taxpayer. Long-term capital gains are taxed at a flat rate of 20 per cent with indexation benefits (inflation-adjusted).

Taxation of bitcoins earned through mining:

If profits earned from bitcoins are taxable as business income, then the bitcoins earned in the ‘mining’ process would also be taxable as business profits.

However, if bitcoins are classified as capital assets, the virtual currency earned from bitcoin mining may not be taxed.

Bitcoins generated during the mining process are classifiable as self-generated capital assets. Since the cost of acquisition of such bitcoins is not available, the taxpayer can take the benefit of judgement of the Supreme Court in the case of B. C. Srinivasa Setty (1981).

The court held that if the cost of acquisition of an asset cannot be ascertained, the machinery provision for computation of capital gains will fail. Therefore, no capital gains can be levied on transfer of such assets. This could mean bitcoins generated through mining may be exempt from tax.

Situs (location) of bitcoins for taxation:

Bitcoins are intangible assets. For income tax purposes, situs of an intangible asset can vary according to its nature and obligations attached to it. Situs of an intangible property is decided on the basis of the law of the land where protection for the property is sought.

Situs of an intangible asset can be linked with such tangible property with which it is most closely connected. For example, a patent is associated with plant and machinery, and a trademark or brand name is associated with goods. Thus, the situs of bitcoin can be linked with the country where its operating server is located.

Taxation of bitcoin sale by NRI:

Suppose an NRI sells bitcoins on an Indian exchange. Would he be liable for taxation in India? Since bitcoin is an intangible asset, income accruing or arising from its transfer outside India by a person who is not a resident in India cannot be taxed in India. Hence, sale of bitcoin by an NRI through an Indian bitcoin exchange may not be taxed in India.

Is it goods or service? If bitcoin gets classified as a currency, it will be considered as ‘money’ in the CGST Act and no GST can be charged on its trading. However, exchanging bitcoin to rupees might be considered a service for the purpose of levy of GST under the category of ‘financial services’.

Here, if the supplier charges any commission for providing exchange services, then GST shall be payable at 18 per cent on the commission. If no consideration is being charged for the services, the supplier shall be liable to pay GST at 18 per cent on 1 per cent of the gross amount of rupees paid by the recipient.
There is a conflicting view also. If bitcoin is not considered as currency, any trading in bitcoin would be considered a service. Therefore, the supplier (who is selling the bitcoin) may be required to pay 18 per cent GST on the total value charged by him from the buyer.

Taxability of bitcoin mining under GST:

In the bitcoin mining process, individuals process the transactions and secure the network by using specialised hardware. In exchange, they are awarded new bitcoins. In other words, the bitcoin is a consideration awarded to individuals in lieu of their services to secure the network. Therefore, bitcoin miners may be required to pay GST on the fair market value of the bitcoin at 18 per cent.
Is bitcoin trading a current account transaction under the FEMA? Current account transactions include all those transactions that are not capital in nature. This includes remittance for import of goods or services, or remittance for personal purposes, etc. The question whether dealing in bitcoin is a current account transaction or not depends wholly on whether bitcoin is a ‘good’ or an ‘asset’.
If it is not a good, foreign transactions in bitcoin shall be treated as capital account transactions and any dealing in bitcoin would require prior approval from the RBI.

Whether Interest paid U/s.201(1A) and late fees U/s.234E can be claimed as business expenditure in Profit & Loss Account ?

Interest paid under s. 201(1A) cannot assume the character of business expenditure and is not allowable as deduction as the liability to pay interest is directly related to the failure to deduct or remit the tax deducted at source as held by Madras High court’s judgement in 239 ITR 435, The Bombay HC judgement reported at 196 ITR 406 and Calcutta HC judgment reported at 73 Taxman 555 says that interest u/s 201(1A) is not deductible.

Whether these expenses are allowed as business expenditure or disallowed under section 40(a)(ii) or 37(1) Income Tax Act, 1961?

The question is with respect to the following amounts:
(1) Interest paid for delayed payment of tax deducted at source (TDS)
(2) Late Fee paid for default in furnishing TDS Statement/returns u/s 234E
(3) Additional/Late fee paid by company to Registrar of Companies for delayed filing of various forms and returns

There is no section that specifically deals with the allowability of above type of payments. However the following two sections are important in this regard.

Section 40(a)(ii) specifically disallows income tax paid as a deductible expenditure. However none of the payments described above falls within the ambit of this section.

Section 37(1) provides for a general deduction for all expenditure laid out wholly and exclusively for the purpose of the business or profession. The relevant exclusions made by the section along with the Explanation 1 are the following:

(i) Expenses of capital nature,
(ii) Expenses which are personal in nature,
(iii) Expenses incurred for any purpose which is an offence by law,
(iv) Expenses incurred for any purpose which is prohibited by law,

All the three type of payments in question squarely falls within the ambit of section 37(1) and the question of their deductibility or allowability depends on the fact whether these expenses can be regarded as expenditure laid out wholly and exclusively for the purpose of the business or profession or hit by the exclusions provided.

Exclusions (i) and (ii) above are not applicable to the question in hand. Further exclusion (iii) and (iv) are applicable only if the purpose of the expenditure is an offence or is prohibited. Kindly note that interest or late fee (as in question) is not paid for a purpose which is an offence or prohibited. In fact the interest and late fee (as in question) are paid for the purpose of the compliance with the Income Tax Act and/or the Companies Act. Therefore the exclusions (iii) and (iv) are also not applicable to the interest /late fee paid as per question 1 to 3 as above.

Now what is left is the soul of the section 37(1) and the allowability or disallowance of the interest or late fee thus depend on the basic criterion, which is ;

“whether the interest paid can be considered as expenditure laid out wholly and exclusively for the purpose of the business or profession?”

The Judicial View

The Hon’ble Supreme Court in Bharat Commerce and Industries Ltd. Vs CIT (5509/1985) has ruled that interest paid for delay in furnishing ITR and Advance Tax is not deductible as business expenditure. The Court observed that;

“it is difficult to see how the interest so paid for not paying the requisite amount of advance tax as prescribed can be considered as expenditure laid out wholly and exclusively for the purpose of business.”

Though the above judgement does not deal with the issue of interest paid for late deposit of TDS, late fee under section 234E or late/additional filing fee paid to the Registrar of Companies, the Court has made it very clear that such payments can not be considered as business expenditure.

In the above judgement, the Hon’ble Supreme Court has cited many instances High Court judgements where interest paid on advance tax/income tax has been disallowed. In particular, in the case of Aruna Mills Ltd. v. CIT [1957] 31 ITR 153, the Bombay High Court observed that

“it was difficult to understand how, when a business man commits default in discharging his statutory obligation, the consequences of that default could constitute an expenditure exclusively incurred for the purpose of his business. ”

Conclusion
Going by the judicial interpretation, all the three type of payments being interest and late/additional fee payable as a consequence of default in discharging a statutory liability can not be considered as expenditure laid out wholly and exclusively for the purpose of business or profession and hence are not deductible by virtue of section 37(1).

Cash payment limit reduced to Rs 10000/- from Rs 20000/- earlier rules also applicable on capital expenses

The existing provision of sub-section (3) of Section 40A of the Income tax Act 1961, provides that any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, shall not be allowed as a deduction except in specified circumstances as referred to in Rule 6DD of the Income-tax Rules, 1962.

Further, sub-section (3A) of section 40A also provides for deeming a payment as profits and gains of business of profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year of a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft.

Reduction in Limit under section 40A(3A)

In order to dis incentivise cash transactions, it is proposed to amend the provision of section 40A of the Act to provide the following:

(i) To reduce the existing threshold of cash payment to a person from twenty thousand rupees to ten thousand rupees in a single day; i.e any payment in cash above ten thousand rupees to a person in a day, shall not be allowed as deduction in computation of Income from “Profits and gains of business or profession”;

(ii) Deeming a payment as profits and gains of business of profession if the expenditure is incurred in a particular year but the cash payment is made in any subsequent year of a sum exceeding ten thousand rupees to a person in a single day; and

(iii) Further expand the specified mode of payment under respective sub-section of section 40A from an account payee cheque drawn on a bank or account payee bank draft to by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account.
These amendments will take effect from 1 April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

No depreciation and deduction u/s 35AD on cash expenses exceeding Rs 10000/-

Under the existing provisions of the Indian Income tax Act 1961, revenue expenditure incurred in cash exceeding certain monetary threshold is not allowable as per sub-section (3) of section 40A of the Act except in specified circumstances as referred to in Rule 6DD of the Income-tax Rules, 1962.
However, there is no provision to disallow the capital expenditure incurred in cash. Further, section 35AD of the Act , inter-alia provides for investment linked deduction on the amount capital expenditure incurred, wholly or exclusively for the purposes of business, during the previous year for a specified business except capital expenditure incurred for acquisition of any land or goodwill or financial instrument.

In order to discourage cash transactions even for capital expenditure, it is proposed to amend the provisions of section 43 of the Act to provide that where an assessee incurs any expenditure for acquisition of any asset in respect which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost of such asset.

It is further proposed to amend section 35AD of the Act to provide that any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.

These amendments will take effect from 1 April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

Sec 269ST– Cash receipts

1. Section 269ST as per budget 2017, makes acceptance of Rs. 3,00,000/- in cash as an offence. There are no caveats like it is applicable only for business receipt etc.

2. Before I elaborate the section, I want to highlight that, there are restrictions on making payment otherwise than by cash – say for dis-allowance of expenditure [section 40A(3)] or loan transactions referred in [Section 269SS / 269T.]
Take away points

3. Section 269ST as being proposed in the budget 2017 to curb transactions in cash, the way the section has been drafted, it appears to be too stringent.

4. Though the object is noble, the manner in which it is drafted and having regard to the situation is absolutely draconian.

5. I will be happy if I go wrong in my interpretation if the objective of curbing black money is achieved without troubling honest tax payers’.

269ST. Mode of undertaking transactions
‘269ST. No person shall receive an amount of three lakh rupees or more—
(a) in aggregate from a person in a day; or
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person,
otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account:
Comments

6. It is on receipt side. The section is unfettered. The character of receipt is irrelevant i.e. exempt income / taxable income etc. There is no exemption even for sale of agricultural produce.
Refer clause (a)

7. so one person one day – above 3 lacs – not allowed even though he may be paying for various transactions which individually are below 3 lacs.
Refer clause (b)

8. in respect of single transaction e.g. the transaction is for 5 lacs you can-not pay above 3 lacs.
Refer clause (c )

9. One event / occasion – marriage is one occasion and the most important thing being the occasion has to be interpreted occasion for recipient.

10. For example, gift in marriage is tax free. But marriage is one occasion and a person can not receive on his / her marriage even say Rs. 100 from 3000 people as it will amount to Rs. 3,00,000/- [100 X 3000]. in the example you can change any combination of figures the multiplication of which comes to Rs. 3,00,000/-. Also it does not have restriction of days because the per day is linked to per person.

11. It extends to transactions, events and even covers occasion. The word used is “Amount” and not “sum”. In other sections, the word “sum” has been used. The word “Sum” means “sum of money”. The word “Amount” includes cash and kind. Also it has nothing to with whether that exchange of money is chargeable to tax or not.

12. On a literal meaning it may mean that, if I borrow a car from my friend of Rs. Say 15 lacs, the violation is already done. The fact that I duly return the car in the same condition to my friend does not / can not undo the violation.

13. Thus it may cover following items
• cash withdrawal from Bank by any personal
• gift in cash or in kind.
• Gift at the time of marriage
• amount to be paid to hospital
• any barter exchange the value of which exceeds Rs. 3,00,000/-
• Sale proceeds – Imagine it is a violation even for an honest / bonafide tax-payer who otherwise is maintaining correct books of account and paying correct taxes.
Refer the penalty clause i.e. proposed section 271DA

14. It requires penalty of 100% of amount of transaction. The exception requires a “good and sufficient reason”. The proviso reads as follows
Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.

15. Normally the criteria used in penalty provisions is “reasonable reason”

16. Also this penalty section does not have cover of section 273B which reads states that, in case the assessee is able to show a “reasonable cause” for the said failure, there will be no penalty.

17. There is a significant difference between the words “reasonable cause” vis-a-vis “ good and sufficient reasons”

18. It is possible that a particular cause may very well be a reasonable cause but not a “good and sufficient reasons”

19. Consider an example where it may fulfill the criteria of “good and sufficient reasons”
• An assessee living with his better half, both of whom are above 75.
• Both are suffering from Alzheimer. The level of alzheimer may be differing.
• They are making payment in cash to a hospital when either of them is admitted on a SOS [ save our sole] or medical emergency basis.
• In this case, the hospital may be able to prove that it has good and sufficient reasons to accept the cash.
• At the cost of repetition, I would like to highlight that the onus will be on hospital to prove the merits and not the old couple.
Some academic points-:

20. If you carefully read the section, it does not have guard of rule 6DD which is there for section 40A(3) i.e. payment for expenditure for Rs. 20,000/- [ revised 10,000] and above.

21. If one decides to make a literal interpretation, anything otherwise than below will get attracted for violation
a) by an account payee cheque or
b) an account payee bank draft or
c) use of electronic clearing system through a bank account:

22. A digital payment e.g. payment by various e-wallets or say payTM which is popular now a days is also hit by this section because these e-wallets / pay-TM are not banks where a clearing system is there as mentioned above.

23. Various payment schemes authorised by RBI whereby other person does not have a bank account and is able to get money with his identity being validated by say – AADHAR with mobile etc. Will also not be covered by the term “use of electronic clearing system through a bank account”

24. Technically even a payment by credit card / debit card . Rupay-card may not amount to clearing system through Bank account.[very very literal interpretation]
Text of Proposed Section

269ST. Mode of undertaking transactions
‘269ST. No person shall receive an amount of three lakh rupees or more—
(a) in aggregate from a person in a day; or
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person,
otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account:
Provided that the provisions of this section shall not apply to—
(i) any receipt by—
(a) Government;
(b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in section 269SS;
(iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify.
Explanation.—For the purposes of this section,—
(a) “banking company” shall have the same meaning as assigned to it in clause (i) of the Explanation to section 269SS;
(b) “co-operative bank” shall have the same meaning as assigned to it in clause (ii) of the Explanation to section 269SS.’.

Penalty for violation of section 269ST
271DA – Penalty for failiure to comply with provisions of section 269ST.
“271DA. (1) If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt:

Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.
Memorandum to Finance Bill, 2017

Restriction on cash transactions
In India, the quantum of domestic black money is huge which adversely affects the revenue of the Government creating a resource crunch for its various welfare programmes. Black money is generally transacted in cash and large amount of unaccounted wealth is stored and used in form of cash.

In order to achieve the mission of the Government to move towards a less cash economy to reduce generation and circulation of black money, it is proposed to insert section 269ST in the Act to provide that no person shall receive an amount of three lakh rupees or more,—
(a) in aggregate from a person in a day;
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.

It is further proposed to provide that the said restriction shall not apply to Government, any banking company, post office savings bank or co-operative bank. Further, it is proposed that such other persons or class of persons or receipts may be notified by the Central Government, for reasons to be recorded in writing, on whom the proposed restriction on cash transactions shall not apply. Transactions of the nature referred to in section 269SS are proposed to be excluded from the scope of the said section.

It is also proposed to insert new section 271DA in the Act to provide for levy of penalty on a person who receives a sum in contravention of the provisions of the proposed section 269ST. The penalty is proposed to be a sum equal to the amount of such receipt. The said penalty shall however not be levied if the person proves that there were good and sufficient reasons for such contravention. It is also proposed that any such penalty shall be levied by the Joint Commissioner.

It is also proposed to consequentially amend the provisions of section 206C to omit the provision relating to tax collection at source at the rate of one per cent. of sale consideration on cash sale of jewellery exceeding five lakh rupees.
These amendments will take effect from 1st April, 2017.
[Clauses 71, 83 & 84]

Source : Taxguru/Yogesh S.Limaye