VODAFONE ESSAR GUJARAT LTD (FORMERLY KNOWN AS FASCEL LTD) vs. ASSISTANT COMMISSIONER OF INCOME TAX

ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE AKIL KURESHI)

“8. License Fee License Fee payable to the Department of Telecommunications, which was a fixed amount every year till 31st  July 1999 and is payable on revenue sharing basis as per new Telecom Policy 1999

SCA/9817/2009 3/19 w.e.f. 1st August, 1999, is treated as follows : Till 31st July, 1989 a) License fee payable upto to the date of commencement of commercial operations, I.e. 24th  January, 1997, was treated as Deferred Revenue Expenditure and amortized on a straight line basis over the remaining period of license (without taking into consideration the extension in license period as per NTR 1999) b) License   fee   payable   for   the   period   subsequent   to   the commencement of commercial operations was amortized as an expense over the remaining period of license. w.e.f. 1st August 1999 c) The entire amount of License  fee  of Rs.3,667.63 million lying unamortised on the above basis as at the close of 31st July, 1999,   after   adjusting   waiver   of   Rs.815.50   million   as   per   the migration package to New Telecom Policy, 1999 is amortised w.e.f. 1st  August,   1999   on   Straight   Line   basis   over   the   balance   of extended License Period (in terms of New Telecom Policy, 1999) ending on 18th December, 2014) d) The amount payable as Revenue Sharing Contribution to Department   of   Telecommunications   under   New   Telecom   Policy 1999   w.e.f.   1st  August,   1999   was   charged   to   Profit   and   Loss Account at the rate of 15% of the Adjusted Gross Revenue(AGR) upto   24th January,   2001. As   per   Department   of Telecommunication's (DOT) order dated 22nd September, 2001, the Company has paid/provided for license fees at the rate of 12% and for WPC fees at the rate of 3% of the Adjusted Gross Revenue (AGR) from licensing activities w.e.f. 25th January, 2001.”

“22. Please furnish the detailed working deduction claimed u/s.

SCA/9817/2009 4/19 35ABB of Rs.27,62,40,888/­ and justify your claim. 27.Please refer to Note No.8(c) in Schedule 21 regarding license fees   of   Rs.3667.63   Million   and   the   amortization   of   the   same. Please explain and submit the details of the same. Please also furnish   the   details   of   amount   payable   as   revenue   sharing contribution to DOT as stated in Note 8(d) of the same schedule.”

“2. In respect of following expenditure, your kind reference is invited to the Tax Audit Report in form no. 3CD as filed along with the Return of Income of the impugned Assessment Year. However, these   details   are   being   reproduced   along   with   this   letter   as indicated below: (c) 35ABB Details as per Annexure­3 of the 3CD report vide Annexure­2B.”

SCA/9817/2009 5/19 Deduction fraction Amount paid Amount   claimed   till Assessment

year 2002­2003 Deduction for the year 1   In   respect   of amount   paid   in 1996­97 1/20 2,038,750,000 917,437,500 101,937,500 2   In   respect   of amount   paid   in 1997­98 1/19 815,500,000 309,985,381 42,921,053 3   In   respect   of amount   paid   in 1998­99 1/18 ­ ­ 4 In respect amount paid in 1999­00 1/17 2,233,499,702 394,147,005 131,383,335 Note : From assessment year 2000­2001, the denominator has been changed as per the terms of License under NTP 99, I.e. the denominator has been increased by 10. Amount debited to Profit and Loss account Rs.238,242,552”

SCA/9817/2009 6/19 “Point No.20: The assessee has been asked to give the bifurcation of Expenditure amortized   U/s.35ABB   before   commencement   and   after commencement of business and nature of expenditure. The details of the same is attached herewith vide Annexure­4.”

SCA/9817/2009 7/19 ending on 18th December, 2014) d) The amount payable as Revenue Sharing Contribution to Department   of   Telecommunications   under   New   Telecom   Policy 1999   w.e.f.   1st  August,   1999   was   charged   to   Profit   and   Loss Account at the rate of 15% of the Adjusted Gross Revenue(AGR) upto   24th January,   2001. As   per   Department   of Telecommunication's (DOT) order dated 22nd September, 2001, the Company has paid/provided for license fees at the rate of 12% and for WPC fees at the rate of 3% of the Adjusted Gross Revenue (AGR) from licensing activities w.e.f. 25th January, 2001.” 10.On 17.3.2006, the Assessing Officer wrote to the petitioner and besides other, called for following information : “(1) In   the   statement   of   income   you   have   claimed   amount allowable u/s.35ABB at Rs.27.62 crores. It is observed from para 8 of  schedule  21(significant  accounting  policies)  that  with  effect from 1st  August, 1999 ie under new telecom policy, 1999, the unamortised license fees of Rs.366.76 crores has remained to be amortized. This amount is worked out after adjusting waiver of Rs.81.55 crores. Thus with effect from 1st  August, 1999 and the remaining period is 16 years. Under section 35ABB,the allowable expenditure   will   be   equal   to   the   appropriate   fraction   of   the amount of such expenditure. On asking about detailed explanation about the working of the allowability,in all your replies dated 29.10.2005 and 9.02.2006, you have just enclosed the copy of annexure­3(clause 15(1))of the return. Ion these replies, it is not clear   as  to   whether   this   waiver   of  Rs.81.55   crores  have   been accounted for. Further details of claim made in each year, prior to this year is also not clear. Under this circumstance, and in the absence of clear bifurcation of allowability u/s.35ABB of the Act for   each   of   the   years,   it   will   be   assumed   that   the   waiver   of Rs.81.55 crores has not been taken care of. Suitable working will be made accordingly.” 11.In reply to said letter dated 17.3.2006, the petitioner sent its communication   dated   21.3.2006   clarifying   this   issue   in   the following manner : “Point 1

SCA/9817/2009 8/19 Claim under Section 35ABB of Rs.37.62 Crore Please   note   that   company   has   been   granted   waiver   of   two installments   I.e.   Rs.81.55   Crore   from   Department   of telecommunication(DOT) in respect of payment of licence fees. This amount was reduced from the amount payable to DOT upto 31.7. 99. The deduction under Section 35ABB is claimed on the basis of actual payment made to DOT as per working attached to Form No.3CD. So, the waiver of 81.55 Crore does not affect the claim of deduction under Section 35ABB.” 12.After this  entire exercise was completed,  the  Assessing Officer framed his assessment on 27.3.2006. In such assessment order, there was no discussion with respect to the claim of deduction of the petitioner with respect to license fee. However, such claim was accepted without any disallowance. 13.It is this assessment which the Assessing Officer seeks to reopen for which the impugned notice dated 17.3.2009 came to be issued. 14.At the request of the petitioner, the Assessing Officer provided the reasons   he   had   recorded   for   reopening   the   assessment.   Such reasons read as under :

“2. As demanded the reason for reopening of your case vide your application dated 07.04.2009 is as under : Under section 35ABB of the I.T.Act, 1961 any expenditure incurred and paid in any previous year of a capital nature incurred for acquiring license/right to operate telecommunication services in any previous year either before the commencement of business or thereafter, shall be allowed a deduction equal to the appropriate fraction of such expenditure paid in each of the relevant previous years. As per Explanation (i)(B) 'relevant previous year' means the previous years beginning with the previous years in which the license fee is actually paid and the subsequent previous year or years during which the license, for which the fee is paid,shall be in force and as per Explanation (ii) “appropriate fraction” means the fraction the numerator of which is one and the denominator of which is the total number of th relevant previous years.

SCA/9817/2009 9/19 On   perusal   of   the   profit   and   loss   account   and   statement   of computation of income, it was seen that a deduction of Rs.276.24 lacs   was   allowed   from   income   u/s.35ABB   ibid.   being   the amortized sum of fixed license fee paid up to July 1999. Further, it was observed from schedule 14; operating Charge that the entire sum of Rs.39.54 crores incurred during the previous year 2002­03 towards license fee was charged to profit and loss account. In note 8 of schedule 16 it was mentioned that the assessee had treated the yearly license fee incurred from August 1999 and onwards as revenue expenditure pursuant to migration to the New Telecom Policy 1999 in April 2002. Accordingly, license fee expenditure of Rs.39.54 incurred during the previous year was charged to profit and loss account. However, license fee was in the nature of capital expenditure as it was paid to acquire and keep in force the license/right to operate the telecommunication services. Further, the fee paid to keep the license in force had an enduring benefit since the account had obtained a right to operate the telecommunication service for a period   of   20   years   beginning   January   1997   and   ending   in December   2016.This   was   in   fact   more   that   the   premigration license for 10 years period of January 1997 to December 2006. Prior to migration too the new policy too, assessee was required to pay license fee on a fixed formula basis. Under the new policy assessee   was   required   to   pay   license   fee   each   year   but   on   a revenue sharing basis. Thus, except for the change in mode of computation of license fee, the nature of payment remained same from the commencement of business itself. In fact, assessee had acquired a greater enduring benefit than that was in place prior to migration. On migration to the new telecom policy, license granted for   enhanced   period   of   20   years   from   10   years   earlier.   The principals laid down by the Hon'ble Supreme Court in the case of SCA/9817/2009 10/19 for depreciation u/s.32(1) of the Act. Thus,   even   though   the   assessee   has   effected   a   change   in   its accounting   policy   for   the   purpose   of   its   books   vis­a­vis   the treatment of expenditure on license fee, the expenditure continued to be in the nature of capital expenditure for the purpose of I.T. Act and deduction was allowable only within the ambit of the provisions of section 35ABB of the Act equal to the appropriate fraction prescribed therein. Omission to restrict the deduction for expenditure on license fee in terms with the provisions of section 35ibid resulted in under assessment of income as follows ; Current previous year (a) 2002­03 Previous year up to which the license to operate telecommunication services granted (b) 2016­17

Therefore the denominator (remaining relevant years) (a) ­(b) (c) 15 Expense on license fee allowed deduction during the year (d) 35450000

Therefore   deduction   allowable   at   appropriate fraction (c)/(d) I.e. 1/12 x Rs.395450000 (e) 26363333 Excess deduction allowed & underassessment of income (d)­(e) (f) 369086667 Therefore,   I   have   reason   to   believe   that   income   has   escaped assessment within the meaning of section 147. Since more than four years have lapsed necessary sanction u/s. 151 of the I.T. Act has been obtained from the CIT­IV, Ahmedabad.” 15.The petitioner raised its objections to such proposal for reopening of   the   assessment   vide   its   communication   dated   17.6.2009. Several   contentions   were   raised   including   that   completed assessment cannot be reopened beyond a period of four years in absence of failure on part of the assessee to disclose truly and fully all material facts. It was contended that entire issue was examined threadbare by the Assessing Officer while framing the original assessment. Any attempt to deny this benefit at this stage would

SCA/9817/2009 11/19 only amount to change of opinion. 16.The   Assessing   Officer   however,   rejected  the   objection   vide   his order dated 24.8.2009. He was of the opinion that though the assessee had effected the change in his accounting policies for the purpose of its books, the expenditure incurred on the license fee continued  to   be   in   the   nature   of   capital   expenditure   and  the deduction thereof can be allowed only within the ambit of Section 35ABB of the Act. The Assessing Officer placed reliance on certain decisions of the Apex Court to suggest that every disclosure cannot be treated as true and full disclosure and that mere production of evidence before the Income Tax Officer would not be enough and there may be cases of omission or failure to make true and full disclosures. If some material for the assessment lay embedded in the evidence which the assessee could have uncovered but did not, would not absolve the assessee from onus to make full and true disclosure.   Primarily   on   these   grounds,   the   Assessing   Officer rejected   the   objections   of   the   petitioner.   At   which   stage   the petitioner approached this Court by filing the present petition. 17.Learned   senior   counsel   Shri   S.N.   Soparkar   appearing   for   the petitioner   vehemently   contended   that   there   was   no   failure   or omission on part of the assessee to disclose fully and truly all material   facts   necessary   for   assessment   which   occasioned   any escapement  of  income   chargeable   to   tax.   He   therefore,   would submit that notice for reopening the issue beyond a period of four years from the end of relevant assessment year lacks jurisdiction.

Taking   us   through   the   return   of   income   filed   by   the petitioner   and   the   correspondence   exchanged   between   the petitioner and the Assessing Officer, during the course of original

SCA/9817/2009 12/19 assessment, the counsel submitted that the issue of deduction of the expenditure for license fee paid by the petitioner was one of the central controversies in the original assessment. The Assessing Officer after having raised several queries and elicited replies to the   petitioner,     made   no   disallowance   in   the   final   order   of assessment. Any different view at this stage therefore, would only amount to change of opinion.

Counsel submitted that all facts necessary for assessment were placed before the Assessing Officer in the original assessment as well as through further materials placed during the course of assessment. 18.On the other hand, learned counsel Shri Paurami Sheth for the department opposed the petition contending that the question of deduction   of   license   fee   was   not   examined   by   the   Assessing Officer. All the queries raised during the assessment proceedings pertained   to   other   aspects.   There   was   failure   on   part   of   the assessee   to   disclose   truly   and   fully   all   material   facts.   Reasons recorded   sufficiently   bring   out   this   aspect   of   the   matter. Assessment   at   this   stage,   therefore,   should   be   allowed   to   be proceeded further. 19.Having thus heard learned counsel for the parties and having perused the documents on record, we may recall that the notice of reopening under section 148 of the Act has been issued beyond a period of four years from the end of the relevant assessment year. In that view of the matter, in addition to the Assessing Officer holding   a   belief   that   income   chargeable   to   tax   has   escaped assessment, requirement of proviso to section 147 also must be fulfilled which reads as under :

SCA/9817/2009 13/19 “Provided   that   where   an   assessment   under   sub­section(3)   of section   143   or   this   section   has   been   made   for   the   relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax  has escaped for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub­section(1) of section 142 or section 148 or to disclose   fully   and   truly   all   material   facts   necessary   for   his assessment, for that assessment year.” 20.The moot question in the present case is whether there was any failure   on   part   of   the   assessee   to   disclose   fully   and   truly   all material facts necessary for the assessment of assessment year in question. 21.Answer to such question, shall have to be ascertained from the reasons recorded by the Assessing Officer which reasons would have to be appreciated with the aid of the documents on record. 22.In the reasons recorded, the Assessing Officer though has outlined in some detail his belief that in case of the petitioner, income chargeable   to   tax   has   escaped  assessment,   he   has   not   in   any manner brought out to form the belief that such escapement of income   was   on   account   of   failure   on   part   of   the   assessee   to disclose truly and fully all material facts. Though such precise words may not be necessary to satisfy the requirement of proviso to section 147 of the Act,  such fact must be discernible from the reasons   recorded   to   enable   the   Assessing   Officer   to   assume jurisdiction to reopen the assessment. In that view of the matter, we have tried to peruse the reasons very minutely. It primarily suggests   that  according   to   the   Assessing   Officer   the   claim   for deduction   of   license   fees   paid   by   the   petitioner   assessee   was

SCA/9817/2009 14/19 required to be dealt with in the manner provided in section 35ABB of the Act. Even if the petitioner changed its accounting policy, such   expenditure   continued   to   be   in   the   nature   of   capital expenditure and the deduction thereof was to be governed by Section 35ABB of the Act. Nowhere do the reasons record that such treatment to the expenditure was not accorded in the original assessment   on   account   of   failure   or   omission   on   part   of   the petitioner to disclose truly and fully all material facts. 23.The reasons recorded also do not indicate or suggest any new material which the Assessing Officer may have received   after framing of the assessment on the basis of which he formed an opinion that income chargeable to tax has escaped assessment. 24.Quite apart from these significant aspects, we may also recall that during the scrutiny assessment, the Assessing Officer raised series of questions and queries. Many of these queries pertained directly to the petitioner's claim for deduction of the license fees paid. In the return that the petitioner filed, the petitioner had highlighted the change in the accounting policy pre and post 1.8.1999. The Assessing Officer had on 1.9.2005 called upon the petitioner to furnish a detailed working of the deduction claimed under section 35ABB  of  the  Act  and had  also  called  upon the  petitioner  to explain with respect to notice under section 8(c) of schedule 21 i.e. the significant accounting policies pertaining to license fees (post   1.8.1999)   regarding   license   fee   of   Rs.3,667.63   million. Assessing Officer asked the petitioner to explain and submit the details of the same and also asked the petitioner to furnish the details of amount payable as revenue sharing contribution to DOT as stated in note 8(d) of the said schedule.  The petitioner replied

SCA/9817/2009 15/19 to such queries and submitted the details as available. 25.Further reply came to be issued by the petitioner on 29.10.2005 in which   the   petitioner   stated   inter­alia   that   regarding   the amortization   of   license   fees,   the   company   had   balance   of Rs.3,031.87 million of unabsorbed license fees under the heading Miscellaneous   expenditure.   Out   of   the   same   license   fees amounting to Rs.238.24 million has been amortized against the profit of said assessment year and same has been disallowed in the return of income. Detailed working of such deduction was also provided. 26.There are further queries by the Assessing Officer and replies by the petitioner on this issue. It is however, not necessary to take note of the same. Suffice it to record that during the original assessment that the Assessing Officer framed after scrutiny, he was fully conscious  and alive to the petitioner's claim of deduction of license fee expenditure. Such deduction was claimed at the outset. Claim was explained and justified through correspondences and series of queries raised by the Assessing Officer. Detailed work out was provided as demanded. It therefore, cannot be stated that the petitioner relied on certain disclosures made in the return filed which only upon due diligence by the Assessing officer could be unearthed.   The   entire   issue   was   threadbare   examined   by   the Assessing Officer. It may be that ultimately in the assessment order that he passed, he did not deal with this aspect while not making any disallowance. In the present case, we are not called upon  to opine whether same would amount to forming an opinion and therefore, any reopening at a later stage  would be impermissible on mere change of opinion. We are called upon to decide whether

SCA/9817/2009 16/19 in the facts of the case reopening of assessment beyond a period of four years from the end of the relevant assessment year could be permissible. 27.As already noted, in the reasons recorded, the Assessing Officer placed no reliance on any new material at his command to form a belief   that   income   chargeable   to   tax   has   escaped   assessment. Further during the original assessment framed after scrutiny, the claim of deduction for license fees paid by the petitioner  came up for consideration. Various aspects thereof were examined. It may be that some of the queries did not directly relate to such claim and the limitation of deduction as provided in Section 35AAB of the Act. However, entire issue was at large before the Assessing Officer.  He  had  occasion   to   apply   his   mind  and  material  was elicited and placed before him before the final assessment was framed. 28.Under the circumstances, it cannot be stated that there was any failure or omission on part of the petitioner  to disclose truly and fully any material facts necessary for assessment. Even the attempt on   part   of   the   Assessing   Officer   to   rely   on   explanation(1)   of section   147   would   not   be   tenable.   Such   explanation   reads   as under : “Explanation 1 : Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.” 29.In   case   of  Calcutta   Discount   Co.   Ltd   v.   Income­tax   Officer, Companies District Calcutta and another  reported  in  41   ITR 191,the Apex Court held that in every assessment proceeding the

SCA/9817/2009 17/19 Assessing   Authority   would   for   the   purpose   of   computing   or determining the proper tax due from an assessee, require to know all the facts which help in coming to the correct conclusion. From the primary facts in his possession, whether on the disclosure by the   assessee,   or   discovered   by   him   on   the   basis   of   the   facts disclosed   or   otherwise   the   Assessing   Authority   had   to   draw inferences  as regards certain other facts and ultimately from the primary facts and further facts inferred from them, the authority had  to draw the proper legal inferences  and ascertain on the correct interpretation of taxing enactment, the proper tax leviable. So far as primary facts were concerned, it was the assessee's duty to disclose all of them. The duty however, did not extend beyond full and truthful disclosure of all primary facts. Once all primary facts were before the Assessing Authority, it was for him to decide what inferences of facts can be drawn. It is not for somebody else, far less the assessee to tell the assessing authority what inferences, whether of facts or of law, should be drawn. 30.To   our   mind,   this   important   aspect   and   conclusion     of   the Constitution Bench of the Apex Court would squarely apply   in the present case. 31.Assessing Officer while rejecting the objections of the petitioners, relied on decision of the Apex Court in case of Indo­Aden Salt Mfg & Trading Co. P. Ltd v. Commissioner of Income­tax, Bombay reported in 159 ITR 624 which to our mind was not well founded. In the said decision, the Apex Court held that the fact that the Income   Tax   Officer   could   have   in   the   original   assessment proceedings found out the correct position by further probing did not exonerate the appellant from the duty to make a full and true

SCA/9817/2009 18/19 disclosure of material facts. 32.The Assessing Officer also  relied on the decision of the Apex Court in case of  Sri Krishna Pvt.Ltd. Etc. v. Income Tax officer and others reported in 221 ITR 538, wherein it was observed that the Income   Tax   Officer   could   have   investigated   the   truth   of   the assertions of the petitioner which he actually did in the subsequent assessment   year   but   that   did   not   relieve   the   assessee   of   the obligation, placed upon it by the statute to disclose fully and truly all material facts. 33.In the present case, we have noticed that in addition to lodging the claim for deduction in the original return filed giving full details and   particulars   and   accounting   policies   followed   by   it,   the petitioner further elaborated its claim for deduction to the query issued   by   the   Assessing   Officer   during   such   correspondence. Through such correspondence, at­least full details of such claims were brought on record. In essence, the assessee desired to claim deduction of license fees paid. If the Assessing Officer was of the opinion that such expenditure had to be spread over as provided in Section 35ABB of the Act,   nothing prevented the Assessing Officer from doing so in the original assessment that he framed. Full facts with respect to such claim were on record before him. Thereafter,   what   legal   inferences   should   be   drawn   and   which statutory provision should be applied while allowing, rejecting or limiting such claim, was within the sole domain of the Assessing Officer. It was not for the assessee to lead the Assessing Officer to any particular legal inference. 34.Under the circumstances,  we are of the opinion that the impugned

SCA/9817/2009 19/19 notice is not sustainable. Same is therefore, quashed. Rule is made absolute accordingly with no order as to costs. (Akil Kureshi,J.) (Harsha Devani,J.) (raghu)