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Facts
The assessee, a telecom service provider, was assessed for the year 2007-08. The Assessing Officer (AO) made disallowances under section 40(a)(ia) for non-deduction of TDS on discount given to prepaid distributors and disallowed depreciation on Asset Restoration Cost (ARC) provision. The CIT(A) partly upheld these disallowances. The assessee appealed to the Tribunal.
Held
The Tribunal held that the discount given to distributors was not in the nature of commission, and thus TDS under section 194H was not required. Consequently, the disallowance under section 40(a)(ia) was deleted. Regarding ARC, the Tribunal found that the provision met the criteria of AS-29 and also qualified for deduction under section 37(1) as per the Delhi High Court's decision, though the matter was remitted to the AO for quantification.
Key Issues
1. Whether the discount on prepaid SIM cards to distributors is commission attracting TDS under section 194H, leading to disallowance under section 40(a)(ia). 2. Whether provision for Asset Restoration Cost (ARC) is eligible for depreciation or deduction.
Sections Cited
40(a)(ia), 194H, 143(3), 250, 43(1), 37(1), 115JB
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Income Tax Appellate Tribunal, MUMBAI BENCH “J” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
This appeal by the assessee is directed against order dated 12.04.2017 passed by the Ld. Commissioner of Income-tax (Appeals) – 33, New Delhi [in short CIT(A)] for assessment year 2007-08 raising following grounds:
“GROUNDS OF APPEAL
INCOME TAX ASSESSMENT YEAR "AY) 2007-08 The Appellant respectfully submits that: On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals)-33, New Delhi ['CIT(A)'] has erred in passing the order under section ('u/s') 250 of the Income Tax Act, 1961 (Act'), partly confirming the adjustments proposed by the Deputy Commissioner of Income Tax, Circle 26(2), New Delhi (jurisdiction realigned from Circle 17(1), New Delhi) ("AO') in the assessment order passed u/s 143(3) of the Act. Each of the ground is referred to separately, which may kindly be considered independent of each other.
1. Ground No. 1-Disallowance u/s 40(a)(ia) of the Act on account of non-deduction of tax at source on the discount extended to prepaid distributors 1.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the order of the learned AO in making an addition u/s 40(a)(ia) of the Act on account of non-deduction of tax at source on the discount of INR 19,54,27,145 extended to distributors of prepaid SIM cards/talktime. 1.2. On the facts and in the circumstances of the case and in law, the learned CIT(A)/AO has erred in concluding that taxes are deductible at source under section 194H of the Act on the discount extended by the Appellant to its distributors of prepaid SIM cards/talktime. 1.3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not holding that no disallowance can be made u/s 40(a)(ia) of the Act since the Appellant is of a bonafide belief that no tax was required to be deducted at source on discount extended to distributors of prepaid SIM cards/talktime
2. Ground No. 2- Disallowance of depreciation on provision for Asset Restoration Cost (‘ARC’) obligation 2.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) ha. erred in upholding the order of the learned AO in disallowing depreciation of INR 4,01,87,416 claimed by the Appellant on the addition to fixed assets on account of ARC obligation.
2.2. On the facts and in the circumstances of the case and in law, the learned CIT(AVAO has erred in not including the amount of ARC as a part of the cost of the telecom towers u/s 43(1) of the Act. 2.3. On the facts and in the circumstances of the case and in law and without prejudice to Grounds 2.1 and 2.2, the learned CIT(A)/AO has erred in not allowing deduction for ARC as a revenue expense u/s 37(1) of the Act. 2.4. On the facts and in the circumstances of the case and in law and without prejudice to Grounds 2.1 to 2.3, the CIT(A)/AO has erred in not allowing deduction for ARC on a proportionate basis over the period of lease. The Appellant craves leave to add, alter, amend or withdraw any of the above grounds at or before the hearing of the appeal.”
2. Briefly stated facts of the case are that the assessee company was engaged in providing cellular mobile telephony services in telecom sector of Haryana, Rajasthan and Uttar Pradesh. For the year under consideration, the assessee filed its original return of income on 31.10.2007 declaring Nil income under the normal provision of the Income-tax Act, 1961 [in short ‘the Act’] and book profit of Rs. 344,61,73,636/- under the provisions of section 115 JB of the Act. Subsequently, the assessee revised the book profit at Rs. 425,48,47,160/- under the provision of section 115JB of the Act. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Act were issued and complied with. The assessment u/s. 143(3) of the Act was made after making various additions /disallowances including (i) disallowances u/s 40(a)(ia) of the act with respect to discount extended to prepaid distributor and (ii) disallowances of depreciation on provision for assets restoration cost obligation. On further appeal Ld. CIT(A) partly allowed the appeal confirming addition on the issue of disallowances u/s 40(i)(ia) of the Act with respect to discount to prepaid distributor and disallowances of depreciation on provision for asset restoration costs obligation. Aggrieved, the assessee is in appeal before the Tribunal by way of raising grounds as reproduced above.
With respect to ground No.1 of the appeal the Ld. counsel for the assessee submitted that the issue in dispute has been decided in favour of the assessee by the Hon’ble Supreme Court in the case of Bharti Cellular Limited vs ACIT reported in (2024) 160 taxmann.com 12 (SC) dated 28.02.2024 including assessee’s own case vide civil appeal no. SLP (C) No. 020764/2018, SLP(C) No. 014023/2019, SLP(C) No. 0117652/2020, 014050/2020 etc. The Ld. counsel further submitted that Coordinate bench of the Tribunal in the group case of the Vodafone India limited has allowed the identical ground following decision of the Hon’ble Supreme Court to the case of Bharti Cellular Limited vs ACIT. On the contrary Ld. DR relied on the order of the lower authorities.
We have heard rival submission of the parties and perused the relevant material on record. The assessing officer in the impugned assessment order held that as far as of sale of prepaid sim cards to the distributor is concerned, relationship between the assessee and the distributor was that of the principal and agent. The Ld. CIT(A) further held that the discount allowed to the distributors by the assessee was actually in the nature of the commission and therefore the same was liable for TDS and due to non deduction of tax at source, expenditure incurred of Rs. 19,54,27,145/- was liable for disallowances u/s 40(a)(ia) of the Act. The relevant finding of the Ld. CIT(A) is reproduced as under:
9.8 In my view the distributor of the appellant company, by way of sale of pre-paid Sim cards eventually makes a living by earning income. The discount given by the appellant is part of the income earned by the distributor. A distributor may realize money and profit (equivalent to discount) only at the time of sale of the Sim card, yet the income generated to him through the so called discount accrues to him at the time of the purchase of the Sim card. 9.8.1 One may argue that commission cannot arise before sale and that at the time of purchase of Sim card by the distributor, there will be no certainty of income getting generated for him because if a Sim card purchased by the distributor eventually remains unsold, no income will arise to the distributor. However, this is only a theoretical possibility. The market dynamics, nature of business, demand for Sim cards and the non-perishability of prepaid talk time given its longevity does ensure that the income will almost certainly arise to the distributor. 9.8.2 The legislative intention behind introduction of tax deduction at source is to widen the tax net and plug the potential leakage of revenue. Consistent with this intention, in these transactions, I find that the appellant has an obligation to ensure that the dealers and traders of prepaid Sim cards, widespread as they are, come and remain in the tax- net and thus ensure that their incomes, if taxable, are brought to tax. 9.9 In view of the above discussion, the discount in question falls within the category of commission earned by the distributor on sale of pre-paid Sim cards the substantial sale value of which accrues in the hands of the appellant at the time of purchase of the Sim card from the appellant. Therefore, it is liable for tax deduction at source. In view of the above discussion as well as the decision of Hon'ble Jurisdictional High Court of Delhi I uphold the addition of Rs. 19,54,27,145/-. 9.10 During the discussions at the appellate stage the counsels of the appellant brought up the issue of mechanism of tax deduction specifically the question as to at what point the TDS is required to be deducted. 9.10.1 I have considered the issue. I find no difficulty in answering the same. To my mind the appellant is required to book the revenue from sale of Sim cards at the MRP instead of at discounted value and simultaneously make an entry equivalent to the discount as commission expense accruing to the concerned distributor. As this commission income accrues to the distributor at the same instant, relevant entries pertaining to TDS are also required to be made simultaneously and the tax so determined is required to be deposited in accordance with law.
5. We find that identical issue of discount extended to distributors, representing difference between Maximum Retail Price(MRP) of the ‘talktime’ and the ‘prepaid connection’ and the price at which those were transferred to distributors , has been held by the Tribunal in in the case of Vodafone Idea Limited (earlier known as Vodafone India Limited which merged with Idea Cellular Limited was for A.Y. 2014-15), as not in the nature of commission and hence not liable for disallowance under section 40(i)(ia) of the Act. The relevant finding of the Tribunal(supra) is reproduced as under:
“5.1. The relevant facts in brief are that during the relevant previous year, discount amounting to INR 68,19,45,415/- were extended by the Assessee to its distributors of pre-paid products (for short "Pre-paid Distributors'). The discount extended represented the difference between the Maximum Retail Price (MRP) of the talk-time & pre-paid connections; and the price at which these were transferred to the Pre-paid Distributors. The Assessing Officer and the DRP were of the view that the upfront discount given by the Appellant to the Pre-paid Distributor was in the nature of 'commission' liable to withholding of tax at source under section 194H of the Act. Since the Appellant had failed to deduct tax at source, the Assessing Officer passed the Final Assessment Order, dated 30/11/2018, making disallowance of INR 68,19,45,415/-under Section 40(a) (ia) of the Act. 5.2. Being aggrieved, the Appellant has carried the issue in appeal before this Tribunal. 5.3. We have considered the rival submissions and perused the material on record. 5.4. It emerges that identical issue had come up for consideration before the Mumbai Bench of the Tribunal in case of the Assessee for the Assessment Year 2009-10 (ITA No. 1121 & 1885/Mum/2014 common order dated 08/11/2023), and identical disallowance made under Section 40(a)(ia) of the Act by the Assessing Officer in respect of the upfront discount was deleted by the Tribunal holding as under: "11. The next issue urged in Ground no.9 relates to disallowance of discount extended on pre-paid cards/recharge vouchers u/s 40(a)(ia) for non-deduction of tax at source. It was brought to our notice that an identical issue was examined by the co-ordinate bench in relating to AY 2009-10 in the case of M/s Vodafone Idea Ltd (As successor to Spice Communications Ltd) and the Tribunal, vide its order dated 24-02- 2023, has held that the TDS is not deductible from the discount paid on prepaid cards. The relevant observations are extracted below:- "3.30. In view of the above observations, we hold that the decision rendered by us in assessee's own case for A.Y.2008-09 In dated 12/10/2022 would be squarely applicable to the facts of the assessee's case before us for the year under consideration also. The relevant operative portion of the said order of this Tribunal is reproduced hereunder:- "2.8.2. We find that in the case before the Co-ordinate Bench of Pune Tribunal in the case of Idea Cellular Limited vs DCIT (TDS) in ITA Nos. 1041, 1042, 1953-1955/Pun/2013 and ITA Nos. 1867 19 M/s. Vodafone India Ltd. 1870/Pun/2014 dated 04/01/2017, the lower authorities had held that relationship between assessee and its distributors was Principal and Agent. It was only the Pune Tribunal which after examining the distributors agreement came to the conclusion that the relationship is that of Principal to Principal. In fact Pune Tribunal also examined the very same agreement which is the subject matter of agreement before us in the instant case before us, as it is not in dispute that all the distributors agreements are standard agreements across India. We also find that the Pune Tribunal relied on para 62 of the decision of Hon'ble Karnataka High Court in the case of Bharti Airtel Ltd vs DCIT reported in 372 ITR 33 (Kar). We find that the Pune Tribunal had taken note of the fact that Hon'ble Karnataka High Court in 372 ITR 33 had distinguished all the three High Court judgements (i.e. Kerala, Calcutta and Delhi) relied upon by the Id. DR hereinabove. Effectively Pune Tribunal adopted the decision of Hon'ble Karnataka High Court. The Id. DR relied on para 64 of decision of Hon'ble Karnataka High Court and argued that it is against assessee for the first 7 months since discount is separately shown in the books of the assessee as an expenditure. In our considered opinion, what is to be seen is the broader question raised before the Hon'ble Jurisdictional High Court in Income Tax Appeal No. 1129 of 2017 dated 13/01/2020 in assessee's own case against the order of Pune Tribunal. For the sake of convenience, the entire order is reproduced hereunder:- "Heard learned counsel for the parties.
The Appellant-Revenue challenges the order dated 4 January 2017 passed by the Income Tax Appellate Tribunal in Income Tax Appeal No.1041, 1042 and 1953 to 1955/PUN/2013.
3. This Appeal pertains to the Assessment Year is 2010-11.
4. The Appellant-Revenue has raised the following questions as a substantial questions of law :- "(a) Whether on the facts and circumstances of the case and in law, the Hon'ble Income Tax Appellate Tribunal erred in holding the discount given by the assessee to its distributors on prepaid SIM Cards does not require deduction of tax under Section 194H of the Income Tax Act? (b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble Income Tax Appellate Tribunal erred in setting aside the case to the Assessing Officer?"
The Tribunal noted the observations of the Assessing Officer that the discount allowed to the distributors by the Respondent assessee company is on account of principal to principal relationship and not that of principal to agent. The Tribunal followed the decision of the Karnataka High Court in the 20 M/s. Vodafone India Ltd. case of Bharati Airtel Ltd. vs. DCIT [372 ITR 33) and held that the sale of SIM cards/recharge coupons at discounted rate to the distributors was not commission and therefore not llable to deduce the TOS under Section 1948. The Tribunal noted that there was no decision of this Court on this issue on that date.
Learned counsel for the parties have tendered the copy of the order passed in Income Tax Appeal No. 702 of 2017 subsequently in the case of Pr. Commissioner of Income Tax-8 vs. M/s. Reliance Communications Infrastructure Ltd where same Issue arose for the consideration of this Court. The Division Bench of this Court while holding against the Appellant Revenue observed thus:- "3. Having heard the learned Counsel for the parties and having perused the documents on we do the Tribunal. The Tribunal, as noted. besides holding that the Commissioner's order setting aside the order passed under Section 201 was not carried in appeal, had also independently examined the nature of the transaction and come to the conclusion that when the transaction was between two persons on principal to principal basis, deduction of tax at source as per section 194H of the Act, would not be made since the payment was not for commission or brokerage."
In view of the finding of fact rendered by the Tribunal which we have noted above, the same principle would apply in the present case. Therefore, the questions of law as proposed do not give any rise to substantial question of law. The Appeal is disposed of. (emphasis supplied by us) 2.8.2.1. It is also pertinent to note that the Distribution Agreement of Maharashtra Circle was subject matter of examination and adjudication by the Pune Tribunal wherein the Pune Tribunal had recorded a finding of fact that the relationship between assessee and distributor is that of Principal to Principal. This Order has been approved by the Hon'ble Jurisdictional High Court. We find that the Hon'ble Jurisdictional High Court held that once Principal to Principal relationship is established, there could be no commission or discount and consequently no deduction of tax at source in terms of section 194H of the Act is warranted. 2.8.3. With regard to reliance placed by the Id. DR vehemently on the decision of Hon'ble Delhi High Court in assessee's own case reported in 325 ITR 148 (Del) is concerned, we find that the Hon'ble Karnataka High Court in the case of Bharti Airtel Ltd (372 ITR 33) referred supra had after considering the decision of Hon'ble Delhi High Court referred supra and decided the issue in favour of the assessee. We find that the Hon'ble Karnataka High Court had also followed the decision of Hon'ble Jurisdictional High Court in the case of Qatar Airways reported in 332 ITR 21 M/s. Vodafone India Ltd. 253 (Bom). Hence the reliance placed on the decision of Hon'ble Delhi High Court by the Id. DR does not advance the case of the revenue. In any case, the decisions of Hon'ble Delhi High Court, Hon'ble Kerala High Court and Hon'ble Calcutta High Court referred supra had been considered and distinguished by the Hon'ble Karnataka High Court referred supra. 2.8.4. We further find that the Hon'ble Rajasthan High Court in the case of Hindustan Coca Cola Beverages (P) Ltd vs CIT III Jaipur reported in 402 ITR 539 (Raj) which had rendered a comprehensive judgement on the impugned issue together with various other assesses including Idea Cellular Ltd (assessee herein). The relevant Income Tax Appeal Nos. 168/2015, 169/2015, 170/2015 and 171/2015 which were admitted by the Hon'ble Rajasthan High Court on 18/10/2016 relates to assessee herein for Rajasthan Circle in respect of the identical issue. The question no.1 raised before the Hon'ble Rajasthan High Court is as under:- 1. Whether in the facts and circumstances of the case, the Tribunal was justified in holding that whether the assessee is liable to deduct TDS u/s. 194-H of IT Act, as the relation between assessee and distributor is that of Principal to Agent?
2.8.4.1. We find that the Hon'ble Rajasthan High Court after considering the plethora of judgements on the impugned issue of various High Courts (which includes the three High Court decisions of Kerala, Delhi and Calcutta relied upon by the Id. DR before us herein) had rendered its decision as under:- "Idea Cellular 58. As the agreement is produced, issues are answered in favour of assessee in the departmental appeals.
Even the contention which has been raised by the counsel for the assessee that the final tax is paid by the Distributor and not by the agent, the revenue is not at loss in any form. 61. In view of the above discussion, all the appeals of assessees are allowed and those of Department are dismissed." 2.8.5. We further find that the Hon'ble Rajasthan High Court in the case of CIT (TDS) Jaipur vs Idea Cellular Ltd in Income Tax Appeal No. 90/2018 dated 12/04/2018 had taken an identical view on the identical set of facts. Further we find that the Hon'ble Jurisdictional High Court in the case of CIT(TDS) Pune vs Vodafone Cellular Ltd (assessee's own case) in Income Tax Appeal Nos. 1152,1274, 1995, of 2017 & Income Tax Appeal Nos. 571, 1266 of 2018 dated 27/01/2020 had also taken an identical view in respect of identical issue. 2.8.6. The Id. DR before us placed heavy reliance on the decision of Hon'ble Supreme Court in the case of Union of India vs Association of Unified Telecom Service Providers of India and Others reported in (2020) 3 SCC 525 dated 24/10/2019 to drive home the point that the assessee had erred in accounting the discounted price of sales as its revenue when sim cards are sold to distributors. We have gone through the said decision and we find that the said decision was rendered in the context of determination of Annual Gross Revenue for the purpose of fixing the licence fee payable to Government by the telecom service providers. It further held that while reckoning the Gross Revenues, no deduction would be available such as discount, commission etc. First of all, we have already held that the assessee had not made any payment of discount to the distributors. In any case, we have already held that the entries in the books of accounts are not determinative of tax liability of an assessee by placing reliance on various decisions of Hon'ble Apex Court. Those decisions still rule the field as they were not overruled by the latest Supreme Court decision relied upon supra by the Id. DR. It is trite law that though the decision of Hon'ble Apex Court would be binding as per Article 141 of the Constitution of India, still the judgement of the Hon'ble Supreme Court should be understood from the issue raised before it. In our considered opinion, this decision has got absolutely nothing to do with the applicability of provisions of section 194H of the Act. Hence we hold that the reliance placed by the Id. DR on the said decision is grossly misplaced. 2.8.7. The Id. DR before us vehemently submitted that the orders of Hon'ble Rajasthan High Courts and Hon'ble Jurisdictional High Courts and Hon'ble Karnataka High Court had not attained finality as they had been appealed by the revenue, in our considered opinion, cannot be a deterrent for this Tribunal to follow those High Court orders. We find that the similarly worded distribution agreement had been subject matter of adjudication and examination by the Hon'ble Rajasthan High Court and Hon'ble Jurisdictional High Court wherein the Hon'ble High Courts had taken a categorical view that the relationship between assessee and distributor is only that of Principal to Principal. Hence this finding cannot be disturbed by this tribunal by respectfully following the judicial hierarchy. Infact no contrary materials on facts were even brought on record by the revenue before us to disturb the findings of Hon'ble High Courts. Hence we have no hesitation in holding that the relationship between assessee and distributor is only that of Principal to Principal and not that of Principal to. Agent and accordingly there is no obligation for the assessee to deduct tax at source in terms of section 194H of the Act. 2.8.8. In view of the aforesaid observations and findings given thereon, we do not deem it fit to adjudicate other arguments advanced by the Id. AR on the applicability of second provise to section 40(a)(ia) read with section 201 of the Act, as it would become academic in nature. This aspect of the issue is left open. 3.31. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that the sale of prepaid sim cards/recharge vouchers by the assessee to distributors cannot be treated as commission/discount to attract the provisions of section 194H of the Act and hence there cannot be any obligation on the part of the assessee to deduct tax at source thereon and consequentially there cannot be any disallowance u/s 40(a)(ia) of the Act. Accordingly, the Ground No. II raised by the assessee is allowed. The Ground No. I raised by the assessee is only supporting the Ground No. II for furnishing of additional evidences, the adjudication of which becomes academic in nature. Hence Ground No. I is also allowed." (Emphasis Supplied) 11.1 Facts being identical, following the above said decision of the coordinate bench in the case of M/s Vodafone Idea Ltd (As successor to Spice Communications Ltd), we hold that the assessee is not liable to deduct tax at source from the discount paid on prepaid sim card/recharge vouchers. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance made u/s 40(a)(ia) of the Act." 5.5 On perusal of above extract of the decision of the Co-ordinate Bench of the Tribunal it can be seen that the Tribunal had concluded that tax was not required to be withheld under Section 194H of the Act from the upfront discount offered to Pre-paid Distributors, and consequently, no disallowance could be made under Section 40(a) (la) of the Act for failure to deduct tax at source. The above decision of the Tribunal has been followed by the Co-ordinate Benches of the Tribunal while deciding identical Issue in favour of the Appellant in appeal preferred for the Assessment Years 2011-2012 & 2012-13 [ITA No.884/Mum/2016 & 2834/Mum/2017, common order dated 17/05/2024] and for the Assessment Year 2013-2014 [ITA No.6671/Mum/2017, dated 22/10/2024). 5.6 Both the sides agree that there is no change in facts and circumstances, therefore, respectfully following the above decisions of the Tribunal in the case of the Appellant, the disallowance of INR 68,19,45,415/- made under Section 40(a)(ia) of the Act in respect of the upfront discount extended to Pre-paid Distributors is deleted. Ground No. 2. to 2.4. raised by the Appellant are allowed.”
6. Respectfully following the finding of the Tribunal(supra), we setaside the finding of the Ld. CIT(A) on the issue-in-dispute and hold that tax was not required to be deducted u/s 194(H) of the Act, on the discount allowed to the prepaid distributors and consequently disallowance u/s. 40(a)(ia) of the Act is deleted. The ground No.1 of the appeal of the assessee is allowed.
7. Ground No. 2 of the appeal of the assessee relates to disallowance of depreciation on provision for Assets Restoration Cost (ARC) obligation. The facts in brief qua the issue-in-dispute are that the assessee was into the business of providing mobile telephonic service. The provision of such services interalia involves setting up of large number of transmission towers for providing sufficient network coverage in the licensed territory. During the course of aforesaid business, the assessee entered into lease agreement with various owners of premise for setting up of telecom towers on their premises. The lease agreements were entered for a long duration of time approximately in the range of 15-20 years. On the expiry of the lease period those telecom towers were to be removed from the said premises. According to the assessee, in such a scenario lease agreement cast an obligation on the assessee to restore the lease premises to their original form at the time of vacating those premises. Accordingly the assessee followed the accounting standard-29 (AS-29) and estimated ARC obligation cost to be incurred for leased and share network sites to restore them to the original condition to the end of the lease period. For the year under consideration the assessee made provision towards ARC obligation of Rs. 16.175 crores as appearing in the note no.10 of the audited financial statement for the year ended 31.03.2007. The relevant extract of such note is reproduced as under: “10. The Company recognizes its obligation for cell site restoration on termination of the related lease agreements in accordance with provisions of Accounting Standard-29-Provisions, Contingent Liabilities and Contingent Assets issued by the Institute of Chartered Accountants of India. Movement in the related provision is set out below: (Refer Schedule 9) Rs. In Million Asset Retirement Obligation As at 31.03.07 As at 31.03.06 Opening Balance 186.80 127.89 Addition during the period 161.75 58.91 Used during the period Nil Nil Closing Balance 348.55 186.80
According to the assessee said amount of provision was in effect directly attributable to the cost of the acquisition of the capital (i.e. telecom tower) and therefore it was treated as part of the cost of acquisition of the asset as it was done in the earlier years, and depreciation of Rs. 4,01,87,416/- was claimed for the year under consideration. It was contention of the assessee that ARC obligation cost was expenditure necessary to bring such asset into existence and put them in working condition and therefore depreciation claimed by the assessee should be allowed. Alternatively, the assessee claimed that ARC obligation cost should be allowed on proportionate basis over the period of the lease. The Ld.AO did not accept the contention of the assessee. According to him this was an unascertained liability as at the time of acquisition of the asset, it was not possible for anybody to say with certainty as to what will be the expenditure required to restore the asset to its original form at the time of vacating it. Thus, any allocation made in that regard at the time of acquisition of the assets was only in the nature of the provision for an unascertained liability, which was not allowable under the provisions of the Act. Accordingly, he disallowed the claim of the assessee for the depreciation. On further appeal Ld. CIT(A) following his own decision in the assessee case for the immediately succeeding year i.e. 2008-09 upheld the disallowance of depreciation claimed on ARC obligation. The alternative prayer of the assessee was also rejected with the same reasoning that said provision was unascertained liability and therefore not eligible for deduction u/s37(1) of the Act.
Before us the Ld. counsel for the assessee submitted that similar disallowances of depreciation on ARC obligation was made by the Assessing Officer in subsequent assessment year 2009-10 , which was challenged before the Tribunal but the Tribunal vide order dated 14.03.2018 reported in (2018 117 ITAT 430)(Delhi Tribunal) upheld the stand of the Assessing Officer and the Ld. dispute resolution panel (DRP) that depreciation was in the nature of unascertained liability. Further the Ld. counsel submitted that the appeal was filed by the assessee against the said order of the Tribunal before the Hon’ble Delhi High Court and Hon’ble Delhi High Court in its recent decision reported in the (2025) 172 taxman.com 378 (Delhi) has held that ARC is allowable as deduction u/s 37(1) of the Act. The finding of the Hon’ble Delhi High Court is reproduced as under: “34. One cannot possibly doubt the imperative requirement of civil works being undertaken on premises in order to erect cell towers. This would necessarily be liable to be removed upon the end of the license term in light of the contractual obligation which stands imposed upon the assessee. Since this would necessarily entail dismantling as well as restoration of the site to its original condition, the assessee appears to have estimated the cost likely to be incurred based on past experience and the inevitability or, to put it differently, the evident probability of such a cost being incurred. The contractual covenant cast a duty upon the assessee to remove the BTS equipment in such a manner that the aesthetics/structural design/architecture of the building is not disturbed. It was also placed under a positive obligation to restore the premises to its original state at its own cost/ The respondents, however, would contend that the aforesaid liability was contingent upon damage if any that may be caused. In our considered opinion, the view so taken is clearly untenable for the following reasons.
We are of the firm view that the usage of the phrase if any damage is caused' in the lease agreement cannot be construed as detracting from the right of the assessee to provision for a liability which flowed from an existing obligation and the occurrence of which was not liable to be viewed as an improbability. In our opinion, the phrase if any damage is caused' as it occurs in the agreement would only be germane to the issue of actual computation of the expenditure that would be incurred in the course of restoration. The qualificatory language as adopted in the agreement is thus liable to be viewed as merely being pertinent to identification of actual damage at the end of the lease term and the true or concrete expense to be incurred in repair and restoration. The said qualification would, in any case, have to be read in conjunction with the primary obligation to restore the premises to its original condition. The obligation to repair and restore forms the core of the contractual obligation which stood placed upon the assessee. It was therefore entitled to provision for such an expense provided it was considered probable and could be quantified on the basis of a reasonable estimation. The usage of the phrase if any damage is caused did not transform that obligation into a contingent liability. We thus find ourselves unable to countenance the view expressed by the Ld.AO and the Tribunal in this respect.
A provision can be validly made, provided it be in line with the prescriptions set out in AS-29. That accounting standard is not concerned with events of certainty or an ascertained liability as the AO and the Tribunal understood. In our considered view, the stand taken by the respondents firstly proceeds on the incorrect premise of the liability being one which already exists and in respect of which there cannot possibly be a doubt. It is while proceeding on this fundamental postulate which has led to the Tribunal seeking to discern the existence of an ascertained liability. This clearly rans contrary to the express language of AS 29 when it defines a liability to be one whose seulement is expected to result in an outflow. AS 29 while explaining when a provision may be justifiably made speaks of the probability of an outflow. The usage of the expression probable' is equated to more likely than not. Thus, it is the reasonable likelihood of the outflow as opposed to a remote or uncertain possibility which is deemed to be germane and relevant. It thus has to be viewed as distinct from unforeseen liabilities and obligations. As we view the contract term, we have no hesitation in recognising the same as being the manifestation of a positive commitment to repair and restore. The duty to repair and restore stands attached to the removal of equipment as well as the liability to restore the premises to its original condition. The contract thus constitutes the past event and which in turn creates an obligation in praesenti pertaining to a liability which is probable and ascertainable. Thus, the only facets which are left to conjecture are the exact timing and the amount of outflow that may occur.
A contingent liability on the other hand is concerned with a possible obligation and which may or may not arise since it would be dependent upon the occurrence or non-occurrence of an uncertain future event. These are liabilities which are neither considered probable nor can they be reasonably estimated. The obligation and outflow which is spoken of in connection with contingent liabilities are prefaced by the words possible, one or more uncertain future events' and where the occurrence or non-occurrence of those events is itself unclear and uncertain. A contingent liability is one where both the obligation as well as the occurrence of the event which would trigger the same are to be found in the realm of conjecture. It is the facet of such liabilities neither being probable, more likely not to occur and being immeasurable which distinguishes these liabilities from those in respect of which a provision may be legitimately made.
The provision as made thus, clearly appears to follow lines similar to the site restoration situation which the Madras High Court had an occasion to review in Vedanta Ltd. As was held by that High Court, the words laid out or expended are not confined to an immediate expenditure but would also comprehend an expenditure which may arise in the future. Their Lordships noted that the assessee in that case was placed under the contractual obligation to expend monies on site restoration and the creation of the provision itself being based on empirical principles. It thus held that all that Section 37(1) requires is that the expenditure should be "laid out" or "expended" for the purposes of business.
The Madras High Court also had an occasion to notice a whole body of precedent which had, while speaking of provisions for liabilities being made, clearly interpreted the words laid out or expended as including an expenditure likely to be incurred in the future. It was thus held that the provision so made, on the basis of and informed by commercial prudence would clearly qualify the prescriptions of Section 37.
We are thus of the considered opinion that the provisioning for ARC qualified the prescriptions of AS 29 and the assessee was thus justified in accounting for the same. The ARC obligation clearly met the test of a positive obligation flowing from a past event, being a conceivable probability as well as being measurable. In any event, both the AO as well as the Tribunal appear to have proceeded on the basis that only an ascertained liability could have been provisioned for. That view is not only erroneous but also unsustainable in law.
We are also of the view that the Tribunal in any case failed to notice or engage with the contention of the assessee in the alternative and which was based on Section 37 of the Act. By placing its case within the ambit of Section 37, the assessee stood relieved of getting into the quagmire of actual cost' and other related issues. All that it was left to establish was that the expenditure had been laid out. As the Madras High Court correctly explains in Vedanta, the usage of the expression laid out and expended' in Section 37 are indicative of that section not being confined to immediate expenditure but also factoring for situations where an amount may be set apart for a determined or specified objective. The appellant was thus clearly entitled to succeed on this point.” 10. On the contrary, Ld. DR submitted that assessing officer rejected the claim of the assessee of the depreciation as well as alternative claim u/s 37(1) on the ground of unascertained liability and therefore he did not examine the genuine computation of the quantum of the deduction and hence the matter might be restored back to the file of the assessing officer for deciding in the light of the decision of Hon’ble Delhi High Court.
We have heard rival submission of the parties and perused the relevant material on record. The issue in dispute is in respect of provision created by the assessee for the cost of the obligation for restoring the lease premises to their original position at the end of the lease period. The assessee has estimated such asset restoration expenses and debited in the books of account as provision. For the purpose of Income-tax purposes, the assessee, firstly, considered the same as part of the cost of the acquisition of the asset and claimed depreciation, but also alternatively prayed for considering those expenses allowable u/s 37(1) of the Act. The Revenue however is of the view that such expenses can’t be estimated with any accuracy at the time of taking the premises on lease. It is further submitted that quantum of the same also cannot be estimated in 15-20 years in advance. Ld. DR submitted that such expenditure can be allowed as revenue expenditure in the year of their actual incurred. However, we find that Hon’ble Delhi High Court (Supra) has already decided the issue and allowed relief to the assessee in respect of the alternative prayer. Since the quantum of claim of the assessee was not examined or verified by the assessing officer at the stage of the assessment proceeding, we feel it appropriate to restore the issue and dispute back to the file of the assessing officer with the direction for deciding in the light of the decision of Hon’ble Delhi High Court (supra) and also examine the depreciation already claimed by the assessee for deletion. The ground No.2 of the appeal of the assessee is accordingly allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced by way of display of result on notice board under Rule 34(4) of ITAT Rules, 1963 on 22/05/2025.