VODAFONE IDEA LTD.,MUMBAI vs. PR CIT -5, MUMBAI

Per Kuldip Singh, Judicial Member: Appellant Vodafone Idea Limited (hereinafter referred to as the ‘assessee’) by filing present appeal sought to set aside the impugned order passed by Pr. Commissioner of Income Tax (hereinafter referred to as PCIT) under section 263 of the Income Tax Act (for short the Act) by invoking the revisionary jurisdiction

2 ITA No.780/M/2021 M/s. Vodafone Idea Limited qua the assessment order dated 29.12.2017 framed by the Assessing

Officer (for short the AO) under section 143(3) of the Act on the

grounds inter-alia that:-

“1. Re.: Validity of Order u/s. 263:

1.1 On the facts and in the circumstances of the case and in law, the impugned Order dated 31 March 2021 passed under section 263 of the Income-tax Act 1961 is without jurisdiction, illegal, bad in law and void ab-initio.

Without prejudice to the above,

1.2 On the facts and circumstances of the case and in law, the Principal Commissioner of Income Tax (“PCIT”) has erred in passing the Order dated 31 March 2021 u/s. 263 of the Income-tax Act, 1961.

1.2.1 On the facts and circumstances of the case and in law, the PCIT has erred m holding that the Order dated 29 December 2017 passed by the Deputy Commissioner of Income Tax - 14(2)(1) (“DCIT”) u/s. 143(3) of the Income- tax Act, 1961 was erroneous and prejudicial to the interests of revenue and in thereby revising the same.

1.2.2. On the facts and circumstances of the case and in law, the Appellant submits that the Order passed by the Ld DCIT was neither erroneous nor prejudicial to the interest of the revenue and hence the revision of the same by the PCIT u/s. 263 of the Income-tax Act, 1961 is erroneous and bad in law.

1.2.3. The learned AO had not only made adequate inquires, but had also undertaken necessary verification basis the details/ documents sought from the Appellant during the course of assessment proceedings, and hence, the assessment order dated 29 December 2017 passed by learned AO is neither ‘erroneous’ nor ‘prejudicial’ to the interest of the revenue. Also, the Mumbai ITAT vide its order dated 6 December 2017 (ITA No. 360/Mum/2016) has quashed the proceedings u/s 263 of the Act in AY 2011-12 and held that the VIL has rightly claimed tax depreciation under section 32 of the Act on spectrum so acquired.

3 ITA No.780/M/2021 M/s. Vodafone Idea Limited 1.2.4 The learned PCIT passed the revisionary order on the issues not following binding judicial precedents (also submitted during the revisionary proceedings) leading to unwarranted litigation.

1.3 On the facts and circumstances of the case and in law, the Appellant prays that the impugned Order passed u/s. 263 of the Income-tax Act, 1961 by the PCIT is to be struck down.

Without prejudice to the aforesaid grounds:

2.1 On the facts and in circumstance of the case and in law, the learned PCIT has erred in concluding that the order passed by the learned AO, accepting the depreciation Claimed by the Appellant under section 32(1) of the Act on the right to use spectrum, is erroneous as well as prejudicial to the interest of the revenue and thereby, erred in directing the learned AO to amortize the spectrum acquired by the Appellant.

2.2 On the facts and circumstances of the case and in law, the Learned PCIT erred m directing the AO to disallow depreciation on Spectrum as claimed by the Appellant under section 32(1) of the Act and in further directing the AO to instead allow deduction under section 35ABB of the Act on the same on the ground that the spectrum was only an extension of the original license for operating telecom services and not a separate intangible asset.

The Appellant prays that it be held that on the facts and Circumstances, invoking section 263 for directing disallowance of depreciation on Spectrum cost and treating it as an extension of the original telecom license, is not in accordance with law and that disallowance of said depreciation is not called for.

2.3 On the facts and in circumstance of the case and in law, the Order of the PCIT directing the AO to reexamine the issue needs to be struck down.

The Appellant craves to add, alter, amend, substitute and/or modify in any manner whatsoever modify all or any of the foregoing grounds of appeal at or before the hearing of the appeal.”

4 ITA No.780/M/2021 M/s. Vodafone Idea Limited 2. Briefly stated facts necessary for adjudication of the

controversy at hand are that; assessee company is into the business

of providing cell phone and data services. In its books of accounts

assessee company amortized amount spent on acquiring 3G spectrum and claimed 1/20th of the expenditure for the year as fee

paid for spectrum. However, for the income tax purposes the

assessee company capitalized the item and claimed depreciation @

25% treating the spectrum as an ‘intangible asset’. The assessee

company by filing return of income for A.Y. 2015-16 declared total

income at Rs.4350,27,68,335/- by claiming depreciation to the tune

of Rs.1682.48 crores @ 25% on the spectrum fees paid by treating

it as ‘intangible asset’, which was allowed by the AO under section

32 of the Act.

jurisdiction called upon the assessee company by way of issuance

of notice under section 263 of the Act, as to why the spectrum fee

claimed as depreciation by the assessee company, should not have

been amortized on pro-rata basis over a period of license in force as

per provisions of section 35AB of the Act as the assessment order

is erroneous in so far as prejudicial to the interest of the Revenue.

raised by the assessee company the Ld. PCIT reached the

5 ITA No.780/M/2021 M/s. Vodafone Idea Limited conclusion that the AO has neither questioned nor examined nor

verified qua the issue of depreciation claim made by the assessee on

spectrum fee and as such depreciation claim allowed by the AO is

incorrect being not examined in accordance with provisions

contained under section 35ABB and thereby held the assessment

order framed under section 143(3) of the Act under consideration,

erroneous in so far as prejudicial to the interest of the Revenue.

under section 263 of the Act, the assessee company has come up

before the Tribunal by way of filing the present appeal.

parties to the appeal, perused the order passed by the Ld. Lower

Revenue Authorities in the light of the facts and circumstances of

the case and case law relied upon.

Rs.1682.48 crores @ 25% on the spectrum fees paid by treating it

as ‘intangible asset’ which was allowed by the AO under section 32

of the Act. It is also not in dispute that by exercising revisionary

jurisdiction under section 263 of the Act the Ld. PCIT sought to

amortize spectrum fee on pro-rata basis over the period of license

6 ITA No.780/M/2021 M/s. Vodafone Idea Limited under section 35AB of the Act and held the assessment order

erroneous insofar as prejudicial to the interest of the revenue.

the case two questions arise for determination are :-

“I. As to whether the assessment order passed by the AO under section 143(3) of the Act by allowing depreciation claimed by the assessee @ 25% on the spectrum fees under section 32 of the Act was erroneous in so far as prejudicial to the interest of the revenue as has been held by the Ld. PCIT?.

II. As to whether depreciation claim made by the assessee @ 25% on the spectrum fee is allowable under section 32 of the Act or it has to be amortized on pro-rata basis over the period of license in force under the provisions contained under section 35ABB of the Act?”

the Ld. A.R. for the assessee contended inter-alia that the

assessment order passed in this case is neither erroneous nor

prejudicial to the interest of the revenue nor it is a case of no

application of mind on the part of the AO; that AO has duly

thrashed the issue as to the allowability of depreciation @ 25% on

spectrum fees as claimed by the assessee company by raising

repeated queries and has taken the Bench to numerous

letters/questionnaire issued by the AO and reply filed thereto.

addressed by the Ld. A.R. for the assessee company, the Ld. D.R.

7 ITA No.780/M/2021 M/s. Vodafone Idea Limited for the Revenue contended inter-alia that the AO has failed to do

adequate enquiries rather accepted the claim of the assessee without

raising any specific question as to the use of spectrum as well as

qua the claim of depreciation on “spectrum fee” made by the

assessee; that in all the questionnaires the AO raised generic

queries which lead to the conclusion that no enquiry has been made

by the AO; that impugned order under section 263 of the Act has

been rightly passed by the Ld. PCIT under explanation 2 to section

263 of the Act as depreciation claim has been allowed without

making enquiry and relied upon the case cited as Malabar Industrial

Co. Ltd. vs. CIT (2000) 109 taxman 66 (SC).

page 76 of the paper book wherein detail qua claim of depreciation

on spectrum as made by the assessee company has been given

under the head “Background on claim of depreciation” on spectrum

fee by the assessee and assessment proceedings and drew our

attention towards financial statements – “Note 2d and 12-fixed

assets” and tax audit report. Thereafter, the Ld. A.R. has taken us

to page 79 wherein detail of depreciation claim on ‘intangible

assets’ amortized on straight-line method has been given. Then on

page 82 particulars of allowable depreciation in respect of the each

8 ITA No.780/M/2021 M/s. Vodafone Idea Limited block of assets has been given under the head ‘intangible asset’ by

the assessee company.

depreciation on “spectrum fees” and detail thereof the Ld. A.R. for

the assessee drew our attention towards page 84 of the paper book

which is a notice issued under section 142(1) read with section 129

of the Act by the AO wherein detail of addition to the fixed assets,

rate of depreciation claimed, proof of installation etc. is sought vide

question no.13 which is extracted for ready perusal as under:

“13. Details of addition to fixed assets and capital work in progress along with items purchased, date of purchase and its value, rate of depreciation claimed and proof of installation with copy of individual assets above Rs.2 lakh.

Name Opening Loans Loans Closing Amount Rate of & Balance taken repaid Balance of interest address during during interest of the the the paid person year year

Also submit confirmation of new loans taken during the year along with copy of bank statement and financial statement of the lender.”

27.10.2017 issued under section 142(1) of the Act by the AO

available at page 90 of the paper book, again AO called for copy of

agreement for purchase of bandwidth detail of upfront fees, detail

9 ITA No.780/M/2021 M/s. Vodafone Idea Limited of entry/license fee and spectrum with date from which obtained

and proof of putting the same to use, by putting pertinent question

as under:

“iv) Copy of agreement for purchase of bandwidth. Details of upfront fees and operation and maintenance charges paid for such acquisition. v) Details of entry / license fees and spectrum with date from which obtained and proof of put to use.”

reply/explanation to the queries raised by the AO during assessment

proceedings had written a letter dated 22 August, 2017 available at

page 95 giving complete details of addition made to the fixed assets

and sample invoices of fixed assets purchased as annexure II(A) and annexure II(B). Then again written letter dated 21st November

2017 available at page 97 wherein in para 1 the details of spectrum

capitalized is given as annexure I, examined by the tax auditor with

necessary calculation of depreciation claimed and certified by the

tax auditor as annexure II. Then again assessee company issued

letter dated 26.12.2017 available at page 99 wherein detail as to

bidding by the assessee company in various spectrum options

conducted by the department of telecommunication (DOT) in order

to acquire right to use spectrum is given.

10 ITA No.780/M/2021 M/s. Vodafone Idea Limited 15. Then Ld. A.R. for the assessee has taken us to the letter dated

5 April, 2017 issued to the AO giving complete detail of

depreciation on cost of right to use spectrum as under:

“2. Depreciation on cost of right to use Spectrum (“the Spectrum Cost”):

In respect of the Spectrum (being distinct from license) won by the Assessee in various auctions conducted by the DOT in past, the Assessee capitalizes the spectrum cost under the block “Intangible Assets” and claims depreciation u/s. 32 of the Act thereon at the applicable rate on being put to use.

That the Spectrum is distinct from the Telecom License fee paid to the DOT, is borne out by the New Telecom Policy 1999, Notice inviting Applications for allotment of spectrum, dated 28 September 2012 and 12 December 2013 as also the individual Letters of Allotment issued by DOT in respect of the respective service areas. Further, as per the foregoing Notice, the allottee, has an obligation to roll out mobile telephone services using the spectrum allotted. Hence, the spectrum is a “business or commercial right” with which the Assessee carries on its business of providing telecom services. The Assessee’s stand is based on the following decisions:

> Skyline Caterers (P.) Lid. (2008) (118 TTJ 344);

> Kotak Forex Brokerage Lid. (2009) (33 SOT 237); etc.

During the F.Y. 2014-15, the Assessee has capitalized Rs.52,059.69 million under the block of “Intangible Assets”, towards the Spectrum Cost in respect of 2G and 3G Spectrum, based on “put to use” test. Interest on Deferred payment liability taken to acquire this spectrum has been capitalised as actual cost till the date on which the spectrum was put to use.”

nature, the Ld. D.R. for the Revenue contended that no specific

question on depreciation of spectrum fee has been raised and has

11 ITA No.780/M/2021 M/s. Vodafone Idea Limited further contended that the suo-moto letter dated 5 April, 2017

containing information extracted in the preceding paras is of no

help to the assessee because no such information was ever called

for by the AO. We are of the considered view that when we

examine the queries raised by the AO by virtue of the numerous

notices issued under section 142(1) of the Act and replies filed

thereto by the assessee company discreet enquiry has been made by

the AO in order to determine the issue as to the allowability of

depreciation on “spectrum fee”.

company to the AO vide letter dated 5 April, 2017 available at page

111 to 117 providing detail qua depreciation on cost of right to use

spectrum as extracted in preceding para 13 is concerned, the

arguments addressed by the Ld. D.R. for the Revenue are

misconceived because information duly received by the AO during

the official course of assessment proceedings in continuation of

earlier communications, though submitted on its own by the

assessee, are deemed to be examined by the AO by applying his

mind.

17A. So far as the contention raised by the Ld. D.R. for the

Revenue that Ld. PCIT has passed the order by invoking

explanation 2 to section 263 of the Act is concerned, the Ld. A.R.

12 ITA No.780/M/2021 M/s. Vodafone Idea Limited for the assessee contended that unless explanation 2 to section 263

of the Act is used in the show cause notice under section 263 of the

Act the same cannot be invoked while passing the order under

section 263 of the Act and relied upon the decision rendered by the

Hon’ble Supreme Court in the case of Principal Commissioner of

Income Tax vs. Shreeji Prints (P.) Ltd. reported in (2021) 130

taxmann.com 294 (SC).

section 263 of the Act available at page 11 of the paper book shows

that explanation 2 to section 263 of the Act has not been used in

notice and as such the view taken by the Hon’ble High Court of

Gujarat having been upheld by the Hon’ble Supreme Court by

holding that “when the Ld. PCIT has not mentioned in the show

cause notice to invoke explanation 2 to section 263 of the Act the

same cannot be invoked while passing the order under section 263

of the Act” is squarely applicable to the contentions raised by the

Ld. A.R. for the assessee.

considered view that the AO has allowed the depreciation @ 25%

claimed by the assessee company on spectrum fees by treating the

same as ‘intangible assets’ under section 32 of the Act by making a

discreet enquiry and as such it is neither a case of non application

13 ITA No.780/M/2021 M/s. Vodafone Idea Limited of mind on the part of the AO nor a case of inadequate enquiry.

Hence, invoking revisionary jurisdiction by the Ld. PCIT under

section 263 of the Act is not sustainable in the eyes of law and the

question No.I framed in the preceding para is answered in favour of

the assessee, that the assessment order passed by the AO under

section 143(3) of the Act allowing depreciation claimed by the

assessee @ 25% on “spectrum fee” under section 32 of the Act was

not erroneous in so far as prejudicial to the interest of revenue.

preceding para that “As to whether depreciation claim made by

the assessee @ 25% on the spectrum fee is allowable on merits

under section 32 of the Act or it has to be amortized on pro-rata

basis over the period of license in force under the provisions

contained under section 35ABB of the Act as has been held by

the PCIT?” the Ld. A.R. for the assessee contended that this

issue has already been decided in favour of the assessee by

the co-ordinate Bench of the Tribunal in assessee’s own case

titled as Idea Cellular Ltd. vs. Principal Commissioner of Income

Tax-14, Mumbai vide order dated 06.12.2017 in ITA

No.360/M/2016 and as such the AO has legally and validly allowed

the depreciation on spectrum fee claimed by the assessee under

section 32 of the Act and section 35ABB is not applicable. This

14 ITA No.780/M/2021 M/s. Vodafone Idea Limited factual and legal position has not been controverted by the Ld. D.R.

for the Revenue nor by the Ld. PCIT while passing the order under

section 263 of the Act.

Ld. PCIT shows that the Ld. PCIT has himself admitted this fact

that on identical issue order passed under section 263 of the Act in

assessee’s own case for A.Y. 2011-12 has been set aside but he has

keept this issue alive on the pretext that the order passed by the

Tribunal is not accepted by the Department by returning following

findings:

“5.11 As regards, the legal objection to taking action against 263 and maintainability of this provision suffice to say that perusal of records and filing does not indicates any debate or discussion for considering Section 35ABB or Section 32 at all. It is thus, not the case that the AO has examined both the provisions and took a conscious decision after detailed enquiry, examination and verification of facts that it is not 35ABB but Section 32 which should be invoked and depreciation is to be allowed.

5.12 The submissions made before the AO only indicates what the assessee had to tell about various expenditures items he had claimed. It is interesting to note that the AO queried about amortization and apparently was satisfied that amortization was done. There is no question about depreciation claim nor any examination or verification. The AO thus apparently was not even alert to the difference between book treatment and income tax claim. Hence, to say that there was application of mind and conscious decision to not invoke 35ABB and allow depreciation is incorrect.

5.13 In assessee’s own case for A.Y 2011-12, order u/s 263 of the act was passed on the similar issue. The said order u/s 263 has been set aside by the Hon’ble ITAT. With due

15 ITA No.780/M/2021 M/s. Vodafone Idea Limited respect, since, the department is not in agreement with the decision of Hon'ble ITAT, further appeal has been filed before the Hon'ble Bombay High Court for A.Y 2011-12 on the same issue, which is still pending.

5.14 In the light of the above, the order made by the Assessing Officer accepting the depreciation claimed on spectrum is erroneous as well as prejudicial to the interest of revenue. The assessment order is therefore set-aside with a direction to amortize and consider appropriate expenditure on the cost incurred on spectrum.”

of the Tribunal available at page 14 to 41 of the paper book in

assessee’s own case for A.Y. 2011-12 on identical issues which

have been decided in favour of the assessee even on merits.

Operative findings thereof are extracted for ready perusal as under:

“19. Before us, the learned Counsel for the assessee relied on the decision of the Hon’ble Supreme Court for the proposition that license is an asset under Explanation 3(b) to section 32(1) of the Act and, thus, it is eligible for depreciation. He relied on CIT vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC), wherein Hon’ble Supreme Court has considered the issue of goodwill and held as under: -

“3. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 [`Act', for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: "Explanation 3.-- For the purposes of this subsection, the expressions `assets' and `block of assets' shall mean— [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." 4. Explanation 3 states that the expression `asset' shall mean an intangible asset, being knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly

16 ITA No.780/M/2021 M/s. Vodafone Idea Limited apply while interpreting the said expression which finds place in Explanation 3(b).

17 ITA No.780/M/2021 M/s. Vodafone Idea Limited view of the above, even the provisions of section 35ABB of the act are not applicable to such payment. In view of these facts, we are of the view that the assessee is entitled for claim of depreciation on merits also and AO has rightly allowed the claim while framing assessment under section 143(3) of the Act and the revision order of CIT Under section 263 of the Act is bad in law. Accordingly, we quash the revision order.”

spectrum fee as claimed by the assessee under section 32 of the Act

and the provisions contained under section 35ABB are not

applicable has already been decided in favour of the assessee by the

Tribunal, the order of the Tribunal cannot be allowed to be

disobeyed by Ld. PCIT merely on the pretext that the department

has not accepted the said decision and appeal has already been filed

before the Hon’ble High Court. In order to maintain judicial

discipline Ld. PCIT had no option but to follow the order.

Tribunal, we are of the considered view that even on merits the

assessee’s claim for depreciation on “spectrum fee” is allowable

under section 32 of the Act as the provisions contained under

section 35ABB of the Act being not applicable to the issue at hand.

Hence, the order passed by the AO is not erroneous. So we are of

the considered view that the AO has rightly allowed the claim by

virtue of the assessment order framed under section 143 of the Act.

So the question No.II framed is also decided in favour of the

assessee and against the Revenue.

18 ITA No.780/M/2021 M/s. Vodafone Idea Limited

considered view that impugned order passed by the Ld. PCIT under

section 263 of the Act by invoking revisionary jurisdiction is not

sustainable in the eyes of law, hence hereby quashed. Resultantly, appeal filed by the assessee is allowed.

Order pronounced in the open court on 28.01.2022.

Sd/- Sd/- (AMARJIT SINGH) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 28.01.2022. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench

//True Copy//

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.