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Income Tax Appellate Tribunal, CUTTACK BENCH CUTTACK
Before: SHRI N.S.SAINI, AM & SHRI PAVAN KUMAR GADALE, JM
आयकर अपील�य अ�धकरण, कटक �यायपीठ,कटक IN THE INCOME TAX APPELLATE TRIBUNAL CUTTACK BENCH CUTTACK BEFORE SHRI N.S.SAINI, AM & SHRI PAVAN KUMAR GADALE, JM आयकर अपील सं./ITA No.285/CTK/2016 (�नधा�रण वष� / Assessment Year :2010-2011) M/S VODAFONE MOBILE Vs. ACIT, Circle-2(2), SERVICES LIMITED, Bhubaneswar (formerly known as Vodafone Spacetel Limited which now stands amalgamated with Vodafone Mobile services Limited), Registered Office, C-48, Okhla Industrial Area Phase-II, New Delhi �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AABCE 2207 R (अपीलाथ� /Appellant) (��यथ� / Respondent) .. AND आयकर अपील सं./ITA No.286/CTK/2016 (�नधा�रण वष� / Assessment Year :2010-2011) ACIT, Circle-1(2), Vs. M/s Vodafone Spacetel Ltd. 2nd Bhubaneswar Moudle-2A, Floor, Chandrasekharpur, Bhubaneswar-751023 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AABCE 2207 R (अपीलाथ� /Appellant) (��यथ� / Respondent) .. �नधा�रती क� ओर से /Assessee by : Shri Sparsh Bhargava, AR राज�व क� ओर से /Revenue by : Shri A.K.Mohapatra, CITDR सुनवाई क� तार�ख / Date of Hearing : 29/08/2018 घोषणा क� तार�ख/Date of Pronouncement 31/08/2018 आदेश / O R D E R Per Shri Pavan Kumar Gadale, JM: These are the cross appeals filed by the assessee and Revenue against the order of CIT(A)-1, Bhubaneswar, dated 26.04.2016 passed in I.T.Appeal No.0287/15-16 for the assessment year 2010-2011.
2 ITA No.285&286/CTK/2016 2. Since issues in both the appeals are common, therefore, they are
heard together and disposed off by this consolidated order. For the sake
of convenience we shall take up assessee’s appeal in ITA
No.285/CTK/2016 and the grounds and facts mentioned therein. The
assessee has raised the following grounds of appeal :-
On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - 1 ['CIT(A)'] has erred in passing the order under section ('u/s') 250 of the Income Tax Act, 1961 ('Act'), partly confirming the adjustments made by the learned Assistant Commissioner of Income Tax, Circle-2(2), Bhubaneswar ('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.
Ground No. 1 - Disallowance of provision for Long Term Incentive Plan ('LTIP') Payments 1.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding disallowance of INR 4,43,00,000, being amount payable to employees under the LTIP scheme by holding that provision created purely on an estimate basis is not allowable under the Act. 1.2 Without prejudice to ground 1.1 above and in the alternative, on the facts and circumstances of the case and in law, since payment for the above amount was made in the subsequent year (which has also been acknowledged by the learned AO in the impugned assessment order), the learned ClT(A)/AO has erred in not holding that deduction for the above amount should be allowed in the subsequent year. 2 Ground No. 2 - Non-grant of credit in respect of Tax Deducted at Source ('TDS') and advance tax paid. 2.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not issuing a specific direction to the learned AO to allow TDS and advance tax credit of INR 15,70,35,470 and 1NR 36,83,800, respectively claimed by the Appellant, instead he has directed the learned AO to conduct a verification to allow such credit. The Appellant has filed an appeal effect application before the learned AO requesting him to verify and grant TDS and advance tax credits pursuant to the directions of the learned CIT(A) and the
3 ITA No.285&286/CTK/2016 aforesaid ground shall not be pressed where the claim is allowed by the learned AO. The Appellant craves leave to add, alter, amend or withdraw any of the above grounds at or before the hearing of the appeal. 3. Brief facts of the case are that the assessee is engaged in providing
Cellular Mobile Telephony services in “Orissa, Assam, North East, Bihar,
Jharkhand, Jammu & Kashmir, Madhya Pradesh and Himachal Pradesh
Circles. The company commenced its business during the F/Y 2008-09
and incurred substantial losses during the first year of its operation. Since
the company had a Mumbai based Permanent Account Number(PAN),
the tax jurisdiction was electronically linked with the office of the Assistant
Commissioner of income tax, Mumbai, even though the Company does
not have any office/place of business in Mumbai. Resultantly, scrutiny
notices were concurrently being issued both by the Mumbai Income Tax
Office & Bhubaneswar Income Tax Office, being the Income Tax Office
exercising jurisdiction on the basis the location of the principal place of
business of the Company. Accordingly, the assessee filed return of
income for the assessment year 2010-11 electronically on 12.10.2010
declaring total loss of Rs.16,07,84,47,011/-. Subsequently, the case was
selected for scrutiny under CASS and notice u/s.143(2) of the Act was
issued to the assessee. In compliance of the same, ld. AR appeared
before the AO, furnished the details and case was discussed. Thereafter
the AO completed the assessment assessing total loss of
Rs.1587,88,45,163/- and passed order u/s.143(3) of the Act, dated
4 ITA No.285&286/CTK/2016 30.03.2014 making disallowance on account of penalty imposed by DoT,
provision for LTIP and proportionate interest debited to P&L A/c.
Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A). In the appellate proceedings ld. AR reiterated the
submissions made before the AO and the CIT(A) after considering the findings of the AO and submission of the assessee, confirmed the
addition made on account of provision for LTIP and deleted the additions made on account of penalty imposed by DoT and proportionate interest
debited to P&L Account and partly allowed the appeal of the assessee.
Aggrieved by the confirmation of addition made on account of
provision for LTIP by the CIT(A), the assessee has filed an appeal before
the Tribunal, whereas against the deletion of addition by the CIT(A) made
on account penalty imposed by DoT and proportionate interest debited to
P&L Account, the Revenue is in appeal before the Tribunal.
In respect of the appeal of the assessee i.e. ITA No.285/CTK/2018,
the ld. AR of the assessee argued on the ground No.1with regard to
disallowance of provision for Long Term Incentive Plan (LTIP) payments
and submitted that the CIT(A) has erred in confirming the disallowance of
payments made to employees under the LTIP scheme by holding that
provision created purely on an estimate basis which is not allowable
under the Act. Ld. AR in the course of hearing proceedings further
submitted that provision which was created w.e.f. 01.07.2007 and based on the management estimate and the company has provided Rs.44.3 million towards this plan as on 31st March, 2010 and the incentives paid
5 ITA No.285&286/CTK/2016 by the assessee company in the month of July, 2010 being
Rs.51,661,497/- more than the provision made in the assessment year
2010-2011. Ld. AR submitted copy of the ledger account evidence and the details of provisions and payment to employees and prayed for
allowing the appeal of the assessee. 7. Contra, ld. DR objected to the submissions that these facts were
never brought to the knowledge of the AO in the course of assessment proceedings and now the assessee for the first time filed before the
Tribunal the copy of ledger account including bank statements and also
reversal of payments made in July, 2010 along with employees details
which were not furnished before the AO in the assessment proceedings
and prayed for dismissal of the appeal of the assessee.
We have heard rival submissions and perused the material on
record. The sole disputed issue argued by the ld. AR of the assessee is in
respect of disallowance of provision for long term incentive plan
payments. Ld. AR further emphasized that the provision is made as on
31.03.2010 and the payments were made in subsequent years which is
more than the provision. The ld. AR has substantiated his arguments with
filing the documents with annexures explaining the details of the
provisions in various places, details of subsequent payments in respect of
LTIP and the bank statements reflecting these payments. In the course of
hearing a query was raised by the Bench to the ld. AR whether these details were provided before the AO in the assessment proceedings. The
explanations of ld. AR are vague and not satisfactory. Whereas ld. DR on
6 ITA No.285&286/CTK/2016 the other hand submitted that the income tax department is deprived to
verify and examine these documents and to form an opinion on the
disputed issue. We find strength in the arguments of ld. DR as these documents are filed for the first time before the Tribunal as envisaged by
ld AR. Therefore, we in the interest of substantial justice, are of the opinion that this disputed issue shall be restored to the file of AO along
with the documents where the AO shall verify and examine and adjudicate the issue. Further the assessee is required to cooperate in submitting the
details and appear before the assessing authority for early disposal of the
case. Accordingly, this issue is remitted to the file of AO for proper
adjudication and this ground of assessee’s appeal is allowed for statistical
purposes.
In regard to ground No.2, though the assessee has raised the
ground in respect of non-grant of credit of TDS, we found that the CIT(A)
having dealt on this issue has directed to AO to consider the assessee’s
claim for grant of TDS credit after due verification as per provisions of law.
Therefore, we are of the opinion that the directions of the CIT(A) are
acceptable and we uphold the same and dismiss this ground of appeal of
the assessee.
Thus, the appeal of the assessee is partly allowed for statistical
purposes.
Now, we shall take up appeal of the Revenue in ITA No.286/CTK/2016, wherein the Revenue has raised the following grounds
of appeal :-
7 ITA No.285&286/CTK/2016 1 On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in law as well as in facts in deleting the addition of Rs.46,00,025/- made by the AO on account of penalty paid to Department of Telecommunication(DoT). 2 On the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in law as well as in facts in deleting the addition of Rs. 15,07,01,823/- made by the AO on account of interest debited to the P& L Account on a proportionate basis. 3 On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in not accepting the examination of findings made by the AO on the issues. 4. The appellant craves to alter, amend or add any other ground that may be considered necessary in course of the appeal proceeding. 12. Ld. DR on the ground No.1 argued that the CIT(A) has erred in
deleting the addition made by the AO, where the assessee has paid
penalty to the Department of Telecommunications. Ld. DR further
emphasised that this penalty cannot be claimed as deductable expense
and prayed for allowing the appeal.
On the other hand, ld. AR relied on the order of CIT(A) and filed
judicial decisions of assessee’s sister concern in respect of the claim.
We have heard rival submissions and perused the material on
record. The sole crux of the disputed issue being penalty paid to the
Department of Telecommunication (DoT), we found that the ld. CIT(A) in
the course of appellate proceedings at page 10 in para 3.2 has dealt on
the disputed issue relying on the decision of the Tribunal and observed as
under :-
“3.2 I have considered the facts of the case carefully. Explanation-1 below section 37 of the Act provides as under:
"For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business
8 ITA No.285&286/CTK/2016 or profession and no deduction or allowance shall be made in respect of such expenditure."
From the facts of the case narrated in detail by the assessee in its written submission, it is clear that the penalty paid to DoT was not an expenditure for any purpose which is an offence or which is prohibited by law. The penalty was imposed by the DoT for violation of contractual obligation required to be fulfilled by the assessee in accordance with the terms of the license agreement entered by the assessee with DoT. The non-compliance with the terms of the license was on account of commercial expediency and.was directly linked with the business of the assessee. I also find that the Hon'ble ITAT, Kolkata Bench in their order dt.15.9.2015 in the case of Vodafone East Ltd. in ITA Nos.l864/Kol/2012, 243/343/Kol/2014 have held that penalty paid to DoT for breach of contractual obligation is allowable as a, deduction u/s.37 of the Act. The relevant portion of this order of the Hon'ble ITAT is reproduced below: "10.5. We have heard the rival submissions and perused the materials available on record. We find that the penalty is paid to DOT for non-maintenance of personal information of the subscribers which would ensure verification of the. same in time of need. To this extent, the assessee had committed a breach of contractual obligation of the terms and conditions of the license agreement entered into with the DOT. We find that the amount paid is towards damages for breach of contractual obligation and are part and parcel of the business of the assessee and hence, should be regarded as an expenditure laid out wholly and exclusively for the purpose of business of the assessee. We find lot of force in the arguments of the Learned AR that merely the fact that penalty has been paid as a result of breach of a contract with the Government or any of its department should not change the character of such payments from contractual liability to a statutory liability. The penalty is not stipulated under any of the statutory Acts and accordingly the same cannot be construed as a statutory liability. At best it could only be construed as a contractual liability.
10.6. We find that the penalty paid to DOT is only for non- compliance of terms and conditions of the license agreement and not paid for infraction of any other law so as to warrant the Explanation to section 37(1) of the Act.' "
I also find that the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Syndicate Bank relied on by the AO to make the disallowance is not at all applicable to the case of the assessee. In that case, penalty was levied u/s.24 of Banking Regulation Act, 1949 which is a statute/law passed by the Parliament of India, and therefore, was disallowable as per Explanation-1 below section 37 of the Act. In assessee's case, penalty has been imposed not for infraction of any law but for violation of the terms of the license
9 ITA No.285&286/CTK/2016 agreement entered by the assessee with DoT. As such the penalty paid to DoT was allowable as business expenditure u/s.37. In view of this, the disallowance of Rs.46,00,025/- is deleted. 15. Ld. AR submitted that this disputed issue was considered by the
Delhi Bench of the Tribunal in the case of Vodafone Essar Digilink Ltd.,
[2018] 92 taxmann.com 234 (Delhi-Trib), wherein the Tribunal at para 43
to 45 has held as under :-
The next ground is against the disallowance of penalty paid to Department of Telecommunications (DoT) amounting to Rs. 63,83,000/-. 44. Succinctly, the facts of this ground are that the assessee paid a sum of Rs. 63,83,000/- to DoT as penalty for non-compliance. The AO observed that the penalties were levied on account of anomalies and irregularities in the Customer Identification Form (CIF) and Customer Acquisition Form (CAF). Such amount was considered as hit by Explanation 1 to section 37(1) as in the opinion of the AO, it was an expenditure incurred for a purpose which is an offence or prohibited by law. No relief was allowed by the DRP which resulted into an addition of Rs. 63.83 lac by the AO in the impugned order. The assessee has assailed this addition before the Tribunal. 45. We have heard both the sides and perused the relevant material on record. The AO has correctly recorded that penalty of Rs. 63.83 lac was paid by the assessee on account of anomalies and irregularities in CIF and CAF. For giving a hue of penalty to such an amount as magnetized under Explanation 1 to section 37(1) of the Act, the AO referred to the provisions of section7(3) and section 20 of the Indian Telegraphs Act, 1885. We have gone through the relevant provisions of the Indian Telegraphs Act, 1885 and find that anomalies and irregularities in CIF and CAF are not covered under any of the specific provisions of the Indian Telegraphs Act. Rather, such penalties were imposed for non- compliance with the contractual obligations under the Licence agreement. As the payment by the assessee is not for an offence, nor is it prohibited by law, the same being failure to comply with the contractual obligations, cannot fall within the domain of Explanation 1 to section 37(1) of the Act. Similar issue came up for consideration before the Kolkata Bench of the Tribunal in the case of Vodafone East Ltd. (supra). The Tribunal has held in para 10.5 of its order that the amount paid under similar circumstances cannot be disallowed under Explanation 1 to section 37(1) of the Act. No contrary decision has been brought to our notice by the ld. DR. Respectfully following the precedent, we hold that the addition of Rs. 63.83 lac has been wrongly made and the same is directed to be deleted.
10 ITA No.285&286/CTK/2016 16. Ld.DR could not bring any new cogent material facts to controvert
the findings of the CIT(A) and we find the issue is squarely covered in
favour of the assessee as per the above judicial decisions. Accordingly,
we follow the judicial precedence and uphold the findings of the CIT(A)
and dismiss this ground of appeal of Revenue.
In regard to ground No.2, ld. DR submitted that the CIT(A) is not
justified in deleting the addition of Rs.15,07,01,823/- made by the AO in
the respect of interest debited to the profit and loss account on a
proportionate basis. Ld.DR relied on the order of AO at page 3 in para 3
as under :-
Disallowance of proportionate interest debited to P &LA/c On perusal of P & L Nc it is seen that interest to the tune of Rs. 123.75 crore has been debited. Further, the balance sheet reveals existence of advances to the tune of Rs.224.42 crores paid to others and Rs.38.13 crores as security deposits. The assessee was requested to explain why proportionate interest on the loans debited should not be disallowed in the light of existence of advances paid as the neutralizing effect of advances over the loans could (/We avoided the debit of interest and consequently deflated amount of profit. In response it has been contended that advances recoverable consists of trade advances. Business expediency was also held attributable to such advances. The contentions of the assessee have been carefully considered. Necessary verification made in this regard. The break-up of the advances of Rs.224.42 crores has been furnished and examined. While there appears to be reasonable ground for advances made to staff and employees, input VAT receivable & Insurance claim & business exigencies of prepaid rent office, those in respect of trade receivables from the group companies towards services, prepaid expenses towards repair and maintenance and advance account in respect of operating expenses do not justify the claim of business expediency. It is seen that much promptness has been shown in incurring prepaid expenses and operating expenses, the trade receivables from group companies have been left unrecovered without any justification. In the light of the above, the trade receivables from the group companies towards services, prepaid expenses towards repair and maintenance and advance account in respect of operating expenses totaling Rs.125,58,48,522/- could have reduced the burden of loans upon the assessee and hence the
11 ITA No.285&286/CTK/2016 interest liability. Accordingly, the proportionate interest on the same amounting Rs.15,07,01,823/- in the light of the above discussion is disallowed and added to the income of the assessee. Addition : Rs.15,07,01,823/- 18. Ld. DR further emphasized that the CIT(A) on this issue has
observed as under :-
“5.2 I have considered the matter carefully. The AO has made the addition by disallowing proportionate interest calculated on the basis of trade receivables from group companies and prepaid expenses of Rs.125,00,00,000/-. The reason given by him, as it appears from the assessment order though not expressed in so many words, is that, had the assessee shown promptness in recovering the trade receivables and not incurred prepaid expenses, it would have taken less loan and would have incurred less interest of Rs.15,07,01,823/-. The very basis of I disallowance is misplaced and questionable. It is not that the AO has found any diversion of borrowed funds for which proportionate interest can be valid disallowed. It is also not the case of the AO that either the loan was not genuine or that the interest expenditure was not actually incurred. In my opinion, the AO cannot legally disallow proportionate interest calculated on the trade receivables and prepaid expenses for the reasons mentioned in the assessment order. Accordingly, the disallowance of Rs.15,07,01,823/- which appears to have been made entirely on misconception of the AO and according to his whims and caprices cannot be sustained in the eye of law. Hence, the disallowance of Rs,15,07,01,823/- is deleted.” 19. Ld. DR submitted that the above observations of the CIT(A) cannot
be accepted and the reasons envisaged are without any supporting
basis/evidence and also remand report on the submission of the
assessee from the Assessing Officer has not been called for by the CIT(A)
before deleting the addition and the AO has rightly observed that there is
diversion of borrowed funds and proportionate interest can be disallowed,
whereas the ld. AR relied on the order of CIT(A).
When the query was raised to the ld. AR whether such
disallowance was made by the AO in earlier years or any scrutiny order
was passed, the ld. AR could not substantiate with any evidence. We
12 ITA No.285&286/CTK/2016 found this issue needs to be re-examined and verified by the AO on material submitted by the assessee. Accordingly, in the interest of substantial justice, we remit this issue to the file of AO to adjudicate afresh and the assessee shall cooperate in submitting the details and accordingly this ground of Revenue’s appeal is allowed for statistical purposes. 21. Thus, appeal of Revenue is partly allowed for statistical purposes. 22. In the result, appeal of the assessee i.e.ITA No.285/CTK/2016 and appeal of the Revenue in ITA No.286/CTK/2016 are partly allowed for statistical purposes. Order pronounced in the open court on this 31/08/ 2018. Sd/- Sd/- (N.S.SAINI) (PAVAN KUMAR GADALE) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER कटक Cuttack; �दनांक Dated 31/08/2018 �.कु.�म/PKM, Senior Private Secretary आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant- 1. ��यथ� / The Respondent- 2. आयकर आयु�त(अपील) / The CIT(A), 3. आयकर आयु�त / CIT 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कटक / DR, ITAT, Cuttack 5. आदेशानुसार/ BY ORDER, गाड� फाईल / Guard file. 6. स�या�पत ��त //True Copy// (Senior Private Secretary) आयकर अपील�य अ�धकरण, कटक / ITAT, Cuttack