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Income Tax Appellate Tribunal, DELHI ‘C’ BENCH,
Before: MS. SUSHMA CHOWLASHRI N.K. BILLAIYA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the assessee is preferred against the order of the Commissioner of Income Tax [Appeals] – 18, New Delhi dated 24.03.2017 pertaining to assessment year 2011-12.
The grievances of the assessee read as under:
“That the Ld. Commissioner of Income-tax (Appeals) erred on facts and in law in confirming a further disallowance of Rs.25,09,817/- made by the assessing officer under section 14A of the Income-tax Act, 1961 (“the Act”) read with Rule 8L}(2)(iu) of the Income-tax Rules, 1962 (“the Rules”) without recording any disagreement with the disallowance worked out by the appellant, duly agreed by its Auditors.
1.1 That in the facts and circumstances of the case the ld. CIT(A) erred in law in upholding / the disallowance made by the AO under section 14A of the Income-tax Act, 1961 (“the Act”) read with Rule 8DC2Xiii) of the Income-tax Rules, 1962 (“the Rules”) even in relation to the strategic investments into subsidiaries made by the appellant company for the purpose of exercising control and not for the purpose of earning any tax-free dividend income
2. That the Id. Commissioner of Income-tax (Appeals) erred on facts and in law in failing to adjudicate the ground which the appellant had raised against the disallowance of an amount of Rs. 3,29,84,635/- on account of License fee.
2.1 A That in the facts and circumstances of the case the ld. CIT(A) erred in not deleting the disallowance of Rs. 3,29,84,635/- made by the AO on account of License fee even though theissue has already been adjudicated by the ITAT in appellant’s favour in own case for Assessment Year 2007-08.
2. That the Id. Commissioner of Income-tax (Appeals) erred on facts and in law in upholding an addition of Rs. 12,40,180 made by the assessing officer on account of credit of tax deducted at source (“TDS”) related to the revenue which the appellant had deferred in the books of account, without appreciating that it was only a case of timing difference and no loss to the Revenue arose on account of said approach followed by the appellant.”
Facts relating to Ground No. 1 are that during the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee company has made an investment to the tune of Rs. 2,79,74,27,002/- in the shares of mutual funds for earning dividend income. The Assessing Officer further noticed that the assessee has earned dividend income of Rs. 1,65,69,728/- from these investments.
The Assessing Officer was of the firm belief that the provisions of section 14A of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] r.w.r 8D of the Income Tax Rules squarely apply on the facts of the case and proceeded to compute the disallowance u/s 14A r.w.r 8D as under:
Expending to be aggregate of the following: Nil/- Nil/- i) The amount of expenditure directly relating to income which does not form part of total income.
Nil /- ii) In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely AxB/C Where: Rs. Nil/- A- Amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the Rs. 54,94,39,000/- previous year ; B- The average of value of investment, Rs. 3,75,67,32,448/- income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; iii) An amount equal to one-half per cent = 0.5% of of the average of the value of investment, 54,94,39,000/- income from which does not or shall not = Rs. 27,47,195/- Rs 27,47,195/- form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. Disallowance Rs. 24,70,095/-
Disallowance already Rs. 2,37,378/- made by the assessee
Total Disallowance Rs. 25,09,817/- Addition of Rs. 25,09,817/- was accordingly made.
Before the ld. CIT(A), the assessee strongly contended that the Assessing Officer has not recorded requisite satisfaction before resorting to the disallowance and placed reliance on various judicial decisions. It was also contended before the ld. CIT(A) that there has been no expenditure which has been incurred for the purpose of earning tax free dividend and expenses are incurred in the course of normal business only.
After considering the facts and submissions, the ld. CIT(A) observed that the Assessing Officer has computed the disallowance and has drawn his satisfaction before invoking provisions. The ld. CIT(A) further observed that satisfaction can also be derived by the ld. CIT(A) and considering the fact that huge investments have been made and dividend income earned thereon, it could hardly be said that no expenditure has been incurred in the process.
The ld. CIT(A) found that in Assessment Year 2011-12, disallowances were made under similar situation and drawing support from the findings of his predecessor, upheld the disallowance made by the Assessing Officer.
Before us, the ld. counsel for the assessee for the first time took the plea that formula envisaged in Rule 8D cannot be applied on the facts of the case in hand since there is no opening balance of investment nor there is any closing balance of any investment. It is the say of the ld. counsel for the assessee that it is impossible to determine the average value of investment and hence disallowance computed by the Assessing Officer has to be deleted.
We have given thoughtful consideration to the orders of the authorities below. The balance sheet of the assessee company is placed at pages 4 to 12 of the paper book. We find that the mutual funds, which are the subject matter of computation of disallowance, are neither in the opening balance nor in the closing balance. This means that the mutual funds have been purchased and sold during the year itself. u/r 8D, the average of value of investment income from which does not form part of total income as appearing in the balance sheet of the assessee on the 1st day and last day of previous year have been mentioned. Since the average value of investment appearing in the balance sheet on the 1st day and last day is NIL, we are in agreement with the contention of the ld. counsel for the assessee that it is impossible to compute the disallowance either in Rule 8D(ii) or 8D(iii). On peculiar facts of the case in hand, we direct the Assessing Officer to delete the disallowance of Rs. 25,09,817/-
Facts relating to Ground No. 2 are that the Assessing Officer noticed that the assessee has debited in the profit and loss account Rs. 5,23,02,128/- being licence fee paid to Government of India department of Telecommunication in consideration for grant of licence to operate and provide services. The Assessing Officer was of the opinion that the expenses incurred on license fee are capital expenditure as per Section 35ABB of the Act. The assessee was asked to explain why licence fee should not be treated as capital expenditure.
In its letter dated 09.02.2015, the assessee submitted that as per the terms of licence agreement with Department of Telecommunication in terms of migration to Revenue Sharing Scheme under National Telecommunication Policy 1999 w.e.f. 01.08.1999, the assessee company was paying licence fee at specified percentage on gross revenue derived by the assessee. It was explained that under the new Revenue sharing regime w.e.f 01.08.1999, licence fee was a direct function of the Revenue and licence fees was correctly claimed as revenue expenditure.
This submission of the assessee did not find any favour with the Assessing Officer who was of the opinion that the licence fee debited in the profit and loss account has to be amortized over the remaining life of licence for the licence to expire. Invoking the provisions of section 35ABB, the Assessing Officer allowed 1/5th of the claim amounting to Rs. 1,04,60,425/- and disallowed Rs. 3,29,84,635/-.
The assessee agitated this issue before the ld. CIT(A) vide Ground Nos. 3 to 3.2 of the grounds of appeal. But, while adjudicating this ground, decided some other issue and the grievance of the assessee remained unadjudicated.
13. Before us, the ld. counsel for the assessee drew our attention to the relevant pages of the order of the first appellate authority and how the ground remained unadjudicated.
14. To this, the ld. DR stated that the issue may be restored to the file of the ld. CIT(A) for adjudication.
15. We find that while making additions, the Assessing Officer himself has observed that similar disallowance was deleted by the Tribunal in Assessment Year 2007-08. Since the Revenue is in the process of filing appeal before the Hon'ble High Court the additions have been made. We are of the considered opinion that since the impugned issue is covered by the decision of the coordinate bench in assessee’s own case for Assessment Year 2007-08 and 5106/DEL/2013, there is no need to burden the first appellate authority on a decided issue. It is not the case of the Revenue that the Hon'ble High Court has stayed the operation of the order of the coordinate bench [supra]. Relevant findings of the coordinate bench read as under:
“30. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the issue under consideration is squarely covered by the judgment of the Hon'ble Jurisdictional High Court in the case of CIT Vs Bharti Hexacom Ltd. 221 Taxman 323 (Del) (supra), wherein it has been held as under:
"The licence fee was imposed and payable under the Indian Telegraph Act and other statutory provisions and was/is mandatory. Failure to pay the same would/will result in discontinuance or stoppage of business operations.
Under 1999 policy, the amount payable speaks of sharing of gross revenue earned by the service provider from the customers. 1994 agreement as noticed did have a provision for sharing but with minimum payment stipulation. In case of non- payment of licence fee, the licence could be revoked and licencee was not permitted to carry on and continue cellular telephone service.
HCL Comnet Systems & Services Ltd.
Thus, the licence fee payable was/is equally with the objective and purpose to maintain and operate cellular telephone services.
It was also an operating expense and non-payment can lead to cancellation as one of the consequences. Endurement requires current expenses and is subject to payment on revenue share. It will not be correct to hold or propound that entire payment during the term of licence, is deferred capital payment. This was/is not the intent under the 1994 agreement or 1999 policy. The intent is to also share the .gross earning to maintain and operate the licence.
The licence fee as such is similar to both prospecting fee, acquisition of right to lease as well as leases which enabled removal of sand/tendu leaves, etc. as nothing has to be won over, or extracted. Part payment was towards an initial investment which an assessee had to make to establish the business. It was a precondition to setting up of business. It has element and includes payment made to acquire the 'asset' i.e. the right to establish cellular telephone service. But the licence permits and allows the assessee to maintain, operate and continue business activities. Payment of licence fee has certain ingredients and is like lease rent which is payable from time to time to be able to use the licence.
The licence acquired was initially for 10 years and the term was extended under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset.
The payment of yearly licence fee on revenue sharing basis was for carrying on business as cellular telephone operator and, thus it was a normal business expense.
HCL Comnet Systems & Services Ltd.
Read in this manner, the licence granted by the Government/authority to the assessee would be a capital asset, yet at the same time, the assessee has to make payment on yearly basis on the gross revenue to continue, to be able to operate and run the business, it would also be revenue in nature.
Failure to make stipulated revenue sharing payment on yearly basis would result in forfeiting the. right to operate and in turn deny the assessee, right to do business with the aid of the capital asset. Non-payment will prevent and bar an assessee from providing services.
In aforesaid circumstances, it would be appropriate and proper to apportion the licence fee as partly revenue and partly capital.
The next obvious question is, on what basis apportionment should be done and what could be the proportion of apportionment between capital and revenue expenditure. In this regard it would be appropriate and proper to divide the licence fee into two periods i.e. before and after 31-7-1999. The licence fee paid or payable for the period up to.31-7-1999 i.e. the date set out in the 1999 policy should be treated as capital and the balance amount payable on or after the said date should be treated as revenue.
The aforesaid apportionment is necessary because licence fee was payable for establishment, maintenance and operation of cellular telephone service. Establishment and set up took place in the initial years and thereafter the payments made were/ are for operation or maintaining the cellular telephone service. Initial outlay and payment, HCL Comnet Systems & Services Ltd. therefore, is capital in nature, whereas the outlays and payments made subsequently are to operate and maintain the service. 1999 policy in the form of letter dated 22-7- 1999 also refers to one time entry fee which is chargeable and had to be calculated as lic7ence fee dues payable up to 31-7-1999 and licence fee was thereafter payable on percentage share of gross revenue.
The new licences issued to others also stipulated one time entry fee and then licence fee payment on sharing basis. In view of the new 1999 policy, the earlier policy which restricted competition, underwent a change and licencees forgo their right to operate in the regime of limited number of operators.
Another reason why licence fee payable for the period on or before 31- 7 -1999 should be treated as capital and the amount payable thereafter as revenue, is justified and appropriate in view of section 3SABB. The provision provides that licence fee of capital nature shall be amortized by dividing the amount by number of remainder years of licences.
Thus, the capitalized amount of licence fee is to be apportioned as a deduction in the unexpired period of the licence. The provision will have ballooning effect with amortized amount substantially increasing in the later years and in the last year the entire licence fee along with the brought forward amortized amount would be allowed as deduction.
After a particular point of time, deduction allowable under section 35ABB would be more than the actual payment by the assessee as licence fee for HCL Comnet Systems & Services Ltd. the said year. This would normally happen after the mid- term of the licence period.
Section 35ABB, therefore, ensures that the capital payment is duly allowed as a deduction over the term and once the expenditure is allowed, it would be revenue or tax neutral provided the tax rates remain the same during this period."
The Hon'ble Jurisdictional High Court concluded as under:
(i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable up to 31- 7-1999 should be treated as capital expenditure and licence fee on revenue sharing basis after 1-8-1999 should be treated as revenue expenditure.
(ii) Capital expenditure will qualify for deduction as per section 35ABB.
Facts of the present case appears to be similar to the facts involved in the case of CIT Vs Bharti Hexacom Ltd. (Delhi) (supra), we, therefore, restored this issue to the file of the AO to be decided in accordance with the findings given by the Hon'ble Jurisdictional High Court in the case of Bharti Hexacom Ltd. (supra) and if any expenditure on account of licence fee was payable up to 31.07.1999, it should be treated as capital expenditure and the licence fee on revenue sharing basis after 01.08.1999 should be treated as revenue in nature.”
Respectfully following the decision of the coordinate bench, we direct the Assessing Officer to delete the addition of Rs. 3,29,84,635/-.
Ground No. 2 with all its sub grounds is allowed.
Facts relating to Ground No. 3 are that during the year under consideration, the assessee has claimed TDS of Rs. 3,50,22,075/-. Vide submissions dated 25.03.2015, the assessee further claimed an additional amount of TDS amounting Rs. 2,19,476/-. Thus the total TDS claimed by the assessee was Rs. 3,52,41,551/-.
During the course of scrutiny assessment proceedings, the Assessing Officer found that the assessee has shown deferred revenue of Rs. 18,95,56,017/-. Accordingly, the assessee was asked to furnish details of TDS claimed on the deferred Revenue of Rs. 60,73,52,960/- and was required to show cause as to why TDS claimed on the income of further years be not disallowed.
The assessee filed detailed reply justifying its claim of TDS drawing support from various judicial decisions. The Assessing Officer was not convinced with the reply of the assessee and was of the opinion that the TDS credit of Rs. 12,40,180/- on deferred revenue will be allowed in the relevant Assessment Year under which the revenue has been offered to tax. The Assessing Officer further observed that the additional TDS was not claimed in the original return of income and applying the ratio laid down by the Hon'ble Supreme Court in the case of Goetz 284 ITR 223. The Assessing Officer denied the claim of additional TDS.
The assessee carried the matter before the ld. CIT(A) but without any success.
Before us, the ld. counsel for the assessee drew our attention to the provisions of section 199(3) of the Act and further drew our attention to Rule 37BA(3)(ii) and stated that according to the provisions and relevant rules, the assessee is entitled to claim TDS.
Per contra, the ld. DR supported the findings of the lower authorities.
We have given thoughtful consideration to the orders of the authorities below. We find that section 199(3) of the Act gives power to the Board to make such rules for the purposes of giving credit in respect of tax deducted or tax paid in terms of provisions of the Act and also A.Y for which such credit may be given. Rule 37BA(3)(ii) provides that where tax has been deducted at source and paid to Central Government and income is sustainable over a number of years, credit for tax deducted at source shall be allowed across those years in same proportion in which income is assessable to tax. We, accordingly, direct the Assessing Officer to give proportionate credit of TDS for the income declared during the year under consideration.
With these directions, Ground no. 3 is allowed.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 31.12.2019.