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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
PER MAHAVIR SINGH, JM:
This appeal by the Assessee is arising out of the Revision order passed under section 263 of the Income Tax Act, 1961(hereinafter ‘the Act’) by Principal Commissioner of Income Tax-14, Mumbai, [in short PCIT] vide No. Pr.CIT CIT 14/263/2/2014-15 dated 18-12-2015. The Assessment was framed by the Deputy Commissioner of Income Tax, Circle 3(2), Mumbai (in short DCIT) for the assessment year 2011-12 vide order dated 27-03-2014 under section 143(3) of the Act.
The only issue in this appeal of assessee is against the revision order of PCIT directing the revision of the assessment framed under
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) section 143(3) of the Act by the AO on the ground that the assessment order is erroneous and prejudicial to the interest of revenue in allowing depreciation amounting to ₹420.76 crores on the 3G Spectrum cost claimed by the assessee under section 32(1) of the Act and further directing the AO to instead allow deduction under section 35ABB of the Act on the ground that the 3G Spectrum was only an extension of the original license for operating telecom services and not a separate intangible asset. For this assessee raised jurisdictional issue as well as on merits by these following grounds:-
“GROUND NO. I
On the facts and circumstances of the case and in law, the Learned Pr.CIT erred in invoking the provisions of section 263 of the Act and directing revision of the assessment order passed under section 143(3) of the Act by the Deputy Commissioner Of Income Tax-3(2), Mumbai(“the AO”)on the alleged ground that the said assessment order was erroneous and prejudicial to the interest of the revenue.
The Appellant prays that it be held that the action of the Learned Pr. CIT in invoking provisions of section 263 of the Act and directing the AO to pass a fresh assessment order to be held to be ab-initio and/or otherwise void and bad in law.
WITHOUT PREJUDICE TO GROUND NO. I
GROUND NO.II:
On the facts and circumstances of the case and in law, the Learned Pr.CIT erred in directing the AO to
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) disallow depreciation amounting to Rs.420.76 crores on the 3G Spectrum cost 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 3G 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 3G Spectrum cost and treating such cost as an extension of the original telecom license, is not in accordance with law and that disallowance of said depreciation is not called for.
WITHOUT PREJUDICE TO GROUND NO.III:
GROUNDNO.III
On the facts and circumstances of the case and in law, the Learned Pr.CIT erred in not accepting the claim of the Appellant that the entire 3G Spectrum cost was deductible under section 37(1) of the Act on the ground that the Appellant has not made such claim in the return of income and that the said expenditure not incurred wholly and exclusively for the purpose of business of the relevant year.
The Appellant prays that the entire 3G Spectrum cost ought to be allowed to the Appellant under section 37(1) of the Act in computing business income.”
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) 3. Brief facts of the case are that the assessee company is engaged in the business of Providing Cellular mobile services and trading of handsets and accessories. The assessee filed its Return of Income for the year under consideration declaring Nil income after set-off of brought forward business losses and unabsorbed depreciation of Rs. 1,27,32,60,976/- under the normal provisions of the Act and Rs. 7,94,64,25,489/-income under section 115JB of the Act and claiming TDS credit of Rs. 1,56,89,92,736/-. Thereafter, the assessee revised ROI on 29.03.2013 declaring Nil taxable income after set-off of brought forward business losses / unabsorbed depreciation of Rs. 1,27,3240,974/- and Rs. 7,94,64,25,489/- income under section 115JB of the Act and claiming TDS credit of Rs. 2,73,76,67,734/-. The original ROI was processed under section 143(1) the Act. The case was selected for scrutiny and a notice under section 143(2) dated 02.08.2012 and 142(1) of the Act along with questionnaire dated 06.08.2012 was served and complied by the assessee. The AO after detailed examination and enquiry of various issues, passed the Assessment Order under section 143(3) of the Act dated 27.03.2014 assessing the total income at Rs. 10,78,68,58,038/- allowing TDS credit of Rs. 1,67,70,59,052/-. The Pr.CIT, subsequently, issued show cause notice on two issues for revision of assessment under section 263 of the Act. The show cause notice was issued on the following two issues:-
i) The claim of depreciation @25% on the amount paid being 3G-Spectrum Band License Fee allowed by the AO is erroneous in so far as it is prejudicial to the interest of revenue, within the meaning of Sec. 263 of the Act, and:
ii) The claim of financial lease with M/s IBM Ltd for IT outsourcing as an operational lease &
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) has accordingly claimed deduction u/s 37(1) of the Act on the repayment made by it during the year which includes the principal amount of Rs.241,42,20,509/-, apart from the interest paid by the assessee pertaining to the principal amount, which is erroneous in so far as it is prejudicial to the interest of revenue, within the meaning of Sec. 263 of the Act.
But, finally, the Pr.CIT in his revision order under section 263 of the Act retained only one issue with regard to the claim of depreciation on the amount paid being 3G-Spectrum Brand License Fee allowed by the AO as erroneous in so far as prejudicial to the interest of revenue.
The Pr.CIT finally passed revision order under section 263 of the Act as under:-
“4. I have carefully considered the assessee's submission and arguments. The same is discussed on merit iii the following paragraphs.
4.1.i. At the outset, the assessee has stated that the conditions laid down in section 263 that the assessment order is erroneous as well as prejudicial to the interest of Revenue do not exist. They have also stated mere non-discussion of the facts is not enough to invoke the provisions of section 263. They have further stated that the invocation of section 263 is only merely a change of opinion. The A.R. of the assessee has also relied on certain case laws which have not been repeated for the sake of brevity.
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) 4.2.i. The argument of the assessee that the conditions laid down in the provisions of section 263 are not satisfied cannot be accepted on the facts and merits of the case which is discussed in the following paragraphs.
4.2.ii On the legal front, the Hon'ble Supreme Court in the case of M/s Malabar industrial Co. Ltd. 243 ITR 83 (SC) has laid down the conditions precedent by which the CIT can invoke the provisions of section 263. The Hon'ble Supreme Court has held that "if the order of the A.O. is erroneous in so far as it is prejudicial to the interest of the Revenue." It is further held that "an incorrect assumption of facts or incorrect application of law will satisfy the requirement of the order being erroneous." Further, it is held that "the phrase prejudicial to the interest of Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to the loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the Revenue. Moreover, the Hon’ble Kerala High Court in the case of English Indian Clays Ltd. 331 ITR 219 (Ker.) has held that a lack of proper enquiry by the Assessing Officer will render the order erroneous and prejudicial to the interest of the Revenue. Reliance is also placed oil Delhi High Court decision in the case of CIT vs.
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) Goetze (India) Ltd. in ITA No. 1179/2010, order dated 09.12.2013, wherein HC observed that CIT had given specific reasons behind treating Assessing Officer's order as prejudicial and erroneous. HC rejected assessee's contention that power u/s 263 could not be invoked since the Assessing Officer had taken a probable view, which may be debatable and not acceptable to the Revenue. HC remarked that the order of CIT could not be set aside only on the ground that two views were possible or probable, but CIT had recorded how the order of Assessing Officer was erroneous and prejudicial to interests of revenue. Order of the CIT could be set-aside only if findings accorded by CIT were incorrect or if order of Assessing Officer was not prejudicial to interest of Revenue. HC observed that CIT could examine the issue on merits even when the same was examined by Assessing Officer and that principles of 'change of opinion' did not apply. HC noted that Revenue did not have any right to appeal against the order of Assessing Officer and therefore the power of revision u/s 263 was conferred on the CIT to correct erroneous order which were also prejudicial to Revenue's interests. It was held that " ......it would be incorrect to state as a broad proposition that an order of Assessing Officer cannot be erroneous, if the Assessing Officer has taken one of the two views possible. In such cases the order of the Assessing Officer is erroneous provided the Commissioner holds and is able to demonstrate that the view taken by the Assessing Officer was not plausible, being legally unsustainable and incorrect".
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) 4.2.ii The argument that two views possible at the time of passing the assessment order, will hold good only in respect of questions of fact - When it comes to questions of law, the law laid down by the competent constitutional Courts has to be invariably followed. It is a settled law that when the Supreme Court or a High Court declares the law on a subject, the declaration go back to the date of enactment of that particular law so as to state that the law, from the date of the enactment itself was in the manner decided by courts subsequently. Hence when the Assessing Officer was passing the assessment order, the law on the subject was always the law as explained by the jurisdictional High Court or Supreme Court. Thus by super imposition made by the judicial pronouncement, the assessment order has become erroneous and Revision is valid. In this regard, reliance is placed on the following decisions:
a. Vijay Kiran Hotels (P) Ltd. Vs CIT (P&H) 196 Taxation 336
b. Simran Farms Ltd. Vs CIT (MI') 300 ITR 270
c. Intellinet Technologies India P Ltd. Vs ITO (ITAT Bang) 5 ITR 96
4.2.iii. The contention of the assessee that the stand taken in the notice u/s 263 is a mere change of opinion is also not tenable. Reliance in this regard is placed on the Chennai ITAT decision in the case of NI/s Coimbatore Cable Net Private Limited Vs ACIT, Coimbatore 2012 TIOL 60 wherein it was held that
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) when the AO believed the nomenclature given in the balance-sheet and simply accepted the claim of the assessee without application of mind and without examining the evidence of the expenditure incurred, CIT has rightly initiated the proceedings u/s 263. Similarly, the Chandigarh ITAT in the case of M/s Ind Sphinx Precision Ltd by an order dated November 10, 2006, has held that the Assessing Officer has passed the order without giving any reasons for accepting the contentions of the assessee, the Commissioner well within his jurisdiction to invoke section 263 as the Order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue, though the Assessing Officer has passed the order after taking a possible view. Reliance in this regard is also placed in the Kerala High Court Judgement in the case of Bhatsons Acquatic Products 329 11'R 67 (Ker).
4.2.iv. It has been held by the Calcutta High Court in the case reported in 31 ITR 872 that if the decision of the Assessing Officer is not in accordance with the law, the same can be revised by the Commissioner of Income-tax u/s 263. It has been held by Honorable ITAT, Mumbai Bench 'A', Mumbai in the case of Sterling construction & Investment Vs. Asstt. Commissioner of Income Tax 79 lTD 299(Mum) that when assessment order was based on incorrect assumption of facts and incorrect application of law the order was erroneous and prejudicial to the interest of Revenue and therefore Commissioner was competent to revise it. Reliance is also placed on the decision of Honorable ITAT,
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) Indore Bench in the case of Frigoscandia Winner Food Process System (79 lTD 357).
4.2.v. Hence, the contentions raised by the assessee against the invocation of section 263 are not tenable and the same are rejected.
4.3 Coming to the facts and merits of the case, the same are discussed under:
i. The assessee was allotted spectrum for 20 years and paid onetime cost. The assessee capitalized the payment in his books as shown as intangible assets and claimed depreciation @ 25% u/s.32 of the l.T. Act on the spectrum under the head "license". The spectrum allotted to the assessee on the basis of telecom license which the assessee company procured long back without having license to operate telecom service in particular circle the assessee cannot apply for allotment of spectrum. Thus the allocation of 3G spectrum is only extension of original license for operating telecom services and no separate intangible assets as claimed by the assessee. Thus the assessee is entitled to claim deduction of 1/20th of the spectrum fees paid as per provision of section 35 ABB of the I.T. Act. It is further pertinent to mention here that one of the eligibility criteria of the bidders who could participate in 3G auction was that any entity that holds Unified Access services. (UAS)/Cellular Mobile Telephone Service (CMTS) Licensee can participate in bid for auction of 3G spectrum.
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) 4.3.ii. The assessee has claimed that spectrum allotted to successful bidders is distinct from UAS/CMTS 'licensee of awardee' which is evident from the individual letters of intimation (L.O. I.) issued by WPC Wing for earmarking spectrum frequency in the respective service area. The contention of the assessee is not acceptable as the 3G spectrum frequency allotted through auction is an extension of existing UAS/CMTS licensee as the same can be allotted to such license holders only.
4.3.iii. The assessee has claimed the depreciation u/s.32 is allowable being intangible assets is not acceptable as the assessee itself claimed that 3G Spectrum allocation is not a license and it is only right to use spectrum service. Spectrum has not been provided for one and all time and it is only for 20 years only, therefore the same cannot be claimed as an intangible asset. The assessee has claimed that without prejudice to above the entire expenditure can be claimed as business expenditure u/s.37(i) of l.T. Act. Firstly, the assessee has not made such claim in the return and secondly only expenditure incurred wholly and exclusively for the purpose of business of the relevant year is allowable u/s.37 of the l.T. Act.
4.3.iv. Thus the assessing officer wrongly allowed depreciation to the assessee on the cost of spectrum instead of allowing 1/20th of the Capital expenditure incurred as per provisions of section 35ABB of the IT Act. Thus order of Assessing Officer is erroneous in so far prejudicial to interest of
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) revenue therefore the order passed by AO under revision is set aside to this extent. The AO is directed to allow 1/20th of the spectrum fees against the claim of the assessee as per provision of section 35ABB of the IT Act after allowing opportunities of being heard to the assessee.”
Aggrieved, assessee is in appeal before Tribunal.
Before us, Sh. J.D. Mistry Ld. Senior Counsel for the assessee narrated the facts of the case that coming to the Order under review, the AO has conducted the detail examination of the issue involved, made inquiries, applied his mind to the facts and circumstances of the case and passed the Assessment Order under section 143(3) of the Act. In the course of the assessment proceedings under section 143(2) of the Act, the AO had asked the details in respect of issues stated in the captioned notice and assessee replied against the same. The summary of the submission filed before the AO and disclosures given in various documents by the assessee are as under:
Sr. Particulars Remarks NO As regards depreciation claimed under section 32(1) of the Act on 3G spectrum 1. Director Report for the caption See heading “capital financial year Expenditure” and launch of 3G services under Significant Developments under the Director Report (see page No. 1 to 6 of APB) 2. Schedule -5 “Fixed Assets” to the See Page No. 19 of APB Audited Financials Statement. 3. Note B1 to Schedule 22 to the Audited See page No. 30 of APB Financial statements 4. Explanatory notes to the Revised Para 2 of Explanatory Notes to Return of income filed under section revised ROI filed on July 19, 139(5) of the Act 2013 with the AO (see page No. 50 to 57 of APB) 5. Depreciation in Annexure 2 to clause See page No. 70 & 71 of APB 14 of the Tax Audit Report
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) Sr. Particulars Remarks NO 6. During the assessment proceedings, See pan 2 - Details of source of our submissions against the query funds for payment towards 3G raised by the AO vide letter dated Spectrum and para 3 - copies of March 4, 2014 earmarking of 3G Spectrum and copies of wireless operating license from Wireless Planning and Coordination Wing to our letter dated March 4,2014 filed with the AC) (See page no. 74 to 452 of APB).
Accordingly, depreciation was claimed by the assessee under section 32(l) of the Act on the cost of 3G Spectrum and allowed by the AO. Ld. Counsel explained that Wireless spectrum in the context of telecom industry refers to electromagnetic radiation and frequency bands. The wireless Spectrum frequencies used in communication regulated by the national organizations, which specify which frequency ranges, can be used by whom and for which purpose. In India, cellular service licenses are issued under the Indian Telegraph Act, 1885 to establish and also to maintain and operate cellular telephone services. These licenses are technology neutral; they are required to provide access services and meet the stipulated roll-out obligations using wire line and wireless technologies by utilizing network equipment that meets the prescribed standards. He further explained that the New Telecom Policy 1999 of the Government of India ("NTP-99") recognised that with proliferation of new technologies and growing demand for telecommunication services, the demand on spectrum had increased manifold. It laid down as one of its objectives that spectrum be utilized efficiently, economically, rationally and optimally. It recognised that there was a need for a transparent process of allocation of frequency spectrum for use by a service against payment of spectrum usage fee. Pursuant to the NTP-99, the Government separated Cellular Licenses from spectrum.
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) Accordingly, in addition to the licenses, the operators had to separately acquire spectrum from the Government. With the objective of Spectrum Management, the Department of Telecommunication ("DOT') invited applications to allot the rights to use certain specified radio spectrum frequencies in the 2.1 GHZ band (the "3G Spectrum band") and in the 2.3 GHZ band (the BWA Spectrum band") by means of auctions in various telecom service areas in India. The Notice inviting Applications dated 25.02.2010 ("the Notice"), which is available in public domain, sets out the objectives of the spectrum auction as under:
a) Obtain a market determined price of 3G/BWA spectrum through a transparent process; b) Ensure efficient use of spectrum and avoid hoarding; c) Stimulate competition in the sector, d) Promote rollout of 3G and Broadband services; e) Maximize revenue proceeds from the Auctions; f) Resolve congestion issues related to second generation ("2G") mobile services. The learned Counsel referred to pages no. 256 to 368 of APB for the relevant extracts of the Notice Inviting Applications dated 25.02.2010.
He referred to the Clause 2.1 of the Notice specified that under the auction process, the Successful Bidders would be granted the right to use spectrum at specified frequencies (2.1 GHz, poured in blocks of 5 MHz, i.e. each block of 2x 5 MHz) for 20 years from the date of award of right to commercially use the allocated spectrum block. However, it also directed that mere awarding of spectrum did not confer a right to provide mobile telephone services on the awardee, successful bidders also
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) needed to acquire UAS/CMTS license for the awarded service areas. The Notice further set out the eligibility criteria of the bidders who could participate in the 3G auction as under:
“Any Entity;
(i) that holds a Unified Access Services ("UAS')/ Cellular Mobile Telephone Service ("CMTS”)) license, or
(ii) that:
(a) has previous experience of running 3G telecom services either directly or through a majority-owned subsidiary.- and
(b) gives an undertaking to obtain a UAS licence through a New Entrant Nominee UAS Licensee as per DoT guidelines before starling telecom operations can bid for 3G Spectrum (subject in other provisions of the Notice)."
Thus, to be eligible to participate in the auctions for 3G spectrum:
I) the bidder must already hold the license for cellular services or
2) must obtain such license separately before rolling out telecom services by paying the required entry fee.
Thus, learned Counsel explained that the spectrum allotted to the Successful Bidders is distinct from the UAS/CMTS license of the awardees. This is also evident from the individual Letters of Intent
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) ("LAM") issued by the WPC Wing for earmarking spectrum frequency in the respective service areas submitted to the AO with assessee’s letter dated 04.03.2014, since each LOI specifically states that “It is not a license”.
Ld. Counsel took us trough Clause 3.6 of the Notice, which specified that 3G Spectrum will be allotted for 20 years unless it is revoked or surrendered, provided the allottee continues to have the telecom license and this clause further points out that Spectrum is distinct from telecom license. Under Clause 3.4 of the Notice, the respective licensee who is awarded spectrum had an obligation to roll-out mobile telephone services as per the conditions specified there under. Thus, it is only with the earmarked spectrum that the awards can render services. Clause 3.7 of the Notice lays down the consequences on breach, revocation and surrender of the allotted spectrum. Under this clause, the telecom operator may surrender the spectrum, by giving notice of at least 60 calendar days in advance. In that case, it shall also notify all its customers of consequential withdrawal of service by giving 30 calendar days’ notice to each of them. The operator shall pay all fees payable by it until the date on which the surrender of the spectrum becomes effective. Thus, the spectrum so allotted is capable of being surrendered upon which it stands extinguished for the allottee. He further explained that once the DOT received the Bid Amount for the spectrum, it allocated specific frequencies in the respective service areas to the Successful Bidder by issuing the LOI which have already been submitted before the AO and now at pages no. 78 to 255 of APB. The successful bidders were allowed to use the spectrum frequencies for commercial operations from the designated date. As per clause 6.4 of the Notice, specific frequencies were earmarked for the Successful Bidders which shows that there was an identified block of spectrum available for use by the bidders. Thus,
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) during the period of allotment, spectrum was used by the allottee to provide mobile telephone services or, in other words, it was an apparatus used in the telecom business to generate revenues.
In view of the above facts, he explained the legal provision of Section 32 of the Act, which grants depreciation at the specified rates on the block of tangible and intangible assets owned by the assessee which are used for the purpose of its business. Thus, there are three conditions required to be satisfied by an assessee for the allowance of depreciation under section 32 of the Act. These are as under:-
(a) There must be an asset, which falls within the classification of tangible or intangible asset, under section 32 of the Act;
(b) Such asset is owned by the assessee; and
(c) Such asset must be used for the purpose of the business or profession of the assessee.
He explained that Section 32(I)(ii) of the Act describes "intangible assets" as "know-how, patents, copyrights, trademarks, licenses, franchisees or any other business or commercial rights of similar nature, being intangible assets acquired on or after assets acquired on or after the t day of April 1998. Hence, he states that the spectrum is the identified frequencies allotted to the Successful Bidder which is used for rolling out mobile telephone services. However, it is distinct from the telecom license of the telecom operator. Thus, spectrum is a business/commercial right of the telecom operator. As to what constitutes a "business or commercial right" is explained by several decisions.
In view of the above facts of the case, legal and grounds on merits, Ld Counsel for the assessee framed the following propositions:-
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) (i) When two views are possible and the AO has taken one of the possible view, which resulted in loss of revenue, the order cannot be treated as ‘erroneous’ for the purposes of section 263 of the Act.
(ii) Both conditions of section 263 of the Act i.e. the assessment order is ‘erroneous’ and ‘pre-judicial to the interest of the Revenue’ are conjuctive.
(iii) On merits also the assessee is entitled to depreciation for the reason that any right obtained for carrying on the business effectively and profitably falls within the meaning of intangible asset.
(iv) Lastly, in any case, 3G spectrum cost be allowed as expenditure under section 37(1) of the Act.
The learned Counsel for the assessee explained first two proposition that the provisions of sub-section (I) of Section 263 of the Act, the jurisdiction of revision can be exercised only the above two conditions are satisfied. He further explained that the power of suo-moto revision under sub-section 263(l) of the Act is in the nature of supervisory jurisdiction and the same can be exercised only if the conditions specified therein exist. He referred to the expressions 'erroneous', 'erroneous assessment' and 'erroneous judgment as defined in Black's Law Dictionary. According to the definition 'erroneous' means ‘involving error’ deviating from the Law. 'Erroneous assessment' refers to an assessment that deviates from the law and creates a jurisdictional defect, and is
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) therefore, invalid. It is a defect that is jurisdictional in its nature, and does not refer to the judgment of the AO. Similarly, 'erroneous judgment' has been defined as a judgment issued by a court with jurisdiction to issue it, but containing an improper application of law. The phrase "prejudicial to the interest of revenue" is not an expression of art and is not defined in the Act. Understood in the ordinary meaning, it is of wide import and is not confined to loss of tax. This phrase has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests. For example, when an AO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the AO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order so as to prejudicial to the interests of Revenue, unless the view taken by the AO is unsustainable in law.
On the other hand Ld CIT-DR B C S Naik just relied on the revision order of CIT passed under section 263 of the Act.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee company has paid an amount of ₹ 3366.09 crores on account of 3G Spectrum Band License fee for six circles, which were put into operation during the previous year and assessee claim depreciation on the same at the rate of 25%. The CIT(A) charge in his revision order is that the 3G Spectrum Bank License fee has been paid for a period of 20 years and accordingly, It should be amortized over a period of 20 years and only 1/20th of the license fee should be allowed as deduction for the year under consideration. From the above facts it is clear that AO has conducted detailed examination of the issue involved, made enquiries as is cleared from documents asked for and replies filed by the assessee . The AO has
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) applied his mind to the facts on the issue and allowed depreciation on the 3G Spectrum Band License fee paid by assessee while framing assessment under section 143(3) of the Act. We have gone through the judgments cited by the learned Counsel of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC), wherein, Hon’ble Supreme Court held that a bare reading of section 263 of the Act makes it clear that the prerequisite to exercise of jurisdiction by the CIT is that the order of the AO is erroneous in so far as it is prejudicial to the interest of the revenue. Hon’ble Supreme Court observed as under: -
“The phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income- tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi Vs. Commissioner of Income-tax (1968) 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal Vs. Commissioner of Income-tax, West Bengal (1973) 88 ITR 323 (SC).”
Similarly, the learned Counsel for the assessee relied on the judgment of Hon’ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom.), wherein it is held as under: -
“14. We, therefore, hold that in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the record called for by the Commissioner to satisfy him prima
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well- settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Our aforesaid conclusion gets full support from a decision of Sabyasachi Mukharji J. (as his Lordship then was) in Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl. CIT . In our opinion, any other view in the matter will amount to giving unbridled and arbitrary power to the revising authority to initiate proceedings for revision in every case and start re- examination and fresh enquiries in matters which have already been concluded under the law. As already stated it is a quasi judicial power hedged in with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly, it is an administrative act, but on
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) examination "to consider" or in other words, to form an opinion that the particular order is erroneous in so tar as it is prejudicial to the interests of the Revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of re-examination and reconsideration of an order of assessment, which has already been concluded and controversy which has been set at rest, is set again in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from the records called for by the Commissioner.
We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-examine the matter. That, in our opinion, is not permissible. Further inquiry and/or fresh determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and it is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.”
In view of the above and the facts of the case that the AO has passed the order under review after detailed enquiry examination and verification of facts of the issue of claim of depreciation on 3G Spectrum cost of license fee and after considering the submissions made by the assessee which are on records, taken a view. According to us, this is one of the permissible view, which is taken by the AO during assessment proceedings under section 143(3) of the Act. We are of the view that pursuant to the NTP-99, the Government separated Cellular Licenses from spectrum. Accordingly, in addition to the licenses, the operators had to separately acquire spectrum from the Government. With the objective
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) of Spectrum Management, the Department of Telecommunication ("DOT') invited applications to allot the rights to use certain specified radio spectrum frequencies in the 2.1 GHZ band (the "3G Spectrum band") and in the 2.3 GHZ band (the BWA Spectrum band") by means of auctions in various telecom service areas in India. The Notice inviting Applications dated 25.02.2010 ("the Notice"), which is available in public domain, sets out the objectives of the spectrum auction. We also find from the term and conditions of spectrum auction details that as per the Clause 2.1 of the Notice specified that under the auction process, the Successful Bidders would be granted the right to use spectrum at specified frequencies for 20 years from the date of award of right to commercially use the allocated spectrum block. However, it also directed that mere awarding of spectrum did not confer a right to provide mobile telephone services on the awardee, successful bidders also needed to acquire UAS/CMTS license for the awarded service areas.
We also observed from the spectrum allotted to the Successful Bidders that it is distinct from the UAS/CMTS license of the awardees. This is also evident from the individual Letters of Intent ("LAM") issued by the WPC Wing for earmarking spectrum frequency in the respective service areas submitted to the AO with assessee’s letter dated 04.03.2014, since each LOI specifically states that “It is not a license”. Hence, we are of the view that on jurisdiction the revision order passed by CIT cannot be sustained and accordingly, reversed.
Now, coming to merits of the case, the learned Counsel stated that the AO after going through the facts of the case particularly note B.1 to the audited financial statements for the year ended on 31.03.2011 gave the disclosure on the accounting treatment of the 3G spectrum charges. Also, in note 2 to the explanatory letter dated 19.07.2013 filed before AO during assessment proceedings explains the tax treatment adopted by
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) assessee in respect of the said charges. He argued, on merits, that the assessee has rightly claimed the depreciation being beneficial owner of the spectrum allotted and it is entitled to use it for the purpose of its business under the Act. It is settled that the owner of an asset is the beneficial owner who has domain over the asset and is in the enjoyment of the asset. The assessee became the beneficial owner of the spectrum allotted under the auction process as it could use it for the purpose of its business and, hence, the test of ownership is satisfied. This fact is also evident from the LOI for the respective circles, under which frequencies are earmarked for the use of the assessee and makes it available to the assessee to render services. There is no ambiguity on the fact that it is used for the purpose of the business of the assessee which is to provide cellular mobile services in the respective telecom circles in which it was allotted spectrum. The assessee successfully bid for 11 telecom circles in 3G auction held during the financial year 2010-I1 and launched 3G services in Gujarat, Himachal Pradesh and Madhya Pradesh including Chhattisgarh, Haryana, Maharashtra and Uttar Pradesh West during the financial year 2010-11. The bid price paid for the allotted spectrum, which is a one-time cost, has been capitalised as an "Intangible Asset" since such cost satisfies the conditions of section 32(1) of the Act. Accordingly, assessee claimed depreciation on the cost of 3G Spectrum under the provisions of section 32 of the Act by treating it as intangible assets. The details of cost capitalised and depreciation thereon are available in Annexure 2 of Form No. 3CD (i.e. Tax Audit Report) submitted to the AO.
In view of the above facts, we find that Revenue now before us could not controvert the facts narrated by the learned Counsel for the assessee. The learned CIT Departmental Representative (‘DR’), merely relied on the revision order passed by CIT. But, we find that the assessee capitalized one time spectrum cost under the block of "intangible Assets"
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) from the financial year 2010-I1 and any additional cost incurred on successful bidding in the auction of spectrum is also added to the WDV of the said block and claimed depreciation on WDV subject to the conditions of section 32 of the Act. This is in compliance with the method of charging depreciation under the Block of Asset concept applicable from 01.04.1988. The spectrum allotted for 20 years does not change its nature under the Act and once an asset qualifies to be an "Intangible Asset", depreciation is to be allowed under section 32 of the Act, regardless of the period for which it is owned by the assessee. The assessee claimed that the telecom license and the spectrum are independent of each other and there is no case to allow deduction in respect of the spectrum cost over 20 years period, in the absence of any specific provision under the Act that permits such amortisation.
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 sub- section, the expressions `assets' and `block of assets' shall mean—
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) [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."
Explanation 3 states that the expression `asset' shall mean an intangible asset, being know- how, 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 apply while interpreting the said expression which finds place in Explanation 3(b).
In the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act.
One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) [`CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal [`ITAT', for short]. We see no reason to interfere with the factual finding.
One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove.
For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee."
From the above judgment of Hon’ble Supreme Court in the case of Smifs Securities Ltd. (supra) and the facts of the present case, it is clear that the assessee has rightly claimed depreciation under section 32 of the Act on 3G spectrum. It means that the expenditure towards 3G Spectrum is not expenditure for acquiring any right to operate telecommunications services. Out of the service areas in which 3G spectrum was won by the assessee, it had acquired the rights to operate telecommunication services in the year 1995-1997 for Maharashtra,
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) Gujarat, Uttar Pradesh West, Madhya Pradesh, Haryana. Andhra Pradesh, Kerala, Punjab telecom circles. In year 2001-02 it acquired rights for Himachal Pradesh, Uttar Pradesh East and thereafter in the year 2007-08 for Jammu & Kashmir. Even if 3G Spectrum was not applied or allotted, assessee could have still continued providing telecommunication services under existing license. The license to operate telecom services is issued u/s. 4 of the Indian Telegraph Act, 1885 which provide rights to establish and operate telecom services. As stated above, without such license one is not ever eligible to bid for 3G Spectrum. 3G Spectrum fees are merely for right to use a particular frequency/spectrum while providing telecommunication services. In 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.
In the result, the appeal of assessee is allowed.
Order pronounced in the open court on 06-12-2017.
Sd/- Sd/- (NK PRADHAN) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 06-12-2017 Sudip Sarkar /Sr.PS
ITA No. 360/Mum/2016 Idea Cellular Limited (A.Y.11-12) Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT (A), Mumbai. 4. CIT BY ORDER, 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// Assistant Registrar ITAT, MUMBAI