ACIT, NEW DELHI vs. M/S. BHARTI INFRATEL LTD., NEW DELHI

Facts giving rise to all these appeals are that M/s Bharti Infratel Ltd. is a passive infrastructure service provider and engaged in providing telecom infrastructure support services to telecommunication companies providing mobile services. The support services are being provided by offering passive equipments like towers, green shelters, DG sets, UPS etc. installed at sites on non exclusive basis. The company takes on a lease certain premises for the purpose of installation of the passive equipment for providing infrastructure support services to various telecommunication companies like Airtel, Idea, Vodafone, etc. and enters into live and license agreement with landlords for a period ranging between 15 to 20 years with the stipulation that the license fee increasable by 15% at the expiry of every 5 years.

For AY 2008-09 the difference between the lease accrued and the amount debited to the rent account in respect of the property taken on lease was Rs. 8,60,42,238/- and this amount was first debited to the rent account in the profit and loss account and subsequently added back to the computation of income, since this particular amount is not the rent that was accrued, but a notional rent debited as per AS-19. So far as this adding back of the amount of Rs. 8,60,42,238/- is concerned, AO has accepted the same, though such amount was not really accrued.

Similarly in respect of the assets given on lease, the lease equalization amount that was credited to Revenue was Rs. 28,59,91,766/- and since this is also similarly not accrued but credited on notional basis in view of AS-19, the same was reduced in the computation of income. However, the AO rejected the same and added the same back to the income of the assessee.

Thus, the AO made an addition of Rs. 7,93,07,072/- u/s 14A of the Act and Rs. 28,59,91,766/- while denying the deduction of the lease equalization charges.

Aggrieved by such additions the assessee carried the matter in appeal and by way of an order dated 25.06.2012 Ld. CIT (A) allowed the appeal in so far as the addition in respect of 14A of the Act is concerned but confirmed the addition in respect of the lease equalization charges.

Challenging the denial of the reduction of the notional entry on account of lease equalization income the assessee preferred and the deletion of the addition in respect of Section 14A the Revenue preferred .

Similarly in respect of the AY 2009-10 AO made an addition of Rs. 121,66,79,662/- rejecting the reduction of the lease equalization charges and in appeal Ld. CIT (A) deleted the same.

Adverting to the lease equalization charges, it is the argument of the Ld.AR that the assessee has been following the mercantile system of accounting as such the tax liability is only on such amount which is actually accrued to the assessee during the year but because of the accounting policy of the company in respect of the lease to follow AS-19, the lease payable or receivable has to be debited or credited to the profit and loss account on straight line basis. The difference between the accrued lease and the lease arrived on straight line basis is called lease equalization charges.

We have carefully gone through the record. Ld. AR vide page 8 of the synopsis demonstrated before us in a tabular form how the lease equalization charges are dealt with. As could be seen from the order of the ld. CIT(A) in respect of the AY 2009-10, a similar exercised was undertaken before him. Ld. AR submitted that in case of a lease for 15 years on an initial rent of Rs. 1000/- with a stipulation of increase of lease amount at 2.5% every year the rent will be Rs. 1,000/- for the first year, whereas it is Rs.1,413/- in the 15th year. Total lease amount receivable in these 15 years is Rs. 17,932/-. For the purpose of arriving the straight line lease amount, this Rs.17,932/- is divided by 15 and the result is 1,195/- for every year. Therefore, for the first year actual lease accrued is Rs. 1,000/-, whereas the amount that is credited to the profit and loss account by following AS-19 is Rs. 1,195/- i.e. with the increase of Rs. 195/- which is added on notional basis.

In respect of the year 2008-09 also it’s not in dispute that in respect of the property taken on lease, the assessee debited the straight line basis lease amount to rent account in the profit and loss account and because such amount is less than the actual amount that was received by Rs. 8,60,42,238/- they added it back in the computation of income, and the same was accepted by the AO. Having accepted this adjustment of the lease equalization charges in respect of the property taken on rent and having accepted the proposition that when the amount actually accrued exceeds the amount that was debited to the rent account, such exceeded portion has to be added back to the computation of income, the AO should have realized that the natural corollary for this in respect of the property given on lease would be that where the lease equalization charges that are credited to the Revenue are greater than the actual rent accrued, such excess portion shall be reduced in the computation of income. Accepting the lease equalization charges adjustment in respect of the property taken on rent and rejecting the same in respect of the property given on rent does not fit it into any logic and it is not permissible for the Revenue to follow the rule of convenience i.e. wherever the amount is added back it is accepted and wherever the amount is reduced it is rejected.

With this view of the matter, we find that the approach of the Ld. CIT (A) to this lease equalization charges in respect of the AY 2009-10 is perfectly logical and legal and we do not find any illegality or regularity in the reasons given by him. We, therefore, uphold the findings of the Ld. CIT (A) in respect of the AY 2009-10 and on that very analogy we reject the approach the authorities in respect of these lease equalization charges for the AY 2008-09.

As stated above, this appeal is preferred by the Revenue in respect of the deletion made by the CIT in respect of the amount added by the AO by application of Section 14A read with Rule 8D of the Rules. According to AO with the average investment of Rs. 15,96,57,16,500/- the assessee earned a sum of Rs. 52,15,095/- and the contention of the assessee that the expenditure incurred was only at 10% i.e. 5,21,510/- cannot be accepted. AO dealt with this matter in paragraph no. 3 and according to us it cannot be said that AO has not recorded any reasons or satisfaction. Vide paragraph no. 3.6 of his order the AO recorded a satisfaction to the follows effect:

Priya Exhibitors (2012) 27 taxman.com (Del.) since we find that there is sufficient recording of reasons by the AO to the effect that the expenditure offered by the assessee for earning the tax exempt income is not acceptable, these decisions are not at all helpful to the case of the assessee.

In this matter the total tax exempt income of the assessee is Rs. 52,15,095/- with the average investment value of Rs.15,96,57,16,500/-. We find that the AO has rightly reached a conclusion that the expenditure at Rs. 5,21,510/- offered by the assessee cannot be accepted. However, by calculating the disallowance under Rule 8D(2) the AO reached the disallowance at Rs. 7,98,28,582/- whereas the Ld. CIT (A) felt that the action of the AO in invoking Rule 8D was arbitrary in as much as the profit and loss account shows the expenditure of personnel at Rs. 1.67 crores and an administrative and other at Rs. 1.32 crores as such put together it comes 2.99 crores. According to the Ld. CIT (A) when the total expenditure incurred by the assessee in respect of personnel, administrative and other was only Rs. 2.99 crores, invocation of Section 14A was against the spirit of the Section.

On this aspect Ld. AR argued that investment to a tune of Rs. 2,017/- crores was made at the vague end of the financial year and offering of 10% of the earnings as expenditure is just and proper; whereas Ld. DR submits that they need not always be any proportion between the expenditure and income and many times it is possible that expenditure may exceed the income depending the business vicissitudes, as such offering of expenditure at 10% is wholly baseless. He prayed to uphold the order of the AO on this aspect.

On a careful perusal of the material, we are of the considered opinion that insofar as the finding of the AO is that offering of 10% expenditure has no basis and cannot be accepted, is concerned it does not admit of any interference inasmuch as admittedly, no separate accounts are being maintained in respect of the expenditure incurred in respect of the income exempt from tax.

In the result, is allowed and ITA No. 2823/Del/2013 is dismissed and is allowed in part.