MAHANAGAR TELEPHONE NIGAM LTD.,NEW DELHI vs. DCIT LTU, NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E”: NEW DELHI BEFORE SHRI I.C.SUDHIR, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 4275/Del/2013 (Assessment Year: 2006-07) Mahanagar Telephone Nigam Ltd, DCIT LTU, 9, CGO Complex, Lodhi Road, New Delhi Vs. New Delhi PAN:AAACM.828R (Appellant) (Respondent)

ITA No. 4587/Del/2013 (Assessment Year: 2006-07) DCIT LTU, Mahanagar Telephone Nigam Ltd, New Delhi 9, CGO Complex, Lodhi Road, Vs. New Delhi PAN:AAACM.828R (Appellant) (Respondent)

Assessee by : Sh. Ved Jain, Adv Sh. Ashish Chadha, Adv Revenue by: Smt. Renuka Jain Gupta, CIT DR Date of Hearing 09/06/2016 Date of pronouncement 05/09/2016 O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the appeals filed by the assessee and the revenue against the order of the ld CIT (A)-LTU, New Delhi dated 22.05.2013 for the Assessment Year 2006-07. 2. The assessee has raised the following grounds of appeal:- “1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (A) is bad, both in the eye of law and on the facts. 2. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in upholding the action of the A.O. in not allowing the deduction under section 80IA of the Act as claimed and allowable under the provision of the Act. 3. On the facts and circumstances of the case, the learned CIT (A) has erred, both on facts and in law, in confirming the disallowance of deduction u/s 80IA of the Act, despite the fact that the order passed by the A.O is not in consonance with the direction given by the ITAT as well as the Hon'ble High Court of Delhi in preceding years. 4. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in confirming the action of the A.O. by wrongly interpreting the provisions of section 80IA, whereby deduction is available in respect of income derived from providing telecom services on or 1st April, 1995 and the appellant company being a

Page 2 of 19 service provider, its total income as such from providing telecom services shall be exempt. 5. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in not appreciating the contention of the assessee that the deduction available under Section 80-IA being undertaking based, the computation of income eligible even otherwise has to be worked out for each undertaking @ 100 per cent for first five years and @ 30 per cent for the next 5 years from the date of setting up of such undertaking. 6. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in confirming the disallowance of an amount of Rs 127,69,83,728/- on account of outstanding subscriber deposits. 7. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in confirming the disallowance of an amount of Rs 28,03,000/- on account of interest accrued on outstanding subscriber deposits.” 3. The revenue has raised the following grounds of appeal:- “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeal) has erred in reducing the addition of outstanding amount in subscribers deposit account of Rs.1159,32,90,000/- to Rs.127,69,83,720/- and in reducing the addition of interest of Rs. 4,79,90,000/- on subscriber deposit account to Rs. 28,03,000/-. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeal) has erred in observing that the appellant has substantiated that the amounts which are still outstanding in security deposit account are related to alive connections in absence of complete live telephone wise details of security deposits and on the basis of appellant's random sample evidence. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeal) has erred in not correctly appreciating the fact that the subscribers deposit lying unclaimed with the assessee for a long time has partaken the character of income chargeable to tax and the case laws relied upon by the assessing officer are applicable in the case. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeal) has erred in not correctly appreciating the fact that the sum of ?4,79,90,000/- on account of accrued interest on outstanding amount in subscriber deposit account was of uncertain and contingent nature and was not an allowable expenditure.” 4. The brief facts are that assessee is a public sector undertaking providing basic and mobile telephony services. It filed its return of income on 29.10.2006 showing income of Rs. 5129604406/- and on this return assessment u/s 143(3) was made at Rs. 17250962611/-. The two additions were made in the assessment proceedings (i) on account of security deposit of Rs. 11641280000/- and (ii) disallowance of claim of deduction u/s 80IA of Rs. 480078205/-. Against this assessee preferred an appeal before the ld CIT(A), LTU, who deleted the disallowance of Rs. 10316296280/- out of Rs. 1276983720/- on account of subscriber deposit and confirmed the disallowance of deduction u/s 80IA of Rs. 480078205/-. Against this order the assessee is in appeal against disallowance of deduction u/s 80IA as well as part

Page 3 of 19 confirmation of disallowance on account of subscriber’s deposit. The revenue is in appeal against deletion of part disallowance on account of security deposit. 5. First we take up the appeal of the assessee. Ground No. 1 and 8 of the appeal of the assessee are general in nature and therefore they are dismissed. 6. Ground Nos. 2 to 5 of the appeal of the assessee are related to disallowance of deduction u/s 80IA of the Income Tax Act. 7. The brief facts of the issue is that in the return of income appellant has claimed deduction u/s 80IA of Rs. 480078205/-. The assessee claimed this deduction because huge investment were made for technology and infrastructure and therefore it has established the new undertaking and therefore, it is eligible for deduction of 100% of its profit u/s 80IA of the Act. Before the ld Assessing Officer assessee submitted that it fulfills all the conditions specified in section 80IA and further it has made additional investments in expansion of its infrastructure facilities and further for earlier years coordinate bench has held that the assessee is eligible for deduction u/s 80IA on proportionate basis on new exchanges established after 01.05.1995. Ld Assessing Officer rejected the contention of the assessee for the reasons that the assessee has not maintained separate books of accounts and further according to the provisions of section 80IA(7) assessee has not got the account of the assessee audited in prescribed form in due time. Further, the AO held that the decision of the ITAT also says that assessee is eligible for deduction with respect to new exchanges put up only after 01.04.1995 and that too subject to the fulfillment of the conditions; however assessee has claimed the deduction on all income. Therefore, the order of the coordinate bench is altogether on different footings. He further disputed the claim of the assessee that no new industrial undertaking has come into operation since the assessee is engaged in the business since 1986 and merely there is a huge investment it cannot be accepted that assessee is eligible for deduction on full income. Alternative claim of the assessee for deduction on new exchanges of Rs. 614.69 million was also rejected as no profit or loss account of the individual undertaking have been submitted. Thus, the total claims of the assessee of Rs. 480078205/- was rejected. On appeal before the ld CIT(A), he decided the issue in favour of the revenue holding as under:- “6.4 Regarding the Grounds No. 6 to 10 of the appeal relating to disallowance of deduction u/s 80IA, I find that the Ld. AO has disallowed the claim of deduction u/s 80-IA on the following grounds: (1) The appellant has not met the cardinal criteria for eligibility u/s 80IA. (a) In particular, the condition that the undertaking should start providing telecommunication services on or after 01.04.1995 has not been satisfied, as the appellant has claimed deduction even on the profits of the exchanges set up before 01.04.1995. (b) Further, in terms of section 80IA (5), for the purpose of determining the quantum of deduction, the profits and gains of an eligible business shall have to be computed as if such

Page 4 of 19 eligible business were the only source of income of the assessee. The Ld. AO observed that the appellant has not maintained separate books of accounts for eligible undertakings. (c) Further, the AO observed that the appellant has not complied with the provision of section 80IA (7), which requires it to get the accounts of the eligible undertakings audited by the accountant and has failed to furnish the audit report in Form No. 10CCB along with the return of income. (2) Regarding the contention of the appellant that the Hon'ble ITAT Delhi, while passing appeal order in the case of appellant for the AY 1998-99, 1999-2000 and 2002-03 dated 3.02.2006 had held that the entire income of the appellant is eligible u/s 80 1 A, the AO found that the order of the Hon'ble ITAT was in the nature of directions to the AO to examine the allowability of the claim of deduction of the appellant in respect of income derived from new exchanges put up after 01.04.1995 and subject to fulfillment of conditions laid down in section 80IA. It did not imply that the entire income of the appellant was deductible u/s 80IA. (3) The contention of the appellant that the assessee itself is an 'undertaking', does not hold good as each exchange is an 'undertaking' and the deduction is allowable only in respect of new undertakings set up after 01.04.1995. Reliance was placed by the AO on the decision of Hon'ble High Court in the case of M/s A K Silk and Woolen Mills Pvt. Ltd. 158 ITR 462. (4) The details of additional investment in the plant & machinery made by the appellant during the period AY 1995-96 till AY 2006-07 do not have any bearing on the allowability of deduction u/s 80IA for the entire income of the appellant. (5) Regarding the alternative claim of appellant that deduction may be allowed in respect of the income of new exchanges established after 01.04.1995 in view of the decision of ITAT in the case of appellant for A.Y. 1998-99, 1999-2000, 2000-01, 2002-03 dated 03.02.2006, the Ld. AO observed that the appellant had not worked out income of each eligible undertaking separately nor has filed audit report in respect of each such undertaking along with their balance sheet and P&L, in terms of requirement of section 80IAJ5) and (7) of the Act respectively. The AO observed in the absence of these details, the computation of the deduction was not possible and the claim of the appellant was imaginary and unverifiable. The Ld. AO also distinguished the facts of the case from the facts in the case of M/s Textile Machinery Corporation Ltd. 107 ITR 195 (SC) cited by the appellant, as in his view, the said decision was in respect of section 15C of the IT Act 1922, in which there was no requirement for maintaining separate books of accounts. 6.4.2 Before me, the appellant company filed detailed submissions. The appellant company through its authorized representatives, submitted that it is not in agreement with the decision of the ITAT Delhi in its case for Assessment Year 1998-99, 1999-2000, 2000-01, 2002-03 and 2005- 06, vide its order dated 11.03.2010 in which, the Hon'ble ITAT has directed the AO to attribute 75% of the income from various services enumerated above as having been carried out by new exchanges having been installed after 01.04.1995 and the balance 25% of the income was to be attributed to the old exchanges. The Ld. AR submitted that the law does not permit deduction to be allowed on proportionate basis and that the Act provides for deduction to the eligible business irrespective of whether profits and gain arose from new undertaking or not. Further, the appellant submitted that since deduction is to be allowed in respect of the income generated by all the facilities, the deduction should be computed for the host of services rendered by MTNL The appellant also emphasized that the authorities have nowhere declined the fact that old exchanges were totally being revamped. Furthermore, it was pointed out that due to complete revamp of the technology and with the starting of cellular service and other service like voice mail, ISDN, a complete new undertaking came into existence, therefore, it was pleaded that the company as a whole is eligible the deduction u/s 80IA. 6.4.3 I have carefully considered the facts of the case in the light of the provision of section 80IA and the decisions of appellate authorities in respect of the claim of the appellant u/s 80IA in different years. Before deciding on various grounds of appeal raised by the appellant in the matter, a brief overview of the scheme of deduction u/s 80IA in the context of the business of telecommunication services is being made hereunder: 6.4.3.1 The provisions of Section 80-IA provide for deduction in the manner and extent provided in that section in respect of the profits and gains of-eligible business of an eligible undertaking, subject to meeting certain procedural conditions. The amount of deduction shall not exceed the amount of such profits and gains (of eligible business of an eligible undertaking). The deduction is available subject to the assessee meeting certain prescribed procedural conditions. Eligible undertaking (Sub-sections (3) and (4)

Page 5 of 19 The eligible undertakings for the purpose of the deduction have been defined in sub-sections (3) read with sub-section (4) thereof. In respect of an undertaking providing telecommunication services, this deduction is available to an undertaking, which- (a) Fulfils the conditions that it is not formed by splitting up, or the reconstruction, of a business already in existence and that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. However, this condition is applicable for AY 2005-06 onwards onlyJSub-section (2)); and (b) has started or starts providing telecommunication 'services, whether basic or cellular, including radio-paging, domestic satellite services, network of truncking, broadband network and internet services on or after the 1st day of April, 1995, but on or before the 31st day of March, 2005 (sub-section (4). Therefore any existing undertaking that has not started eligible business activity on or after 01.04.1995 or any existing undertaking that started eligible business activity prior to 01.04.1995, will not be eligible to claim deduction u/s 80IA, Eligible business (sub-section (4)) The eligible business, in respect of an undertaking includes, - (a) any of the activities in the nature of basic or cellular telecommunication services, including radio-paging, domestic satellite services, network of truncking, broadband network and internet services, which (b) have been started on or after the 1st day of April, 1995, but on or before the 31st day of March, 2005. Thus, an eligible business activity of an undertaking for the purpose of claiming deduction u/s 80- IA is the one, which has not started prior to the 1st day of April, 1995, and after the 31st day of March, 2005. Procedural conditions In order to ensure that only eligible profits are given deduction u/s 80-IA the onus is heavy on the assessee to prove that the deduction has not been claimed on non-eligible activity and subject to meeting the conditions specified under the section 80-IA. For this purpose, the mechanism of furnishing audit report in the prescribed form no. 10CCB in respect of each eligible undertaking for enabling verification of the eligible profits for deduction by an independent auditor has been provided. Computation of the amount of deduction The amount of deduction is to be computed as per sub-section (5) and subsection (9). The sub- section (5) of section 80IA reads as under: "(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of subsection (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." The ITAT Mumbai Bench 'C' in the case of M/s Pidilite Industries Ltd. v. Deputy Commissioner of Income Tax, Circle 3(2), Mumbai reported at [2011] 46 SOT 263 (Mum.) (RROJ/12 taxmann.com 96 (Mum. - ITAT) has interpreted this provision by holding that for the purpose of granting deduction in the initial year or a subsequent year it shall be considered as if the assessee is having eligible business as the only source of its income and if other words, if there is a loss in the initial year and in the subsequent year there is a profit, deduction shall be allowed by considering the brought forward loss in the year of profit. The relevant para of the decision is as under: "Section 80IA(5) provides that notwithstanding anything contained in the provisions of the Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply, shall for the purposes of determination the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only sources of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. By virtue of sub- section (5), section 80IA has become a standalone provision. The effect of sub-section (5) is that

Page 6 of 19 for the purpose of granting deduction in the initial year or a subsequent year it shall be considered as if the assessee is having eligible business as the only source of its income. In other words, if there is a loss in the initial year and in the subsequent year there is a profit, deduction shall be allowed by considering the brought forward loss in the year of profit. Firstly, such brought forward loss shall be set off against the profit of the eligible unit for such succeeding year and the deduction shall be allowed only if there is net profit of the eligible unit, that is, the profit of the year is sufficient enough to absorb the brought forward loss of the unit and also thereby leaving some positive profit for the current year. This position remains notwithstanding the fact that the assessee may have set off such loss from the eligible unit against the income of non- eligible unit in the year of incurring of such loss. By means of sub-section (5), the loss incurred in the eligible unit is nationally carried forward to the subsequent years and considered as such in the subsequent years until it is wiped out with the profits of the eligible unit for the succeeding years. This position stands despite the fact that such loss may have been actually set off against the income of non-eligible units in an earlier year or even the very year in which commercial production started". The Special Bench of ITAT, Ahmedabad in Asstt. C1T v. Goldmine Shares & Finance (P) Ltd. [2008] 113 ITD 209 (Ahd.) has also held that in view of the provisions of section 80IA(5), profits from eligible business for purpose of determination of quantum of deduction under section 80IA are to be computed after deduction of notional brought forward losses and depreciation of eligible business even though this had been set off against other income in the earlier years. The Hyderabad ITAT in the case of M/s Hyderabad Alkalies supplies ltd. Vs. ACIT reported in [2012] 20 taxmann.com 289 (Hyd.) has also held the same. "——(9) Where any amount of profits and gains of an -[undertaking] or of an enterprise in the case of an assessee is claimed and allowed-0- under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading "C Deductions in respect of certain incomes", and shall in no case exceed the profits and gains of such eligible business of -[undertaking] or enterprise, as the case may be ——" .

6.4.3.2 Therefore, on a comprehensive overview of the scheme of deduction under section 80-IA with respect to telecommunication services, it is evident that the benefit of deduction is available only to the profits and gains attributable to those eligible business activities, which have started on or after the 1st day of April,1995, but on before the 31st day of March, 2005, which are being carried out by an undertaking, which is eligible under sub-sections (3) and (4). There is a possibility that an assesseee may be having several undertakings, some of which may have started some of the eligible business activities during the specified period, while some undertaking may be carrying out other activities that are not eligible for the deduction u/s 80-IA or may have started eligible business activity before 01.04.1995. However, the deduction shall be available to an assessee in respect of an eligible undertaking, in respect of eligible business activities carried out undertaking that has started during the specified period (and not for other activities of that undertaking) and restricted to the extent of the profits derived from such eligible business activities only (sub-section (9)), computed in the manner provided in sub-section (5), and subject to fulfillment of various procedural conditions (sub-section)?)). 6.4.3.3 In view of the above, various grounds of appeal in the matter are being decided as under, keeping in view the legal provisions as summarized above: 6.4.3.3.2 The Ground No. 6 and 7 of the appeal, which are based on the premise that the appellant itself is one whole eligible undertaking, are as under: "(6). That on the facts and circumstances of the case and in law, the Assessing Officer has erred in neither considering nor allowing deduction allowable under section 80IA of the Act to MTNL as a whole, being a telecom service provider eligible for such deduction. (7). On the facts and circumstances of the case, the Assessing Officer has erred in ignoring the contention that the appellant company has on or after I5r April, 1995 undergone complete revamp of its technology and infrastructure leading to the formation of new undertaking and hence entitled to deduction in respect of telecommunication services U/S 801 A," I find that the main pivot of the appellant's main contention is that the entire technology and the system used by various exchanges of the appellant company have been revamped and in respect of basic telecom services, various add-on services such as datacom, radio-paging, etc. have started

Page 7 of 19 after 01.04.1995; that the company started cellular services after 01.04.1995; and that the appellant had made huge investments after 01.04.1995 for this purpose. In appellant's submission, in effect, the entire setup of the appellant company comprising various exchanges, networks, technology and system has been revamped, which implies that the appellant company itself is a new undertaking set up after 01.04.1995 and its income from all eligible activities is eligible for deduction u/s 80IA. However, I find that the appellant had also also taken an alternative plea before the Ld. CIT(A) in respect of its appeal for the AY 2005-06 on the same issue, in which the appellant has argued that the provisions of section 80IA do not make it obligatory that a new undertaking should be established. In view of this in that proceeding, the appellant had argued that each exchange is an independent undertaking and had furnished year-wise details of such exchanges along with the amount of investments made therein, for the period starting from 1996-07 onwards. The appellant had then vehemently argued that the deduction is available in respect of each individual undertaking and the profit and gains have to be computed separately. Further, in the appeal filed before the Hon'ble ITAT Delhi for the AY 1998-99, 1999-2000, 2000- 01, 2002-03 and 2005-06, the appellant itself has taken the following ground: "(iv) on the facts and circumstance of the case the Ld. CIT(A) has erred both on facts and in law, in not appreciating the contention of the asseessee that deduction available u/s 801 A, being undertaking based the computation of income, eligible even otherwise has to be worked out for each undertaking @ 100% on first 5 years and @ 30% for the next 5 years from the date of setting up of such undertaking."

The appellant seems to have now changed its position and is claiming deduction in respect of the eligible income of the appellant as a whole, taking it as the only undertaking, owned by the appellant. It is thus evident that that the appellant itself is not sure of its position in the matter. 6.4.3.33 I find that the Hon'ble ITAT, while deciding the appeal in the case of the appellant for A.Y. 1998-99, 1999-2000, 2000-01, 2002-03 and 2005-06, vide its order dated 11.03.2010 has held as under: "Keeping in view the totality of facts and circumstances of the case, we direct the AO to attribute 75% of the income from various services enumerated above as having been carried out only by the virtue of new exchanges having been installed 25% of the income may be attributed to the old exchanges. Accordingly, the matter is restored back to the file of the AO for re-computing the claim of deduction u/s 80IA with reference to 75% of the income being eligible for deduction in all the years under consideration. We direct accordingly'. While holding this, the Hon'ble ITAT held that post- 1995, the telecom sector underwent tremendous revolution by inducting de novo technology and system in place of antiquated system/technology and therefore for the purpose deduction, on the basis of attributing the income in the ratio of telephone exchanges was not proper but have to take into account various services rendered by MTNL 1995 which were actually generating income. Having held this, the Hon'ble ITAT was of the view that as the income generated through so many service rendered by the new exchanges is eligible for deduction u/s 80IA, the claim in respect of the nominal income if any generated out of the old exchanges cannot be restricted (by implication 'denied'). The Hon'ble ITAT thereafter, determined a thumb Rule by which 75% of the income from various services were considered to have been derived from the new exchanges. 6.4.3.3.4 In my humble submission, the above view of the Hon'ble ITAT tantamount to holding that the appellant itself is one single undertaking, which is primarily carrying out entire new range of telecom services, in respect of which the Hon'ble ITAT estimated 75% of the income of the appellant from telecom activity from new exchanges while for the basic telecom services emanating from old exchanges that had started prior to 1.4.1995, 25% of the income from eligible telecom services has been attributed. In my respectful submission, the scheme of deduction u/s 80- IA is with respect to profits of an eligible business activity of an eligible undertaking alone, which have to be computed in accordance with sub-section(S). Therefore, it is very likely that new undertakings may not be having any eligible profits after setting off business losses and unabsorbed depreciation, which is generally higher in earlier years. Further, the Rule 18BB of IT. Rules, 1962 has prescribed Form No. 10-CCB, which is required to be filed at the time of filing of return of income for claiming the deduction, in the prescribed manner. This Form categorically makes distinction amongst an assessee, an undertaking and a business activity and restricts the deduction in respect of profits of an eligible business activity of

Page 8 of 19 an eligible undertaking only. The appellant therefore, with multiple services, each requiring different set up and technology and several telephone exchanges in different areas for providing basic telecom services to the subscribers in the given area, may be held as owner of such different undertakings, which are working coherently in their operation for providing telecom services. It cannot be called as one unified single 'undertaking'. Keeping in view the accounting system followed by the appellant, it is possible to determine the eligible profits in respect of each new eligible business activity and each new eligible undertaking. The exact amount of deduction that is available to the appellant can be aggregated accordingly. Respectfully appreciating the virtue of practicability in dispute resolution as was adopted by the Hon'ble ITAT while pronouncing the decision dated 11.03.2010 in the case of appellant, in my humble submission, the thumb rule method of estimation of deductible profits has no sound legal basis keeping in view the provisions discussed in Para 6.4.3.1 and 6.4.3.2. Incidentally, the same is not acceptable to the appellant also, whose main plea before me is on the same ground. 6.4.3.3.5 Before holding that the revamped MTNL has started providing a different genre of services, it is also needed to ascertains as to what new services are actually being received by the old subscribers (receiving basic telecom services since prior to 1.4.1995). The appellant was primarily providing basic telecommunication services prior to 1995. The term 'basic telecommunication services' has been defined by the Govt. of India in response to a questionnaire on basic telecommunication made by the "negotiating group on basic telecommunication (NGBT) established by the WTO, asunder: "In the Indian Government's Law and Regulations relating to telecommunications, there is no definition of Basic Telecommunications. However, for the purposes of reply to this questionnaire, the word "basic telecommunication services" is assumed to cover the following services:- a. voice telephone service b. Packet-switched data transmission services c. Circuit switched data transmission services d. Telex services e. Telegraph services f. Facsimile services g. Private teased circuit services o. Other Note- Provision of 64 KBPS V-SAT based telecom networks for dosed user groups is considered as a value added service. Provision of radio-based mobile voice telephone services is considered as a Value Added Service. Keeping in view the above, for a subscriber who was receiving basic telecom services prior to 1.4.1995, the core facilities that he was getting and for which objective, he had obtained a telephone connection prior to the revamp, continue to remain the same, i.e., voice telephoning, facsimile, telex and telegraph services with some new add-on facilities added after 01.04.1995 only. The revamp in the systems may have made the operation of the facility better and made the working of the exchanges modern and may have opened up new possibilities, it cannot be said that the core services, i.e. voice telephony, facsimile, etc. received by the consumers were radically any different in post-1995 era. The modifications such as virtual card, tele-waiting, IVRS, etc could at best be considered as improvisation or add-on of the same core basic telecommunication service. Therefore, in case of revamped old exchanges, it cannot be said that the appellant had 'started basic telecommunication services after 01.04.1995', in order to make them eligible for the deduction. The services in the nature of cellular facilities and datacorn, voicemail etc. were absolutely new services, which certainly required new infrastructure for that purpose and which can be called as a new 'undertaking'. However, it was only during the financial year 2001-02 that the appellant entered into providing cellular services. 6.4.3.3.6 The observation of the Hon'ble ITAT of attributing 75% of the entire income of the appellant from telecom services to various new facilities provided by the appellant post-1995, is based on the reasoning that the appellant has not merely changed or modified services but introduced totally different facilities by revamping the technology and systems, implies that in case of substantial renovation of technology and systems a new undertaking comes into existence. Respectfully submitting that the existing provisions of section 80IA do not provide for deduction in the case of such substantial renovation and modernization for telecom sector, while on the other hand, specific I provisions in this regard were brought in statute for the Power sector. It may be noted that for the Power sector, the Finance Act 2004 w.e.f 1.4.2005 specifically extended the

Page 9 of 19 benefit of the deduction u/s 80IA in respect of the undertaking that undertakes substantial renovation and modernisation of the existing transmission line or distribution lines at any time during the period beginning on the ls: day of April 2004 and ending on 31tl day of march 2012 (sub-section (4)(iv)(c)). The provisions of section 80IA (4) (iv) (c ) read as under: "(iv) an [undertaking] which,— (a) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2012; (b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2012: Provided that the deduction under this section to an undertaking under sub-clause (b) shall be allowed only in relation to the profits derived from laying of such network of new lines for transmission or distribution; (c) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines at any time during the period beginning on the 1st day of April, 2004 and ending on the 31st day of March, 2012." It is thus evident that while for the telecommunication sector, the eligibility criteria covers only those undertakings which have started or start providing telecommunication services during the specified period, for the power sector, the deduction is available not only for undertakings that begins to generate power or start transmission or distribution by laying a network of new transmission or distribution lines within the specified period but also to the undertakings that undertake substantial renovation and modernisation of the existing network of transmission or distribution lines within the specified period.

In the absence of the specific counter-part provisions for the telecommunication sector in section 80IA, it can be reasonably inferred that the legislature had consciously not extended the benefit of tax holiday on substantial renovation and modernization of the telecommunication infrastructure. Therefore, in my humble view, the Hon'ble ITAT's interpretation that by making substantial revamping of infrastructure, the appellant had become a new undertaking eligible for deduction u/s 80IA as it had started providing absolutely new genre of services is not supported by the relevant legal provisions cited above. 6.4.3.3.7 Respectfully further submitting that while holding that 75% of income from various telecommunication services is eligible for deduction, the hon'ble ITAT did not take into account the fact that the deduction u/s 80IA to telecom sector is available only to an eligible undertaking and that too in respect of the eligible business activity and subject to the provisions of section 80IA (5). The decision of the Hon'ble ITAT of attributing 75% of the income from various telecommunication services of the appellant company is an adhoc determination of eligible profits, which may have the side-effect of allowing the deduction in respect of income from ineligible undertakings of the appellant company and may also include profits from telecommunication services that were started before 01.04.1995 and may not be confined to only new telecom services that started after 01.04.1995. Further, even for each eligible undertakings the impact of section 80IA (5) the computation of eligible profit has to be worked out keeping in view the brought forward losses and unabsorbed depreciation of such undertakings, which are to be first set-off against the income in subsequent years in view of the above referred decisions of Hon'ble Mumbai ITAT in the case of M/s Pidilite Industries Ltd.(supra) and of Hyderabad ITAT in the case of Hyderabad Alkalies Supplies Ltd. (supra). 6.4.3.3.8 In view of the above, as discussed in Para 6.4.3.1 and 6.4.3.2 above, the deduction is admissible only to an eligible undertaking of the appellant in respect of and confined to the extent of profits of the eligible business activity of that undertaking only to be computed in accordance with sub-section(S). The contention of the appellant that, as a whole, it is one undertaking (deemed to have been set up after 1.4.1995) is not correct. The appellant had started certain new eligible services such as cellular services, and for the basic telecom services, it has set up certain new exchanges or started add-on services after 1.4.1995, each of such new services/exchanges may be considered as eligible for the deduction, subject to satisfying the conditions under sub- section (3) and meeting the procedural conditions laid down in sub-section (7) and computed in the manner provided in sub-section (5). In view of the above, this ground of appeal is decided against the appellant.

Page 10 of 19 6.4.3.3.9 The Ground No. 8 of the appeal is as under: "(B). On the facts and circumstances of the case, the Assessing Officer has erred, both on facts and in law, in holding that the appellant is not entitled to deduction under section 80- IA of the Act despite the fact that the appellant fulfils all the conditions applicable to telecommunication company for claiming deduction under section 80- IA of the Act." For the purpose of claiming deduction u/s 80IA, a mechanism of furnishing an audit report in respect of each eligible undertaking, in the prescribed form no. 10CCB verified and signed by an independent auditor has been prescribed. The relevant provisions of section 80IA (7) read as under: "(7) The deduction under sub-section (1) from profits and gains derived from an undertaking shall not be admissible unless the accounts of the undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant,"

Keeping in view the language of sub-section (7), the use of words "shall not be admissible" is mandatory in nature and therefore if the assessee is not able to furnish the specific audit reports in respect of eligible undertakings along with the return of income or later before passing of the assessment order, deduction u/s 80IA cannot be granted to the assessee. Further, the instructions to the prescribed form no. 10CCB provide that in case there are multiple eligible undertakings, separate audit report in respect of the profits of such eligible undertakings need to be furnished. The said Form no. 10CCB provides clear distinction amongst the assessee (Item no. 1), the eligible undertaking (Item no. 6) and eligible business in respect of an undertaking providing telecommunication services (Item no.15). The information relating to the ownership status of the undertaking is captured in Item no. 4. For the telecom service, the audit report specifically requires information on the nature of telecom service rendered on which the deduction is being claimed, eg, basic telecom service, cellular service etc. Making distinction with the total sales of the undertaking (Item No. 27), the item 29 of the report specifically captures information relating to profit and gains derived by the undertaking/ enterprise from the eligible business. For this purpose, a copy of P&L account and balance sheet of the undertaking is to be enclosed. It is thus evident that the requirement of enclosing audit report for the eligible undertaking is not just a routine procedural requirement, as in the absence of the same, the AO is unable to decide whether any of the undertakings of the appellant were actually carrying out eligible business or not and what is the amount of the deduction available to each such eligible undertaking. Even in respect of an eligible undertaking, the amount of deduction is to be computed by first setting off the brought forward losses and the unabsorbed Depreciation allowance in view of the provisions of sub-section (5) and the profits for the year for the undertaking cannot be taken towards deduction as such. In the absence of such working as is mandated by the statutorily prescribed form NO.10CCB report (read with instructions thereto), it is not possible to ascertain the correct amount of the deduction for various eligible units. 1 find that the appellant did not furnish audit report in respect of any eligible undertakings while filing the return of income. However later during the assessment proceeding, in response to the Ld AO's query on the matter, the appellant company had filed an audit report in Form No. 10CCB, however, in the same, the assessee has considered itself as one single undertaking eligible for deduction u/s 80IA. However, as held in Para 6.4.3.3.8 above, the appellant itself is not an undertaking but is an owner of several undertakings. The deduction can be examined only in respect of the eligible undertakings for the eligible business activities and the amount of deduction can be computed only on examination of the details furnished in the respective audit reports in Form No. 10CCB of such eligible undertakings, if any. 6.4.3.4 In view of the above, in my humble opinion, the general thumb-rule law applied by the Hon'ble ITAT cannot help in identifying the specific undertakings of the appellant that are eligible for deduction nor in computing the eligible profits for deduction u/s 80IA in respect of the eligible telecommunication services (started after 1.4.1995) by an eligible undertaking. In my view, the deduction is to be allowed only to a new undertaking, which starts a specified telecommunication service after 1.4.1995 only. This could be ascertained only on the basis of the audit reports in prescribed Form No. 10CCB in respect of each eligible undertaking of the appellant, in the light of relevant P&L accounts and balance sheets and by computing profits for each such eligible undertaking in terms of sub-section (5).

Page 11 of 19 In view of the above, since the appellant has not satisfied the condition entitled in the section 80IA, this ground of appeal is also decided against the appellant. 6.4.3.4.2 The Ground No. 9 of the appeal is as under: "(9). That on the facts and in the circumstances of the case and in law, The Assessing Officer has failed to take in cognizance the order of the Honorable Income Tax Appellate Tribunal in the case of the assessee (for AY 1998-99, 1999-00, 2000-01, 2002-03) wherein the Honorable ITAT had held that MTNL has an arguable case in respect of deduction u/s 80 IA and a reasonable opportunity of being heard should be afforded to appellant before taking decision as per law." On careful consideration, I find that in its order dated 3.2.2006 for the AY 1998-99,1999-2000, 2000-01 and 2002-03, the Hon'ble ITAT has not held that the appellant itself is one single eligible undertaking in the above order, as was interpreted by the appellant. Hon'ble ITAT has merely observed that the appellant has an 'arguable case1. However that is neither in the nature of obiter dicta nor ratio deddendi. The language of the above order clearly shows that the Hon'ble ITAT had not summarily disposed off the appeal, but has given one more opportunity to the appellant before the AO, in view of the fact that in the earlier years, i.e. 1996-97, the appellant had not pressed for its claim u/s 80IA. The purpose of the above order was to restore the matter back to the AO, so that the appellant can get reasonable opportunity of being heard. In view of the above, the appellant's interpretation of the direction of the ITAT is incorrect and therefore, this ground of appeal is decided against the appellant. 6.4.3.4.3 The Ground No. 10 of the appeal is as under: "(10). That the interpretations placed on section 801A by the A.O. are totally against law and contradictory to the views as taken and accepted by the department in earlier years". I find that subsequent upon the above referred decision of the Hon'ble ITAT dated 3.2.2006, the AY 1998-99, 1999-2000, 2000-01, 2002-03 and 2005-06, the Ld. AO had held that only new exchanges set up after 1.4.1995 are eligible for deduction u/s 80IA. This has been confirmed by the Ld. CIT (Appeal) also. The subsequent orders of the AO and of the CIT(Appeal) for the AY 2001-02 are based on the ITAT's order dated 11.3.2010, in which 75% of the eligible income of the appellant has been held as eligible for deduction u/s 80IA. Thus, the department had formed a clear view that only income from eligible business of undertakings set up after 1.4.1995 is eligible for the deduction, prior to following the ITAT's order dated 11.3.2010, with which I am respectfully making deviation in the light of interpretation of section 80-IA in paragraphs 6.4.3.1 and 6.3.4.2 above, which in my humble view was never placed before the Hon'ble ITAT. Thus, the position of the department has remained consistent and when the Hon'ble ITAT provided a working formula for the deduction, the department followed the same. The fact that the Commissioner of Income Tax-IV New Delhi dropped the proceedings under Section 263 for A.Y. 1998-99, 1999-2000, 2000-01 and 2002-03, by holding that since the position in the matter was not firmed up & hence the failure of the AO in allowing deduction on new exchanges was not erroneous & prejudicial to the interest of revenue does not imply that the department has changed its legal position. The CIT-IV has only given her views on that proceedings u/s 263 cannot be initiated in the given case and the same cannot be considered as department's agreed position in the matter of deduction u/s 80IA. Moreover, resjudicata does not apply to tax proceedings, and therefore, the views of CIT-IV, which give credence to the Finance Minister's views conveyed to BSNL in the same matter by way of a letter, which itself have doubtful legal interpretational value, may not be considered as department's authentic position in the matter. On the other hand, as observed by me in para 6.4.3.3.2, the position of appellant on the issue is vacillating as appellant is not sure whether the deduction is available to it as one unified undertaking or to separate undertakings. In view of the above, this ground of-appeal is also decided against the appellant. 6.5 Keeping in view the above, in my view the issue whether the appellant, as one whole undertaking, is eligible for deduction u/s 80IA or not is not the relevant one, as the deduction is to be examined with respect to each eligible undertaking separately and be so computed. Therefore, in my humble submission, the decision of the ITAT of holding the appellant as eligible for the deduction for all its eligible activities (to the extent of 75% of profits therefrom) is without taking cognisance of the applicable provisions of section 80IA, which allow deduction for an eligible business activity of an eligible undertaking only, subject to mandatorily meeting certain prescribed requirements. Keeping in view the same, I hold that an eligible undertaking in the case of the appellant for the current year is the one that starts telecommunication services after 1.4.1995, and one that is eligible under sub-section (3) and (4) of section 80IA.

Page 12 of 19 6.5.2 The Hon'ble ITAT in the above referred order dated 11.3.2010, while deciding the appeal for the AY 2005-06 had held as under: "Since in the,AY 2005-06, there was change in the eligibility criteria of deduction eligible u/s 801 A, we direct the AO to recompute the deduction in terms of the amended provisions of the law applicable for the AY 2005-06. However the same criteria for apportioning the income attributable to income generated through various services by the new exchanges and old exchange at 75% and 25% is to be kept. We direct accordingly. In the result, the appeal of the assessee is allowed in part, in the indicated above. " I find that, while giving effect to the above directions of the Hon'ble ITAT, the Ld. AO vide order dated 27.3.2012 for that year, has not discussed this issue and to the extent the order of the AO is not a speaking one. The Finance Act, 2004, w.e.f. 1.4.2005 has made an amendment in sub-section (3) whereby undertaking engaged in providing telecommunication services referred to in clause (//) of sub-section (4), has been made ineligible for deduction u/s 80IA, if it is formed by splitting up, or by reconstruction, of a business already in existence or by the transfer to a new business of machinery or plant previously used for any purpose. In view of the same, for the current year, the appellant cannot be exempted from the conditions entailed in sub- section (3). Thus, the deduction is no more available w.e.f. 1.4.2005 for an undertaking that was formed by splitting up, or reconstruction, of a business already in existence or formed by the transfer to a new business of machinery or plant previously used for any purpose. The contention of the appellant that undertaking that were eligible in the respective 'initial assessment years' shall continue to remain eligible despite the amendment in sub-section (3) is not acceptable as the stipulated condition have to be met in each relevant Assessment Year. Moreover, the said amendment was brought by Finance Act 2004, w.e.f. 1.4.2005 while the same Finance Act with the same date has put a sun-set clause on telecom sector w.e.f. 1.4.2005. Had the contention of appellant correct, there was no need to build-in a condition in sub-section (3) w.e.f. 1.4.2005. The appellant's contention that subsequent upon the substantial revamping undertaken by it, the appellant itself be treated as a new undertaking setup after 01.04.1995 is also not acceptable in view of the fact that the law did not provide for the deduction on substantial revamping for telecommunication sector while specific provisions were introduced for the power sector, which shows definite legislative interest in the matter. In view of the above, I hold that in respect of the telecommunication services provided by the appellant, the deduction u/s 80IA is available to only the following business activities/undertaking: (a) New services such as cellular services that have been started after 01.04.1995. For such services the infrastructure set up by the appellant may be considered as the relevant undertaking. (b) Basic telecommunication services, including add-on services, if started after 01.04.1995, by any new telephone exchange set up after 01.04.1995. 6.5.3 However, in view of the mandatory provisions of section 80IA (7) read with Rule 18BBB and the instructions to the Form No.10CCB, the deduction shall be admissible only on furnishing of the prescribed audit reports in respect of each such eligible undertaking. Since the appellant had not furnished the same before the AO, the AO had rightly rejected the claim of the appellant as in the absence of the audit reports, the AO could not have verified the quantum of deduction available to each such eligible undertaking. The appellant was required to make available to AO the audit reports duly signed and verified by the accountant referred to in that section in respect of each such eligible undertaking which would have been examined by the AO in the light of provisions of section 80IA (5) for determining the amount of deduction u/s 80IA available to each such eligible undertaking, keeping in account the initial assessment year of each such unit separately for computing the deduction at the applicable rate for each such eligible undertaking. However, since the appellant failed to follow this mandatory condition and in the absence of which the Ld. AO had no wherewith all to ascertain eligibility of any undertaking for claiming deduction u/s 801A, the action of the AO in rejecting the claim of appellant was justified and is upheld.” 8. The ld AR submitted that for AY 1998-99 to 2001-02 and 2005-06 where the Tribunal allowed the deduction u/s 80IA to the extent of 75% of the income eligible for deduction on new exchanges set up. Further against the above order of ITAT, Hon’ble Delhi High Court vide order dated 17.08.2011 has not admitted the appeals of the revenue on this issue. He

Page 13 of 19 therefore submitted that this issue is covered in favour of the assessee. Further regarding furnishing of the audit report in due time he submitted that it has been furnished during the assessment proceedings and therefore on this ground the deduction cannot be rejected. He referred several decisions and amongst them prominently decision of the Hon’ble Delhi High Court in case of CIT Vs Centimeters Electrical Pvt Ltd. 317 ITR 249. 9. Ld DR vehemently relied on the orders of the lower authorities and submitted that there are no undertaking which are separate to existing composite undertaking which is in operation since 1986 and therefore, each exchange set up after specified date is not an eligible undertaking independent of its own existence income of which can be allowed deduction u/s 80IA of the Act. She further submitted that no audit was carried out of the accounts of those new exchanges and therefore, the basic conditions are not satisfied. 10. We have carefully considered the rival contentions and also the orders of the lower authorities where the deduction is disallowed to the assessee for this year. The assessee is a public sector undertaking operating as a company engaged in the business of providing telecommunication services in Bombay and New Delhi as per the license issued by Dept of Telecommunication, Govt. of India. For the year it claimed deduction u/s 80IA of the Act of Rs. 480078205/- being 30% of its income from services and operations. The main thrust of the assessee was that as it is making huge investment year-wise and therefore it is entitled to the deduction on its income. It was further argued that it has also started several telecommunication services and has undergone major expansion establishing new exchanges and assessee satisfied all the conditions of the claim. However, alternatively it claimed before the Assessing Officer that in earlier years the issue has been decided in favour of the assessee and deduction has been granted on proportionate basis by the coordinate bench. We have carefully perused the decision of coordinate bench on this issue which has been decided by coordinate bench in ITA No. 3448, 3449 and 3450/Del/2003 and 2919/Del/2004 for AY 1998-99 to 2002-03. Hon’ble High Court has dismissed the appeal of the revenue against the order of the Tribunal. Therefore, on the principal of judicial discipline the decision of coordinate bench binds us. The coordinate bench has decided this issue as under:- “35. We have considered the rival contentions and gone through the orders of the authorities below. From the record, we found that the assessee is a government of India undertaking engaged in providing telecommunication services. In respect of its income from providing telecommunication services it claimed deduction u/s 80IA which was declined by the AO and CIT(A) confirmed the AO's action. In an appeal filed before the Tribunal, after appreciating the correct provisions of the law as it stood at the relevant point of time, the matter was restored back to the AO for deciding the issue afresh as per law. While giving effect to the order of the Tribunal, the Assessing Officer has accepted the assessee's eligibility for claim of deduction however the quantum of deduction was restricted to the number of exchanges installed after 1995. Sub-section (4C) deals with allowability of claim of deduction

Page 14 of 19 u/s 80IA in respect of assessee engaged in providing telecommunication services which reads as under:- "(4C). This section applies to any undertaking -which starts providing telecommunication services, whether basic or cellular including radio- paging, domestic satellite services or network of trunking and electronic data interchange services at any time on or after the 1st of April, 1995 but before the 31st day of March, 2000. " 36. A plain reading of the above Section makes it clear that unlike provisions of sub- section 2 of Section 80IA in respect of industrial undertaking which imposes a condition that ft should be a new undertaking and that it should not be formed by splitting up or reconstruction of a business already in existence nor there is any condition that it should not be formed by transfer to a new business of machinery or plant previously used for any purpose. After analyzing all these eligibility criteria, the AO has reached to the conclusion that assessee is eligible for deduction u/s 80IA u/s 4C of the IT Act. Now, we have to see whether AO was justified in restricting claim of deduction with reference to exchanges installed after 1995. It is pertinent to mention here that deduction u/s 80IA is to be computed on the profits of the eligible business and not on the basis of amount, invested in plant & machinery in the form or telephone exchanges. Therefore, the profit accruing from telecommunication services is required to be taken into account while granting claim of deduction u/s 80IA. In this regard, we/found that after 1995, there is a complete revolution in telecommunication industry and old exchanges, if any had been totally revamped. It was not merely addition of the new exchanges but there was entire change in the set up, technology, instruments and equipments exchanges which were earlier operating on old technology whereby there was use of big cross bar exchanges with large telephone instruments of dialing numbers mechanically by rotating the dial. Since this technology has been totally abandoned and revamped, replacing the old, most of the income venerated is attributable to such new technology exchanges. Merely on the number of old exchanges which were not in operation at all or had undergone totally revamped, income cannot be attributable to such old exchanges, we found that the new technology and the new exchanges made possible a multitude of new intelligent network services which are like cellular services, virtually calling card services, premium rate services, ISDN, calling line identification, call forward on busy and free lines, credit card payment scheme, tele-mart interactive voice response services, directory on CD-Rom etc. Various add on services such as Datacom, Inet, DID PABX, voice mail, Radio paging and ISDN has been started after 1.4.1995. In addition to this phone plus facilities like dynamic locking, call waiting/call transfer, hot lines etc. has been extended to valued customers. Further in order to minimize human re-interface, important operator based special services have been automated with IVRS (Interactive Voice Response Systems). We also found that the assessee MTNL started providing several other advanced and other add on services such as virtual card/ account card falling, free phone, virtual private network, premium rate service, telecasting etc. A new technique named DLC (digital loop carrier system) has also been established. Thus, 1995 onwards the assessee's industry he -went a tremendous revolution resulting from the possibilities by automatic self operated exchanges. This was not a change or but introduction of totally different facilities. It has inducted de novo systems and technology in place of outmode and itiquated system and technology. In view of the above discussion-fit is crystal clear that merely on the basis of attributing the income in the ratio of telephone exchanges not proper, but we have to see the various services rendered by MTNL after 1995 which were actually generating income. Since the deduction is to be allowed in respect of income generated by all these facilities, we are required to compute deduction as per these host of services being rendered by MTNL. The lower

Page 15 of 19 authorities have also nowhere declined the very fact of old exchanges totally being revamped, most of which were non-operating and under discarded position. As the income generated through so many services being rendered by the .new exchanges which is eligible for claim of deduction u/s 80IA, we cannot restrict the claim in respect of the nominal income if any generated out of the old exchanges. Keeping in view the totality of facts and circumstances of the case, we direct the AO to attribute 75% (seventy five percent) of the income from various services enumerated above as having been carried out only by virtue of new exchanges having been installed^ 25% of the income may be attributed to the old exchanges. Accordingly, the matter is restored back to the file of the AO for recomputing the claim of deduction u/s 80IA with reference to 75% of the income being eligible for deduction, whereas balance 25% is eligible for deduction in all the years under consideration. We direct accordingly. 37. The other grounds in the appeal were not pressed by the learned AR, the same are therefore dismissed in-limine. 38. Since, In the AY 2005-06, there was change in the eligibility criteria of deduction eligible u/s 80IA, we direct the AO to recompute the deduction in terms of the amended provisions of the law applicable for the AY 2005-06. However, the same criteria for apportioning the income attributable to income generated through various services by the new exchanges-and old exchanges at 75% and 25% is to be kept. We dirert accordingly. 39. In the result, the appeal of the assessee is allowed in part, in terms indicated hereinabove.” 11. Further, the audit report submitted by the assessee during the assessment proceedings and not along with the return of income does not debar assessee from claiming the deduction u/s 80IA as held by Hon’ble Delhi High court in CIT Vs. Centimeter Electricals Ltd. 317 ITR 249 that requirement of filing the audit report along with the return is not mandatory but directory and therefore if the audit report is filed at any time before passing of the assessment order it satisfied the requirement. Therefore on this ground deduction cannot be denied to the assessee. In view of the above facts and following the decision of the coordinate bench in assessee’s own case for earlier years we set aside the issue back to the file of Assessing Officer to grant deduction to the assessee in similar manner in terms of para No. 35 to 39 of the order of the coordinate bench after obtaining requisite detail and granting opportunity of proper hearing to the assessee. In the result ground No. 2 to 5 of the appeal of the assessee are allowed for statistical purposes. 12. The ground No. 6 of appeal is against the action of the ld CIT(A) in reducing the addition of outstanding amount in subscriber deposit account of Rs. 11593290000/- to Rs. 1276983720/- and in reducing the addition of interest of Rs. 47990000/- to Rs. 2803000/-. 13. As the assessee is engaged in business of providing basic and mobile telephony services , at the time of application for obtaining telephone connection it accepts deposits from its subscribers. According to the P&T Rules such deposit taken is kept as security deposit and refundable only after the telephone line gets disconnected. Therefore, such subscriber deposit is taken as security deposit and for new connection given during the year the amount gets

Page 16 of 19 enhanced and for refund of deposit the amount get reduced to that extent every year. Similarly, for the current year the amount outstanding in that account was Rs. 1159.3290 crores. Such deposit are also subject to payment of nominal interest. During the assessment proceedings the ld Assessing Officer asked for the details of these outstanding deposits and deposits received during the year and repaid during the year with the age wise analysis of outstanding amount and interest thereon. The assessee submitted its reply. However, ld Assessing Officer rejected the contention of the assessee as according to him , assessee could not give the details of refund of security deposit and outstanding balance are lying unclaimed for the several years and therefore he treated this amount as income of the assessee. Further, on this outstanding liability the assessee has provided interest of Rs. 47.99 million holding that this liability is contingent in nature. Therefore, an addition of Rs. 11593.29 million on account of deposits and Rs. 47.99 million on account of interest amounting in all to Rs. 11641.28 million was added to the income of the assessee. 14. On appeal before the ld CIT(A) the assessee submitted that outstanding balance of unclaimed security deposit etc was submitted by the assessee with respect to Delhi and Mumbai Unit and further additional details were also provided of live collections along with details of customer code and amount refunded. The various types of deposits was also submitted with reconciliation. The ld CIT(A) obtained remand report on the details submitted by the appellant and after considering the same the rejoinder of the assessee was sought. Before the ld CIT(A) assessee conceded that as per statement in annexure-3 the amount of deposit of Rs. 1276983723/- is under reconciliation and interest thereon consequently is required to be reconciled. Considering all the above submission of rival parties he deleted the addition of Rs. 10316296280/- and confirmed the unreconciled sum of Rs. 1276983720/- on account of subscriber deposit. This is challenged by the parties before us in respective appeals. 15. Before us Ld AR submitted that these liabilities are outstanding balance of the refundable unclaimed security deposit and same cannot be treated as a trading receipt as the obligation to repay the same exists on the assessee. He further submitted that these amounts are not written back by the assessee and therefore provisions of section 41(1) of the Income Tax Act cannot be invoked. He further submitted that as the complete details with the list of number of connection active at the close of the year is submitted and refund of deposit was also substantiated by payment through banking channel the addition is wrongly confirmed to the extent of un-reconciled deposit. He submitted that as the deposit is under reconciliation does not mean that it is income of the assessee . He submitted that as the complete details are available, liability is genuine and shown in the books of account reconciled with live connections addition could not have been sustained. He further relied on the several decisions to buttress his claim. He further submitted that period of limitation cannot be applied in the

Page 17 of 19 present case for the purpose of saying that liability is barred by limitation. Therefore he submitted that the order of the first appellate authority granting partial relief is erroneous as security deposit is received from the customer and cannot be considered to be income of the assessee. He submitted further that assessee is a public sector undertaking and bound to refund the sums as soon as claim is made for refund. He therefore submitted that sustaining of the partial addition on the amount under reconciliation is incorrect. 16. The ld DR submitted that for the outstanding liability the assessee did not discharge its primary onus regarding to whom it is payable. Further she referred to the qualification in the auditor’s report and submitted that as reconciliation has not been done for old outstanding security deposit provisions of section 41(1) are rightly applied. She further submitted that nature of the deposit is not also cleared and merely because deposit reduces gradually cannot be the criteria for deletion of the addition. Therefore, she submitted that ld CIT(A) erred in law in deleting the addition partially though he confirmed the addition to the extent of un- reconciled amount. 17. We have carefully considered the rival contentions. The brief nature of the security deposit is that when customer demands for a connection same is collected and when it is disconnected the amount of deposit becomes refundable to the customer on production of deposit receipt and making claim thereof. As it is apparent that assessee is a public sector undertaking and operates the telephony services in select cities. It also uses CSMS system which is a programme regarding new connection refund adjustment and disconnections. Therefore, as on 31.03.2006 an amount of Rs. 11593290000/- was outstanding as net balance of security deposit. Therefore, such amount of deposit are accepted with an obligation of repayment at the time of disconnections of services. Apparently this money does not belong to the assessee company but is required to be refunded to the customers as and when claimed. Before the ld CIT(A) the assessee has submitted the details of this account with respect to outstanding balances, interest accrued thereon, telephone connection disconnected during the year, the amount of security deposit received during the year and security deposit refunded during the year for year ended March 2003 to March 2009. Regarding the live connections assessee submitted details with customer code and for security deposit refund the subscriber details. It also submitted as per annexure 3 details with regard to current status of live connections and amount of outstaying security deposit. Before him the assessee also submitted that trial balance, nature of deposits, deposit refund account and details of deposit adjustments. Such furnishing of details have been mentioned by the ld CIT(A) in para 5.2.4 to 5.2.6 in his order. On submission of this information the ld CIT(A) obtained the remand report from Assessing Officer and after obtaining rejoinder has held that the deposits held by the assessee are in the character of custodial as it has to refund it as soon as services are terminated. He further

Page 18 of 19 observed that the deposit outstanding is decreasing gradually and therefore held that it does not partake the character of trading liability as there is obligation to repay the same. He further held that the appellant does not enjoy complete dominion over this deposit as it does not own it. However, he confirmed the addition to the extent of Rs. 127.69 crores and deleted the addition of Rs. 1031.62 crores. The reason given by him for confirming the amount is that these could not be reconciled with the respect to the live connection as per statement in annexure 3 submitted. We do not agree with the finding of the ld CIT(A) to the extent of confirmation of the addition partly merely because reconciliation in these accounts with respect to the live connections are pending. The observation of the ld CIT(A) is also not correct that assessee submitted that this amount is under reconciliation and to that extent such credits are not fully explained. Before him assessee submitted that it is under reconciliation. Further when the character of deposit is determined, looking to the nature of operation geographically as well as large subscriber’s base , it is not correct to hold that pending reconciliation the deposit become income of the assesse. In view of this we set aside this issue back to the file of the Assessing Officer to give proper opportunity to the assessee to provide reconciliation of the same and then if the amounts are not at all identifiable with respect to the customers then to that extent addition may be restricted. However, if this amount is identifiable with the subscriber and even if it is not claimed by the subscriber despite disconnection of the services assessee is under obligation to repay whenever demanded by the customer. Therefore, ld Assessing Officer is directed to grant an opportunity to the assessee for reconciliation of the above deposit as held above and then decide the issue afresh. In view of this ground No. 6 of the assessee’s appeal is allowed accordingly. 18. Ground No. 7 of the appeal of the assessee is against confirming the disallowance of an amount of Rs. 2803000/- on account of interest accrued on outstanding subscriber deposit. This ground is related to ground No. 6 of the appeal of the assessee. Therefore, as we have already set aside ground No. 6 of the assessee’s appeal to the file of the Assessing Officer, we also set aside ground No. 7 to the file of the Assessing Officer to determine amount of disallowance of interest after determining the amount of taxability of subscriber deposit. This ground of appeal is allowed for statistical purposes. 19. In the result the appeal of the assessee is partly allowed. 20. Now we come to the appeal of the revenue in ITA No. 4587/Del/2013. 21. Ground No. 1 to 4 of the appeal are against deletion of addition on account of subscriber deposit and interest thereon. These grounds of appeal are inter linked to the ground No. 6 and 7 of the appeal of the assessee. While deciding the ground Nos. 6 and 7 of the appeal of the assessee we have held that that there is no infirmity in the order of the ld CIT(A) with

Page 19 of 19 respect to subscriber’s deposit held to be payable by the assessee to the subscriber on termination of services to the extent of reconciled amount and therefore, it cannot be added to the income of the assessee specially in view of the assessee furnishing substantial details and reconciliation of the amount outstanding. Further the amount of interest related to that deposit is also deleted by the ld CIT(A) as the interest was payable with respect to subscriber deposit which is completely reconciled. In view of this we dismiss ground No. 1 to 4 of the appeal of the revenue. 22. In the result the appeal of the revenue is dismissed. Order pronounced in the open court on 05/09/2016. -Sd/- -Sd/- (I.C.SUDHIR) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 05/09/2016 A K Keot Copy forwarded to