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Income Tax Appellate Tribunal, DELHI BENCH ‘C’, NEW DLEHI
Before: SHRI SAKTIJIT DEY & SHRI M. BALAGANESH
assessee arise out of order dated 13.02.2018 of learned Commissioner of Income-tax (Appeals)-35, New Delhi for the assessment year 2012-13.
The effective grounds raised by the Revenue in its appeal are as under :
“1. Whether the Ld. CIT(A) is justified in restricting the disallowance u/s. 14A of the Act on ground that the investment was made for strategic purpose which is against the disclosure of the Apex Court in CA No. 104- 109 of 2015 in case of Max Opp Investment Ltd. vs. CIT, New Delhi? 2. Whether on the facts & circumstances of the case and law, the CIT(A) is justified in deleting the addition made by the A.O. on capitalization of Licence Fee of Rs.2,26,50,074/-? Whereas, grounds raised in cross objection are as under :
“1. That on the facts and circumstances of the case and in law, the CIT(A) erred in restricting the disallowance of Rs.1,38,54,771 made by the assessing officer under section 14A of the Income-tax Act, 1961 (“the Act’) read with Rule 8D of the Income-tax Rules. 1962 (“the Rules”) to Rs.9,31,978 and not deleting the same in entirety. 1.1. That on the facts and circumstances of the case and in law, the CIT(A) erred in not holding that no disallowance could be made under section 14A of the Act since the assessing officer failed to point out any error in the computation of expenses incurred for earning the tax-free income suo motu disallowed by the assessee. 1.2. That on the facts and circumstances of the case and in law, the CIT(A) erred in not holding that no disallowance could he made under section 14A of the Act without recording satisfaction/ reaching finding as to nexus of any expenditure incurred during the year with exempt income earned.
1.3. Without prejudice, that on the facts and circumstances of the case and in law, the CIT(A) erred in not holding that investments on which no exempt income was earned were not required to be taken into account for computing disallowance under sub-rule (2)(iii) of Rule 8D of the Rules; since the opening and closing value of such investments yielding exempt income was Nil, no disallowance could be made under section 14A of the Act read with Rule 8D of the Rules.
2. That on the facts and circumstances of the case and in law, the CIT(A) erred in not allowing credit of tax deducted at source (“TDS”) amounting to Rs. 15,15,968, on the ground that the same pertained to deferred revenue, not offered to tax in entirety by the assessee in the subject assessment year. 2.1. That on the facts and circumstances of the case and in law, the CIT(A) erred in not deleting addition of Rs. 15,15,968 made by the assessing to the total income of the assessee on account of rejection of TDS credit pertaining to deferred revenue, to the extent not reversed in subsequent assessment years; not appreciating that the issue pertained to credit of TDS and no deduction was claimed by the assessee in respect of such TDS in the computation of income.”
As could be seen from the grounds raised in appeal and cross objection, the issue raised in ground No. 1 of Revenue’s appeal is corresponding to ground No. 1 with its sub-grounds in the cross objection of the Assessee and relates to disallowance made u/s. 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.
Briefly, the facts are, the assessee is a resident corporate entity and is stated to be engaged in the business of providing remote infrastructure management services and telecommunication services. In the assessment year under dispute, the assessee filed its return of income on 30.11.2022 declaring total income of Rs.218,80,78,010/-. In course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee had earned exempt income by way of dividend earned on investments made in mutual fund. Whereas, suo motu, the assessee has disallowed an amount of Rs.1,32,364/- for earning the exempt income. Being of the view that suo motu disallowance made by the assessee is not in accordance with Rule 8D(2)(iii), the Assessing Officer issued a show cause notice to the assessee to explain why disallowance should not be computed strictly in terms with the aforesaid Rule. In response to the show cause notice, the assessee furnished a detailed reply justifying the suo motu disallowance.
However, the Assessing Officer remained unconvinced. Ultimately, he proceeded to compute the disallowance under Rule 8D(2)(iii) read with section 14A at Rs.1,39,87,135/-. After setting off the suo motu disallowance made by the assessee, he made net disallowance of Rs.1,38,54,771/-. The assessee contested the aforesaid disallowance before learned first appellate authority. After considering the submissions of the assessee and taking note of the judicial precedents cited before him, learned Commissioner (Appeals) held that strategic investments made by the assessee in subsidiary/group companies should be excluded while computing the disallowance under Rule 8D(2)(iii). Thus, on the basis of aforesaid reasoning, learned Commissioner (Appeals) restricted the disallowance to Rs.9,31,978/-.
Aggrieved with the aforesaid decision of ld. Commissioner (Appeals), both the Revenue and assessee are in appeal before us.
Learned Departmental Representative submitted, the reasoning based on which learned Commissioner (Appeals) has deleted major part of the disallowance made by the Assessing Officer, is unsustainable in view of the decision of the Hon’ble Supreme Court in case of Max Opp Investment Ltd vs. CIT (judgment dated 12,02.2018 in Civil Appeal No. 104-109 of 2015), wherein, Hon’ble Supreme Court has held that strategic investment made in group companies would also attract provision of section 14A read with Rule 8D. Thus, he submitted, the disallowance made by the Assessing Officer should be restored.
Per contra, learned counsel for the assessee submitted, the exempt income earned by the assessee is from dividend on mutual fund. He submitted, no exempt income has been earned during the year on the strategic investment. He submitted, as per settled legal principle, Rule 8D(2)(iii) could be applied only with reference to the investments yielding exempt income during the relevant assessment year. He submitted, since, the assessee has not earned any exempt income on the strategic investment, they should be excluded from the average value of investments, for compliance of Rule 8D(2)(iii). He submitted, in so far as investment in mutual fund is concerned, there is neither any opening balance nor closing balance. He submitted, the investment in mutual funds, on which assessee has earned the exempt income, were not only made during the year itself, but were also disposed of during the year.
Thus, he submitted, the average value of investment as on the 1st day of the previous year as well as at the year end, is nil. In this context, he drew our attention to the balance sheet as at 31.03.2012 placed in the paper book. Thus, he submitted, in absence of any opening and closing balance of mutual fund, no disallowance under Rule 8D(2)(iii) can be computed. He submitted, under identical facts and circumstances, the Tribunal has deleted similar disallowance in assessee’s own case in assessment year 2011-12. In this regard, he drew our attention to the relevant observations of the Tribunal.
We have considered rival submissions and perused the materials on record. In so far as factual aspect of the issue is concerned, there is no dispute that in the year under consideration the assessee had earned exempt income only on the investment made in mutual fund. No exempt income, whatsoever, has been earned on the strategic investment made in subsidiary/group companies. Now, it is well settled by virtue of catena of judicial precedents that for computing disallowance under Rule 8D(2)(iii), only the investments yielding exempt income during the year under consideration can form part of average value of investment. Since, the strategic investments made by the assessee have not yielded any exempt income during the year, they cannot form part of the average value of investment for computing the disallowance under Rule 8D(2)(iii).
So far as investments in mutual fund are concerned, from the materials on record, including the financial statements of the assessee, it is observed that there is no opening and closing balances of mutual fund.
Meaning thereby, the investments, on which the assessee had earned exempt income, were not only made during the year under consideration, but also sold during the year under consideration. That being the case, the average value of investment as on the 1st day of the financial year and at the year end is nil. That being the case, the computation mechanism provided in Rule 8D(2)(iii) would fail, as it is not possible to compute the disallowance in absence of average value of investment. This is the view expressed by the coordinate bench while deciding identical issue in assessee’s own case in assessment year 2011- 12 vide order dated 31.12.2019 passed in ITA No. 3221/Del/2017. In view of the aforesaid, we direct the Assessing Officer to delete the disallowance made over and above the suo motu disallowance made by the Assessee. This disposes of ground No. 1 of Revenue’s appeal and ground No. 1 with its sub-grounds in assessee’s cross objection.
In ground No. 2 of Revenue’s appeal, the issue arising for consideration is deletion of addition made by the Assessing Officer on capitalisation of license fee.
Briefly, the facts are, in course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee had paid an amount of Rs.4,41,47,333/- to the Department of Telecommunication, Government of India for grant of license to operate and provide telecom services. Noticing these facts, the Assessing Officer called upon the assessee to explain why the expenses incurred, since, result in enduring benefit to the assessee, should not be treated as capital expenditure as per section 35ABB of the Act. In response to the query raised by the Assessing Officer, the assessee submitted that earlier the assessee was paying license fee at specified percentage of the gross revenue derived by it. Whereas, as per the National Telecom Policy, 1999, effective from 01.08.1999, the model has been changed to revenue sharing scheme, the license fee is a direct function of the Revenue. It was submitted, the assessee had not paid license fee again to obtain license.
Rather, it was paid on account of continuation of business, based on existing license. Assessing Officer, however, was not convinced with the submissions of the assessee. He concluded that the license fee debited to the profit and loss account is a capital expenditure, hence, has to be amortised over the remaining life of the license. Accordingly, applying the provisions of section 35ABB, he restricted the deduction to 1/4th of the amount claimed, which amounted to Rs.1,10,36,833/-. The assessee contested the disallowance before learned first appellate authority. After considering the submissions of the assessee, learned Commissioner (Appeals) found that the issue has been decided in favour of the assessee by the Tribunal in its own case in assessment year 2007-08 and other assessment years. Thus, following the decisions of the Tribunal, learned Commissioner (Appeals) deleted the disallowance.
Before us, learned Departmental Representative fairly submitted that in assessee’s own case in various other assessment years, the issue has been decided in favour of the assessee by the Tribunal.
Having considered rival submissions, we find, this is a recurring dispute between the parties from past assessment years. While deciding identical issue in assessment year 2011-12 (supra), the coordinate Bench has followed its earlier order in assessment year 2007-08 and held as under :
“15. We find that while making additions, the Assessing Officer himself has observed that similar disallowance was deleted by the Tribunal in Assessment Year 2007-08. Since the Revenue is in the process of filing appeal before the Hon'ble High Court the additions have been made. We are of the considered opinion that since the impugned issue is covered by the decision of the coordinate bench in assessee’s own case for Assessment Year 2007-08 and 5106/DEL/2013, there is no need to burden the first appellate authority on a decided issue. It is not the case of the Revenue that the Hon'ble High Court has stayed the operation of the order of the coordinate bench [supra]. Relevant findings of the coordinate bench read as under:
“30. We have considered the submissions of both the parties and carefully gone through the material available on the record.
It is noticed that the issue under consideration is squarely covered by the judgment of the Hon'ble Jurisdictional High Court in the case of CIT Vs Bharti Hexacom Ltd. 221 Taxman 323 (Del) (supra), wherein it has been held as under:
"The licence fee was imposed and payable under the Indian Telegraph Act and other statutory provisions and was/is mandatory. Failure to pay the same would/will result in discontinuance or stoppage of business operations. Under 1999 policy, the amount payable speaks of sharing of gross revenue earned by the service provider from the customers. 1994 agreement as noticed did have a provision for sharing but with minimum payment stipulation. In case of non- payment of licence fee, the licence could be revoked and licencee was not permitted to carry on and continue cellular telephone service. HCL Comnet Systems & Services Ltd.
Thus, the licence fee payable was/is equally with the objective and purpose to maintain and operate cellular telephone services. It was also an operating expense and non-payment can lead to cancellation as one of the consequences. Endurement requires current expenses and is subject to payment on revenue share. It will not be correct to hold or propound that entire payment during the term of licence, is deferred capital payment. This was/is not the intent under the 1994 agreement or 1999 policy. The intent is to also share the .gross earning to maintain and operate the licence.
The licence fee as such is similar to both prospecting fee, acquisition of right to lease as well as leases which enabled removal of sand/tendu leaves, etc. as nothing has to be won over, or extracted. Part payment was towards an initial investment which an assessee had to make to establish the business. It was a precondition to setting up of business. It has element and includes payment made to acquire the 'asset' i.e. the right to establish cellular telephone service. But the licence permits and allows the assessee to maintain, operate and continue business activities. Payment of licence fee has certain ingredients and is like lease rent which is payable from time to time to be able to use the licence.
The licence acquired was initially for 10 years and the term was extended under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset.
The payment of yearly licence fee on revenue sharing basis was for carrying on business as cellular telephone operator and, thus it was a normal business expense.
HCL Comnet Systems & Services Ltd.
Read in this manner, the licence granted by the Government/authority to the assessee would be a capital asset, yet at the same time, the assessee has to make payment on yearly basis on the gross revenue to continue, to be able to operate and run the business, it would also be revenue in nature.
Failure to make stipulated revenue sharing payment on yearly basis would result in forfeiting the. right to operate and in turn deny the assessee, right to do business with the aid of the capital asset. Non-payment will prevent and bar an assessee from providing services.
In aforesaid circumstances, it would be appropriate and proper to apportion the licence fee as partly revenue and partly capital.
The next obvious question is, on what basis apportionment should be done and what could be the proportion of apportionment between capital and revenue expenditure. In this regard it would be appropriate and proper to divide the licence fee into two periods i.e. before and after 31-7-1999. The licence fee paid or payable for the period up to.31-7-1999 i.e. the date set out in the 1999 policy should be treated as capital and the balance amount payable on or after the said date should be treated as revenue.
The aforesaid apportionment is necessary because licence fee was payable for establishment, maintenance and operation of cellular telephone service. Establishment and set up took place in the initial years and thereafter the payments made were/ are for operation or maintaining the cellular telephone service. Initial outlay and payment, HCL Comnet Systems & Services Ltd. therefore, is capital in nature, whereas the outlays and payments made subsequently are to operate and maintain the service. 1999 policy in the form of letter dated 22-7- 1999 also refers to one time entry fee which is chargeable and had to be calculated as lic7ence fee dues payable up to 31-7-1999 and licence fee was thereafter payable on percentage share of gross revenue.
The new licences issued to others also stipulated one time entry fee and then licence fee payment on sharing basis. In view of the new 1999 policy, the earlier policy which restricted competition, underwent a change and licencees forgo their right to operate in the regime of limited number of operators.
Another reason why licence fee payable for the period on or before 31- 7 -1999 should be treated as capital and the amount payable thereafter as revenue, is justified and appropriate in view of section 3SABB. The provision provides that licence fee of capital nature shall be amortized by dividing the amount by number of remainder years of licences.
Thus, the capitalized amount of licence fee is to be apportioned as a deduction in the unexpired period of the licence. The provision will have ballooning effect with amortized amount substantially increasing in the later years and in the last year the entire licence fee along with the brought forward amortized amount would be allowed as deduction.
After a particular point of time, deduction allowable under section 35ABB would be more than the actual payment by the assessee as licence fee for HCL Comnet Systems & Services Ltd. the said year. This would normally happen after the mid- term of the licence period.
Section 35ABB, therefore, ensures that the capital payment is duly allowed as a deduction over the term and once the expenditure is allowed, it would be revenue or tax neutral provided the tax rates remain the same during this period."
The Hon'ble Jurisdictional High Court concluded as under:
(i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable up to 31- 7-1999 should be treated as capital expenditure and licence fee on revenue sharing basis after 1-8-1999 should be treated as revenue expenditure. (ii) Capital expenditure will qualify for deduction as per section 35ABB.
Facts of the present case appears to be similar to the facts involved in the case of CIT Vs Bharti Hexacom Ltd. (Delhi) (supra), we, therefore, restored this issue to the file of the AO to be decided in accordance with the findings given by the Hon'ble Jurisdictional High Court in the case of Bharti Hexacom Ltd. (supra) and if any expenditure on account of licence fee was payable up to 31.07.1999, it should be treated as capital expenditure and the licence fee on revenue sharing basis after 01.08.1999 should be treated as revenue in nature.”
16. Respectfully following the decision of the coordinate bench, we direct the Assessing Officer to delete the addition of Rs. 3,29,84,635/-. Ground No. 2 with all its sub grounds is allowed.”
Identical view was reiterated by the Tribunal while deciding cross appeals for the assessment year 2015-16 vide order dated 11.05.2022 in and 447/Del/2019. Thus, respectfully following the consistent view of the Tribunal on the disputed issue, we uphold the decision of learned first appellate authority. This ground of Revenue is dismissed. This leaves us with ground No. 2 and its sub-grounds raised in the cross objection.
As could be seen from the grounds raised, the issue relates to the disallowance of TDS credit of Rs.15,15,968/- and corresponding addition made to the income of the assessee.
Briefly, the facts are, in course of assessment proceedings, the Assessing Officer on verification of materials on record found that the assessee had claimed TDS credit in respect of deferred revenue. Thus, he called upon the assessee to explain why TDS claimed on income of future years should not be disallowed. Though, the assessee objected to the proposed disallowance, however, rejecting assessee’s explanation, the Assessing Officer disallowed the TDS credit of Rs.15,15,968/- and added the corresponding amount to the income of the assessee. Learned Commissioner(Appeals) upheld the addition.
Before us, learned counsel appearing for the assessee submitted that once the TDS credit is disallowed, it cannot again be added to the income of the assessee as it amounts to double addition.
Learned Departmental Representative submitted, the Assessing Officer may be directed to factually verify assessee’s claim.
Having considered rival submissions, we find, the assessee had claimed certain TDS credits, which were disallowed by the Assessing Officer on the reasoning that such TDS credit relates to future income.
However, even after disallowing the TDS credit claimed by the assessee, the Assessing Officer has added the corresponding amount to the income of the assessee. Once, certain amount claimed as TDS credit is disallowed, assessee’s claim of pre-paid taxes to that extent gets reduced.
Therefore, there is no need for making any further addition of the corresponding amount to the income of the assessee as it amounts to addition of the same amount twice. In view of the aforesaid, we direct the Assessing Officer to factually verify assessee’s claim and in case, the assessee has not been given credit of TDS amounting to Rs.15,15,968/- in the computation of income, the addition of the same amount made to the income of the assessee should be deleted. This ground of assessee is allowed subject to factual verification.
In the result, Revenue’s appeal is dismissed. Whereas, cross objection of the assessee is allowed.
Order pronounced in the open court on 07/06/2023.