2012 (8) TMI 972 - AT - Income Tax

Disallowance of exchange difference arising on account of import of Hand sets traded by the assessee - Held that - We reject the ground of the assessee for treating the expenses on revenue account. However we direct the Assessing Officer to allow depreciation on this amount being the same on capital account for purchase of machinery/ hand set. Disallowance on account of contribution to superannuation fund due to delay of 32 days in depositing - Held that - This issue is covered by the decision of CIT Vs. Alom Extrusions Ltd. (2009 (11) TMI 27 - SUPREME COURT) wherein it is held that if the contribution has been paid before filing the return then the same is allowable. Since the issue is covered by the decision of Hon ble Supreme Court therefore we direct the Assessing Officer to allow the deduction which is paid before filing the return of income Treating licence fee paid to Department of Telecom ( DOT ) as capital expenditure by invoking sec. 35ABB - Held that - Here in the present case facts are on much stronger footing as assessee is paying license fee annually whereas in the case of Bharti Infotel Ltd. (2015 (1) TMI 1259 - ITAT DELHI ) license fees was paid in the first year itself for 15 years. These cases are applicable directly on the issue. Therefore in view of the above observations of ours and in view of these decisions we hold that the expenditure on account of license fee paid by assessee is revenue in nature and is allowable u/s 37(1) of the Act. Accordingly we direct the Assessing Officer to allow the expenditure as claimed by the assessee. Disallowance towards notional interest on investments in an advances made to subsidiary company - Held that - As stated above the assessee has its own funds therefore the entire addition is liable to be deleted. Even otherwise the amount has been advanced to its sister concern/ subsidiary which are doing business and it has been clearly stated that the same has been advanced for commercial expediency no disallowance is to be made. Treatment to interest income - business income OR income from other sources - Held that - We are of the view that the matter should be examined afresh by the Assessing Officer by examining the factual aspect that on which amount the interest has been earned; whether there is direct nexus between earning of interest and expenditure of interest. If there is a direct nexus between earning of interest and expenditure of interest then set off is to be given and if there is an income on account of surplus funds then of course the interest income has to be treated as income from other sources. Since facts are not clear therefore we set aside this issue to the file of the Assessing Officer. For the sake of clarification this observation was made in the open court and both the parties agreed to these observations made by the Bench.

Issues Involved:

1. Disallowance of exchange difference as revenue expenditure.
2. Deduction under Section 35ABB for license fees.
3. Disallowance of contribution to superannuation fund due to late deposit.
4. Treatment of license fee as capital expenditure.
5. Disallowance of notional interest on investments in and advances to subsidiary companies.
6. Classification of interest income as business income or income from other sources.

Issue-wise Detailed Analysis:

1. Disallowance of Exchange Difference as Revenue Expenditure:

The assessee claimed a deduction of Rs. 19.96 lakhs as revenue expenditure due to exchange variation on the import of handsets. The Assessing Officer (AO) disallowed the claim, treating the expense as capital in nature since the loan was taken for purchasing machinery and handsets. The CIT(A) upheld this decision. Before the Tribunal, the assessee's representative could not provide detailed justification for treating the expense as revenue in nature but requested depreciation allowance. The Tribunal rejected the claim for revenue expenditure but directed the AO to allow depreciation on the amount as it was treated as capital expenditure.

2. Deduction under Section 35ABB for License Fees:

Grounds 2.1, 2.2, and 2.3 related to the deduction under Section 35ABB for initial license fees paid over three years, which were not pressed by the assessee as the deduction was already allowed by the AO. These grounds were dismissed as not pressed.

3. Disallowance of Contribution to Superannuation Fund Due to Late Deposit:

The AO disallowed Rs. 5,06,416/- due to a 32-day delay in depositing the contribution to the superannuation fund. The Tribunal referenced the Supreme Court decision in CIT Vs. Alom Extrusions Ltd., which allows such contributions if paid before filing the return. Consequently, the Tribunal directed the AO to allow the deduction, deleting the addition made by the AO and confirmed by the CIT(A).

4. Treatment of License Fee as Capital Expenditure:

For A.Y. 1999-2000, the AO treated the license fee of Rs. 18,64,57,000/- as capital expenditure under Section 35ABB. The assessee argued that the fee was linked to revenue generation and should be treated as revenue expenditure. The Tribunal found that the license fee, paid annually based on subscriber strength, was directly linked to revenue generation. Citing similar cases and decisions, the Tribunal concluded that the license fee was revenue in nature and allowable under Section 37(1).

5. Disallowance of Notional Interest on Investments in and Advances to Subsidiary Companies:

The AO disallowed Rs. 66,17,92,963/- as notional interest on interest-free advances to subsidiaries, despite the assessee paying interest on its loans. The CIT(A) upheld this disallowance due to insufficient evidence of a nexus between interest-free advances and interest-free funds. The Tribunal, however, noted that the assessee had sufficient own funds to cover the advances and cited relevant case law supporting the claim that advances made for commercial expediency should not attract disallowance. The Tribunal allowed the assessee's claim, directing the deletion of the disallowance.

6. Classification of Interest Income as Business Income or Income from Other Sources:

The assessee argued that interest income should be treated as business income, not income from other sources. The CIT(A) rejected this claim. The Tribunal remanded the issue back to the AO to examine the nexus between the earning and expenditure of interest. If a direct nexus is established, set-off should be given; otherwise, interest income should be treated as income from other sources.

Conclusion:

The appeals were allowed in part for statistical purposes, with specific directions for each issue. The Tribunal's order was pronounced in open court on 03-08-2012.

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