2010 (6) TMI 558 - AT - Income Tax

Disallowance - Scrutiny - Capital or revenue expenditure - Depreciation - In the case of the assessee though the licence was granted for 10 years initially however as per terms of licence the assessee is required to pay licence fee payable every year on quarterly basis - The assesee company has shown licence operating fee under the head miscellaneous expenditure as balance sheet item and amortized the same over the validity period of licence i.e. 10 years - Once the fees paid is for the period covered by the relevant previous only there is no question of amortization of expenses over a period of ten years; entire amount of the fees so paid should have been allowed as deduction as revenue expenditure - provisions of section 35 ABB of the Act are not applicable as both expenses are revenue in nature allowable u/s.37(1) of the Act in computing the profits of the business Disallowance of interest Rs.41, 66, 122/- u/s.40A(2) - the issue of levy of interest u/s.234D of the Act is covered in favour of the assessee Since the ground raised by the assessee before the ld. CIT(A) is a legal ground and keeping in view the ratio of decision in National Thermal Power Co. Ltd. vs. CIT (1996 -TMI - 5626 - SUPREME Court) - the common ground raised by the revenue is devoid of any merit and accordingly the same is rejected - In the result the assessee s appeals are allowed and the assessee s C.O. and revenue s appeals stand dismissed

Issues Involved:
1. Disallowance of DOT Licence Fee
2. Disallowance of Arrears of Licence Fee and Interest
3. Disallowance of Interest under Section 40A(2)
4. Levy of Interest under Section 234D
5. Disallowance of Space Segment Charges
6. Disallowance of Extraordinary Items
7. Deduction under Section 80IA

Detailed Analysis:

1. Disallowance of DOT Licence Fee
The primary issue was whether the DOT licence fee paid by the assessee should be treated as capital expenditure under Section 35ABB or as revenue expenditure under Section 37(1). The Tribunal noted that the licence fee, although initially granted for ten years, required annual payments. The benefit of the licence fee paid during the year lasted only till the end of that financial year. Consequently, the Tribunal held that the licence fee did not confer any enduring advantage and was not a capital expenditure. Therefore, it should be allowed as revenue expenditure under Section 37(1).

2. Disallowance of Arrears of Licence Fee and Interest
The assessee claimed arrears of licence fee and interest on delayed payments. The Assessing Officer disallowed these amounts, treating the interest as penal and the arrears as capital expenditure. The Tribunal, however, held that both the arrears of licence fee and the interest were revenue in nature and allowable under Section 37(1). The interest was compensatory and not penal, as it arose from a revision of rates with retrospective effect.

3. Disallowance of Interest under Section 40A(2)
The Assessing Officer disallowed a portion of the interest paid to related parties, considering it excessive compared to the market rate. The Tribunal noted that the loans were taken for business purposes and that the interest rates were comparable to those paid to external parties like ICICI Bank. The Tribunal emphasized that the Revenue cannot dictate the terms of business transactions unless proven excessive or unreasonable. Consequently, the disallowance was deleted.

4. Levy of Interest under Section 234D
The issue was whether interest under Section 234D could be levied for the assessment year 2002-03. The Tribunal referred to the Special Bench decision in ITO vs. Ekta Promoters P. Ltd., which held that Section 234D is applicable only from the assessment year 2004-05 onwards. Therefore, the interest under Section 234D could not be charged for the assessment year 2002-03.

5. Disallowance of Space Segment Charges
The Assessing Officer treated the space segment charges as capital expenditure. The Tribunal, following its earlier decision in the assessee's case, held that the payment for space segment charges and the use of satellite did not bring into existence any capital asset. These charges were for the use of a facility and not for acquiring the facility itself. Therefore, they were allowable as revenue expenditure.

6. Disallowance of Extraordinary Items
The Assessing Officer disallowed expenses claimed under extraordinary items, including arrears of licence fee, interest on delayed payments, and space segment charges. The Tribunal, consistent with its findings on the nature of these expenses, held that they were revenue in nature and allowable under Section 37(1).

7. Deduction under Section 80IA
The revenue contested the CIT(A)'s direction to verify facts and allow the deduction under Section 80IA. The Tribunal upheld the CIT(A)'s direction, noting that the deduction should be allowed if the assessee's income was assessed at a positive figure due to additions made by the Assessing Officer. The Tribunal emphasized that the CIT(A) acted within his jurisdiction by directing the Assessing Officer to verify and allow the deduction accordingly.

Conclusion:
The Tribunal allowed the assessee's appeals on all grounds, treating the disputed expenses as revenue in nature and allowable under Section 37(1). The revenue's appeals were dismissed, and the CIT(A)'s directions regarding the deduction under Section 80IA were upheld. The Tribunal's decisions were based on a consistent interpretation of the nature of expenses and the applicable legal provisions.

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