2010 (1) TMI 941 - AT - Income Tax

Deduction u/s 80-IA - year of commencement - Revenue contended since certificate of commencement of business was issued to the company on 4-4-1995 hence initial year for cliaming deduction should be AY 1996-97 and not AY 1997-98 claimed by assessee - reopening of assessment - Held that - AO has not reopened the assessment proceedings for the assessment year 1996-97. Instead, the findings recorded in the assessment year 1996-97 are being reconsidered in the year under consideration. This approach of the Assessing Officer is against the settled position in law as AO can reopen a question previously decided only if fresh facts come to light or if the earlier decision was rendered without taking into consideration material evidence, etc. No such material has been placed on behalf of the Revenue that certain fresh facts came to light or that relevant material evidence was ignored at that time in the proceedings for the assessment year 1996-97 - Decided in favor of the assessee. Deduction u/s 80-IA - whether assessee is entitled to claim deduction u/s 80-IA in terms of the provisions amended w.e.f. 1-4-2000 even when the assessee had already started providing telecommunication services in the period relevant to the AY 97-98 - assessee did not actually claim any such deduction in the period relevant to the AY 97-98 until the AY 2003-04 in view of losses -Held that - The assessee was justified in exercising option in terms of the amended provisions, especially when the provisions of section 80-IA(4)(ii) clearly stipulate that the option is available even to those undertakings which had started providing telecommunication services on or after 1-4-1995. Therefore, when the assessee fulfilled all other stipulated conditions in terms of the relevant provisions of section 80-IA CIT(A) was not justified in holding that the benefit of substituted provisions was available only to those undertakings which were granted a license after 1-4-1995 and could not start operations until 1-4-2002. Thus such an restrictive interpretation does not emerge from the amended provisions. CIT(A) was also not justified in concluding that the assessee having exercised option in the period relevant to the assessment year 1997-98 even though there was no such provision of exercising option and the assessee could not claim any such deduction in view of loss , provisions of section 80-IA of the Act substituted from the assessment year 2002-03 would not apply - Decided in favor of the assessee Setting of losses of earlier AY 1997-98 to 2000-01 without giving effect to the provisions of section 79 while computing the deduction u/s 80-IA - Held that - Similar issue in assessee s own case for the assessment year 2005-06 while rejecting the contentions on behalf of the assessee held that the gross total income of the assessee-company has first got to be determined after adjusting losses etc., and if the gross total income of the assessee will remain, then the assessee will be entitled to be deduction under section 80-IA(1) of the Act on that gross total income. In case, the gross total income of the assessee is nil, the assessee would not be entitled deduction under section 80-I(1) of the Act. Against assessee. Licence fees - revenue or capital expenditure - license fees for the first year was required to paid in lump sum prior to the signing of the agreement while for the subsequent years in quarterly instalments in advance Held that - If the outgoing or expenditure is so related to the carrying on or the conduct of the business, that it may be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure - This expenditure is regarded as revenue expenditure. Deduction u/s 80IA on the miscellaneous income and scrap sales - Held that - A mere glance at the observations of the CIT(A) of his order reveals that the CIT(A) have not passed a speaking order. The application of mind to the material facts and the arguments should manifest itself in the order - set aside the order of the CIT(A) and restore the issue raised in this ground to his file for deciding the matter afresh in accordance with law. Levy of interest u/s 234B and 234C - Held that - As relying Ashima Syntex Limited.(2008 (10) TMI 298 - ITAT AHMEDABAD-B) it can be concluded that interest under Section 234B and 234C of the Act is chargeable while determining book profits in terms of provisions of the section 115JB of the Act. Against assessee. Deletion of dis-allowance on account of sale promotion expenses - expenditure on account of gifts to the staff on the occasions of marriage, Diwali, gift vouchers - Held that - ITAT allowed claim of assessee in the assessee s own case for the AYs 2003-04 and 2005-06 - Deletion of dis-allowance upheld Deletion of dis-allowance of claim for deduction u/s 80IA on the Revenue on a/c of sharing of certain common facilities - Held that - ITAT decided in favor of assessee for AY 05-06 on ground that income generated on account of bandwidth capacity and site sharing, which has direct nexus with the business income of the Industrial Undertaking, is eligible for deduction u/s. 80IA(1) - Deletion of dis-allowance upheld Deletion of addition made on account of provision for Municipal Tax while determining book profits in terms of provisions of section 115JB - Held that - ITAT decided in favor of assessee for the AY2005-2006 on ground that provisions made for Municipal tax liability on the basis of reasonable estimate made by the management on the basis of the relevant information, cannot be added and cannot be called unascertained liability - Deletion of dis-allowance upheld.

Issues Involved:
1. Disallowance of sales promotion expenses.
2. Deduction under section 80-IA for revenue from sharing of cell site.
3. Addition to book profit on account of provision for municipal taxes for MAT liability.
4. Determination of initial year for providing telecommunication services.
5. Deduction under section 80-IA for the relevant assessment year.
6. Setting off losses of earlier assessment years without giving effect to section 79.
7. Classification of license fees paid on a revenue-sharing basis as capital expenditure.
8. Deduction under section 80-IA for miscellaneous income and scrap sales.
9. Levy of interest under sections 234B and 234C when income is computed under section 115JB.

Detailed Analysis:

1. Disallowance of Sales Promotion Expenses:
The AO disallowed sales promotion expenses amounting to Rs.48,935, considering them as personal obligations of the directors. The CIT(A) allowed the claim, relying on the ITAT's decision in the assessee's own case for the AY 2005-06. The ITAT upheld the CIT(A)'s decision, noting that the expenses were for business purposes and not personal obligations.

2. Deduction under Section 80-IA for Revenue from Sharing of Cell Site:
The AO disallowed the deduction under section 80-IA for revenue from sharing of cell site, arguing it was not derived from the industrial undertaking's business. The CIT(A) allowed the claim, relying on the ITAT's decision in the assessee's own case for the AY 2005-06, which held that such income had a direct nexus with the business income of the industrial undertaking.

3. Addition to Book Profit on Account of Provision for Municipal Taxes for MAT Liability:
The AO added Rs.9,52,20,000 to the book profit for MAT liability, treating the provision for municipal taxes as an unascertained liability. The CIT(A) deleted the addition, relying on the ITAT's decision in the assessee's own case for the AY 2005-06, which held that the provision was for a known liability and could not be added to book profit.

4. Determination of Initial Year for Providing Telecommunication Services:
The AO determined the initial year for providing telecommunication services as AY 1996-97 based on the date of the license agreement. The CIT(A) upheld this finding, but the ITAT disagreed, noting that the assessee started providing services in AY 1997-98. The ITAT emphasized the principle of consistency and the fact that the initial year should be determined based on when services were actually provided.

5. Deduction under Section 80-IA for the Relevant Assessment Year:
The AO concluded that the deduction under section 80-IA should be governed by the provisions as they stood in AY 1996-97. The CIT(A) upheld this view. However, the ITAT held that the amended provisions, which allowed the assessee to choose any ten consecutive years out of fifteen, applied. The ITAT noted that the assessee started claiming the deduction from AY 2005-06 and was entitled to do so under the amended provisions.

6. Setting Off Losses of Earlier Assessment Years without Giving Effect to Section 79:
The AO set off losses of earlier assessment years without considering the provisions of section 79. The CIT(A) upheld this action, and the ITAT agreed, noting that the provisions of section 80-IA(5) were overriding and required the set-off of earlier years' losses in determining the quantum of deduction.

7. Classification of License Fees Paid on a Revenue-Sharing Basis as Capital Expenditure:
The AO treated the license fees paid on a revenue-sharing basis as capital expenditure. The CIT(A) upheld this view. However, the ITAT disagreed, noting that the fees were paid for the use of the telecom network and were directly related to the conduct of the business. The ITAT held that the fees were revenue expenditure and allowable under section 37(1).

8. Deduction under Section 80-IA for Miscellaneous Income and Scrap Sales:
The AO disallowed the deduction under section 80-IA for miscellaneous income and scrap sales, arguing they were not derived from the business of the industrial undertaking. The CIT(A) upheld this view. The ITAT remanded the issue to the CIT(A) for a fresh decision, noting that the CIT(A) had not passed a speaking order.

9. Levy of Interest under Sections 234B and 234C when Income is Computed under Section 115JB:
The AO levied interest under sections 234B and 234C, which the CIT(A) upheld. The ITAT confirmed this decision, relying on the ITAT Special Bench's decision in the case of Ashima Syntex Ltd., which held that interest under sections 234B and 234C is chargeable when income is computed under section 115JB.

Conclusion:
The ITAT's judgment provided clarity on various issues, emphasizing the principles of consistency, the proper application of amended provisions, and the correct classification of expenses. The ITAT allowed some of the assessee's claims while remanding others for fresh consideration by the CIT(A). The judgment highlighted the importance of detailed reasoning and adherence to legal principles in tax assessments.

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