2013 (11) TMI 1269 - AT - Income Tax

Utilization of Interest on Borrowed Funds Whether the CIT (A) had erred to allow interest paid on borrowed funds ignoring the fact that the borrowed funds were utilized for advancing to group companies or in advancing interest free loans to them Following C.I.T. vs. Bharti Televenture Ltd. 2011 (1) TMI 326 - DELHI HIGH COURT - There was no specific instance noted by the Assessing Officer in respect of any direct nexus between the borrowed fund and the advances made to the subsidiaries - The Assessing Officer had made general observations without going into the depth of the matter and without pointing out any specific instance where an interest bearing borrowing was advanced to the subsidiaries or establishing that the borrowings made by the appellant were not for business purposes - the assessee was found to be having an adequate non-interest bearing fund by way of Share Capital and Reserves - Even otherwise, the advances were found to be made to the subsidiaries for business considerations which is nothing but the commercial expediency of assessee - the factual position reflected from the record of the assessee, the onus laid on it stood discharged Decided against Revenue. License Fee - Amortization u/s 35ABB Applicability of Section 37 - Whether the CIT (A) has erred in directing to allow license fee paid to Department of Telecommunication - Held that - Following ASSISTANT COMMISSIONER OF INCOME-TAX Versus BHARTI CELLULAR LTD. 2006 (4) TMI 50 - ITAT, KOLKATA - Annual license fee calculated on the basis of annual revenue of the assessee company was of revenue expenditure and have to be allowed u/s. 37 and not u/s. 35ABB thus Assessing Officer was directed to treat the licence fee as revenue expenditure covered u/s. 37 of the I.T. Act. Rate of Depreciation - Higher rate of depreciation on computers, printers and scanners - Whether the CIT (A) has erred by allowing the depreciation @ 60% on computer peripherals though the I.T. Rules allows 60% depreciation only on computer and computer software Held that - Following C.I.T. vs. BSES Rajdhani Powers Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT - Computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system - the computer accessories and peripherals cannot be used without the computer - they are the part of the computer system, they are entitled to depreciation at the higher rate of 60% - Assessing Officer was directed to allow the depreciation @ 60% on computer peripherals. Disallowance of Block Profit u/s 115JB - Whether the CIT (A) has erred in directing to delete addition from block profit ignoring the fact that the Explanation to section 115JB (2)(b) of the Act clearly states that if any reserve by whatever name called are debited to the P&L account, The book profit has to be increased by that amount Held that - The losses acquired under the scheme of amalgamation and difference in consideration and value of net assets acquired under the scheme of amalgamation was a valid charge made to profit and loss account, as per the general accepted accounting policy and accounting standard - Commissioner of Income Tax (A) has allowed this loss claimed in the profit and loss account for the purposes of computing the book profits u/s. 115JB Following Apollo Tyres Ltd. vs. C.I.T. 2002 (5) TMI 5 - SUPREME Court . The statutory auditors of the company have confirmed in their auditor s report that the profit and loss account has been drawn up in accordance with Accounting Standards and Companies Act, 1956 Explanation to section 115JB (2) does not provide any such adjustment to compute the book profit from the profit and loss account drawn as per Schedule VI of the Companies Act, 1956 - Any such adjustments which are not explicitly provided under the said Expln. 2 are not tenable Decided against Revenue.

Summary

Issues Involved:
1. Allowability of interest paid on borrowed funds.
2. Treatment of license fee paid to the Department of Telecommunication.
3. Depreciation rate on computer peripherals.
4. Addition to book profit under section 115JB of the Income Tax Act.

Detailed Analysis:

1. Allowability of Interest Paid on Borrowed Funds:
The Assessing Officer (AO) disallowed interest expenses amounting to Rs. 186,40,95,000/- on the grounds that borrowed funds were used to advance interest-free loans to group companies. The AO argued that such investments were not for the business purpose of the assessee, which primarily involved leasing telecom equipment. The AO also disallowed an additional Rs. 1,49,95,000/- from finance charges, estimating it as non-business expenditure.

Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee contended that similar disallowances in earlier years were set aside by the CIT(A) and confirmed by the ITAT. The CIT(A) noted that the assessee had sufficient interest-free funds and followed the ITAT's decision in earlier years, deleting the disallowance.

The ITAT upheld the CIT(A)'s order, citing that the issue had been decided in favor of the assessee in earlier years by the ITAT, affirmed by the Delhi High Court, and the Supreme Court dismissed the SLP.

2. Treatment of License Fee Paid to the Department of Telecommunication:
The AO amortized the license fee of Rs. 7,63,14,56,000/- over 20 years under Section 35ABB of the Act, allowing only Rs. 214,98,43,220/- as a deduction and disallowing Rs. 548,16,12,350/-.

The CIT(A) concluded that the license fee calculated on an annual revenue basis was revenue expenditure allowable under Section 37(1) of the IT Act, not Section 35ABB. The CIT(A) relied on ITAT decisions in the assessee's own case for earlier years.

The ITAT upheld the CIT(A)'s order, noting that the issue was covered in favor of the assessee by ITAT decisions in earlier years and the principle of stare decisis.

3. Depreciation Rate on Computer Peripherals:
The AO allowed depreciation at 25% on computer peripherals, disallowing the assessee's claim of 60%, resulting in an addition of Rs. 41,83,174/- to the income.

The CIT(A) directed the AO to allow 60% depreciation on computer peripherals, treating them as part of the computer system, based on ITAT decisions in the assessee's group company cases.

The ITAT upheld the CIT(A)'s order, referencing the Delhi High Court's decision in the case of C.I.T. vs. BSES Rajdhani Powers Ltd., which held that computer accessories and peripherals are integral parts of the computer system and entitled to 60% depreciation.

4. Addition to Book Profit Under Section 115JB:
The AO added Rs. 17,50,02,49,000/- to the book profit, arguing that losses acquired under amalgamation and the difference in consideration and net assets were appropriations of profits and should be added back under clause (b) of the Explanation to subsection 2 of Section 115JB.

The CIT(A) held that the write-off was a valid charge to the profit and loss account as per accepted accounting policies and standards. The CIT(A) noted that similar adjustments were allowed in earlier years and accepted by the Revenue.

The ITAT upheld the CIT(A)'s order, stating that the write-off was in accordance with Accounting Standard 15 and Schedule VI of the Companies Act. The ITAT referenced the Supreme Court decision in Apollo Tyres Ltd. and noted that Section 115JB does not provide for such adjustments. The ITAT also noted that the Revenue had accepted similar claims in earlier years without filing a second appeal.

Conclusion:
The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s orders on all grounds, thereby allowing the interest on borrowed funds, treating the license fee as revenue expenditure, allowing 60% depreciation on computer peripherals, and not adding the write-off to the book profit under Section 115JB.