2017 (12) TMI 660 - AT - Income Tax

Revision u/s 263 - assessment order is erroneous and prejudicial to the interest of revenue in allowing depreciation on the 3G Spectrum cost claimed by the assessee under section 32(1) - CIT-A directing the AO to instead allow deduction under section 35ABB on the ground that the 3G Spectrum was only an extension of the original license for operating telecom services and not a separate intangible asset - Held that - From the judgment of Hon ble Supreme Court in the case of Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) and the facts of the present case, it is clear that the assessee has rightly claimed depreciation under section 32 of the Act on 3G spectrum. It means that the expenditure towards 3G Spectrum is not expenditure for acquiring any right to operate telecommunications services. Out of the service areas in which 3G spectrum was won by the assessee, it had acquired the rights to operate telecommunication services in the year 1995-1997 for Maharashtra, Gujarat, Uttar Pradesh West, Madhya Pradesh, Haryana. Andhra Pradesh, Kerala, Punjab telecom circles. In year 2001-02 it acquired rights for Himachal Pradesh, Uttar Pradesh East and thereafter in the year 2007-08 for Jammu & Kashmir. Even if 3G Spectrum was not applied or allotted, assessee could have still continued providing telecommunication services under existing license. The license to operate telecom services is issued u/s. 4 of the Indian Telegraph Act, 1885 which provide rights to establish and operate telecom services. As stated above, without such license one is not ever eligible to bid for 3G Spectrum. 3G Spectrum fees are merely for right to use a particular frequency/spectrum while providing telecommunication services. In view of the above, even the provisions of section 35ABB of the act are not applicable to such payment. In view of these facts, we are of the view that the assessee is entitled for claim of depreciation on merits also and AO has rightly allowed the claim while framing assessment under section 143(3) of the Act and the revision order of CIT Under section 263 of the Act is bad in law. - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdictional issue regarding the invocation of Section 263 of the Income Tax Act, 1961.
2. Merits of disallowing depreciation on 3G Spectrum cost under Section 32(1) of the Act.
3. Alternative claim for deduction under Section 37(1) of the Act.

Detailed Analysis:

Issue 1: Jurisdictional Issue Regarding Section 263 Invocation
The primary issue in this appeal is whether the Principal Commissioner of Income Tax (PCIT) erred in invoking Section 263 of the Income Tax Act, 1961, to revise the assessment order passed under Section 143(3). The PCIT contended that the assessment order was erroneous and prejudicial to the interest of the revenue because it allowed depreciation on the 3G Spectrum cost under Section 32(1) instead of treating it as an extension of the original telecom license and allowing deduction under Section 35ABB.

The Tribunal examined whether the conditions for invoking Section 263 were met. The PCIT relied on the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which held that an order is erroneous if it involves an incorrect assumption of facts or incorrect application of law and is prejudicial to the interest of the revenue if it results in loss of tax lawfully payable. The Tribunal noted that the Assessing Officer (AO) had conducted a detailed examination, made inquiries, and applied his mind to the facts before allowing the depreciation claim. Therefore, the Tribunal concluded that the AO's view was one of the permissible views and not erroneous. Consequently, the Tribunal held that the invocation of Section 263 by the PCIT was not justified and reversed the revision order.

Issue 2: Merits of Disallowing Depreciation on 3G Spectrum Cost
On the merits, the Tribunal examined whether the depreciation on the 3G Spectrum cost was allowable under Section 32(1) of the Act. The assessee argued that the spectrum is an intangible asset distinct from the telecom license and qualifies for depreciation under Section 32(1)(ii), which includes "licenses, franchises, or any other business or commercial rights of similar nature."

The Tribunal agreed with the assessee's contention, noting that the spectrum is a business/commercial right used for rolling out mobile telephone services. The Tribunal referred to the Supreme Court's decision in CIT v. Smifs Securities Ltd., which held that goodwill is an asset under Explanation 3(b) to Section 32(1). Applying this reasoning, the Tribunal concluded that the 3G Spectrum qualifies as an intangible asset eligible for depreciation under Section 32(1).

Issue 3: Alternative Claim for Deduction Under Section 37(1)
The assessee also claimed that the entire 3G Spectrum cost should be allowed as a business expenditure under Section 37(1) of the Act. However, the Tribunal did not find it necessary to address this alternative claim, as it had already concluded that the depreciation claim under Section 32(1) was valid.

Conclusion:
The Tribunal allowed the assessee's appeal, quashing the revision order passed by the PCIT under Section 263. It held that the AO's assessment order allowing depreciation on the 3G Spectrum cost was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal also affirmed that the 3G Spectrum qualifies as an intangible asset eligible for depreciation under Section 32(1) of the Act.