2020 (2) TMI 322 - AT - Income Tax

Disallowance of deduction u/s. 35ABB(2) - expenses on surrender of National Long Distance (NLD) license - HELD THAT - Assessee has surrendered NLD license to DOT during the year and accordingly, wrote-off the amount of ₹ 2.50 Crores in its Books of Accounts, being license fees paid to acquire the NLD license. The allegation of Ld. AO was that NLD was an intangible asset which would be eligible for depreciation u/s 32. The perusal of financial statements for the year as placed before us also corroborate the said fact which is further fortified by the fact that the assessee has not claimed any depreciation on intangible assets in its Income Tax Return. This being the case, the assessee was clearly eligible to claim the write-off of ₹ 2.50 Crores as normal business loss as well as in terms of provisions of Sec.35ABB(2) read with CBDT Circular No. 763 dated 18/02/1998 . It is noteworthy that the assessee was engaged in the business of providing telecom services and the losses incurred on account of surrender of NLD license would be in the normal course of business and therefore, the same would be an allowable deduction to the assessee in the normal business losses also. The decision of Hon ble Bombay High Court rendered in CIT V/s Evergrowth Telecom Ltd. 2013 (1) TMI 64 - BOMBAY HIGH COURT also support assessee s case and therefore, no fault could be found in the impugned order, in this regard. - Decided against revenue Interest on fixed deposits / margin money which was reduced from work-in-progress (WIP) and not credited to Profit Loss Account - HELD THAT - The perusal of financial statements corroborates the same. The Note no. 4 of Schedule 17 also mention that the company has started operations in 8 of its 21 circles with effect from 29/07/2010. This being the case, we direct Ld. AO to verify the stated facts and accept assessee s claim after due verification since the learned first appellate authority agreed with assessee s proposition that interest received during pre-operative period could not be charged to tax and the revenue is not in further appeal on this point. If the said interest of ₹ 151.89 Lacs pertains to circle which were not operationalized during the year, the impugned addition would stand deleted. Accordingly, the appeal may be treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of deduction under Section 35ABB(2) of the Income Tax Act for surrender of National Long Distance (NLD) License.
2. Taxability of interest earned on fixed deposits/margin money during the pre-operative period.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 35ABB(2) for Surrender of NLD License:

The Revenue challenged the deletion of an addition made by the Assessing Officer (AO) concerning the disallowance of a deduction under Section 35ABB(2) of the Income Tax Act, claimed by the assessee for the surrender of the NLD License amounting to ?2.50 Crores. The AO had opined that the NLD License was an intangible asset eligible for depreciation and that any loss from its surrender should be treated as a capital loss, not a business expense. The assessee, however, argued that the surrender of the NLD License was a prudent business decision to avoid penalty charges and yearly license fees, and thus, the loss should be deductible under Section 35ABB(2).

The Commissioner of Income Tax (Appeals) [CIT(A)] concurred with the assessee, noting that the NLD License had become redundant due to the acquisition of Unified Access Service License (UASL), which covered all telecom services across India. The CIT(A) observed that the assessee had not claimed depreciation on the NLD License and that the provisions of Section 35ABB(2) allowed for the deduction of the unallowed expenditure when the license is surrendered.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing that the surrender of the NLD License was a business loss eligible for deduction under Section 35ABB(2) and supported by CBDT Circular No. 763 dated 18/02/1998. The Tribunal dismissed the Revenue's appeal, affirming that the loss incurred was in the normal course of business and thus deductible.

2. Taxability of Interest Earned on Fixed Deposits/Margin Money During Pre-operative Period:

The assessee contested the addition of ?1,51,89,429 as taxable income, which was interest earned on fixed deposits/margin money. The assessee argued that this interest should be capitalized as it was inextricably linked to the setting up of the telecom project and thus should reduce the project costs. The AO, however, noted that the business activities had commenced during the year, and therefore, the interest income should be taxable.

The CIT(A) agreed with the AO, stating that since the business had commenced, the interest income could not be treated as a capital receipt. The CIT(A) noted that the assessee's operations had started in some telecom circles, and without a detailed bifurcation of interest income pertaining to operational and non-operational circles, the entire interest income was taxable.

The ITAT found that the business had indeed commenced during the year, and thus, the interest income could not be capitalized. However, the ITAT noted that the assessee had already offered a substantial portion of the interest income to tax and only a proportionate amount was reduced from project expenditure. The Tribunal directed the AO to verify the facts and accept the assessee's claim if the interest income pertained to non-operational circles, thereby allowing the appeal for statistical purposes.

Conclusion:
The Revenue's appeal was dismissed, and the assessee's appeal was allowed for statistical purposes, with directions for verification of the interest income pertaining to non-operational circles. The order was pronounced in the open court on 05th February 2020.