2024 (12) TMI 1383 - AT - Income Tax

Depreciation of passive infrastructure assets (PIAs) - AO concluded that it is a case of simple transfer and the actual cost of the PIAs in hands of the assessee would be determined basis the amount of consideration paid by the TowerCos, which in the present case is Nil - whether the PIAs were acquired by the tower companies without any consideration from the operating companies would qualify as a gift? - HELD THAT - The department cannot question the validity of the sanction of the scheme when the approved scheme is at the stage of implementation. The scheme once sanctioned by the competent court is binding on all the stakeholders which admittedly include the department also. Accordingly, the revised return filed by the assessee by giving due effect to the scheme of demerger and merger had to be accepted and given effect to by the revenue. In support of this proposition, the learned AR rightly placed reliance on the decision of Dalmia Power Ltd 2019 (12) TMI 991 - SUPREME COURT Since, the due notices were issued to the income tax department before sanctioning of the scheme by the competent court, the binding nature of the scheme cannot be questioned or challenged at the time of implementation of the scheme as the scheme had attained statutory force not only between the transferor or transferee company but also between statutory authorities to whom notices were issued by the Court. The action of the learned CIT(A) in the instant case before us merging both the schemes, is wrong. It is to be noted that parties to the scheme in the first step of demerger are different and parties to the scheme in the 2nd step of merger are different. By merging both schemes together, the learned CIT(A) is only try to rewrite the scheme which is not permissible. Under the erstwhile provisions of the Companies Act, 1956, there is specific provision in Section 394(7) of the Companies Act, 1956 wherein, liberty was given to the tax department to challenge the scheme of arrangement sanctioned by the competent court before the higher court. This admittedly was not done in the instant case before us by the income tax department. Hence, the scheme of arrangement under 2 independent steps carried out in the instant case before us cannot be questioned at all. The first scheme which was sanctioned did contain the element of gift of assets. Hence, the aspect of gift, as rightly contended by the learned AR before us, attaining finality, is correct and deserve to be accepted. The assessee would be entitled for claim of depreciation on the assets (PIAs) transferred to the tower companies under the transfer scheme which was specifically transferred to assessee under the merger scheme w.e.f. 01.04.2009 in the sum of Rs. 1344,19,48,510/-. If depreciation benefit is not given to the assessee at the value of assets which ultimately stood transferred, then none of the parties could have claimed depreciation on those assets. On this ground also and considering and totality of the facts and circumstances and in view of the detailed observations made herein above by taking due cognizance of scheme of arrangement under two steps process being sanctioned independently by the Hon ble High Court by duly accepting the element of gift involved in the first step and respectfully relying on the judicial precedent herein above, we hold that the assessee should be eligible for allowance of depreciation in its hands. Hence, disallowance made on account of depreciation is hereby directed to be deleted. Upward adjustment of depreciation on aforesaid assets obtained pursuant to the scheme of arrangement, while computing book profits u/s 115JB - Pursuant to the scheme of amalgamation, the value of assets are to be recognized at their fair values only. As in the case of Priapus Developers Pvt. Ltd. 2019 (4) TMI 1283 - ITAT DELHI had considered an identical issue where shares acquired pursuant to amalgamation were recognized at their fair values, wherein the learned AO treated the same as revaluation and denied deduction of fair value as cost of acquisition while computing book gains on transfer of shares. The Tribunal held that recognition of shares at fair value does not amount to revaluation. Hence the assessee would be entitled for claim of depreciation in the computation of book profits under section 115JB of the Act. Accordingly, the Ground Nos. 10 11 raised by the assessee are allowed. Disallowance of Capital Work In Progress (CWIP) written off - HELD THAT - The genuineness of incurrence of such expenditure is also not doubted by the revenue. The only grievance of the revenue is that the expenses were incurred by the assessee for setting up of a new tower site which is capital in nature and since the said project of setting up of tower site got abandoned / aborted, the said entries of expenditure continues to remain as capital in nature and the abandoned project loss would only have to be construed as capital loss and not revenue business loss. The fact of the project getting aborted/ abandoned is not disputed by the revenue. That the project is linked with the primary business of the assessee is not doubted. Hence, if such business project gets abandoned, the amount already spent on the said project would only have to be construed as a business loss when the same is written off in the books and hence squarely allowable as deduction. This issue is also no longer res integra in view of the decision of Idea Cellular Ltd 2016 (10) TMI 181 - BOMBAY HIGH COURT wherein held that since the new cellular towers were constructed in addition to the existing towers and no new business was being set up by assessee, expenditure incurred in respect of the said abandoned cell towers would be allowable business expenditure u/s 37(1). Decided in favour of assessee. Disallowance of Provision for Site Restoration Obligation (SRO)/ Asset Restoration Obligation (ARO) under normal provisions of the Act and also in the computation of book profits u/s 115JB - AO concluded that the provision of expenses on account of SRO/ ARO as an unascertained liability not eligible for deduction both under the normal provisions of the Act as well as in the computation of book profit u/s 115JB - HELD THAT - We hold that whenever the said provision exceeds the actual expenditure incurred at the time of expiry of lease period, excess provision, if any, would get reversed by credit to Profit and Loss account and consequentially becomes taxable u/s 41(1) of the Act. Hence, we have no hesitation to hold that the provision made for expenses on account of SRO/ ARO as an ascertained liability. Reliance is also placed on the decision of Rotork Constrols India (P) Ltd 2009 (5) TMI 16 - SUPREME COURT and Bharat Earth Movers Ltd 2000 (8) TMI 4 - SUPREME COURT Hence, it become an allowable expenditure both under the normal provisions of the Act as well as in the computation of book profit u/s 115JB of the Act. Accordingly, Ground raised by the assessee are hereby allowed. Disallowance of provision for expenses treating the same as unascertained liability both under normal provisions of the Act as well as in the computation of book profit u/s 115JB - HELD THAT - The said provision of expenses have been actually made by the assessee on scientific/ rational basis in consonance with the accrual system of accounting regularly employed by the assessee and in consonance with AS- 29 issued by ICAI. In our considered opinion, the said expenditure would have to be squarely allowed as deduction both under normal provisions of the Act as well as in the computation of book profit u/s 115JB of the Act as it falls under the category of ascertained liability. Accordingly, the Ground raised by the assessee are allowed. Disallowance of provision for Service Level Adjustment (SLA) credits both under normal provisions of the Act as well as computation of book profit u/s 115JB of the Act - AO treated the aforesaid provision for SLA credits as unascertained liability - HELD THAT - We find that the said provision of SLA credits made by the assessee is made on a scientific basis having proper rationale for the same as it is akin to provision made for warranty. In view of the decision of Rotork Controls Pvt Ltd 2009 (5) TMI 16 - SUPREME COURT we hold that the aforesaid provision of SLA credit would have to be construed as an ascertained liability eligible for deduction both under normal provisions of the Act as well as in the computation of book profit u/s 115JB of the Act. Accordingly, ground raised by the assessee are allowed. Disallowance of interest paid u/s 36(1)(iii) - HELD THAT - As in the instant case that there is no extension of existing business. The assessee has merely got new circles to render telecom services wherein towers are installed. Accordingly, in our considered opinion, proviso to section 36(1)(iii) of the Act per se is not applicable. Further, we find that the issue in dispute is covered in favour of the assessee by the decision of this Tribunal in assessee s own case for AY 2009-10 2019 (6) TMI 474 - ITAT DELHI . Once it is held that borrowed capital has been utilized for the purpose of business of the assessee, the interest paid on such loan becomes an allowable deduction u/s 36(1)(iii) - Reliance in this regard has been rightly placed on the decision of Core Healthcare Ltd 2008 (2) TMI 8 - SUPREME COURT There is absolutely no basis for the lower authorities to arrive at the average credit period of 90 days obtained from the vendors or average period taken for installation/ construction of tower sites - Decided in favour of assessee. Denial of additional claim of enhanced depreciation of energy saving device @80% as against 15% granted by the revenue - HELD THAT - We find that the devices installed by the assessee are only to ensure uninterrupted power supply at the tower sites at the required temperature level. Hence, these equipments do fall under the category of energy saving device eligible for enhanced rate of depreciation of 80%. Hence, the ld AO is directed to grant 80% depreciation on this energy saving device and recompute the allowable income tax deprecation u/s 32 of the Act for the year under consideration and also for subsequent years consequentially Decided in favour of assessee. Upward adjustment of depreciation on aforesaid assets obtained pursuant to the scheme of arrangement, while computing book profits u/s 115JB - HELD THAT - Pursuant to the scheme of amalgamation, the value of assets are to be recognized at their fair values only. The Delhi bench of this Tribunal in the case of Priapus Developers Pvt. Ltd. 2019 (4) TMI 1283 - ITAT DELHI had considered an identical issue where shares acquired pursuant to amalgamation were recognized at their fair values, wherein the learned AO treated the same as revaluation and denied deduction of fair value as cost of acquisition while computing book gains on transfer of shares. The Tribunal held that recognition of shares at fair value does not amount to revaluation. The assessee would be entitled for claim of depreciation in the computation of book profits under section 115JB of the Act. Accordingly, the Ground raised by the assessee are allowed. Disallowance made on account of depreciation in relation to provisional capitalization added to the cost of fixed assets - HELD THAT - It is pertinent to note in the special audit report issued for the assessment year 2010-11, the special auditor has categorically accepted the accounting policy/ basis adopted by the assessee and had specifically noted that provisional capitalization needs to be added to the cost base of tower site in order to measure the cost of fixed assets capitalized and depreciation there on. In view of the modus operandi adopted by the assessee which stood uncontroverted by the revenue before us and in view of the report of the Special auditor, we hold that no fault could be attributed on the basis of derivation of provisional capitalization by the assessee as narrated and detailed supra. Accordingly, we hold that the depreciation on aforesaid provisional capitalization deserves to be allowed as the corresponding assets thereon are already ready for use. We find that the learned CITA had duly appreciated this contention of the assessee and on which, we do not find any infirmity. Accordingly Ground raised by the revenue is dismissed . Disallowance of depreciation on tower sites from RFAI notice generation date - HELD THAT - We find that the Hon ble Courts have already held that the term use as referred to in Section 32 of the Act is not restricted to actual use , but also includes passive use i.e. assets kept ready for use which should also be considered for the purpose of claim of depreciation. The date on which the depreciation is being claimed by the assessee and the date for which depreciation is granted to the assessee by the revenue only results in a timing difference and effectively becomes revenue neutral and hence the revenue need not have any grievance on the same. Thus we hold that depreciation on tower sites are to be allowed from RFAI notice generation date. Hence, we do not find any infirmity in the order of the Learned CITA granting relief to the assessee. Accordingly, Ground raised by the revenue is hereby dismissed. Capitalization of salary expenses - AO capitalization of salary expenses and granting depreciation thereon in the facts and circumstances of the case - HELD THAT - We find that the employees are not only engaged in setting up of tower sites, rather majority of responsibilities relate to post setting up of tower sites and help in day to day operations of the assessee company. Hence it could be safely concluded that there is absolutely no basis for the Learned AO to even allege that these divisions perform only pre-capitalization work. We find that these salary expenditures are incurred in a routine course of business having direct nexus with the business operations of the assessee company and hence would be squarely allowable as deduction which fact has been duly appreciated by the Learned CITA while granting the relief to the assessee. Hence we do not find any infirmity in the order of the Learned CITA granting relief to the assessee. Accordingly, the Ground raised by the revenue is hereby dismissed. Partial deletion of disallowance made on account of provision for expenses, treating it as an ascertained liability - HELD THAT - As provision has been made for expenses on a rational basis by strictly following the principles mandated for mercantile system of accounting and those provided in AS-29 issued by ICAI and they are to be construed only as an ascertained liability consequentially allowable as deduction. Accordingly, we do not find any infirmity in the order of the learned CITA granting relief to the assessee qua the same - Ground raised by the revenue is hereby dismissed. Difference in turnover reported in service tax return and income tax return - CIT(A) deleted addition - HELD THAT - CIT-A had rightly admitted the additional evidences filed by the assessee under Rule 46A of the Income Tax Rules containing the turnover reconciliation statements between service tax returns and income tax return as the same are very much required for determination of the issue in dispute before him. DR before us could not draw our attention to any errors or deficiencies in the said reconciliation statement submitted before the Learned CITA. CITA on due verification of the said reconciliation statement was convinced that there was no difference in the turnover declared in the income tax return vis- -vis the service tax return. Hence we do not find any infirmity in the order of the Learned CITA granting relief to the assessee in this regard - Ground raised by the revenue is hereby dismissed. Disallowance on account of upfront fees - CIT(A) deleted addition - HELD THAT - The issue in dispute is no longer res integra in view of the decision of this Tribunal in assessee's own case for assessment year 2009-10 2019 (6) TMI 474 - ITAT DELHI wherein the loan upfront fees paid by the assessee was held to be revenue expenditure, also confirmed by HC 2023 (11) TMI 88 - DELHI HIGH COURT dated 31-10-2023 - Ground raised by the revenue is hereby dismissed. Disallowance of unverifiable expenses - CIT(A) deleted addition - HELD THAT - From the perusal of the details filed by the assessee, we find that assessee has not only placed the invoices, but also agreements of almost all the vendors for the 17 transactions, both during the assessment proceedings as well as before the Learned CITA proceedings. The assessee on its part had duly discharged its onus of genuineness of the expenditure. These facts were not appreciated by the Learned AO, whereas the Learned CITA appreciated the same and granted relief to the assessee. Nowhere the incurrence of the expenditure wholly and exclusively for the purpose of business has been doubted by the Learned AO. Hence the expenses becomes an allowable deduction in accordance with the mercantile system of accounting followed by the assessee. Accordingly, the Ground raised by the revenue is dismissed. Unverifiable expenses due to discrepancy in the PAN - HELD THAT - We find that the learned CITA had duly appreciated the contentions of the assessee and rightly deleted the disallowance made on account of expenses - Ground raised by the revenue is dismissed.

Summary

Issues Involved:

1. Depreciation of Passive Infrastructure Assets (PIAs).
2. Upward adjustment of depreciation while computing book profits under section 115JB.
3. Disallowance of Capital Work In Progress (CWIP) written off.
4. Disallowance of Provision for Site Restoration Obligation (SRO)/ Asset Restoration Obligation (ARO).
5. Disallowance of provision for expenses as unascertained liability.
6. Disallowance of provision for Service Level Adjustment (SLA) credits.
7. Disallowance of interest under section 36(1)(iii).
8. Denial of additional claim of enhanced depreciation on energy saving devices.
9. Capitalization of salary expenses.
10. Disallowance of depreciation on tower sites from RFAI notice generation date.
11. Disallowance based on difference in turnover reported in service tax return and income tax return.
12. Disallowance of upfront fees as capital expenditure.
13. Disallowance of unverifiable expenses and expenses due to discrepancy in PAN.

Detailed Analysis:

1. Depreciation of Passive Infrastructure Assets (PIAs):
The tribunal addressed the issue of depreciation claimed by the assessee on PIAs transferred under a merger scheme. The assessee argued that the transfer was a 'gift' and thus eligible for depreciation based on the tax written down value (WDV) of the assets. The tribunal upheld the assessee's claim, recognizing the transfer as a gift under the scheme approved by the High Court, and allowed the depreciation claim.

2. Upward Adjustment of Depreciation under Section 115JB:
The tribunal found that the accounting of PIAs at fair value in the books, as per the court-approved scheme, did not amount to revaluation. Consequently, the tribunal allowed the book depreciation claimed by the assessee, rejecting the upward adjustment made by the AO while computing book profits under section 115JB.

3. Disallowance of CWIP Written Off:
The tribunal allowed the write-off of CWIP, recognizing it as a business loss. The tribunal noted that the expenses were related to abandoned projects and were thus deductible as they were linked to the primary business of the assessee.

4. Disallowance of SRO/ARO:
The tribunal allowed the provision for SRO/ARO as an ascertained liability, finding that it was made on a scientific basis and was a contractual obligation under the lease agreements. The tribunal relied on precedents that recognized such provisions as deductible expenses.

5. Disallowance of Provision for Expenses:
The tribunal allowed the provision for expenses, recognizing it as an ascertained liability. The tribunal found that the provision was made on a scientific basis and was consistent with the accrual system of accounting.

6. Disallowance of SLA Credits:
The tribunal allowed the provision for SLA credits, treating it as an ascertained liability. The tribunal found that the provision was made on a scientific basis and was akin to a warranty provision.

7. Disallowance of Interest under Section 36(1)(iii):
The tribunal allowed the deduction of interest, finding that the borrowed funds were used for business purposes. The tribunal noted that there was no extension of business and hence, the proviso to section 36(1)(iii) was not applicable.

8. Denial of Enhanced Depreciation on Energy Saving Devices:
The tribunal allowed the enhanced depreciation claim at 80% for energy saving devices, finding that the devices qualified as energy saving devices under the Act.

9. Capitalization of Salary Expenses:
The tribunal found that the salary expenses were incurred in the routine course of business and were not solely related to the setting up of tower sites. The tribunal allowed the deduction of these expenses.

10. Disallowance of Depreciation on Tower Sites:
The tribunal allowed depreciation from the RFAI notice generation date, recognizing it as the date the assets were ready for use. The tribunal found that the revenue's contention to consider the billing date was not justified.

11. Disallowance Based on Turnover Difference:
The tribunal found no discrepancy in the turnover reported in the service tax return and the income tax return, based on the reconciliation provided by the assessee. The tribunal upheld the deletion of the disallowance.

12. Disallowance of Upfront Fees:
The tribunal upheld the treatment of upfront fees as revenue expenditure, consistent with the decision in the assessee's own case for the previous year.

13. Disallowance of Unverifiable Expenses:
The tribunal found that the assessee had provided sufficient evidence to support the genuineness of the expenses. The tribunal upheld the deletion of the disallowance made by the AO based on discrepancies in PAN and other clerical errors.

The tribunal's decision was largely in favor of the assessee, allowing most of the claims and deductions while dismissing the revenue's appeal.