2019 (6) TMI 474 - AT - Income Tax

Allowability of Gratuity payments - whether expenditure in respect of so called gratuity can be said to be incurred wholly and exclusively for business purposes? - HELD THAT - It is pertinent to note that at the time of incorporation some of the employees from Bharti Vodafone and Idea group companies were transferred to the assessee and were enrolled as full time employees. The assessee was required to pay ex-gratia/gratuity amount in terms of the terms and conditions of appointment for such employees. Sample employment contracts details of all the employees transferred from Bharti Vodafone and Idea group companies period of employees continuous service and the amount of gratuity paid were duly furnished before CIT(A). CIT(A) called for the remand report and the AO has not pointed out any fault with the evidence produced by the assessee. In present case gratuity was actually paid. AR relied upon the decision of CIT vs. Premier Cotton Spg. Mills Ltd. 2002 (7) TMI 66 - MADRAS HIGH COURT wherein it was held that if the entire amount is not allowable u/s 36(1)(v) the balance amount would necessarily have to be allowed as a business expenditure u/s 37 of the Act and also that section 40A(7) has no application when there was an actual payment to an approved gratuity fund. Ground No. 1 of Revenue s appeal is dismissed. Taxability of Lease equalization reserve -t he additional expenditure/revenue is nothing but an average of increase in future lease rental over the lease term which is credit to special account revenue/lease equalization reserve under AS 19 - which is part of the lease rent to be paid or payable to the owner of the premise on which telecom sites (towers) are installed - HELD THAT - The assessee debited an additional amount of 16, 21, 45, 355 to P L over and above the actual lease expenditure/revenue during the assessment year as the assessee adopted AS 19. The liability to pay increased payments is contingent upon use of the premises in future. Thus additional expenditure representing lease equalization reserve is a notional expense not allowable u/s 37. AR relied upon the decision in case of CIT vs. Shoorji Vallabhdas Co. 1962 (3) TMI 6 - SUPREME COURT wherein it was held that If income does not result at all there cannot be a tax even though in book-keeping an entry is made about a hypothetical income which does not materialize . The Ld. AR also relied upon the decision of Godhra Electricity Co. Ltd. 1997 (4) TMI 4 - SUPREME COURT wherein it was held that only real income can be brought to tax. Both these decision are applicable in the present case as the assessee has made hypothetical income and is not a real income which cannot be taxed. Hence Ground No. 2 of the Revenue s appeal is dismissed. Disallowance of interest on loan - whether any part of loan taken is used to finance activity of construction of communication towers - statements of the assessee that on an average the tower is constructed within 45 days - HELD THAT - Construction of towers began in April 2008 whereas IRU agreement was entered into 1st January 2009. AO was factually incorrect in observing that assessee commenced business through lease of towers under IRU agreement. The submission AR that Receipt of equipment and services is accounted for as CWIP while the telecom site is under construction and are capitalized to fixed assets only after site is completed and starts generating revenue and the assessee gets an average credit period of 90 days from its suppliers for various material and services while erection and commissioning of telecom sites normally takes approx. 45 days for being ready to use is correct as per the records submitted before the CIT(A). Accordingly a telecom site is ready to use even before the suppliers are paid. Hence no loan needs to be drawn when the site is under construction. Details of 14, 484 self-constructed towers were submitted as additional evidences before CIT(A) and sample RFAI certificates were furnished to CIT(A). Thus after going through the evidence the CIT(A) arrived at a proper finding and correctly deleted this addition - Ground No. 3 of the Revenue s appeal is dismissed. Disallowance of IRU charges - allowable revenue expense - HELD THAT - Amount paid as confirmed by various parties is no case less than amount as per IRU agreement and in most cases same as stated in IRU agreement. AO in his notice u/s 133(6) did not ask for number of tower confirmation. AO only asked for amount confirmation. From the records it can be seen that the confirmations filed by the assessee was not properly verified either by the CIT(A) as well as by the AO and both the authorities take the cognizance of the relevant clauses of the IRU agreement. Therefore it will be appropriate to remand back this issue to the file of the Assessing Officer to take into account all the relevant evidence. Allowability of Loans processing fees as revenue expenditure u/s 37 - interest u/s 2(28A) - HELD THAT - Business need funding from time to time and thus this expense is routine business expense claimed as revenue in nature. In fact CIT(A) gave finding with respect to disallowance of interest and depreciation that none of the loans related to incomplete towers shown as CWIP as the appellant has yet to make payment for such suppliers i.e. loans were not utilized for construction of telecom towers. Expense related to loan cannot be capital in nature and allowable as revenue expenditure. These contentions of the AR are acceptable as the funding is required in business necessities from time to time and these expenses are regular business expenses claimed by the assessee. The assessee has filed the relevant evidence before the Revenue authorities as to the expenses and there is no adverse finding that these expenses are not utilized for the business. - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of gratuity payments.
2. Disallowance of net accrual of equalization reserve.
3. Disallowance of interest on loan and depreciation on telecom towers.
4. Disallowance of Indefeasible Right to Use (IRU) charges.
5. Treatment of loan processing fee as capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Gratuity Payments:
The Revenue contended that the CIT(A) erred in deleting the addition of ?42,25,273/- made on account of gratuity payments, arguing that the expenditure was not incurred wholly and exclusively for business purposes as required under Section 37(1) of the I.T. Act. The Revenue emphasized that the gratuity payments were for past services rendered to previous employers, not the assessee, and thus should not be considered a business expense. The assessee argued that the gratuity payments were contractual obligations for employees transferred from Bharti, Vodafone, and Idea group companies, and were paid as part of the terms of their employment. The Tribunal upheld the CIT(A)’s decision, noting that the payments were indeed contractual obligations and were actually paid, thus allowable under Section 37(1). The Tribunal cited the Hon’ble Madras High Court in CIT vs. Premier Cotton Spg. Mills Ltd. and the Hon’ble Supreme Court in Kerala Road Lines vs. CIT to support its decision.

2. Disallowance of Net Accrual of Equalization Reserve:
The Revenue argued that the CIT(A) erred in deleting the addition of ?30,32,30,226/- made on account of net accrual of equalization reserve, stating that the Income Tax Act permits only the mercantile or cash system of accounting, and the use of lease equalization reserve under AS 19 was not allowable. The assessee contended that the additional expenditure was notional and added back in the computation of income, and thus should not be taxed. The Tribunal agreed with the assessee, citing the Hon’ble Supreme Court in CIT vs. Shoorji Vallabhdas & Co. and Godhra Electricity Co. Ltd., ruling that notional income cannot be taxed. Therefore, the Tribunal dismissed the Revenue’s appeal on this ground.

3. Disallowance of Interest on Loan and Depreciation on Telecom Towers:
The Revenue contended that the CIT(A) erred in deleting the addition of ?1,23,75,65,807/- on account of disallowance of interest on loan and ?1,07,50,16,411/- on account of disallowance of depreciation on telecom towers, arguing that the loans were used for constructing telecom towers, which are capital assets. The assessee argued that the construction of towers began before the IRU agreements, and the loans were not utilized for the construction of towers. The Tribunal found that the construction of towers began in April 2008 and the IRU agreements were entered into in January 2009, supporting the assessee’s claim. The Tribunal upheld the CIT(A)’s decision, noting that the loans were not used for constructing towers, and thus the interest and depreciation were allowable expenses.

4. Disallowance of Indefeasible Right to Use (IRU) Charges:
The Revenue argued that the CIT(A) erred in restricting the addition of ?31,03,91,544/- on account of disallowance of IRU charges to ?3,87,51,992/-, stating that the assessee failed to provide confirmations for the number of towers leased. The assessee contended that the IRU agreements did not specify the number of towers, and the payments were fixed irrespective of the number of towers. The Tribunal found that the confirmations filed by the assessee were not properly verified by the CIT(A) or the Assessing Officer. Therefore, the Tribunal remanded the issue back to the Assessing Officer for proper verification, allowing the ground for statistical purposes.

5. Treatment of Loan Processing Fee as Capital Expenditure:
The Revenue argued that the CIT(A) correctly treated the loan processing fee of ?21,87,50,000/- as capital expenditure, allowing depreciation instead of treating it as revenue expenditure under Section 37(1). The assessee contended that the loan processing fee was a regular business expense incurred for obtaining finance for normal business operations, and thus should be treated as revenue expenditure. The Tribunal agreed with the assessee, noting that the expense was routine and necessary for business operations, and thus allowable as revenue expenditure under Section 37(1). The Tribunal cited the Hon’ble Delhi High Court in CIT vs. Gujarat Guardian Ltd. and other relevant cases to support its decision.

Conclusion:
The Tribunal dismissed the Revenue’s appeal on the grounds of gratuity payments, net accrual of equalization reserve, and interest on loan and depreciation on telecom towers. The Tribunal remanded the issue of IRU charges back to the Assessing Officer for proper verification. The Tribunal allowed the assessee’s appeal on the treatment of loan processing fee, ruling it as revenue expenditure. Both appeals were partly allowed for statistical purposes.