2023 (5) TMI 508 - AT - Income Tax

Deduction u/s. 80IA - Disallowance of claim as assessee had set up its business prior to 01/04/1995 and assessee has been formed by way of splitting up / re-construction of business - HELD THAT - The above issues have already been decided by the Tribunal in appeal by the Department in assessee s case for assessment year 2005-06 2022 (12) TMI 28 - ITAT MUMBAI has held that the assessee started telecommunication services after 01/04/1995 and hence, eligible for deduction u/s. 80IA(4) of the Act. The Coordinate Bench further held that even if the assessee s undertaking is formed after merger/re-construction there would be no impediment to claim deduction u/s. 80IA of the Act in the light of CBDT Circular No. 5 of 2005.Ground No. 1 of appeal is allowed. Deduction u/s. 80IA in respect of income from Other Incomes - Tribunal 2022 (12) TMI 28 - ITAT MUMBAI in appeal by the assessee for 2005-06 has accepted assessee s claim of deduction u/s. 80IA of the Act on other incomes viz. interest income and miscellaneous income, by placing reliance on the decision in the case of Bharat Sanchar Nigam Limited 2015 (12) TMI 1531 - ITAT DELHI . Hence, ground No. 2 of the present appeal is allowed for parity of reasons. Depreciation on ARC obligation capitalized - Assessee first proposition is, that the same be considered as capital in nature and the assessee be allowed depreciation on capitalized amount - HELD THAT - This proposition has already been rejected by the Delhi Bench of Tribunal in assessee s group concern M/s. Vodafone Essar Digilink Ltd. 2018 (6) TMI 1029 - ITAT DELHI Though the assessee has filed appeal against the decision of Tribunal before Hon ble Delhi High Court, the appeal of the assessee has been admitted, however, no stay is operative against the Tribunal order. Therefore, the first proposition of the assessee is rejected. Second proposition is that the provision on ARC be allowed as expenditure u/s. 37 - Liability is fasten on the assessee to restore the leased premises to the original condition in case of any damage caused due to installation work at the time of executing licence agreement The liability is ascertained however, the same would be crystallized only in the year of vacating the leased premises. It is a well settled principle that the provision has to be created on some reliable /rational basis. Assessee has purportedly furnished the basis on which provision has been created before the Assessing Officer, however, the same has not been examined by AO and has been rejected at threshold. In the case of Rotork Control India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT on which both sides have placed reliance it has been held that the provision has to be made on some reliable estimates in respect of present obligation. Thus, what is essential for allowing the provision as revenue is (i) it should be for the purpose of business exclusively; (ii) the provision is for present obligation; and (iii) based on reliable estimates. In the present case the assessees has been able to substantiate that condition (i) (ii) above are satisfied. The assessee has purportedly furnished working of provision before the AO - The assessee s method of determining provision was not examined by the AO. We deem it appropriate to restore this issue back to the file of Assessing Officer to examine the same, in accordance with law. The ground No. 3 of the appeal is thus, partly allowed for statistical purpose. Disallowance u/s. 14A - assessee submits that during the period relevant to assessment year under appeal, the assessee has not received any income exempt from tax on the investments made - HELD THAT - It is an unrebutted fact that during the period relevant to the assessment year under appeal, the assessee has not earned any income exempt from tax on the investments. It is no more resintegra that no disallowance u/s. 14A of the Act is warranted where the assessee has not earned any exempt income during the relevant period. We further observe that the Assessing Officer has made disallowance invoking provisions of Rule 8D. The provisions of Rule 8D are effective from assessment year 2008-09. In the impugned assessment year Rule 8D has no application. Re. Godrej Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT . Hence, ground of the appeal is allowed. Interest on loan to subsidiaries - assessee submits that the assessee and its subsidiaries are engaged in the business of providing mobile telecom services PAN India, there is significant inter-dependance between the assessee and its group companies for providing cellular services in different telecom circles - Therefore, loan advanced by the assessee to its group concerns were driven by commercial expediency - HELD THAT - The Hon ble Supreme Court of India in S.A Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT has held that once it is established that interest free loans has been advanced to sister concerns on account of commercial expediency, the interest paid on such loans by assessee cannot be disallowed. In so far as the objection of Revenue regarding advancement of loans to a loss making group concern, we hold that it is the assessee who has the exclusive right to take a call regarding advancing of loans to the group concern, the AO cannot sit in the arm chair of the assessee and decide to whom loan is to be extended or at what rate of interest loan is to be extended. Once the assessee has been able to establish commercial expediency for extending the loan, which in our considered view the assessee has been successful in the present case, the interest expenditure cannot be disallowed. The assessee has further shown that to cover the interest free loans advanced to Vodafone South Limited and Vodafone Digilink Limited aggregating to Rs. 830 crores, the assessee has sufficient own funds to cover the investment. In the case of Reliance Utilities and Power Limited 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that, where the assessee is having mixed bag of interest free funds and interest bearing funds and the assessee has made investment out of such common pool of funds, the presumption would be that the investments are made out of interest free funds available with the company provided the said funds are sufficient to meet the investments. Thus, assessee succeeds. Disallowance of interest on Capital Work-in-Progress and on ECB - assessee submits that the assessee has acquired fixed assets from the borrowed capital during the year relevant to the assessment year under appeal - HELD THAT - The investment in assets / Plant Machinery/ Network equipment by the assessee have improved the quality of services, this may have resulted in increase of the subscriber base to some extent. Increase in volume of subscriber base within the same territory of operation cannot be termed as extension of business. No merit in the observations of the Assessing Officer that the interest u/s. 36(1)(iii) of the Act has to be disallowed. Reason for rejecting assessee s claim of interest expenditure on ECBs is that interest in respect of borrowed capital can only be allowed from the date on which such asset is first put to use . It is an admitted fact that ECB loans were not utilized upto 31/03/2006. In so far as other borrowed funds the Assessing Officer has not raised any such objection. In the preceding part of the order, we have held that the borrowed funds have been utilized for the purpose of business. Once it is established that the funds are used wholly and exclusively for the purpose of business interest paid on such borrowed funds is allowed u/s. 36(1)(iii) of the Act. In the case of ECBs, it is not the case of Revenue that ECB loan was diverted for non-business purpose. The assessee has received ECB loans on 10/03/2006, the funds were available with the assessee, even if, ECB loan was not utilized, interest paid thereon would be allowable. Hence, ground of the appeal are allowed. Expenditure on raising of loans - AO disallowed expenditure on raising of loan for the reason that loan has been disbursed for capital expenditure and not for augmentation of the working capital and loan funds have been utilized for non-business considerations - Whether secured and unsecured loans were raised purely for business exigencies? - HELD THAT - While deciding the preceding grounds we have held that the loans have been utilized by the assessee for the purpose of business. The loans that have been advanced to the group concern are on account of business exigencies Hon ble Apex Court in the case of India Cements Ltd. 1965 (12) TMI 22 - SUPREME COURT has held that expenditure on raising of loan is revenue in nature, hence, allowable. The nature of expenditure on raising of loan does not depend upon nature and purpose of loan. Hence, we have no hesitation in holding that the expenditure incurred for raising of the loan is allowable u/s.37(1) of the Act. The ground of the appeal is thus, allowed. Disallowance of roaming cost u/s. 40(a)(ia) - assessee submits that during the year under consideration the assessee incurred expenses on roaming charges - HELD THAT - One of the issue in the case of Vodafone East Ltd. 2015 (9) TMI 1358 - ITAT KOLKATA was with respect to deduction of tax at source in respect of roaming charges paid by the assessee to other telecom operators. The Co-ordinate Bench after analyzing the facts of the case and various decisions held that the payment of roaming charges does not fall under the ambit of TDS provision either u/s. 194C or 194J of the Act, hence, addition made u/s. 40(a)(ia) of the Act was deleted. We find that the facts and the reason for making disallowance u/s. 40(a)(ia) of the Act in the impugned order are similar to the case of Vodafone East Ltd. 2015 (9) TMI 1358 - ITAT KOLKATA No distinction has been pointed by the Revenue in the present case. Thus, for parity of reasons, disallowance u/s. 40(a) (ia) of the Act is directed to be deleted. The assessee succeeds on ground No. 9 of appeal. MAT book profit u/s 115JB - disallowance of deduction of provision for doubtful debts while computing book profit u/s. 115JB - HELD THAT - It is not in dispute that the provision made for doubtful debts amounting to Rs. 218.31 million has been added back by the Assessing Officer while computing book profits u/s. 115JB of the Act by applying clause (i) of Explanation -2 to section 115JB(2) of the Act. When the assessee chose to write back the provision for doubtful debts by creating it in its P L Account, which in the present case is Rs. 326.79 million, the same would obviously be outside the ambit of provision of section 115JB of the Act. In fact, this is specifically provided in clause (i) of Explantion-1 to section 115JB(2) of the Act under expression as reduced by while computing book profit u/s. 115JB of the Act. In view of this, we direct the Assessing Officer to reduce Rs. 326.79 million towards provision for doubtful debts written back while computing book profits u/s. 115JB of the Act. The assessee succeeds on this ground.

Summary

Issues Involved:
1. Disallowance of claim of deduction u/s. 80IA of the Act.
2. Disallowance of depreciation on provision for 'Asset Retirement Cost' (ARC).
3. Disallowance u/s. 14A of the Act.
4. Disallowance of interest on loans advanced to subsidiaries.
5. Disallowance of interest on 'Capital Work-in-Progress' and 'External Commercial Borrowings' (ECB).
6. Disallowance of expenditure incurred in connection with raising of loans.
7. Disallowance of Roaming Cost u/s. 40(a)(ia) of the Act.
8. Disallowance of provision for doubtful debts while computing book profit u/s. 115JB of the Act.
9. Initiation of penalty u/s. 271(1)(c) of the Act.
10. Levy of interest u/s. 234B, 234C & 234D of the Act.

Summary:

1. Disallowance of claim of deduction u/s. 80IA of the Act:
The Tribunal allowed the assessee's claim for deduction u/s. 80IA, following its own decision for the previous year (AY 2005-06), where it was held that the assessee commenced telecommunication services after 01/04/1998, making it eligible for the deduction. The Tribunal also allowed the deduction on 'Other Incomes' like interest and miscellaneous income, citing the case of Bharat Sanchar Nigam Limited (BSNL) 156 ITD 847 (Del-Trib).

2. Disallowance of depreciation on provision for 'Asset Retirement Cost' (ARC):
The Tribunal rejected the assessee's claim for depreciation on capitalized ARC, following the Delhi Bench decision in the assessee's group concern case, Vodafone Essar Digilink Ltd., 170 ITD 430 (Del-Trib). However, the Tribunal restored the issue to the Assessing Officer to examine the provision for ARC under section 37(1) of the Act as revenue expenditure, emphasizing that the provision should be based on reliable estimates.

3. Disallowance u/s. 14A of the Act:
The Tribunal allowed the appeal, noting that the assessee did not earn any exempt income during the relevant period. It was held that no disallowance u/s. 14A is warranted in such cases, and provisions of Rule 8D were not applicable for the impugned assessment year.

4. Disallowance of interest on loans advanced to subsidiaries:
The Tribunal allowed the appeal, finding that the loans were advanced out of commercial expediency and the assessee had sufficient own funds to cover the interest-free loans. The Tribunal relied on the Supreme Court decision in SA Builders Ltd. vs. CIT and the Bombay High Court decision in Reliance Utilities and Power Ltd.

5. Disallowance of interest on 'Capital Work-in-Progress' and 'External Commercial Borrowings' (ECB):
The Tribunal allowed the appeal, holding that the assets acquired were for improving service quality and not for business extension. It was also noted that ECB loans were received but not utilized by 31/03/2006, and interest paid on such loans was allowable.

6. Disallowance of expenditure incurred in connection with raising of loans:
The Tribunal allowed the appeal, following the Supreme Court decision in India Cements Ltd. vs. CIT, which held that expenditure on raising loans is revenue in nature and allowable under section 37(1) of the Act.

7. Disallowance of Roaming Cost u/s. 40(a)(ia) of the Act:
The Tribunal allowed the appeal, citing the Kolkata Bench decision in Vodafone East Ltd. vs. Addl. CIT, which held that roaming charges do not fall under the ambit of TDS provision either u/s. 194C or 194J of the Act.

8. Disallowance of provision for doubtful debts while computing book profit u/s. 115JB of the Act:
The Tribunal directed the Assessing Officer to reduce the provision for doubtful debts written back while computing book profits, following the decision in CIT vs. Vodafone Essar Gujarat Ltd., 397 ITR 55 (Guj).

9. Initiation of penalty u/s. 271(1)(c) of the Act:
The Tribunal dismissed the ground as premature.

10. Levy of interest u/s. 234B, 234C & 234D of the Act:
The Tribunal dismissed the ground, stating that charging of interest under these sections is mandatory and consequential.

Conclusion:
The appeals for the assessment years 2006-07 and 2007-08 were partly allowed in the terms stated above.