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TMI Blog2015 (12) TMI 1505X X X X Extracts X X X X X X X X Extracts X X X X ..... elves that the terms of licence granted in Phase-I has come to an end. In our view terms and conditions of license has been modified in above manner and tenure of the same is also extended and license granted in Phase-II is not independent of license granted to assessee in Phase-I. Therefore the claim of the assessee for deduction of above sum u/s 35ABB (1) is also not correct. Whether the amount of unallowed capital expenses paid by the assessee under phase-I policy is a capital loss or whether such a sum is allowable to the assessee? - Held that:- The reason given by CIT(A) for allowing the deduction of fees paid by assessee under PHASE-I over the remaining life of the license granted under PHASE-II of the regime. We do not find any infirmity in the finding as well as reasoning given by CIT(A) as in substances the reason canvassed by CIT(A) are similar to what we have propounded in our order. In view of this we confirm the order of CIT(A) in granting deduction of ? 1,26,58,244/- being 1/10th of ? 12,65,82,440/- being fees paid by assessee in Phase-I as deductible expenditure u/s 35ABB(1) during the year under consideration i.e. A.Y. 2006-07 - Decided against assessee. Depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and revenue regarding allowability of license fee u/s 35ABB of The Income Tax Act(in short the 'Act') paid by assessee under Phase-I of the license granted to them by GOI, amongst other grounds as under :- SR No Amount of license fees remaining unallowed under Phase-I (INR) 1 Digital Radio (Delhi) Broadcasting limited ITA No 1316/Del/2011 by Assessee and ITA No 1720/Del/2011 by revenue ₹ 12,65,82,440/- 2 Digital Radio (Mumbai) Broadcasting limited ITA No 5081/Del/2011 by Assessee and ITA No 4364/Del/2011 by revenue ₹ 26,37,65,421/- 3 Digital Radio (Kolkata) Broadcasting limited ITA No 1317/Del/2011 by Assessee and ITA No 1721/Del/2011 by revenue ₹ 1,77,65,995/- 2. As the facts and the circumstances of all these six appeals are identical except the amount involved, we dispose them off by this common order and for the sake of simplicity discuss facts and circumstances in appeal no. ITA No.1316 /Del/2012 ITA No 1720 / Del/2012 for A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve limits were rejected summarily. The One time entry fee is the charge / fee for the new successful bidder for a period of 10 years with effect from 1.4.2005. Over and above OTEF each successful bidder is also required to pay an annual license fees on revenue sharing basis @ 4 % of gross revenue for the year or 10 % of the OTEF for the concerned city, whichever is higher. On exercise of option given to the exiting broadcasters to migrate to phase-II, they were required to pay one time entry fee which is equal to average of all successful bids received under phase-II in that city. 5. All these assessee on migration to phase-II paid one time entry fee and accordingly got a new grant of permission agreement executed with the ministry of Information and broadcasting. Then they moved to revenue sharing model of phase-II for a fresh period of 10 years with effect from 1.04.2005. 6. For AY 2006-07 the assessee claimed following deduction for license fee expenditure:- I. For phase -I ₹ 12,65,82,440/- a. Assessee paid ₹ 7,12,50,000/- as license fee for phase-I up to Ay 2003-04 out of which ₹ 71,25,000/- was claimed as deduction for AY 2004-05 and 2005- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT (A) in his appellate order are either incorrect or untenable. The LD. CIT (A) had not demonstrated in his appellate order as to how the case laws cited by the appellant were distinguishable. he is also incorrect in holding that section 35ABB (2) of the IT Act has no application and that the expenditure of ₹ 12,65,82,440/- needs to be allowed over 10 new year's term of phase-II license regimes starting from assessment year 2006-07 thereby allowing deduction of ₹ 1,26,58,244/- only. 2. That without prejudice to ground no 1 above, the authorities below ought to have allowed depreciation on the entire amount of ₹ 12,65,82,440/- @ 25 % per annum. 3. The interest income as declared at ₹ 38,41,383/- ought to have been assessed as business income and not under the head income from other sources 10. Revenue being aggrieved with the order of CIT (A) has risen following grounds of appeal. 1. On the facts and circumstances of the case and in law, ld. CIT (A) has erred in allowing ₹ 1,26,58,244/- being 1/10th of the total license fees claimed u/s 35ABB of the Act. 2. On the facts and circumstances of the case and in law, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Phase-II which was made effective w.e.f. 01/04/2005. According to him such relinquishment/ extinguishment/exchange/ parting of asset or rights therein in capital asset in any manner whatsoever clearly amounted to transfer as per the definition of transfer u/s 2(47) read with Explanation 2. For this proposition, reliance is placed on various case laws as cited before the CIT (A).Therefore his first argument was that there is transfer of license due to migration from phase-I to phase-II of the policy and provision of sub section 2 of section 35ABB should apply. As there is no consideration received the full amount of amount outstanding shall be allowed as deduction to the assessee. (ii) Even if it is presumed (though not admitted) that the definition of transfer u/s 2(47) is not applicable to section 35ABB, then he pressed to look at the ordinary/common meaning of the word 'migrate' and 'transfer'. As per the dictionary meaning of these words both these words are synonyms. Hence, from this angle also, migration of license from Phase-I regime to Phase-II license regime is to be considered as transfer of license and therefore, the Assessee' s case is covere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 79 of the paper book. Moreover, fact that in order to become eligible to migrate and obtain Phase-II license, the Assessee was first required to clear off and pay all its dues under the Phase-1 license as applicable till cut-off date of 1st April, 2005 and then further pay a One Time Entry Fee (OTEF) equal to average of all successful bids received from new bidders under Phase-II for the city of Mumbai. This clearly demonstrates that Phase-I license remained in force or was valid till 1st April, 2005 only. The AO had also recorded this finding of fact at page 7of his order by observing as under: Rather; as a result of assessee migrating to Phase-II regime, the earlier licence agreement has come to an end . Moreover, the clearance of Phase-I license fees dues was not only a precondition for migrating to Phase-II license regime but was also a precondition for the other option of surrendering the Phase-I license. Hence, the Ld. CIT(A) findings that payment of arrears of Phase-I license fee is to be considered as part and parcel of migration fee is not based on the factual position because such payment of arrears of ₹ 26,37,65,421/- can at no stage be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) of the act. Further he submitted that for transfer there has to be two person i.e. one transferor and another transferee and in this case transferee is absent and hence it cannot be called transfer u/s 2 (47) of the act. In nutshell his argument was that the claim of the assessee for license fee remaining unallowed cannot be allowed either u/s 35ABB (1) or (2) of the act. 14. We have carefully considered the rival submission as well as the orders of lower authorities. There is no dispute on the allowability of license fee paid by the assessee under PHASE -II of policy on migration form phase I to Phase-II. Dispute relates on amount remaining unallowed in the hands of the assessee paid for license under Phase-I on migration. AO has disallowed the same holding that it is a capital loss and there is not transfer as envisaged u/s 35ABB (2) of the act. CIT (A) has upheld both the contention of AO however he has increased the amount of license fees paid under phase-II with the amount remaining unallowed in the hands of assessee for fees paid for Phase-I and granted the deduction on such amount over the new term of ten years of license in phase-II. 15. Provision of section 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g unallowed shall be chargeable to income-tax as profits and gains of the business in the previous year in which the licence has been transferred. Explanation.-where the licence is transferred in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year. (4) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed, no deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in which the licence is transferred or in respect of any subsequent previous year or years. (5) Where a part of the licence is transferred in a previous year and sub-section (3) does not apply, the deduction to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be arrived at by- (a) subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure remaining unallowed; and (b) dividing the remainder by the number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re more than the expenditure remaining unallowed amount of sale proceeds or amount of expenditure incurred to obtaining license (whichever is less) as reduced by the expenditure remaining unallowed shall be taxable as business profits in the year of transfer, whether business exists or not in that year. If the sale proceeds is more than the expenditure incurred to obtain license, then such excess is taxable as Capital Gain under Section 45. c) As per sub section (3) In case part of the license is transferred Where proceeds are less than the expenditure remaining unallowed, In this case the deduction allowed under this section for remaining period will be calculated as expenditure remaining unallowed less sale proceeds)/No. of years remaining for effectiveness of license. Where proceeds are more than the expenditure remaining unallowed Amount of sale proceeds or amount of expenditure incurred to obtaining license (whichever is less) as reduced by the expenditure remaining unallowed shall be taxable as business profits in the year of transfer, whether business exists or not in that year. If the sale proceeds is more than the expenditure incurred to obtain license, then such exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lient features of the Policy are given below: 1. Process of granting permission: 1.1 Permission shall be granted on the basis of One-Time Entry Fees (OTEF) quoted by the bidders (Closed Tender System). The Ministry of I B would separately issue detailed tender notice in due course enabling the interested parties to participate. 2. Eligibility Process: 2.1 The process of granting permission for new participants under Phase 2 shall consist of two rounds. The first round shall be for pre-qualification and only applicants qualifying in accordance with prescribed eligibility criteria given at item no. 3 below will proceed to the next round for making financial bids for specific channels in different cities. 2.2 Participants of Phase 1, who exercise their option to be considered for Phase 2, including those licensees who are eligible for automatic migration for channels already operationalised by them, shall be eligible to be considered for the pre-qualification round for fresh tendering under Phase 2, subject to their fulfilling the prescribed eligibility criteria. MIGRATION TO PHASE 2. 1. Licensees of Phase-I, who have actually operationalized their c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icy regime, as modified from time to time. 8. In the event of any operationalised license holder of Phase 1 declining to opt for automatic migration, it shall continue to be governed by the terms and conditions of its original license under Phase 1 Policy regime, as modified from time to time. 9. In the event of opting to close down its radio station, an operationalised license holder of Phase 1 shall give a notice of termination with a minimum period of one month at the end of which the Ministry of Information Broadcasting may cancel its license and permit it to close down the station, and may allocate the frequency so released to the next highest eligible bidder under Phase 2. 19. Now first we examine claim of assessee u/s 35ABB (2) of the Income tax act. According to that section if a. Whole of license is transferred where proceeds are less than the expenditure remaining unallowed, expenditure remaining unallowed as reduced by the amount of sale proceeds is allowed as a deduction in the year of transfer. b. Where proceeds are more than the expenditure remaining unallowed amount of sale proceeds or amount of expenditure incurred to obtaining license (whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from transferring the license as well as the transfer of any right contained in the license, according to us, there is no transfer of license. According to letter dated 21 December 2005 issued by GOI also mentioned clearly in para no 2 that license of operationalised channels shall be considered to migration in phase-II provided they have paid all their dues from due dates up to cut off date and are not in default of any other license condition till the date of migration to phase-II. The cut of date for automatic migration was set at April 1, 2005. As it is submitted that assessee has paid all their dues in terms of that letter they were entitled for automatic migration from phase-I to phase -II. Further according to the new policy better terms and conditions are offered to the existing operators by migration from phase-I to phase-II. Further looking to the agreement entered in to by assessee and GOI for phase-I and Phase-II, there is no substantial change in the terms and conditions except that License fee payments has changed from 'Fixed fee basis' to 'revenue sharing basis' and duration of payment. Further On exercising its option to automatically migrate to Phas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te telecommunication services shall be eligible for deduction. b. Such capital expenditure can be incurred before commencement of business or after commencement of business. c. Payment has to be actually made for obtaining such license. d. Then such expenditure is allowed as a deduction over the period for which the license remains effective. e. If the expenditure is incurred before the commencement of business, then deduction starts from the year of commencement of the business. f. Such expenditure is allowed for the remaining time for which the license remains in force. 26. According to the migration policy the new license shall commence with effect from 1-4.2005 with following three options:- a. Migrate to Phase-II policy regime with fresh term of 10 years provided they had operationalised their FM channels and paid off all license fees dues of Phase-I license up to the cut-off date of 1st April 20052 and were not in default of any other license conditions till the date of migration to phase-II. b. Continue to remain under Phase-I policy regime c. Surrender their FM channel under Phase-I license in order to exit. Accordingly assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 as per section 35ABB of I.T. Act, as allowed by the AO vide assessment order for 2004-05. The issue for consideration therefore is the allowability of the remaining license fee expenditure of ₹ 12,65,82,440/- as paid during the A.Ys. 2004-05 and 2005-06 under Phase-I license regime. The appellant has claimed the above amount for deduction in full as revenue expenditure u/s 35ABB of the Act basing on the cut-off date of 01.04.2005 for migration to Phase-II license regime. The AO has disallowed the same by treating it as a capital loss. On careful examination, I find that the migration of license from Phase-I license regime to Phase-II license regime does not per-se amount to 'transfer 'of license by the appellant as required under sub-section (2) of section 35ABB of I.T. Act in order to justify the appellant's claim for allowing the remaining entire license fee expenditure of ₹ 12,65,82,440/- under Phase-I license regime during A.Y 2006-07 itself. In this case, I find that while migrating from Phase-I license regime to Phase-II license regime, there was no transfer of license from the appellant to any other party. The case laws as cited by the ld. AR vide i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment account. On exercising your option to automatic migration to Phase II, and payment of OTEF within prescribed period, you shall be required to sign a fresh Grant of Permission Agreement with Government on the same Terms and Conditions as for the successful Bidders of Phase II . In other words, payment of license fee dues under Phase-I license regime was made a recondition by the Govt, in order to permit the appellant to migrate to Phase-II license regime. 5.9 In view of the above, the remaining expenditure on account of Fixed License Fee as actually incurred by the appellant under Phase-I license regime becomes part and parcel of all the payments as made in order to become eligible for obtaining Phase-II license. As OTEF (migration fee) of ₹ 22,22,52,219/- has been accepted by the AO to be allowed over the 10 year term of Phase-II license under sub-section (1) of section 35ABB, on the same basis, I am of the view that the remaining expenditure of ₹ 12,65,82,440/- as incurred by the appellant under Phase -I license also needs to be allowed over the new 10 year term under Phase-II license regime starting from A.Y. 2006-07 in accordance with section 35ABB(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as reasoning given by CIT(A) as in substances the reason canvassed by CIT(A) are similar to what we have propounded in our order. In view of this we confirm the order of CIT(A) in granting deduction of ₹ 1,26,58,244/- being 1/10th of ₹ 12,65,82,440/- being fees paid by assessee in Phase-I as deductible expenditure u/s 35ABB(1) during the year under consideration i.e. A.Y. 2006-07. In result ground no 1 of the appeal of the assessee is dismissed. 28. Assessee has raised alternative ground of allowance of depreciation u/s 32(i) (ii) on the amount of license fees. Contention of the assessee was that if the license fee expenditure of ₹ 26,37,65,421/- is not considered to be allowable in full during the year under consideration as per section 35ABB, then alternative submission as also taken up before CIT(A) deserves to be considered according to which section 32(i)(ii) of I.T. Act recognizes licenses as an intangible asset on which depreciation is to be allowed as prescribed under the Income-tax Rules which prescribes the rate of 25% as per Rule 5 of Appendix I (Part B). 29. We have carefully considered the rival contention on this issue and we are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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