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2019 (6) TMI 474 - AT - Income TaxAllowability 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.
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