TMI Blog2016 (9) TMI 1336X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the addition partly merely because reconciliation in these accounts with respect to the live connections are pending. The observation of the ld CIT(A) is also not correct that assessee submitted that this amount is under reconciliation and to that extent such credits are not fully explained. Before him assessee submitted that it is under reconciliation. Further when the character of deposit is determined, looking to the nature of operation geographically as well as large subscriber’s base, it is not correct to hold that pending reconciliation the deposit become income of the assessee. In view of this we set aside this issue back to the file of the Assessing Officer to give proper opportunity to the assessee to provide reconciliation of the same and then if the amounts are not at all identifiable with respect to the customers then to that extent addition may be restricted. However, if this amount is identifiable with the subscriber and even if it is not claimed by the subscriber despite disconnection of the services assessee is under obligation to repay whenever demanded by the customer. Therefore, ld Assessing Officer is directed to grant an opportunity to the assessee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 80 - IA being undertaking based, the computation of income eligible even otherwise has to be worked out for each undertaking @ 100 per cent for first five years and @ 30 per cent for the next 5 years from the date of setting up of such undertaking . 6 . On the facts and circumstances of the case, the learned CIT ( A ) has erred both on facts and in law, in confirming the disallowance of an amount of ₹ 127,69,83,728 /- on account of outstanding subscriber deposits . 7 . On the facts and circumstances of the case, the learned CIT ( A ) has erred, both on facts and in law, in confirming the disallowance of an amount of ₹ 28,03,000 /- on account of interest accrued on outstanding subscriber deposits . 3. The revenue has raised the following grounds of appeal:- 1 . On the facts and in the circumstances of the case and in law, the Ld . CIT ( Appeal ) has erred in reducing the addition of outstanding amount in subscribers deposit account of Rs . 1159,32,90,000 /- to Rs . 127,69,83,720 /- and in reducing the addition of interest of Rs . 4,79,90,000 /- on subscriber deposit account to Rs . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of deduction u/s 80IA of the Income Tax Act. 7. The brief facts of the issue is that in the return of income appellant has claimed deduction u/s 80IA of ₹ 480078205/-. The assessee claimed this deduction because huge investment were made for technology and infrastructure and therefore it has established the new undertaking and therefore, it is eligible for deduction of 100% of its profit u/s 80IA of the Act. Before the ld Assessing Officer assessee submitted that it fulfills all the conditions specified in section 80IA and further it has made additional investments in expansion of its infrastructure facilities and further for earlier years coordinate bench has held that the assessee is eligible for deduction u/s 80IA on proportionate basis on new exchanges established after 01.05.1995. Ld Assessing Officer rejected the contention of the assessee for the reasons that the assessee has not maintained separate books of accounts and further according to the provisions of section 80IA(7) assessee has not got the account of the assessee audited in prescribed form in due time. Further, the AO held that the decision of the ITAT also says that assessee is eligible for deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02 - 03 dated 3 . 02 . 2006 had held that the entire income of the appellant is eligible u / s 80 1 A, the AO found that the order of the Hon'ble ITAT was in the nature of directions to the AO to examine the allowability of the claim of deduction of the appellant in respect of income derived from new exchanges put up after 01 . 04 . 1995 and subject to fulfillment of conditions laid down in section 80IA . It did not imply that the entire income of the appellant was deductible u / s 80IA . ( 3 ) The contention of the appellant that the assessee itself is an 'undertaking', does not hold good as each exchange is an 'undertaking' and the deduction is allowable only in respect of new undertakings set up after 01 . 04 . 1995 . Reliance was placed by the AO on the decision of Hon'ble High Court in the case of M / s A K Silk and Woolen Mills Pvt . Ltd . 158 ITR 462 . ( 4 ) The details of additional investment in the plant machinery made by the appellant during the period AY 1995 - 96 till AY 2006 - 07 do not have any bearing on the allowability of deduction u / s 80IA for the entire income of the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hermore, it was pointed out that due to complete revamp of the technology and with the starting of cellular service and other service like voice mail, ISDN, a complete new undertaking came into existence, therefore, it was pleaded that the company as a whole is eligible the deduction u / s 80IA . 6 . 4 . 3 I have carefully considered the facts of the case in the light of the provision of section 80IA and the decisions of appellate authorities in respect of the claim of the appellant u / s 80IA in different years . Before deciding on various grounds of appeal raised by the appellant in the matter, a brief overview of the scheme of deduction u / s 80IA in the context of the business of telecommunication services is being made hereunder : 6 . 4 . 3 . 1 The provisions of Section 80 - IA provide for deduction in the manner and extent provided in that section in respect of the profits and gains of - eligible business of an eligible undertaking, subject to meeting certain procedural conditions . The amount of deduction shall not exceed the amount of such profits and gains ( of eligible business of an eligible undertaking ). The deduction is avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions specified under the section 80 - IA . For this purpose, the mechanism of furnishing audit report in the prescribed form no . 10CCB in respect of each eligible undertaking for enabling verification of the eligible profits for deduction by an independent auditor has been provided . Computation of the amount of deduction The amount of deduction is to be computed as per sub - section ( 5 ) and subsection ( 9 ). The sub - section ( 5 ) of section 80IA reads as under : ( 5 ) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of subsection ( 1 ) apply shall, for the purposes of determining the quantum of deduction under that sub - section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made . The I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This position remains notwithstanding the fact that the assessee may have set off such loss from the eligible unit against the income of non - eligible unit in the year of incurring of such loss . By means of sub - section ( 5 ) , the loss incurred in the eligible unit is nationally carried forward to the subsequent years and considered as such in the subsequent years until it is wiped out with the profits of the eligible unit for the succeeding years . This position stands despite the fact that such loss may have been actually set off against the income of non - eligible units in an earlier year or even the very year in which commercial production started . The Special Bench of ITAT, Ahmedabad in Asstt . C1T v . Goldmine Shares Finance ( P ) Ltd . [ 2008 ] 113 ITD 209 ( Ahd .) has also held that in view of the provisions of section 80IA ( 5 ) , profits from eligible business for purpose of determination of quantum of deduction under section 80IA are to be computed after deduction of notional brought forward losses and depreciation of eligible business even though this had been set off against ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are being decided as under, keeping in view the legal provisions as summarized above : 6 . 4 . 3 . 3 . 2 The Ground No . 6 and 7 of the appeal, which are based on the premise that the appellant itself is one whole eligible undertaking, are as under : ( 6 ). That on the facts and circumstances of the case and in law, the Assessing Officer has erred in neither considering nor allowing deduction allowable under section 80IA of the Act to MTNL as a whole, being a telecom service provider eligible for such deduction . ( 7 ). On the facts and circumstances of the case, the Assessing Officer has erred in ignoring the contention that the appellant company has on or after I5r April, 1995 undergone complete revamp of its technology and infrastructure leading to the formation of new undertaking and hence entitled to deduction in respect of telecommunication services U / S 801 A, I find that the main pivot of the appellant's main contention is that the entire technology and the system used by various exchanges of the appellant company have been revamped and in respect of basic telecom services, various add - on servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding the appeal in the case of the appellant for A . Y . 1998 - 99, 1999 - 2000, 2000 - 01, 2002 - 03 and 2005 - 06, vide its order dated 11 . 03 . 2010 has held as under : Keeping in view the totality of facts and circumstances of the case, we direct the AO to attribute 75 % of the income from various services enumerated above as having been carried out only by the virtue of new exchanges having been installed 25 % of the income may be attributed to the old exchanges . Accordingly, the matter is restored back to the file of the AO for re - computing the claim of deduction u / s 80IA with reference to 75 % of the income being eligible for deduction in all the years under consideration . We direct accordingly' . While holding this, the Hon'ble ITAT held that post - 1995, the telecom sector underwent tremendous revolution by inducting de novo technology and system in place of antiquated system / technology and therefore for the purpose deduction, on the basis of attributing the income in the ratio of telephone exchanges was not proper but have to take into account various services rendered by MTNL 1995 which were actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ping in view the accounting system followed by the appellant, it is possible to determine the eligible profits in respect of each new eligible business activity and each new eligible undertaking . The exact amount of deduction that is available to the appellant can be aggregated accordingly . Respectfully appreciating the virtue of practicability in dispute resolution as was adopted by the Hon'ble ITAT while pronouncing the decision dated 11 . 03 . 2010 in the case of appellant, in my humble submission, the thumb rule method of estimation of deductible profits has no sound legal basis keeping in view the provisions discussed in Para 6 . 4 . 3 . 1 and 6 . 4 . 3 . 2 . Incidentally, the same is not acceptable to the appellant also, whose main plea before me is on the same ground . 6 . 4 . 3 . 3 . 5 Before holding that the revamped MTNL has started providing a different genre of services, it is also needed to ascertains as to what new services are actually being received by the old subscribers ( receiving basic telecom services since prior to 1 . 4 . 1995 ). The appellant was primarily providing basic telecommunication services prio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices, which certainly required new infrastructure for that purpose and which can be called as a new 'undertaking' . However, it was only during the financial year 2001 - 02 that the appellant entered into providing cellular services . 6 . 4 . 3 . 3 . 6 The observation of the Hon'ble ITAT of attributing 75 % of the entire income of the appellant from telecom services to various new facilities provided by the appellant post - 1995, is based on the reasoning that the appellant has not merely changed or modified services but introduced totally different facilities by revamping the technology and systems, implies that in case of substantial renovation of technology and systems a new undertaking comes into existence . Respectfully submitting that the existing provisions of section 80IA do not provide for deduction in the case of such substantial renovation and modernization for telecom sector, while on the other hand, specific I provisions in this regard were brought in statute for the Power sector . It may be noted that for the Power sector, the Finance Act 2004 w . e . f 1 . 4 . 2005 specifically extended the benefit of the deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation that by making substantial revamping of infrastructure, the appellant had become a new undertaking eligible for deduction u / s 80IA as it had started providing absolutely new genre of services is not supported by the relevant legal provisions cited above . 6 . 4 . 3 . 3 . 7 Respectfully further submitting that while holding that 75 % of income from various telecommunication services is eligible for deduction, the hon'ble ITAT did not take into account the fact that the deduction u / s 80IA to telecom sector is available only to an eligible undertaking and that too in respect of the eligible business activity and subject to the provisions of section 80IA ( 5 ). The decision of the Hon'ble ITAT of attributing 75 % of the income from various telecommunication services of the appellant company is an adhoc determination of eligible profits, which may have the side - effect of allowing the deduction in respect of income from ineligible undertakings of the appellant company and may also include profits from telecommunication services that were started before 01 . 04 . 1995 and may not be confined to only new telecom services tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed . The relevant provisions of section 80IA ( 7 ) read as under : ( 7 ) The deduction under sub - section ( 1 ) from profits and gains derived from an undertaking shall not be admissible unless the accounts of the undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub - section ( 2 ) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant, Keeping in view the language of sub - section ( 7 ) , the use of words shall not be admissible is mandatory in nature and therefore if the assessee is not able to furnish the specific audit reports in respect of eligible undertakings along with the return of income or later before passing of the assessment order, deduction u / s 80IA cannot be granted to the assessee . Further, the instructions to the prescribed form no . 10CCB provide that in case there are multiple eligible undertakings, separate audit report in respect of the profits of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 6 . 4 . 3 . 3 . 8 above, the appellant itself is not an undertaking but is an owner of several undertakings . The deduction can be examined only in respect of the eligible undertakings for the eligible business activities and the amount of deduction can be computed only on examination of the details furnished in the respective audit reports in Form No . 10CCB of such eligible undertakings, if any . 6 . 4 . 3 . 4 In view of the above, in my humble opinion, the general thumb - rule law applied by the Hon'ble ITAT cannot help in identifying the specific undertakings of the appellant that are eligible for deduction nor in computing the eligible profits for deduction u / s 80IA in respect of the eligible telecommunication services ( started after 1 . 4 . 1995 ) by an eligible undertaking . In my view, the deduction is to be allowed only to a new undertaking, which starts a specified telecommunication service after 1 . 4 . 1995 only . This could be ascertained only on the basis of the audit reports in prescribed Form No . 10CCB in respect of each eligible undertaking of the appellant, in the light of relevant P L accounts and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000, 2000 - 01, 2002 - 03 and 2005 - 06, the Ld . AO had held that only new exchanges set up after 1 . 4 . 1995 are eligible for deduction u / s 80IA . This has been confirmed by the Ld . CIT ( Appeal ) also . The subsequent orders of the AO and of the CIT ( Appeal ) for the AY 2001 - 02 are based on the ITAT's order dated 11 . 3 . 2010, in which 75 % of the eligible income of the appellant has been held as eligible for deduction u / s 80IA . Thus, the department had formed a clear view that only income from eligible business of undertakings set up after 1 . 4 . 1995 is eligible for the deduction, prior to following the ITAT's order dated 11 . 3 . 2010, with which I am respectfully making deviation in the light of interpretation of section 80 - IA in paragraphs 6 . 4 . 3 . 1 and 6 . 3 . 4 . 2 above, which in my humble view was never placed before the Hon'ble ITAT . Thus, the position of the department has remained consistent and when the Hon'ble ITAT provided a working formula for the deduction, the department followed the same . The fact that the Commissioner of Income Tax - IV New D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010, while deciding the appeal for the AY 2005 - 06 had held as under : Since in the,AY 2005 - 06, there was change in the eligibility criteria of deduction eligible u / s 801 A, we direct the AO to recompute the deduction in terms of the amended provisions of the law applicable for the AY 2005 - 06 . However the same criteria for apportioning the income attributable to income generated through various services by the new exchanges and old exchange at 75 % and 25 % is to be kept . We direct accordingly . In the result, the appeal of the assessee is allowed in part, in the indicated above . I find that, while giving effect to the above directions of the Hon'ble ITAT, the Ld . AO vide order dated 27 . 3 . 2012 for that year, has not discussed this issue and to the extent the order of the AO is not a speaking one . The Finance Act, 2004, w . e . f . 1 . 4 . 2005 has made an amendment in sub - section ( 3 ) whereby undertaking engaged in providing telecommunication services referred to in clause (//) of sub - section ( 4 ) , has been made ineligible for deduction u / s 80IA, if it is formed by splitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 80IA ( 7 ) read with Rule 18BBB and the instructions to the Form No . 10CCB, the deduction shall be admissible only on furnishing of the prescribed audit reports in respect of each such eligible undertaking . Since the appellant had not furnished the same before the AO, the AO had rightly rejected the claim of the appellant as in the absence of the audit reports, the AO could not have verified the quantum of deduction available to each such eligible undertaking . The appellant was required to make available to AO the audit reports duly signed and verified by the accountant referred to in that section in respect of each such eligible undertaking which would have been examined by the AO in the light of provisions of section 80IA ( 5 ) for determining the amount of deduction u / s 80IA available to each such eligible undertaking, keeping in account the initial assessment year of each such unit separately for computing the deduction at the applicable rate for each such eligible undertaking . However, since the appellant failed to follow this mandatory condition and in the absence of which the Ld . AO had no wherewith all to ascertain eligibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer that in earlier years the issue has been decided in favour of the assessee and deduction has been granted on proportionate basis by the coordinate bench. We have carefully perused the decision of coordinate bench on this issue which has been decided by coordinate bench in ITA No. 3448, 3449 and 3450/Del/2003 and 2919/Del/2004 for AY 1998-99 to 2002-03. Hon ble High Court has dismissed the appeal of the revenue against the order of the Tribunal. Therefore, on the principal of judicial discipline the decision of coordinate bench binds us. The coordinate bench has decided this issue as under:- 35 . We have considered the rival contentions and gone through the orders of the authorities below . From the record, we found that the assessee is a government of India undertaking engaged in providing telecommunication services . In respect of its income from providing telecommunication services it claimed deduction u / s 80IA which was declined by the AO and CIT ( A ) confirmed the AO's action . In an appeal filed before the Tribunal, after appreciating the correct provisions of the law as it stood at the relevant point of time, the matter was restored back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents of dialing numbers mechanically by rotating the dial . Since this technology has been totally abandoned and revamped, replacing the old, most of the income venerated is attributable to such new technology exchanges . Merely on the number of old exchanges which were not in operation at all or had undergone totally revamped, income cannot be attributable to such old exchanges, we found that the new technology and the new exchanges made possible a multitude of new intelligent network services which are like cellular services, virtually calling card services, premium rate services, ISDN, calling line identification, call forward on busy and free lines, credit card payment scheme, tele - mart interactive voice response services, directory on CD - Rom etc . Various add on services such as Datacom, Inet, DID PABX, voice mail, Radio paging and ISDN has been started after 1 . 4 . 1995 . In addition to this phone plus facilities like dynamic locking, call waiting / call transfer, hot lines etc . has been extended to valued customers . Further in order to minimize human re - interface, important operator based special services have been automated with IVRS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 - 06, there was change in the eligibility criteria of deduction eligible u / s 80IA, we direct the AO to recompute the deduction in terms of the amended provisions of the law applicable for the AY 2005 - 06 . However, the same criteria for apportioning the income attributable to income generated through various services by the new exchanges - and old exchanges at 75 % and 25 % is to be kept . We dirert accordingly . 39 . In the result, the appeal of the assessee is allowed in part, in terms indicated hereinabove . 11. Further, the audit report submitted by the assessee during the assessment proceedings and not along with the return of income does not debar assessee from claiming the deduction u/s 80IA as held by Hon ble Delhi High court in CIT Vs. Centimeter Electricals Ltd. 317 ITR 249 that requirement of filing the audit report along with the return is not mandatory but directory and therefore if the audit report is filed at any time before passing of the assessment order it satisfied the requirement. Therefore on this ground deduction cannot be denied to the assessee. In view of the above facts and following the decision of the coordinate b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that outstanding balance of unclaimed security deposit etc was submitted by the assessee with respect to Delhi and Mumbai Unit and further additional details were also provided of live collections along with details of customer code and amount refunded. The various types of deposits was also submitted with reconciliation. The ld CIT(A) obtained remand report on the details submitted by the appellant and after considering the same the rejoinder of the assessee was sought. Before the ld CIT(A) assessee conceded that as per statement in annexure-3 the amount of deposit of ₹ 1276983723/- is under reconciliation and interest thereon consequently is required to be reconciled. Considering all the above submission of rival parties he deleted the addition of ₹ 10316296280/- and confirmed the unreconciled sum of ₹ 1276983720/- on account of subscriber deposit. This is challenged by the parties before us in respective appeals. 15. Before us Ld AR submitted that these liabilities are outstanding balance of the refundable unclaimed security deposit and same cannot be treated as a trading receipt as the obligation to repay the same exists on the assessee. He further sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that assessee is a public sector undertaking and operates the telephony services in select cities. It also uses CSMS system which is a programme regarding new connection refund adjustment and disconnections. Therefore, as on 31.03.2006 an amount of ₹ 11593290000/- was outstanding as net balance of security deposit. Therefore, such amount of deposit are accepted with an obligation of repayment at the time of disconnections of services. Apparently this money does not belong to the assessee company but is required to be refunded to the customers as and when claimed. Before the ld CIT(A) the assessee has submitted the details of this account with respect to outstanding balances, interest accrued thereon, telephone connection disconnected during the year, the amount of security deposit received during the year and security deposit refunded during the year for year ended March 2003 to March 2009. Regarding the live connections assessee submitted details with customer code and for security deposit refund the subscriber details. It also submitted as per annexure 3 details with regard to current status of live connections and amount of outstaying security deposit. Before him the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held above and then decide the issue afresh. In view of this ground No. 6 of the assessee s appeal is allowed accordingly. 18. Ground No. 7 of the appeal of the assessee is against confirming the disallowance of an amount of ₹ 2803000/- on account of interest accrued on outstanding subscriber deposit. This ground is related to ground No. 6 of the appeal of the assessee. Therefore, as we have already set aside ground No. 6 of the assessee s appeal to the file of the Assessing Officer, we also set aside ground No. 7 to the file of the Assessing Officer to determine amount of disallowance of interest after determining the amount of taxability of subscriber deposit. This ground of appeal is allowed for statistical purposes. 19. In the result the appeal of the assessee is partly allowed. 20. Now we come to the appeal of the revenue in ITA No. 4587/Del/2013. 21. Ground No. 1 to 4 of the appeal are against deletion of addition on account of subscriber deposit and interest thereon. These grounds of appeal are inter linked to the ground No. 6 and 7 of the appeal of the assessee. While deciding the ground Nos. 6 and 7 of the appeal of the assessee we have held that that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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