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2017 (12) TMI 660

Revision u/s 263 - assessment order is erroneous and prejudicial to the interest of revenue in allowing depreciation on the 3G Spectrum cost claimed by the assessee under section 32(1) - CIT-A directing the AO to instead allow deduction under section 35ABB on the ground that the 3G Spectrum was only an extension of the original license for operating telecom services and not a separate intangible asset - Held that:- From the judgment of Hon’ble Supreme Court in the case of Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) and the facts of the present case, it is clear that the assessee has rightly claimed depreciation under section 32 of the Act on 3G spectrum. It means that the expenditure towards 3G Spectrum is not expenditure for acquiring any right to operate telecommunications services. Out of the service areas in which 3G spectrum was won by the assessee, it had acquired the rights to operate telecommunication services in the year 1995-1997 for Maharashtra, Gujarat, Uttar Pradesh West, Madhya Pradesh, Haryana. Andhra Pradesh, Kerala, Punjab telecom circles. In year 2001-02 it acquired rights for Himachal Pradesh, Uttar Pradesh East and thereafter in the year 2007-08 .....

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cts and circumstances of the case and in law, the Learned Pr.CIT erred in invoking the provisions of section 263 of the Act and directing revision of the assessment order passed under section 143(3) of the Act by the Deputy Commissioner Of Income Tax-3(2), Mumbai( the AO )on the alleged ground that the said assessment order was erroneous and prejudicial to the interest of the revenue. The Appellant prays that it be held that the action of the Learned Pr. CIT in invoking provisions of section 263 of the Act and directing the AO to pass a fresh assessment order to be held to be ab-initio and/or otherwise void and bad in law. WITHOUT PREJUDICE TO GROUND NO. I GROUND NO.II: On the facts and circumstances of the case and in law, the Learned Pr.CIT erred in directing the AO to disallow depreciation amounting to ₹ 420.76 crores on the 3G Spectrum cost claimed by the Appellant under section 32(1) of the Act and in further directing the AO to instead allow deduction under section 35ABB of the Act on the same on the ground that the 3G spectrum was only an extension of the original license for operating telecom services and not a separate intangible asset. The Appellant prays that it be .....

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The claim of depreciation @25% on the amount paid being 3G-Spectrum Band License Fee allowed by the AO is erroneous in so far as it is prejudicial to the interest of revenue, within the meaning of Sec. 263 of the Act, and: ii) The claim of financial lease with M/s IBM Ltd for IT outsourcing as an operational lease & has accordingly claimed deduction u/s 37(1) of the Act on the repayment made by it during the year which includes the principal amount of ₹ 241,42,20,509/-, apart from the interest paid by the assessee pertaining to the principal amount, which is erroneous in so far as it is prejudicial to the interest of revenue, within the meaning of Sec. 263 of the Act. But, finally, the Pr.CIT in his revision order under section 263 of the Act retained only one issue with regard to the claim of depreciation on the amount paid being 3G-Spectrum Brand License Fee allowed by the AO as erroneous in so far as prejudicial to the interest of revenue. 4. The Pr.CIT finally passed revision order under section 263 of the Act as under:- 4. I have carefully considered the assessee's submission and arguments. The same is discussed on merit iii the following paragraphs. 4.1.i. At th .....

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ken a probable view, which may be debatable and not acceptable to the Revenue. HC remarked that the order of CIT could not be set aside only on the ground that two views were possible or probable, but CIT had recorded how the order of Assessing Officer was erroneous and prejudicial to interests of revenue. Order of the CIT could be set-aside only if findings accorded by CIT were incorrect or if order of Assessing Officer was not prejudicial to interest of Revenue. HC observed that CIT could examine the issue on merits even when the same was examined by Assessing Officer and that principles of 'change of opinion' did not apply. HC noted that Revenue did not have any right to appeal against the order of Assessing Officer and therefore the power of revision u/s 263 was conferred on the CIT to correct erroneous order which were also prejudicial to Revenue's interests. It was held that ......it would be incorrect to state as a broad proposition that an order of Assessing Officer cannot be erroneous, if the Assessing Officer has taken one of the two views possible. In such cases the order of the Assessing Officer is erroneous provided the Commissioner holds and is able to dem .....

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er). 4.2.iv. It has been held by the Calcutta High Court in the case reported in 31 ITR 872 that if the decision of the Assessing Officer is not in accordance with the law, the same can be revised by the Commissioner of Income-tax u/s 263. It has been held by Honorable ITAT, Mumbai Bench 'A', Mumbai in the case of Sterling construction & Investment Vs. Asstt. Commissioner of Income Tax 79 lTD 299(Mum) that when assessment order was based on incorrect assumption of facts and incorrect application of law the order was erroneous and prejudicial to the interest of Revenue and therefore Commissioner was competent to revise it. Reliance is also placed on the decision of Honorable ITAT, Indore Bench in the case of Frigoscandia Winner Food Process System (79 lTD 357). 4.2.v. Hence, the contentions raised by the assessee against the invocation of section 263 are not tenable and the same are rejected. 4.3 Coming to the facts and merits of the case, the same are discussed under: 43. i. The assessee was allotted spectrum for 20 years and paid onetime cost. The assessee capitalized the payment in his books as shown as intangible assets and claimed depreciation @ 25% u/s.32 of the l. .....

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rest of revenue therefore the order passed by AO under revision is set aside to this extent. The AO is directed to allow 1/20th of the spectrum fees against the claim of the assessee as per provision of section 35ABB of the IT Act after allowing opportunities of being heard to the assessee. Aggrieved, assessee is in appeal before Tribunal. 5. Before us, Sh. J.D. Mistry Ld. Senior Counsel for the assessee narrated the facts of the case that coming to the Order under review, the AO has conducted the detail examination of the issue involved, made inquiries, applied his mind to the facts and circumstances of the case and passed the Assessment Order under section 143(3) of the Act. In the course of the assessment proceedings under section 143(2) of the Act, the AO had asked the details in respect of issues stated in the captioned notice and assessee replied against the same. The summary of the submission filed before the AO and disclosures given in various documents by the assessee are as under: Sr. NO Particulars Remarks As regards depreciation claimed under section 32(1) of the Act on 3G spectrum 1. Director Report for the caption financial year See heading capital Expenditure and lau .....

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eparated Cellular Licenses from spectrum. Accordingly, in addition to the licenses, the operators had to separately acquire spectrum from the Government. With the objective of Spectrum Management, the Department of Telecommunication ( DOT') invited applications to allot the rights to use certain specified radio spectrum frequencies in the 2.1 GHZ band (the 3G Spectrum band ) and in the 2.3 GHZ band (the BWA Spectrum band ) by means of auctions in various telecom service areas in India. The Notice inviting Applications dated 25.02.2010 ( the Notice ), which is available in public domain, sets out the objectives of the spectrum auction as under: a) Obtain a market determined price of 3G/BWA spectrum through a transparent process; b) Ensure efficient use of spectrum and avoid hoarding; c) Stimulate competition in the sector, d) Promote rollout of 3G and Broadband services; e) Maximize revenue proceeds from the Auctions; f) Resolve congestion issues related to second generation ( 2G ) mobile services. The learned Counsel referred to pages no. 256 to 368 of APB for the relevant extracts of the Notice Inviting Applications dated 25.02.2010. 7. He referred to the Clause 2.1 of the Not .....

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revocation and surrender of the allotted spectrum. Under this clause, the telecom operator may surrender the spectrum, by giving notice of at least 60 calendar days in advance. In that case, it shall also notify all its customers of consequential withdrawal of service by giving 30 calendar days notice to each of them. The operator shall pay all fees payable by it until the date on which the surrender of the spectrum becomes effective. Thus, the spectrum so allotted is capable of being surrendered upon which it stands extinguished for the allottee. He further explained that once the DOT received the Bid Amount for the spectrum, it allocated specific frequencies in the respective service areas to the Successful Bidder by issuing the LOI which have already been submitted before the AO and now at pages no. 78 to 255 of APB. The successful bidders were allowed to use the spectrum frequencies for commercial operations from the designated date. As per clause 6.4 of the Notice, specific frequencies were earmarked for the Successful Bidders which shows that there was an identified block of spectrum available for use by the bidders. Thus, during the period of allotment, spectrum was used by .....

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-section (I) of Section 263 of the Act, the jurisdiction of revision can be exercised only the above two conditions are satisfied. He further explained that the power of suo-moto revision under sub-section 263(l) of the Act is in the nature of supervisory jurisdiction and the same can be exercised only if the conditions specified therein exist. He referred to the expressions 'erroneous', 'erroneous assessment' and 'erroneous judgment as defined in Black's Law Dictionary. According to the definition 'erroneous' means involving error deviating from the Law. 'Erroneous assessment' refers to an assessment that deviates from the law and creates a jurisdictional defect, and is therefore, invalid. It is a defect that is jurisdictional in its nature, and does not refer to the judgment of the AO. Similarly, 'erroneous judgment' has been defined as a judgment issued by a court with jurisdiction to issue it, but containing an improper application of law. The phrase prejudicial to the interest of revenue is not an expression of art and is not defined in the Act. Understood in the ordinary meaning, it is of wide import and is not confined to loss .....

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t be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi Vs. Commissioner of Income-tax (1968) 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal Vs. Commissioner of Income-tax, West Bengal (1973) 88 ITR 323 (SC). 14. Similarly, the learned Counsel for the assessee relied on the judgment of Hon ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom.), wherein it is held as under: - 14. We, therefore, hold that in order to exercise power under sub-section (1) of section 26 .....

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he whole machinery of re-examination and reconsideration of an order of assessment, which has already been concluded and controversy which has been set at rest, is set again in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from the records called for by the Commissioner. 15. We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the as .....

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s also needed to acquire UAS/CMTS license for the awarded service areas. 16. We also observed from the spectrum allotted to the Successful Bidders that it is distinct from the UAS/CMTS license of the awardees. This is also evident from the individual Letters of Intent ( LAM ) issued by the WPC Wing for earmarking spectrum frequency in the respective service areas submitted to the AO with assessee s letter dated 04.03.2014, since each LOI specifically states that It is not a license . Hence, we are of the view that on jurisdiction the revision order passed by CIT cannot be sustained and accordingly, reversed. 17. Now, coming to merits of the case, the learned Counsel stated that the AO after going through the facts of the case particularly note B.1 to the audited financial statements for the year ended on 31.03.2011 gave the disclosure on the accounting treatment of the 3G spectrum charges. Also, in note 2 to the explanatory letter dated 19.07.2013 filed before AO during assessment proceedings explains the tax treatment adopted by assessee in respect of the said charges. He argued, on merits, that the assessee has rightly claimed the depreciation being beneficial owner of the spectr .....

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ifies to be an Intangible Asset , depreciation is to be allowed under section 32 of the Act, regardless of the period for which it is owned by the assessee. The assessee claimed that the telecom license and the spectrum are independent of each other and there is no case to allow deduction in respect of the spectrum cost over 20 years period, in the absence of any specific provision under the Act that permits such amortisation. 19. Before us, the learned Counsel for the assessee relied on the decision of the Hon ble Supreme Court for the proposition that license is an asset under Explanation 3(b) to section 32(1) of the Act and, thus, it is eligible for depreciation. He relied on CIT vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC), wherein Hon ble Supreme Court has considered the issue of goodwill and held as under: - 3. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 [ Act', for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: Explanation 3.- For the purposes of this sub-section, the expressions assets' and block of assets' shall mean- [a] tangible assets, being b .....

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judgment of Hon ble Supreme Court in the case of Smifs Securities Ltd. (supra) and the facts of the present case, it is clear that the assessee has rightly claimed depreciation under section 32 of the Act on 3G spectrum. It means that the expenditure towards 3G Spectrum is not expenditure for acquiring any right to operate telecommunications services. Out of the service areas in which 3G spectrum was won by the assessee, it had acquired the rights to operate telecommunication services in the year 1995-1997 for Maharashtra, Gujarat, Uttar Pradesh West, Madhya Pradesh, Haryana. Andhra Pradesh, Kerala, Punjab telecom circles. In year 2001-02 it acquired rights for Himachal Pradesh, Uttar Pradesh East and thereafter in the year 2007-08 for Jammu & Kashmir. Even if 3G Spectrum was not applied or allotted, assessee could have still continued providing telecommunication services under existing license. The license to operate telecom services is issued u/s. 4 of the Indian Telegraph Act, 1885 which provide rights to establish and operate telecom services. As stated above, without such license one is not ever eligible to bid for 3G Spectrum. 3G Spectrum fees are merely for right to use .....

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