TMI Blog2019 (6) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operly 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 find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spective of the number of telecom sites leased. 2. That the Ld. CIT(A) erred in treating loan processing fee of ₹ 21,87,50,000/- which is revenue in nature allowable under section 37(1) of the Act, as capital expenditure and thereby allowing depreciation instead of allowing it as revenue expenditure u/s 37(1) of the Act. That the above grounds of appeal are without prejudice to each other. 3. The assessee is a public limited company registered under the Companies Act, 1956 and was incorporated 011 20.11.2007. The assessee is a joint venture among Bharti Infratel Ltd., Vodafone Essar Limited and Aditya Birla Telecom Ltd in the ratio of 42,42,16 respectively. The company has been formed with the main object of sharing telecom infrastructure among the various telecom service providers. It renders telecom supports services to several telecom operators viz. Bharti Airtel, Vodafone, Idea, Reliance, Aircel, Uninor, Datacom, Loop, BSNL, BNSL etc in 16 telecom circles through 93,723 telecom sites, out of which 79,239 telecom sites are taken under indefeasible right to use 011 01.01.2009 and remaining 14,484 sites are built and persona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Foreign exchange fluctuation loss 9,05,76,526 2 Gratuity payments 42,25,273 3 Net accrual of equalization reserve 30,32,30,226 4 Capitalization of interest on loan 123,75,65,807 5 Depreciation on telecom towers 107,50,16,411 6 IRU charges 31,03,91,544 7 Depreciation on network cables, printers and scanners 94.78.632 8 Disallowance of loan processing fee 16,29,61,479 TOTAL 319,34,45,898 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en incurred wholly and exclusively for business purposes. Therefore, the Assessing Officer rightly disallowed this deduction. The Ld. DR further submitted that the CIT(A) erred in holding that this was a contractual obligation, hence allowable u/s 37(1). The CIT(A) erred in holding that each and every contractual obligation is wholly and exclusively for business purposes. The CIT(A) erred in not appreciating that the Assessing Officer appreciating the relevant evidences returned a logical and implicit finding that the expenditure in respect of so called gratuity cannot be said to have been incurred wholly and exclusively for business purposes. The CIT(A) has not found that the said finding in perverse or in the process of reaching the said finding principles of natural justice has not been followed. The CIT(A) erred in not appreciating that the reading of Section 36(1)(v), in light of whole scheme of computation of income from profits and gains of business or profession, deductions in respect of payment of gratuity in lieu of period of service rendered with an employer is not allowed being capital and non-recurring in nature and also relates to earlier period. That s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod of employees continuous service and the amount of gratuity paid were duly furnished before CIT(A). The CIT(A) called for the remand report and the Assessing Officer has not pointed out any fault with the evidence produced by the assessee. In present case, gratuity was actually paid. The Ld. AR relied upon the decision of the Hon ble Madras High Court in case of CIT vs. Premier Cotton Spg. Mills Ltd. (2003) 131 Taxman 79 (Mad.) wherein it was held that if the entire amount is not allowable under section 36(1)(v), the balance amount would necessarily have to be allowed as a business expenditure under section 37 of the Act and also that section 40A(7) of the Act has no application when there was an actual payment to an approved gratuity fund. Thus, Ground No. 1 of Revenue s appeal is dismissed. 8. As regards Ground No. 2 of Revenue s appeal, the Ld. DR submitted that during the year the assessee debited an amount of ₹ 16,21,45,355/- to the P L Account under the head lease equalization reserve 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. Further, the debited amount has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... added back in the computation of income. Lease expense is cancellable by giving one month s notice to the owner to terminate the agreement. Thus, 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 under Section 37 of the Act. The Ld. AR relied upon the decision of the Hon ble Supreme Court in case of CIT vs. Shoorji Vallabhdas Co. (1962) 46 ITR 144 (SC) and also relied upon the decision of the Hon ble Apex Court in case of Godhra Electricity Co. Ltd. (1997) 91 Taxman 351 (SC). The Ld. AR relied upon the following judicial decisions:- i) CIT vs. Reliance Industrial Infrastructure Ltd. (2015) 234 Taxman 256 ii) CIT vs. Bilahari Investment (P.) Ltd. (2008) 299 ITR 1 (SC) iii) CIT vs. Realest Builders Services Ltd. (2008) 307 ITR 202 (SC) iv) CIT vs. Excel Industries Ltd. (2013) 358 ITR 295 (SC) v) CIT vs. Vishnu Industrial Gases Pvt. Ltd. (ITR No. 229/1988 [Del. Tri.]) vi) CIT vs. Dinesh Kumar Goel (2011) 331 ITR 10 (Del) vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is constructed within 45 days where as there is no material to support this statement. Moreover, it is not necessary that each and every tower was constructed within 45 days. The statement of assessee that loan taken for construction of a particular tower was disbursed only after the construction of site was over which was already handed over to the telecom companies for business operations, is not supported by any material evidence. In fact, assessee has not mentioned any material to suggest that separate loan taken for construction of a particular tower. AS 16 defines a borrowing cost to be interest and other costs incurred by an enterprise in connection with borrowing of funds with reference to a qualifying asset. The term borrowing implies mobilizing of funds which are returnable. The plea of the assessee is based upon the implied statement that the loan was taken for each and every tower, separately after it was constructed, capitalized and put to use. The order of CIT(A) erred in not discussing evidence indicating this fact. In fact, the CIT(A) has accepted additional evidences in form of Ready For Active Installation (RFAI) Certificate in respect of 114 sites ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that assessee commenced business through lease of towers under IRU agreement. The submissions of the Ld. 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. There is no need to interfere with the findings of the CIT(A). The case laws relied upon by the Ld. DR is factually different from the present assessee s case as well as the ratio laid down does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not include any active infrastructure without any reference to number of sites. Essence of IRU agreement was to make all sites available to Indus as per Clause C D in the preamble. No clause in IRU agreement on proportionality of consideration which was fixed with reference to specific circles where towers were located. On the contrary, as per clause 2.1.3 consideration was not subject to change even when more towers were to be added. 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. The Assessing Officer in his notice u/s 133(6) did not ask for number of tower confirmation. The Assessing Officer only asked for amount confirmation. In fact as per Table 1, page 44 of the CIT (A) order, there was excess confirmation of ₹ 75,41,467 by various vis- -vis IRU agreements. There are cases where parties have confirmed more towers than as per IRU agreement. Similar clauses are present in other IRU agreements. 16. We have heard both the parties and perused all the relevant material available on record. The assessee had taken 79,239 telecom sites towers un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and financial institutions amounting to ₹ 1850 crores for operating its business and banks charges ₹ 21,87,50,000/- as one time processing fees (upfront fee). The entire amount of loans processing fees has been claimed as revenue expenditure u/s 37 of the Act, but for accounting purposes assessee amortised the total fees over the period of respective loan by debiting an amount of ₹ 4,45,38,521 to its P L, based on number of years for which loan was used in this assessment year. The aforesaid expense has been incurred for getting the finance for normal business operations and does not provide any enduring benefit to the assessee. 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. In view of this finding, expense related to loan cannot be capital in nature and allowable as revenue expenditure. Alternatively, the upfront f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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