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2019 (6) TMI 474

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..... 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 - SUPRE .....

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..... firmations 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 authori .....

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..... t, 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 personalized by the assessee on its own during the financial year. The assessee company filed its E-return of income on 30.09.2009 declaring total loss, at ₹ 452,16,70,660/- which was subsequently revised on 30.09.2010 revising the total loss at ₹ .....

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..... n processing fee 16,29,61,479 TOTAL 319,34,45,898 4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. 5. As regards Ground No. 1 of the Revenue s appeal, the Ld. DR submitted that 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 was formed with the main objective of sharing telecom infrastructure among the various telecom service providers. It renders telecom service to several telecom operators viz. Bharti Airtel, Vodafone, Idea, Reliance, Aircel, Uninor, Datacom, Loop, BSNL etc in 16 telecom circle through 93,723 telecom sites out of which 79,239 telecom sites are taken under indefeasible right to use on 01.01.2009 and remaining 14,484 sites are built and personalized by the assessee on its own during the financial year. As regards Ground No. 1, the Ld. DR submitted that the question as to whether expenditure (in respect of so called gratuity can be said to be incurred wholly and exclusively for business purposes is a question of fact. This is settled position of law that u/s 37 .....

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..... ribution to approved gratuity fund created for exclusive benefit of its employees under trust. The CIT(A) erred in not appreciating that there is bar on allowability of deduction under Section 37(1) in respect of expenditure which are in nature of expenditure in respect of whom deduction is allowed under any other section. Natural connotation of the term nature narrows down the scope section 37(1). 6. The Ld. AR submitted 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). It is the practice of the assessee to pay ex-gratia to its employees as matter of general practice and on the principles of commercial expediency. No disallowance under section 40A(7) was called for, as it was not a case that the assessee h .....

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..... provision of the Act. Similarly, the assessee enters into an agreement with telecom companies to provide them space on its towers in lieu of which services charges are being received. During the year, the assessee has credited an amount of ₹ 46,53,75,581 to its revenue account under the head revenue equalization reserve which is the part of service charges to be collected or collectible from telecom companies on account of use of space on assessee towers, further, credited amount has been reduced from the profit in the computation of income. The Ld. DR further submitted that the Income Tax Act permits two methods of accounting - mercantile (accrual) and cash. Under the mercantile method, income and expenses are accounted as and when the right to receive or the right to pay arises. Under the cash method, income and expenses are accounted on actual receipt or payment. The Income Tax Act clearly lays down the scope of total which includes both income received as well income accrued. From a conjoint reading of Section 5 and Section 145(2) it is amply clear that assessee is bound to follow either the cash system or mercantile system of accounting. The Ld. DR relied upon the decisi .....

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..... e 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 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) 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 the Hon ble Apex Court in case of Godhra Electricity Co. Ltd. (1997) 91 Taxman 351 (SC) 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. 11. As regards to Ground No. 3 of the Revenue s appeal, the Ld. DR submitted that during the Financial Year 2008-09, the assessee has borrowed loan of  .....

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..... in case of Punjab State Industrial Corporation Ltd. vs. CIT 225 ITR 792 (SC). 12. The Ld. AR submitted that construction of towers began in April 2008 whereas IRU agreement was entered into 1st January, 2009. The Assessing Officer was incorrect in stating that assessee commenced business through lease of towers under IRU agreement. 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. 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. 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). The Ld. AR relied upon the following judicial decisions: i) Capital Bus Service (P.) Ltd. vs. CIT 123 ITR 404 (Del.) wherein it is held that depreciation must .....

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..... 268.20 crore which has been debited in P & L account claiming it as allowable expenditure. Notices u/s 133(6) were issued to all parties so as to confirm the number of towers being given on IRU agreement to the assessee, total cost incurred by the companies in erecting the towers eventually being leased out to the assessee, WDV of the towers in the books of the party as on the date of IRU agreement and total IRU charges being received by the above parties from the assessee during F.Y. 2008-09. The Ld. DR submitted that the CIT(A) passed a judicious decision but erred in certain points. The Ld. DR submitted that as per the Assessment Order, when certain confirmations were not received/there was mismatch between figures of towers taken on lease as shown by the assessee vis-à-vis as per confirmations received by way of enquiry u/s 133(6), the assessee was categorically asked to furnish confirmation which it failed to furnish. As per statement of facts submitted before the CIT(A), the assessee did not dispute the fact that the assessee was categorically asked to furnish confirmation which it failed to furnish. However, as per Para 7.3.5 of CIT(A) s order, the Assessing Offic .....

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..... ntually being leased out to the assessee, WDV of the towers in the books of the party as on the date of IRU agreement and total IRU charges being received by the above parties from the assessee during F.Y. 2008-09. The Ld. AR contended that 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. 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 Assessing Officer 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. Needless to say that the assessee be given proper opportunity of hearing by following principles of natural justice. Hence Ground No. 4 of the Revenue s appeal and Grou .....

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..... rties and perused all the relevant material available on record. It is pertinent to note that the assessee had taken loans from banks 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 was claimed as revenue expenditure u/s 37 of the Act. The Ld. AR contented that 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 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. I .....

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