Commissioner of Income Tax vs Evergrowth Telecom Ltd.

M.S. Sanklecha, J.—This appeal by the Revenue under s. 260A of the IT Act ("the Act") challenges the order dt. 9th Sept., 2009 of the Tribunal relating to the asst. yr. 1998-99. Being aggrieved by the order dt. 9th Sept., 2009, the Revenue has formulated the following questions of law for the consideration of this Court:

(A) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that license fees paid by the assessee company to its holding company amounting to Rs. 1,15,09,09,090 is an allowable expenditure under s. 37(1) of the IT Act even though the assessee company had itself amortized the said license fee for a period of ten years in its books of account and further s. 35ABB of the IT Act was applicable to such payment as license fee ?

(B) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that prior period expenses towards PSTN charges amounting to Rs. 72,46,725 and dealers commission amounting to Rs. 88,12,972 were allowable as revenue expenditure in the year under appeal ?

(C) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that foreign travel expenses amounting to Rs. 12,63,615 was allowable as revenue expenditure even though such expenditure was incurred for imparting training to officials which was a benefit of an enduring nature and thus capital expenditure in nature ?

The respondent was appointed as an operator by M/s. J.T. Mobiles Ltd. for providing cellular mobile service in Punjab Circle after M/s. J.T. Mobiles Ltd. received a telecoms license for 10 years from the Government of India to provide cellular mobile service. In its return of income filed for asst. yr. 1998-99 the respondent had declared a loss of Rs. 151 crores. The aforesaid loss was declared inter alia after claiming the following deduction as expenditure:

(i) Rs. 115 crores being the operating fees paid to M/s. J.T. Mobiles Ltd. under s. 37(1) of the Act;

(ii) Rs. 72.46 crores being expenses for PSTN charges and Rs. 95.35 lacs being expenses on account of commission and

(iii) Rs. 12.63 lacs being expenditure on foreign travel.

Regarding question (A):

(a) The AO by an order dt. 20th Feb., 2001 disallowed expenses of Rs. 115 crores claimed as license operating fee on the ground that such expenses are not allowable in one year but have to be amortized over the life of the license in view of s. 35ABB of the Act. Further, it was held that expenses were incurred for a right to operate a telecommunication service and thus is not allowable as a revenue expenditure but the same has to be amortized to the extent of the license fee attributable for the year under consideration. For this support was drawn from the fact that in its books of accounts the respondent had written off an amount of Rs. 115 crores by amortizing it over a period of 10 years. In support of the above, the assessment order drew support from the fact that the respondent had in its books of account written off only Rs. 47.46 crores during the year under consideration.

(b) In an appeal filed by the respondent-assessee, the CIT(A) by his order dt. 7th June, 2007 allowed the appeal on the basis of the order of the Tribunal dt. 29th March, 2007 for the asst. yr. 1997-98 wherein the entire amount paid as operating license fee by the respondent to M/s. J.T. Mobiles Ltd. was allowed as an expenditure under s. 37(1) of the Act.

(c) In the appeal filed by the appellant-Revenue, the Tribunal by its order dt. 9th Sept., 2009 upheld the order of the CIT(A) dt. 7th June, 2007 following its own decision dt. 29th March, 2007 for asst. yr. 1997-98. Thus, the entire expenditure of Rs. 115 crores paid as operating license fee was allowed as revenue expenditure under s. 37(1) of the Act.

(d) Mr. Vimal Gupta, senior counsel appearing for the Revenue in support of the appeal submits that an amount of Rs. 115 crores cannot be allowed as revenue expenditure under s. 37(1) of the Act in as much as in its books of account the respondent-assessee has amortized the entire expenditure for a period of 10 years and had written off only Rs. 47.46 crores during the year under consideration. Therefore, the deduction of expenditure of Rs. 47.46 crores as allowed by the AO can only be allowed as revenue expenditure for the asst. yr. 1998-99. As against the above, Mr. Percy Pardiwala, senior counsel for the respondent-assessee relied upon the order of the Tribunal dt. 29th March, 2007 and submits that for the earlier year i.e., asst. yr. 1997-98, the Tribunal has allowed the entire amount paid as operating license fee to M/s. J.T. Mobiles Ltd. under s. 37(1) of the Act. Further, the order dt. 29th March, 2007 of the Tribunal has been accepted by the Revenue and no appeal therefrom has been preferred by the Revenue. Further, he submits that the license fee actually paid by the respondent-assessee to M/s. J.T. Mobiles Ltd. is in the nature of operating fee which is payable yearly. Therefore, the payment not being a capital expenditure is allowable expenditure under s. 37(1) of the Act.

(e) We have considered the submissions. We find that amount of Rs. 115 crores was paid by the respondent-assessee to M/s. J.T. Mobiles Ltd. as operating license fee for the year under consideration. Consequently, no enduring benefit is received by the respondent-assessee so as to spread the expenditure beyond the period of one year in which the expenditure is incurred. In such a case, there can be no amortization of the expenditure over a period of 10 years. Further, s. 35ABB of the Act would have no application in the present case but would apply in respect of the license fee paid by M/s. J.T. Mobiles Ltd. The fact that the respondent-assessee had in its books of accounts spread the expenditure of Rs. 115 crores over a period of 10 years and only debited amount of Rs. 47.46 crores as expenditure during the year under consideration would not change the nature of the expenditure for the purpose of determining the allowability of the expenditure for income tax purpose. It is well settled that the treatment given in the books of account would not by itself determine the taxability of the item. Further, the Tribunal in the present case has merely followed its earlier order dt. 29th March, 2007 for the asst. yr. 1997-98 which appears to have been accepted by the Department as no appeal therefrom has been preferred by the Revenue. In view of the above, we find that no substantial question of law arises with regard to question (A).

Regarding question (B):

(a) The respondent-assessee had sought a deduction on account of expenses incurred of Rs. 72.46 lacs as PSTN charges and Rs. 95.35 lacs as dealers commission. The AO by order dt. 20th Feb., 2001 disallowed both these expenses on the ground that they were expenses incurred prior to the date of commercial launch of service i.e., 12th Jan., 1998. Therefore, the expenses being incurred during the pre-operative period are not admissible as deduction and added the same to respondent''s income.

(b) In appeal, the CIT(A) by order dt. 7th June, 2007 held that the aforesaid expenses are not pre-operating expenses as the appellant had set up its business much before the commercial launch on 12th Jan., 1998. This is evident from the fact that it had started marketing its services, appointing dealers, accepting deposits from subscribers much before the commercial launch. The aforesaid expenses were incurred after setting up of business and allowable as permissible deductions. However, the deduction on account of dealers commission was restricted to Rs. 88.12 lacs under s. 37(1) of the Act.

(c) Being aggrieved the Revenue carried the matter in appeal to the Tribunal. By order dt. 9th Sept. 2009 the Tribunal held that for the asst. yr. 1997-98, the Tribunal had upheld the order of the CIT(A) allowing expenses as operating charges and dealers commission even when the same were incurred prior to the date of commercial launch. The Tribunal therefore rejected the appeal of the Revenue and upheld the order dt. 7th June, 2007 of CIT(A).

(d) It is an admitted position that the order of the Tribunal dt. 29th March, 2007 for the asst. yr. 1997-98 allowed expenses on account of PSTN charges and dealers commission incurred prior to commencement date. This order of the Tribunal for asst. yr. 1997-98 was accepted by the Revenue as no appeal therefrom is filed by the Revenue. Further any expenditure incurred after setting up of a business and before the commencement of business is allowable as a deduction under s. 37(1) of the Act. The issue whether the expenditure has been incurred for purposes of business is an issue of fact and two authorities under the Act have rendered a finding of fact that expenses incurred on account of PSTN charges and dealers commission are incurred for purposes of business and allowable under s. 37(1) of the Act. In view of the above, we find that no substantial question of law arises with regard to question (B).

Regarding question (C):

(a) The respondent-assessee had claimed in its return of income deduction of Rs. 12.63 lacs on account of foreign travel expenses incurred by the respondent-assessee for its employees. The AO by order dt. 20th Feb., 2001 disallowed the expenditure holding it to be a capital expenditure as it resulted in enduring benefit to the respondent.

(b) On appeal, the CIT(A) by order dt. 7th June, 2007 held that foreign travel of the officers did not give rise to any benefit of an enduring nature but enabled efficient running of its business and therefore was revenue in nature. Thus the deduction on account of expenses on account of foreign travel was allowed as claimed by the respondent.

(c) On further appeal by the appellant-Revenue, the Tribunal by its order dt. 9th Sept., 2009 held that from the facts on record the amount spent on foreign travel resulted in efficient running of the business and hence allowable as a revenue expenditure.

(d) We find no fault with the order of the Tribunal which upheld the finding of CIT(A). The issue whether the amount spent on traveling has resulted in an enduring benefit for the respondent-assessee or not is a question of fact and two authorities under the Act i.e., CIT(A) and the Tribunal on examination of the facts concluded that the expenses incurred do not give rise to any enduring benefits but only enable the respondent-assessee to efficiently run its business so as to achieve higher profits. In view of the above, we find that no substantial question of law arises with regard to question (C) as it is a finding of fact and this finding is neither perverse nor arbitrary.

In view of the above, the questions A, B, and C formulated by the appellant-Revenue are dismissed as they do not give rise to any substantial question of law for consideration by this Court. The appeal is dismissed with no order as to costs.