Interest and penalty paid on account of non-payment of additional license fee are revenue expenditure.
No disallowance under section 14A is required if there is no other source of exempt income.
I. Allowability of Interest and Penalty as Business Expenditure (Section 37(1))
- Issue: Whether interest and penalty paid by the assessee due to delayed payment of license fees and Spectrum Usage Charges (SUC) should be allowed as a revenue deduction.
- Facts:
- The assessee, a telecom operator, was required to pay annual license fees and SUC on a revenue-sharing basis.
- A Supreme Court ruling led to the quantification of additional amounts payable by the assessee.
- The assessee made delayed payments, resulting in interest and penalty.
- The Assessing Officer (AO) allowed the interest and penalty as a revenue deduction.
- The PCIT invoked revisionary jurisdiction, arguing that the interest and penalty should be treated as capital expenditure.
- Decision:
- The court held that the interest and penalty payments were compensatory in nature.
- The court held that the incidence of interest and penalty arose from a business decision to contest the license fee quantum and should not be considered as part of the license fee itself.
- The court held that the interest and penalty were revenue in nature and should be allowed as a revenue deduction.
II. Carry Forward and Set Off of Accumulated Loss and Unabsorbed Depreciation (Section 72A)
- Issue: Whether the assessee-company, which acquired the consumer wireless mobile business undertaking of TTSL pursuant to a demerger scheme, is entitled to carry forward and set off accumulated loss and unabsorbed depreciation of TTSL under Section 72A.
- Facts:
- The assessee acquired the consumer wireless mobile business undertaking of TTSL through a demerger scheme.
- The assessee claimed entitlement to carry forward and set off accumulated loss and unabsorbed depreciation of TTSL under Section 72A.
- The PCIT held that the demerger did not fulfill the conditions of Section 2(19AA) and directed the AO to deny the benefits of Section 72A.
- Decision:
- The court held that the necessary conditions of clauses (i) to (iii) of Section 2(19AA) were complied with.
- The court held that the issuance of preference shares of the resulting company to at least three-fourths of the shareholders of the demerged company would result in compliance with the mandate of clause (v) of Section 2(19AA).
- The court set aside the PCIT’s order.
III. Income from Other Sources (Section 56)
- Issue: Whether a business undertaking, as a separate and independent property, is covered within the definition of “property” for the purpose of Section 56(2)(x), and whether a demerger transaction is excluded from the purview of said section.
- Facts:
- The consumer mobile business undertaking of TTSL was acquired by assessee on a wholesome basis without valuation of an individual asset and a lumpsum consideration through process of demerger was paid.
- PCIT alleged a deemed capital gain on the aquisition.
- Decision:
- The court held that a business undertaking, as a separate and independent property, is not covered within the definition of “property” for the purpose of Section 56(2)(x), and a demerger transaction is excluded from the purview of said section.
- The court held that the provisions of Section 56 are deeming income provisions and come into effect where there is an allegation that the transaction of acquisition of an asset is without consideration or the consideration is less than the fair market value.
- The court held that it was not justified for the PCIT to have gone beyond the scope of the notice under Section 263 and to allege that there was a deemed capital gain on the acquisition of the consumer wireless business of TTSL.
IV. Deduction of Tax at Source (TDS) on Bandwidth Charges (Section 195, 40(a)(i))
- Issue: Whether payments on account of bandwidth charges to non-residents in non-treaty countries are subject to TDS provisions.
- Decision:
- The court held that when payments are not in regard to royalty or Fees for Technical Services (FTS) under the Act, then also, in respect of non-treaty countries, payments on account of bandwidth charges to non-residents are not subject to TDS provisions.
V. Expenditure Incurred in Relation to Income Not Includible in Total Income (Section 14A)
- Issue: Whether a suo-motu disallowance of expenditure under Section 14A is justified when the Assessing Officer (AO) has already considered the issue and no adverse findings were given.
- Facts:
- During the year, the assessee received exempt dividends from its subsidiary company only, and there was no other source of exempt income or fresh investment in the shares of the subsidiary company.
- A suo-motu disallowance of a certain amount was made.
- Decision:
- The court held that since the issue was duly considered by the AO and no adverse findings were given, the issue did not deserve to be interfered with under Section 263.
In summary, the court consistently ruled in favor of the assessee, emphasizing the importance of considering the commercial realities of transactions, adhering to the specific provisions of the Income-tax Act, and ensuring that revisionary powers are exercised judiciously.
IN THE ITAT DELHI BENCH ‘H’
Bharti Airtel Ltd.
v.
Principal CIT
ANUBHAV SHARMA, Judicial member
and M. Balaganesh, Accountant member
and M. Balaganesh, Accountant member
IT Appeal No. 1160 (Del) of 2024
[Assessment Year 2020-21]
[Assessment Year 2020-21]
FEBRUARY 21, 2025
Ajay Vohra, Sr. Adv., Rohit Jain, Deepesh Jain, Advs. and Shivam Gupta, CA for the Appellant. S.K. Jhadav, CIT DR fot the Respondent.
ORDER
Anubhav Sharma, Judicial Member. – This appeal by the assessee is preferred against the order dated 19.01.2024 passed under section 263 of the Income Tax Act, 1961 [hereinafter referred as ‘the Act’] by the Principal Commissioner of Income Tax (Appeals)-1, Delhi [hereinafter referred to as Revisional Authority or in short “PCIT”] pertaining to assessment year 2020-21 and arises out of the assessment order dated 10.10.2023, passed u/s 143(3) r.w.s 144C(13) of the Act, by assessing officer, Circle 4(2), New Delhi (here inafter referred in short as ‘AO”)
2. Heard and perused the records. The assessee is engaged in the business of providing cellular mobile telephone services and landline services and other associated value added services and internet service. During the relevant year ending on 31.03.2020, the assessee company gave effect to the demerger of consumer mobile business undertaking of M/s Tata Tele Services Ltd. with the assessee on 1st July, 2019 being the effective and the appointed date of the scheme of arrangement u/s 230 to 232 of the Companies Act, 2013. The case of the assessee was selected for complete scrutiny assessment through CASS for various reasons and statutory notices were issued. In the mean time, reference to the TPO was made by the National Faceless Assessment Centre after getting necessary statutory approval for determination of arm’s length price for the international transaction undertaken by the assessee during the year under consideration.
3. Thereafter, due to restructuring of case for the reasons of merger, amalgamation, demerger, etc., it was transferred out of Faceless Assessment Centre u/s 144B(8) of the Act to the jurisdictional Assessing Officer. The assessment was completed on 10.10.2023 by adjustments recommended by the TPO u/s 92CA of the Act making addition of Rs.457,64,80,114/-. Further, Ld. AO has made a disallowance on account of ESOP expenses; a disallowance u/s 40(a)(ia) was made on account of free air time; disallowance was made on account of variable license fee. A modified claim pursuant to the Hon’ble Supreme Court order dated 24.10.2019 was made and the business income was recalculated. Thereafter, adjustments on account of income from short-term capital gain, brought forward short-term capital loss, income from long-term capital gain and brought forward long-term capital loss were made and further, taking into account income from other sources, the loss returned of the assessee of Rs.453,56,97,41,897/- was recalculated to Rs.547,39,89,21,868/-. Soon, after conclusion of this assessment u/s 143(3) read with section 144C(3) dated 10.10.2023, the jurisdictional PCIT issued show cause notice dated 22.12.2023 u/s 263 proposing to revise the assessment order dated 10.10.2023. The said show cause notice was primarily on the basis that proper inquiries were not conducted by the AO in so far as huge claims had been allowed without verification and examination, thereby rendering the assessment order erroneous and prejudicial to the interest of the Revenue. The assessee had responded to the show cause notice by submissions dated 22.12.2023 and after taking into consideration the submissions and the objections to the exercise of jurisdiction, the impugned order was passed whereby the revisional authority enhanced the assessment on certain issues and set aside the assessment on some other issues.
4. During pendency of appeal before this Tribunal, an effect giving order u/s 143(3) r.w.s. 263 of the Act dated 14.01.2025 was passed by the ld. AO and based upon the aforesaid subsequent event of passing of the effect giving order, certain grounds of challenge of impugned order have become superfluous and some require modification in terms of remaining grievances of the assessee.
5. On hearing ld. Sr. Counsel and ld. Departmental Representative, we find that primarily they have relied their respective cases as before ld. tax authorities and, accordingly, we proceed to decide the controversy in the form of issues and their consequences on the grounds as raised before the Tribunal. As for convenience, here itself the grounds raised by the assessee are reproduced:-
“Validily of 263 order
1. That on the facts and circumstances of the case and in law, the order dated 19.01.2024, passed by the Principal Commissioner of Income Tax, Delhi – 1 [‘PCIT’], under section 263 of the Income Tax Act, 1961 (‘the Act’) enhancing the assessment (on some issues) and setting aside the assessment (on some other issues)is without jurisdiction, illegal, bad in law,void ab initio and liable to be quashed.
2. That on the facts and circumstances of the case, the impugned order having been passedby the PCIT in undue haste without: (a) affording reasonable opportunity of being heard; (b) considering the request for deferment to file submissions on certain issues (in particular residuary issues (referred infra); (c) considering the supplementary submissions filed; (d) first disposing off the legal objections by passing a separate speaking order; (e) issuing any show-cause notice of the proposed addition/ variation; and (f) granting oral/ personal hearing, is illegal, bad in law and liable to be quashed/ set aside.
3. That the PCIT erred on facts and in law in exercising revisionary powers under section 263 of the Act on various issues in the impugned order, without satisfying the twin jurisdictional conditions of the assessment order being: (a) erroneous; and (b) prejudicial to the interests of the Revenue and consequently, the impugned order is illegal, bad in law and liable to be quashed.
4. That the PCIT erred in enhancing/ setting aside the assessment order by exercising powers under section 263 of the Act, without appreciating that: (a) it was not a case of lack of enquiry on any of the issues raised; (b) the view taken by the assessing officer in respect of the various issues was, in any case, a plausible view; and (c) revisionary proceedings under could not be initiated on a mere ‘change of opinion’.
5. That the PCIT erred in setting aside the assessment order on certain issues (ground nos. 12 to 14 infra),with vague directions, without even recording any prima facie findings on merits, thereby, not demonstrating how and why the final assessment order was erroneous and prejudicial to the interests of the Revenue, qua such issues.
6. That the PCIT erred in enhancing the assessment, inter alia, on the following issues that were not even specified in the show-cause notice dated 26.12.2023 and for which no opportunity was provided to the appellant:
(a) Alleged gain of Rs.1,230 crore on acquisition of Tata Teleservices Ltd. business (in short “Tata Business”);
(b) Alleged incorrect proportionate adjustment allowed by the Transfer pricing officer.
7. That the PCIT failed to appreciate that revisionary proceedings under section 263 of the Act could not be initiated merely to: (a) conduct vague/ roving enquiries; or (b) authorize the assessing officer to conduct roving/ fishing enquiries, by merely setting aside the assessment.
Without Prejudice
Quaclaim ofdeductiononaccountofpayment oflicensejees
8. That the PCIT erred in enhancing the income of the appellant by Rs.39,251 crores by directing disallowance of license fees, spectrum usage charges (SUC) and interest/ penalty thereon payable to Department of Telecommunication [‘DOT’].
8.1. That the PCIT erred in exercising revisionary jurisdiction, without appreciating that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue and solely on this ground, without anything more, the impugned order qua the aforesaid issue was without jurisdiction and bad in law.
8.2. That the PCIT erred in holding/ directingdisallowance of interest and penalty on delayed payment of license fee and SUC aggregating to Rs.30,574 crores, without appreciating that the samewas allowable in its entirety as revenue expenditure and no part thereof could be regarded as capital in nature.
8.3. That the PCIT erred in holding/ directing disallowance of SUC of Rs.2,975 crores, without appreciating that the decision of the apex Court in CIT v. Bharti Hexacom:(SC) was applicable only in respect of variable license fee and that SUC was always, without any dispute, allowed as revenue deduction.
8.4. That the PCIT erred in holding/ directing disallowance of entire variable license fees of Rs.5,082 crores, without appreciating that substantial part thereof, including but not limited to fees relating to expired licenses, was allowable as deduction in its entirety.
8.5. That the PCIT erred in not: (a) considering the rectification application filed, suo-motu,by the appellant before the assessing officer appropriately modifying the claim of deduction in respect of variable license fee in light of the decision of the apex Court (supra); (b) issuing any show-cause notice and/ or granting hearing.
8.6. Without prejudice, the PCIT erred in not allowing and/ or directing the assessing officer to allow benefit of section 35ABB of the Act in respect of the amount held to be capital in nature.
8.7. Without prejudice the PCIT erred in incorrectly considering the amount of license fees, SUC and interest/ penalty thereon payable to DOT at Rs.39,251 crores as against determined demand of Rs.38,631 crores.
8.8. That the PCIT erred in mechanically initiating penalty proceedings under section 270A for ‘misreporting of income’ perversely alleging misrepresentation of facts.
Qua Carry forward of accumulated Tata business loss and unabsorbed depreciation
9. That the PCIT erred in directing denial of benefit of section 72A of the Act and in directing the assessing officer to withdraw the allowance of brought forward business loss of Rs.14,585crores and unabsorbed depreciation of Rs.7,147crores relatable to the consumer wireless undertaking ofM/s Tata Teleservices Limited (TTSL).
9.1. That the PCIT erred in exercising revisionary jurisdiction, without appreciating that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue and solely on this ground, without anything more, the impugned order qua the aforesaid issue was without jurisdiction and bad in law.
9.2. That the PCIT erred in holding that ‘demerger’ of consumer wireless undertaking of TTSL did not fulfill the conditions of section 2(19AA) of the Act inasmuch as: (a) preference shares were issued pursuant to demerger, thereby violating the statutory mandate that threefourth (%) of the shareholders must continue to participate in company; and (b) requirement of transfer of all assets and liabilities was not fulfilled.
9.3. That thePCIT erred in exceeding his jurisdiction in disregarding the NCLT sanctioned scheme of arrangement, having a statutory force, for demergerand vesting of the consumer wireless undertaking of TTSL into the appellant,and instead in perversely holding the same to be mere ‘business acquisition’, not qualifying as ‘demerger’.
9.4. That the PCIT erred in not: (a) considering the supplementary reply dated 11.01.2024 filed by the appellant providing detailed justification in support of the claim of losses under section 72A of the Act; and (b) issuing any show-cause notice and/ or granting hearing.
9.5. Without prejudice, the PCIT failed to appreciate that the eligibility of unabsorbed business losses/ depreciation, in any case, ought to be tested in the subsequent year(s) of its actual set off and therefore, the PCIT had no jurisdiction to direct its denial in the year under consideration.
9.6. That the PCIT erred in mechanically initiating penalty proceedings under section 270A for ‘misreporting of income’ perversely alleging that the appellant made a fraudulent claim.
Qua Alleged gain on acquisition of business
10. That on the facts and circumstances of the case and in law, the PCIT erred in enhancing the income by directing addition of Rs.1,230.01 crores under section 56(2)(x) of the Act on account of alleged gain on acquisition of consumer wireless business of TTSL.
10.1. That the PCIT erred in making aforesaid addition without even issuing any show-cause notice indicating any such proposal and/ or setting out the conclusion sought to be drawn on the aforesaid issue and without affording any opportunity to the appellant.
10.2. That the PCIT erred in invoking provisions of section 56(2)(x) of the Act without appreciating that sanctioned demerger of consumer wireless business of TTSL fell within the exception provided in the said section.
10.3. Without prejudice, the PCIT erred in not appreciating that even otherwise, acquisition of ‘business’ does not constitute ‘property’ for the purpose of section 56(2)(x) of the Act.
10.4. That the PCIT erred in not even providing/explaining the basis of computation of the aforesaid alleged gains of Rs.1,230.01 crores.
Qua transfer pricing adjustment
11. That on the facts and circumstances of the case and in law, the PCIT erred in enhancing transfer pricing adjustment to the extent of Rs.2,663.71 crores on account of alleged incorrect reduction of proportionate adjustment allowed by the transfer pricing officer (TPO).
11.1. That the PCIT erred in assuming revisionary jurisdiction under section 263 qua order passed by TPO under section 92CA of the Act under the supervision and directions of CIT-International.
11.2. That the PCIT erred in incorrectly stating that Revenue SLP in the case of ‘Firestone International Pvt. Ltd.’stood admitted by the apex Court.
11.3. That the PCIT erred in making addition, without issuing any showcause notice setting out the final conclusion on the aforesaid issue and affording opportunity of hearing to the appellant.
Qua Disallowance under section 40(a)(i) of the Act
12. That the PCIT erred in issuing vague/ open ended direction tothe assessing officerto examine transactions and disallow payments with nonresidents without deduction of tax at source under section 40(a)(i) in cases where there is no certificate under section(s) 195/197 of the Act.
12.1. That the PCIT failed to appreciate that the scope of revisionary jurisdiction is limited to issues on which the assessment order is found to be erroneous and prejudicial to the interests of the Revenue and not for directing vague/ open ended direction to the assessing officer to undertake roving/ fishing enquiries.
12.2. That the PCIT failed to appreciate that the transactions entered into by the appellant with non-residents stands duly examined and accepted by the Department vide separate order passed under section 201 of the Act for the relevant assessment year.
12.3. That the PCIT erred in dictating the assessing officer to disallow expenses on which tax has not been deducted following stand of the revenue on those issues, which is not permissible.
12.4. That the PCIT erred in passing the aforesaid directions, without issuing any show-cause notice on the aforesaid issue and/ or affording opportunity of hearing to the appellant.
Qua Residuary Issues
13. That the PCIT erred in vaguely directing the assessing officer to make disallowance under section 14A of the Act read with Rule 8D of the Income Tax Rules.
14. That the PCIT erred in vaguely directing the assessing officer to verify the following transactions:
| (a) | Claim of depreciation made by the assessee; |
| (b) | Violation of section 269SS of the Act; |
| (c) | Huge expenses claimed by the assessee; |
| (d) | Liabilities, to ascertain whether the same are genuine. |
15. That the PCIT erred in alleging that no objection was raised by the appellant against invocation of revisionary jurisdiction in respect of the aforesaid issues.
16. That the PCIT failed to appreciate that the revisionary jurisdiction under section 263 of the Act is not meant for such perverse/ vague/ open ended directions to the assessing officer to undertake roving/ fishing enquiries.
The appellant craves leave to add, to amend or vary the above grounds of appeal on or before the date of hearing.”
6. Ld. Sr. Counsel has laid lot of stress on the fact that the PCIT, has passed the impugned order in undue haste and has arbitrary enhanced the assessment on some issues and set aside the assessment on some other issues, on completely vague grounds, virtually permitting the assessing officer to undertake fishing/ roving expedition in the set aside proceedings. Further, the PCIT has enhanced the assessment, inter alia, on certain issues that were not even specified in the show-cause notice dated 26.12.2023 and for which no opportunity/ SCN was provided to the appellant.
7. Ld. Sr. Counsel has submitted that AO had made extensive enquires during the assessment and on incorrect notion of lack of enquiry, the jurisdiction u/s 263 has been invoked. In this context Ld. Sr. Counsel has taken the bench across various notices issued by the ld. AO and the submissions of assessee with relevant evidences as available in Paper Book filed by the appellant. Ld. Sr. Counsel has submitted that the observations of PCIT that there was lack of enquiry is not substantiated by any new facts found during revision proceedings. Thus it was submitted the allegation of no enquiry is vague and could not have been basis to hold the assessment to be erroneous so far prejudicial to the interest of the revenue.
8. Though it is submitted by ld. Sr. Counsel of the assessee that as a result of the consequential order passed under section 143(3)/ 263, and more particularly in view of the assessing officer, after fresh reexamination/ re-verification, granting relief to the appellant on some of the issues, the substantive grievance of the appellant survives on the residual issues on which relief has not been allowed and the grievance of the appellant on the issues on which relief has already been granted are merely rendered academic in nature. Still for completeness, while adjudicating the residual issues on merits we shall examine this controversy, as to if the allegation and conclusion of PCIT about lack of enquiry is sustainable, as same goes to the question of validity in assumption of jurisdiction.
9. Issue No.1: We will like to preface the discussion on this issue by bringing some vital facts on record, though same may seem superfluous, in the light of effect giving order narrowing the controversy, but still remain vital. The appellant, as stated above, is engaged in the business of providing telecommunication services and was granted permission/ license to operate cellular services under Section 4 of the Indian Telegraph Act, 1885 on payment of license fees. As per the license agreement entered into by the appellant with the Department of Telecom (DoT), the Telecom companies are required to pay license fee (LF) and Spectrum Usage Charges (SUC) to DoT. Further in terms of the National Telecom Policy, 1999 (NTP)/ Agreement with DoT, the License fee and SUC are paid on revenue sharing basis, being a fixed percentage of Gross Adjusted Revenue (‘AGR’). The computation of license fees and SUC payments was subject matter of divergent interpretation between the telecom companies and DoT since beginning whereby the telecom industry believed that the license fees and SUC rates should be applied to telecom revenues only while DoT was demanding it on entire revenue of telecom companies. The Telecom Disputes Settlement and Appellate Tribunal (TDSAT) had earlier passed an order deciding that out of the revenue line items disputed by the telecom companies, specified items of revenue shall be included for the purpose of AGR while on few others relief was provided. Both DoT and telecom companies challenged the TDSAT order before the Hon’ble Supreme Court. In accordance with the same, telecom companies while making payment of license fee to DoT were excluding certain items of revenue which were not connected to the operation of the telecom license, while calculating the AGR. Broadly, these items were categorized under non-telecom revenues by the appellant.
9.1 During the year under consideration, the Hon’ble Supreme Court vide order dated 24.10.2019 delivered a judgment against the aforesaid order of TDSAT upholding the view of the DoT in respect of the definition of AGR. The Hon’ble Supreme Court dealt with different heads of revenue / inflow and held that these will fall within the definition of AGR. Accordingly, the telecom companies were required to pay License fee and SUC on revenue generated from licensed activities as well as on revenue generated from non-specified licensed activities. Further, the additional amount of Rs.39,251crores payable by the appellant also stood quantified in the said order of the Hon’ble Supreme Court.
9.2 The telecom companies including the appellant thereafter filed review petitions before the Hon’ble Supreme Court for self-assessment/re-assessment to be done in the Supreme Court order dated 24.10.2019, which was rejected vide order dated 18.03.2020 observing as follows:
“……….no exercise of self-assessment/re-assessment to be done and the due which placed before us have to be paid as we have affirmed these dues including interest and penalty as ordered in the judgement.”
9.3 Accordingly, in view of the above orders, during the year under consideration, the appellant provided an amount of Rs.28,498 crores comprising of license fee of Rs.17,044.60 crores and SUC of Rs.11,453.20 crores as a charge to the statement of profit & loss account, disclosed as an exceptional item. Relevant extracts of audited financial statement for the year ended 31.03.2020 are on record at pages 3657 to 3658 of paper book Vol.II. Ld. Sr. Counsel has submitted that the aforesaid amount was computed after excluding impact of certain computation errors and payments already made by the appellant in past periods not considered by DoT while raising the demands. Subsequently, the Hon’ble Supreme Court vide order dated 01.09.2020, directed that demands raised by DoT in respect of AGR dues based on order dated 24.10.2019 and 18.03.2020 shall be final and there shall not be any dispute raised by any of the Telecom operators. Accordingly, during the financial year 2020-21, the appellant provided for the balance additional charge of Rs.10,689 crores (which included interest of Rs.556 crores from 01.04.2020 to 30.06.2020) in the statement of profit & loss account which was disclosed as an exceptional item. Thus it is apparent that the appellant had initially claimed the above amount(s) of Rs.28,498 crores and Rs.10,689 crores in the return of income filed for assessment year(s) 2020-21and 2021-22 respectively. However, during the course of assessment proceedings, the appellant, in view of the fact that the additional liability actually stood crystallized pursuant to the first order of the Hon’ble Supreme Court vide order dated 24.10.2019 and the subsequent order dated 01.09.2020, merely re-affirmed the view, filed letter dated 19.09.2023 before the assessing officer seeking withdrawal of deduction in respect of the balance additional liability of Rs.10,133 crores [Rs.10,689 – Rs.556] which was inadvertently claimed in the return of income filed for the financial year 2020-
21. In other words, the claim of deduction in respect of additional liability of license fee and SUC stood enlarged/enhanced to Rs. 38,631 crores as against the initial claim of Rs.28,498 crores made in the return of income. Further, as a necessary consequence, the claim made in the return of income filed for assessment year 2021-22 was withdrawn by the appellant vide letter dated 29.09.2023 filed before the assessing officer. Ld. Sr. Counsel has pointed out that the entire additional liability in respect of license fee and SUC crystallized only pursuant to the order of the SC passed on 24.10.2019 i.e., in the relevant assessment year. Further, in the assessment order dated 27.02.2024 passed for the subsequent assessment year 2021-22, the claim of additional liability of Rs.10,133 crores made in the return of income was treated as withdrawn by the assessing officer. In the meanwhile, subsequent to the receipt of assessment order dated 10.10.2023, for the relevant assessment year 2020-21, the Hon’ble Supreme Court vide order dated 16.10.2023 in CA No. 11128 of 2016 (reported iN pronounced its verdict on the issue of allowability of variable license fee and held that variable license fee is capital in nature and should be amortized in terms of section 35ABB of the Act over the remaining period of the License.
9.4 In pursuance of the aforesaid order, the appellant immediately filed rectification request vide letter dated 25.10.2023 before the assessing officer requesting for re-calculation of the amount of variable license fee of Rs.5,082 crore included in the additional claim of Rs.38,631 crores which was to be amortized and allowed in terms of section 35ABB of the Act. The aforesaid rectification application filed by the appellant, suo-moto seeking recalculation of variable license fee continues to remained pending before the assessing officer as on date when impugned order u/s 263 of the Act was passed. It was thus submitted that the appellant taking cognizance of the order of the Supreme Court suo-moto requested the assessing officer to recompute the amount of variable license fee allowable in terms of section 35ABB of the Act. Thus, as per ld. Sr. Counsel the assessing officer, rightly allowed the claim of additional license fee and SUC and initiation of impugned revisionary proceedings on the said issue was without jurisdiction, unwarranted and bad in law.
10. Thus, this issue arises out of allowability of payment of license fee, spectrum usage charges (SUC), interest/penalty thereon (hereinafter referred to as AGR issue). PCIT held that the judgment of the Supreme Court in CIT v. Bharti Hexacom:(SC) leaves no doubt that expenditure claimed under license fees is a capital expenditure and is to be allowed over a period of time as provided in section 35ABB. PCIT further observed that the assessing officer has allowed this expenditure without applying mind. PCIT further observed amount of interest or penalty arising on account of nonpayment of license fees cannot have a different character and the said expenditure is also capital in nature. Accordingly, the order passed by the AO was held to be erroneous and prejudicial to the interests of the Revenue.
10.1 In the consequential assessment order passed u/s. 143(3)/ 263, the assessing officer has taken note of the bifurcation of Rs.39,251 crores (correct amount is Rs.38,631 crores) claimed by the assessee during AY 2020-21. Secondly, AO held that Spectrum Usage Charges and corresponding interest and penalty aggregating to Rs.11,742 crores were never considered for amortization in any earlier years and were also not part of the dispute before the Supreme Court. AO accordingly allowed the said amount claimed as revenue expenditure. Thirdly, as regard amount of Rs.26,889 crores on account of VLF and interest/ penalty, AO held that Spectrum Usage Charges and corresponding interest and penalty aggregating to Rs.11,742 crores were never considered for amortization in any earlier years and were also not part of the dispute before the Supreme Court. AO accordingly allowed the said amount claimed as revenue expenditure. Thirdly, as regard amount of Rs.26,889 crores, Amortization u/s 35ABB of Rs. 15619,70,08,650 was allowed and Net amount disallowed to be allowed in subsequent years is 11269,75,06,843. To that extent the assessee is left with no grievance.
10.2 In view of the aforesaid order passed by the assessing officer substantive surviving grievance of the appellant is only in respect of the following disallowance by treating the same as capital expenditure required to be amortized under section 35ABB of the Act:
| (a) | Interest on License Fees – Rs.11,955 crs. |
| (b) | Penalty on License Fees – Rs.3,338 crs. |
| (c) | Interest on penalty on License Fees – Rs.6,514 crs. |
It is clarified by the ld. Sr. Counsel that after allowing deduction under section 35ABB of the Act, the net disallowance (in consequential assessment) stands at Rs.11,269 crores which includes:
| (i) | Rs.1,487.30 crores qua unamortized balance [out of Rs.5,082 crores of VLF, no grievance survives in this regard in view of Supreme Court order dated 16.10.2023 (supra) and rectification application dated 25.10.2023] |
| (ii) | Rs.9,781.7 crores towards unamortized interest and penalty on delayed payment aforesaid VLF [surviving grievance]. |
10.3 Ld. Sr. Counsel has submitted that the exercise of revisionary jurisdiction qua the said issue is invalid and bad in law, inter alia, for the reasons briefly explained hereunder:
| (a) | It is worthwhile to note that the genesis of revisionary jurisdiction invoked by the PCIT on the said issue is the order passed by the apex Court decision in the case of CIT v. Bharti Hexacom: holding variable license fee (VLF) to be capital expenditure to be amortized as per section 35ABB of the Act. |
| It | is pertinent to note that the issue of allowability of interest or penalty or nature of the same (capital v. revenue) was undisputedly not the question before the apex Court nor the said judgement deals with the said issue. The apex Court merely dealt with the nature and allowability of VLF and not interest/ penalty on delayed payment thereof. In view of the aforesaid, assumption of jurisdiction to disallow, inter alia, interest and penalty on the basis of the aforesaid judgement of the apex Court is invalid and bad in law. |
| (b) | In so far as interest/ penalty, the PCIT initially in the SCN observed that the same was penal in nature and disallowable in terms of Explanation 1 to section 37 of the Act. However, in the impugned order finally concluded that interest and penalty shall acquire the same character as principal payment and therefore, held the same to be capital in nature. In this regard it is submitted as under: |
| ■ | Interest and penal interest have been determined on the basis of contractual agreement between the appellant and Department of Telecommunication (DoT). Therefore, the amounts determined as payable by the appellant is merely a compensatory levy by DoT for non-payment of license fee at the particular threshold in time. Thus, the same being merely in the nature of compensation levied in pursuance of terms of the contract is allowable as deduction under section 37(1) of the Act. |
| ■ | Reliance, in this regard, is placed on the following cases, wherein, the Courts have held that damages paid for breach of contract, carried on in the normal course of business, is in the nature of expenditure incurred wholly and exclusively for purposes of business, allowable as deduction under section 37(1) of the Act: |
| – | Prakash Cotton Mills Ltd. v. CIT: 201ITR 684 (SC) |
| – | CIT v. Desiccant Rotors International (P.) Ltd.: |
| – | CIT v. Enchante Jewellery Ltd.: |
| – | New Mahalaxmi Silk Mills Pvt. Ltd.: |
| – | Golder v. Great Boulder Mines: 33 TC 75 |
| – | Sardar Prit Inder Singh v. CIT: |
| – | Huber Suhner Electronics (P.) Ltd. v. DCIT: |
| – | DCIT v. Hindustan Packaging Co. Ltd.: |
| – | G.L. Rexroth Industries Ltd. v. DCIT: [1997] 59 TTJ 757 (Ahmedabad – ITAT) |
| – | ITO v. Radiant Cables (P) Ltd.: 18 ITD (Hyd) 79 |
| – | Vodafone East Ltd. v. ACIT: |
| ■ | The interest and penalty (compensatory) are for delay in payment of dues [license fee] as per the regulations, particularly on account of the subsequent ruling of the apex Court (AGR Judgement). Payment of compensatory interest/ penalty does not result in acquisition of any capital asset or right coming into existence, but merely compensating for delay in payment of license fees. The said interest and penalty is period cost and is thus required to be expensed off in any case. The same is thus clearly a revenue expense which crystallised into a liability as a consequence of the Supreme Court decision directing payment of license fees, read with the terms of the license agreement between the DOT and the telecom operators and has rightly been allowed as revenue deduction in the assessment order. Allowance of the interest/ penalty cannot thus be alleged to have resulted in an error causing prejudice to the Revenue, so as to warrant exercise of revisionary jurisdiction. |
| ■ | It is emphatically reiterated that the issue of allowability of interest/ penalty was not at all agitated before/ is not dealt with by the apex Court in. Therefore, the judgment rendered by the Apex Court cannot, in any case, be a legitimate ground to justify exercise of revisionary jurisdiction by the PCIT in respect of interest/ penalty on variable license fees. |
| ■ | For the aforesaid cumulative reasons, allowability of deduction of interest and penalty under section 37 of the Act cannot, in our submission, be doubted, much less resulting in any prejudice to the Revenue. Being so, the original assessment order allowing deduction of the same cannot be treated as ‘erroneous’causing any prejudice to the Revenue for justifying exercise of revisionary jurisdiction by the PCIT. |
| ■ | That apart and more importantly, considering the substantive reasons/ grounds/ explanation set out herein-above, it is clearly evident that the view taken by the assessing officer accepting/ allowing the claim of interest/ penalty to the appellant is, in any case, a correct view in law. The view taken by the assessing officer cannot, therefore, by any stretch of argument, be regarded as unsustainable in law, so as to be regarded as “erroneous” causing any prejudice to the Revenue, warranting exercise of revisionary jurisdiction[refer Malabar Industrial Co. Ltd. v. CITl Suppliers Complex |
| (c) | It is also pertinent to mention, with all emphasis at the appellant’s command, that it is also trite law that the question whether an expenditure is capital or revenue is a vexed question of law and is, by its very nature, highly debatable. Assumption of revisionary jurisdiction under section 263 of the Act qua such a vexed question (capital v. revenue) is held to be invalid by the Courts in the following decisions: |
| – | CIT v. Bramha Bazar Hotels Ltd.: om.) |
| – | Genesis Colors (P.) Ltd. v. CIT: [2014] 147ITD 191 (Del) |
| – | Adani Wilmar Ltd. v. DCIT: |
| (d) | In any case, even as per the revenue, the entire amount is allowable over a period of time under section 35ABB, it is clear that the allowability of the amount of the interest/penalty is merely a timing difference and hence same cannot be alleged to be prejudicial to the interest of the revenue warranting exercise of jurisdiction under section 263 of the Act. |
| (e) | Due enquiries and verification conducted by the assessing officer during original assessment proceedings |
| ■ | It is emphatically submitted that the AO, in the course of original assessment proceedings for the assessment year 2020-21, was not only conscious/ aware of the aforesaid issues but also conducted extensive/ necessary enquiries/ investigations, as required in law, before passing the order, as would be evident from the details of enquiries conducted: |
| s. No | Issue | Information sought by AO/TPO in original proceedings | Summary of information/docu ments filed before AO/TPO | Finding of OO/TPO |
| 1. | Claim of deductio n on account of payment of license fee | Vide notice dated 11.09.2023, the appellant was required to furnish comments qua allowability of penalty paid for license fee and spectrum usage charges as allowable expenditure. (@ pages 2589 to 2592 of paper book Vol.III) | The appellant vide reply dated 16.09.2023, filed comprehensive response to the query raised in the notice dated 11.09.2023. (@ pages 2593 to 2621 & 3111 to 3364 of paper book Vol.III) Thereafter, the appellant vide reply dated 19.09.2023, filed justification in support of claim of deduction while relying upon the Hon ble Supreme Court judgement. (@ pages 3365 to 3370 of paper book Vol.III) Post assessment, in light of the Supreme Court verdict vide CA No. 11128 of 2016, order dated 16.10.2023 the appellant vide rectification letter dated 25.10.2023 recalculated the amount allowable under section 35ABB of the Act. (@ pages 3371 to 3503 of paper book Vol.III) | In para 22.2, the assessing officer has accepted the claim of the appellant. (@ page 30 of AO order) |
| ■ | That apart, it may thus be noted that the appellant had initially claimed the above amount(s) of Rs.28,498 crores and Rs.10,689 crores in respect of variable license fee, SUC charges and corresponding interest and penalty in thereturn of income filed for assessment year(s) 2020-21and2021-22respectively. |
| ■ | However, during the course of assessment proceedings, the appellant, in view of the fact that the additional liability actually stood crystallized pursuant to the first order of the Supreme Court vide order dated 24.10.2019 and the subsequent order dated 01.09.2020, merely re-affirmed the view, filed letter dated 19.09.2023 before the assessing officer seeking claim of deduction in respect of the balance additional liability of Rs.10,133 crores [Rs.10,689 – Rs. 556] which was inadvertently claimed in the return of income filed for the financial year 2020-21. In other words, the claim of deduction in respect of additional liability of license fee and SUC stood enlarged/enhanced to Rs.38,631 crores as against the initial claim of Rs.28,498 crores made in the return of income. (@ pages 3365 to 3370 of paper book Vol.III). As a necessary consequence, the claim made in the return of income filed for assessment year 2021-22 was withdrawn by the appellant vide letter dated 29.09.2023 filed before the assessing officer. (@ pages 3666 to 3667 of paper book Vol.III). |
| ■ | The aforesaid claim made by the appellant was extensively examined and accepted by the assessing officer. Further, in the assessment order dated 27.02.2024 passed for the subsequent assessment year 2021-22, the claim of additional liability of Rs.10,133 crores made in the return of income was treated as withdrawn by the assessing officer – Refer pg 46 of the order. |
| ■ | In the meanwhile, subsequent to the receipt of assessment order dated 10.10.2023, for the relevant assessment year 2020-21, the Hon’ble Supreme Court vide order dated 16.10.2023 in CA No. 11128 of 2016 (reported in ronounced its verdict on the issue of allowability of variable license fee and held that variable license fee is capital in nature and should be amortized in terms of section 35ABB of the Act over the remaining period of the License. |
| ■ | In pursuance of the aforesaid order, the appellant immediately filed rectification request vide letter dated 25.10.2023 before the assessing officer requesting for re-calculation of the amount of variable license fee of Rs.5,082 crore included in the additional claim of Rs.38,631 crores which was to be amortized and allowed in terms of section 35ABB of the Act. (@ pages 3371 to 3503 of paper book Vol. III). It may thus be appreciated that the appellant taking cognizance of the order of the Supreme Court suo-moto requested the assessing officer to recompute the amount of variable license fee allowable in terms of section 35ABB of the Act. |
| ■ | Considering the aforesaid facts, it is respectfully submitted that all the necessary facts were on record before the assessing officer and the original assessment was completed after conducting extensive enquiries and verification. |
| ■ | It is trite that where an issue has been examined by the TPO/AO, the PCIT cannot set aside the assessment merely because according to the PCIT enquiries should have been conducted in a particular manner and/ or further enquiries ought to have been conducted by the TPO /AO. PCIT cannot substitute his opinion in place of that of the TPO/AO as to the manner and the form in which the enquiries should have been conducted during the course of assessment. |
| – | CIT v. Sunbeam Auto Ltd: 332ITR 167 (Del) |
| – | CIT v. International Travel House: |
| – | CIT v. Vikas Polymers:TR 537 (Delhi) |
| – | Gulmohar Finances Limited |
| – | Fab India Overseas v. CIT: |
| – | CIT v. Vodafone Essar:axman 184 (Delhi) |
| – | CIT v. DLF Ltd.: [ |
| – | CIT v. Ratlam Coal Ash Co: |
| – | CIT v. Ganpat Ram Bishonoi: |
| – | CIT v. Mehrotra Brothers |
| – | CIT v. Associated Food Profits (P) |
| – | CIT v. Development Credit Bank Ltd: |
| ■ | For the aforesaid reason, the impugned revisionary order is liable to be quashed on the aforesaid issue at the threshold.” |
10.4 As with regard to this issue, after taking into consideration the aforesaid notices and submissions cited from the assessment proceedings, we are of the considered view that there is substance in the contention of the ld. Sr. Counsel that it is not a case where AO had not made relevant enquires at the time of assessment. After taking into consideration the sequence of events with regard to contest of the issue of nature of license fee being revenue or capital expenditure, between the telecom companies or service providers as well as the Department of Telecommunication the AO has taken into cognizance the Hon’ble Supreme Court judgments and additional claim of the assessee. PCIT has observed that there were perfunctory enquiry but that is too strong a view. When a quasi judicial authority has done its basic homework of raising queries and reached a conclusion on submissions the same cannot be said to be outcome of perfunctory enquiry without establishing firmly through a superimposing factual findings that the opinion or view so formed lacked credibility. That is not the case here as same set of facts and law has been made basis for holding the opinion or view of AO to be erroneous. Thus, it was not justified for the PCIT to hold that necessary inquiries/investments were not made by AO to set it aside for fresh lease of life.
10.5 At the same time, after taking into consideration the judgement of the Hon’ble Supreme Court in Bharti Hexacom’s case (supra), we are of the considered view that allowability of interest/penalty in the context of AGR issue was not in issue at all. The issue only revolved around the determination of validity of Hon’ble Delhi High Court holding a part of the license fee to be capital expenditure and part to be revenue expenditure. The Hon’ble Delhi High Court had held that the license fee payable up to 31 July 1999 should be treated as capital expenditure which is to be amortised under section 35ABB of the Act, and the variable annual license fee payable on revenue sharing basis after 1 August 1999 should be treated a revenue expenditure and in that context only the Hon’ble Supreme Court had examined the agreement signed under the Policy of 1994 letter issued by the DOT proposing the migration to the Policy of 1999 and the amendments made to the existing license agreement with effect from 1 August 1999 and laid down that variable annual license fee to be paid on the basis of the annual gross revenue. It was held that the reliance placed by the Hon’ble High Court in cases of Jonas Woodhead and Sons India Limited v. CIT CIT v. Best and Co ; Southern Switch Gear Limited v. CIT, as these cases do not deal with a single source or purpose to which the payments in different forms have been made. The purpose of the payments in the said case was traceable to different subject matters. In the instant case, the license issued under section 4 of the Telegraph Act is a single license issued for establishing, maintaining and operating the telecommunication services. The license is not granted for divisible rights that conceived divisible payments; hence, the apportionment of license fee as capital expenditure and revenue expenditure is without any legal basis. The High Court decision would have sustained if the facts were such that, even if the taxpayer does not make the payment of variable annual license fee based on the annual gross revenue, the taxpayer would be able to hold the right for establishing the network and running the business. The fact that the failure to pay the variable annual license fee will lead to revocation of the license vindicates the legal position that the said fees is paid towards the right to operate the telecommunication services. Although the license fee is paid in a deferred manner, the nature of the payment flowing from the licensing conditions cannot be re-characterised. A single transaction cannot be split up in an artificial manner into capital payment and revenue payment by simply considering the mode of payment, as this will contradict the settled position of law and the Supreme Court decisions, which suggest that payment in instalments does not change the capital payment into revenue payment. When a payment is made in two parts, i.e. lump sum payment and the payment in instalments, the nature of the two payments would be distinct only when the periodic payments have no nexus with the original obligation. In the instant case, the successive payment of variable annual license fee has the nexus with the original obligation, i.e. consideration for the right to establish, maintain and operate telecommunications services. The taxpayer has been granted a composite right relating to establishing, maintaining and operating the telecommunication services. The said right cannot be artificially bifurcated into right to establish telecommunication services on one hand and the right to maintain and operate telecommunication services on the other. Such bifurcation is contrary to the terms of the licensing agreement, and the Policy of 1999 and the nomenclature and manner of payment is irrelevant. It is noteworthy that, even under the Policy of 1994, the consideration for the license was bifurcated in two parts. A fixed payment in first three years of the license regime and a variable payment from the fourth year of the license regime onwards based on the number of subscribers and subject to prescribed minimum payments. Both these components paid under the Policy of 1994 were treated as capital expenditure and were duly amortised. There is no basis of reclassifying the under the new Policy of 1999. The nature of payment that was made for the same purpose cannot have different characterization merely because of change in the manner of the payment. The High Court is not right in apportioning the expenditure partly as capital expenditure and partly as revenue expenditure. In view of the above, the one-time entry fee as well as the variable annual license fee paid by the taxpayer under the Policy of 1999 were held capital in nature and were to be amortised in accordance with section 35ABB of the Act. It is pertinent to mention that these very findings have been considered by the PCIT and reproduced on page 87 of the impugned order and have been made basis to form a different opinion, as formed by AO.
10.6 We are of considered view that aforesaid conclusions in Bharti Hexacom’s case (supra), have been considered out of context by the PCIT thus there was inherent fallibility in the approach of PCIT to examine the question with regard to taxability of interest/penalty as payable by the assessee under the license agreement entered into between the assessee and the Department of Telecommunication by reference the judgement of the Hon’ble Supreme Court in Bharti Hexacom’s case (supra). Thus on this aspect alone the direction of PCIT are liable to be quashed.
10.7 Still to examine the issue, for completeness, we will like to reproduce the relevant clauses of agreement, copy of which is available at page no.368 to 3752 of PB Volume III, here in below:-
“10. Suspension, Revocation or Termination of License;
10.2(i) The LICENSOR may, without prejudice to any other remedy available for the breach of any conditions of LICENSE, by a written notice of 60 Calendar days from the date of issue of such notice to the LICENSEE at its registered office, terminate this LICENSE under any of the following circumstances:
If the LICENSEE:
(a) fails to perform any obligation(s) under the LICENSE including timely payments of fee and other charges due to the LICENSOR;
(b) fails to rectify within the time prescribed any defect/deficiency/correction in service/equipment as may be pointed out by the LICENSOR
(c) goes into liquidation or ordered to be wound up.
(d) is recommended by TRAI for termination of LICENSE for noncompliance of the terms and conditions of the LICENSE”
PART-III FINANCIAL CONDITIONS
18. FEES PAYABLE:
18.1 Entry Fee:
No additional entry fee shall be charged from CMSPs for migration to UASL.
18.2 License Fees:
The Licensee shall pay License fee annually @ 10% of Adjusted Gross Revenue (AGR), excluding spectrum charges. Separate spectrum charges would be required to be paid by the licensee.
The Licensor reserves the right to modify the above mentioned License Fee at any time during the currency of this Agreement.
18.3 Radio Spectrum Charges:
18.3.1 In addition to the license fee as per clause 18.2, the Licensee shall pay spectrum charges on revenue share basis of 2% of AGR towards WPC Charges covering royalty payment for the use of cellular spectrum upto 4.4 MHz + 4.4 MHz and License fee for Cellular Mobile handsets & Cellular Mobile Base Stations and also for possession of wireless telegraphy equipment as per the details prescribed by Wireless Planning & Coordination Wing (WPC). Any additional band width, if allotted subject to availability and justification shall attract additional License fee as revenue share (typically 1% additional revenue share if Bendwidth allocated is upto 6.2 MHz + 6.2 MHz in place of 4.4 MHz + 4.4 MHz).
18.3.2 Further, royalty for the use of spectrum for point to point links and access links (other than Cellular Service Spectrum) shall be separately payable as per the details and prescription of Wireless Planning & Coordination Wing. The fee/royalty for the use of spectrum /possession of wireless telegraphy equipment depends upon various factors such as frequency, hop and link length, area of operation etc. Authorization of frequencies for setting up Microwave links by Cellular Operators and issue of Licenses shall be separately dealt with WPC Wing as per existing rules.
18.3.3 The above spectrum charge is subject to unilateral review by WPC Wing from time to time which shall be binding on the licensee.
19. Definition of ‘Adjusted Gross Revenue’:
19.1 Gross Revenue:
The Gross Revenue shall be inclusive of installation charges, late fees, sale proceeds of handsets (or any other terminal equipment etc.), revenue on account of interest, dividend, value added services, supplementary services, access or interconnection charges, roaming charges, revenue from permissible sharing of infrastructure and any other miscellaneous revenue, without any set-off for related item of expense, etc
19.2 For the purpose of arriving at the “Adjusted Gross Revenue (AGR)” the following shall be excluded from the Gross Revenue to arrive at the AGR:
I. PSTN related call charges (Access Charges) actually paid to other eligible/entitled telecommunication service providers within India;
II. Roaming revenues actually passed on to other eligible/entitled telecommunication service providers; and III. Service Tax on provision of service and Sales Tax actually paid to the Government if gross revenue had included as component of Sales Tax and Service Tax
20. Schedule of payment of ANNUAL LICENSE FEE and other dues:
20.1 For the purposes of the License Fee, the 1st year shall end on 31st March following the date of commencement of the License Agreement and the License fee for the First year shall be determined on a pro-rata basis for the actual duration of the “year”. From second year onwards, the year shall be of Twelve English calendar months from 1st of April to the 31st March for payment of License Fee
EXPLANATION: The License fee for the last quarter of the first year and last quarter of the last year of the License will be computed with reference to the actual number of days after excluding the other quarters, each being of three months
20.2 License Fee shall be payable in four quarterly installments during each financial year (FY). Quarterly installment of license fee for the first three quarters of a financial year shall be paid within 15 days of the completion of the relevant quarter. This Fee shall be paid by the LICENSEE on the basis of actual revenue (on accrual basis) for the quarter, duly certified with an affidavit by a representative of the LICENSEE, authorized by the Board Resolution coupled with General Power of Attorney. However, for the last quarter of the financial year, the LICENSEE shall pay the License Fee by 25th March on the basis of expected revenue for the quarter, subject to a minimum payment equal to the actual revenue share paid of the previous quarter.
20.3 The LICENSEE shall adjust and pay the difference between the payment made and actual amount duly payable (on accrual basis) for the last quarter of financial year within 15 days of the end of the quarter.
20.4 The quarterly payment shall be made together with a STATEMENT in the prescribed form as Annexure-II, showing the computation of revenue and License fee payable. The aforesaid quarterly STATEMENTS of each year shall be required to be audited by the Auditors (hereinafter called LICENSEE’S Auditors) of the LICENSEE appointed under Section 224 of the Companies Act, 1956. The report of the Auditor should be in prescribed form as Annexure-II.
20.5 Any delay in payment of License Fee payable, or any other dues payable under the LICENSE beyond the stipulated period will attract interest at a rate which will be 5% above the Prime Lending Rate (PLR) of State Bank of India prevalent on the day the payment became due. The interest shall be compounded monthly and a part of the month shall be reckoned as a full month for the purposes of calculation of interest. A month shall be reckoned as an English calendar month
20.6 Final adjustment of the License fee for the year shall be made based on the gross revenue figures duly certified by the AUDITORS of the LICENSEE in accordance with the provision of Companies Act, 1958.
20.7 A reconciliation between the figures appearing in the quarterly statements submitted in terms of the clause 20.4 of the agreement with those appearing in annual accounts shall be submitted along with a copy of the published annual accounts audit report and duly audited quarterly statements, within 7 (seven) Calendar days of the date of signing of the audit report. The annual financial account and the statement as prescribed above shall be prepared following the norms as prescribed in Annexure.
20.8 In case, the total amount paid as quarterly License Fee for the 4 (four) quarters of the financial year, falls short by more than 10% of the payable License Fee, it shall attract a penalty of 150% of the entire amount of short payment. However, if such short payment is made good within 60 days from the last day of the financial year, no penalty shall be imposed. This amount of penalty shall be payable within 15 days of the date of signing the audit report on the annual accounts, failing which interest shall be further charged per terms of Condition 20.5
20.9 The Fee/royalty payable towards WPC Charges shall be payable at such time(s) and in such manner as the WPC Wing of the DoT may prescribe from time to time.
20.10 All sums becoming due and payable as mentioned in this License Agreement shall be paid by the LICENSEE through a demand draft or Pay Order payable at New Delhi, drawn on any Scheduled Bank, in favour of the Pay & Accounts Officer (HQ), DOT or any other Authority if so designated by LICENSOR
20.11 The LICENSOR, to ensure proper and correct verification of revenue share paid, can, if deemed necessary, modify, alter, substitute and amend whatever stated in Conditions 20.4, 20.7, 22.5 and 22.6 hereinbefore and hereinafter written.
20 12 The LICENSEE shall separately pay the access charges for carriage of calls originating in its network but carried and terminated in the Other Service Providers’ networks. The LICENSEE shall also separately pay charges for network resources obtained by the LICENSEE from other licensed service providers. This will be governed by the determination of TRAI if any.”
10.8 After taking into consideration the aforesaid relevant clauses, we are of the considered view that the interest and penalty clauses are enshrined in the license agreement as compensatory mechanism for delayed payment of three components i.e entry fee, license fee and charges. Charges is not specifically defined but when we take into consideration the aforesaid clauses we find that apart from entry fee and license fee the Licensee was supposed to pay Radio Spectrum Charges and royalty for the use of spectrum for point to point links and access links. These charges admittedly were considered as revenue expenditure. Thus sub clause 10.2 mentions that for delayed payment of fee and other charges due to this provision of clause of termination of license can be invoked. It is very much apparent from the clauses of license agreement that the interest is payable on the quantum of delayed payment of license fee determined as per the license agreement. Penalty is payable in case the total amount paid as quarterly License Fee for the 4 (four) quarters of the financial year, falls short by more than 10% of the payable License Fee. Delayed payment of penalty shall also be liable to interest.
10.9 Therefore, in case of default in payment of three components referred above, which are part of consideration for license, the licensor has right to revoke or terminate the license but in case of default in payment of interest and penalty the licensor Department of Telecommunication had no right for suspension, revocation and termination of the license agreement. Thus the principle which Hon’ble Supreme Court has accepted, that the failure to pay the variable annual license fee will lead to revocation of the license vindicates the legal position that the said fees is paid towards the right to operate the telecommunication services and then to hold that license fee is part of capital expenditure, is not applicable in case of interest payments or penalty. Thus, in the absence of rights of revocation/termination of the agreement for default in payment of penalty/interest cannot be equated with consequences arising out of default in payment of the license fee which as per the judgement of the Hon’ble High Court in the case of Bharti Hexacom (supra) was similar to one time entry fee. Therefore, the interest/penalty payment arising out of default in payment of the license fee is merely compensatory in nature.
10.10 Then we are of the view that delayed payment of license fee would result in benefitting the assessee in terms of availability of the funds available for use in its own business and that in turn lead to payment of compensatory cost of the delayed payment of the license fee in the form of interest or penalty. PCIT himself on page 121 of the impugned order has observed that “It is not the case that the assessee has paid interest on the money borrowed to acquire a capital asset (license in this case). It is a case where the license fee has not been paid and therefore, the assessee is called upon to make further payment of interest and penalty.” Thus it is not case of PCIT that like in loan borrowing of capital nature, interest and penalty get submerged with the principal amount leading to capitalization of the interest and penalty. Thus without alleging capitalization of interest and penalty PCIT has concluded that interest and penalty will have same colour as license fee. The license here was to grant ‘services’ as defined. Thus it is the right to provide services in lieu of entry free, license fee or charges, formed the intangible asset and interest or penalty were only by way of default in payment in time as per agreement. So there could have been no situation like loan borrowing.
10.11 Then we are of the considered view that the nature of agreement giving rise to the payment of interest or penalty should have been examined by the PCIT. The reasoning given by the ld. PCIT as followed by the ld. AO in the effect giving order is that the interest and penalty will take the colour of license fee to hold that the same is capital expenditure. However, we consider the same to be not a justified manner of determining the taxability of an expenditure. Every expenditure or income giving rise to a tax incidence should be categorically defined either in the statute or be otherwise impliedly decipherable from the transaction. It is not justified to draw any inferences about the nature of an expenditure being revenue or capital on the basis of another expenditure without analyzing the surrounding circumstances and the context in which the liability of expenditure arises.
10.12 The fact that initially PCIT intended to question the payment of interest and penalty being hit by the provisions of section 37 of the Act, but, which was not ultimately done shows that as with regard to relationship of this expenditure with the business expediency of the assessee is not disputed. PCIT should have been cognizant of the fact that since there was a dispute between the assessee and the licensor Department of Telecommunication with regard to various heads of revenue, as part of AGR, on which the license fee was payable and which has been ultimately settled by the Hon’ble Supreme Court only, thus, for valid reasons there was delay on the part of the assessee to make payment of the license fee and it is only subsequent to the determination of the issue finally that the assessee had to revise its claim in the context of license fees which has been accepted. This shows that the interest and penalty have arisen not out of an act of voluntary nature or in the background of contractual obligation to pay interest and penalty as part of the principal liability, but this expenditure of interest and penalty as arisen out of a contingency due to attempt of the assessee to contest the issue of quantum of license fee itself. Therefore, the incidence of interest and penalty is outcome of a business decision to defend the license fee quantum and, thus, it cannot be considered to have submerged with the license fee and to be coloured in its nature similar to license fee as a capital expenditure.
10.13 In regard to this issue we further find that in the impugned order, the PCIT has proceeded to deny the claim of deduction in respect of license fee to the extent of Rs.39,251 crores as against Rs.38,631 actually claimed by the appellant. The basis for considering the amount of Rs.39,251 crores for the purpose of disallowance has nowhere been explained by the PCIT in its order. In the impugned order, the PCIT has directed denial of claim of deduction in respect of license fee and SUC in the relevant assessment year by referring to apex Court decision in the case of Bharti Hexacom: (supra), wherein payment of license fee was held to be capital in nature and allowable in terms of section 35ABB of the Act. However, the PCIT has not allowed benefit under section 35ABB, on the license fee component. In so far as applicability of provisions of section 35ABB of the Act, it comes up that since the order of the Apex Court on the said issue was pronounced after the conclusion of the assessment in the case of the appellant, the appellant vide rectification application dated 25.10.2023, suo-moto requested the AO to rectify the assessment order to the effect of allowing deduction in respect of license fees only to the extent of amount pertaining to the period of expired licenses and in respect of renewed license fees which was currently in operation, the same was requested to be amortized over the remaining life of the respective license in terms of section 35ABB of the Act. However, the PCIT has proceeded to completely ignore the aforesaid rectification application filed by the appellant before the AO, wherein the appellant had suo-moto requested for recalculation of variable license fee in terms of section 35ABB of the Act in light of the decision of the Hon’ble Apex Court. The PCIT failed to appreciate that rectification application dated 25.10.2023 filed by the appellant formed part of the “record” and it was thus incumbent upon the PCIT to have considered the same while passing the impugned revisionary order. That apart, it comes up that the order of the Hon’ble Apex Court dated 16.10.2023 was rendered after the completion of the assessment vide order on dated 10.10.2023, thus as such there was no error in the assessment order as on the date of passing of the assessment order.
10.14 Therefore, on the basis of the aforesaid discussion, we are of the considered view that on the one hand the assessee has established that the issue was genuinely examined by the AO before passing of the assessment order and on the other hand, it is established that the conclusion drawn by the PCIT and as followed by the AO at the time of effect giving order to colour the interest and penalty component similarly to license fee, and hold them to be of capital expenditure is not sustainable under law. This issue no. 1 is decided in favour of the assessee and consequently ground nos 8-8.3 are sustained to the extent of relief not granted by the AO in consequential order.
11. Issue No.2: This issue is with regard to allowability of carry forward of accumulated business loss and unabsorbed depreciation relatable to the consumer wireless undertaking of M/s Tata Tele Services Ltd. (hereinafter referred to as Tata Business or in short, TTSL). The PCIT in his order dated 19.01.2024 u/s 263 of the Act had directed the AO to deny the benefit of section 72A of the Act and withdraw the allowance of brought forward business loss and unabsorbed depreciation relatable to the consumer wireless undertaking of TTSL. In the effect giving order dated 14.01.2025, the AO had disallowed these two components relatable to demerged undertaking.
11.1 In regard to this issue ld. Sr. Counsel has drawn attention to the copy of the Composite Scheme of Arrangement alongwith order dated 30.01.2019 passed by the NCLT duly sanctioning the Scheme, which also was filed before the assessing officer during the course of original assessment proceedings vide letter dated 09.05.2023 (@ pages 357 to 448 of paper book Vol.I). Further, TTSL also filed letter dated 06.10.2021, duly intimating its jurisdictional officer about the Scheme of arrangement. (@ pages 500 to 502 of paper book Vol.II). It is submitted that pursuant to the aforesaid Scheme of arrangement, the assets, liabilities, customers and employees of consumer wireless mobile businesses of TTSL stood transferred to the appellant as per the Scheme of Arrangement.
11.2 The assertion on behalf of assesses is that pursuant to the aforesaid demerger, the appellant acquired net assets aggregating to Rs.12,639 million against a consideration of Rs.338 million which was paid by way of issuance of 9,70,668 equity shares of Rs.5/- each and 470 redeemable preference shares of Rs.100/- each. The excess of net assets over purchase consideration amounting to Rs.12,301 million was recognized as capital reserve in the books of the appellant. Due disclosures in this regard were made under Note (iv) of the audited financial statements for the year ended March,2020. (@ pages 51 to 52 of paper book Vol.I)
11.3 Attention in this regard was invited to the Scheme of arrangement filed before NCLT, copy of which was duly filed before the AO vide submission dated 09.05.2023 during the course of original assessment(@ pages 432 to 433 of paper book Vol.I). It was pointed out that consideration was determined in terms of Share Entitlement Report dated 19.12.2017, issued by Ernst & Young Merchant Banking Services Private Limited and Walker Chandiok & Co LLP. Further, Fairness Opinion of even date was issued by RBSA Capital Advisors LLP, a merchant banker registered with the Securities and Exchange Board of India. It is specifically cited that the Revenue’s counsel, Ms. Easha Kadian was present during the hearing and her presence was duly recorded in the final order of the NCLT sanctioning the Scheme under Company Application No. (CAA) 65/PB/2018, vide order dated 30.01.2019(@ pages 397 of paper book Vol.I). That apart, the no-objection was duly granted by the assessing officer to the NCLT prior to approval of the Scheme (@page 448 of paper book Vol. I).Copy of order of NCLT alongwith copy of Scheme of arrangement was duly filed before the assessing officer vide letter dated 09.05.2023. It is submitted, that as a necessary consequence of the aforesaid demerger, accumulated loss of Rs.145,85,05,66,980 and unabsorbed depreciation of Rs.7,147,93,79,862 relatable to the consumer wireless mobile undertaking of TTSL stood transferred to the appellant in terms of section 72(4) of the Act. However, no loss/ depreciation was transferred from TTML. The year wise details of accumulated business loss and unabsorbed depreciation of TTSL which stood transferred pursuant to demerger, were also duly furnished before the AO vide response dated 21.09.2023(@ page 503 of paper book Vol.II) It is submitted that the consumer wireless mobile business undertaking of TTSL was always incurring losses since inception and thereby the entire business loss of Rs.14,585 crores related to the said undertaking alone. In so far as accumulated depreciation, since TTSL held assets which were used by both consumer wireless mobile business undertaking as well as residual undertakings, the amount of unabsorbed depreciation attributable to the consumer wireless mobile business undertaking was determined on the basis of ratio of assets held by the said undertaking to the total assets held by TTSL. In this regard, it is submitted that TTSL vide letter dated 06.10.2021, provided details of losses and unabsorbed depreciation of CMB undertaking computed in terms of provision of section 72A(4) of the Act, which were inter-alia transferred to the appellant. It was averred that in the return of income filed by TTSL for the relevant assessment year 2020-21, the aforesaid business loss and unabsorbed depreciation of CMB undertaking which stood transferred to the appellant, were not carried forward by TTSL. The aforesaid letter filed by TTSL was duly filed by the appellant vide submission dated 21.09.2023, before the AO during the course of original assessment. (@ pages 500 to 502 of paper book Vol.II). Further, in the tax audit report of TTSL for the year ended 31.03.2020, Clause 32(a) explicitly discloses year wise details of total brought forwarded loss and depreciation allowance from assessment year 2002-03 to 2019-20. Copy of tax audit report of TTSL was duly filed before the AO during the course of original assessment vide submission dated 21.09.2023.(@ pages 492 to 494 of paper book Vol.II). It was however clarified that only losses eligible, i.e., not related to period exceeding eight years, is carried forward by the appellant pursuant to demerger
11.4 Further, it is submitted, that the issue of allowability of accumulated loss and unabsorbed depreciation of TTSL in the hands of the appellant pursuant to the demerger was specifically examined by the AO and in depth enquiries were made by the assessing officer during the course of assessment, in response to which the appellant filed detailed reply(ies) justifying the allowability of loss/depreciation as cited before us was tabulated in the submissions and same is reproduced hereunder:
| s. No | Issue | Information sought by AO/TPO in original proceedings | Summary of information/doc uments filed before AO/TPO | Finding of AO/TPO |
| 2. | Claim of brought forward loss and unabsor bed deprecia tion relatable to consume r wireless underta king of TTSL acquired by the appellan t and Alleged Gain on acquisiti on of TTSL | Vide notice dated 30.12.2022, the appellant was directed to furnish details/ documents with respect to amalgamation or demerger taken place during the year along with comprehensive note explaining whether all conditions of tax neutral amalgamation and demerger have been complied with or not along with proper evidence. (@ pages 352 to 356 of paper book Vol.I) Thereafter, vide notice dated 11.09.2023, details/ documents qua accumulated business loss and unabsorbed depreciation of consumer wireless mobile business of TTSL which stood transferred to the appellant was enquired. (@ pages 449 to 452 of paper book Vol.I) | The appellant vide reply dated 09.05.2023 submitted comprehensive response explaining the scope and terms of scheme of arrangement and submitted copy of Scheme of Arrangement, NCLT order. Further, the appellant also explained how the demerger was tax neutral in terms of the provisions of the Act. (@ pages 357 to 448 of paper book Vol.I) The appellant vide letter dated 21.09.2023, filed detailed submission providing complete details of accumulated business loss and unabsorbed depreciation of consumer wireless mobile undertaking of TTSL taken over post demerger and justification in support of the same. (@ pages 453 to 464 of paper book Vol.II) Further, in the aforesaid response, the appellant also furnished copy of return of income and tax audit report filed by TTSL for the relevant year, wherein the said losses and depreciation have been excluded and copy of the intimation filed by TTSL before the jurisdictional assessing office intimating about the transfer of accumulated losses and unabsorbed depreciation pertaining to the consumer wireless mobile undertaking to the appellant. (@ pages 465 to 503 of paper book Vol.II) | In para 15.2 of the assessment order, the assessing officer has stated that documents qua demerger have been verified and the conditions of section 72(4) of the Act with respect to the captioned demerger are complied with. (@ page 12 of AO order) |
11.5 As with regard to this issue no. 2, the relevant discussion of the PCIT in its order u/s 263 of the Act dated 19.01.2024, as has been relied and reproduced by the AO in the effect giving order in para No.5.2 at page No.48, needs to be reproduced below:-
“From the facts so given, it is evident that assessee is not entitled for any brought forward of loss or unabsorbed depreciation due to the following reasons:
1. It is an acquisition of business and not a demerger
2. The aforesaid proposition is made on the legal basis that “demerger’ is well defined in section 2(19AA) as extracted above. To qualify as demerger certain conditions, need to be satisfied
3. On of the conditions stipulated in clause(iv) thereof is that in consideration of demerger at least 75% of the shareholders of the demerged company shall become shareholders of the resultant company. This is primary condition for demerger as also for amalgamation. The idea is to allow freedom of restructuring of businesses by the persons or entities, which are carrying on such businesses. While in amalgamation there is pooling of interest by both companies, in demerger, a company springs up to carry on the business with 3/4th of old shareholders continuing to participate in the business of the Resulting company. In either case, the participation of existing shareholders to the given extent is a must.
4. In the present case, the scheme as approved by NCLT provides for issue of not the equity shares but preference shares and that too much are redeemable non participative, non-voting. The shares are mandatorily redeemable after a given period of eighteen months from the date of issue. This is very peculiar. If the shares get redeemed after 18 months, it would mean these shareholders would no longer be the shareholders of the Resulting company. This is nothing short of making mockery of a statutory condition. The issue of shares to 3/4th shareholders is not just a formality which can be accomplished one day and nullified the other day.
5. It needs to be kept in mind that preference shares are classified according to their nature. The preference shares of this kind are regarded as being in the nature of debt instruments and not being equity. Where is participation in the capital of the company if they are mandatorily to be redeemed after 18 months. These don’t have voting rights.
6. Further, one of the other conditions is that all the assets and liabilities of the demerging company be transferred to the Resulting company. The scheme does not provide for the list of the assets transferred. The definition of undertaking does make reference to certain but what assets really got transferred and what did not was specifically not looked into.
7. In the case of liabilities, the net asset value of the business was arrived at Rs.1263.9 crores but the preference shares of the value of only Rs 33 crores were issued on the assumption that certain liabilities have been taken over and would be discharged by the Resulting company. But it appears that such liabilities have in fact been taken over but only indemnified by the Resulting company. The indemnification of a liability is not the same as taking over of the liability. I am constrained to observe that the other primary condition of transfer of all assets and all liabilities is equally not fulfilled. This cannot then be a demerger so as to qualify for the benefits of claims under section 72A of the Act.
8. It needs to be pointed out that acquisition of a business where old shareholders lose their participation after receiving the consideration is not the kind of reorganization even if one prefers to call it a demerger is entitled for the benefits of section 72(4) or for that matter even section 47 of the Act.
9. It is apparent from what is stated above is that AO has failed to conduct the necessary enquiries in this regard and his findings are erroneous and prejudicial to the interest of revenue. For the reasons given above the transaction does not qualify to be a demerger and therefore the assessee was not entitled to benefits given by the AO under section 72(4) of the Act. The AO is directed to withdraw the allowance of the claim so made by him.”
11.6 Now admittedly section 72A of the Act, allows in the case of amalgamation/ demerger, for the amalgamated/ resulting company to claim carry forward and set off of unabsorbed business loss and unabsorbed depreciation only of the amalgamating / demerged company, subject to the restrictions contained in that section. The said section enacts a deeming fiction to deem the unabsorbed business loss and unabsorbed depreciation of the demerged company to become the unabsorbed business loss and unabsorbed depreciation of the resulting company. As a result of the said deeming fiction, the resulting company is enabled to carry forward and set off unabsorbed business loss and unabsorbed business depreciation of the demerged company. The case of assessee is that since the entire business loss of TTSL related to the consumer wireless mobile business undertaking alone, the entire loss stood transferred to the appellant. In so far as unabsorbed depreciation, the same was apportioned between the appellant and TTSL in the same proportion in which the assets have been retained by TTSL and transferred to the appellant, strictly in terms of section 72A(4) of the Act.
11.7 When the aforesaid observations of the PCIT are considered in context to relevant provisions of the Act, we find that PCIT has not taken any cognizance of vital pieces of material in the form of Composite Scheme of Arrangement, copy of which is available at pages 432-433 of the paper book. We are of considered view that without citing anything from the record or relevant material that the action of demerger was outcome of some extraneous factors and not a genuine reorganization of the business by the assessee. Now as settled proposition of law a scheme of arrangement approved by the Court carries the force of a statute and reliance can be placed on catena of decisions as cited before us including of Delhi Bench in Aamby Valley Ltd. v. ACIT vide decision dated 22.02.2019 in ITA No.1148/Del/2017 (Delhi Trib.) ; Priapus Developers (P) Ltd v. ACIT:
223/71 ITR(T) 113 (Delhi – Trib.); Indus Towers Ltd (formerly known as Bharti Infratel Ltd) v. DCIT: ITA No. 1962/Del/2023 dated 10.12.2024
11.8 Having considered the observation of PCIT as recorded on pages 156-157 of impugned order, questioning the merger on basis that same was outcome of strategy to merely claim set off of the brought forward losses, for which he had placed reliance of the decision in DCIT Circle 1(1), Pune Versus M/s Cummins Sales and Services India Ltd. ITA no. 2121/Pun/2017. We are of considered opinion that tax authorities should be always cognizant of the state of affairs of economy and particularly the sector of business to which any assessee belongs. The turmoil period of Telecom companies due to controversies and litigations and economic affairs had resulted in effecting their financials to a great extent. The competition in this sector has been stiffer than usual. Thus for quite valid reasons there was restructuring of amongst these Telecom companies by way of acquisition, merger and amalgamations. The same cannot be alleged to be for ulterior motive to claim benefits of setoff, by a bald allegation and deny benefit of Section 72A of the Act.
11.9 Then what is relevant is that Section 2(19AA) of the Act specifically refers to the provisions of Companies Act for the purpose of determining if it is a case of demerger and the basic requirement to fulfill the eligibility of section 72A(4) of the Act is that the transfer of undertaking should be in pursuance of a scheme of arrangement under the Companies Act by demerged company. Thus, without examining the various aspects of the arrangement on a gross basis PCIT has drawn inferences holding that assessee is not entitled for benefit of any brought forward loss or unabsorbed depreciation.
11.10 It is sufficiently established before us on the basis of various evidences discussed above and forming part of the paper book that TTSL was engaged in consumer wireless mobile business and was continuously incurring loss since inception and the entire business loss related to the said undertaking alone. The assets relating to consumer wireless mobile business undertaking was only considered for unabsorbed depreciation. In fact, all the assets/ liabilities relating to the demerged business have been transferred by the demerged company which has vested in the appellant. Attention in this regard was rightly invited to the special purpose balance sheet of demerged undertaking which provides for all assets and liabilities transferred (page 2548 of PB Vol II). That being the case, necessary conditions of clauses (i) to (iii) of Section 2(19AA) of the Act stood complied.
11.11 The attempt of the ld. DR in supporting the order of PCIT that only issuance of equity shares would have led to compliance of clause (iv) and (v) of section 2(19AA) of the Act is completely misplaced as there is no specific definition or reference to a particular type of shares being issued for clause (iv) and (v) of the Act. In this regard, it can be seen that clause (v) of section 2(19AA) of the Act provides that “the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become share-holders of the resulting company or companies by virtue of the demerger”. Thus, the condition required to be satisfied is that the % shareholders of the demerged company shall become ‘shareholders’ of the resulting company. The said ‘shareholders’, the law does not necessitates, must only be equity shareholders (and not preference shareholder). In other words, there is no bar on issuance of preference shares by the resulting company to the shareholders of the demerged company. On perusal of the Section 43 of the Companies Act, it is evidently clear that ‘share capital includes both equity and preference share capital. Thus, holders of preference shares of the company are also considered as shareholders of the company. Being so, issuance of preference shares of resulting company to at least % shareholders of the demerged company would result in compliance with the mandate of clause (v) of section 2(19AA) of the Act.
11.12 At this juncture, we will also like to appreciate the contention of ld. Sr. Counsel that the legislature has expressly included or excluded a particular type/ nature of shares/)(e) of the Act, payment by way of loan or advance to shareholder who is beneficial owner of shares is considered as dividend; the provision expressly exclude shareholder owning shares entitled to fixed rate of dividend with or without right to participate in profits. Under section 79 of the Act, change in shareholding is considered only qua shares with voting power. Thus, in absence of section 2(19AA) of the Act being expressly providing for shareholders becoming equity shareholders, such condition presumed by the Commissioner in the impugned is beyond the letter of the law, which is impermissible.
11.13 Thus the liberty was there with the assessee to issue shares of the class that were more beneficial to the shareholders or the resultant company itself. The Revenue cannot dispute that shareholders of preferential shares of the company are as good a shareholder like equity holder. We are of the considered view that as for the purpose of section 2(19AA) r.w.s. 72A of the Act, there is no requirement under law that the allotee shareholders should continue to be shareholders of the resultant company for a minimum period. Therefore, the observations of PCIT that preferential shares after redemption will lead to violation of clause (iv) and (v) of section 2(19AA) of the Act is not a correct perspective. The objective fulfillment of the condition is necessary and not the subjective effect on compliances of the conditions. The manner in which PCIT has examined the issue subjectively as to what would be the effect after redemption of the preferential shares on the shareholding of the resultant company cannot be basis to hold that it is not a case of demerger for the purpose of section 2 (19AA) of the Act. Ld. Sr. Counsel has referred to the decision of the Constitution Bench of the Hon’ble Supreme Court in the case of Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Co.: (2018herein the Hon’ble Apex Court held that that once the eligibility conditions for availing exemption/ benefit are satisfied, the same needs to be liberally construed so as to confer the exemption/ benefit rather than frustrate the same and same certainly applies to the case of assessee here.
11.14 To conclude we will like to observe that the ld. Sr. Counsel has sufficiently established on the basis of the queries which were raised by the AO that a comprehensive response was submitted to the AO explaining the scope and terms of the schemes of arrangement. The details of the accumulated business loss and unabsorbed depreciation of consumer wireless mobile undertaking of TTSL were provided to the AO. Still, PCIT has held that the AO had not conducted in-depth inquiries. On the contrary we are of the firm view that if this all was part of assessment record then PCIT was supposed to take that first into consideration and then examine the issue. Rather, from the conclusions which have been drawn by the PCIT, it appears that more than analysis of questions of facts on the basis of material available from assessment record by the queries raised by the AO and response of the assessee, the PCIT has gone on a different tangent discussing more about the manner in which the provisions of section 2(19AA) of the Act can be interpreted. However, that cannot be a basis to hold the assessment order to be erroneous so far as prejudicial to the interest of revenue. Thus we firmly hold that at one end there was sufficient examination of the issue by the AO at time of assessment. Then on merits the case as made out by the PCIT is not sustainable as all the conditions u/s 2(19AA) r.w Section 72A(4) of the Act stood fulfilled and there was erroneous conclusion to hold assessment to be erroneous so far as prejudicial to the Revenue. Thus we decide this issue in favour of assessee and corresponding grounds 9 to 9.6 are sustained.
12. Issue No.3: This issue is with regard to taxation of difference of asset over liability with TTSL u/s 56(2)(x) of the Act. Pertinent to mention here is that one of the submissions of the ld. Sr. Counsel is that no show cause notice was issued by PCIT u/s 263 of the Act on this issue. The PCIT had directed in the impugned order to enhance income of the assessee by Rs.1230.01 crores being addition u/s 56 of the Act on account of alleged gain on acquisition of consumer wireless business of TTSL. In the effect giving order the net assets over consideration received on demerger to the extent of Rs.1230.01 crores has been added u/s 156(2)(10) of the Act.
12.1 At outset it is pertinent to mention that the PCIT, in continuation to the preceding issue pertaining to disallowance of carry forward of accumulated business losses and unabsorbed depreciation of consumer wireless business undertaking of TTSL acquired by the appellant, in paragraph 4 at page 155 of the impugned order has further held that since the conditions of demerger under section 2(19AA) of the Act were not satisfied (as mentioned supra), the appellant is not entitled to benefit under proviso to section 56(2)(x) of the Act and accordingly, amount of Rs.1230.01 crores representing excess of net assets acquired over purchase consideration paid by the appellant is liable to be taxed under section 56 of the Act. Thus where we have sustained ground nos 9 to 9.6 and held that demerger conditions under section 2(19AA) of the Act were satisfied the issue can be decided in favour of asseesee.
12.2 On merits, we find that it is submitted by ld. Sr. Counsel that Section 56(2)(x)(c) of the Act, are not applicable and we appreciate the same as Section 56(2)(x)(c) of the Act inter alia, provides that where a property other than immovable property is received without consideration or for consideration which is less than fair market value (‘FMV’) of such property by any person, then, the FMV or difference between the consideration and FMV, as the case maybe, would be taxable under the head “Income from other sources” in the hands of the recipient. Section 56(2)(x) of the Act essentially attempts to tax receipt of money, immovable property (being land or building) and specified movable assets, without or for inadequate consideration. Pertinently, a business undertaking, as in the case of the appellant, which is a separate and independent property, is not covered within the definition of ‘property’ for the purpose of section 56(2)(x) of the Act. That apart, it may be noted that clause (IX) of the proviso to section 56(2)(x) specifically excludes the transaction of demerger from the purview of the said section. Thus, even otherwise, the case of the appellant falls within the specific exclusion provided in the said section.
12.3 On basis of aforesaid discussion we are of the considered view that there is specific definition of ‘property’ in section 56(2)(x) of the Act and as with regard to amalgamation and merger there is specific provisions under the Act as to how the transfer of interest in the assets forming part of the concerned entities shall be dealt with. The same is a complete code in itself as far as the taxability of any gain or loss arising out of acquisition of any business in the process of amalgamation or demerger. The provisions of section 56 of the Act, are deeming income provisions and come into effect where there is some sort of allegation that the transaction of acquisition of an asset is without consideration or the consideration is less than the fair market value. The consumer mobile business undertaking of TTSL was acquired by the appellant on a wholesome basis without valuation of an individual asset and a lumpsum consideration through the process of demerger was paid. It has been established before us that the valuation of this demerger was done by professional valuers and the valuation was accepted in the scheme of arrangement by NCLT and High Court. That being the case, on the one hand, it was erroneous on the part of the PCIT to have gone beyond the scope of notice u/s 263 of the Act, on the other hand, to allege that there was a deemed capital gain on acquisition of consumer wireless business of the TTSL. Therefore, we are inclined to allow this issue in favour of the assessee and corresponding ground nos. 10 to 10.4 are allowed.
13. Issue No.4: As with regard to this issue arising out of transfer pricing adjustment, PCIT had directed an adjustment to the extent of Rs.2663.71 crores on account of alleged incorrect reduction of proportionate adjustment allowed by the ld. TPO and ld. AO has enhanced the income to that extent in the effect giving order. In the impugned order, the PCIT has enhanced the TP adjustment on the alleged ground that in the case of CIT v. Firestone International Ltd. ITR 558 (Bombay), SLP preferred by Revenue stood admitted by the Hon’ble Apex Court and thereby the TPO was not justified in allowing pro-rata adjustment to the appellant.
13.1 Ld. Sr. Counsel has emphatically submitted that the TPO, in the course of transfer pricing proceedings for the assessment year 2020-21, conducted extensive/ necessary enquiries/ investigations, as required in law. It was submitted that after considering the replies furnished by the appellant, the TPO, vide order dated 11.05.2023 (@ pages 3906 to 3977 of paper book Vol.IV) made substantial TP adjustment(s) aggregating to Rs.457,64,80,114/-. It was submitted that the appellant vide reply dated 31.03.2023, requested the TPO that without prejudice to its arguments on merits, even if comparable companies considered by the TPO is to be upheld, arm’s length principle should be restricted to international transactions undertaken by the appellant with its associated enterprise. As for this assessee had relied catena of decisions, where pro-rata adjustment is recognized. On consideration of the above, the TPO @ para 7 & 8 of the computation specifically allowed for pro-rata adjustment of arm’s length price to the extent of Rs.249.04 crores and the adjustment was restricted to the value of international transaction alone.
13.2 Ld. Sr. Counsel has submitted that admittedly, the issue is covered in favour of the appellant by virtue vaious judgment of the jurisdictional High Court, as cited before us too, and in fact, the Hon’ble Apex Court has dismissed the SLP in the case of the Hindustan Unilever Ltd. (ITA No. 1873 of 2013 (Bom)). Being so, restricting the adjustment on pro-rata basis cannot be branded as erroneous. The basis of PCIT that SLP in case of Firestone (supra) is admitted cannot be the basis to deny benefit of pro-rata adjustment to the assessee or doubt the action of the TPO in allowing such benefit.
13.3 On the basis of aforesaid discussion on this issue we are of the considered view that only for the reason that an issue is pending before the Hon’ble Supreme Court that cannot be a basis for interference into an assessment order and direct for an adjustment in the transfer pricing while exercising powers u/s 263 of the Act. The assessment order being erroneous so far prejudicial to the interest of the Revenue is to be examined in the light of the existing state of affairs including the settled provisions of law so far and only for the reason that Revenue is contesting the settled provision before the Hon’ble Supreme Court cannot be the basis for invoking exceptional jurisdiction of Section 263 of the Act. Here the AO had sufficiently examined the issue and benefitted assessee on basis of decision of Hon’ble Jurisdictional High Curt, so a contrary direction is rather not appreciable.
13.4 Rather it is established before us on the basis of a decision of Mumbai benches in the case of M/s Damco India Pvt. Ltd versus DCIT, Circle-6(2)(1) Mumbai ITA1155/Mum/2017 order dated 20.03.2019, that Hon’ble Supreme Court is merely dealing with the issue of disallowance u/s 14A of the Act, in M/s Firestone case SLP. Thus that all the more requires setting aside the directions of PCIT on this issue. Therefore, this issue is decided in favour of the assessee and corresponding grounds nos. 11 to 11.3 are allowed.
14. Issue No.5: This issue concerns the observations of PCIT that the AO has not examined the issue of disallowance u/s 40(a)(i) of the Act while huge payments were made without deduction of tax. The AO was directed to examine each contract between the assessee and non-residents and to make necessary disallowances u/s 40(a)(i) of the Act. The AO has made disallowance of payment amounting to Rs.141,47,898/- to parties of three non-resident countries viz., Ghana, Rwanda and Gabon being non-treaty countries and the same is based on an order passed u/s 201(1) of the Act. No adverse inference was drawn by the AO in respect of other payments and he was satisfied with the evidences submitted by the assessee. In view of the aforesaid effect giving order dated 14.01.2025, the assessee’s grievance is only with regard to the disallowance in respect of Rs.141,47,898/-. Pertinent to mention here itself is that an order dated 18.05.2023 under section 201 of the Act for the year under consideration was passed by ITO Ward, International Taxation 1(1)(2), Delhi [refer page 3984-4007 of PB (Vol IV)]wherein no adverse inference was drawn qua communication charges and bandwidth charges paid to non-residents in respect of countries with which India has entered into a Double Tax Avoidance Agreement (DTAA).Copy of order dated 18.05.2023 passed under section 201 of the Act is enclosed @ pages 3984 to 4007 of paper book Vol. IV.Being so, no disallowance under section 40(a)(ia) of the Act is called for in this regard. In the aforesaid order dated 18.05.2023, the appellant was held to be in default for communication charges to the extent of Rs.60,15,629 paid to residents of Ghana and Rwanda and bandwidth charges of Rs.81,32,269paid to resident of Gabon, countries with which India has not entered into a DTAA. The said order has been challenged in appeal by the appellant before CIT(A) which is presently pending. It is, based on the said order, that the assessing officer in the consequential assessment made disallowance under section 40(a)(i) amounting to Rs.1,41,47,898/- in respect of payments to parties of three non-resident of countries viz. Ghana, Rwanda and Gabon [non-treaty countries] on account of alleged non without deducting TDS; the same is based on aforesaid order passed under section 201(1) of the Act.
14.1 Now what is relevant is that the PCIT, in the impugned order dated 10.10.2023 PCIT has vaguely alleged that huge payments were made by the appellant without deduction of TDS and accordingly, disallowance under section 40(a)(i) is required to be made. Ld. Sr. Counsel has established that detailed inquiry in respect of this issue was made by the AO during the assessment proceedings. Details of relevant queries raised by the AO vide notices/questionnaire and information/ replies filed by the appellant in response thereto from time to time were submitted during hearing. The AO had directed the appellant to provide the following details:
“3. Foreign Remittance made to person(s) located in low tax jurisdiction countries(Business ITR) Assessee has made large Foreign Remittance to person(s) located in low tax jurisdiction countries.
(i). In your case Assessee has made large Foreign Remittance to person(s) located in low tax jurisdiction countries. In view of this kindly submit details of all the payments made under various heads to non residents in the format name, amount, country of residence, head /type of payment.
(ii) Kindly explain for each such payment, whether income tax was not deducted or was deducted at lower rate. If you have any certificate to that extent from Dept, please Submit copy of the same.
(iii) For all such payments where income tax is not deducted or deducted at Lowe rate, kindly submit copies bills and TRC issued by those parties along with copies of agreements and entered into with them for those transactions.
(iv) Also in this case kindly submit supporting documents to prove actual delivery of goods and services in terms of Delivery challans, transportation bills, emails communications mentioning requisition, coordination, feedback, Delivery of services.”
14.2 Assessee had responded to these queries by reply dated 16.09.2023 [pages 2593 to 2621 of paper book (Vol. III)]. In response to the aforesaid queries, the appellant submitted detailed explanation along with supporting documents (pages 2593 to 2621 & 2622 to 2924 of paper book Vol.III) It is evident from the above that specific and pointed queries were raised, in respect of possible violations under section 40(a)(i), by the AO during the course of assessment and all the relevant supporting documents were duly filed by the appellant. The appellant had explained the nature of each of the payment to nonresident on which tax was not deducted and reason for the same. It was only on considering the detailed explanations and supporting documents filed by the appellant that AO drew no adverse inference in this regard.
14.3 Then ld. Sr. Counsel has submitted that the nature of expenditures involved are Communication charges/ bandwidth charges and the rationale for non-deduction of tax at source on the payments made on account of telecom services received from foreign telecom operators is as under:-
“The appellant is engaged in the business of providing telecommunication services to its subscribers. In India, mobile services are being provided by multiple telecom operators in different Licensed Service Areas ‘LSA or telecom circles’ under licenses issued by Department of Telecommunication. These operators establish networks in their respective LSAs. While rendering telecommunication services to their subscribers, the operators have to mandatorily interconnect with other operators for the purpose of providing seamless end to end connectivity to the subscribers across both the networks as per regulatory and licensing framework. To facilitate seamless communication between subscribers of respective networks of various operators across multiple domestic and international destinations/ locations, the entire chain of operators pools their services and network/ infrastructure with each other on non-exclusive and reciprocal basis by way of interconnection arrangements and share revenue from calls. The charges which include origination, termination and carriage charges on per minute basis are known as Interconnection Usage Charges ‘IUC’. Thus, if a subscriber of Airtel in Delhi makes a call to her friend in the USA, who is a subscriber of the AT&T network there, then if the call matures, a call termination charge is payable to AT&T, which is called the IUC charge, in this case.
The aforesaid charges are prescribed and regulated by the Telecom Regulatory Authority of India (‘TRAI/regulator’) as far as the domestic arena is concerned whereas in the case of international interconnect, these are commercially negotiated and mutually agreed upon between the domestic operators and Foreign Telecom Operators (FTOs). Pursuant to these revenue sharing arrangements with overseas network operators, the appellant made various remittances of IUC or Communication Charges to FTOs. No tax was deducted on the said payments in terms of section 195 of the Act since their payments are not liable to tax in India.
Attention in this regard is invited to the following:
(a) The Hon’ble High Court in appellant’s own case in (Delhi), while examining the scope of the definition of “fees for technical services” in Explanation 2 to section 9(1)(vii) of the Act, observed that the expression “technical services” takes colour from the expressions “managerial services” and “consultancy services”, which necessarily involve a human element. The Revenue assailed the order passed by the Delhi High Court by way of Special Leave Petition (SLP) before the Supreme Court. The Supreme Court vide order dated 12/08/2010, in SLP No. 16452 of 2009 agreed in principle with the aforesaid observation of the Delhi High Court regarding involvement/presence of human element in order for ‘technical services’ to be said to have been rendered in terms of Explanation 2 to section 9(1)(vii) of the Act. The Court, however, directed the Revenue to determine whether, on facts, there was any human intervention involved in rendering cellular services.
(b) In the decision of this Hon’ble Tribunal in appellant’s own case for assessment years 2008-09 to 2011-12 [Bharti Airtel Limited:(Delhi – Trib.)- refer pages 2746 to 2877 of PB (Vol III)], the Tribunal examined in detail the fact pattern of arrangement between telecom operators and payments of IUC to FTOs as well as analyzed the legal provisions under the Act and Double Taxation Avoidance Agreements (DTAA). The Tribunal, after considering arguments of both the appellant and the revenue, after relying upon clauses of agreements with FTOs, held that payments for international interconnect charges to foreign telecom operators are neither fee for technical services nor royalty either under the Act or under the Treaties.
Moreover, the Department has accepted the decision of the Tribunal, and no appeal is filed there against. That the said acceptance was formally communicated to the appellant by way of directions dated 29th December 2017 issued under section 144A of the Act. Directions under section 144A of the Act has been enclosed as page 2878-2880 of PB (Vol III).
(c) The Karnataka High Court in the case of CIT v. Vodafone South Ltd (Karnataka) wherein the Court has held that roaming charges paid for the roaming process is not qua the service provided by one operator to the other, but are the charges paid for utilization of the roaming facility which is fully automatic and does not require any human intervention. Accordingly, such roaming charges is not FTS and accordingly no tax is liable to be deducted under section 194J of the Act.
(d) Specific attention in this regard is invited to the case of CIT (TDS)-2 v. M/s. Tata Teleservices Ltd ITA 1417/2018[page 2881 to 2885 of PB(Vol III)] before the jurisdictional Delhi High Court, wherein the Departmental Representative filed directions issued by the CBDT which state that the Board has accepted the position that Roaming and IUC charges are not to be subjected to TDS and thereby no appeal was preferred against the decision of the Karnataka High Court in the case of Vodafone South (supra).
(e) Later, the Hon’ble Karnataka High Court in the case of Vodafone Idea Ltd v. DCIT:ITR 189 (Karnataka), has held that payments made to non-resident telecom operators by assessee, telecommunication service provider, for providing interconnect services and transfer of capacity in foreign countries was not chargeable to tax as royalty and hence tax is not deductible when payments are made to non-resident telecom operator.
14.4 Now what we find is that relying the jurisdictional Hon’ble Delhi High Court decision in the case of CIT v. Telstra Singapore Pte. Ltd.:ITR 302 (Delhi) a co-ordinate bench at Delhi in appellant’s own case for assessment year 2014-15 titled as Bharti Airtel Ltd. v. ACIT: ITA No. 7891/Del/2019 order dated 09.10.2024 has held that the appellant is not liable to deduct tax at source on payment of bandwidth charges to non-residents including where payees are from non-treaty countries. Thus, the said issue squarely covers the case of the appellant. On the basis of aforesaid, we are of the considered view that not only the issue was duly examined by the AO during the assessment but the law, at time of assessment, stood settled that when the payments are not in regard to royalty or FTS under the Act, then also, in respect of non-treaty countries the payments on account of bandwidth charges to non-residents are not subject to TDS provisions. Thus the issue did not require any fresh enquiry by AO by interference under section 263 of the Act. Consequently, we are inclined to decide this issue in favour of the assessee and corresponding grounds nos. 12 to 12.4 are allowed.
15. Issue No.6: This issue concerns disallowance u/s 14A in regard to which ld. PCIT had observed that ld. AO has failed to make disallowance u/s 14A in the light of the Hon’ble Supreme Court decision in the case Maxopp Investment Ltd. v. CIT/402 ITR 640 (SC). No adverse inference has been drawn by the AO after due verification and examination during the effect giving proceedings and the ground concerning the same no more survives in substantive terms. The only contention of the ld. Sr. Counsel was that in respect of disallowance u/s 14A of the Act, detailed explanations were furnished by the assessee, therefore, the observations of the ld. PCIT in proceedings u/s 263 of the Act that the AO has failed to make inquiries was not sustainable.
15.1 In this context, we find that during the year, the assessee has received exempt dividend from its subsidiary company Bharti Infratel Ltd. only and there was no other source of exempt income nor fresh investment was made during the year in the shares of Bharti Infratel Ltd.. Still a suo-moto disallowance of Rs.35,10,337/- was made. There were no borrowed funds used for investments and no disallowances u/s 14A were made in the past. However, as during the consequential assessment ld. AO has not given any adverse findings on the issue, the aforesaid submissions become academic. In any case, we are satisfied that as issue was considered duly by AO vide notice dated 11.09.2023 and response of assessee dated 16.09.2023 copies of which are part of PB page 2593 to 2621 of PB Vol. III, we are of considered view that issue did not deserved to be interfered u/s 263 of the Act. We thus allow the ground no. 13.
16. Issue No.7: This issues concerns the directions of ld. PCIT that the AO did not investigate the issue concerning non-availability of depreciation. It is established that no depreciation on good will was claimed by appellant during the year and as with regard to tangible assets detailed enquiry was conducted by the AO vide notice dated 06.09.2023 and 11.09.2023 as replied by assessee by reply dated 16.09.2023, copy available at pages 2593 to 2621 of PB Vol. III. Though, in the consequential proceedings, no adverse inference has been drawn by the AO. Thus, the grievance of the assessee on the directions issued by the ld. PCIT as challenged do not survive, but certainly as the issue was duly examined by the AO, we are of considered view that issue did not deserved to be interfered u/s 263 of the Act. We thus allow the ground no. 14(a).
17. Issue No.8: This issue arises out of the directions of ld. PCIT that the AO has not verified the relevant transactions from the perspective of section 269SS of the Act and thereby did not initiate penal action u/s 271E of the Act. The case of the assessee was that the issue was extensively examined and all transactions were through banking channel only. The ld. Sr. Counsel has pointed out various notices and replies communicated between the AO and the assessee during the assessment proceedings. However, in the effect giving order, no adverse inference was drawn by the AO and he was satisfied by the evidences of the assessee and upon verification of the same, therefore, as such, no grievance of the assessee survives substantially. In any case, we are satisfied that as issue was considered duly by AO vide notice dated 06.09.2023 and response of assessee dated 16.09.2023 copies of which are part of PB page 2593 to 2621 of PB Vol. III, we are of considered view that issue did not deserved to be interfered u/s 263 of the Act. We thus allow the ground no. 14(b).
18. Issue No.9: This issue concerns the observations of the ld. PCIT that genuineness of claim with regard to huge expenses were not examine by the AO and no supporting documentary evidences were called. Compliance with TDS provisions were allegedly not verified by the AO. The case of the assessee is that the issue was extensively examined and, in that regard, the ld. Sr. Counsel has pointed out about the notice dated 06.09.2023 available at pages 3978 to 3983 issued on this aspect by the AO an as responded by the assessee vide reply dated 21.09.2023, the copy of which is available at pages 453 to 464 of the paper book Volume II. The assessee had provided partywise details of five major expenses along with supporting documents like invoices, Form 16A, etc. In the effect giving proceedings, the assessing officer was satisfied and no addition has been made. Thus, substantively, no grievance of the assessee is left. In any case, we are satisfied that as issue was considered duly by AO so the issue did not deserved to be interfered u/s 263 of the Act. We thus allow the ground no. 14(c).
19. Issue No.10: This issue concerns the allegation of Ld. PCIT that during the assessment proceedings the AO has failed to make inquiries to ascertain the genuineness of liabilities claimed. Again, the ld. Sr. Counsel has pointed out a specific notice dated 06.09.2023 issued by the AO and the reply dated 21.09.2023 available at pages 4532 to 4654 of the paper book Vol.II wherein the assessee had filed the list of sundry creditors outstanding as on 31.03.2020. The ld. Sr. Counsel has also pointed out that the issue was set aside by the ld.PCIT without minimal inquiries and for that reason, the directions were not sustainable in the light of the decision of the Hon’ble Delhi High Court in the case ITO v. DG Housing Projects Ltd Delhi). As a matter of fact, in the effect giving proceedings, no adverse inference has been drawn. Thus, substantially, no grievance survives. In any case, we are satisfied that as issue was considered duly by AO so the issue did not deserved to be interfered u/s 263 of the Act. We thus allow the ground no. 14(d).
20. As a consequence of aforesaid determination of the grounds covered by specific issues in favour of assessee, the appeal is allowed with consequences to follow as per determination of issues, as above.