ACIT Vs Vodafone Idea Limited (ITAT Mumbai)
Summary: ITAT Mumbai partly allowed the Revenue’s appeal for Assessment Year 2001-02 in the case of Vodafone Idea Limited, successor to the erstwhile Vodafone East Limited/Usha Martin Telekom Ltd. The principal dispute concerned deduction of ₹6.80 crore paid to Usha Martin Ventures Ltd. under an agreement dated 25.07.2000 for closure of the Paging Division. The Assessing Officer had disallowed the payment under Section 37(1), while the CIT(A) allowed it on the basis that the Paging and Cellular Divisions constituted a composite business with common management, administration, control and interlacing of funds.
The Tribunal reversed the CIT(A). On examining the agreement, it found that Usha Martin Ventures Ltd. was entrusted with taking over the assets, liabilities, employees, contracts and obligations of the Paging Business and implementing its closure. The ₹6.80 crore payment was therefore incurred specifically for bringing that business undertaking to an end and not for carrying on the assessee’s business. Even assuming that the Paging and Cellular Divisions formed one composite business, the expenditure independently had to satisfy Section 37(1), which allows expenditure laid out wholly and exclusively for purposes of business. The Tribunal distinguished the Supreme Court rulings in Veecumsees v. CIT and K. Ravindranathan Nair v. CIT, and held that B.R. Ltd. v. V.P. Gupta, CIT v. Prithvi Insurance Co. Ltd. and Produce Exchange Corporation Ltd. v. CIT, which concerned the “same business” test for carry-forward/set-off of losses, did not govern deductibility of contractual closure expenditure under Section 37(1).
On the second issue, however, the Tribunal upheld deletion of the foreign-exchange fluctuation disallowance. The books showed that ₹3,24,40,221 related to imports of spares and consumables, while ₹61,23,000 attributable to capital goods had already been capitalised. Since actual transaction-wise figures were available and the Revenue produced no contrary material, an estimated allocation to capital assets could not be sustained. The Revenue’s appeal was accordingly partly allowed.
Cases Discussed
- K. Ravindranathan Nair v. CIT, (2001) 247 ITR 178 (Supreme Court) — distinguished; the Supreme Court had allowed compensation paid on closure of four out of ten integrated cashew-processing units because the same business continued and the expenditure was incurred to preserve the industrial health of that continuing business, whereas the present payment arose specifically from the contractual closure of the Paging Business.
- Veecumsees v. CIT, (1996) 220 ITR 185 (Supreme Court) — distinguished; that decision concerned continuing interest liability on borrowings originally obtained for business purposes under Section 36(1)(iii), whereas the ₹6.80 crore payment in the present case was itself made exclusively for closure of the Paging Business.
- B.R. Ltd. v. V.P. Gupta, (1978) 113 ITR 647 (Supreme Court) — distinguished as having been rendered in the context of the expression “same business” under Section 24(2) of the Indian Income-tax Act, 1922 concerning carry-forward and set-off of losses, rather than deductibility of business-closure expenditure under Section 37(1).
- Produce Exchange Corporation Ltd. v. CIT, (1970) 77 ITR 739 (Supreme Court) — distinguished; the decision laid down tests such as unity of control, common management and interlacing of activities for determining whether activities constituted the “same business” under Section 24(2) of the 1922 Act and did not govern expenditure incurred contractually to close a business undertaking.
- CIT v. Prithvi Insurance Co. Ltd., (1967) 63 ITR 632 (Supreme Court) — distinguished for the same reason, as the ruling concerned the statutory “same business” test rather than the independent conditions for deduction under Section 37(1).
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal is filed by the Revenue against the order dated 22.09.2025 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the ld. CIT(A)”] under section 250 of the Income-tax Act, 1961 (“the Act”), arising out of the assessment order passed under section 143(3) of the Act for the Assessment Year 2001-02.
2. The effective grounds raised by the Revenue are as under: –
“1. Whether, on the facts and in the circumstances of the case and in law, the learned CIT(A) was justified in deleting the disallowance of ₹6,80,00,000/- made on account of payment made to M/s. Usha Martin Ventures Ltd. towards closure of the Paging Division?
2. Whether the learned CIT(A) was justified in deleting the addition made on account of foreign exchange fluctuation loss attributable to capital assets?”
3. Briefly stated, the facts are that the assessee (erstwhile M/s. Usha Martin Telekom Ltd), now known as Vodafone Idea Limited as successor to erstwhile M/s. Vodafone East Limited, is engaged in the business of providing telecommunication services. The assessee filed its return of income declaring loss, which was subsequently revised. The assessment was completed under section 143(3) of the Act. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction of ₹6,80,00,000/- being payment made to M/s. Usha Martin Ventures Ltd. (UMVL) pursuant to an Agreement dated 25.07.2000 executed for closure of the Paging Division. According to the Assessing Officer, the Paging Division was a separate and identifiable business undertaking and under the said agreement all its assets, liabilities, receipts and obligations stood transferred to UMVL. The Assessing Officer, therefore, held that the payment was not incurred for carrying on the business of the assessee but represented expenditure incurred for closure of a separate business undertaking and consequently disallowed the claim under section 37(1) of the Act. The Assessing Officer also treated foreign exchange fluctuation relatable to capital assets as capital in nature and made a disallowance. Aggrieved, the assessee preferred appeal before the learned CIT(A), who deleted the aforesaid additions. The Revenue is, therefore, in appeal before us.
4. The learned CIT(DR), Ms. Rajni Rani Roy, strongly supported the assessment order. Referring to the Agreement dated 25.07.2000, she submitted that UMVL was incorporated solely for taking over and closing the Paging Business. Under the agreement, the entire Paging Business together with its assets, liabilities, employees, contracts and obligations stood vested in UMVL and all receipts and expenditure thereafter became attributable to UMVL. Therefore, according to her, the payment of ₹6.80 crore was admittedly made for closure of the Paging Business and not for carrying on the business of the assessee. She submitted that the basic requirement of section 37(1), namely that the expenditure should be incurred wholly and exclusively for the purposes of the business, was absent in the present case. She further submitted that the authorities relied upon by the assessee were clearly distinguishable. According to the learned CIT(DR), the decision in Veecumsees v. CIT (220 ITR 185) dealt with deduction of interest under section 36(1)(iii); K. Ravindranathan Nair v. CIT (247 ITR 178) related to compensation paid while the assessee continued the same business after closure of certain units; whereas B.R. Ltd. (113 ITR 647), Prithvi Insurance Co. Ltd. (63 ITR 632) and Produce Exchange Corporation Ltd. (77 ITR 739) were rendered in the context of section 24(2) of the Indian Income-tax Act, 1922 dealing with carry forward and set-off of losses. She accordingly prayed that the order of the learned CIT(A) be reversed.
5. Per contra, the learned Authorised Representative supported the impugned order. He submitted that the Paging Division and Cellular Division constituted one composite business having common management, common administration, unity of control and interlacing of funds. According to him, UMVL was merely incorporated as a vehicle to facilitate closure of the Paging Division and the assessee continued its telecommunication business even thereafter. He submitted that the expenditure incurred for closure of one division of a composite business was allowable under section 37(1). Reliance was placed upon the decisions of the Hon’ble Supreme Court in Veecumsees v. CIT (220 ITR 185), K. Ravindranathan Nair v. CIT (247 ITR 178), B.R. Ltd. v. V.P. Gupta (113 ITR 647), CIT v. Prithvi Insurance Co. Ltd. (63 ITR 632) and Produce Exchange Corporation Ltd. v. CIT (77 ITR 739). In respect of the foreign exchange fluctuation loss, the learned Authorised Representative submitted that the Assessing Officer had proceeded entirely on estimation. It was explained that the books of account clearly reflected the actual foreign exchange fluctuation relating to individual imports. A sum of ₹3,24,40,221/- represented exchange fluctuation on import of spares and consumables, which was claimed as revenue expenditure, whereas exchange fluctuation of ₹61,23,000/- relating to import of capital goods had already been capitalised by the assessee. It was, therefore, submitted that when actual figures were available from the books of account, there was no justification for estimating the amount attributable to capital assets. The learned Authorised Representative accordingly supported the order of the learned CIT(A).
6. We have heard the rival submissions and perused the material available on record. We have also carefully gone through the assessment order, the impugned order of the learned CIT(A), the written submissions filed by both the parties and, more importantly, the Agreement dated 25.07.2000 executed between M/s. Usha Martin Telekom Ltd. and M/s. Usha Martin Ventures Ltd. (UMVL). In our considered opinion, the learned CIT(A) was not justified in deleting the disallowance of ₹6,80,00,000/-.
6.1 The claim of the assessee is under section 37(1) of the Act. The first and foremost requirement of the said provision is that the expenditure should be laid out wholly and exclusively for the purposes of the business. Therefore, the nature and purpose of the expenditure has to be examined before considering whether the Paging Division and Cellular Division constituted one composite business.
6.2 On a careful reading of the Agreement dated 25.07.2000, we find that the agreement itself records that the Paging Business was proposed to be closed and UMVL was entrusted with the responsibility of implementing such closure. The agreement authorises UMVL to take over and deal with the assets, liabilities, employees, contracts and all obligations relating to the Paging Business. It further provides that all receipts, expenditure, profits and liabilities of the Paging Business after the effective date shall be to the account of UMVL. Thus, the payment of ₹6.80 crore was made under the said agreement for effectuating the closure of the Paging Business. The expenditure, therefore, was not incurred for carrying on the business of the assessee but for bringing one of its business undertakings to an end.
6.3 In our considered opinion, there is a clear distinction between expenditure incurred for carrying on a business and expenditure incurred for closure of a business undertaking. Section 37(1) permits deduction only of the former. Once the expenditure itself is incurred exclusively for implementing the closure of a business undertaking, the basic requirement of section 37(1) is not satisfied.
6.4 The learned CIT(A) has proceeded on the footing that since the Paging Division and Cellular Division were under common management and common control, the expenditure automatically became allowable. In our view, the approach adopted by the learned CIT(A) is legally unsustainable. Even if it is assumed that both divisions constituted one composite business, the expenditure must still satisfy the independent requirement of section 37(1). The existence of common management cannot convert a closure expenditure into an expenditure incurred for carrying on the business.
6.5 The principal reliance of the learned Authorised Representative is on the judgment of the Hon’ble Supreme Court in Veecumsees v. CIT (220 ITR 185). In our opinion, the said decision has no application to the facts of the present case. The controversy before the Hon’ble Supreme Court was whether interest paid on borrowings utilised for construction of a cinema theatre continued to be allowable under section 36(1)(iii) after the cinema business had been transferred. Thus, the issue related to the allowability of interest on borrowed capital under section 36(1)(iii). The Supreme Court held that since the borrowings had originally been made for business purposes, the subsequent transfer of one activity did not alter the character of the interest liability. The deduction was thus allowed because the liability represented continuing interest on borrowings obtained for business purposes. The present case does not concern deduction under section 36(1)(iii). Here, the payment itself has been made under the agreement exclusively for closure of the Paging Business. Therefore, the ratio laid down in Veecumsees cannot be extended to the facts before us.
6.6 Equally distinguishable is the judgment of the Hon’ble Supreme Court in K. Ravindranathan Nair v. CIT (247 ITR 178). In that case, the assessee was carrying on one integrated business through ten cashew processing units. Owing to labour disputes, four units were closed and compensation was paid to the workmen. The Tribunal recorded a categorical finding that all the ten units constituted one business having common management, common accounts, common financing system and complete interlacing of activities. It was further found that the assessee continued the very same business after reducing the number of units from ten to six and the compensation was paid to preserve the industrial health of the continuing business. It was on these facts that the Hon’ble Supreme Court held the expenditure to be allowable under section 37.
6.7 The facts before us are materially different. In the present case, the payment was not made to facilitate continuation of the same business after reduction of a few units. The Agreement dated 25.07.2000 envisaged transfer of the entire Paging Business together with its assets, liabilities, employees and obligations to UMVL for its closure. Thus, the expenditure itself arose because of the contractual arrangement for closure of the Paging Business. Unlike K. Ravindranathan Nair, the assessee has not incurred expenditure for preserving or continuing the same business but for closing down one business undertaking. Therefore, the ratio of the said decision is clearly distinguishable.
6.8 The decisions in B.R. Ltd. v. V.P. Gupta (113 ITR 647), CIT v. Prithvi Insurance Co. Ltd. (63 ITR 632) and Produce Exchange Corporation Ltd. v. CIT (77 ITR 739) also do not advance the case of the assessee. Those decisions were rendered while interpreting the expression “same business” occurring in section 24(2) of the Indian Income-tax Act, 1922 relating to carry forward and set-off of business losses. The Hon’ble Supreme Court laid down the tests of unity of control, common management and interlacing of activities for determining whether different activities constituted the “same business”. Those judgments did not deal with deduction of expenditure under section 37(1), much less expenditure incurred under a contractual arrangement for closure of a business undertaking. In our view, the statutory context as well as the controversy before the Hon’ble Supreme Court in those cases is entirely different.
6.9 In view of the foregoing discussion, we hold that the payment of ₹6,80,00,000/- made to Usha Martin Ventures Ltd. was incurred for closure of the Paging Business and not for carrying on the business of the assessee. Consequently, the conditions prescribed under section 37(1) are not fulfilled. The learned CIT(A) was, therefore, not justified in deleting the disallowance made by the Assessing Officer. We accordingly set aside the order of the learned CIT(A) on this issue and restore that of the Assessing Officer. Accordingly, the grounds raised by the Revenue are allowed.
7. Next grounds of appeals relate to deletion of the addition made on account of foreign exchange fluctuation loss.
7.1 The Assessing Officer observed that a part of the foreign exchange fluctuation loss claimed by the assessee related to import of capital goods and, accordingly, estimated a sum of ₹3,24,40,221/- as relatable to capital assets and disallowed the same.
7.2 Before the learned CIT(A), the assessee submitted that the Assessing Officer had proceeded entirely on estimation. It was explained that the books of account separately reflected the actual foreign exchange fluctuation relatable to each category of imports. According to the assessee, foreign exchange fluctuation amounting to ₹3,24,40,221/- pertained to import of spares and consumables and had been claimed as revenue expenditure, whereas fluctuation of ₹61,23,000/- relatable to import of capital goods had already been capitalised in the books. The learned CIT(A) accepted the said explanation and deleted the addition.
7.3 We have considered the rival submissions. We find considerable merit in the submissions advanced on behalf of the assessee. Foreign exchange fluctuation is not an item which can be determined on estimates. It has to be computed with reference to the actual liability arising on individual import transactions as reflected in the books of account. When the actual figures are available, there is no scope for estimating the portion relatable to capital goods.
7.4 In the present case, the assessee has demonstrated that exchange fluctuation of ₹3,24,40,221/- related to import of spares and consumables, whereas exchange fluctuation of ₹61,23,000/- relating to capital goods had already been capitalised. The Revenue has not brought any material on record to controvert the aforesaid factual position. In the absence of any contrary evidence, the estimated disallowance made by the Assessing Officer cannot be sustained.
7.5 We, therefore, find no infirmity in the order of the learned CIT(A) deleting the addition on this issue. Accordingly, the grounds raised by the Revenue are dismissed.
8. In the result, the appeal of the Revenue is partly allowed.
Order pronounced in the open court on 14/07/2026.
