Section 80IA Incidental income of telecom business, eligible for deduction

Brief of the case: The Hon’ble Delhi HC held that in case of assessees engaged in providing telecom services deduction under Section 80IA shall be allowed in respect of even those incidental incomes earned during the course of telecom business not derived from core business operations because by virtue of exception carved  out by  section 80IA(2A) in  case of telecom business  there is no requirement that income should be derived from eligible business rather income of  eligible business is entitled for deduction (including incidental incomes) ,thereby enlarging the scope of deduction.

Facts of the case:

⊕ AO while making assessment disallowed the following type of incomes claimed as deduction under Section 80IA:

i) Extra Ordinary Items

ii) Refund from Universal Service Fund

iii) Interest from others
iv) Liquidated Damages

v) Excess provision written back

vi) Others including sale of directories, publications, form, waster paper, etc.

⊕ AO disallowed the said incomes claimed as deduction under Section 80IA because as per him these items could not be considered as profits and gains ‘derived from’ the eligible business for the purpose of deduction under section 80IA.

⊕ In the appeal by the Assessee, the Commissioner of Income Tax (Appeals) agreed with the AO that three of the above items, viz. Extraordinary Items, Refund from Universal Service Fund and Interest from Others, did not form part of the profit derived from eligible business. However, the Assessee’s plea regarding the other three items as being derived from the business was accepted by the CIT (A).

⊕ Both assessee and revenue filed cross appeals challenging the order of CIT(A). The ITAT held that as per the wording used in Sec 80IA(2A) no need that income to be derived from core telecom operations and therefore, even incidental income earned in the course of telecom business will be eligible incomes to be deducted under Section 80IA. Therefore, ITAT allowed all the above disputed incomes as deduction.

Held by Hon’ble Delhi HC:

⊕ HC observed that as per Section 80IA(1) , what is available for deduction are profits and gains “derived by an undertaking or an enterprise from any business referred to in sub-section (4)-i.e. eligible businesses whereas Sec 80IA (2A) which starts with non-obstante clause dealing exclusively with telecom business states that notwithstanding anything contained in sub-section (1) or sub-section (2), the deduction in computing the total income of an undertaking providing telecommunication services, specified in clause (ii) of sub-section (4), shall be hundred per cent of the profits and gains of the eligible business for the first five assessment years commencing at any time during the periods as specified in sub-section (2) and thereafter………

⊕ Thus, it follows that what is available for deduction under Section 80IA (2A) is 100% of the profits and gains of the eligible business and not the merely the profits derived from eligible business which is only for other eligible businesses.

⊕ Therefore, assessees engaged in the business of providing telecommunication services, are entitled to deduction in respect of even those incomes earned during the course of telecom (incidental income)  not derived from core business operations .

⊕ In result the appeal of revenue was dismissed.