ITAT criticises AO and DRP for blatantly frivolous and unsustainable additions

Issue-  whether or not addition of Rs 5,739.60 crores (Rs 5739,60,05,089) made by the Assessing Officer with respect to the dis allowance of loss on transfer of telecom infrastructure is justified, tenable in law and on the facts of this case. The related grievances, as set out in the memorandum of appeal, are as follows:

Briefly stated, the relevant material facts are like this. The assessee before us is a company engaged in the business of telecommunication services. On 30th September 2008, the assessee filed an income tax return disclosing taxable income of Rs 1,608.58 crores (Rs 1608,58,05,679). In its computation of  taxable income, the starting point was the profit as per profit and loss account. In the course of scrutiny assessment proceedings, the Assessing Officer noted that “the assessee has booked an expenditure of Rs 5739,60,05,089 on account of loss on transfer of telecom infrastructure to Bharti Infratel Limited as a reduction in WDV ( i.e. written down value) of fixed assets” and that “the same is dis allowable from the profit and loss account, as per provisions of the Income Tax Act, as it is clearly a capital loss”. It was explained by the assessee that the reflecting the loss in the profit and loss account did not have any impact on the profits as the debit, by way of loss on transfer of telecom infrastructure, was squared by corresponding credit from the ‘business restructuring reserve’, and thus there was no debit to the profit and loss account. The amounts were only in the inner columns and there was no net debit by way of entry in the outer column. It was explained that “the loss on sale of telecom infrastructure to BIL is corresponding to the amount credited to business restructuring reserve” and that “if this amount is not withdrawn from the said reserve, the profit of assessee company is lowered by Rs 5,739 crores for the year under consideration”. None of these submissions impressed the Assessing Officer and, in the draft assessment order, the Assessing Officer proposed an addition of Rs 5739,60,05,089 in respect of the above loss.

An objection was taken up by the assessee before the Dispute Resolution Panel as well  however, the DRP proceeded to reject the same by making following brief, or rather cryptic, observations:

” We have considered the facts of the case. Submission of assessee has also been gone through. The dis allowance of Rs.5 73 9,60,05,000 by the AO in normal computation provisions as capital loss representing loss on transfer of Telecom Infrastructure to Bharti Infratel Limited is held as perfectly in order. Therefore, as for as dis allowance is concerned, no interference is called for. However, as regards the claim of assessee of not reducing the equivalent sum from the computation of income, it is noted that it is a matter of pure verification. The AO is directed, to verify the claim of the assessee from the records and take necessary action.”

In the final assessment order, passed as a result of the above DRP directions, the Assessing Officer made the impugned additions. The Assessing Officer noted that the “from the directions of Hon’ble DRP, it is abundantly clear that the DRP has categorically held that the dis allowance of Rs 5739,60,05,089 by the Assessing Officer represents capital loss on transfer of telecom infrastructure to Bharti Infratel Limited in the computation as per normal provisions of the Act was perfectly in order and no interference was called for”, and “therefore, the contention of the assessee company that there is double addition of the above sum, is incorrect”. As for the DRP’s directions to the Assessing Officer to make verifications with respect to “not reducing the claim of assessee of not reducing the equivalent sum from the computation of income”, the Assessing Officer noted that “after verifications, it is ascertained that these are the same documents and papers which were available before the Assessing Officer during the course of assessment proceedings leading to draft assessment order” and that “there are no fresh or additional documents except the written submissions”. The Assessing Officer then took note of the fact that in the computation of income attached to the return of income, the assessee has first added Rs 5739,60,05,089 as “Loss on transfer of telecom infrastructure to Bharti Infratel Limited” and then reduced Rs 5 739,60,05,089 as “amount withdrawn from Reserve for Business Restructuring”. Effectively thus, according to the Assessing Officer, there was a debit and credit of the same amount and he was justified in adding back the loss of transfer of telecom infrastructure debited to the profit and loss account. He thus concluded that “in view of the above and consequent upon verification of facts as directed by the learned DRP, the finding for addition of Rs 5739,60,05,089 in the computation of income by the Assessing Officer under the normal provisions of the Act is found to be correct for the assessment year under consideration”.

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