Vodafone Essar South Ltd. Vs. Commissioner of Income Tax
I.T.A. No. 3238/Del/2009
A.Y. : 2004- 05
This appeal by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 30.3.2009 pertaining to assessment year 2004-05.
2. The grounds raised read as under:-
“On the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax-IV, New Delhi (hereinafter referred to as the Learned C.I.T.) erred in initiating proceedings under section 263 of Income Tax Act, 1961 (Act) by wrongly assuming jurisdiction under section 263 of the Act and hence, the order passed by the C.I.T. under section 263 of Act is bad in law and void ab-initio.
On the facts and circumstances of the case and in law, the C.I.T. erred in holding that the regulatory charges amounting to Rs. 358,130,408 are capital in nature and need to be amortized under section 35ABB of the Act and has, therefore, erred in directing the DCIT, Circle 12(1), New Delhi (hereinafter referred to as the Ld. A.O.) to compute allowance under section 35ABB of the Act.
On the facts and circumstances of the case and in law, the C.I.T. erred in holding that due enquiries in respect of loan arrangement fee and stamp duty charges were not conducted by the Assessing Officer and hence, has erred in remanding the matter back to the Ld. A.O.”
3. In this case Ld. Commissioner of Income Tax noted that from an examination of the income tax assessment records of the assessee it transpired that the assessee had claimed and was allowed the payment of Rs. 35,81,30,408/-, on account of regulatory fees, which is capital in nature and should have been disallowed. The assessee has had claimed and was allowed expenditure of 3,10,22,106/- towards product launches under advertising and publicity, which is capital in nature and should have been disallowed. The assessee had claimed and was allowed an expenditure of 34,92,168/- towards stamp duty under bank charges and guarantee commission, which is capital in nature and should have been disallowed.
3.1 The Ld. Commissioner of Income Tax noted that due to inadvertent error wrong narration in respect of amount of 3,10,22,106/- was mentioned in notice dated 10.2.2009. The correct narration being expenditure of 3,10,22,106/- towards loan arrangements and guarantee commission was communicated to the assessee vide this officer letter dated 24.3.2009. Ld. Commissioner of Income Tax noted that assessee has made the following submissions :-
i) The assessee has submitted that as per the terms of license agreement with the Department of Telecommunication, in terms of migration of National Telecom Policy 1999, effective from 01.08.1999, the license fee accrued and paid up-till the date of migration was treated as one time entry fee which has been capitalised by the assessee company and amortised under section 35ABB.
(ii) The assessee has further submitted that in terms of the migration to the revenue sharing regime, with effect from 01.08.1999, the assessee company was paying licence fee at specified percentage of the gross revenue derived by the assessee from its cellular business. The assessee has submitted that under the new revenue sharing regime effective from 01.08.1999, the licence fees was a direct function of the revenue which was based on unit call rate and call time. The assessee, has therefore, submitted that the licence fees was correctly claimed as revenue expenditure.
(iii) The assessee has further submitted that payment of the yearly fee for use of licence did not confer upon the company any advantage of an enduring nature since the licence fee was payable annually as a function of the gross revenue earned and that the Licence could be revoked by Dot without any compensation. It has been submitted that the expenditure was covered u/s 37(1) of the Income Tax Act, 1961, and section 35ABB is not applicable in this case.
(iv) In respect of twin issues of Rs. 3,10,22,106/- on account of loan ‘arrangement fee and Rs. 34,92,168/- towards stamp duty, bank charges and guarantee commission. It is assessee’s submission that these are allowable revenue expenditure and reliance has been placed on several decisions including India Cement vs. CIT 60 ITR 52 (SC), Jeewanlas Ltd vs. CIT 74 ITR 753 (SC).
In addition to objections on merits the assessee company has also objected to assumption of jurisdiction u/s 263 on legal grounds claiming that :-
(a) The assessing officer had duly sought details and replies were given and then only after due application of mind the order was passed, therefore, action u/s 263 is not legally tenable.
b) In case two view are possible and AO has taken one view then CIT cannot substitute the view of the AO for its own.
c) Various case laws have been relied upon including Malabar Industrial Co. Ltd. vs. CIT (243ITR83(SC)); CIT vs. GM Mittal Stainless Steel Pvt. Ltd. (263ITR255)(SC); CIT vs. Gabriel India Ltd. (2031TR 108)(Bom); Rawani Dal & Floor Mills vs. Commissioner of Sales Tax (86 ITR 409) (Orissa); Garden Silk Mills Ltd. vs. C.I.T. (221 ITR 861) (Guj); Ram Kishan Dass vs. ITO 149 Taxman 55 9AT).
3.2 The Ld. Commissioner of Income Tax (Appeals) did not accept the above contention. He opined that the payments were towards acquisition of and in consideration of licence for 20 year to operate specified services by the assessee. The main object of expenditure is towards acquisition of an intangible asset i.e. “licence” which has an enduring benefit for the assessee. The C.I.T. did not accept the case law relied upon by the assessee. He held that expenditure on account of licence fee should have been held to be capital expenditure incurred on account of intangible asset. He further observed that the arguments of the assessee that two view are possible is not tenable, because there can only be one view in the matter under consideration.The C.I.T. further held that on all the issues, Assessing Officer did not examine the issue at all. He observed that there was general questionnaire raised and mere break-up to support the allow-ability with no justification or legal authority was submitted. C.I.T. concluded that in view of the above, patent lack of enquiry on the part of the Assessing Officer is duly established and this lack of enquiry renders the assessment order passed as erroneous and prejudicial to the interest of the revenue as held by the Honourable Jurisdictional High Court in the case of M/s Gee Vee Enterprises vs. Addl. C.I.T. [99 ITR 375). Accordingly, C.I.T. held that assessment order dated 29.12.2006 was held to be erroneous and prejudicial to the interest of the Revenue and the same are set aside on limited issues discussed in the order.
5.1 Ld. counsel of the assessee further referred to reply given to the Assessing Officer which was placed in the paper book page no. 84 to 115.
5.2 In light of the above submissions, ld. counsel of the assessee contended that in this case in all the three issues Assessing Officer has made the necessary enquiries. He argued that if the enquiries are inadequate the recourse cannot be made u/s 263 by the C.I.T. In this connection, he placed reliance upon the order of the Jurisdictional High Court in the case of C.I.T. vs. Sunbeam Auto Ltd. 227 CTR (Del) 133.
5.3 Ld. Departmental Representative on the other hand, supported the order of the C.I.T.. She claimed that there was no enquiry at all by the Assessing Officer and assessee did not submit details in this regard.
6. We have carefully considered the issue and perused the records. We find that Ld. Commissioner of Income Tax in the notice issued has mentioned that the expenditures were capital in nature. However, in the revision order he has held that the there was patent lack of enquiry on the part of the Assessing Officer. This lack of enquiry in his opinion, has rendered the assessment order passed erroneous and prejudicial to the interest of justice. It transpires that the Assessing Officer had asked for the details for all the three items as emanating from the paper book no. 75-76 in this regard. Details were inter-alia sought from the assessee, regarding other regulatory fee, circle wise, bank charges and guarantee commission. Assessee has given reply in this regard to the Assessing Officer as emanating from page no. 84 to 114. The detailed break-up of these expenditure was duly given. No further enquiry was made by the Assessing Officer. In this regard, the assessee’s contention is that if Assessing Officer had made enquiries and the enquiries are not adequate, the order cannot be said to be erroneous or prejudicial to the interest of revenue. In this regard, Honourable Apex Court decision in the case of C.I.T. vs. Sunbeam Auto Ltd. 227 CTR 133 is relevant wherein it has been held as under (Heads Notes Only):-
“There is a distinction between “lack of enquiry” and ‘inadequate enquiry” – If there is an enquiry, even inadequate, that would not by itself give occasion to the C.I.T. to pass order under section 263, merely because he has a different opinion in the matter- Such a course of action is open only in cases of “lack of enquiry” – Contention of the Revenue that the Assessing Officer did not consider as to whether the expenditure in question was capital or revenue expenditure cannot be accepted- Although apparently the assessment does not give any reasons for allowing the entire expenditure as revenue expenditure, that by itself would not be indicative of the fact that the Assessing Officer has not applied his mind to the issue – Assessing Officer is not required to give detailed reason in respect of each and every item of deduction in the assessment order – Assessing Officer had called for explanation regarding this very item and the assessee had furnished its explanation- This fact has been noticed by the C.I.T. himself in his order – Thus, it cannot be said that it is a case of ‘lack of enquiry’ – Further, even the C.I.T. was not clear as to whether the said expenditure is to be treated as capital or revenue expenditure – Dyes used by the assessee, a manufacturer of car parts, are the components of the machines and need constant replacement as their life span is not more than a year – With the replacement of such tools and dyes, no new asset comes into existence, nor there is benefit of enduring nature – It does not enhance the life of the existing machine or increase its production capacity – Therefore, the view taken by the Assessing Officer was one of the possible views and the assessment order passed by the Assessing Officer could not be held to be prejudicial to the Revenue.
6.1 Considering the present case on the anvil of the aforesaid case law, we find that Assessing Officer did enquire on all the three items and assessee responded by giving the breakup of expenditure. Though, assessment order does not give reason for allowing the expenditure and Assessing Officer did not make further enquiry, it cannot be said there was lack of enquiry in this case. In this view of the matter, the ratio from the Honourable Jurisdictional High Court drawn above is applicable fully. There is due enquiry by the Assessing Officer, though it has been considered to be inadequate by the C.I.T., recourse u/s 263 cannot be made.
7. In the background of the aforesaid discussion and precedent, and in our considered opinion, the order u/s 263 of the IT Act passed by the Ld. Commissioner of Income Tax is liable to be quashed and accordingly, the same is quashed for lack of jurisdiction.
8. In the result, the appeal filed by the Assessee is allowed.
Order pronounced in the open court on 24/06/2011.