Income Tax Appellate Tribunal - Delhi
Mahanagar Telephone Nigam Ltd. vs Additional Commissioner Of Income Tax on 3 February, 2006
Equivalent citations: (2006)100TTJ(DELHI)1
ORDER
B.R. Jain, A.M.
1. Since common issues are involved, all these four appeals filed by the assessee are directed to be disposed of by a common order.
2. The first ground in appeal for asst. yr. 1998-99 is against the disallowance of the licence fee amounting to Rs. 271,10,91,600 paid by the assessee to the Department of Telecommunication (DoT).
3. Briefly the facts of the case are that the appellant is a public sector corporation incorporated on 28th Feb., 1986, for providing telecommunication services. It took over the management, control and operation of Delhi and Mumbai telecommunication Districts w.e.f. 1st April, 1986. The DoT in exercise of the power of the Central Government conferred under Sub-section (2) of Section 4 of the Indian Telegraph Act, granted licence vide letter No. 1-101/85-MTAC/PHB, dt. 27th March, 1986, to establish, maintain and work telecommunication services within the territorial jurisdiction of the Union Territory of Delhi and areas covered by the Municipal Corporation of Bombay, New Bombay and Thane. This licence was effective from 1st April, 1986 and was for a period of 5 years. The licence fee fixed for the same was Rs. 101 per annum. The appellant-company purchased the fixed assets for a total consideration of Rs. 900 crores vide sale agreement entered by the appellant-company and the President of India. The sale consideration was discharged by allotment of shares of Rs. 599,94,84,000 to the President of India. Balance sale consideration was treated as unsecured loan. As per the agreement entered by the appellant-company and the DoT, charges payable for the use of the national network are fixed at a percentage of gross income booked for the year. The national network charges are part of the operation expenses. The licence fee and national network charges were allowed as expenses and there is no dispute on this issue till asst. yr. 1993-94.
4. Later on the DoT vide letter dt. 2nd March, 1989, imposed a rural levy of 7 per cent of the gross amount of the revenue. This levy was increased to 14 per cent for the financial year 1989-90. For the financial year 1990-91, the levy was fixed at 12 per cent. However, the rural levy which was paid upto the asst. yr. 1992-93 was discontinued from the asst. yr. 1993-94 onwards.
5. The initial licence which was granted for a period of 5 years was renewed vide order dt. 25th March, 1991 on the same terms and conditions. This renewal continued from time-to-time till 1992. The licence for the financial year 1993-94 was also renewed, but the licence fee which was initially fixed at Rs. 101 per annum stood increased. From financial year 1993-94 the licence fee was fixed at Rs. 800 per working direct exchange line (DEL). This licence fee was further revised to Rs. 900 per DEL for the financial year 1995-96. As such, from time-to-time the licence has been renewed by the DoT and the licence fee has been fixed in terms of the order granting licence.
6. The appellant-company has been debiting the amount of the licence fee payable for each year and claiming the same as a deduction while computing its profit for each year. For the asst. yr. 1996-97, the assessee-company debited a sum of Rs. 198.68 crores on account of the licence fee paid to the DoT. The Assessing Officer (AO for short) while examining the case of the assessee disallowed the same by passing a detailed order. It was held by the AO that the said payment of the licence fee is a replacement for the rural levy charges which were being paid by the assessee-company and as such it is a sharing of the revenue and not an allowable expenditure. Based on the same reasoning, the case of the assessee for the asst. yr. 1995-96 was set aside under Section 263 of the Act by the CIT. The assessee came in appeal before the Tribunal against the abovesaid disallowance. The appeal for these years was decided by the Tribunal vide order dt. 10th Dec., 2001. The Tribunal in its order held that the licence fee paid by the appellant-company to the DoT is an allowable business expenditure of revenue nature. The said finding was given following the judgment of the Bombay Bench of the Tribunal in the case of Videsh Sanchar Nigam Ltd. v. Jt CIT in ITA No. 1434/Mum/1999, dt. 14th Sept., 2000 [reported at (2000) 69 TTJ (Mumbai) 882--Ed.]. However, while giving relief to the appellant-company, the Tribunal directed the AO to work out the exact amount allowable to the appellant on the basis of the office memorandum (OM) applicable at that point of time.
7. A similar issue arose in asst. yr. 1997-98. The AO disallowed the claim of the appellant on account of the licence fee of Rs. 234.70 crores. The disallowance in this year has been made by the assessing authority for the same reasoning that the payment was nothing but sharing of revenue between DoT and this assessee. Since the appellant-company has stopped payment under the rural levy charges, there was substantial increase in the licence fee from Rs. 101 per annum to Rs. 234.70 crores which is nothing but rural levy charges. For this purpose the AO referred to a communication addressed by the DoT, dt. 22nd Sept., 1993 whereby the chairman-cum-managing director (CMD) of the appellant-company was invited for discussion at the convenience of the CMD. The AO in support of his contention also prepared a chart year-wise to highlight the fact that rural levy charges were substantially high when the licence fee was nominal. However, after the stoppage of the rural levy charges, the licence fee has been increased substantially. On the basis of the above, the AO was of the view that there was no justification or rationale for the DoT to increase the licence fee and hence disallowed the claim of the appellant.
8. The appellant-company in appeal before the Tribunal, contended that as per the provisions of the Indian Telegraph Act, 1885, the Central Government have exclusive privilege of establishing and working telegraphy. By way of proviso to Section 4, the Central Government has power to grant licence on such conditions and in consideration of such payment as it thinks fit to any person to establish/maintain or work telegraphy within any part of India. Since the Central Government through DoT has granted licence to the appellant-company in consideration of the licence fee, the licence fee paid by the appellant-company will be an allowable business expenditure. It was further argued that the above contention has been accepted in the appellant's own case in the asst. yrs. 1995-96 and 1996-97. As regards the observation of the Tribunal in the order for the asst. yrs. 1995-96 and 1996-97 it was argued that in that order, the Tribunal has not adjudicated upon the issue whether the liability of the appellant towards licence fee was of contractual or statutory nature. It was argued that the liability is statutory in nature and allowable in the year to which it relates. It was further stated that the licence fee paid by the appellant-company derived this authority from the statute. The Tribunal in its order dt. 18th June, 2004 held that the payment of licence (fee) is a statutory liability and an allowable expenditure.
9. The AO following his earlier order passed in asst. yrs. 1996-97 and 1997-98 also disallowed the claim of the appellant for subsequent assessment years on account of the licence fee. For the asst. yr. 2001-02 the claim of the licence fee of Rs. 361.53 crores was disallowed by the AO. This assessment order was passed on 31st Jan., 2003 after adjudication of the issue by the Tribunal for the asst. yrs. 1995-96 and 1996-97 on 10th Dec., 2001. While framing the assessment, it was stated by the AO that firstly the order of the Tribunal has not been accepted by the Department and the Department is in appeal against the same and as such order of Tribunal cannot be implemented. The AO then has given justification for not accepting the order of the Tribunal, as in his opinion there are many issues which have been wrongly decided by the Tribunal. It was stated by the AO that the Tribunal has followed its own order passed in the case of Videsh Sanchar Nigam Ltd. (supra), ignoring the fact that the stand of the assessee was quite opposite to the stand taken before the learned CIT(A). It was further stated by the AO that the Tribunal has failed to construe the true import of the plea of the Department in not referring to the relationship between the assessee-company and the DoT. The Department's stand that the abnormal hike in the licence fee without any rationale behind the same was accepted by the assessee without any demure, not because of any business consideration but because of its position under the DoT. On the basis of above reasoning and the reason given in the earlier assessment orders, the AO disallowed the claim for the assessment year, i.e., asst. yr. 2001-02 as well. The order in appeal for asst. yr. 2001-02 had since been passed by the Tribunal on 11th Oct., 2004.
10. At the time of the hearing of this appeal for asst. yr. 1998-99, the Revenue raised a preliminary objection that there is a difference of opinion between the decision of the Hon'ble Tribunal in the case of the appellant in the order passed for the asst. yrs. 1995-96 and 1996-97 and the order passed by the Tribunal for the asst. yr. 1997-98. It was contended by the Departmental Representative that in the asst. yrs. 1995-96 and 1996-97, the Tribunal has held that the payment of licence fee is a contractual liability whereas in the asst. yr. 1997-98 the Tribunal has held that it is a statutory liability. This preliminary objection was examined by the Tribunal in the asst. yr. 2001-02 and the Tribunal gave a finding that there is no difference between the decisions of the two Benches of the Tribunal. It was held that in the asst. yrs. 1995-96 and 1996-97 no arguments were advanced on the nature of the liability and as such it could not be said that the Tribunal has held it to be a contractual liability. It was further held that in their order passed by the Tribunal in the asst. yr. 1997-98 it decided this issue which was not decided in the earlier assessment year by holding that the licence fee is a statutory liability. Accordingly, the Tribunal can be said to have rejected the preliminary objection and following the order for the asst. yr. 1997-98 it held that the entire gamut of issues involved have been discussed at length and the claim of the assessee for that year was allowed.
11. It was thus contended that the claim of the appellant stands allowed on account of the licence fee in the earlier assessment orders. Thereafter an application was moved by the CIT, Delhi-II, to the Hon'ble President, Tribunal, for consolidation of the appeals with a request that no order should be passed till the matter is heard by the Hon'ble Delhi High Court. It was further requested that a Special Bench be constituted for deciding the issue. The President, Tribunal, vide his letter dt. 13th Dec., 2004 held that after considering the fact and circumstances of the cases he does not see any need to constitute a Special Bench or postpone hearing of appeals any longer. However, the request for consolidation of appeals was accepted and that is why all these appeals are being heard together. Meanwhile the request for approval by the Revenue to agitate the issue before the Delhi High Court was also rejected by the Committee on Disputes (COD).
12. It is in this background that the appeal was argued by both the parties. The learned Departmental Representative took a persisted stand that he needs to be heard again on the issue of the disallowance made by the AO of the licence fee and issue be not taken as covered by earlier orders of the Tribunal. He supported the contention that disallowance of licence fee is justified. The learned Authorised Representative on the contrary submitted that the issue is squarely covered in favour of the appellant by the earlier orders of the Tribunal. On merit it was contended by the learned Authorised Representative that the licence fee is an expenditure incurred for carrying on the business and is allowable under the provisions of Section 37 of the Act. As per provisions of Section 4 of the Indian Telegraph Act, the Central Government has the exclusive privilege of establishing, maintaining and working telegraphy. Section 4 simply declares the sovereign right of the Central Government and does not create such a right in it. The Central Government has granted a licence to the appellant-company in terms of the proviso to Section 4 of the Indian Telegraph Act which authorises the Central Government to grant licence on such conditions and in consideration of such payment as it thinks fit. Thus, obtaining of a licence is a condition precedent to the carrying on of the business. Further, the consideration, as clearly provided in the proviso, is to be determined by the Central Government itself. The proviso clearly gives powers to the Central Government not only to fix the conditions but also to determine the consideration as it thinks fit. Thus, it is the exclusive privilege of the Central Government for the fixation of the consideration. The appellant-company cannot and does not have any say in the determination of this consideration. This is a clear proposition in the proviso as well as in the order granting licence in the OM issued by the DoT from time-to-time. A licence fee is a revenue expenditure and payments made to the State for use of licence or permit are nonetheless deductible. It was further submitted by the learned Authorised Representative that the allegations of the Revenue are far-fetched and they are putting unnecessary motives of having connivance with DoT ignoring the fact that the appellant-company is a public sector company where the majority of the shares are held by the President of India. The charging of licence fee is a sovereign act and no such motive can be imputed on a sovereign act.
13. On the issue of statutory liability. contractual liability, it was submitted that though this issue may be academic in this case because the assessee is entitled to deduction in respect of the liability in respect of the expenditure incurred in carrying on the business whether it is statutory or contractual, but the fact remains that this liability is a statutory liability. Statutory liability is a liability which derives authority from the statute. On the contrary a contractual liability is a liability which arises by way of agreement or contract between the parties. Thus, wherever a liability which derives its authority from the statute is to be held as statutory liability as is the case here. The liability in this case on account of the licence fee derives its authority from the proviso to Section 4 of the Indian Telegraph Act which gives absolute authority to the Central Government for fixing such payment as it thinks fit for granting the licence. Thus, there is no agreement or contract but the liability flows from the statute. In support of the proposition, the learned Authorised Representative placed reliance on the judgment of the Calcutta High Court in the case of Star Paper Mills Ltd. v. CIT . In this case a dispute has arisen regarding the provision of the liability in respect of the payment of royalty for obtaining eucalyptus and pinewood trees from the forest belonging to the State Government. The assessee was liable to pay royalty as determined by the Government. It was held that the said liability is a statutory liability, not a contractual liability. The Court observed that in the case in hand, the Government is the authority to decide the rate of royalty and that can be revised. The assessee can only make a request for a lower rate of royalty. Had it been a contractual liability, how can the power of fixation of the rate of royalty be with the Government only ? Similarly in the case of Hukumchand Jute & Industries Ltd. v. CIT it has been held that the State Electricity Board is constituted under the statute and any liability fixed by the State Electricity Board shall be statutory liability. Similarly in the case of CIT v. Swadeshi Mining & Manufacturing Ltd. it has been held that the liability to pay additional price for the sugarcane purchased was governed by the provisions of Sugarcane (Control) Order, 1955, and as such it was statutory liability accruing at the point of purchase of sugarcane.
14. The learned Authorised Representative further submitted that the above judgments clearly support the contention that licence fee is a statutory liability. Further, this issue has been examined specifically, in the case of the appellant in the asst. yr. 1997-98 as well as in the asst. yr. 2001-02 by the Tribunal where a categorical finding has been given that the licence fee is a statutory liability. He also makes reference to the judgment of the Bombay Bench of the Tribunal in the case of Videsh Sanchar Nigam Ltd. (supra). In para 20 of the said order, the arguments of the Departmental Representative have been referred and examined. It was explained that there were two contentions on behalf of the Revenue. The first contention was that the licence fee is not a statutory payment and the second contention was that the licence fee can only be a matter of agreement or contract between the two parties. In the said para itself both these contentions have been rejected. On the first proposition that the licence fee is not statutory payment, the findings of the Tribunal have been as under:
This contention overlooks the express provisions of the Indian Telegraph Act and the first proviso thereof. In fact there is a reference to the powers conferred upon the Director General-Telecommunications (Telegraphy authority) under Section 4 of the Indian Telegraph Act, 1885, in the letter written by the DoT on 31st March, 1993 to the assessee-company. The licence fee paid by the assessee derived its authority only from the statute.
The last sentence of the above quote is a finding given by the Tribunal in the order of the VSNL to the effect that the licence fee which derives its authority from the statute is a statutory liability. Subsequently in this para, the second contention that the licence fee can only be a matter of agreement or contract has been considered and rejected. For this purpose, references have been made to the various statutes, as an illustration to counter the argument that the licence fee can only be a matter of agreement or contract. The reference to Punjab Excise Act and Andhra Pradesh Excise Act illustrates that it is not agreement but the licence fee is payable under the provisions of law.
15. On the other hand, the learned Departmental Representative contends that the background of the licence fee in dispute is that the assessee-company, MTNL, a public sector undertaking, was incorporated on 28th Feb., 1986 under Section 4 of Indian Telegraph Act, 1885. DoT vide memorandum dt. 27th March, 1986 transferred the management, control and operations of telecommunication in Delhi, Mumbai, Navi Mumbai and Thane Districts to the assessee-corporation along with all the assets and liabilities of the said telephone Districts for a consideration of Rs. 900 crores pursuant to agreement between the President of India and MTNL w.e.f. 1st April, 1986.
16. The sale consideration was discharged by way of allotment of 59,99,48,400 shares of Rs. 10 each to the President of India for consideration other than cash and the balance sale consideration was treated as unsecured loan to MTNL carrying interest @ 14 per cent per annum. Licence to establish, maintain and work telephone services in metros of Delhi, Mumbai, New Mumbai, Thane was granted to MTNL w.e.f. 1st April, 1986 initially for a period of 5 years. In the aforesaid licence, MTNL was required to pay licence fee of Rs. 101 per annum.
17. DoT vide its letter dt. 2nd March, 1989 imposed 7 per cent levy called national network charges on the gross amount of revenue by way of charges for telecommunication services, derived by MTNL during the financial year 1987-88. The said letter was issued with concurrence of Department of Revenue in the Ministry of Finance.
18. Thereafter the said levy called national network charges continued. The percentage of the network charges to the gross income of MTNL varied from 22.07 per cent to 23.42 per cent during the financial years 1987-88, 1988-89 and 1989-90. Deduction of network charges under IT Act was discussed at the level of the CBDT, on a representation from DoT, and it was accepted that network charges at 22.5 per cent of the MTNL's gross earnings would be allowed as a deduction from financial year 1991-92 onwards. This payment towards network charges has been allowed by the AO as a deduction while calculating taxable income of the assessee.
19. In addition to the network charges, DoT vide its letter dt. 26th March, 1991 imposed another 'levy1 allegedly for rural network development @ 12 per cent of the gross amount of revenue of MTNL. This letter of DoT specifically states that formal order in this regard will be issued on receipt of concurrence of Department of Expenditure and Department of Revenue, Ministry of Finance. Deduction of this levy under the IT Act was also discussed at the highest level and it was decided that no deduction in respect of rural network development will be allowed to MTNL for financial year 1991-92 and onwards. It was noticed that the levy diverged surplus income of MTNL to reduce its tax liability. This was accepted and regarded as diversion of profit and hence non-deductible. The assessee in its return for the financial year 1991-92 (asst. yr. 1992-93) did not claim rural levy charges of Rs. 45 crores paid by it as expenditure in the computation of income filed by it. After the financial year 1992-93, MTNL altogether stopped all payment under the head rural network development.
20. The said rural levy charge was being paid by MTNL pursuant to an administrative direction to "apply" its profits for development of rural telephony. The MTNL being a Government undertaking company can undoubtedly be directed to apply its post-tax profits, in any manner the Government considers appropriate. However, such an application of profits by its very nature cannot constitute a deduction from taxable income. This was also reflected in the then Finance Minister's communication to the Minister of Telecommunication pointing out that it is not just and correct that MTNL, a Government company, does not pay its fair share of the tax.
21. MTNL for the asst. yrs. 1987-88 onwards till 1992-93 paid Rs. 101 per annum as licence fee to DoT. The said amount was never claimed as expenditure. However, for the asst. yr. 1994-95, Rs. 1,24,85,60,000 was claimed as deduction on account of licence fee for the first time. This deduction has been claimed on the basis of OM dt. 13th May, 1994 issued by DoT. In this OM, it is stated that licence fee @ Rs. 800 per working DEL w.e.f. 1st April, 1993 will be payable by MTNL to DoT. The said OM does not state and describe the nature of the licence fee and why suddenly it has been increased to a substantially huge amount from Rs. 101 per year. The assessee was paying Rs. 101 per year as licence fee from 1986 onwards till 1994. It may also be relevant to mention that the office memorandum is dt. 13th May, 1994 i.e. after close of the accounting year and closing of books of account on 31st March, 1994.
22. DoT by another office memorandum dt. 5th May, 1995 '"provisionally subject to review/revision" asked MTNL to pay licence fee of Rs. 800 per working DEL as on 1st April, 1994 for the year 1994-95. DoT again provisionally fixed the licence fee for 1995-96 at Rs. 800 per working DEL as on 1st April, 1995 vide another office memorandum dt. 27th June, 1996. The licence fee for the year 1995-96 was increased "provisionally" to Rs. 900 per working DEL with MTNL as on 1st April, 1995 vide office memorandum dt. 6th Sept., 1996.
23. The following table gives complete details of various deductions claimed and payments made over the years :
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Table
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Asst. yr. Network charges Licence fees Rural levy charges
1987-88 1243704567 101 0
1988-89 1649366257 101 492912783
1989-90 2259240196 101 771231416
1990-91 2578206885 101 1609397902
1991-92 3533949431 101 1570459769
1992-93 3477020626 101 450000000
1993-94 4101756732 101 --
1994-95 5494367534 1248560000 --
1995-96 6406848436 1479535200 --
1996-97 7613826534 1986802200 --
1997-98 8822542428 2347015500 --
1998-99 10239976824 2711091600 --
1999-00 110911893393 3066066000 --
2000-01 10504170000 3288550000 --
2001-02 11316630000 3615300000 --
2002-03 7335090000 6652420000 --
2003-04 1099544000 6162371483 --
24. A cursory glance at the abovementioned table will show that after the rural levy was withdrawn, almost simultaneously after a period of one year, the token amount of licence fee was enhanced to Rs. 124 crores. It was more than fortuitous coincidence.
25. As has been indicated earlier the assessee's claim under the head licence fees was disallowed for the first time in asst. yr. 1996-97. The assessee had challenged the disallowance in appeal before the CIT(A). The CIT(A) vide his order dt. 11th Feb., 2002 dismissed the assessee's plea.
26. CIT(A) held that there was no justification or rationale for DoT to increase the licence fees from a mere 101 rupees per annum to Rs. 124 crores for asst. yr. 1994-95, Rs. 148 crores for asst. yr. 1995-96 and Rs. 198 crores for asst. yr. 1996-97. He held that there was a diversion of income by mutual understanding, adjustment and acceptability, which does not tantamount to diversion by overriding title.
27. The assessee had gone in appeal before Tribunal against the order of CIT(A) for asst. yrs. 1995-96 and 1996-97. The Tribunal, Delhi Bench, following the order of Tribunal, Bombay Bench in the case of Videsh Sanchar Nigam Ltd. (supra) held in a common order vide ITA Nos. 1088 and 1618/Del/2000, dt. 10th Dec., 2001 that though the licence fee, in principle, should be allowed as business expenditure, however in the case of MTNL, the exact amount of licence fee/share of revenue will be allowed on the basis of office memorandum issued by the DoT regarding the charging of licence fee. If the office memorandum was passed during or prior to the accounting year, the licence fee will be allowed, and if the OM was passed after the end of the accounting year, the licence fee will not be allowed in view of Supreme Court decision in CIT v. Travancore Sugar Ltd. .
28. The order of the Tribunal holding that licence fees would be admissible as business expenditure has not been accepted by the Department, and the Department has gone in appeal before High Court against the order of the Tribunal. The Hon'ble Tribunal chose to follow their own order in the case of VSNL (supra) accepting the assessee's claim that its case was similar to that of VSNL ignoring the fact that before the CIT(A), the assessee's stand was quite the opposite as has been pointed out by the CIT(A) in para 6.8 of his order.
29. The above appeal was argued on 14th Dec., 1999, wherein it was submitted that the remand report had proceeded on an incorrect comparison of the assessee's case with that of VSNL, inasmuch as the facts of the two cases were nowhere similar to each other. Attention of the learned CIT(A) was also drawn to the provisions of Section 4 of the Indian Telegraph Act ('the Act' for short) under which the exclusive privilege of establishing, maintaining and working of telecommunication within India has been given to the Central Government (DoT) which, in turn has issued licence to the assessee and the consequences of breach of the terms and conditions of the said licence or default in payment of any consideration payable there under by the assessee would incur liability of revocation of the said licence under Section 8 of the Act. It was also submitted that the learned assessing authority had overlooked the fact that the character and nature of the so-called revenue sharing under the Act is to be judged by terms and conditions of the licence issued under the Act and cannot be confused with terms under which VSNL makes the payment to DoT, which are totally different. It was further submitted that in the case of VSNL (supra), the licence fee is a consolidated amount determined as a function of usage of telephone line, i.e., Rs. 3 per minute of usage whereas licence agreement entered into by the Central Government with the assessee under the provisions of the Act provide a separate collection by the assessee for and on behalf of Central Government (DoT) to which the specified share as per agreement accrues at . the inception.
30. It is, thus, evident from the above that the assessee's stand was quite categorical that the facts of the two cases, [i.e., of the assessee and VSNL (supra)] were nowhere similar. The Hon'ble Tribunal also failed to deliberate on the issue raised before it by the Department vide para 20 of the order that the case of VSNL (supra) as decided by the Bombay Bench of the Tribunal was different from that of the assessee inasmuch as the licence fees paid by the VSNL was for user of the network belonging to DoT whereas in the case of the MTNL, the network was purchased by it from DoT and there was no question of paying any licence fees for the user of the same for MTNL area. Separate network charges are paid for use of network beyond Delhi area.
31. The case of MTNL is, thus, clearly distinguishable from the case of VSNL (supra). Tribunal in the case of VSNL (supra) has held that "DoT levy" and "licence fee" is for the use of the network made available to VSNL by DoT. It is consideration paid by VSNL for use of telecommunication network of DoT. VSNL does not possess the telecommunication network and is perforce to make use of the network owned by DoT. Payment made by VSNL by whatever name called is in truth payment for making use of the network of DoT. License fee paid by VSNL to DoT is for user of the network belonging to DoT. The facts of the present case are entirely different. The alleged licence fee is only for sharing of profits and not payment or consideration for using telecommunication network or any other asset of DoT. MTNL has purchased fixed assets (land, building, apparatus, plant, lines, wires, cables, etc.) for Rs. 900 crores vide sale between President of India and MTNL on 1st April, 1986. MTNL is owner of the telecommunication network in its area of operation and is not using DoT network outside MTNL area. The payment made by MTNL to DoT for use of its network outside MTNL has been allowed as a deduction. Payment and deduction of national network charges is not an issue and question in the present matter as in the case of VSNL (supra).
32. The then Minister of Communications had also written to the then Finance Minister on the question of deductibility of the licence fee paid by them from the MTNL's income. In response to that, the then Finance Minister conveyed on 4th of August, 2003 "We first examined it in the ministry and then sought the opinion of the former Solicitor General of India, Sh. Harish Salve. He advises that there being a difference between the natures of licence fees paid by VSNL from that of the MTNL, the two are not on par." In any event, the writ petition filed by MTNL against the Department is currently pending before the Supreme Court on this issue.
33. The assessee-company also filed a representation before the CBDT and it was claimed that the facts of the case of VSNL (supra) and MTNL are identical and since the CBDT had withdrawn the Departmental appeal filed before the Mumbai (Bombay) High Court, the appeal in the case of MTNL should also be withdrawn. The CBDT considered the representation of the MTNL and stated that "the basic facts involved in your case, in terms of your available infrastructure, the terms of agreement(s) with the DoT, the nature of licence fees payable by you, etc. are different from those involved in the case of VSNL (supra). Accordingly, the CBDT is of the considered view that it is not possible to issue any directions in your case, particularly in view of the substantial question of law to be decided by the judicial authorities."
34. The intention of the DoT in this regard is also clear from the letter dt. 2nd Sept., 1993, written to the CMD as well as financial advisor of the assessee. A mere perusal of the said letter shows that the DoT and the assessee are merely sharing profits after they have arisen. The aim and object of DoT while sharing profits from the asst. yr. 1992-93 onwards has been to ensure that the assessee gets 12 per cent rate of return on the net worth of MTNL as far as possible. To ensure sharing of profits, DoT has been charging the alleged licence fee. Regardless of the nomenclature used and given by the DoT and the assessee, the alleged licence fee is nothing but sharing of profits, after they have arisen, between the assessee and DoT.
35. The assessee's claim that the licence fee stands diverted by overriding title is not correct as supported by the decision of Hon'ble Supreme Court in the case of CIT v. Sitaldas Tirathdas wherein it was held as under :
The present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge as obligation and not a case in which by an overriding charge the assessee became only a collector of another's income. Therefore, the assessee was not entitled to the deduction.
36. The assessee's alternate claim that the licence fee is an expenditure incurred wholly and exclusively for the purpose of business and hence is allowable under Section 37 of the IT Act is also not correct. The landmark judgment on the subject is the judgment of Supreme Court in the case of CIT v. Malayalam Plantation . Hon'ble Supreme Court has observed as under :
However wide the meaning of expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for carrying on of the business, and the assessee shall incur it in his capacity as the person carrying on the business. It cannot include sum spent by the assessee as agent of the third party whether the origin of the agency is voluntary or statutory in that event, he pays the amount on behalf of another and for a purpose unconnected with the business.
37. In the assessee's case, the purpose of enhanced licence fees was to divert funds to DoT and reduce the assessee's taxable income. Payment made to DoT was only money spent out of profits earned and not expenditure incurred to earn profits.
38. The assessee's claim is also negated by the provision of Section 40(a)(ii) of the IT Act, which says "any sum paid on account of rate or tax levied on the gross profit or gain of any business or profession or assessed at proportion thereof or otherwise on the basis of such gross profit or gain is not allowable as deduction." The alleged licence fee has been levied by DoT only on the basis of gross profits and gains of the assessee and thus not allowable as a deduction.
39. It can be seen that the subject and reference given in the OMs starting from 13th May, 1995, cannot be correlated with the reference given by DoT while granting the original licence and their further extension.
40. Hence, the nomenclature of "licence fee" used in these OMs can be directly correlated with the withdrawal of rural levy that was communicated by Minister of Finance's OM dt. 7th Feb., 1992 (Mrs. Archana Ranjan) and DO of the Finance Minister dt. 23rd June, 1993. It is in this context that an internal communication between DoT and MTNL is very relevant as it is only in this background that understanding for the sharing of profit was arrived at in the name of licence fee vide DO dt. 2nd Sept., 1993.
41. Further, the COD has not considered the following facts while examining the application of the Department for seeking approval for filing appeal before the Hon'ble Delhi High Court.
(i) The genesis of the dispute arises from the view taken that the liability of the MTNL to pay the licence fee is a statutory liability. It may be pointed out that the Department's view is that the licence fee paid by MTNL is not a statutory liability and that its case is different from VSNL's (supra) case.
(ii) It may be mentioned that for asst. yrs. 1998-99, 1999-2000, 2000-01 and 2002-03 the appeals of the assessee are pending before Tribunal, G-Bench. In the course of the hearing, Tribunal has directed that verification of the licence fee be co-related to the office memorandum. This verification indicated that for asst. yr. 2000-01 the relevant OM is that dt. 9th April, 2001, which states that based on the recommendations of Telecom Regulatory Authority (TRAI), the annual licence fee payable by MTNL w.e.f. 1st Aug., 1999 is 12 per cent of the annual gross revenue (AGR). However, the MTNL have themselves shown that they have paid the licence fee on the basis of Rs. 900 per DEL. If the liability of the MTNL to DoT was a statutory liability MTNL would have shown the balance amount payable to DoT as outstanding, which has not been done. This clearly indicates that the MTNL does not regard the liability to pay money to DoT as a statutory liability.
(iii) Further, in MTNL's case, DoT has imposed licence fee invoking its powers under Section 4 of the Indian Telegraph Act, 1885. That section merely empowers DoT to charge any fee as a part of the conditions to be set by it for granting licence to a person, allowing it to establish telephone facility.
(iv) However, this is not the position here as the DoT vide memorandum dt. 27th March, 1986 transferred the management, control and operations of telecommunication in Delhi, Mumbai, Navi Mumbai and Thane Districts to the MTNL for a consideration of Rs. 900 crores, thereafter there is no question of annual payment of licence fee, as the primary condition is not applicable or attracted, as the licence has already been granted, and there is no mandate for levying of annual licence fee.
(v) In fact this distinction becomes more apparent, if the cases of other entities and operators like reliance telecom are seen, where licence fee was taken at a single stroke, and thereafter deduction under Section 35ABB. However, in the case of MTNL it has been the stand of the Department that the provisions of Section 35ABB are not attracted, as this section deals with the tax treatment to be given in respect of expenditure that had actually been incurred to obtain a licence. In the instant case, MTNL came into existence in the year 1986, and from its inception it was paying licence fee @ Rs. 101 per annum. As such the subsequent increase in the fee from asst. yr. 1994-95 onward cannot be treated as an amount paid to obtain the licence. In this background it may be pointed out that in cases of other operators the factual position is as under:
(vi) In the case of Reliance Telecom the basic telephone services commenced from March, 2000, and the licence fee paid upto 31st March, 2000 was Rs. 1,79,08,58,630. The licence period remaining in the year ended 31st March, 2000 was 17 years, and the licence fee was apportioned over the remaining 17 years. Thus, there is no dispute over the Department and the assessee on this point. The apportionment is based on unexpired period of licences from the date of the payment of the licence fee or commencement of business, whichever is later.
(vii) M/s Bharati Cellular Ltd. was incorporated on 20th March, 1992 for asst. yr. 2002-03 the assessee had claimed an amount of Rs. 65,15,10,000 on account of licence fee. However, invoking the provisions of Section 35ABB only a licence fee amounting to Rs. 4,07,19,375 was allowed, and the balance of Rs. 61,07,90,625 was disallowed.
42. In the cases of private operators, licence has been given for a definite period, e.g., in the cases of Reliance Telecom Ltd. and Bharati Cellular Ltd., licence has been given for a period of 20 years. However, in the assessee's case, licence has been given on year-to-year basis as has been seen from the OMs filed by the assessee in this regard.
43. A statutory liability is one which is levied under a statute passed by the legislature and it enjoins upon certain persons or class of persons, etc. to pay some fee, tax or cess to the Government. Such statutes contain machinery provisions for collection and recovery of the levy.
44. In MTNL's case, DoT has imposed licence fee invoking its powers under Section 4 of the Indian Telegraph Act, 1885. That section merely empowers DoT to charge any fee as a part of the conditions to be set by it for granting licence to a person, allowing it to establish telephone facility. Failure on part of the licensee to make payment may entail imposition of fine and discontinuance of the facility but there is no provision in that statute for resolution of disputes. This, indeed, is a case of contractual liability.
44.1 Sometime back MTNL itself has approached senior advocate, Dr. V. Gauri Shankar for his opinion. A copy of that opinion was tendered by MTNL to the Department. It is found therein that the learned Counsel has very clearly opined that the liability to pay licence fee is a contractual liability. In spite of that the MoL and the COD have opined that the licence fee is a "statutory fee".
44.2 One has to consider whether by the mere fact of being contractual liability, the licence fee has to be treated as deductible expenditure; or, it should be considered as to whether the expenditure has been laid out wholly and exclusively for the purposes of business.
44.3 Before considering that question he wished to advert to Dr. V. Gauri Shankar's opinion again wherein he has stated that the payment of licence fee by MTNL is diversion of income by overriding title and hence is deductible. But such questions have not at all been considered by the Tribunal.
45. We have heard the parties and perused the material on record and precedents referred. The Revenue through a written note dt. 30th March, 2005 made a prayer to pass a judicial order making reference to the President, Tribunal, to constitute a Special Bench in view of the divergent views, between earlier Benches of the Tribunal. For asst. yrs. 1995-96 and 1996-97, the first Tribunal held that the income had already accrued to the MTNL before the revised charges were created in MTNL by OM dt. 5th May, 1995 for financial year 1994-95 and OM dt. 6th Sept., 1996 for financial year 1996-97 of DoT issued after the relevant accounting year. In other words, the OM had been issued not only after the accrual of income but even after the liability to tax has arisen for that year. In such circumstances, the Tribunal directed to allow deduction in respect of amounts which are relatable to the decisions and agreements which had taken place prior to or during the relevant year and not those which are relatable to the decisions and agreements which had taken place after the relevant accounting year. Thus, the Tribunal had necessarily come to the conclusion that the liability was contractual. On the other hand, the subsequent Tribunal who decided the issues for asst. yrs. 1997-98 and 2001-02 concluded that the said liability is statutory and thus taken a contrary view. Section 4 of the Indian Telegraph Act nonetheless shows that this is a contractual liability moreso because this is only an enabling section. The Tribunal has also not adverted upon the application of provisions of Section 43B if it was held to be a statutory liability. Besides this, whether the revenue sharing arrangement between MTNL and DoT is a distribution of profits and hence not deductible was not considered by the subsequent Tribunal who took decision for asst. yrs. 1997-98 and 2001-02. This has now become imperative to resolve the conflict and settle the important legal issue arising in the matter by way of making a reference to the Special Bench.
45.1 In the backdrop of aforesaid submissions, we have perused the entire material on record. The Revenue is found to have moved a petition before the Hon'ble President, Tribunal, New Delhi, on 7th Dec., 2004 pointing out the aforesaid position stated before us also. The Hon'ble President gave opportunity of being heard to the assessee as well as Revenue and after hearing the parties and after considering facts and circumstances of the case, took decision on 13th Dec., 2004. He did not find any need to constitute a Special Bench or postpone hearing of appeals any longer. While disposing of the petition, it was stated in the order that the objections raised by the Revenue have already been judicially examined by the Bench in 1TA No. 5359/Del/2003 for asst. yr. 2001-02 as per order dt. 11th Oct., 2004. We, thus, find that there has been a proper application of mind on the issue of constitution of Special Bench under Sub-section (3) of Section 255 of the Act and there is also no violation of principle of natural justice inasmuch as the Hon'ble President, Tribunal, took decision after affording reasonable opportunity of being heard to the parties. Under such peculiar facts it was not considered necessary to make any reference to the Hon'ble President to constitute a Special Bench by the powers vested in him under Sub-section (3) of Section 255 of the Act and thus the prayer made by them stood rejected at the time of hearing when the parties were directed to address the issues on merit of the case and the appeal was heard in various sittings in the backdrop of submissions and facts narrated by both the parties set out hereinbefore.
46. The learned Departmental Representative has also argued that the decision taken by the earlier Tribunal in the asst. yrs. 1995-96 and 1996-97 should have been accepted for the reason of consistency as facts and circumstances remained the same. However, in the present case in appeal, we find that the subsequent Tribunal took its own decision to hold the liability as statutory liability in the asst. yrs. 1997-98-and 2001-02 after considering the earlier decision for asst. yrs. 1995-96 and 1996-97 and thus there are conflicting decisions of the Tribunal of co-ordinate jurisdiction. That being so, it is now well settled that an earlier decision which is binding between the parties loses its binding force if between the parties a second decision decides to the contrary. In the third litigation, which is now before us, the decision in the second one shall prevail and not the decision taken by the first Tribunal. This principle finds support from the judgment of Supreme Court in the case of Sajjadanashin Sayed v. Musa Dadabhai Ummei and also by the Bombay High Court in the case of CIT v. Thana Electricity Supply Ltd. , where also it was held that where there are conflicting decisions of Courts of co-ordinate jurisdiction, the later decision is to be preferred if reached after full consideration of the earlier decision. Following the aforesaid principle essentially the later decision taken by the Tribunal in the asst. yrs. 1997-98 and 2000-01 is preferred and shall be applicable in the present case in appeal as well. "However, the learned assessing authority as well as the learned CIT(A) did not accept the decision rendered by the earlier Tribunal and have chosen to depart there from even though the fact and circumstances remained the same. It is needless to add that, a judgment delivered by the Tribunal is binding on the AO. He is bound to follow the judgment of the Tribunal in its true letter and spirit. The AO being an inferior officer vis-a-vis the Tribunal, was bound by the judgment of the Tribunal and, therefore, he should not have tried to distinguish the same on untenable grounds. It is also necessary for the judicial unity and discipline that all the authorities below Tribunal, must accept as binding judgment of the Tribunal." A reference to this principle may be had from the judgment of Bombay High Court in the case of Bank of Baroda v. H.C. Srivastava and also to the judgment of High Court of Madhya Pradesh, Indore Bench, in the case of Aggarwal Warehousing & Leasing Ltd. v. CIT . "The learned CIT(A) also, therefore, should not have committed any judicial impropriety in refusing to follow the order of the Tribunal. Even if she had some reservations about the correctness of the decision of the Tribunal, she should have followed that order. She could and should have left it to the Department to take the matter in further appeal to the Tribunal for taking an appropriate order thereon." Be that as it may be and having expressed our opinion that the decision by the second Tribunal will prevail over the decision taken by the first Tribunal, on the persistent efforts made by the Revenue, we consider it our onerous duty to adjudicate on the issue as to whether the licence fee paid was an expenditure incurred for the purpose of earning the income by the appellant and whether there was any business necessity or obligation on the part of MTNL to make such a payment as necessary expenditure eligible for deduction under Section 37 of the Act. 47.
During the year under consideration, the claim for deduction of licence fee of Rs. 2,71,10,91,600 paid to the Department of Telecommunication is stated to have arisen from office memorandum No. 26/10/TA-I dt. 29th Sept., 1997 issued by Government of India, Ministry of Communication, Department of Telecommunications, received by the appellant much before the close of relevant financial year. A copy thereof is also placed at Departmental paper book p. 87, whereby a decision to the assessee was conveyed as under :
Licence fee of Rs. 900 per working DEL with MTNL as on 1st April of each of the financial year also is payable by MTNL for the year 1997-98, 1998-99, 1999-2000.
The above decision was conveyed pursuant to licence granted to it vide letter No. 1-101/85/MTAC/PHB, dt. 27th March, 1986 by the Department of Telecommunications in exercise of the power of Central Government conferred under Sub-section (2) of Section 4 of the Indian Telegraph Act. Section 4 of Indian Telegraph Act relevant for this purpose is reproduced herebelow :
4. Exclusive privilege in respect of telegraphs, and power to grant licences.--(1) Within India, the Central Government shall have exclusive privilege of establishing, maintaining and working telegraphs :
Provided that the Central Government may grant a licence, on such conditions and in consideration of such payments as it thinks fit, to any person to establish, maintain or work a telegraph within any part of India :
Provided further that the Central Government may, by rules made under this Act and published in the Official Gazette, permit, subject to such restrictions and conditions as it thinks fit, the establishment, maintenance and working--
(a) of wireless telegraphs on ships within Indian territorial waters and on aircraft within or above India, or Indian territorial waters, and
(b) of telegraphs other than wireless telegraphs within any part of India.
(2) The Central Government may, by notification in the Official Gazette, delegate to the telegraph authority all or any of its powers under the first proviso to sub-Section (1).
The exercise by the telegraph authority of any power so delegated shall be subject to such restrictions and conditions as the Central Government may, by the notification, think fit to impose.
From the perusal of the aforesaid statutory provision, it is evident that for the purpose of establishment, maintenance and working of telegraph within any part of India, it is mandatory to obtain a licence under the Indian Telegraph Act. Essentially the appellant was granted a licence to establish its business in the year 1986 but for the purpose of maintenance and working of its telegraphic business, it was essential for it to hold such licence during continuance of its business on the terms as contained and in consideration of such payment as the Central Government thinks fit for this purpose. The licence fee directed to be paid under consideration of grant of licence by the Government is, therefore, the annual charge imposed in this case for granting the privilege which exclusively vested with the Central Government. The appellant cannot wriggle out of its obligation to abide by the rate of fee fixed by the Government from time-to-time for maintenance or working of a telegraph within any part of India irrespective of the fact that all the assets and liabilities along with management, control and operation of telecommunications in Delhi, Mumbai, Navi Mumbai and Thane District stood transferred to the assessee-corporation for a consideration of Rs. 900 crores at the time of setting up of its business. The expression "licence fee" used in the office memorandum is not merely a nomenclature used for the first time for replacement of rural levy charges in the year 1992-93 or thereafter but such a fee though was nominal, were being charged from the assessee right from the inception though its quantum has undergone a great variance. It is, however, for the Government to see as to what is commensurate with the obligation that flows while parting with the privilege which has been exclusively vested in the Central Government by the Act. Merely because the guantum of licence fee has undergone a change from the asst. yr. 1992-93 onwards, there lies nothing in the mouth of the Revenue to say that rural levy charges have been classified as licence fee moreso when the assessee was under obligation to pay a fee annually from inception itself for the purpose of establishment, maintenance and working of telephone services. We also do not find any merit in the Revenue's averment on the basis of letter dt. 22nd Sept., 1992 placed at Department's paper book p. 76 which also came for consideration of earlier Tribunal, that the appellant has entered into a profit sharing arrangement with DoT. The subject of the letter goes to state "sharing of revenue between DoT and MTNL". The letter was written by Department of Telecom to the CMD of MTNL with the proposal to lay down the principles for sharing of revenue between DoT and MTNL from 1992-93 onwards. This letter does not convey of sharing of profits but speaks of sharing of overall revenue on the basis of which a licence fee has been fixed as an obligation on the appellant for use of exclusive privilege vested in the Central Government. It, therefore, cannot be inferred that this letter conveyed the arrangement of sharing of profit earned by the appellant from running of telephone services. Section 8 of Indian Telegraph Act lays down the consequences for making default of payment of any consideration payable under Section 4 of that Act which is reproduced as under:
8. Revocation of licences--The Central Government may, at any time, revoke any licence granted under Section 4, on the breach of any of the conditions therein contained, or in default of payment of any consideration payable thereunder.
From perusal of Section 8 of that Act, it is now evident that under the circumstances the licence is revoked, the appellant shall not be able to carry on its business of telephone services, unless it had paid such a licence fee to the Government. The irresistible conclusion, therefore, would be that payment of licence fee is wholly and exclusively incurred for the purpose of the business carried on by it. The same is, therefore, an allowable deduction under Section 37 of the Act. Since this liability stands paid during the year under consideration, we direct the AO to allow the deduction to the appellant.
48. For parity of reasons and material fact and circumstances remaining the same, payment made for Rs. 3,06,60,60,000 for asst. yr. 1999-2000, Rs. 3,28,85,50,500 for asst. yr. 2000-01 and Rs. 665.24 crores for asst. yr. 2002-03 are also directed to be allowed.
49. The second common ground in all the four years under appeal, relates to the disallowance of the appellant's claim for deduction under Section 80-IA(4C) of the IT Act. As per the AO, the assessee filed a revised return on 19th Jan., 2000 claiming deduction under Section 80-IA(4C) of the Act. A note was appended to the said return justifying the above claim on the ground that Section 80-IA was introduced to provide incentive for industrial growth and as such a liberal interpretation of the provisions of Section. 80-IA should be taken. The AO, however, rejected the claim of the appellant on the ground that firstly this Section 80-IA(4C) stipulates certain conditions such as the company should be registered in India and it should enter into an agreement with the Central or State Government for developing, maintaining, operating new infrastructure facilities. Further, the AO held that Section 80-IA applies to a company which starts providing telecommunication services on or after 1st April, 1995. Since in this case, the company has not started providing telecommunication services at any time on or after 1st April, 1995, it is not entitled to deduction under Section 80-IA(4C).
50. Aggrieved by the order of the AO, the assessee filed an appeal before the CIT(A) who confirmed the order of the AO on the ground that this benefit will not be available as the assessee-company is an old company.
51. Before us, it was contended by the learned Authorised Representative that the case of the appellant has not been examined in right perspective by the authorities below. It was submitted that the claim in the return was made for the first time in this assessment year. In earlier years, no formal claim was made in the return of income. In the immediately preceding asst. yr. 1997-98, a letter was filed before the AO claiming deduction under Section 80-IA of the Act. The said claim was rejected by the AO on the ground that since the claim has not been made in the return of income nor any revised return has been filed, the same is untenable. The AO made a specific observation refusing to adjudicate upon the issue on merit. It was submitted that as such the claim of the appellant has not been examined in earlier years on merit, in this year, the appellant has made a claim in the return itself and the said claim had been examined by the AO in the course of the assessment proceedings. However, the same has been rejected ignoring the fact as well as the correct position of law. It was submitted that the assessee justified the deduction under Section 80-IA(4C) vide its letter dt. 14th Jan., 2000 and letter dt. 11th Dec., 2000 filed before the AO. In the reply dt. 11th Dec., 2000 which is available on p. 375 of the paper book, the assessee enclosed the opinion of Mr. Gauri Shankar, advocate, and that of Justice S. Ranganathan by way of Annexure. In this note filed with the letter dt. 11th Dec., 2000 the opinion of Justice S. Ranganathan was enclosed and in the last para, i.e., paper book p. 388, it has been clarified :
The section talks of two types of telecommunication facilities, basic and cellular, the latter of which is a very advanced and sophisticated development of recent years when the new telecommunication policy of Government of India was evolved. There can be no doubt that if an enterprise had been providing basic services earlier commenced providing "cellular" services after 1st April, 1995, it will be eligible for exemption under the section. Now, the word "basic" is only a generic term and even "basic" telecommunication facilities are of various grades and types. In early 1986, when MTNL took over the telephone facilities operated on electricity and functioned through the medium of cross bar exchanges. Later on, analogue exchanges were introduced. Toward the end of 1994, the industry underwent a tremendous revolution resulting from the possibilities opened up by electronically operated automatic exchanges. This was not a minor change or modification but constituted the introduction of basically and totally different types of facilities. The progress of MTNL in this regard has been discussed earlier. It is clear that MTNL, has since 1st April, 1995 inducted de novo systems and technologies in place of the outmoded and antiquated system and technology that existed earlier and this was in pursuance of the same new telecommunication policy that gave birth to the insertion of this part of Section 80-IA. It is very clear that MTNL, which was providing certain basic telecommunication services prior to 1st April, 1995 started to provide various other types of basic telecommunication services on or after that date. Its activities, therefore, fall squarely within the language of Section 80-IA(4C). Once this condition is fulfilled the enterprise is entitled to a deduction of the specified percentage of all its profits and gains derived from its business of providing basic telecommunication services, whether existing earlier or introduced after 1st April, 1995. For the reasons above discussed, I am of the view that the MTNL is eligible for the deduction under Section 80-IA of the IT Act, 1961.
On the basis of the above submission, it was argued that the appellant has specifically brought to the notice of the AO that the appellant-company since 1st April, 1995 has inducted de novo systems and technology. It was further submitted that the appellant which was providing certain basic telecommunication services prior to 1st April, 1995 has started providing certain other types of basic telecommunication services on or after 1st April, 1995, making it eligible for deduction under Section 80-IA(4C) of the Act. The AO has rejected the claim ignoring the specific contentions in an arbitrary manner. The contention of the AO regarding infrastructure facilities is misplaced as no condition is required to be fulfilled by an undertaking providing telecommunication services. Secondly, the AO has failed to make distinction between an undertaking and a company. The deduction under Section 80-IA is to an undertaking specific and as such it places no bar on a company which comes into existence before 1st April, 1995. An undertaking which has come into existence before 1st April, 1995, shall be eligible to claim deduction in respect of telecommunication services which it starts providing after 1st April, 1995. The issue was agitated again in the appeal before the CIT(A). All the papers including the above said letters and note were filed before the CIT(A) in support of its claim for deduction under Section 80-IA. Even in the written submission at p. 334 of the paper book, the claim regarding services which have been started on or after 1st April, 1995, was put forth before the CIT(A). The CIT(A) however without considering all these contentions has rejected the claim of the appellant ignoring the express provisions of the law.
52. The learned Authorised Representative further submitted that as per the provisions of Section 80-IA this deduction is available to nine types of business which have been referred to as eligible businesses. For each type of eligible businesses, different conditions have been imposed. Sub-section (1) of Section 80-IA only enumerates these nine types of businesses and Sub-section (2) to Sub-section (4F), i.e., all nine sub-sections place conditions to be fulfilled by each type of business for being eligible to claim deduction as tabulated below :
(i) Industrial undertaking Sub-Section (2) prescribes the condition
to whom it shall be applicable
(ii) Hotel Sub-Section (3)
(iii) Operation of a ship Sub-Section (4)
(iv) Developing, maintaining and operating Sub-Section (4A)
any infrastructure facility
(v) Scientific and industrial research Sub-Section (4B)
(vi) Telecommunication services Sub-Section (4C)
(vii) Industrial park Sub-Section (4D)
(viii) Refining of mineral oil Sub-Section (4E)
(ix) Housing projects Sub-Section (4F)
52.1 Thus, the conditions for each of the entities are exclusive conditions and it is not that the conditions other than those stated in particular sub-section shall be applicable to others also. Accordingly, in the case of the appellant which is providing telecommunication services, all it has to fulfil is the condition prescribed in Sub-section (4C) of the Act which reads as under :
(4C). This section applies to any undertaking which starts providing telecommunication services, whether basic or cellular including radio-paging, domestic satellite services or network of trunking and electronic data interchange services at any time on or after the 1st of April, 1995 but before the 31st day of March, 2000.
52.2 The above is an exclusive clause applicable to telecommunication services and cannot be confused with the conditions which are applicable to industrial undertaking and specified in Sub-section (2). It is important to note that there is no word such as, "new undertaking" in this sub-section nor there is any condition that it should not have been formed by splitting up or reconstruction of a business already in existence, nor there is any condition that it should not be formed by transfer to new business of machinery or plant previously used for any purpose.
52.3 In the absence of any of these conditions being applicable to an undertaking providing telecom services, such undertaking can be formed out of a business already in existence and such undertaking can also use the machinery or plant previously used for any purpose and still can be eligible for deduction under Section 80-IA(1). These are important distinctions. Based on these interpretations the appellant-company has been contending that it is eligible to claim the deduction and the word "starts providing" have to be read in line with the express purpose for which this provision has been introduced.
52.4 Had the intention of the legislature been to allow deduction only to a new undertaking, then these two conditions that the undertaking should not be formed out of a business already in existence and the undertaking should not use plant and machinery previously used would have been there. Absence of these two conditions changes the whole concept. An undertaking for claiming deduction can be formed out of a business already in existence and it can also use old plant and machinery. It was this interpretation on the basis of which in the two opinions submitted before the AO as well as the CIT(A), the appellant-company is entitled to deduction in respect of whole of its income. The word "starts providing" have to be interpreted in the above context and cannot be interpreted in isolation.
53. Further, the appellant-company has started providing telecommunication services by putting up new exchanges to the new subscribers. As such these services have been started providing after 1st April, 1995. These services which have been started after 1st April, 1995 meet both the conditions of the new undertaking as well as that of starting services after 1st April, 1995, though there is no such condition of a new undertaking as explained above. As per the express provision of the clause, any undertaking whether in existence or new, the moment it starts providing telecommunication services will be eligible for claiming deduction under Section 80-IA. Thus, the case of the appellant is two-fold :
(i) The first contention is that its entire profit is eligible for deduction under Section 80-IA. This contention is based on the reasoning that the word "start" here cannot be interpreted as setting up an establishment anew for the purpose of providing services. It should mean beginning to provide services. The language of the section together with the memorandum explaining it is that an existing undertaking whenever set up or established if it begins to provide telecommunication services to a particular constituent the profit and gains such derived shall be eligible for concession under Section 80-IA. On the issue why it should be total income, it is submitted that the moment the undertaking becomes eligible the whole of such income shall be eligible for exemption. The above interpretation is on the basis of the language of Section 80-IA which provides deduction in respect of profits and gains derived by such undertaking.
Further, in the case of an 'industrial undertaking' despite the condition of not formed by way of reconstruction and not to use any plant and machinery previously used still an 'industrial undertaking' which uses old plant and machinery the value of which does not exceed 20 per cent of the total value of the plant and machinery, the entire profit arising from such industrial undertaking is eligible for deduction. In that case it cannot be said that profit to the extent derived from the use of old plant and machinery shall not be eligible for deduction. The industrial undertaking can use old plant and machinery upto 20 per cent of its own and the profit derived from such old plant and machinery shall also be eligible for deduction. In the absence of any such condition not to use any old plant and machinery in the case of the telecommunication provider under Sub-section (4C) the entire profit on the line as explained above shall be eligible for deduction.
(ii) The second contention of the appellant is that even it is assumed that the deduction shall be available only in respect of that undertaking which came into existence on or after 1st April, 1995 and which have started providing services thereafter, the appellant-company shall still be eligible to claim deduction in respect of the profit derived from the undertaking which starts providing telecommunication services on or after 1st April, 1995. As explained in the note by way of legal opinion, the appellant-company has since 1st April, 1995 inducted de novo systems and technologies and set up new undertakings and telephone exchanges which were electronically operated automatic exchanges. These were entirely different from the earlier exchanges which were using crossbar exchanges and were operating on electricity. An idea of the new undertakings and the telephone exchanges which started providing telecommunication services on or after 1st April, 1995 can be had from the following :
Year Total No. of Investment
undertakings/exchanges (Rs. crores)
31-3-1995 219 50,273.13
Additions in F.Y. 1995-96 10 9,836.90
Financial year 1996-97 40 8,852.70
Financial year 1997-98 20 9,125.40
Financial year 1998-99 21 9,774.40
Financial year 1999-2000 30 8,723.30
Financial year 2000-01 23 Exchanges 8 Cellulars 2,471.86
Financial year 2001-02 68 Cellulars & WLL 2,662.15
On the basis of above figures it was argued that even if it is assumed that the deduction under Section 80-IA is to be given on the basis of the undertaking which starts providing telecommunication services on or after 1st April, 1995, the AO should have allowed the deduction on the basis of the undertakings/exchanges which definitely started providing telecommunication services on or after 1st April, 1995. The deduction under Section 80-IA is not related to the assessee. The deduction is related to the undertaking. As such, any undertaking shall be eligible for deduction under this section irrespective of the services which it started providing on or after 1st April, 1995. On this basis, the appellant-company shall be entitled to following deduction under Section 80-IA(4C), in respect of profit derived from undertaking which has started providing telecommunication services on or after 1st April, 1995 :
Asst. yr. 1998-99 Rs. 341.322 crores Asst. yr. 1999-2000 Rs. 473.737 crores Asst. yr. 2000-01 Rs. 441.551 crores Asst. yr. 2002-03 Rs. 692.894 crores
54. In support of the above contention, reliance has been placed on the following judgments :
(i) CIT v. Indian Aluminium Co. Ltd
(ii) International Instruments (P) Ltd. v. CIT (1979) 123 ITR 11 (Ker)
(iii) CIT v. Premier Cotton Mills Ltd.
(iv) CIT v. Shree Digvijay Cement Co. Ltd.
(v) CIT v. Bhilai Engineering Corporation (P) Ltd.
(vi) Textile Machinery Corporation Ltd. v. CIT
(vii) CIT v. Ganga Sugar Corporation Ltd.
(viii) CIT v. Bhageeratha Engineering Ltd. (1992) 193 ITR 674 (Ker)
(ix) Mohan Dairy v. Dy. CIT (2004) 90 TTJ (Del) 403
55. On the basis of the above arguments, the contention of the appellant is that the appellant is entitled to deduction under Section 80-IA(4C) and the AO and the CIT(A) both have failed to properly appreciate the contention of the appellant as well as the provisions of the Act.
56. The learned Departmental Representative submits that the assessee-company had claimed deduction under Section 80-IA for the first time in the asst. yr. 1996-97 before the CIT(A) as additional ground. However, the then learned CIT(A) rejected the claim with the following observations :
Section 80-IA(4C) reads as under :
This section applies to any undertaking which starts providing telecommunication services whether basic or cellular at any time on or after the first day of April, 1995, but before the 31st day of March, 2000.
The appellant's case was that being an incentive provision, it should be interpreted liberally in favour of the taxpayer. The AO negatived the claim on the ground that as MTNL had not "started" providing services at any time on or after 1st April, 1995 but before 31st March, 2000, it did not fulfil the requisite conditions specified for allowance on the deduction under Section 80-IA(4C).
Section 80-IA(4C) was inserted in the Act by the Finance Act, 1997 with retrospective effect from 1st April, 1996. The Explanatory Notes on the provisions of the Finance Act, 1997, as contained in Board's Circular No. 763, dt. 18th Feb., 1998 which was a reiteration of the Memorandum explaining the Provisions of the Finance Bill, 1997, (which was part of the Budget papers) stated at para 34 as under:
Tax holiday to enterprises providing telecommunication services Under the provisions of Section 80-IA of the IT Act, five year tax holiday and a deduction of 23 per cent (30 per cent in the case of companies), in the subsequent five years is allowed to an undertaking engaged in the business of generation, or generation and distribution, of power or to an industrial undertaking set up in backward States or Districts.
The country needs huge investments in the area of telecommunication services. In order to attract a large number of commercial enterprises to engage in these services, the Act provides for hundred per cent deduction from the profits and gains of an enterprise carrying on the business of providing telecommunication services, whether basic or cellular, for the initial five assessment years and thereafter twenty-five per cent (thirty per cent in case of companies) of such profits and gains for subsequent five years.
The deductions shall be available to an undertaking which begins to provide the telecommunication services (whether basic or cellular) at any time during the period beginning on 1st April, 1995 and ending on 31st March, 2000.
The amendment will take effect retrospectively form 1st April, 1996 and will, accordingly, apply in relation to the asst. yr. 1996-97 and subsequent years.
In view of the clear statement of intent and the wording of the provision, there is no doubt that the appellant who started providing telecom services way back in 1986 is not entitled to the tax exemption contained in Section 80-IA(4C) of the Act. Accordingly, the AO's conclusion is confirmed. This ground of appeal fails.
The matter was taken up in further appeal before Tribunal by the appellant. The Tribunal dismissed the claim of the appellant with the following observations :
Para 35 of Tribunal's order :
We have heard both the sides and considered the materials on the file. The provision of Section 80-IA(4C) introduced by the Finance Act, 1997 with retrospective effect from 1st April, 1996 is so clear that for non-fulfilment of the basic condition of starting the business of providing telecommunication services on or after the 1st day of April, 1995 but before the 31st day of March, 2000, the aforesaid additional ground raised by the assessee liable to be rejected. As stated above, the CIT(A) also gave convincing reasons for not admitting the additional ground and for holding that it was not allowable. In fact during the year, the learned Authorised Representative of the assessee fairly conceded that in view of the aforesaid clear provisions, the assessee was not entitled to the benefit of deduction under Section 80-IA(4C) of the Act. We, therefore, dismiss the assessee's grievance against the non-admission and reject the aforesaid ground.
57. Thus, the Tribunal while rejecting the claim of the assessee has dealt (with) the matter on merits also and not only by way of concession.
Interestingly, for the asst. yr. 1997-98, this ground of appeal was not pressed by the assessee-company before the Tribunal.
58. This issue again came up for consideration in asst. yr. 2001-02 when the claim of deduction was disallowed by the AO. CIT(A) confirmed this stand again observing that :
Section 80-IA(4C) was inserted in the Act by the Finance Act, 1997 with retrospective effect from 1st April, 1996. The Explanatory Notes on the Provisions of the Finance Act, 1997 as contained in Board's Circular No. 763, dt. 18th Feb., 1998 which was a reiteration of the Memorandum explaining the Provisions of the Finance Bill, 1997 (which was part of the Budget papers), stated at para 34 as under:
Tax holiday to enterprises providing telecommunication services 34.1 Under the provisions of Section 80-IA of the IT Act, five year tax holiday and a deduction of 25 per cent (30 per cent in the case of companies) in the subsequent five years is allowed to an undertaking engaged in the business of generation, or generation and distribution, of power or to an industrial undertaking set up in backward States or Districts.
34.2 The country needs huge investments in the area of telecommunication services. In order to attract a large number of commercial enterprises to engage in these services, the Act provides for hundred per cent deduction from the profits and gains of an enterprise carrying on the business of providing telecommunication services, whether basic or cellular, for the initial five assessment years and thereafter twenty five per cent (thirty per cent in case of companies) of such profits and gains for subsequent five years. The deductions shall be available to an undertaking which begins to provide the telecommunication services (whether basic or cellular) at any time during the period beginning on 1st April, 1995 and ending on 31st March, 2000.
34.3 The amendment will take effect retrospectively from 1st April, 1996 and will, accordingly apply in relation to the asst. yr. 1996-97 and subsequent years.
In view of the clear statement of intent and the wording of the provision, there is no doubt that the appellant who started providing telecom services way back in 1986 is entitled to the tax exemption contained in Section 80-IA(4C) of the Act. Accordingly, the AO's conclusion is confirmed. This ground of appeal fails.
While confirming that the deduction is not available to the assessee-company in this assessment year, the Hon'ble Tribunal has observed that "this ground was fairly conceded by the learned Counsel in favour of the Revenue and hence the same stands rejected. The issue had come up before the G Tribunal in the asst. yrs. 1995-96 and 1996-97 also. In it, the Tribunal had observed that Section 80 IA(4C) was introduced w.e.f. 1st April, 1996 and was applicable to those assessees who had started providing telecommunication services on or after 1st April, 1995. In the present case, the assessee-company had started providing such services from 1st April, 1986 and hence since the basic condition was not fulfilled, the assessee's request for admission of additional ground was rejected. Respectively following the said order of the Tribunal, the ground raised by the assessee stands dismissed.
59. Thus, overall if the issue of admissibility of deduction under Section 80-IA is analyzed, it can be seen that the assessee is not entitled to this deduction as has been held by Tribunal in various years, on account of the following reasons :
(i) The assessee-company does not fulfil the basic condition of Section 80-IA(4C) of having started providing telecommunication services on or after 1st April, 1995 but before 31st March, 2000 as the assessee-company had started providing these services from 1st April, 1986.
(ii) Assessee's renewed claim that the technical upgradation of existing industrial undertaking would amount to starting of new industrial undertaking is also not allowable as the assessee-company is required to fulfil the conditions laid down in Sub-section (2) of Section 80-IA according to which in order to be entitled for making this claim, the assessee-company :
(a) it is not formed by splitting up, or the reconstruction, of a business already in existence :
Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of a business of any such industrial undertaking as is referred to in Section 33B.
(b) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
(c) it manufactures or produces any article... India.
(d) in the case of an industrial undertaking... March, 2000.
Connotation of the word 'reconstruction' in the context of industrial undertaking has been defined in the case of South African Supply & Cold Storage Co. as :
an undertaking of some definite kind is being carried on... but is desirable to preserve it in some form, and to do so, not by selling it to an outsider who shall carry it on... but in some altered form to continue the undertaking in such manner as that the person now carrying it on will substantially continue to carry it.
It is further held in the case of Travancore Rayons Ltd. v. CIT that an industrial unit which is an expansion of the existing business is not eligible for deduction under Section 80J. Applying the same ratio to this case, mere upgradation of existing exchanges or their replacement introducing new technologies and adding new services would only amount to continuation of same business, and it cannot be said that a new undertaking has come into existence.
Accordingly, the assessee-company would not be entitled for deduction under Section 80-IA on this account also.
Para 7.4. Section 80-IA(4C) was introduced by the Finance Act, 1997, with retrospective effect from 1st April, 1996. This section reads as under :
This section applies to any undertaking which starts providing telecommunication services whether basic or cellular (including radio paging, domestic satellite service or network of trunking and electronic data interchange services) at any time on or after the 1st day of April, 1995 but before 31st day of March, 2000.
The key words are "start providing telecommunication services" after the 1st day of April, 1995. MTNL does not fulfil this basic condition as MTNL started providing telecommunication services from financial year 1986-87 and not after 1st April, 1995. From the dictionary meaning of "start" in the context in which the word 'start' has been used in this section is very clear that it refers to the point of time when an assessee begins to provide telecommunication services. Further, the appellant-corporation does not fulfil the conditions listed in Section 80-IA(2)(ii) as it cannot be said that MTNL was not formed by splitting up or the reconstruction of an existing enterprise and it also cannot be said that MTNL was not formed by the transfer to a new business of machinery or plant previously used for any purpose. The apparatus and infrastructure of the DoT of the Government of India relating to providing telecommunication services in Bombay and Delhi was taken over lock, stock and barrel by MTNL from 1st April, 1986. MTNL took over the management, control and operations of Delhi and Bombay telephone Districts with all its assets, including land, apparatus and plant, lines and wires, cables, motor vehicles, building, etc. from DoT w.e.f. 1st April, 1986. Therefore, it is obvious that this basic condition for allowance under Section 80-IA is also not fulfilled by the appellant-corporation.
60. We have heard the parties with reference to the material on record. The relevant provisions of statute have also been perused. It appears to us that the appellant has an arguable case but the authorities below have not passed any speaking order on the appellant's claim as to whether the appellant could be held an "undertaking" after it had put up new exchanges to the new subscribers and meets out the essential requirement so as to be eligible for deduction under Section 80-IA of the Act. If the appellant did not press its claim in the earlier years, that alone should not be taken as a disqualification for this purpose. We, therefore, set aside the decision of the authorities below and restore the matter back to the AO for taking a decision afresh in the light of aforesaid directions. A reasonable opportunity of being heard shall be afforded to the appellant before taking decision in accordance with law.
61. The third ground in appeal for asst. yr. 1998-99 is regarding disallowance of an amount of Rs. 47,45,62,757 prior-period expenditure over and above the Rs. 30,18,37,243 suo motu added back by the appellant in its computation of income. As per the AO, the assessee-company was asked to reconcile the figure of the prior-period adjustment as per the P&L a/c amounting to Rs. 17,18,26,550 with the amount of prior-period depreciation amounting to Rs. 30,18,37,243 added back by the assessee itself in the computation of income. It was clarified by the assessee that the prior-period expenditure represents that expenditure in respect of which items of expenditure crystallised during the year. The AO further noticed that the prior-period figures stated in the annual accounts for the year under consideration are not matching with the figures of the annual accounts for the last year. Further, the AO noticed that there is a change in the accounting policy during the year whereby income and expenditure for more than Rs. 1 lakh are treated as prior-period items of expenditure as compared to Rs. 1,000 in the earlier years. On the basis of this, the AO considered that the figure of the year which was Rs. 33,50,34,346 has got reduced to Rs. 17,81,16,661. On that basis he applied the above formula to the current year prior-period expenditure of Rs. 40,73,75,787 and worked out a figure of Rs. 77.64 crores and added the same in the income of the appellant. The assessee carried the matter in appeal before the learned CIT(A) who confirmed the order of the AO.
62. Before us it was argued by the learned Authorised Representative that the AO has gone wrong in making the above disallowance. The AO has not been able to understand the figure of the previous year which has been re-adjusted only in presentation and there is no change as far as the figures are concerned. The Authorised Representative invited our attention to paper book p. 301 where the figures of the current year as well as the previous year have been given, those which were printed in the annual accounts for the year ended 31st March, 1998 and the figures which were printed in the annual accounts for the year ended 31st March, 1997. He invited our attention to columns 2 and 3 of this page where the total of both the figures are exactly same, i.e., Rs. 70,75,35,432. He further explained that for the year ended 31st March, 1997 in the annual accounts published for that year given in the third column, the figure of depreciation has been shown at two different places. The first figure is Rs. 15,69,17,685 and the second figure is Rs. 1,02,22,40,564. The net figures of this amounts to (Rs. 102,22,40,564 - Rs. 15,69,17,685) = Rs. 86,53,22,879. When the annual accounts for the year ended 31st March, 1998 were prepared the figures for the year ended 31st March, 1997 in column 2 have been shown as net figure of depreciation of Rs. 86,53,22,879. This figure is so apparent as there is a dash in column 2 against the figure of Rs. 15,67,17,685 and against the figure of Rs. 1,02,22,40,564 the net figure of Rs. 86,53,22,879 has been given. On the basis of the above it was clarified that the AO has wrongly assumed that the total of the expenses of the year ended 31st March, 1997 has got reduced from Rs. 33,50,34,346 to Rs. 17,81,16,661 because of change in any accounting policy. There is no reduction in this figure. It is only a presentation. Consequently, the action of the AO in increasing the figure to Rs. 77.64 crores on the basis of the ratio of Rs. 17.81 crores to Rs. 33.50 crores is stated to be absolutely wrong. It was further submitted that the assessee itself has made a disallowance of Rs. 33,50,34,346 and there was no need for the AO to make a disallowance of Rs. 77.64 crores which has been made by totally misunderstanding the figures. As regards the impact on account of the change in accounting policy, it was submitted that as per para 1.1 of p. 55 of the paper book, this policy has been discussed and it has been stated that profit before tax has gone higher by Rs. 548.63 lakhs instead of profit being reduced. Consequently, because of the change in policy instead of there being a negative impact on the profit there is a positive impact and this has gone to increase the profit rather than reduce the profit of the company. Further, even otherwise this is a bona fide change in the accounting policy which is being followed consistently in the subsequent year and as such no adverse inference can be drawn on this basis.
63. We have considered the above submission and find that the AO has not appreciated the facts correctly. He has assumed that the figure of Rs. 33,50,34,346 of the prior-period expenses of the last year has been reduced to Rs. 17,81,16,661 because of the change in accounting policy ignoring the fact that it is only a presentation in the figures whereby the figure of depreciation of Rs. .15,69,17,685 has been shown net of Rs. 1,02,22,40,564. Accordingly the AO was not justified in proportionately increasing the expenditure in the ratio which he has applied and then making the disallowance of Rs. 77.64 crores. The assessee having itself added back the amount of Rs. 33,50,34,346 there was no justification to make a further disallowance of Rs. 77.64 crores. Accordingly, the disallowance so made by the AO is directed to be deleted and this ground in appeal by the assessee stands allowed.
64. In ground No. 4 for asst. yr. 1998-99 the appellant has contested the addition of Rs. 6,51,92,000 made by the AO on the basis of the comments of the Comptroller and Auditor General (C&AG). The AO has made the above addition by picking up two comments from the report of the C&AG given under Section 619(4) of the Companies Act. The learned CIT(A) has confirmed the decision taken by the AO.
65. Before us it was contended by the learned Authorised Representative that the learned CIT(A) was not justified in confirming the above addition. The AO has picked up certain comments from the annual accounts and has made the above addition ignoring the other comments of the C&AG which go to reduce the income. For this purpose attention was invited to pp. 76 to 80 of the paper book where various comments of the C&AG are available. It was further argued that as per the C&AG report--para 15, p. 80 of the paper book, the net result of the various comments is that the profit has been overstated to the extent of Rs. 72.64 crores. In case the AO was placing reliance on the C&AG report, he should have reduced the income of the appellant by Rs. 72.64 crores instead of picking up certain figures and increasing the same. He cannot pick up some part of the report and ignore the other part. It is a settled law that a document has to be read as a whole and cannot be read in part. For this, the learned Authorised Representative placed reliance on the judgment of the Supreme Court in the case of Mehta Parikh v. CIT (1956) 30 ITR 181 (SC) and the judgment of the Gujarat High Court in the case of Glass Lines Equipment Co. Ltd. v. CIT . The learned Departmental Representative, however, placed reliance on the order of the authorities below.
66. We have considered the arguments of parties with reference to material on record. The AO was not justified in considering only one part of the report and ignoring the other part. The learned Authorised Representative is correct in saying that a document cannot be read in part; it has to be read in totality. As such the addition made by the AO on this account is set aside and matter is restored to him for taking decision afresh in accordance with law. A reasonable opportunity of being heard shall be allowed.
67. For parity of reasons and facts being identical, similar issues in ground No. 3 for asst. yrs. 1999-2000 and 2000-01 are set aside and restored to the AO for taking decision afresh after affording opportunity of being heard to the assessee.
68. Ground No. 5 in appeal for asst. yr. 1998-99, ground No. 8 for asst. yr. 1999-2000, ground No. 9 for asst. yr. 2000-01 and ground No. 6 for asst. yr. 2002-03 are general and no prejudice having been projected, the same are dismissed.
69. Ground No. 6 for asst. yr. 1998-99, ground No. 9 for asst. yr. 1999-2000, ground No. 10 for asst. yr. 2000-01 and ground Nos. 4 and 5 for asst. yr. 2002-03 relate to levy of interest under Sections. 234A/234B/234C of the Act. The AO shall give consequential effect.
70. Ground Nos. 4, 5 and 6 in appeal for asst. yr. 1999-2000 are in respect of the addition made by the AO of the following amounts on the basis of the tax audit report :
(i) Rs. 1,52,49,121
(ii)Rs. 12,16,36,713
(iii)Rs. 8,86,17,100 The AO has not given any reasons in the assessment order except adding these amounts in the computation of income in the assessment order. On p. 9 in Clause (vi). the AO has made the following observation :
(vi). As per Clause 20 and Annex. VII of audit report on account of profit under Section 41.
(a) Amount recovered during the year Rs. 1,52,49,121 (b) Amount reversed during the year Rs. 12,16,36,716 (c) Unadjusted credit balances written back Rs. 8,86,17,100
71. The learned CIT(A) is stated to have confirmed the order passed by the AO.
72. Before us it was submitted by the learned Authorised Representative that the additions are absolutely unjustified. The assessee has itself included the above amounts in the P&L a/c and there is no justification for making the addition again. This information in the audit report is only an additional information whereby the auditor is supposed to give the computation of income chargeable under Section 41 of the Act. In order to reconcile the fact that income has already been shown in the return, a reference was made to schedule of other income given in the annual accounts at p. 43 of the paper book where the total amount has been included in the P&L a/c. The details of the abovesaid amounts are available at p. 138 of the paper book which clearly show that all these three amounts are part of the other income included in the P&L a/c as is evident from the entry of Rs. 1,52,49,121 which consists of two amounts of Rs. 83,95,232 of Delhi unit and Rs. 68,53,889 of Mumbai unit. The aggregate of both these amounts come to Rs. 1,52,49,121. Similarly, the amount of Rs. 12,16,36,713 is clearly shown in the Mumbai unit. The amount of Rs. 8,86,17,101 has also been shown under the head Mumbai unit. Thus, all these three amounts are clearly shown as forming part of the total other income of Rs. 2,26,83,30,614 included in the P&L a/c.
73. Having heard the parties and on the perusal of material on record, we find that this is a factual error committed by the AO. The assessee having included these amounts in its income there was no justification in adding the same amounts again to the income so disclosed by the appellant. That being so, we direct the AO to delete these additions. Accordingly, the ground Nos. 4, 5 and 6 in appeal stand allowed.
74. Ground No. 7 in appeal for asst. yr. 1999-2000, relates to disallowance of an amount of Rs. 30,992 representing late deposit of employees' contribution to the provident fund. The said addition has been made by the AO by invoking the provisions of Section 43B of the Act. This issue (is) stated to be covered by the judgment of the Delhi Tribunal delivered in the case of Addl. CIT v. Vestas RRB (India) Ltd. (2005) 93 TTJ (Del) 144 : (2005) 92ITD 1 (Del) where it has been held that the amendment carried out by the Finance Act, 2003 is clarificatory in nature. After the amendment no disallowance for late payment can be made even if the same is made beyond due date prescribed under Section 36(1 )(va). This amendment has been made to remove the hardship caused at present by the total disallowance of the amount paid if the same has been paid after the due date. We, therefore, set aside the addition and restore the matter back to the AO who shall take decision in the light of Tribunal decision in the case of Vestas RRB (India) Ltd. (supra).
75. Ground Nos. 4 and 5 in appeal for asst. yr. 2000-01 are regarding disallowance made by the AO in respect of the late payment of the employees' contribution to the provident fund. The facts of this case are identical to ground No. 7 in assessee's own appeal for the asst. yr. 1999-2000 whereby we have remitted the matter to the file of the AO to examine the claim with reference to the judgment of the Delhi Tribunal in the case of Add]. CIT v. Vestas RRB (India) Ltd. (supra). Accordingly, these grounds are also restored to him. For parity of reasons, ground No. 3 in appeal for asst. yr. 2002-03 is restored to the AO.
76. Ground Nos. 6 and 7 in appeal for asst. yr. 2000-01 are in respect of the additions made by the AO in respect of the bad debt recovered for Rs. 1,49,70,927 and other liabilities written back during the year for Rs. 2,55,11,654. The addition is stated to have been made by the AO in the computation of income without any comments. On p. 4, under item (iii), the AO has simply observed :
Amount taxable under Section 41 as per Annex. 8--Rs. 4,04,82,581.
The said addition has been confirmed by the CIT(A) without any discussion. It was submitted that the above amount has been wrongly added by the AO as the same has already been included in the income. The AO has simply picked up the figure from p. 103 of the paper book which is Annex. 8 to the tax audit report. In the said audit report in the last para it has been clearly stated by the auditor that the above amount has been credited to the P&L a/c. The AO though has referred to the audit report but has not bothered to look at the note which has been given on that very page from where he has picked up the figure. The amount of Rs. 4,04,82,581 consists of these two figures of Rs. 1,49,70,927 and Rs. 2,55,11,654 stated on this page. On p. 37 of the paper book is a schedule of other income forming part of the annual accounts whereby a sum of Rs. 174.70 crores has been included as other income in the income of the appellant during the year. Thus, it was argued by the learned Authorised Representative that it was a clear case of duplicate income and the AO has simply not applied his mind. The learned Departmental Representative has placed reliance on the order of the authorities below.
77. We have considered the factual position explained by the learned Authorised Representative. The tax audit report Annex. VIII is very clear where the auditor has stated that these amounts have been credited to the P&L a/c. The profit on P&L a/c has been taken as basis of computation of income for the year under appeal. As such there was no justification on the part of the AO to make these additions. We, therefore, direct the AO to delete these additions and these grounds in appeal stand allowed.
78. Ground No. 8 in appeal relates to the addition of Rs. 5,50,00,000 representing provision for loss on abandoned assets. The AO has made the above addition in the computation of income and the same has been confirmed by the CIT(A) without much discussion. It was contended by the learned Authorised Representative that this amount of Rs. 5,50,00,000 is part of the loss on sale of assets of Rs. 5,66,20,053 which has been added in the computation of income as is evident from p. 1 of the paper book. Reference was also made to the tax audit report, paper book p. 198 where under Clause 17(a) it has been stated that Rs. 5,50,00,000 is the provision made for loss of abandoned assets and has been debited to the 'loss on sale of assets' account. On the basis of the above it was argued that since the assessee has itself added Rs. 5,66,20,053 there was no justification for the AO to make another addition of Rs. 5,50,00,000.
79. The learned Departmental Representative, however, submitted that in view of the explanation given by the learned Authorised Representative, this matter can be remitted to the file of the AO to verify the same and allow the same as per the explanation given by the Authorised Representative.
80. We have considered the rival submissions and in view of the factual position explained by the parties, the matter needs fresh examination. We, therefore, set aside the addition and restore the matter to AO to adjudicate the issue afresh. Accordingly, this ground of the assessee stands allowed for statistical purposes.
81. In the results all the four appeals by assessee stand partly allowed.