2015 (1) TMI 1259 - AT - Income Tax

High Court ruling on interest capitalization and revenue expenditures under Income Tax Act

Bharti Cellular Limited, New Delhi Versus DCIT, Circle-2 (1), New Delhi

The High Court remanded the appeal concerning the disallowance of interest on license fee as capital expenditure, focusing on determining if the interest ... Interest on licence fee paid to DoT Government of India disallowed - Held that:- We confirm the finding arrived at by the CIT(A to the extent that the interest accrued on delayed payments on the license fee is a capital expenditure u/s 35ABB since the payment was for the period prior to 31.07.1999. - Decided against assessee Issues:1. Disallowance of interest on license fee as capital expenditure.2. Determination of nature of interest payment on delayed license fee.Issue 1: Disallowance of interest on license fee as capital expenditure:The appeal was remanded by the High Court regarding the disallowance of interest on license fee as capital expenditure. The issue revolved around whether the interest payment pertained to the period before July 31, 1999, making it eligible for capitalization under Section 35ABB. The ITAT had initially ruled in favor of the assessee, but the High Court directed a reevaluation based on facts. The High Court concluded that if the interest payment related to the period before July 31, 1999, it should be treated as capital expenditure under Section 35ABB. The remand was specific to this issue, focusing on determining the nature of the interest payment in relation to the license fee.Issue 2: Determination of nature of interest payment on delayed license fee:The High Court admitted a substantial question of law regarding the nature of interest on delayed payment of license fee. The Assessing Officer had disallowed the interest payments, considering them as capital expenditure due to lack of details and the association with capital license fee. The Commissioners (Appeals) also viewed the interest payments as capital expenditure based on the capital nature of the license fee. The High Court emphasized that the treatment of interest payment depended on whether it related to the period before July 31, 1999, or thereafter. If the interest was for the period before July 31, 1999, it should be capitalized; otherwise, it should be treated as revenue expenditure. The High Court ruled in favor of the Revenue, directing a remand to reassess the nature of the interest payment in light of the observations made. The interest accrued on delayed license fee payments was deemed a capital expenditure under Section 35ABB since it related to the period before July 31, 1999, leading to the dismissal of the assessee's ground.In conclusion, the judgment addressed the disallowance of interest on license fee as capital expenditure and the nature of interest payments on delayed license fee. The High Court's directives and the reevaluation of facts played a crucial role in determining the treatment of these expenditures under the Income Tax Act, 1961. The decision highlighted the significance of distinguishing between capital and revenue expenditures based on specific timelines and legal provisions, ultimately impacting the tax implications for the parties involved.