2017 (5) TMI 1506 - HC - Income Tax

Court upholds deduction for license fee migration expenses, allows carry forward of unabsorbed depreciation

The Court dismissed the appeals, finding no substantial question of law. The decisions of the CIT (A) and ITAT were upheld, allowing deduction under ... Deduction towards the license fee of phase-I under Section 35ABB - Phase-I license was no longer in force - Held that:- The purport of the said questions raised by the Revenue are that Phase-II licence regime was not in continuation of Phase-I when in fact it was. It is on this basis that the amount equivalent to 1/10th of the total capital expenditure was allowed proportionately over 10 year period in accordance with Section 35ABB (1) of the Act. It provides that any capital expenditure actually incurred by the Assessee on the acquisition of any right to operate telecom services is to be allowed as a deduction in equal instalment over the period for which the licence remains in force. The concurrent findings of the ITAT and CIT (A) in this regard are not shown to be perverse or contrary to the express terms of those licenses. Consequently, the Court declines to frame the questions as posed by the Revenue at 2.1 to 2.3 above. Carry forward business loss/unabsorbed depreciation - Held that:- It is pointed out that what the Assessee claimed was brought forward unabsorbed depreciation in terms of Section 32 (2) of the Act and not unabsorbed brought forward business loss. The CIT (A) directed the AO to verify from the Respondent’s record and only permit claim relating to unabsorbed brought forward depreciation. This is not prohibited under Section 79 of the Act even when there is a change in the shareholding of the Respondent. Consequently, the Court is not inclined to frame question 2.4 as a substantial question of law. Issues:1. Disallowance of expenditure incurred on license fee migration from Phase-I to Phase-II.2. Allowance of deduction under Section 35ABB of the Income Tax Act for capital expenditure.3. Treatment of loss incurred due to migration as capital loss.4. Authorization of license fee expenses of Phase I in Phase II regime.5. Verification and allowance of carry forward business loss/unabsorbed depreciation.Issue 1: Disallowance of Expenditure on License Fee Migration from Phase-I to Phase-II:The Respondent migrated from Phase-I to Phase-II policy regime and claimed deduction under Section 35ABB of the Act for the remaining license fee payable under Phase-I. The Assessing Officer disallowed this expenditure, treating it as capital expenditure. The Commissioner of Income Tax (Appeals) partially allowed the appeal, allowing the deduction proportionately over 10 years. The ITAT concurred with this decision, allowing the remaining capital expenditure to be spread over the 10-year life of the Phase-II license.Issue 2: Allowance of Deduction under Section 35ABB for Capital Expenditure:The Respondent claimed deduction under Section 35ABB of the Act for the capital expenditure incurred on the license fee migration. The CIT (A) allowed a portion of the expenditure to be deducted over 10 years, in line with the provisions of Section 35ABB. The ITAT upheld this decision, allowing the deduction as per the terms of the license and the migration from Phase-I to Phase-II.Issue 3: Treatment of Loss Incurred Due to Migration as Capital Loss:The AO treated the loss incurred by the Respondent due to migration from Phase-I to Phase-II as a capital loss, disallowing it as a revenue expenditure. The CIT (A) and ITAT both considered the expenditure as part of the migration process and allowed it to be treated as a deduction under Section 35ABB, not as a capital loss.Issue 4: Authorization of License Fee Expenses of Phase I in Phase II Regime:The ITAT and CIT (A) allowed the authorization of license fee expenses of Phase I in the Phase II regime, considering it as part of the payments made for the Phase-II license. The authorization was in accordance with Section 35ABB of the Act, allowing the expenditure to be spread over the remaining 10-year period of the Phase-II license.Issue 5: Verification and Allowance of Carry Forward Business Loss/Unabsorbed Depreciation:The Assessee claimed carry forward unabsorbed depreciation under Section 32(2) of the Act, not unabsorbed business loss. The CIT (A) directed the AO to verify and permit the claim related to unabsorbed brought forward depreciation, even after a change in shareholding. The Court declined to frame this issue as a substantial question of law, as it was not prohibited under Section 79 of the Act.In conclusion, the Court dismissed the appeals, finding no substantial question of law in the issues raised by the Revenue. The decisions of the CIT (A) and ITAT regarding the deduction under Section 35ABB and treatment of expenses related to the license fee migration were upheld, as they were in accordance with the provisions of the Income Tax Act and the terms of the licenses involved.