2015 (12) TMI 1505 - AT - Income Tax

Tribunal Decision on License Fees and Depreciation

Digital Radio (Delhi) Broadcasting Ltd, C/o O.P. Sapra & Associates Versus Asstt. Commissioner of Income Tax And Vica-Versa

The Tribunal dismissed the assessee's appeal for full deduction of Phase-I license fees under Section 35ABB(2) as the migration to Phase-II was not ... Deduction u/s 35ABB (2) - Held that:- In view of prohibition to transfer the original license, we reject the claim of the assessee for deduction of the whole sum paid under Phase-I of the license u/s 35ABB (2) of the Act and confirm the order of CIT(A) on this count. Deduction u/s 35ABB (1) - Held that:- Assessee has exercised option to migrate to Phase-II and not to continue under phase-I policy. As per chart submitted by the assessee showing difference between the Phase-I and Phase II, there are change in the payments terms which has become from fixed payment regime to revenue sharing regime, in the conditions pertaining to shareholding, conditions for appointment of directors, hiring of broadcasting equipment's etc. As we have already held that migration of license of assessee from phase-I to phase-II is just modification of terms and conditions of the license and these modification cannot be said that old license granted to assessee in phase-I has ceased or not in force. Therefore we are unable to persuade ourselves that the terms of licence granted in Phase-I has come to an end. In our view terms and conditions of license has been modified in above manner and tenure of the same is also extended and license granted in Phase-II is not independent of license granted to assessee in Phase-I. Therefore the claim of the assessee for deduction of above sum u/s 35ABB (1) is also not correct. Whether the amount of unallowed capital expenses paid by the assessee under phase-I policy is a capital loss or whether such a sum is allowable to the assessee? - Held that:- The reason given by CIT(A) for allowing the deduction of fees paid by assessee under PHASE-I over the remaining life of the license granted under PHASE-II of the regime. We do not find any infirmity in the finding as well as reasoning given by CIT(A) as in substances the reason canvassed by CIT(A) are similar to what we have propounded in our order. In view of this we confirm the order of CIT(A) in granting deduction of ? 1,26,58,244/- being 1/10th of ? 12,65,82,440/- being fees paid by assessee in Phase-I as deductible expenditure u/s 35ABB(1) during the year under consideration i.e. A.Y. 2006-07 - Decided against assessee. Depreciation u/s 32(i) (ii) on the amount of license fees - Held that:- We are of the view that provision of section 35ABB(8) which provides that Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section 32 for the same previous year or any subsequent previous year. Further as held by is in deciding the issue of allowability of claim of the assessee u/s 35ABB (1) wherein we have allowed the claim of the assessee on proportionate basis from remaining years of license, the claim of the assessee cannot be accepted - Decided against assessee. Interest income - assessed as business income OR income from other sources - Held that:- Before CIT(A) the details of such interest income was not furnished by AR of the assessee and same was no such details have been furnished before us. In the assessment order also, AO has not mentioned the reason for changing the head of bank interest income from 'Business Income 'offered by assessee to 'income from other sources'. Therefore in the interest of justice we set aside this ground of appeal of the assessee back to the file of AO to decide the same on merit after affording reasonable opportunity of hearing to assessee. - Decided in favour of assessee for statistical purposes. Direction by CIT(A) to verify the record and allow carry forward of unabsorbed depreciation/ business loss as per law - Held that:- Assessee submitted before CIT(A) that it has only carried forward of unabsorbed depreciation of previous years of ? 9796408/- and ? 12521695/- of unabsorbed Business loss as per assessment order for AY 2004-05. Against this CIT(A) has granted a direction to AO verify the record and allow carry forward of unabsorbed business loss and depreciation in accordance with the law. We do not find any infirmity in the order of CIT (A) - Decided against revenue Issues Involved:1. Allowability of license fee under Section 35ABB of the Income Tax Act for Phase-I and Phase-II licenses.2. Classification of interest income as business income or income from other sources.3. Allowance of depreciation on the license fee.4. Verification and allowance of carry forward of unabsorbed depreciation/business loss.Detailed Analysis of the Judgment:1. Allowability of License Fee under Section 35ABB:Facts and Arguments:- The assessee companies, engaged in FM radio broadcasting, were awarded licenses by the Ministry of Information and Broadcasting, Government of India. They paid license fees under Phase-I and migrated to Phase-II, which introduced a new fee structure.- For AY 2006-07, the assessee claimed deductions for license fees paid under both phases. The AO allowed the Phase-II deduction but disallowed the Phase-I deduction, treating it as a capital loss.- The CIT(A) rejected the full deduction claim under Section 35ABB(2) but allowed 1/10th of the Phase-I fees as part of the Phase-II license fees.Judgment:- The Tribunal examined whether the migration from Phase-I to Phase-II constituted a 'transfer' under Section 35ABB(2). The Tribunal held that the license was non-transferable, and there were no proceeds from the transfer, thus Section 35ABB(2) did not apply.- The Tribunal agreed with the CIT(A) that the remaining unallowed expenditure from Phase-I should be amortized over the new term of the Phase-II license, allowing 1/10th of the expenditure each year under Section 35ABB(1).2. Classification of Interest Income:Facts and Arguments:- The assessee declared interest income of Rs. 38,41,383 as business income. The AO reclassified it as income from other sources.- The assessee argued that part of the interest was earned on amounts kept under lien for bank guarantees to the Ministry of Information and Broadcasting.Judgment:- The Tribunal noted the lack of detailed information regarding the interest income. It set aside the issue to the AO for reconsideration, directing the AO to decide on the classification after providing the assessee an opportunity to present its case.3. Allowance of Depreciation on the License Fee:Facts and Arguments:- The assessee alternatively claimed depreciation on the license fee if the full deduction was not allowed under Section 35ABB.- The Tribunal referred to Section 35ABB(8), which prohibits claiming depreciation under Section 32 if a deduction has already been allowed under Section 35ABB.Judgment:- The Tribunal rejected the alternative claim for depreciation, affirming that the license fee should be amortized over the remaining life of the license as per Section 35ABB(1).4. Verification and Allowance of Carry Forward of Unabsorbed Depreciation/Business Loss:Facts and Arguments:- The CIT(A) directed the AO to verify and allow the carry forward of unabsorbed depreciation and business loss as per law.- The revenue challenged this direction.Judgment:- The Tribunal found no infirmity in the CIT(A)'s direction to the AO. It upheld the decision, allowing the verification and carry forward of unabsorbed depreciation and business loss.Conclusion:- The Tribunal dismissed the assessee's appeal regarding the full deduction of Phase-I license fees under Section 35ABB(2).- It upheld the CIT(A)'s decision to amortize the Phase-I fees over the Phase-II license term under Section 35ABB(1).- The issue of interest income classification was remanded to the AO for reconsideration.- The alternative claim for depreciation on the license fee was rejected.- The Tribunal upheld the CIT(A)'s direction for verifying and allowing the carry forward of unabsorbed depreciation and business loss.