Income Tax Tribunal allows deduction under Section 35ABB(2) for surrendering NLD License

The Income Tax Appellate Tribunal upheld the Commissioner of Income Tax (Appeals)' decision, allowing the deduction under Section 35ABB(2) for surrendering the National Long Distance (NLD) License, stating it was a business loss. The Tribunal dismissed the Revenue's appeal, affirming the deduction eligibility. Regarding the taxability of interest earned on fixed deposits/margin money, the Tribunal directed verification of interest income related to non-operational circles, allowing the appeal for statistical purposes. The Revenue's appeal was dismissed, and the assessee's appeal was allowed with directions for verification of interest income, pronounced on 05th February 2020.

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Issues Involved:
1. Disallowance of deduction under Section 35ABB(2) of the Income Tax Act for surrender of National Long Distance (NLD) License.
2. Taxability of interest earned on fixed deposits/margin money during the pre-operative period.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 35ABB(2) for Surrender of NLD License:

The Revenue challenged the deletion of an addition made by the Assessing Officer (AO) concerning the disallowance of a deduction under Section 35ABB(2) of the Income Tax Act, claimed by the assessee for the surrender of the NLD License amounting to Rs. 2.50 Crores. The AO had opined that the NLD License was an intangible asset eligible for depreciation and that any loss from its surrender should be treated as a capital loss, not a business expense. The assessee, however, argued that the surrender of the NLD License was a prudent business decision to avoid penalty charges and yearly license fees, and thus, the loss should be deductible under Section 35ABB(2).

The Commissioner of Income Tax (Appeals) [CIT(A)] concurred with the assessee, noting that the NLD License had become redundant due to the acquisition of Unified Access Service License (UASL), which covered all telecom services across India. The CIT(A) observed that the assessee had not claimed depreciation on the NLD License and that the provisions of Section 35ABB(2) allowed for the deduction of the unallowed expenditure when the license is surrendered.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing that the surrender of the NLD License was a business loss eligible for deduction under Section 35ABB(2) and supported by CBDT Circular No. 763 dated 18/02/1998. The Tribunal dismissed the Revenue's appeal, affirming that the loss incurred was in the normal course of business and thus deductible.

2. Taxability of Interest Earned on Fixed Deposits/Margin Money During Pre-operative Period:

The assessee contested the addition of Rs. 1,51,89,429 as taxable income, which was interest earned on fixed deposits/margin money. The assessee argued that this interest should be capitalized as it was inextricably linked to the setting up of the telecom project and thus should reduce the project costs. The AO, however, noted that the business activities had commenced during the year, and therefore, the interest income should be taxable.

The CIT(A) agreed with the AO, stating that since the business had commenced, the interest income could not be treated as a capital receipt. The CIT(A) noted that the assessee's operations had started in some telecom circles, and without a detailed bifurcation of interest income pertaining to operational and non-operational circles, the entire interest income was taxable.

The ITAT found that the business had indeed commenced during the year, and thus, the interest income could not be capitalized. However, the ITAT noted that the assessee had already offered a substantial portion of the interest income to tax and only a proportionate amount was reduced from project expenditure. The Tribunal directed the AO to verify the facts and accept the assessee's claim if the interest income pertained to non-operational circles, thereby allowing the appeal for statistical purposes.

Conclusion:
The Revenue's appeal was dismissed, and the assessee's appeal was allowed for statistical purposes, with directions for verification of the interest income pertaining to non-operational circles. The order was pronounced in the open court on 05th February 2020.

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