Telecom licence payments: delayed interest and radio frequency royalty were treated as revenue outgoings, not capital licence cost.

Interest on delayed payment of telecom licence fee was treated as compensatory in nature and not as part of the capital cost of acquiring the licence, so section 35ABB did not apply and the deduction was allowed on accrual basis. Royalty payable for use of radio frequency was held to be a distinct contractual, revenue outgo unrelated to acquisition of the telecom licence, making section 35ABB inapplicable and the expense allowable as revenue expenditure. Fees paid to the Registrar of Companies for increase in share capital were treated as expenditure connected with capital expansion and fell within section 35D(2)(c)(iv) to the extent permitted by that provision.

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Issues: (i) Whether interest payable on overdue licence fee for telecommunication services is deductible on accrual basis or is governed by section 35ABB of the Income-tax Act, 1961; (ii) Whether royalty payable to the Wireless Planning Commission for use of radio frequency is covered by section 35ABB of the Income-tax Act, 1961 or is allowable as revenue expenditure; (iii) Whether fees paid to the Registrar of Companies for increase in share capital are allowable under section 35D(2)(c)(iv) of the Income-tax Act, 1961.

Issue (i): Whether interest payable on overdue licence fee for telecommunication services is deductible on accrual basis or is governed by section 35ABB of the Income-tax Act, 1961

Analysis: The liability to pay interest arose from the licence agreement and was compensatory in nature for delayed payment of licence fee. Although the underlying licence fee related to a capital right to operate telecommunication services, the interest on delay did not assume the character of licence fee or capital expenditure. Section 35ABB applies to expenditure incurred for acquiring the right to operate telecommunication services where payment is actually made for the licence, and not to interest for delay in payment. The deduction was therefore allowable on accrual basis.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether royalty payable to the Wireless Planning Commission for use of radio frequency is covered by section 35ABB of the Income-tax Act, 1961 or is allowable as revenue expenditure

Analysis: The licence fee for operating telecommunication services and the royalty payable to the Wireless Planning Commission were distinct obligations under the agreement. The royalty was linked to actual use of radio frequency and formed part of the operational cost of the business. It did not result in an enduring capital advantage and was incurred under a contractual obligation. Section 35ABB, which deals with capital expenditure for acquiring a telecom licence, was inapplicable.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (iii): Whether fees paid to the Registrar of Companies for increase in share capital are allowable under section 35D(2)(c)(iv) of the Income-tax Act, 1961

Analysis: The fee paid to the Registrar of Companies was treated as expenditure connected with increase of share capital. The Tribunal found no conflict between the Supreme Court decisions relied upon by the Revenue and the High Court view applied by the first appellate authority. The claim fell within the scope of section 35D(2)(c)(iv) and was therefore allowable to the extent contemplated by that provision.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The additions disallowed by the Assessing Officer were deleted, and the Revenue's appeal failed in full.

Ratio Decidendi: Interest on delayed payment of a telecom licence fee and royalty for use of radio frequency are not part of the capital expenditure for acquiring a telecom licence under section 35ABB, and contractual revenue outgoings are deductible on accrual basis unless specifically barred by law.

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