ITAT allows depreciation on transferred assets, deductions for abandoned projects, and provisions for restoration obligations

ITAT Delhi ruled in favor of the assessee on multiple issues. The tribunal held that court-sanctioned demerger and merger schemes are binding on tax authorities, allowing depreciation claims on passive infrastructure assets transferred through the scheme. The tribunal permitted deduction of capital work-in-progress written off as business loss when projects were abandoned. Provisions for site restoration obligations, service level adjustments, and other expenses were deemed ascertained liabilities eligible for deduction under normal provisions and section 115JB. Interest disallowance under section 36(1)(iii) was deleted, and enhanced depreciation at 80% was granted for energy-saving devices. Revenue's appeals on salary capitalization and various expense disallowances were dismissed.

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Issues Involved:

1. Depreciation of Passive Infrastructure Assets (PIAs).
2. Upward adjustment of depreciation while computing book profits under section 115JB.
3. Disallowance of Capital Work In Progress (CWIP) written off.
4. Disallowance of Provision for Site Restoration Obligation (SRO)/ Asset Restoration Obligation (ARO).
5. Disallowance of provision for expenses as unascertained liability.
6. Disallowance of provision for Service Level Adjustment (SLA) credits.
7. Disallowance of interest under section 36(1)(iii).
8. Denial of additional claim of enhanced depreciation on energy saving devices.
9. Capitalization of salary expenses.
10. Disallowance of depreciation on tower sites from RFAI notice generation date.
11. Disallowance based on difference in turnover reported in service tax return and income tax return.
12. Disallowance of upfront fees as capital expenditure.
13. Disallowance of unverifiable expenses and expenses due to discrepancy in PAN.

Detailed Analysis:

1. Depreciation of Passive Infrastructure Assets (PIAs):
The tribunal addressed the issue of depreciation claimed by the assessee on PIAs transferred under a merger scheme. The assessee argued that the transfer was a 'gift' and thus eligible for depreciation based on the tax written down value (WDV) of the assets. The tribunal upheld the assessee's claim, recognizing the transfer as a gift under the scheme approved by the High Court, and allowed the depreciation claim.

2. Upward Adjustment of Depreciation under Section 115JB:
The tribunal found that the accounting of PIAs at fair value in the books, as per the court-approved scheme, did not amount to revaluation. Consequently, the tribunal allowed the book depreciation claimed by the assessee, rejecting the upward adjustment made by the AO while computing book profits under section 115JB.

3. Disallowance of CWIP Written Off:
The tribunal allowed the write-off of CWIP, recognizing it as a business loss. The tribunal noted that the expenses were related to abandoned projects and were thus deductible as they were linked to the primary business of the assessee.

4. Disallowance of SRO/ARO:
The tribunal allowed the provision for SRO/ARO as an ascertained liability, finding that it was made on a scientific basis and was a contractual obligation under the lease agreements. The tribunal relied on precedents that recognized such provisions as deductible expenses.

5. Disallowance of Provision for Expenses:
The tribunal allowed the provision for expenses, recognizing it as an ascertained liability. The tribunal found that the provision was made on a scientific basis and was consistent with the accrual system of accounting.

6. Disallowance of SLA Credits:
The tribunal allowed the provision for SLA credits, treating it as an ascertained liability. The tribunal found that the provision was made on a scientific basis and was akin to a warranty provision.

7. Disallowance of Interest under Section 36(1)(iii):
The tribunal allowed the deduction of interest, finding that the borrowed funds were used for business purposes. The tribunal noted that there was no extension of business and hence, the proviso to section 36(1)(iii) was not applicable.

8. Denial of Enhanced Depreciation on Energy Saving Devices:
The tribunal allowed the enhanced depreciation claim at 80% for energy saving devices, finding that the devices qualified as energy saving devices under the Act.

9. Capitalization of Salary Expenses:
The tribunal found that the salary expenses were incurred in the routine course of business and were not solely related to the setting up of tower sites. The tribunal allowed the deduction of these expenses.

10. Disallowance of Depreciation on Tower Sites:
The tribunal allowed depreciation from the RFAI notice generation date, recognizing it as the date the assets were ready for use. The tribunal found that the revenue's contention to consider the billing date was not justified.

11. Disallowance Based on Turnover Difference:
The tribunal found no discrepancy in the turnover reported in the service tax return and the income tax return, based on the reconciliation provided by the assessee. The tribunal upheld the deletion of the disallowance.

12. Disallowance of Upfront Fees:
The tribunal upheld the treatment of upfront fees as revenue expenditure, consistent with the decision in the assessee's own case for the previous year.

13. Disallowance of Unverifiable Expenses:
The tribunal found that the assessee had provided sufficient evidence to support the genuineness of the expenses. The tribunal upheld the deletion of the disallowance made by the AO based on discrepancies in PAN and other clerical errors.

The tribunal's decision was largely in favor of the assessee, allowing most of the claims and deductions while dismissing the revenue's appeal.

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