2025 (5) TMI 808 - AT - Income Tax

Interest on delayed license fee payment treated as capital expenditure doesn't warrant penalty under section 271(1)(c)

ACIT Circle-26 (2), Delhi Versus M/s. Vodafone West Ltd. (thereafter merged with Vodafone Mobile Services Ltd.), Delhi

ACIT Circle-26 (2), Delhi Versus M/s. Vodafone West Ltd. (thereafter merged with Vodafone Mobile Services Ltd.), Delhi - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in these appeals under the Income-tax Act, 1961, primarily involved:Whether penalty under section 271(1)(c) can be imposed on the assessee for concealment of income or furnishing inaccurate particulars of income where the issue involved is debatable and the assessee has furnished full disclosure and bona fide explanations;The nature of interest paid on delayed license fee-whether it constitutes revenue expenditure or capital expenditure-and the implications of this classification on penalty and assessment;The validity of disallowance of 10% of commission expenses on grounds of genuineness and whether such disallowance can be sustained without specific evidence;The classification of royalty and Wireless Planning Commission (WPC) charges as capital or revenue expenditure;The classification of advertisement expenditure as capital or revenue expenditure;The application of judicial precedents concerning penalty imposition under section 271(1)(c), especially in cases involving difference of opinion and debatable questions of law;The requirement of mens rea or deliberate concealment for levy of penalty under section 271(1)(c) and the burden of proof on the assessee under Explanation 1 to the section.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Levy of penalty under section 271(1)(c) for concealment or inaccurate particulars of income where issue is debatable and bona fide explanations are furnishedRelevant legal framework and precedents: Section 271(1)(c) of the Income-tax Act empowers levy of penalty where an assessee is found to have concealed income or furnished inaccurate particulars. The terms 'concealment' and 'inaccurate particulars' are not explicitly defined but have been judicially interpreted. The Supreme Court in Reliance Petroproducts (2010) held that penalty cannot be imposed merely because a claim is not accepted by the tax authorities; there must be proven concealment or furnishing of inaccurate particulars. The Court defined 'inaccurate' as 'not accurate, not exact or correct; not according to truth; erroneous.' Similarly, T. Ashok Pai vs. CIT emphasized that a deliberate act or omission with intent to conceal income or furnish inaccurate particulars is necessary for penalty.Court's interpretation and reasoning: The Tribunal noted that the assessee had fully disclosed the treatment of interest on late payment of license fee in audited financial statements and provided all details during assessment and penalty proceedings. The issue was debatable, with two possible views: the assessee treating interest as revenue expenditure and the Revenue treating it as capital expenditure. The Tribunal relied on multiple judicial precedents (e.g., Samtel India, Bacardi Martini India Ltd., Nortel Networks Ltd., Porritts & Spencer Ltd., Liquid Investment and Trading Co.) holding that penalty cannot be levied merely due to difference of opinion or debatable issues. The Tribunal emphasized that where a substantial question of law is admitted by the High Court, penalty under section 271(1)(c) cannot be imposed.Key evidence and findings: The assessee had cooperated fully, furnished explanations, and the issue was pending adjudication before the High Court with a substantial question of law framed. The Assessing Officer did not find any particulars furnished by the assessee to be false or incorrect, nor did he disregard the explanations provided.Application of law to facts: The Tribunal held that since the issue was debatable and bona fide explanations were furnished, the levy of penalty was not sustainable. The mere fact that the Revenue preferred a different view does not amount to concealment or furnishing inaccurate particulars. The Tribunal also noted that the Supreme Court in Reliance Petroproducts clarified that quantum and penalty proceedings are parallel but distinct; disallowance does not ipso facto attract penalty.Treatment of competing arguments: The Revenue relied on judgments such as CIT vs. Zoom Communications Pvt Ltd., arguing that penalty can be levied where claims are wrongly made. However, the Tribunal distinguished these cases on facts, noting that in Zoom Communications, the claim was made by oversight without bona fide explanation, whereas here the assessee had bona fide belief and full disclosure. The Revenue also cited Gujarat High Court's decision in CIT vs. Prakash S Vyas, but the Tribunal observed that this decision itself recognizes the need for case-by-case analysis and that the issue here had been examined by higher courts.Conclusions: The Tribunal upheld the CIT(A)'s order deleting the penalty under section 271(1)(c), holding that no concealment or inaccurate particulars were furnished, and that the issue was debatable with bona fide explanations provided.Issue 2: Nature of interest on delayed license fee-capital or revenue expenditureRelevant legal framework and precedents: The classification of expenditure as capital or revenue is a question of fact and law, with significant tax implications. The Supreme Court in CIT v. Bharti Hexacom Ltd (2023) held that such license fee payments should be amortized under section 35ABB of the Act, indicating a capital nature.Court's interpretation and reasoning: The Tribunal observed that this issue is no longer res-integra in light of the Supreme Court's ruling. Both parties agreed that the Assessing Officer should frame consequential computations accordingly.Key evidence and findings: The issue had been subject to multiple rounds of litigation, including appeals to the High Court and the Supreme Court, with finality reached on the capital nature of the license fee payments.Application of law to facts: The Tribunal directed the Assessing Officer to frame consequential computations after amortization under section 35ABB, accepting the Revenue's ground for statistical purposes.Treatment of competing arguments: No dispute was raised on this point during the hearing before the Tribunal.Conclusions: The Tribunal accepted the Revenue's first substantive ground for statistical purposes and directed consequential action consistent with the Supreme Court's decision.Issue 3: Disallowance of 10% commission expenses on grounds of genuinenessRelevant legal framework and precedents: The onus lies on the assessee to prove genuineness of claimed expenses. However, ad hoc disallowances require justification based on facts of the particular assessment year.Court's interpretation and reasoning: The Tribunal noted that the identical issue had been decided against the Revenue in the succeeding assessment year by the Tribunal, and the assessee had explained the necessity of commission payments as part of telecommunication business marketing strategies. The CIT(A)'s deletion of the disallowance was upheld.Key evidence and findings: The assessee's consistent acceptance of 90% of commission expenses in other years supported its bona fide claim.Application of law to facts: The Tribunal found no reason to interfere with the CIT(A)'s order deleting the disallowance.Treatment of competing arguments: The Revenue argued that each year should be considered independently, but failed to distinguish facts or provide contrary evidence.Conclusions: The Tribunal rejected the Revenue's ground and upheld the deletion of the 10% disallowance.Issue 4: Classification of royalty and Wireless Planning Commission (WPC) chargesRelevant legal framework and precedents: The Tribunal relied on its earlier decision in Vodafone Idea Ltd. and CIT vs. Fascel Ltd., which held such expenses as revenue in nature.Court's interpretation and reasoning: Following judicial consistency, the Tribunal upheld the CIT(A)'s deletion of the disallowance treating these expenses as revenue expenditure.Application of law to facts: The Tribunal found no error in the CIT(A)'s order.Conclusions: The ground raised by the Revenue was rejected.Issue 5: Classification of advertisement expenditure as capital or revenue expenditureRelevant legal framework and precedents: The Tribunal referred to its earlier decision in Vodafone Mobile Services Ltd., which held advertisement expenditure as revenue in nature.Court's interpretation and reasoning: Applying judicial consistency, the Tribunal upheld the CIT(A)'s order treating advertisement expenditure as revenue expenditure.Conclusions: The Revenue's ground was rejected.Issue 6: Requirement of mens rea and burden of proof for penalty under section 271(1)(c)Relevant legal framework and precedents: The Supreme Court in UOI vs. Dharmendra Textile Processors held that mens rea is not an essential ingredient for penalty under section 271(1)(c). Explanation 1 to the section places the onus on the assessee to prove absence of concealment or inaccurate particulars.Court's interpretation and reasoning: The Tribunal acknowledged the Revenue's argument but found that in the instant case, the assessee had furnished full explanations and disclosures, which were not disbelieved or disregarded by the Assessing Officer. Hence, the penalty could not be sustained.Conclusions: The Tribunal held that despite the absence of requirement of mens rea, the facts did not justify penalty imposition.3. SIGNIFICANT HOLDINGSThe Tribunal crystallized several core principles and made key determinations:On penalty under section 271(1)(c): 'Penalty under section 271(1)(c) may be imposed only in case where it is proved that the assessee has consciously made a concealment or has furnished inaccurate particulars of his income.' Mere difference of opinion or debatable issue does not attract penalty. The Tribunal quoted the Supreme Court in Reliance Petroproducts stating: 'A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee.'On debatable issues and penalty: 'Where the assessing officer accepts one version in preference to the other does not make out a case for penalty, nor can the guilt of concealment of income be said to have been established.' The Tribunal relied extensively on judicial precedents including Bacardi Martini India Ltd., Nortel Networks Ltd., Porritts & Spencer Ltd., and Liquid Investment and Trading Co. to hold that penalty cannot be levied where substantial question of law is admitted and the issue is debatable.On burden of proof and explanations: 'The Appellant offered full disclosure of the facts and offered its explanation wherever required, hence it cannot be said that the Appellant had not furnished its explanation.' The Tribunal emphasized that explanations furnished and not disbelieved cannot be basis for penalty.On classification of expenditures: The Tribunal accepted the Supreme Court's ruling that license fee interest payments are capital expenditure requiring amortization under section 35ABB. It upheld the CIT(A)'s deletion of disallowances relating to commission expenses, royalty/WPC charges, and advertisement expenditure, relying on consistent judicial decisions.Final determinations: The Tribunal dismissed the Revenue's appeal challenging the penalty deletion under section 271(1)(c). It partly allowed the Revenue's appeal on the capital nature of license fee interest for statistical purposes, directing consequential computations. The other substantive grounds relating to commission, royalty/WPC charges, and advertisement expenditure disallowances were rejected, confirming the CIT(A)'s orders.