TaxTMI 
TaxTMI 
2016 (9) TMI 1336
X X X X Extracts X X X X
X X X X Extracts X X X X
....h on facts and in law, in confirming the disallowance of deduction u/s 80IA of the Act, despite the fact that the order passed by the A.O is not in consonance with the direction given by the ITAT as well as the Hon'ble High Court of Delhi in preceding years. 4. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in confirming the action of the A.O. by wrongly interpreting the provisions of section 80IA, whereby deduction is available in respect of income derived from providing telecom services on or 1st April, 1995 and the appellant company being a service provider, its total income as such from providing telecom services shall be exempt. 5. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in not appreciating the contention of the assessee that the deduction available under Section 80-IA being undertaking based, the computation of income eligible even otherwise has to be worked out for each undertaking @ 100 per cent for first five years and @ 30 per cent for the next 5 years from the date of setting up of such undertaking. 6. On the facts and circumstances of the case, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ho deleted the disallowance of Rs. 10316296280/- out of Rs. 1276983720/- on account of subscriber deposit and confirmed the disallowance of deduction u/s 80IA of Rs. 480078205/-. Against this order the assessee is in appeal against disallowance of deduction u/s 80IA as well as part confirmation of disallowance on account of subscriber's deposit. The revenue is in appeal against deletion of part disallowance on account of security deposit. 5. First we take up the appeal of the assessee. Ground No. 1 and 8 of the appeal of the assessee are general in nature and therefore they are dismissed. 6. Ground Nos. 2 to 5 of the appeal of the assessee are related to disallowance of deduction u/s 80IA of the Income Tax Act. 7. The brief facts of the issue is that in the return of income appellant has claimed deduction u/s 80IA of Rs. 480078205/-. The assessee claimed this deduction because huge investment were made for technology and infrastructure and therefore it has established the new undertaking and therefore, it is eligible for deduction of 100% of its profit u/s 80IA of the Act. Before the ld Assessing Officer assessee submitted that it fulfills all the conditions specified in section....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned separate books of accounts for eligible undertakings. (c) Further, the AO observed that the appellant has not complied with the provision of section 80IA (7), which requires it to get the accounts of the eligible undertakings audited by the accountant and has failed to furnish the audit report in Form No. 10CCB along with the return of income. (2) Regarding the contention of the appellant that the Hon'ble ITAT Delhi, while passing appeal order in the case of appellant for the AY 1998-99, 1999-2000 and 2002-03 dated 3.02.2006 had held that the entire income of the appellant is eligible u/s 80 1 A, the AO found that the order of the Hon'ble ITAT was in the nature of directions to the AO to examine the allowability of the claim of deduction of the appellant in respect of income derived from new exchanges put up after 01.04.1995 and subject to fulfillment of conditions laid down in section 80IA. It did not imply that the entire income of the appellant was deductible u/s 80IA. (3) The contention of the appellant that the assessee itself is an 'undertaking', does not hold good as each exchange is an 'undertaking' and the deduction is allowable only in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ect of the income generated by all the facilities, the deduction should be computed for the host of services rendered by MTNL The appellant also emphasized that the authorities have nowhere declined the fact that old exchanges were totally being revamped. Furthermore, it was pointed out that due to complete revamp of the technology and with the starting of cellular service and other service like voice mail, ISDN, a complete new undertaking came into existence, therefore, it was pleaded that the company as a whole is eligible the deduction u/s 80IA. 6.4.3 I have carefully considered the facts of the case in the light of the provision of section 80IA and the decisions of appellate authorities in respect of the claim of the appellant u/s 80IA in different years. Before deciding on various grounds of appeal raised by the appellant in the matter, a brief overview of the scheme of deduction u/s 80IA in the context of the business of telecommunication services is being made hereunder: 6.4.3.1 The provisions of Section 80-IA provide for deduction in the manner and extent provided in that section in respect of the profits and gains of-eligible business of an eligible undertaking, subje....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... For this purpose, the mechanism of furnishing audit report in the prescribed form no. 10CCB in respect of each eligible undertaking for enabling verification of the eligible profits for deduction by an independent auditor has been provided. Computation of the amount of deduction The amount of deduction is to be computed as per sub-section (5) and subsection (9). The sub-section (5) of section 80IA reads as under: "(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of subsection (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." The ITAT Mumbai Bench 'C' in the case of M/s Pidilite Industries Ltd. v. Deputy Commissioner of Income Tax, Circle 3(2)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and considered as such in the subsequent years until it is wiped out with the profits of the eligible unit for the succeeding years. This position stands despite the fact that such loss may have been actually set off against the income of non-eligible units in an earlier year or even the very year in which commercial production started". The Special Bench of ITAT, Ahmedabad in Asstt. C1T v. Goldmine Shares & Finance (P) Ltd. [2008] 113 ITD 209 (Ahd.) has also held that in view of the provisions of section 80IA(5), profits from eligible business for purpose of determination of quantum of deduction under section 80IA are to be computed after deduction of notional brought forward losses and depreciation of eligible business even though this had been set off against other income in the earlier years. The Hyderabad ITAT in the case of M/s Hyderabad Alkalies supplies ltd. Vs. ACIT reported in [2012] 20 taxmann.com 289 (Hyd.) has also held the same. "--(9) Where any amount of profits and gains of an -[undertaking] or of an enterprise in the case of an assessee is claimed and allowed-0- under this section for any assessment year, deduction to the extent of such profits and gains shal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rastructure leading to the formation of new undertaking and hence entitled to deduction in respect of telecommunication services U/S 801 A," I find that the main pivot of the appellant's main contention is that the entire technology and the system used by various exchanges of the appellant company have been revamped and in respect of basic telecom services, various add-on services such as datacom, radio-paging, etc. have started after 01.04.1995; that the company started cellular services after 01.04.1995; and that the appellant had made huge investments after 01.04.1995 for this purpose. In appellant's submission, in effect, the entire setup of the appellant company comprising various exchanges, networks, technology and system has been revamped, which implies that the appellant company itself is a new undertaking set up after 01.04.1995 and its income from all eligible activities is eligible for deduction u/s 80IA. However, I find that the appellant had also also taken an alternative plea before the Ld. CIT(A) in respect of its appeal for the AY 2005-06 on the same issue, in which the appellant has argued that the provisions of section 80IA do not make it obligatory ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in the ratio of telephone exchanges was not proper but have to take into account various services rendered by MTNL 1995 which were actually generating income. Having held this, the Hon'ble ITAT was of the view that as the income generated through so many service rendered by the new exchanges is eligible for deduction u/s 80IA, the claim in respect of the nominal income if any generated out of the old exchanges cannot be restricted (by implication 'denied'). The Hon'ble ITAT thereafter, determined a thumb Rule by which 75% of the income from various services were considered to have been derived from the new exchanges. 6.4.3.3.4 In my humble submission, the above view of the Hon'ble ITAT tantamount to holding that the appellant itself is one single undertaking, which is primarily carrying out entire new range of telecom services, in respect of which the Hon'ble ITAT estimated 75% of the income of the appellant from telecom activity from new exchanges while for the basic telecom services emanating from old exchanges that had started prior to 1.4.1995, 25% of the income from eligible telecom services has been attributed. In my respectful submission, the schem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....' has been defined by the Govt. of India in response to a questionnaire on basic telecommunication made by the "negotiating group on basic telecommunication (NGBT) established by the WTO, asunder: "In the Indian Government's Law and Regulations relating to telecommunications, there is no definition of Basic Telecommunications. However, for the purposes of reply to this questionnaire, the word "basic telecommunication services" is assumed to cover the following services:- a. voice telephone service b. Packet-switched data transmission services c. Circuit switched data transmission services d. Telex services e. Telegraph services f. Facsimile services g. Private teased circuit services o. Other Note- Provision of 64 KBPS V-SAT based telecom networks for dosed user groups is considered as a value added service. Provision of radio-based mobile voice telephone services is considered as a Value Added Service. Keeping in view the above, for a subscriber who was receiving basic telecom services prior to 1.4.1995, the core facilities that he was getting and for which objective, he had obtained a telephone connection prior to the revamp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 80IA (4) (iv) (c ) read as under: "(iv) an [undertaking] which,- (a) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2012; (b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2012: Provided that the deduction under this section to an undertaking under sub-clause (b) shall be allowed only in relation to the profits derived from laying of such network of new lines for transmission or distribution; (c) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines at any time during the period beginning on the 1st day of April, 2004 and ending on the 31st day of March, 2012." It is thus evident that while for the telecommunication sector, the eligibility criteria covers only those undertakings which have started or start providing telecommunication services during the specified period, for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lies Supplies Ltd. (supra). 6.4.3.3.8 In view of the above, as discussed in Para 6.4.3.1 and 6.4.3.2 above, the deduction is admissible only to an eligible undertaking of the appellant in respect of and confined to the extent of profits of the eligible business activity of that undertaking only to be computed in accordance with sub-section(S). The contention of the appellant that, as a whole, it is one undertaking (deemed to have been set up after 1.4.1995) is not correct. The appellant had started certain new eligible services such as cellular services, and for the basic telecom services, it has set up certain new exchanges or started add-on services after 1.4.1995, each of such new services/exchanges may be considered as eligible for the deduction, subject to satisfying the conditions under sub-section (3) and meeting the procedural conditions laid down in sub-section (7) and computed in the manner provided in sub-section (5). In view of the above, this ground of appeal is decided against the appellant. 6.4.3.3.9 The Ground No. 8 of the appeal is as under: "(B). On the facts and circumstances of the case, the Assessing Officer has erred, both on facts and in law, in holdi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is purpose, a copy of P&L account and balance sheet of the undertaking is to be enclosed. It is thus evident that the requirement of enclosing audit report for the eligible undertaking is not just a routine procedural requirement, as in the absence of the same, the AO is unable to decide whether any of the undertakings of the appellant were actually carrying out eligible business or not and what is the amount of the deduction available to each such eligible undertaking. Even in respect of an eligible undertaking, the amount of deduction is to be computed by first setting off the brought forward losses and the unabsorbed Depreciation allowance in view of the provisions of sub-section (5) and the profits for the year for the undertaking cannot be taken towards deduction as such. In the absence of such working as is mandated by the statutorily prescribed form NO.10CCB report (read with instructions thereto), it is not possible to ascertain the correct amount of the deduction for various eligible units. 1 find that the appellant did not furnish audit report in respect of any eligible undertakings while filing the return of income. However later during the assessment proceeding, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, as was interpreted by the appellant. Hon'ble ITAT has merely observed that the appellant has an 'arguable case1. However that is neither in the nature of obiter dicta nor ratio deddendi. The language of the above order clearly shows that the Hon'ble ITAT had not summarily disposed off the appeal, but has given one more opportunity to the appellant before the AO, in view of the fact that in the earlier years, i.e. 1996-97, the appellant had not pressed for its claim u/s 80IA. The purpose of the above order was to restore the matter back to the AO, so that the appellant can get reasonable opportunity of being heard. In view of the above, the appellant's interpretation of the direction of the ITAT is incorrect and therefore, this ground of appeal is decided against the appellant. 6.4.3.4.3 The Ground No. 10 of the appeal is as under: "(10). That the interpretations placed on section 801A by the A.O. are totally against law and contradictory to the views as taken and accepted by the department in earlier years". I find that subsequent upon the above referred decision of the Hon'ble ITAT dated 3.2.2006, the AY 1998-99, 1999-2000, 2000-01, 2002-03 and 2005-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is not the relevant one, as the deduction is to be examined with respect to each eligible undertaking separately and be so computed. Therefore, in my humble submission, the decision of the ITAT of holding the appellant as eligible for the deduction for all its eligible activities (to the extent of 75% of profits therefrom) is without taking cognisance of the applicable provisions of section 80IA, which allow deduction for an eligible business activity of an eligible undertaking only, subject to mandatorily meeting certain prescribed requirements. Keeping in view the same, I hold that an eligible undertaking in the case of the appellant for the current year is the one that starts telecommunication services after 1.4.1995, and one that is eligible under sub-section (3) and (4) of section 80IA. 6.5.2 The Hon'ble ITAT in the above referred order dated 11.3.2010, while deciding the appeal for the AY 2005-06 had held as under: "Since in the,AY 2005-06, there was change in the eligibility criteria of deduction eligible u/s 801 A, we direct the AO to recompute the deduction in terms of the amended provisions of the law applicable for the AY 2005-06. However the same criteria for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ication services provided by the appellant, the deduction u/s 80IA is available to only the following business activities/undertaking: (a) New services such as cellular services that have been started after 01.04.1995. For such services the infrastructure set up by the appellant may be considered as the relevant undertaking. (b) Basic telecommunication services, including add-on services, if started after 01.04.1995, by any new telephone exchange set up after 01.04.1995. 6.5.3 However, in view of the mandatory provisions of section 80IA (7) read with Rule 18BBB and the instructions to the Form No.10CCB, the deduction shall be admissible only on furnishing of the prescribed audit reports in respect of each such eligible undertaking. Since the appellant had not furnished the same before the AO, the AO had rightly rejected the claim of the appellant as in the absence of the audit reports, the AO could not have verified the quantum of deduction available to each such eligible undertaking. The appellant was required to make available to AO the audit reports duly signed and verified by the accountant referred to in that section in respect of each such eligible undertaking which w....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 480078205/- being 30% of its income from services and operations. The main thrust of the assessee was that as it is making huge investment year-wise and therefore it is entitled to the deduction on its income. It was further argued that it has also started several telecommunication services and has undergone major expansion establishing new exchanges and assessee satisfied all the conditions of the claim. However, alternatively it claimed before the Assessing Officer that in earlier years the issue has been decided in favour of the assessee and deduction has been granted on proportionate basis by the coordinate bench. We have carefully perused the decision of coordinate bench on this issue which has been decided by coordinate bench in ITA No. 3448, 3449 and 3450/Del/2003 and 2919/Del/2004 for AY 1998-99 to 2002-03. Hon'ble High Court has dismissed the appeal of the revenue against the order of the Tribunal. Therefore, on the principal of judicial discipline the decision of coordinate bench binds us. The coordinate bench has decided this issue as under:- "35. We have considered the rival contentions and gone through the orders of the authorities below. From the record, we fou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elecommunication industry and old exchanges, if any had been totally revamped. It was not merely addition of the new exchanges but there was entire change in the set up, technology, instruments and equipments exchanges which were earlier operating on old technology whereby there was use of big cross bar exchanges with large telephone instruments of dialing numbers mechanically by rotating the dial. Since this technology has been totally abandoned and revamped, replacing the old, most of the income venerated is attributable to such new technology exchanges. Merely on the number of old exchanges which were not in operation at all or had undergone totally revamped, income cannot be attributable to such old exchanges, we found that the new technology and the new exchanges made possible a multitude of new intelligent network services which are like cellular services, virtually calling card services, premium rate services, ISDN, calling line identification, call forward on busy and free lines, credit card payment scheme, tele-mart interactive voice response services, directory on CD-Rom etc. Various add on services such as Datacom, Inet, DID PABX, voice mail, Radio paging and ISDN has be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....We direct accordingly. 37. The other grounds in the appeal were not pressed by the learned AR, the same are therefore dismissed in-limine. 38. Since, In the AY 2005-06, there was change in the eligibility criteria of deduction eligible u/s 80IA, we direct the AO to recompute the deduction in terms of the amended provisions of the law applicable for the AY 2005-06. However, the same criteria for apportioning the income attributable to income generated through various services by the new exchanges-and old exchanges at 75% and 25% is to be kept. We dirert accordingly. 39. In the result, the appeal of the assessee is allowed in part, in terms indicated hereinabove." 11. Further, the audit report submitted by the assessee during the assessment proceedings and not along with the return of income does not debar assessee from claiming the deduction u/s 80IA as held by Hon'ble Delhi High court in CIT Vs. Centimeter Electricals Ltd. 317 ITR 249 that requirement of filing the audit report along with the return is not mandatory but directory and therefore if the audit report is filed at any time before passing of the assessment order it satisfied the requirement. Therefore on this g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he income of the assessee. 14. On appeal before the ld CIT(A) the assessee submitted that outstanding balance of unclaimed security deposit etc was submitted by the assessee with respect to Delhi and Mumbai Unit and further additional details were also provided of live collections along with details of customer code and amount refunded. The various types of deposits was also submitted with reconciliation. The ld CIT(A) obtained remand report on the details submitted by the appellant and after considering the same the rejoinder of the assessee was sought. Before the ld CIT(A) assessee conceded that as per statement in annexure-3 the amount of deposit of Rs. 1276983723/- is under reconciliation and interest thereon consequently is required to be reconciled. Considering all the above submission of rival parties he deleted the addition of Rs. 10316296280/- and confirmed the unreconciled sum of Rs. 1276983720/- on account of subscriber deposit. This is challenged by the parties before us in respective appeals. 15. Before us Ld AR submitted that these liabilities are outstanding balance of the refundable unclaimed security deposit and same cannot be treated as a trading receipt as the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of deposit receipt and making claim thereof. As it is apparent that assessee is a public sector undertaking and operates the telephony services in select cities. It also uses CSMS system which is a programme regarding new connection refund adjustment and disconnections. Therefore, as on 31.03.2006 an amount of Rs. 11593290000/- was outstanding as net balance of security deposit. Therefore, such amount of deposit are accepted with an obligation of repayment at the time of disconnections of services. Apparently this money does not belong to the assessee company but is required to be refunded to the customers as and when claimed. Before the ld CIT(A) the assessee has submitted the details of this account with respect to outstanding balances, interest accrued thereon, telephone connection disconnected during the year, the amount of security deposit received during the year and security deposit refunded during the year for year ended March 2003 to March 2009. Regarding the live connections assessee submitted details with customer code and for security deposit refund the subscriber details. It also submitted as per annexure 3 details with regard to current status of live connections an....