TaxTMI 
TaxTMI 
2016 (9) TMI 1336
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.... circumstances of the case, the learned CIT (A) has erred, both 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 ....
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....ance of claim of deduction u/s 80IA of Rs. 480078205/-. Against this assessee preferred an appeal before the ld CIT(A), LTU, who 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 ....
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....ess shall have to be computed as if such eligible business were the only source of income of the assessee. The Ld. AO observed that the appellant has not maintained 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 conte....
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.... for deduction to the eligible business irrespective of whether profits and gain arose from new undertaking or not. Further, the appellant submitted that since deduction is to be allowed in respect 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 hereun....
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....conditions In order to ensure that only eligible profits are given deduction u/s 80-IA the onus is heavy on the assessee to prove that the deduction has not been claimed on non-eligible activity and subject to meeting the conditions specified under the section 80-IA. 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....
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....ition remains notwithstanding the fact that the assessee may have set off such loss from the eligible unit against the income of non-eligible unit in the year of incurring of such loss. By means of sub-section (5), the loss incurred in the eligible unit is nationally carried forward to the subsequent years 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. ....
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....eduction allowable under section 80IA of the Act to MTNL as a whole, being a telecom service provider eligible for such deduction. (7). On the facts and circumstances of the case, the Assessing Officer has erred in ignoring the contention that the appellant company has on or after I5r April, 1995 undergone complete revamp of its technology and infrastructure 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....
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.... the income being eligible for deduction in all the years under consideration. We direct accordingly'. While holding this, the Hon'ble ITAT held that post- 1995, the telecom sector underwent tremendous revolution by inducting de novo technology and system in place of antiquated system/technology and therefore for the purpose deduction, on the basis of attributing the income 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 i....
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.... ground. 6.4.3.3.5 Before holding that the revamped MTNL has started providing a different genre of services, it is also needed to ascertains as to what new services are actually being received by the old subscribers (receiving basic telecom services since prior to 1.4.1995). The appellant was primarily providing basic telecommunication services prior to 1995. The term 'basic telecommunication services' 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 ....
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....regard were brought in statute for the Power sector. It may be noted that for the Power sector, the Finance Act 2004 w.e.f 1.4.2005 specifically extended the benefit of the deduction u/s 80IA in respect of the undertaking that undertakes substantial renovation and modernisation of the existing transmission line or distribution lines at any time during the period beginning on the ls: day of April 2004 and ending on 31tl day of march 2012 (sub-section (4)(iv)(c)). The provisions of section 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 ....
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....to only new telecom services that started after 01.04.1995. Further, even for each eligible undertakings the impact of section 80IA (5) the computation of eligible profit has to be worked out keeping in view the brought forward losses and unabsorbed depreciation of such undertakings, which are to be first set-off against the income in subsequent years in view of the above referred decisions of Hon'ble Mumbai ITAT in the case of M/s Pidilite Industries Ltd.(supra) and of Hyderabad ITAT in the case of Hyderabad Alkalies 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....
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....communication services (Item no.15). The information relating to the ownership status of the undertaking is captured in Item no. 4. For the telecom service, the audit report specifically requires information on the nature of telecom service rendered on which the deduction is being claimed, eg, basic telecom service, cellular service etc. Making distinction with the total sales of the undertaking (Item No. 27), the item 29 of the report specifically captures information relating to profit and gains derived by the undertaking/ enterprise from the eligible business. For this 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 th....
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....has failed to take in cognizance the order of the Honorable Income Tax Appellate Tribunal in the case of the assessee (for AY 1998-99, 1999-00, 2000-01, 2002-03) wherein the Honorable ITAT had held that MTNL has an arguable case in respect of deduction u/s 80 IA and a reasonable opportunity of being heard should be afforded to appellant before taking decision as per law." On careful consideration, I find that in its order dated 3.2.2006 for the AY 1998-99,1999-2000, 2000-01 and 2002-03, the Hon'ble ITAT has not held that the appellant itself is one single eligible undertaking in the above order, 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 appella....
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....SNL in the same matter by way of a letter, which itself have doubtful legal interpretational value, may not be considered as department's authentic position in the matter. On the other hand, as observed by me in para 6.4.3.3.2, the position of appellant on the issue is vacillating as appellant is not sure whether the deduction is available to it as one unified undertaking or to separate undertakings. In view of the above, this ground of-appeal is also decided against the appellant. 6.5 Keeping in view the above, in my view the issue whether the appellant, as one whole undertaking, is eligible for deduction u/s 80IA or not 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 requireme....
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....n-set clause on telecom sector w.e.f. 1.4.2005. Had the contention of appellant correct, there was no need to build-in a condition in sub-section (3) w.e.f. 1.4.2005. The appellant's contention that subsequent upon the substantial revamping undertaken by it, the appellant itself be treated as a new undertaking setup after 01.04.1995 is also not acceptable in view of the fact that the law did not provide for the deduction on substantial revamping for telecommunication sector while specific provisions were introduced for the power sector, which shows definite legislative interest in the matter. In view of the above, I hold that in respect of the telecommunication 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....
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....taking independent of its own existence income of which can be allowed deduction u/s 80IA of the Act. She further submitted that no audit was carried out of the accounts of those new exchanges and therefore, the basic conditions are not satisfied. 10. We have carefully considered the rival contentions and also the orders of the lower authorities where the deduction is disallowed to the assessee for this year. The assessee is a public sector undertaking operating as a company engaged in the business of providing telecommunication services in Bombay and New Delhi as per the license issued by Dept of Telecommunication, Govt. of India. For the year it claimed deduction u/s 80IA of the Act of 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 th....
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....analyzing all these eligibility criteria, the AO has reached to the conclusion that assessee is eligible for deduction u/s 80IA u/s 4C of the IT Act. Now, we have to see whether AO was justified in restricting claim of deduction with reference to exchanges installed after 1995. It is pertinent to mention here that deduction u/s 80IA is to be computed on the profits of the eligible business and not on the basis of amount, invested in plant & machinery in the form or telephone exchanges. Therefore, the profit accruing from telecommunication services is required to be taken into account while granting claim of deduction u/s 80IA. In this regard, we/found that after 1995, there is a complete revolution in telecommunication 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....
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....aim of deduction u/s 80IA, we cannot restrict the claim in respect of the nominal income if any generated out of the old exchanges. Keeping in view the totality of facts and circumstances of the case, we direct the AO to attribute 75% (seventy five percent) of the income from various services enumerated above as having been carried out only by virtue of new exchanges having been installed^ 25% of the income may be attributed to the old exchanges. Accordingly, the matter is restored back to the file of the AO for recomputing the claim of deduction u/s 80IA with reference to 75% of the income being eligible for deduction, whereas balance 25% is eligible for deduction in all the years under consideration. 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....
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....d repaid during the year with the age wise analysis of outstanding amount and interest thereon. The assessee submitted its reply. However, ld Assessing Officer rejected the contention of the assessee as according to him, assessee could not give the details of refund of security deposit and outstanding balance are lying unclaimed for the several years and therefore he treated this amount as income of the assessee. Further, on this outstanding liability the assessee has provided interest of Rs. 47.99 million holding that this liability is contingent in nature. Therefore, an addition of Rs. 11593.29 million on account of deposits and Rs. 47.99 million on account of interest amounting in all to Rs. 11641.28 million was added to the 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 s....
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....tor's report and submitted that as reconciliation has not been done for old outstanding security deposit provisions of section 41(1) are rightly applied. She further submitted that nature of the deposit is not also cleared and merely because deposit reduces gradually cannot be the criteria for deletion of the addition. Therefore, she submitted that ld CIT(A) erred in law in deleting the addition partially though he confirmed the addition to the extent of un-reconciled amount. 17. We have carefully considered the rival contentions. The brief nature of the security deposit is that when customer demands for a connection same is collected and when it is disconnected the amount of deposit becomes refundable to the customer on production 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 repa....
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....operation geographically as well as large subscriber's base, it is not correct to hold that pending reconciliation the deposit become income of the assesse. In view of this we set aside this issue back to the file of the Assessing Officer to give proper opportunity to the assessee to provide reconciliation of the same and then if the amounts are not at all identifiable with respect to the customers then to that extent addition may be restricted. However, if this amount is identifiable with the subscriber and even if it is not claimed by the subscriber despite disconnection of the services assessee is under obligation to repay whenever demanded by the customer. Therefore, ld Assessing Officer is directed to grant an opportunity to the assessee for reconciliation of the above deposit as held above and then decide the issue afresh. In view of this ground No. 6 of the assessee's appeal is allowed accordingly. 18. Ground No. 7 of the appeal of the assessee is against confirming the disallowance of an amount of Rs. 2803000/- on account of interest accrued on outstanding subscriber deposit. This ground is related to ground No. 6 of the appeal of the assessee. Therefore, as we have alre....