2020 (1) TMI 403

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....ances of the case the ld. CIT(A) erred in law in upholding / the disallowance made by the AO under section 14A of the Income-tax Act, 1961 ("the Act") read with Rule 8DC2Xiii) of the Income-tax Rules, 1962 ("the Rules") even in relation to the strategic investments into subsidiaries made by the appellant company for the purpose of exercising control and not for the purpose of earning any tax-free dividend income 2. That the Id. Commissioner of Income-tax (Appeals) erred on facts and in law in failing to adjudicate the ground which the appellant had raised against the disallowance of an amount of Rs. 3,29,84,635/- on account of License fee. 2.1 A That in the facts and circumstances of the case the ld. CIT(A) erred in not deleting the disallowance of Rs. 3,29,84,635/- made by the AO on account of License fee even though theissue has already been adjudicated by the ITAT in appellant's favour in own case for Assessment Year 2007-08. 2. That the Id. Commissioner of Income-tax (Appeals) erred on facts and in law in upholding an addition of Rs. 12,40,180 made by the assessing officer on account of credit of tax deducted at source ("TDS") related to the revenue w....

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....e strongly contended that the Assessing Officer has not recorded requisite satisfaction before resorting to the disallowance and placed reliance on various judicial decisions. It was also contended before the ld. CIT(A) that there has been no expenditure which has been incurred for the purpose of earning tax free dividend and expenses are incurred in the course of normal business only. 5. After considering the facts and submissions, the ld. CIT(A) observed that the Assessing Officer has computed the disallowance and has drawn his satisfaction before invoking provisions. The ld. CIT(A) further observed that satisfaction can also be derived by the ld. CIT(A) and considering the fact that huge investments have been made and dividend income earned thereon, it could hardly be said that no expenditure has been incurred in the process. 6. The ld. CIT(A) found that in Assessment Year 2011-12, disallowances were made under similar situation and drawing support from the findings of his predecessor, upheld the disallowance made by the Assessing Officer. 7. Before us, the ld. counsel for the assessee for the first time took the plea that formula envisaged in Rule 8D cannot be applied ....

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....ed as revenue expenditure. 11. This submission of the assessee did not find any favour with the Assessing Officer who was of the opinion that the licence fee debited in the profit and loss account has to be amortized over the remaining life of licence for the licence to expire. Invoking the provisions of section 35ABB, the Assessing Officer allowed 1/5th of the claim amounting to Rs. 1,04,60,425/- and disallowed Rs. 3,29,84,635/-. 12. The assessee agitated this issue before the ld. CIT(A) vide Ground Nos. 3 to 3.2 of the grounds of appeal. But, while adjudicating this ground, decided some other issue and the grievance of the assessee remained unadjudicated. 13. Before us, the ld. counsel for the assessee drew our attention to the relevant pages of the order of the first appellate authority and how the ground remained unadjudicated. 14. To this, the ld. DR stated that the issue may be restored to the file of the ld. CIT(A) for adjudication. 15. We find that while making additions, the Assessing Officer himself has observed that similar disallowance was deleted by the Tribunal in Assessment Year 2007-08. Since the Revenue is in the process of filing appeal before the H....

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....ch an assessee had to make to establish the business. It was a precondition to setting up of business. It has element and includes payment made to acquire the 'asset' i.e. the right to establish cellular telephone service. But the licence permits and allows the assessee to maintain, operate and continue business activities. Payment of licence fee has certain ingredients and is like lease rent which is payable from time to time to be able to use the licence. The licence acquired was initially for 10 years and the term was extended under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset. The payment of yearly licence fee on revenue sharing basis was for carrying on business as cellular telephone operator and, thus it was a normal business expense. HCL Comnet Systems & Services Ltd. Read in this manner, the licence granted by the Government/authority to the assessee would be a capital asset, yet at the same time, the assessee has to make payment on yearly basis on the gross revenue to continue, to be able to o....

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....ount by number of remainder years of licences. Thus, the capitalized amount of licence fee is to be apportioned as a deduction in the unexpired period of the licence. The provision will have ballooning effect with amortized amount substantially increasing in the later years and in the last year the entire licence fee along with the brought forward amortized amount would be allowed as deduction. After a particular point of time, deduction allowable under section 35ABB would be more than the actual payment by the assessee as licence fee for HCL Comnet Systems & Services Ltd. the said year. This would normally happen after the mid- term of the licence period. Section 35ABB, therefore, ensures that the capital payment is duly allowed as a deduction over the term and once the expenditure is allowed, it would be revenue or tax neutral provided the tax rates remain the same during this period." 31. The Hon'ble Jurisdictional High Court concluded as under: (i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable up to 31- 7-1999 should be treated as capital expenditure and licence fe....