1. This is an appeal by the assessee which is a company. The appeal relates to the asst. yr. 1997-98, for the previous year ended on 31st March, 1997.
2. There are two disputes raised by the assessee. The first is regarding the correctness of the prima facie adjustment made by the AO under s. 143(1)(a) of the Act by disallowing a sum of Rs. 31.38 crores, for the reasons given by him in the adjustment explanatory sheet. The second dispute, which is the more important one is whether the AO was justified in levying additional income-tax of Rs. 2,69,86,800 under s.
143(1A), as a consequence to the prima facie adjustment.
3. We may first take up the main dispute, namely, the levy of the additional income-tax under s. 143(1A), the AO is empowered to charge additional tax from the assessee where as a result of the prima facie adjustment made under the first proviso to cl. (a) of sub-s. (1), the income declared by the assessee in the return is increased or the loss declared by such person is reduced or is converted into income. The additional tax in the present case came to be imposed under the following circumstances. The assessee is engaged in the business of providing telecom services. In the month of December, 1995, it paid licence-fees of Rs. 313.8 crores in respect of the licence, which was to remain valid for a period of ten years. The payment fell in the accounting year ended 31st March, 1996, relevant to the asst. yr.
1996-97. The assessee's business had not been set up in this year. If, therefore, filed Nil return in November, 1996, which is stated to have been accepted under s. 143(1)(a). The installation of the equipment was completed during the next accounting year, namely, 1st April, 1996 to 31st March, 1997, relevant for the asst. yr. 1997-98. The first telephone call was made on 26th January, 1997, and the business is stated to have been set up on that date. For this year i.e. year ended 31st March, 1997, the assessee filed a return declaring a loss of Rs. 1,14,21,17,389 and claimed the entire tax deducted at source as refund.
In the return, a copy of which is available at p. 1 of the paper-book, the assessee commenced the computation of the income from business from the figure of loss as per the P&L a/c and increased the same, inter alia, by a sum of Rs. 80,19,33,333 which was described as 'deduction under s. 35ABB in respect of licence-fees to operate telecom services'.
Page 2 contains the details of the claim relating to the licence-fees and the same are reproduced as under :-----------------------------------------------------------------------Particulars Amount Amount-----------------------------------------------------------------------Licence-fees paid during previous 3,138,000,000year ended 31st March, 1995 (asst. yr. 1996-97)1/10th of the expenditure as the 313,800,000same could not be claimed as s. 35ABB is introducedwith retrospective effect from 1st April, 1996.1/10th of the amount paid in 313,800,000previous year 1995-96Licence-fees paid during the 1,569,000,000previous year ended 31st March, 1997Deduction for asst. yr. 1997-98 1,74,333,3331/9th of amount paid during 1996-97 Total Deduction 8,01,933,333 ----------------------------------------------------------------------- 4. It may be seen from the aforesaid details that the assessee claimed two amounts of Rs. 31.38 crores each in respect of the payment of Rs. 313.8 crores made during the previous year ended 31st March, 1996. Each of these amounts represented 1/10th of the licence-fees paid during the year ended 31st March, 1996. In addition, 1/9th of the licence-fees of Rs. 159.6 crores paid during the previous year ended 31st March, 1997, which came to Rs. 17,43,33,333 was also claimed as deduction.
5. The return was processed under s. 143(1)(a) of the Act and an initimation was drawn up on 3rd November, 1998. The loss was reduced to Rs. 82,82,74,300 by disallowing two items claimed by the assessee in the return as deduction. The first was the disallowance under 43B in an amount of Rs. 43,089 with which we are not concerned in this appeal.
The second was the disallowance of licence-fees of Rs. 31.38 crores.
The AO gave the following reasons in the Adjustment Explanatory Sheet for disallowing the licence-fees.
"In the return the assessee has claimed deduction under s. 35ABB of Rs. 80,19,33,333. This consists of an amount of Rs. 17,43,33,333 claimed in asst. yr. 1997-98. Further the assessee has claimed deduction of Rs. 31,38,00,000 @ 10 per cent of licence-fees paid of Rs. 313,80,00,000 in asst. yr. 1997-98. The assessee has further claimed an additional amount of Rs. 31,38,00,000 being 1/10th amount relating to asst. yr. 1996-97. Thus, against payment of Rs. 313,80,00,000 in asst. yr. 1996-97 the assessee has claimed deduction @ 20 per cent. As per s. 35ABB, deduction in any year is allowable at appropriate fraction meaning fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years. Thus regarding any payment in assessment year a deduction will be allowed of the amount distributed over remaining years of life of licence. Since payment of Rs. 313,80,00,000 was made in asst. yr. 1996-97 and the licence was valid for 10 years, deduction allowable in asst. yr. 1997-98 is only Rs. 31,38,00,000 i.e. @ 10 per cent of Rs. 313,80,00,000. The claim of the assessee that in asst. yr. 1996-97, there was no business and therefore, deduction pertaining to that year which was claimed in asst. yr. 1997-98 is not supported by any provision of law, as mentioned in s. 35ABB. Accordingly this is a mistake apparent from record and is a prima facie mistake within meaning of s. 143(1)(a).
Since s. 35ABB allows deduction only at appropriate fraction and does not permit deduction for an amount pertaining to assessment year in which the business was not set up, claim of the assessee of deduction of Rs. 31,38,00,000 is without any basis. Accordingly claim is not allowed and the disallowance of Rs. 31,38,00,000 is made under s. 143(1)(a)." 6. Consequently additional income-tax of Rs. 2,69,90,506 was charged which is now challenged before us.
7. The assessee filed an appeal before the CIT(A) and contended that the adjustment by disallowing the licence-fees paid was not a prima facie adjustment and that consequently the levy of additional income-tax was also illegal. It was contended that until the business was set up, the assessee cannot claim any expenses or losses under the Act and therefore, prior to 26th January, 1997, it could not have claimed any expenses or losses and therefore, it had rightly not claimed any deduction in respect of the licence-fees under s. 35ABB in the return filed for the asst. yr. 1996-97. It was further pointed out that the Finance Act, 1997 made the provisions of the section retrospective from 1st April, 1996 and ensured that even those instalments of licence-fees which were paid prior to 1st April, 1996 would be eligible for deduction for the balance period of the licence and therefore, the provision must be so construed as to avoid hardship which may be caused to genuine cases like that of the assessee. It was further submitted that at any rate, the question whether the assessee could claim deduction in respect of the fees paid in December, 1995, and referable to asst. yr. 1996-97, in the return for the asst. yr.
1997-98 was a debatable issue on the basis of the provision as it existed at the time of filing the return for the asst. yr. 1997-98 and therefore, no additional income-tax can be charged.
"4. On a careful consideration of the submissions made, I agree with the action taken by the AO. The appropriate fraction of licence-fee is allowed from the year of commencement of business up to the stipulated number of years. Moreover, in Expln. (ii) to sub-s. (1) of s. 35ABB, "appropriate fraction" has been defined to mean "......... the numerator of which is one ....." whereas, the appellant claimed two deductions, including one in respect of the year when the business had not commenced, which is clearly not permissible. The argument that the proposed amendment to these provisions in the Finance Bill of 1999 would suggest that the issue was unclear and hence debatable at the relevant point of time does not appear correct, as the law had to be applied as it stood at the relevant point of time. The AO has correctly worked out the deduction admissible to the appellant, as per law and hence does not call for any interference on my part. Accordingly the issue is decided against the appellant.
In the second ground, the appellant has contested levy of additional tax under s. 143(1A) of the IT Act, 1961. The issue being consequential in nature, no specific directions are called for on my part.
9. The assessee is in further appeal before us. It was contended on its behalf that no deduction of the licence-fees paid could have been claimed in the return for the asst. yr. 1996-97 because the assessee's business of providing telecom services had not been set up during the previous year. However, the intention of s. 35ABB was to give complete deduction in respect of the payment of licence-fees for telecom services and since the amount had actually been paid, the assessee bona fide took the view that it could claim 1/10th of the payment made in December, 1995 and referable to the asst. yr. 1996-97 in the return filed for the asst. yr. 1997-98, in addition to the 1/10th of the fees paid and referable to the asst. yr. 1997-98. Thus, it was that two deductions under s. 35ABB, each of Rs. 313.38 crores and each representing 1/10th of the total licence-fees of Rs. 313.8 crores paid in December, 1995, came to be claimed in the return for the asst. yr.
1997-98. It was submitted that the object of inserting the section as explained in the Memorandum [(1997) 224 ITR (St) 9, 120] was to amortise the capital expenditure of paying telecom services fees and that if the fees has actually been paid, the same has to be amortised in equal instalments over the period for which the licence remained in force and viewed in the background of this object, the assessee was justified in its belief that the payment of Rs. 313.8 crores would be amortised over a period of ten assessment years, but since the business had not been set up in the previous year, relevant to the asst. yr.
1996-97, it genuinely believed that the fraction of 1/10th can be claimed, instead of in the asst. yr. 1996-97, in the return filed for the asst. yr. 1997-98. The claim, it was submitted, would be in consonance with the object of introducing the provision. It was pointed out further that originally, the section was to take effect only from 1st April, 1998, but after considering the representations the legislature was pleased to give retrospective effect from 1st April, 1996. Our attention, in this connection, was drawn to the speech of the Hon'ble Union Finance Minister while moving the Finance Bill 1997 in the Lok Sabha (See 225 ITR (St) 30, para 24). The reason for accepting the representations and giving retrospective effect from 1st April, 1996, has been stated to be the fact that 1st April, 1996, marks the beginning of the fiscal year when the first telecom licence was issued.
It was, therefore, contended that if the object of the provision is to allow the assessee to amortise the licence-fees paid, the assessee cannot be faulted for entertaining a bona fide impression that any deduction referable to an assessment year, which is prior to the setting up of the telecom business can be claimed in the return for the assessment year first available after the setting up of such business.
In further support of the contention, the learned counsel for the assessee has drawn attention to the fact that realising the difficulties which the assessees were facing where the payment of the fees has been made prior to the setting up of the telecom business, s.
35ABB was amended by the Finance Act, 1999, with retrospective effect from 1st April, 1996, to provide that irrespective of the fact that the payment of the licence-fees had been effected prior to the commencement of the business, the assessee can claim deduction of the appropriate fraction in the previous years beginning with the previous year in which such business was commenced. The effect of this amendment, it was pointed out, was that the assessee's claim was proper. Attention was also drawn to the Notes on Clauses of the Finance Bill, 1999 [(1999) 236 ITR (St) 30, 170] wherein the reason for the amendment was given as under : Rationalisation of the provisions relating to allowance for telecommunication licence fees.
In computation of the profits and gains of business or profession, a deduction is allowable under s. 35ABB, in respect of any capital expenditure incurred for acquiring any right to operate telecommunication services and for which the payment has actually been made to obtain a licence. This deduction is allowable in equal instalments during the relevant previous years. Under the existing provisions, the expression "relevant previous years" means the previous years beginning with the previous year in which the licence fee is actually paid and the subsequent previous year or years during which the licence, for which the fee is paid, shall be in force.
With a view to clarifying that the deduction is allowable in respect of the entire capital expenditure incurred and actually paid by the assessee, whether before the commencement of the business or thereafter, the Bill proposes to provide that in a case, where the licence-fee is actually paid before the commencement of the business, the relevant previous years would mean the previous years beginning with the previous year in which such business commenced and the subsequent previous year or years during which the licence is in force. It is also proposed that no deduction under sub-s. (1) of s. 32 shall be available for such expenditure for the same year or any subsequent previous year.
The proposed amendment will take effect retrospectively from the 1st of April, 1996, and will, accordingly apply in relation to the asst.
yr. 1996-97 and subsequent years." 10. It is stressed that the amendment put the matter beyond doubt, in the sense, that the assessee's claim must now be considered as a proper claim and that at any rate, the amendment itself recognised the existence of a doubt or difficulty in the earlier provision and if there is a doubt or debate with respect to the interpretation of a statutory provision, no prima facie adjustment can be made, nor additional income-tax be charged.
11. The learned senior Departmental Representative on the other hand, strongly relied on para 4 of the order of the CIT(A). He pointed out that for the purpose of levying additional income-tax or for deciding whether the prima facie adjustment was properly made, the law as it stood at the time of filing the return has to be seen and it was not open to the assessee to raise a debate on the basis of the subsequent amendment to the law. In support of this contention, he relied upon the judgment of the Calcutta High Court in the case of Modern Fibotex India Ltd. & Anr. vs. Dy. CIT & Ors. (1995) 212 ITR 496 (Cal). He submitted that equitable considerations such as that the assessee would not get a deduction in respect of the payment of licence-fees under s. 35ABB in the year in which the business was not set up and, therefore, it must get the deduction in the year in which the business is set up and thus the entire payment should get amortised over the period of the licence can have no place in the interpretation of the income-tax law and if the claim is incorrect, on the basis of the law existing at the time of filing of the return, there is no option but to charge additional income-tax. He pointed out that there was no room for any doubt that the first year in which the assessee, according to the unamended section would get deduction of the appropriate fraction of the licence-fees paid, was the asst. yr. 1997-98 and in the return filed for this year, the assessee cannot get a deduction which relates to the asst. yr. 1996-97 and has been missed due to the fact that in the previous year relevant to that assessment year, the assessee had not set up the business. The learned senior Departmental Representative thus supported both the prima facie adjustment as well as levy of additional income-tax.
12. In his rejoinder, the learned counsel for the assessee pointed out that the return of income was filed only in accordance with law prevailing at the time of filing the same in the sense that "there was "nothing revolutionary" in claiming a deduction in the return in respect of an expenditure or payment made in the earlier year and that the section itself permitted deduction, spread over a period of the licence, even though the payment of the licence-fees had been effected in an earlier year. The only question was, according to him, whether the AO was justified in charging additional income-tax in respect of a debatable or ticklish question relating to the interpretation of a statutory provision. In his submission, the AO was not justified.
13. We have carefully considered the rival contentions. We find a good deal of force in the arguments taken on behalf of the assessee. Sec.
35ABB, as it was first introduced from 1st April, 1996, stood as under : "35ABB. Expenditure for obtaining licence to operate telecommunication services. - (1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services and for which payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.
(i) "relevant previous years" means the previous years beginning with the previous year in which the licence-fee is actually paid and the subsequent previous year or years during which the licence, for which the fees is paid, shall be in force; (ii) "appropriate fraction" means the fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years; (iii) "payment has actually been made" means the actual payment of expenditure irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee." 14. In accordance with the above section, in respect of the payment made in December, 1995, the deduction of the fraction of 1/10th had to be allowed in the asst. yr. 1996-97 since this was the assessment year relevant to the previous year in which the licence-fees was actually paid. But since the business had not been set up during the previous year ended 31st March, 1996, the assessee could not, and rightly did not, claim the same in the return filed for the asst. yr. 1996-97, in November, 1996. In fact, at the time when the return for asst. yr.
1996-97 was filed, s. 35ABB was not even thought of. The return for the asst. yr. 1997-98 was the first return which the assessee filed after the coming into force of s. 35ABB, with retrospective effect from 1st April, 1996. Since the section had been given retrospective effect from the asst. yr. 1996-97, it is quite possible that the assessee was under an impression that what it did not and could not claim in the return for the asst. yr. 1996-97, could be claimed in the return filed for the asst. yr. 1997-98, in addition to the appropriate fraction relating to the asst. yr. 1997-98. The claim of the two amounts of Rs. 313.38 crores each, one representing the appropriate fraction relating to the asst. yr. 1996-97 and the other representing the appropriate fraction relating to the asst. yr. 1997-98, was also in consonance with the object of introducing the provision, namely, the amortisation of the entire licence-fees, if it had actually been paid. There is no dispute that the assessee had actually paid the licence-fees of Rs. 313.8 crores in December, 1995. Therefore, consistent with the object of introducing s. 35ABB, the assessee was justified in entertaining a bona fide impression that the arrears of the appropriate fraction can also be claimed in the return filed for the first time after the section came into force. The section at that time specifically stated that the deduction would commence with the previous year in which the licence-fee was actually paid and the subsequent previous year or years during which the business was in force. This also must have lent support to the assessee's belief that the arrears of the claim could also be made in the return filed for the asst. yr. 1997-98. The section was amended by the Finance Act, 1999, with retrospective effect from 1st April, 1996, and after the amendment, the relevant portion of the section stood as under : 35ABB. Expenditure for obtaining licence to operate telecommunication services. - (1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecommunication services or thereafter at any time during any previous year and for which payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.
(A) In a case where the licence-fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced; (B) in any other case, the previous years beginning with the previous year in which the licence-fee is actually paid, and the subsequent previous year or years during which the licence for which the fee is paid, shall be in force; (ii) "appropriate fraction" means the fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years; (iii) "payment has actually been made" means the actual payment of expenditure irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee." 15. The amendment, it may be noted, clarifies that irrespective of the fact that the licence-fees was paid before the commencement of the business, the deduction would start from the previous year in which such business commenced. The words underlined by us as well as the definition of the words "relevant previous years" in Expln. (i) clearly bring out the intention of the legislature to sanctify arrears of the claims for deduction in the year in which the business is actually commenced. The object of the amendment has been brought out in the Notes on Clauses (236 ITR st 170) which we have already extracted in the earlier portion of our order. Thus, considering the object of the amendment also, the assessee's claim appears to be prima facie acceptable. In any event, there is scope for debate and argument as to whether the assessee was right in claiming 1/10th of the licence-fees relating to the asst. yr. 1996-97 in the return for the asst. yr.
1997-98 and if there is a debate, the levy of additional income-tax cannot be upheld.16. At this juncture, we may clarify that we are not to be understood as having pronounced on the correctness or otherwise of the assessee's claim on merits. We are only saying that there is much to be said in favour of the assessee's stand and that it is not a case where no argument is available to the assessee. It is our considered view that it is not a case for prima facie adjustment as envisaged in s.
143(1)(a).
17. For the aforesaid reasons, we cancel the levy of additional income-tax and allow the assessee's appeal.