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2025 Supreme(Online)(DEL) 820
HIGH COURT OF DELHI
Yashwant Varma, Harish Vaidyanathan Shankar, JJ
VODAFONE MOBILE SERVICES LTD. – Appellant
Versus
DEPUTY COMMISSIONER OF INCOME TAX – Respondent
ITA-660/2018
Mr. Sachit Jolly, Sr. Adv. with Ms. Soumya Singh, Ms. Disha Jham and Mr. Abhyudaya Shankar Bajpai, Advs.; Mr. Indruj Singh Rai, SSC with Mr. Sanjeev Menon, Mr. Rahul Singh, JSCs with Mr. Anmol Jagg, Mr. Gaurav Kumar and Ms. Varsha Sharma, Advs.
Provisions for future obligations can be recognized under accounting standards if they meet specific criteria, emphasizing the distinction between ascertained liabilities and contingent liabilities.
Headnote:(A) Income Tax Act, 1961 - Sections 32, 36(1)(iii), and 37 - Depreciation claim on Asset Reconstruction Cost (ARC) disallowed by ITAT - Tribunal held that ARC is not an ascertained liability and disallowed depreciation for not being incurred - ITAT's interpretation of 'extension of existing business' led to interest disallowance under Section 36(1)(iii) - Tribunal's view on commission to distributors under Section 40(a)(ia) upheld - The court found that the Tribunal failed to address the alternative plea regarding ARC under Section 37 - The court ruled that provisions for future obligations can be recognized if they meet the criteria of AS 29 - The term 'extension' in Section 36(1)(iii) does not necessarily exclude the concept of 'expansion'. (Paras 1-81)
(B) The court emphasized that the obligation to restore cell sites creates a present obligation, allowing for provisions to be made, as future costs can be estimated reliably. (Paras 34-36)
(C) The court directed the AO to reconsider the common pool of funds and the usage of cell sites in light of the judgment. (Paras 78-80)
YASHWANT VARMA, J.
1. The assessee as well as the Revenue seek to assail the correctness of the judgment dated 14 March 2018 rendered by the Income Tax Appellate Tribunal’ and in terms of which the two cross appeals of parties have come to be decided. We had in terms of our order of 23 January 2024 admitted these two appeals on the following questions of law:
“ ITA No. 660/2018
A. Whether on the facts and in the circumstances of the case and in law, the ITA T erred in upholding the disallowance of depreciation 1 Tribunal erified ITA 660/2018 Page 1 of 70
to the tune of Rs.5,10,79,752/- claimed on account of Asset Reconstruction Cost [“ARC’] being an ascertained liability, or alternatively allowing deduction for such expenditure in the year of execution of lease agreements or over the period of the lease?
B.Whether on the facts and in the circumstances of the case and in law, the ITAT erred in holding that installation of cell site towers amounted to ‘extension of existing business’ as stipulated in
proviso to Section 36(1)(iii) of the Income Tax Act, 1961 [“Act”] and, thereby warranting proportionate disallowance of interest under that provision?
C.Whether on the facts and in the circumstances of the case and in law, the ITAT erred in misbranding the discount offered by the Appellant to the pre-paid sim-card distributors as commission and hence upholding disallowance made by the AO under Section
40(a)(ia) of the Act? ITA 634/2019
A. Whether the ITAT erred in law and on facts in deleting the disallowance amounting to Rs. 14,23,29,976/- on account of commission paid to distributors by ignoring the factual matrix of the case and solely relying upon the decision of the DRP, Ahmedabad wherein the claim on commission expenditure was upheld?
B. Whether the ITAT erred in law and on facts in deleting the disallowance of penalty paid to Department — of Telecommunications even though penalty expenses, being penal in nature are not allowable u/s 37 of the Act?”
2. Subsequently and when the appeals were taken up for review on 03 April 2024, we had taken note of the contention of Mr. Jolly, learned senior counsel appearing for the assessee, that the Tribunal had undisputedly failed to deal with the alternative plea which was taken by the assessee with respect to Asset Reconstruction Cost”. The ARC was sought to be factored in while computing depreciation claimed and the same, according to the assessee, being otherwise liable to be accorded
recognition by virtue of Section 37 (1) of the Income Tax Act, 1961 ? in
case its stand of the same being covered by Section 32 were to not find 2 ARC 3 Act Signatu: Verified - ITA 660/2018 Page 2 of 70 Digitally Si, By:KAMLI KUMAR favour. It was thus contended that the Tribunal had clearly committed a manifest illegality in failing to deal with the aforesaid question.
3. Turning then to the issues emanating from Section 36(1)(iii), we had taken note of the submissions addressed by learned counsels appearing for respective sides and who had extensively argued on the meaning liable to be ascribed to the word ‘extension’ as appearing in the Proviso thereto. Insofar as Question ‘C’ as framed in the assessee’s appeal was concerned, it was conceded that the issue stands conclusively answered and laid to rest in light of the judgment rendered by the Supreme Court in Bharti Cellular Ltd. (now Bharti Airtel Ltd.) vs. Assistant Commissioner of Income Tax & Anr*.
4. The appeals themselves pertain to Assessment Year 2009-10 and arise in the backdrop of the following facts. The assessee which is a company engaged in providing telecommunication services, had filed a Return of Income on 30 September 2009 declaring NIL income after claiming deductions under Section 80JA and having reported profits as per Section 115JB. The return was thereafter revised on 30 March 2011.
We are now left to consider the upward transfer pricing adjustments made by the Transfer P
