A. Corporate Taxes

1. Supreme Court¹: Holds that variable license fees paid by telecommunication companies is capital expenditure and should be amortised over the life of the license.


In the year 1999, the National Telecom Policy, 1999 (new policy) substituted the National Telecom Policy of 1994 (old policy). Some of the key features of the new policy were:

  1. The telecom operator licensee is required to pay to the Department of Communication (DoT), a one-time entry fee and additionally, a licence fee on a percentage share of gross revenue (adjusted gross revenue – AGR).
  2. The entry fee (one-time fee) chargeable was payable by the existing operator up to 31 July 1999, calculated up to the said date and adjusted upon notional extension of the effective date.
  3. From 1 August 1999, licence fee (variable fee) was payable on a percentage of the AGR earned.
  4. The period of licence was 20 years from the effective date of the existing licence agreement, i.e. from 1994.

As per section 35ABB, any expenditure being in the nature of capital expenditure for acquisition of right to operate telecommunication services - either before the commencement of the business or thereafter and for which payment has actually been made to obtain a licence, there shall be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.

Judgement of the Hon'ble Supreme Court

The question before the Hon'ble Supreme Court was whether the variable annual licence fee paid by the assesse was revenue in nature and to be allowed deduction under section 37 of the Act or it was capital in nature and accordingly was required to be amortised under section 35ABB of the Act. 

The Hon'ble Supreme Court concluded that the payment of entry fee as well as the variable fee was capital in nature and to be amortised in accordance with the provisions of section 35ABB of the Act.

The Hon'ble Supreme Court laid down important principles for determining whether the expenditure is revenue or capital in nature and held that:

  1. To determine an expenditure is capital or revenue in nature, the ordinary course of business usually adopted in that concern and the object of incurring the expenditure should be taken into account. What is material is the nature of right sought to be secured through the payment. An expenditure cannot be treated as a revenue expenditure simply because the payment is structured in instalments.
  2. The test to identify whether an expenditure structured in the form of instalments is in the nature of a capital expenditure or revenue expenditure, is to first consider whether the payment made (in lump-sum or in instalments) relates to the acquisition / expansion of a capital asset, or for working of an asset to produce profits. Further, if it is determined that the payment is towards acquisition / expansion of a capital asset, then it needs to be verified if the payment has simply been chopped up into smaller sums payable in instalments only for the sake of convenience.
  3. Where a transaction consists of payments in two parts - lump-sum payment at the outset, followed by periodic payments - the nature of the two payments would be distinct only when the periodic payments have no nexus with the original obligation of the taxpayer. Payments post 31 July 1999 was a continuation of the payment pre 31 July 1999 albeit in an altered format which did not take away the essence of the payment. It was a mandatory payment traceable to the license agreement as modified post migration to the new policy. Consequence of non-payment would result in ouster of the licensee from the trade. Thus, the payment was intrinsic to the existence of the licence as well as trade itself.

2. Mumbai ITAT²: Excess Cash shown in books of accounts than the cash found during the survey proceedings, such difference in cash cannot be treated as unexplained expenditure under section 69C.


During the course of survey proceedings in the premises of the petitioner actual cash of INR 11,800/- was found as against the cash in hand shown in books of accounts of INR 18,00,312/- Since the petitioner has failed to reconcile the difference and also not provided the details asked by the AO, the AO treated the difference amount of INR 17,88,512/- as unexplained expenditure under section 69C.

On Ld. CIT(A) upheld the decision of AO to treat the difference as unexplained expenditure, since no evidence was presented by the petitioner.

The petitioner preferred an appeal before the Hon'ble ITAT on the ground that whether merely on the basis of the shortfall between the actual cash found during the survey proceedings and the cash shown in the books of the accounts, addition under section 69C is warranted.

Decision of ITAT:

Placing reliance on the judgments of the Allahabad High Court and the Co-ordinate Bench of Mumbai Tribunal, it was held in the case of the petitioner that the provisions of section 69C will not attract and the shortfall in the cash cannot be considered as an unexplained expenditure. The Hon'ble Tribunal drew attention to the decision in the case of Allahabad High court, wherein it was held that where money is found to be in excess of the amount recorded in the books of accounts, that itself will not be suffice to make in addition under section 69 or 69A of the Act. At the most the authorities could have presumed that the assessee has spent the difference amount somewhere.

Further, reliance was also place in the case of M/s Sarang & Associates Vs. DCIT wherein the Mumbai Tribunal was of the opinion that the addition made under section 69C, due to the difference in cash in hands as per books and cash found during survey is not sustainable as the source of such expenditure could be the cash in hand available with the assessee as per the books of accounts.

3. Mumbai ITAT³: Doctrine of Merger: An intimation issued under section 143(1) merges with the assessment order under section 143(3). Therefore, any adjustments made in the intimation would be valid only if the same adjustment is made in the assessment order.


The assesse is a stock exchange company and filed its Return of Income for AY 2021- 22 on 12/02/21 declaring total income of INR 2049,74,12,520/-. The assesses return was processed by CPC and intimation was issued under section 143(1) of the Act determining total income of INR 2084,98,11,580/-. 

The assesse while computing the total income claimed a deduction of abandoned project expenses amounting to INR 35,23,99,063/-. However, the same was disclosed by the tax auditor in its tax audit reported as capital expenditure and hence, the same was disallowed by the CPC under section 37(1) of the Act in the intimation issued under section 143(1) of the Act.

Aggrieved with the intimation, assesse preferred to the CIT (A). CIT(A) dismissed the case in favour of the revenue.

Decision of ITAT:

As the case of assesse was scrutinized under section 143(2) and assessment order under section 143(3) of the Act was passed, doctrine of merger comes into picture and therefore the adjustment made by the CPC gets merged into the order passed under section 143(3) and only the order under section 143(3) survives. Thus if no addition is there in the assessment order, as was the case, the whole issue becomes academic.

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1. Bharti Hexacom Ltd vs CIT [Delhi] [2023] [ TS-605-SC-2023]

2. Almech Enterprise vs. ACIT [ I.T.A. No. 2110/Mum/2023]

3. National Stock exchange of India Limited vs DCIT [TS-611-ITAT-2023]

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