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The Tax Publishers2015 TaxPub(DT) 3639 (Del-Trib) Bharti Airtel Ltd. v. CIT INCOME TAX ACT, 1961 --Revision under section 263--Erroneous and prejudicial orderAllegedly non-examination of taxability of amount transferred from reserve to P&L Account--The assessee was engaged in the business of providing telecommunication services, like mobile, fixed lined, long distance and data services across the country. The assessee and M/s BI Ltd. (BIL) filed Scheme of Arrangement (SOA) before the Hon'ble Delhi High Court for transfer of passive infrastructure undertaking (PI undertaking), all assets and liabilities were transferred from assessee to BIL (a wholly owned subsidiary of the assessee). All the plant and machinery, current assets and liabilities relating to the towers and other related telecom assets/liabilities were also transferred to BIL in pursuance of the SOA which was sanctioned by the Hon'ble High Court on 26-11-2007. The assessee transferred the PI undertaking to BIL at Nil consideration which resulted into capital loss of Rs. 5,739 crores but the assessee did not claim such loss as deductible expenditure in its return of income being loss of capital nature. The assessee revalued its investment in BIL to Rs. 8,218 crores from Rs. 5,00,000 and the corresponding amount (i.e. difference between the fair value and the book value of the investment) was credited to 'reserve for business restructuring', out of the said reserve an amount of Rs. 5,739 crores corresponding to capital loss arising out of transfer of PI undertaking for Nil consideration was credited to the P & L A/c. Aggrieved by the proposed additions in the draft assessment order, the assessee filed objection before the Dispute Resolution Panel (DRP) and the DRP vide directions dated 30-8-2012 held that the disallowance of Rs. 5,739 crores by the AO being capital loss on transfer of PI undertaking by the assessee to BIL at Nil consideration was perfectly in order. At the same time, the AO was directed to verify the claim of the assessee for not reducing the equivalent sum from the computation of income on account of amount transferred from the reserves. The AO held that the assessee transferred PI undertaking to BIL at Nil consideration resulting in a capital loss of Rs. 5,739 crores which was not allowable under normal computation provisions. The AO added back the loss of Rs. 5,739 crores to the income offered by the assessee. Being aggrieved the assessee filed the appeal before the ITAT on the issue of disallowance made by the AO. In the meantime, the CIT exercised his revisionary power under section 263. The CIT after considering the submissions of the assessee observed that this claim of the assessee that the AO after examination and after due application of mind had concluded that the assessee received Nil consideration on transfer of passive telecom infrastructure and that the AO after examining the scheme and the accounting entries passed in this regard by the assessee had concluded that the assessee in the transaction of transfer of passive telecom infrastructure suffered a capital loss, was not factually correct. The final effect in the balance sheet as on 31-3-2008 was that the value of investment had increased to the tune of Rs. 8,218 crores and value of its passive infrastructure assets had decreased by Rs. 5,739 crores, the difference thereof amounting to Rs. 2,479 crores arising on transfer of those assets standing to the credit of Business Restructuring Reserve was allegedly in the nature of capital gains accruing to the assessee which should have been offered to tax under section 45 and alternatively, such amount was allegedly taxable under section 28(iv). *Held:* In the instant case, the amount of Rs. 5,739 crores transferred from Business Restructuring Reserves of Rs. 8,218 crores was not a taxable item, the obvious corollary would be that the balance amount of Rs. 2,479 crores (Rs. 8218 crores - Rs. 5,739 crores) remaining in the said reserve account after the aforesaid transfer was non-taxable. The same finding had been given by the ITAT vide aforesaid order dated 11-3-2014. Therefore, the CIT was not justified in holding that the order passed by the AO was erroneous as well as prejudicial to the interest of the revenue, particularly when the CIT himself failed to arrive at a definite conclusion and to form an opinion regarding the tax implication of the impugned transaction. In the present case, the CIT on the one hand, stated that the transfer of telecom passive infrastructure undertaking at Nil consideration resulted in a capital gain of Rs. 2,479 crores, on the other hand, the same transaction was alternatively alleged to have resulted in a business income of Rs. 2,479 crores under section 28(iv). Moreover, the CIT directed the AO to re-examine and verify the issue, however, he himself failed to arrive at a definite conclusion. Therefore, the CIT without arriving at a definite conclusion was not justified in holding the assessment order dated 30-10-2012 as erroneous and prejudicial to the interest of the revenue. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2015 TaxPub(DT) 3639 (Del-Trib)

Bharti Airtel Ltd. v. CIT

INCOME TAX ACT, 1961

--Revision under section 263--Erroneous and prejudicial orderAllegedly non-examination of taxability of amount transferred from reserve to P&L Account--The assessee was engaged in the business of providing telecommunication services, like mobile, fixed lined, long distance and data services across the country. The assessee and M/s BI Ltd. (BIL) filed Scheme of Arrangement (SOA) before the Hon'ble Delhi High Court for transfer of passive infrastructure undertaking (PI undertaking), all assets and liabilities were transferred from assessee to BIL (a wholly owned subsidiary of the assessee). All the plant and machinery, current assets and liabilities relating to the towers and other related telecom assets/liabilities were also transferred to BIL in pursuance of the SOA which was sanctioned by the Hon'ble High Court on 26-11-2007. The assessee transferred the PI undertaking to BIL at Nil consideration which resulted into capital loss of Rs. 5,739 crores but the assessee did not claim such loss as deductible expenditure in its return of income being loss of capital nature. The assessee revalued its investment in BIL to Rs. 8,218 crores from Rs. 5,00,000 and the corresponding amount (i.e. difference between the fair value and the book value of the investment) was credited to 'reserve for business restructuring', out of the said reserve an amount of Rs. 5,739 crores corresponding to capital loss arising out of transfer of PI undertaking for Nil consideration was credited to the P & L A/c. Aggrieved by the proposed additions in the draft assessment order, the assessee filed objection before the Dispute Resolution Panel (DRP) and the DRP vide directions dated 30-8-2012 held that the disallowance of Rs. 5,739 crores by the AO being capital loss on transfer of PI undertaking by the assessee to BIL at Nil consideration was perfectly in order. At the same time, the AO was directed to verify the claim of the assessee for not reducing the equivalent sum from the computation of income on account of amount transferred from the reserves. The AO held that the assessee transferred PI undertaking to BIL at Nil consideration resulting in a capital loss of Rs. 5,739 crores which was not allowable under normal computation provisions. The AO added back the loss of Rs. 5,739 crores to the income offered by the assessee. Being aggrieved the assessee filed the appeal before the ITAT on the issue of disallowance made by the AO. In the meantime, the CIT exercised his revisionary power under section 263. The CIT after considering the submissions of the assessee observed that this claim of the assessee that the AO after examination and after due application of mind had concluded that the assessee received Nil consideration on transfer of passive telecom infrastructure and that the AO after examining the scheme and the accounting entries passed in this regard by the assessee had concluded that the assessee in the transaction of transfer of passive telecom infrastructure suffered a capital loss, was not factually correct. The final effect in the balance sheet as on 31-3-2008 was that the value of investment had increased to the tune of Rs. 8,218 crores and value of its passive infrastructure assets had decreased by Rs. 5,739 crores, the difference thereof amounting to Rs. 2,479 crores arising on transfer of those assets standing to the credit of Business Restructuring Reserve was allegedly in the nature of capital gains accruing to the assessee which should have been offered to tax under section 45 and alternatively, such amount was allegedly taxable under section 28(iv). Held: In the instant case, the amount of Rs. 5,739 crores transferred from Business Restructuring Reserves of Rs. 8,218 crores was not a taxable item, the obvious corollary would be that the balance amount of Rs. 2,479 crores (Rs. 8218 crores - Rs. 5,739 crores) remaining in the said reserve account after the aforesaid transfer was non-taxable. The same finding had been given by the ITAT vide aforesaid order dated 11-3-2014. Therefore, the CIT was not justified in holding that the order passed by the AO was erroneous as well as prejudicial to the interest of the revenue, particularly when the CIT himself failed to arrive at a definite conclusion and to form an opinion regarding the tax implication of the impugned transaction. In the present case, the CIT on the one hand, stated that the transfer of telecom passive infrastructure undertaking at Nil consideration resulted in a capital gain of Rs. 2,479 crores, on the other hand, the same transaction was alternatively alleged to have resulted in a business income of Rs. 2,479 crores under section 28(iv). Moreover, the CIT directed the AO to re-examine and verify the issue, however, he himself failed to arrive at a definite conclusion. Therefore, the CIT without arriving at a definite conclusion was not justified in holding the assessment order dated 30-10-2012 as erroneous and prejudicial to the interest of the revenue.