ITAT Quashes PCIT's Order u/s 263 Against Bharti Airtel, Holds Interest and Penalty on License Fee as Revenue Expenditure [Read Order]

In a recent ruling, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) quashed the revisionary order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, against Bharti Airtel Limited. The tribunal held that interest and penalty paid on license fees qualify as revenue expenditure and allowed a deduction under the Income Tax Act.

The case is regarding the assessment year 2015-16. Bharti Airtel Limited, the appellant had claimed certain expenditures under the head of revenue expenses, mainly interest and penalty related to paying license fees to the Department of Telecommunications (DoT). The Assessing Officer (AO) accepted the claim in the scrutiny assessment under Section 143(3) of the Income Tax Act. The PCIT invoked revisionary powers under Section 263, stating that the AO’s order was erroneous and prejudicial to the interests of the revenue.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

On the issues of whether the deduction claimed by Bharti Airtel on interest paid for delayed payment of license fees and that the deduction claimed on penalties paid on the same grounds, the PCIT took the view that both these amounts were capital in nature or disallowable under Explanation 1 to Section 37(1), thereby directing the AO to re-adjudicate the matter fresh.

The ITAT relied on settled judicial precedent, including earlier rulings involving Bharti Airtel, to hold that interest paid on delayed license fees is not a capital expenditure. The tribunal asserted that license fees constitute a continuous right to operate, and any interest due to delayed payment does not add to the capital base but arises out of regular business obligations. Thus, the interest was held to be revenue in nature and deductible under Section 37(1) of the Income Tax Act 1961

The ITAT noted that the so-called "penalty" was compensatory, not for an infraction of law. The payments were made to the data of Taxation Trends (DoT) for defaulting on financial terms under the license agreement and were not penalties for illegal acts. The tribunal distinguished between penal consequences and contractual compensations, the latter being eligible for deduction under the Income Tax Act.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The ITAT held that the AO had made an informed and plausible view after a detailed inquiry, including issuing notices under Section 142(1). It was not a case of non-application of mind.

The ITAT, comprising Judicial Member Anubhav Sharma and Accountant Member Pradip Kumar Kedia, cited the Supreme Court’s decision in Malabar Industrial Co. Ltd. v. CIT, in which the tribunal reiterated that mere disagreement with the AO’s conclusion does not empower the PCIT to invoke Section 263 unless the order is both erroneous and prejudicial.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates