Relief of Tata Teleservices: ITAT Rules Pre-Operative Expenses for Telecom Business Expansion as Revenue Expenditure, Allows Full Deduction [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that pre-operative expenses incurred by Tata Teleservices Ltd. for the expansion of its existing telecommunication business constitute revenue expenditure, fully deductible under Section 37(1) of the Income Tax Act, 1961.

Tata Teleservices Ltd. (assessee), a company providing telecommunication services, faced scrutiny for Assessment Years (AY) 2009-10 and 2010-11. The Assessing Officer (AO) made additions of Rs. 90,14,00,000 for AY 2009-10 and Rs. 33,30,00,000 for AY 2010-11, classifying pre-operative expenses as capital expenditure.

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The AO alleged these expenses, incurred prior to the commencement of commercial operations in new circles, should be capitalized rather than debited to the Profit & Loss Account. Aggrieved by the AO’s orders, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)].

The CIT(A) upheld the AO’s disallowance of pre-operative expenses. The CIT(A) did not accept the assessee’s contention that the pre-operative expenses were revenue in nature, incurred for expanding existing business operations in new circles.

Aggrieved by the CIT(A)’s orders, the assessee filed appeals before the ITAT. The counsel for the assessee argued that the pre-operative expenses were revenue expenditure, incurred for expanding the existing telecommunication business into new circles (Northeast, Jammu & Kashmir, and Assam) and introducing GSM technology in existing circles.

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The counsel submitted that these expenses, detailed in the financial statements, did not create new capital assets and were allowable under Section 37(1). The assessee relied on judicial precedents, including Commissioner of Income Tax vs. India Discount Co. Ltd. and Commissioner of Income-tax vs. Arvind Kumar Jain, which held that the nomenclature of expenses does not determine their allowability.

The two-member bench, comprising Anubhav Sharma (Judicial Member) and Manish Agarwal (Accountant Member), observed that the pre-operative expenses were incurred for expanding the assessee’s existing business, with intermingled funds and common management, and not for setting up a new business.

The tribunal observed that the financial statements clearly showed the expenses as revenue in nature, with no evidence of new asset creation. The tribunal further observed that the new circles were launched in the same year, as disclosed in Schedule T of the financial statements.

The tribunal held that the nomenclature of expenses is not determinative of their nature, citing Supreme Court and High Court precedents which ruled that the pre-operative expenses were revenue expenditure, fully deductible under Section 37(1) of Income Tax Act.

The tribunal deleted the additions of Rs. 90,14,00,000 and Rs. 3,38,40,00,000 for AY 2009-10, and Rs. 33,30,00,000 and Rs. 2,41,60,00,000 for AY 2010-11. The appeals of the assessee were allowed.

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