Income Tax - Deductions and other tax treatments of expenditure for obtaining telecom licence

Section 35ABB: Expenditure for obtaining licence to operate telecommunication services

 

(1)  In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecommunication services or thereafter at any time during any previous year and for which payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.

        Explanation.—for the purposes of this section,—

        i.   "relevant previous years" means,—

          (A)  In a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced;

          (B)  In any other case, the previous years beginning with the previous year in which the licence fee is actually paid; And the subsequent previous year or years during which the licence, for which the fee is paid, shall be in force;

      ii.  "Appropriate fraction" means the fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years;

       iii. "Payment has actually been made" means the actual payment of expenditure irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee.

 

(2)   Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds of the transfer, shall be allowed in respect of the previous year in which the licence is transferred.

 

Deduction allowable in the previous year in which the licence is transferred

=   Expenditure incurred remaining unallowed – Proceeds of the transfer

(3)  Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are more than the amount of the expenditure incurred remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incurred to obtain the licence and the amount of such expenditure remaining unallowed shall be chargeable to income-tax as profits and gains of the business in the previous year in which the licence has been transferred.

 

Amount chargeable to income-tax as profits and gains of the business in the previous year in which the licence has been transferred

=   (Proceeds of the transfer – Expenditure incurred remaining unallowed),

      Subject to maximum of total expenditure already allowed as deduction.

 

If Proceeds of the transfer > Cost of acquisition,

Proceeds of the transfer – Cost of acquisition = Capital gains

 

Explanation.—where the licence is transferred in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.

(4)  Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed:

No deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in which the licence is transferred or in respect of any subsequent previous year or years.

(5)   Where a part of the licence is transferred in a previous year and sub-section (3) does not apply (i.e. proceeds of the transfer (so far as they consist of capital sums) are not more than the amount of the expenditure incurred remaining unallowed), the deduction to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be arrived at by—

(a)  Subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure incurred remaining unallowed; and

(b)   Dividing the remainder by the number of relevant previous years which have not expired at the beginning of the previous year during which the licence is transferred.

 

Deduction allowable in the previous year in which the licence is transferred

=   (Expenditure incurred remaining unallowed – Proceeds of the transfer) ÷

(Number of unexpired relevant previous years at the beginning of the previous year during which the licence is transferred)

(6)  Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the licence to the amalgamated company (being an Indian company),—

i.  The provisions of sub-sections (2), (3) and (4) shall not apply in the case of the   amalgamating company; and

ii.   The provisions of this section shall, as far as may be, apply to the amalgamated company   as they would have applied to the amalgamating company if the latter had not transferred   the licence.

(7)   Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the resulting company (being an Indian company),—

i.   The provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company; and

ii.  The provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence.

(8)   Where a deduction for any previous year under sub-section (1) of setion 35ABB is claimed and allowed in  respect of any expenditure referred to in that sub-section, no deduction shall be allowed under sub section (1) of section 32 for the same previous year or any subsequent previous year.

 

Illustration: 1

Debnath Telecom Ltd., a company providing telecommunication services, obtains a telecom licence on 20-4-2019 for a period of 10 years which ends on 31-3-2029 (licence fee being Rs 18 lakh). Find out the amount of deduction u/s 35ABB of the Income Tax Act, 1961, if:

(a) The entire amount is paid on 6-5-2019;

(b) The entire amount is paid on 1-4-2020;

(c) The entire amount is paid in equal instalments on 30-4-2019; 30-4-2020 and 30-4-2021

 

Solution: 1

Case (a)

Number of relevant previous years: 2019 – 20 to 2028 – 29 = 10 years

∴ Deduction u/s 35ABB:

Rs 18, 00,000 ÷ 10 = Rs 1, 80,000 in each of the 10 previous years 2019 – 20 to 2028 – 29.

Case (b)

Number of relevant previous years: 2020 – 21 to 2028 – 29 = 9 years

∴ Deduction u/s 35ABB:

Rs 18, 00,000 ÷ 9 = Rs 2, 00,000 in each of the 9 previous years 2020 – 21 to 2028 – 29. There will be no deduction u/s 35ABB available in the previous year 2019 – 20 because relevant previous years start in the year 2020 – 21.

 

  Case (c)

Deduction u/s 35ABB in the previous years:	For 1st  instalment (Relevant previous years: 19-20 to 28-29) = 10 years	For 2nd  instalment (Relevant previous years: 20-21 to 28-29) = 9 years	For 3rd  instalment (Relevant previous years: 21-22 to 28-29) = 8 years	Total
	Rs	Rs	Rs	Rs
2019 – 20	60,000			60,000
2020 – 21	60,000	66,667		1,26,667
2021 – 22 to 2028 – 29	60,000 Each year	66,667 Each year	75,000 Each year	2,01,667 Each year

 

Illustration: 2

  Aryan Enterprises has acquired a telecom licence. Details in respect of such licence are as under:

Particulars		Particulars
Acquisition cost	Rs 1,00,000	Life of licence	10 years
Date of purchase	16/8/2017	Licence sold	100%
Payment terms	Lump sum	Date of sale of licence	15/3/2020
Date of first payment	16/8/2017	Sale value	Rs 1,20,000

State the tax consequence in the several previous years up to 2019-20 related to such transactions.

 

Solution: 2

Relevant previous years: 10 years [2017 – 18 to 2026 – 27]

∴ Deduction u/s 35ABB in each of the two previous years 2017 – 18 and 2018 – 19

=   Rs 1, 00,000 ÷ 10 = Rs 10,000

 

  Deduction u/s 35ABB in the previous year 2019 – 20

	Particulars	Rs
a	Cost of acquisition	1,00,000
b	Proceeds from transfer	1,20,000
c	Expenditure incurred remaining unallowed [1,00,000 – (10,000 + 10,000)]	80,000
d	Business income chargeable to income tax [(b – c) subject to (a – c)]	20,000
e	Short term capital gain (as asset is not held for more than 3 years)      (b - a)	20,000

Illustration: 3

  Prince Enterprises has acquired telecom licence. Details in respect of this licence are as under:

Particulars		Particulars
Acquisition cost	Rs 3,00,000	Life of licence	7 years
Date of purchase	14/7/2016	Licence sold	40%
Payment terms	Lump sum	Date of sale of licence	12/12/2019
Date of first payment	14/7/2017	Sale value	Rs 1,20,000

 State the tax consequence in the several previous years up to 2019-20 related to such transactions.

 

Solution: 3

Relevant previous years: 6 years [2017 – 18 to 2022 – 23]

∴ Deduction u/s 35ABB in each of the two previous years 2017 – 18 and

2018 – 19 =   Rs 3, 00,000 ÷ 6 = Rs 50,000

 

  Deduction u/s 35ABB in the previous year 2019 – 20

	Particulars	Rs
a	Cost of acquisition	3,00,000
b	Proceeds from transfer	1,20,000
c	Expenditure incurred remaining unallowed [3,00,000 – (50,000 + 50,000)]	2,00,000
d	Number of unexpired relevant previous years at the beginning of the PY 2019-20	4
e	Deduction u/s 35ABB [(c – b) ÷ d]	20,000

 Note: there is no question of any business income or capital gain, because b < c