In a major relief to Vodafone, the Delhi High Court has allowed Rs.5,10,79,752 claimed on account of asset reconstruction cost (ARC).
The bench of Justice Yashwant Varma and Justice Harish Vaidyanathan Shankar has observed that the provisioning for ARC qualified the prescriptions of AS 29 and the assessee was thus justified in accounting for the same. The ARC obligation clearly met the test of a positive obligation flowing from a past event, being a conceivable probability as well as being measurable. In any event, both the AO as well as the Tribunal appear to have proceeded on the basis that only an ascertained liability could have been provisioned for. That view is not only erroneous but also unsustainable in law.
The appellant/assessee, Vodafone is a company engaged in providing telecommunication services, had filed a Return of Income on 30 September 2009 declaring NIL income after claiming deductions under Section 80IA and having reported profits as per Section 115JB.
The assessee urged that it had capitalized certain sums on account of the ARC obligation, and which represented the estimated cost likely to be incurred at the network sites and office premises in order to restore them to their original condition at the end of the lease period. The appellant had claimed depreciation in this respect in the sum of INR 5.10 crores.
The provision itself was made in light of Accounting Standard 29 on the basis of the same constituting a present obligation and which could be reasonably estimated. However, the AO proceeded to disallow the provision holding that it was not in the nature of an ascertained liability. It also rejected the alternate plea of the assessee resting on Section 37 of the Income Tax Act.
An amount of INR 510,79,752 had come to be disallowed by the AO and which was claimed as being part of the cost likely to be incurred on account of ARC.
The objections which were taken in this respect came to be rejected by the DRP and the view expressed was affirmed ultimately by the Tribunal.
The court held that a contingent liability on the other hand is concerned with a possible obligation and which may or may not arise since it would be dependent upon the occurrence or non-occurrence of an uncertain future event. These are liabilities which are neither considered probable nor can they be reasonably estimated. The obligation and outflow which is spoken of in connection with contingent liabilities are prefaced by the words „possible‟, „one or more uncertain future events‟ and where the occurrence or non-occurrence of those events is itself unclear and uncertain. A contingent liability is one where both the obligation as well as the occurrence of the event which would trigger the same are to be found in the realm of conjecture. It is the facet of such liabilities neither being probable, more likely not to occur and being immeasurable which distinguishes these liabilities from those in respect of which a provision may be legitimately made.
The court held that the scope of the remand would necessarily entail the AO not only examining the aspects pertaining to a common pool of funds as framed by the Tribunal but also whether the cell sites had been actually brought into use. The exercise which the AO would thus be obliged to undertake would have to cover the twin issues that have been identified bearing in mind the construction that we have placed on Section 36(1)(iii) of the Income Tax Act.
Case Details
Case Title: Vodafone Mobile Services Ltd. Versus Deputy Commissioner Of Income Tax
Case No.: ITA 660/2018
Date: 11/03/2025
Counsel For Petitioner: Sr. Adv. Sachit Jolly
Counsel For Respondent: Indruj Singh Rai
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