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The Supreme Court in their recent ruling in Centre of Public Interest Litigation and others v. Union of India and others in CWP NO. 423/2010 dated 02.02.2012 have given a clear finding that those in whose case licences have been awarded at 2001 rates have earned a clear benefit as they have offloaded their stakes for many thousand crores in the name of fresh infusion of equity  and bearing this in mind and further since such benefit is obtained under clear violation of the public policy by a wholly arbitrary and unconstitutional method for grant of UAS licences and allocation of spectrum in 2G band the Apex Court has even levied a cost of Rs.5 crores per licensee.     


Under the National Telecom Policy (NTP) 1999 the operators share their revenue with the Government in the form of annual licence fee and spectrum charges. In the revenue sharing model, the operators are required to pay a percentage of their Adjusted Gross Revenue (AGR) as annual license fee and spectrum usage charge to the Government besides one time entry fee at the time of allotment. The percentage of revenue share depended on the service area where they offered their services.


Radio frequency spectrum, i.e., the entire range of wavelengths of electromagnetic radiation, is a finite global natural resource with a high economic value, due to its heavy demand in the telecommunications sector. The word ‘Spectrum’ basically refers to the collection of various types of electromagnetic radiations of different wavelengths. Frequencies are allocated by the International Telecommunication Union (ITU) at “World Radio Communication Conferences” Spectrum is thus a scarce national asset.


In the matter of 2G spectrum allotment in 2008 the Comptroller and Auditor General of India (CAG), the Supreme Audit Institution of India in their report  computed a shortfall between the money collected and the money which the law mandated to be collected at an estimate of  176,645 crore (US$33.56 billion) based on 3G auction prices, the price fixed for such allocation. In their audit report it has been pointed out that spectrum allotment has been pegged at 2001 price which appeared nascent and far below what has been perceived to be the appropriate market price in 2008. The CAG thus indicated such figure as a presumptive loss which of late has come under scrutiny before the PAC/JPC as well as appeared in cross section of press as well as debated in media. In the entire debate and discussion one is looking at the aspect whether such presumptive loss can be subject matter of taxation under any provisions of the Income tax Act, 1961 and if yes then under what provision.   

Whereas it is stated by the Central Board of Direct Taxes that there is no provision for “presumptive loss” in the statute, in their further opinion while the Income Tax Act, 1961 deals with the concept of “presumptive profit” to fix tax liability in certain cases, the field offices of the tax department “do not calculate loss on presumptive basis”. In other words any such indicated amount cannot be taxed. The CAG at the same time has been read as quoting at least three cases to justify that there did exist a well-established practice to calculate tax lost or presumptive loss. In his first reference it has quoted an order of the I-T commissioner in Surat who reassessed the case of SNS Textiles Ltd for 2007-08 and found that the “incorrect carry forward of losses involved a short levy of potential tax of Rs 2.25 crore”. Another case that was referred to is that of Inductor Ispat Alloys Ltd by CIT, Ahmedabad where again losses carried forward by the company erroneously resulted in a potential tax loss of Rs 62.81 lakh and the I-T department reassessed the accounts of the company for 2006-07 to recover the tax of Rs 62.81 lakh. A third similar referred case pertained to a Kilburn Engineering Ltd of West Bengal where the company’s tax liabilities were reassessed and increased by Rs 2.13 crore. In other words in all the three cases the loss assessed/returned at the earlier stage were recomputed at a lower amount which is taken as similar to taxation of presumptive or potential loss to the revenue. It is further viewed that the proposed Direct Tax Code and the finance bill have references to presumptive and potential loss while reassessing income in case of undisclosed income. Even a not so fitting reference to section 44 A(d) of the Act has been cut into pieces by the CBDT when it rightly said this was used in a different context – dealing with presumed income in case of establishments with a turnover of less that Rs 60 lakh a year.


Section 147 of the Income tax Act, 1961 which provide for power to make reassessment in case of escaped income and further even authorize the AO to re-compute the loss read as under:


“147. Income escaping assessment.–If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):


Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.


Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject-matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.


Explanation 1.–Production before the Assessing officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.


Explanation 2.–For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:–


        (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;


        (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;


        (c) where an assessment has been made, but–


               (i) income chargeable to tax has been under assessed; or


               (ii) such income has been assessed at too low a rate; or


               (iii) such income has been made the subject of excessive relief under this Act; or


               (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.


Explanation 3. — For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.”


Thus the significance of section 147 is only viz a viz excessive loss returned or assessed in the case of an assessee and it has perhaps no direct bearing to the type of presumptive loss or potential loss of the kind estimated in the CAG report but do not find any place in the return of income.  As the type of loss of presumptive nature is not declared or assessed at any stage earlier the provisions of section 147 do not straightway be capable to tax them. More so section 147 is a machinery section available to the Income-tax Officer for the purpose of making reassessment or recomputation of income or loss and not a charging section by any standards and before invoking the same one must be satisfied of charge of such presumptive loss under the charging sections of the Income tax Act, 1961 under the respective heads of income. It is here that the CAG plea has slightly been not in symmetry to the scheme of taxation therefore went into a vacuum.


But now after the Supreme Court ruling dated 2.2.12 it is apparent that the licensees have earned a clear benefit which they have further realized by offloading equity at premium. The potential or presumptive loss referred to in the CAG report can now be better described as the benefit resulting to the licensee and the Income Tax Act do provide for taxation in such a case.  Clause (iv) of section 28 being the charging section provides as under:

        “the value of any benefit or perquisite, whether convertible into  money or not, arising from business or the exercise of a profession. ”

The Rajasthan High Court in Commissioner of Income-tax v. Kasliwal (R.L.) (1994) 207ITR208 held that the value of any benefit or perquisite whether converted into money or not, if it arises out of business or profession, is chargeable to tax u/s 28(iv)and the only thing  which has to be seen is that there must be direct nexus between the  business and the benefit which has been derived. There can be no denying the fact that the licenses awarded to the companies bear direct nexus in their business as the licensees would derive the benefit because of the award of license. The memorandum objects may provide added consideration to explain such direct nexus.

Now the entire matter revolves around ascertaining the true or fair value of 2G spectrum and fixing the loss to the exchequer which also in the corresponding reflect a benefit to the licensees within the meaning and purpose of clause (iv) of section 28 after the Supreme Court verdict. Fair value accounting or determination is quite relevant in the context of application of the provisions of section 28(iv).


In their first the Gujarat High Court in Commissioner of Income-tax v. Kaira District Co-operative Milk Producers’ Union Ltd. (2001) 247ITR314 emphasised on the fair value accounting. In this case the assessee received without payment soya flour and skimmed milk powder of the value of Rs. 13,03,192 being the raw material  for manufacturing high protein food. Consumption of soya flour and skimmed milk powder being raw material were debited to the profit and loss account and sales of high protein food credited to it by the assessee.  The said raw material was received by the assessee under an agreement dated April 21, 1970, with the Government of India, under which the Government of India undertook to arrange for the raw material under the aegis of the UNICEF. The Government of India also agreed to arrange for supply of spare parts for the plant and machinery from the UNICEF, which item is the subject-matter of similar controversy for the assessment year 1977-78. As against the supply of the raw material free of cost from  the UNICEF, the assessee undertook to the Government a corresponding  obligation under the agreement to supply free of cost to the Government,  as a matching contribution, a specified quantity of weaning food at a price  not exceeding 10 per cent. profit over the cost of production. Thus the scheme was a welfare measure and therefore restrictive of the assessee’s profit margin. This matching commitment of the assessee was to start after 24 months of the installation of the machinery and equipment. The supply of the matching contribution was to be in a phased manner to be determined by the Government.  The entire value of the raw material of Rs. 13,93,192 was debited by the assessee in the trading account and credited to the stores account.


The Income-tax Officer held that charging of the amount to the trading account was not justified because the raw material was received free of cost and that there was no liability on the assessee to meet the expenditure during the previous year itself. The Commissioner of Income-tax (Appeals)  reinforced the order of the Income-tax Officer by holding that the receipt of the raw material was intimately connected with the assessee’s business  and was on revenue account and that it would also be the assessee’s  income under section 2(24) read with section 28(iv) as benefit arising from  the assessee’s business. The Tribunal holding that the raw material was  received on revenue account, distinguished the decision of the Supreme  Court in CIT v. Groz-Beckert Saboo Ltd. [1979] 116 ITR 125 on the basis of  which the assessee had claimed the deduction of the cost price of the raw  material.


In reversing the decision of the Tribunal the High Court in this case held that every transaction when analysed has two aspects, an aspect of giving, and an aspect of receiving. One who receives is a debtor and one who gives is a creditor. Under the double entry system both these aspects receiving and giving are recorded in terms of account. The account which receives the benefit is debited. Goods when received are coming into the business and that transaction is to be expressed or measured in terms of money in the account that receives the benefit. Further in expressing their opinion on fair value accounting the Court held as under: (pg 321-322)


“When a non-monetary grant in the form of supply of raw materials, as  in the present case, is charged to the income statement at a “nominal” or  “nil” rate, it would lead to present a superior profit figure without indicating as to how much of such profit results from such grant. This would mislead the appreciation of profitability of the reporting entity in the absence of the grant. Similarly, when an asset is supplied free of cost and it is recorded at a nominal or “nil” value, it will have the effect of understatement of the asset position and the real strength of the reporting entity would not be correctly appreciated. Thus, opting out from fair value accounting would lead to non-transparent reporting. Therefore, inputs received at a concessional rate or free of cost should be charged at their fair value.”


Further since in this case the raw material and spares supplied to the assessee were not a gift  properly so called and further in view of the conditions, restrictions or liability which were attached to such  supply under the agreement the Court directed assignment of fair value to such receipts from the Government and in this regard further found strong reason from their reference to Explanation 2 to section 43(1) for showing the value of the goods received by way of gift and put into business being measured in terms of money while computing the  income under section 28 of the Act.  The High Court thus held a conclusion that there is no basis for accepting the “nil” cost concept that would fly in the face of accounting practices. In the result it held that the Tribunal committed an error in holding that the cost price of milk powder and soya flour received by the assessee-Union from the UNICEF free of charge is not deductible in the computation of the total income.


Even though a new Explanation 2 has come into force by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 , with effect from 1st April, 1988 viz a viz gift transactions the same does not take away the relevance of fair value accounting in the context of transactions that involve fulfilment of certain conditions or restrictions.  

In the 2G spectrum allocation taking on the entry fee at 2001estimates certainly bypass the fair value accounting principle and it is for this very reason it would not be out of context to work out the deeming benefit to the licensee under the provisions of section 28(iv). As in this case the entry fee is payable only once at the time of grant of license and being entirely in the nature of revenue for the Government the difference in their fair value and actual entry fee realised be deemed to be income under cl. (va) of s. 2(24) of the I.T. Act, 1961, and, as such, that value may be liable to be treated as income from business under s. 28(iv). However, since under the license the revenues are to be shared between the Government and the licensee it would be desirable to deduct from it matching cost equivalent to percentage share of the Government of such difference in fair value and actual price by reason of the condition of sharing of revenues.

In a matter relating to alleged lesser price charging in Commissioner of Income-tax v. Diners Business Services Pvt. Ltd. (2003) 263ITR1 the basic issue was whether the Assessing Officer was justified in estimating 60 per cent. of the amount of the lesser rent/charges received by the assessee as the value of the benefit accruing to the assessee under section  28(iv) of the Act. In this case the assessee is given to have bought three floors in Raheja Chambers, Nariman Point, Mumbai. That, the first and the second floors were used as “executive centre” in which secretarial assistants, telex, fax and other amenities were provided. However the premises in question which were given on rent were located in the basement and on the first floor (a small portion) and since the assessee had no use for the premises in question, the assessee had let out the premises to Diners Club India Limited without the facility of air-conditioning; without numerous fixtures and amenities which existed in the “executive centre”. It is in these circumstances that the Commissioner (Appeals) took the view that the Assessing Officer erred in determining the market rent on the higher side without discounting the amenities and facilities which existed in so-called comparable premises. The Commissioner (Appeals) found that the premises in question were not comparable with the premises under the “executive centre”. Consequently, the Commissioner (Appeals) came to the conclusion that the rent charged from Diner Club India Limited vis-a-vis the premises in question were comparable to the rent from the “executive centre” if fittings and amenities provided in the “executive centre” were discounted.


Even though in this case the estimate was found arbitrary there is however every reason to justify tax u/s 28(iv) on the basis of fair or market value exchange in any business dealing.


Though the CAG has referred to a whopping figure of 176,645 crore (US$33.56 billion) as a presumptive loss the same would answer the description of benefit u/s 28(iv) on the basis of the Supreme Court verdict. However, at best there can be difference in point of view in determination of fair value of such benefit but in all certainties there is now a definite possibility to assess such benefit under the provisions of the Income tax Act, 1961. The revenue has now much more to cheer after the adverse order in Vodafone case.


Gopal Nathani



  1. TOI report dated 12.12.2011
  2. TOI report dated 22.12.2011
  3. Performance Audit Report of CAG on the Issue of Licences and Allocation of 2G Spectrum by the Department of Telecommunications dated 8.11.2010.
  4. Supreme Court ruling dated 2.12.2012

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