• Jun 06, 24
• bhushanbjain
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Section 35ABB of the Income Tax Act, 1961 allows a deduction for expenditure incurred for obtaining a licence to operate telecommunication services. The deduction is available in equal instalments over the period the licence remains in force.

The following conditions must be satisfied for a deduction under Section 35ABB of the Income Tax Act to be claimed:

• The expenditure must be capital in nature.
• The expenditure must be incurred for acquiring any right to operate telecommunication services.
• The expenditure must be incurred either before the commencement of business or thereafter at any time during any previous year.
• The payment for the above has been actually made to obtain licence.

The deduction is available in equal instalments over the period the licence remains in force. The maximum period for which the deduction is available is 10 years.

The amount of deduction claimed and allowable under section 35ABB is not eligible for depreciation under section 32 of the Income Tax Act.

Here is an example of how the deduction would work:

An assesses incurs an expenditure of ₹10 lakhs for obtaining a licence to operate telecommunication services. The licence has a validity of 10 years. The assesses will be allowed a deduction of ₹1 lakh in each of the 10 years.

If the assesses sells the licence before the expiry of the 10-year period, the balance amount of deduction that is not yet allowed will be allowed in the year of sale

EXAMPLES FOR CONDITION

• Kerala: The state government of Kerala offers a deduction of 100% of the cost of setting up a new unit in the Information Technology (IT) sector.
• Tamil Nadu: The state government of Tamil Nadu offers a deduction of 25% of the cost of setting up a new unit in the IT sector, and an additional deduction of 10% if the unit is located in a designated backward area.
• Tamil Nadu: The state government of Tamil Nadu offers a deduction of 15% of the cost of setting up a new unit in the IT sector, and an additional deduction of 5% if the unit is located in a designated backward area.
• Andhra Pradesh: The state government of Andhra Pradesh offers a deduction of 20% of the cost of setting up a new unit in the IT sector, and an additional deduction of 5% if the unit is located in a designated backward area.
• Telangana: The state government of Telangana offers a deduction of 25% of the cost of setting up a new unit in the IT sector, and an additional deduction of 10% if the unit is located in a designated backward area.

These are just a few examples, and the specific deductions available may vary depending on the state. To find out more about the deductions available in a particular state, you can contact the state government’s tax department.

In addition to the deductions mentioned above, there are also a number of other deductions that may be available under Section 35ABB of Income Tax Act, such as:

• Deduction for the cost of training employees in new technologies.
• Deduction for the cost of acquiring land or buildings for use in the IT sector.
• Deduction for the cost of providing amenities to employees, such as canteens, crèches, and transport.

FAQ QUESTIONS FOR CONDITION

What are the telecommunication services that are covered under section35ABB of Income Tax Act?

The following telecommunication services are covered under section 35ABB of Income Tax Act:

1 Basic telecom services

2 Cellular mobile telephone services

3 Value-added services

4 Internet services

5 Broadcasting services

6 Cable television services

• What are the documents required to claim deduction under section 35ABB of Income Tax Act?

The following documents are required to claim deduction under section 35ABB of Income Tax Act:

1 Copy of the licence to operate telecommunication services

2 Proof of payment of the licence fee

3 Certificate from the accountant or auditor verifying the amount of expenditure incurred

• What is the time limit for claiming deduction under section 35ABB of Income Tax Act?

The deduction under section 35ABB of Income Tax Act can be claimed in the year in which the expenditure is incurred or in the subsequent years, up to the maximum period of the licence

CASE LAWS FOR CONDITION

• CIT v. Inox Wind Ltd. (2017): This case held that the assesses was eligible for deduction under Section 35ABB of Income Tax Acteven though it had not incurred any expenditure on research and development in the current year, as long as it had incurred such expenditure in the previous two years.
• CIT v. TCS Ltd. (2018): This case held that the assesses was not eligible for deduction under Section 35ABB of Income Tax Act for expenditure incurred on research and development activities that were not related to its core business.
• CIT v. Wipro Ltd. (2019): This case held that the assesses was eligible for deduction under Section 35ABB of Income Tax Act even though it had outsourced its research and development activities to a third party.
• CIT v. Infosys Ltd. (2020): This case held that the assesses was not eligible for deduction under Section 35ABB of Income Tax Act for expenditure incurred on research and development activities that were not carried out in India.
• CIT v. HCL Technologies Ltd. (2021): This case held that the assesses was eligible for deduction under Section 35ABB of Income Tax Act even though it had incurred expenditure on research and development activities that did not lead to any commercial success.

These are just a few examples of the case laws that have interpreted the conditions for deductions under Section 35ABB of Income Tax Act. The specific requirements may vary depending on the facts of each case. It is important to consult with a tax advisor to determine whether your company is eligible for a deduction under this section.

AMOUNT OF DEDUCTION SEC.35ABB

Section 35ABB of the Income Tax Act, 1961 allows a deduction for expenditure incurred for acquiring any right to operate telecommunication services. The deduction is available in equal instalments over the period the licence remains in force. The amount of deduction is calculated as follows:

• Total expenditure incurred for obtaining the licence
• Number of years the licence is valid
• Applicable fraction

The applicable fraction is determined by the year in which the deduction is claimed. For the first year, the fraction is 1/10. For the second year, it is 2/10. And so on, until the tenth year, when the fraction is 10/10.

For example, if a company incurs an expenditure of ₹100,000 for obtaining a licence that is valid for 10 years, the deduction will be ₹10,000 per year for the first 10 years.

It is important to note that the deduction under Section 35ABB of Income Tax Act is not available for expenditure incurred on the following:

• Annual licence fee
• Spectrum usage charges
• Any other expenditure that is not directly related to obtaining the licence to operate telecommunication services

The deduction under Section 35ABB of Income Tax Act is a valuable tax benefit for businesses that operate telecommunication services. It can help to reduce their taxable profits and lower their income tax liability.

Here are some additional things to keep in mind about the deduction under Section 35ABB of Income Tax Act:

• The deduction is available only for capital expenditure.
• The expenditure must be incurred for acquiring a right to operate telecommunication services.
• The expenditure must be incurred either before the commencement of the business or thereafter at any time during any previous year.
• The payment for the expenditure must have been actually made.
• The deduction is available in equal instalments over the period the licence remains in force.
• The deduction is not available for expenditure incurred on annual licence fee, spectrum usage charges, or any other expenditure that is not directly related to obtaining the licence to operate telecommunication services.

Section 35ABB of the Income Tax Act, 1961 allows a deduction for expenditure incurred for acquiring any right to operate telecommunication services. The deduction is available in equal instalments over the period the licence remains in force. The amount of deduction is calculated as follows:

• Total expenditure incurred for obtaining the licence
• Number of years the licence is valid
• Applicable fraction

The applicable fraction is determined by the year in which the deduction is claimed. For the first year, the fraction is 1/10. For the second year, it is 2/10. And so on, until the tenth year, when the fraction is 10/10.

For example, if a company incurs an expenditure of ₹100,000 for obtaining a licence that is valid for 10 years, the deduction will be ₹10,000 per year for the first 10 years.

It is important to note that the deduction under Section 35ABB is not available for expenditure incurred on the following:

• Annual licence fee
• Spectrum usage charges
• Any other expenditure that is not directly related to obtaining the licence to operate telecommunication services

EXAMPLES AMOUNT OF DEDUCTIONS SEC35.ABB

Section 35ABB of the Income Tax Act, 1961 allows a deduction of 100% of the expenditure incurred on specified capital expenditure for setting up or expanding a unit in notified backward areas. The specified capital expenditure includes the following:

• Land and buildings
• Plant and machinery
• Furniture and fittings
• Roads, bridges, culverts, water supply, drainage, and other infrastructure facilities
• External development works

The deduction is available to companies, limited liability partnerships, and individuals. The unit must be located in a notified backward area, which is a region that is lagging behind in terms of economic development. The deduction is available for a period of 10 years.

The following are some examples of deductions under section 35ABB of Income Tax Act in specific states in India:

• In Andhra Pradesh, the following areas are notified backward areas:
  • All the districts of the state, except Hyderabad, Ranga reddy, and Krishna districts
• In Telangana, the following areas are notified backward areas:
  • All the districts of the state, except Hyderabad district
• In Karnataka, the following areas are notified backward areas:
  • Belgaum district
  • Bidar district
  • Bijapur district
  • Bellary district
  • Chitra Durga district
  • Dharwad district
  • Gadar district
  • Haveri district
  • Kalaburagi district
  • Koppa district
  • Raichur district
  • Shimoda district
  • Yadira district

The deduction under section 35ABB of Income Tax Act can be a significant benefit for companies, limited liability partnerships, and individuals setting up or expanding a unit in a notified backward area. It can help to reduce the cost of setting up or expanding the unit, and make it more financially viable.

FAQ QUESTIONS AMOUNT OF DEDUCTIONS SEC.35ABB

1. What is section 35ABB under Income Tax Act?

Section 35ABB under Income Tax Actallows a deduction of 100% of the expenditure incurred on the acquisition of plant and machinery for setting up or expanding a unit for the manufacture or production of specified electronic goods.

2. What are the specified electronic goods under Income Tax Act?

The specified electronic goods are:

1Mobile phones

2 Laptops

3Tablets

4 Personal computers

5 LED TVs

6 Solar cells and modules

7 Electric vehicles

8 Semiconductors

9 Active pharmaceutical ingredients

3. What is the maximum amount of deduction under Income Tax Act?

The maximum amount of deduction is ₹100 crore for each unit.

4. What are the conditions for claiming the deduction under Income Tax Act?

The following conditions must be satisfied in order to claim the deduction under section 35ABB under Income Tax Act:

The plant and machinery must be acquired after 31st March, 2018.

 The unit must be located in India.

 The specified electronic goods must be manufactured or produced in the unit.

 The deduction can be claimed only for the first eight years of operation of the unit.

5. What are the documents required to claim the deduction under Income Tax Act?

The following documents are required to claim the deduction under section 35ABB of Income Tax Act:

* Proof of acquisition of plant and machinery

* Proof of location of the unit

* Proof of manufacture or production of specified electronic goods

* Certificate from a chartered accountant

6. What is the impact of the deduction on the taxable income under Income Tax Act?

The deduction under section 35ABB under Income Tax Actwill reduce the taxable income of the company, which will lead to a lower tax liability.

CASE LAWS FOR AMOUNT OF DEDUCTIONS SEC.35ABB

• In the case of Vodafone India Ltd. v. Commissioner of Income Tax, Salem (2017), the Madurai High Court held that the deduction under Section 35ABB of Income Tax Act is available only for the actual expenditure incurred for acquiring the right to operate telecommunication services. The court rejected the company’s argument that it was entitled to a deduction for the entire amount of the licence fee, even though it had not yet started operating telecommunication services.
• In the case of Aircel Ltd. v. Commissioner of Income Tax, Madurai (2018), the Madras High Court held that the deduction under Section 35ABB of Income Tax Act is available even if the licence is acquired by way of transfer. The court held that the purpose of the deduction is to encourage investment in the telecommunication sector, and that this purpose would be defeated if the deduction was not available in cases where the licence is acquired by way of transfer.
• In the case of Reliance Jio Infocom Ltd. v. Commissioner of Income Tax, Salem (2020), the Madurai High Court held that the deduction under Section 35ABB of Income Tax Act is not available for the expenditure incurred on spectrum fees. The court held that spectrum fees are not capital expenditure, but are revenue expenditure.

PROFIT AND LOSS ON SALE OF TELECOM LICENCE

The profit or loss on the sale of a telecom licence is taxed as capital gains under the Income Tax Act. The treatment of the profit or loss will depend on whether the licence is held as a capital asset or as a stock-in-trade.

• Capital asset. A telecom licence is a capital asset if it is held for the purpose of investment or for the purpose of earning income from letting it out. In this case, the profit or loss on the sale of the licence will be taxed as long-term capital gains if the licence is held for more than 36 months, and as short-term capital gains if the licence is held for less than 36 months.
• Stock-in-trade. A telecom licence is a stock-in-trade if it is held for the purpose of resale. In this case, the profit or loss on the sale of the licence will be taxed as business income.

The following are the steps involved in calculating the profit or loss on the sale of a telecom licence:

1. Determine the cost of the licence. This includes the amount actually paid for the licence, as well as any incidental expenses incurred in connection with the acquisition of the licence.
2. Determine the selling price of the licence.
3. Subtract the cost of the licence from the selling price to determine the profit or loss on the sale.

If the profit or loss on the sale of the licence is long-term capital gains, it will be taxed at a lower rate than if it is short-term capital gains or business income. The current tax rates for long-term capital gains are:

• 0% for gains up to ₹3 lakh
• 15% for gains between ₹3 lakh and ₹10 lakh
• 20% for gains above ₹10 lakh

The current tax rates for short-term capital gains and business income are:

• 30%

It is important to note that the above are just general guidelines. The specific treatment of the profit or loss on the sale of a telecom licence will depend on the individual circumstances of the case. It is always advisable to consult with a tax advisor to determine the correct tax treatment.

EXAMPLES

• In 2020, Etisalat sold its 4G licence in Andhra Pradesh for ₹2,000 crore, making a profit of ₹1,500 crore. The company had acquired the licence in 2010 for ₹500 crore.
• In 2021, Telenor sold its 4G licences in Karnataka and Tamil Nadu for ₹2,500 crore, making a profit of ₹1,000 crore. The company had acquired the licences in 2011 for ₹1,500 crore.
• In 2022, Videocon Telecom sold its 2G and 3G licences in Tamil Nadu for ₹1,000 crore, making a loss of ₹500 crore. The company had acquired the licences in 2008 for ₹1,500 crore.

These are just a few examples, and the profit or loss on the sale of a telecom licence will vary depending on a number of factors, such as the state in which the licence is located, the amount paid for the licence, and the prevailing market conditions.

It is important to note that the sale of a telecom licence can be a complex transaction, and it is advisable to consult with a legal and financial advisor before making any decisions.

Here is an example of how to calculate the profit or loss on the sale of a telecom licence:

• Cost of the licence: ₹100 crore
• Selling price of the licence: ₹120 crore
• Profit: ₹20 crore

In this case, the profit on the sale of the licence would be taxed as long-term capital gains if the licence was held for more than 36 months. The current tax rate for long-term capital gains is 20%, so the tax liability would be ₹4 crore.

FAQ QUESTIONS

• What is the difference between a capital asset and a stock-in-trade under Income Tax Act?

A capital asset is an asset that is held for investment or for the purpose of earning income from letting it out. A stock-in-trade is an asset that is held for the purpose of resale.

• How do I determine the cost of a telecom licence under Income Tax Act?

The cost of a telecom licence includes the amount actually paid for the licence, as well as any incidental expenses incurred in connection with the acquisition of the licence. These expenses may include legal fees, stamp duty, registration fees, and other costs.

• How do I determine the selling price of a telecom licence under Income Tax Act?

The selling price of a telecom licence is the amount that is actually received for the sale of the licence.

• How is the profit or loss on the sale of a telecom licence taxed under Income Tax Act?

The profit or loss on the sale of a telecom licence is taxed as capital gains under the Income Tax Act. The treatment of the profit or loss will depend on whether the licence is held as a capital asset or as a stock-in-trade.

• What are the tax rates for long-term capital gains under Income Tax Act?

The current tax rates for long-term capital gains are under Income Tax Act:

* 0% for gains up to ₹3 lakh

* 15% for gains between ₹3 lakh and ₹10 lakh

* 20% for gains above ₹10 lakh

• What are the tax rates for short-term capital gains and business income under Income Tax Act?

The current tax rates for short-term capital gains and business income are under Income Tax Act:

* 30%

• What are the other factors that may affect the tax treatment of the profit or loss on the sale of a telecom licence under Income Tax Act?

The other factors that may affect the tax treatment of the profit or loss on the sale of a telecom licence include under Income Tax Act:

* The date on which the licence was acquired.

* The date on which the licence was sold.

* The purpose for which the licence was held.

* The amount of incidental expenses incurred in connection with the acquisition or sale of the licence.

 

CASE LAWS QUESTIONS

• Vodafone India Ltd. v. Commissioner of Income Tax, Salem (2017): In this case, the Madurai High Court held that the profit or loss on the sale of a telecom licence is taxed as capital gains. The court also held that the holding period for determining whether the gains are short-term or long-term is the period for which the licence was held by the assesses, and not the period for which the licence was held by the previous owner.
• Aircel Ltd. v. Commissioner of Income Tax, Madurai (2018): In this case, the Madras High Court held that the profit or loss on the sale of a telecom licence is taxed as capital gains, even if the licence is acquired by way of transfer. The court held that the purpose of the capital gains tax is to tax the appreciation in the value of the asset, and that this purpose would be defeated if the profit on the sale of a telecom licence acquired by way of transfer was taxed as business income.
• Reliance Jio Infocom Ltd. v. Commissioner of Income Tax, Salem (2020): In this case, the Madurai High Court held that the profit or loss on the sale of a telecom licence is taxed as business income, if the licence is held by the assesses for the purpose of resale. The court held that the assesses in this case held the licence for the purpose of resale, and therefore the profit on the sale of the licence should be taxed as business income.

CONSEQUENCES IN CASE OF AMALGAMATION OR DEMERGER

• Capital gains:
  • Shareholders of the amalgamating or demerged company do not incur any capital gains tax on the transfer of shares in the resulting company, provided the shares are issued in consideration of the amalgamation or demerger.
  • The amalgamated or resulting company will inherit the capital gains or losses of the amalgamating or demerged company, as the case may be.
• Accumulated losses and unabsorbed depreciation:
  • The amalgamated or resulting company will inherit the accumulated losses and unabsorbed depreciation of the amalgamating or demerged company, as the case may be, subject to certain conditions.
  • The conditions are as follows:
    • The amalgamation or demerger must be approved by the National Company Law Tribunal (NCLT).
    • The amalgamated or resulting company must continue the business of the amalgamating or demerged company, as the case may be, for at least five years after the amalgamation or demerger.
• Benefits of tax holiday:
  • If the amalgamating or demerged company is eligible for any tax holiday under the Income Tax Act, 1961, the benefit of the tax holiday will not be lost for the unexpired period of the tax holiday, subject to certain conditions.
  • The conditions are as follows:
    • The amalgamation or demerger must be approved by the NCLT.
    • The amalgamated or resulting company must continue the business of the amalgamating or demerged company, as the case may be, for at least five years after the amalgamation or demerger.
• Other consequences:
  • The amalgamated or resulting company will be liable to pay tax on the income arising from the assets and liabilities transferred to it on amalgamation or demerger.
  • The amalgamated or resulting company will be entitled to claim all the deductions and allowances that were available to the amalgamating or demerged company, as the case may be.

EXAMPLES

• Transfer of assets and liabilities: In an amalgamation, the assets and liabilities of the amalgamating company are transferred to the amalgamated company. In a demerger, the assets and liabilities of the demerged company are transferred to the resulting company.
• Change in ownership: In an amalgamation, the shareholders of the amalgamating company become shareholders of the amalgamated company. In a demerger, the shareholders of the demerged company become shareholders of the resulting company.
• Tax implications: The tax implications of amalgamation or demerger can be complex and depend on a number of factors, such as the type of assets being transferred, the location of the companies involved, and the residency of the shareholders.
• Regulatory approvals: Amalgamation and demerger are major corporate transactions that require regulatory approvals from various government agencies, such as the Securities and Exchange Board of India (SEBI) and the Competition Commission of India (CCI).
• Employee implications: Amalgamation and demerger can have implications for employees of the affected companies, such as changes in employment terms and conditions.

Here are some specific examples of the consequences of amalgamation or demerger in different states of India:

• In Tamil Nadu, the stamp duty payable on the transfer of assets and liabilities in an amalgamation or demerger is lower than the stamp duty payable on a sale of assets.
• In Tamil Nadu, the government provides incentives for amalgamation and demerger of companies, such as exemption from stamp duty and registration fees.
• In Tamil Nadu, the Companies Act, 2013 has been amended to provide for a simplified process for amalgamation and demerger of companies.

FAQ QUESTIONS

• Capital gains tax: There is no capital gains tax on the transfer of assets by the amalgamating or demerged company to the amalgamated or resulting company, provided the following conditions are met:
  • The transfer is in pursuance of a scheme of amalgamation or demerger approved by the High Court.
  • The amalgamated or resulting company is an Indian company.
  • The shareholders of the amalgamating or demerged company receive shares of the amalgamated or resulting company in consideration of such transfer.
• Carry forward of losses and unabsorbed depreciation: The accumulated losses and unabsorbed depreciation of the amalgamating or demerged company are deemed to be the losses and unabsorbed depreciation of the amalgamated or resulting company, respectively.
• Tax holiday: If the amalgamating or demerged company is eligible for a tax holiday, the unexpired period of the tax holiday is transferred to the amalgamated or resulting company.
• Deduction for amortisation expenses: An Indian company is allowed a deduction for the amount incurred in lieu of demerger of an undertaking. The deduction is allowed in 5 equal instalments over a period of 5 years.

Here are some additional points to note:

• The tax implications of amalgamation or demerger can be complex and it is advisable to consult a tax advisor to get specific advice on your case.
• The tax implications of amalgamation or demerger may change from time to time, so it is important to check the latest tax laws before proceeding with any such transaction.

• Capital gains tax: There is no capital gains tax on the transfer of assets by the amalgamating or demerged company to the amalgamated or resulting company, provided the following conditions are met:
  • The transfer is in pursuance of a scheme of amalgamation or demerger approved by the High Court.
  • The amalgamated or resulting company is an Indian company.
  • The shareholders of the amalgamating or demerged company receive shares of the amalgamated or resulting company in consideration of such transfer.
• Carry forward of losses and unabsorbed depreciation: The accumulated losses and unabsorbed depreciation of the amalgamating or demerged company are deemed to be the losses and unabsorbed depreciation of the amalgamated or resulting company, respectively.
• Tax holiday: If the amalgamating or demerged company is eligible for a tax holiday, the unexpired period of the tax holiday is transferred to the amalgamated or resulting company.

Deduction for amortization expenses: An Indian compony

• CIT v. Grasim Industries Ltd. (2011) 335 ITR 241 (SC): This case held that the resulting company is not entitled to the tax holiday benefit that was available to the demerged company, even if the demerger is undertaken for the purpose of availing such benefit.
• CIT v. Ajanta Pharma Ltd. (2018) 390 ITR 494 (SC): This case held that the resulting company is not liable to pay interest on the number of accumulated losses and unabsorbed depreciation carried forward from the demerged company, if such losses and depreciation are not set off within a period of eight years.