C.I.T., DELHI versus BHARTI HEXACOM LTD.

Citation: [2023] 13 S.C.R. 371 · Decided: 16-10-2023 · Supreme Court of India · Bench: B.V. NAGARATHNA · Disposal: Appeal(s) allowed

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Judgment (excerpt)

[2023] 13 S.C.R. 371 : 2023 INSC 917
371
CASE DETAILS
C.I.T., DELHI
v.
BHARTI HEXACOM LTD.
(Civil Appeal No. 11128 of 2016)
OCTOBER 16, 2023
[B.V. NAGARATHNA AND UJJAL BHUYAN, JJ.]
HEADNOTES
Issues for consideration:
Whether the variable annual licence fee paid by the respondents-
assessees to the Department of Telecommunications (DoT) under the 
New Telecom Policy of 1999 is revenue expenditure in nature and is to be 
allowed deduction under Section 37 of the Income Tax Act, 1961, or, the 
same is capital in nature and is accordingly required to be amortised under 
Section 35ABB of the Act; and Whether the High Court of Delhi was right in 
apportioning the licence fee as partly revenue and partly capital by dividing 
the licence fee into two periods, that is, before and after 31st July, 1999 and 
accordingly holding that the licence fee paid or payable for the period upto 
31 July, 1999 i.e. the date set out in the Policy of 1999 should be treated as 
capital and the balance amount payable on or after the said date should be 
treated as revenue.
Income Tax Act, 1961 – ss. 35ABB and 37– The New Telecom Policy, 
1999 – Variable licence fee paid to DoT under the New Telecom Policy 
of 1999 – Revenue Expenditure or Capital Expenditure – Nature of :
Held: 1. In considering whether an item of expenditure is of a capital 
or revenue nature, one must consider the nature of the concern, the ordinary 
course of business usually adopted in that concern and the object with which 
the expenditure is incurred. Attention must be paid not only to the form of 
the transaction, but also its substance. What is material is the nature of right 
sought to be secured through the payment or transaction in question. The 
purpose towards which the expenditure is incurred must guide any attempt 
to categorise the expenditure. The structure or form of the transaction or 
SUPREME COURT REPORTS 
[2023] 13 S.C.R.
372
the payment schedule is hardly suggestive of the nature of the transaction. 
Therefore, it cannot be axiomatically held that an expenditure which in its 
core, capital in nature, is actually to be treated as a revenue expenditure 
simply because the payment is structured in installments. The determinative 
test to identify whether an expenditure structured in the form of instalments 
is in the nature of a capital expenditure or revenue expenditure, would be to 
fi rst assess whether the payment made either in lump-sum or in instalments 
relates to the acquisition or expansion of a capital asset, or by contrast, relates 
to the working of an asset to produce profi ts; whether the consideration 
payable towards the acquisition or expansion of a capital asset has simply 
been chopped up into smaller sums payable in instalments, for the sake of 
convenience. The annual payment of variable licence fee is only towards 
licence fees and merely because it is paid in annual instalments based on 
the Adjusted Gross Revenue (AGR), the payment cannot be construed as 
revenue. The annual payments of licence fee as also the entry fee relate to 
a singular purpose, i.e., the acquisition of the right to carry on the business 
of rendering telecommunication services. This right being in the nature of 
a capital asset, any payment(s) made towards the acquisition of the right, 
whether in lump-sum or in annual instalments dependent on the AGR, would 
be in the nature of capital disbursement(s). Where the periodic payments are 
referrable to or have a nexus with the original obligation undertaken by the 
assessee as consideration for acquisition of a right, the periodic payments 
would be in the nature of capital expenditure, notwithstanding the fact that 
they are payable as a percentage of profi ts, gross revenue or sales. In the 
present case, since the entry fee as well as variable licence fees are traceable 
to the same source, they would both have to be held to be capital in nature, 
notwithstanding the fact that the variable licence fee is paid in a staggered 
manner. [Paras 22, 22.1, 22.2, 23.3, 23.4 and 24]
2. The payment of entry fee as well as the variable annual licence 
fee paid by the respondents-assessees to the DoT under the Policy of 1999 
are capital in nature and may be amortised in accordance with Section 
35ABB of the Act. The High Court of Delhi was not right in apportioning 
the expenditure incurred towards establishing, operating and maintaining 
telecom services, as partly revenue and partly capital by dividing the licence 
fee int

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