Advance lease income taxable on pro-rata basis as per AS-19 – Bombay HC

CIT v Reliance Communication Infrastructure Ltd. [28 302] –BOMBAY HIGH COURT


Assessee filed its return of income for the AY 2004-05 declaring a loss of Rs.277 crores. The AO passed order under Section 143(3) of the Act determining the loss at Rs.276 crores under the normal provisions of the Act and determining the income of Rs.394 crores under the provisions of Section 115 JB of the Act. The Commissioner of Income Tax on review found that the assessment order appeared to be erroneous and prejudicial to the interest of the revenue on following two counts:

(i)  That 50 crores shares of Reliance Infocomm Ltd. (RIL) were transferred at the rate of Rs.1/- per share (the face value per share) to Mr Mukesh Ambani when the market value of the share was Rs.53.01/- per share. Therefore, a sum of Rs.2635 crores was proposed to be taxed as a short term capital gain being a difference between market value per share of Rs.53.71 and face value per share was Rs.1/-.

(ii) Amount of Rs.3037 crores received from Reliance Infocomm Ltd. as fees for grant of Indefeasible Right of Connectivity (IRC) for a period of 20 years was income accrued to the assessee in the assessment year 2004-05 itself.

Assessee’s Contention:

  • Assessee contended that 50 crores shares of the face value of Rs.1/-per share were given as pledge for an amount of Rs.50 crores borrowed and there was no sale of shares. Alternatively, it was contended that at the highest the short term capital gain could be on the basis of Rs.50 crores received as consideration for sale of the shares and not the market value of the shares.
  • On the second ground i.e., of Rs.3037 crores received from Reliance Infocomm Ltd. it was pointed out that the assessee were the owners of nationwide network of multiple conduit (LDCA) (long distance calling area). In that capacity the assessee had entered into an agreement with Reliance Infocomm Ltd. giving it non-exclusive IRC right to use the nation-wide network of multiple conduit for a period of 20 years and in consideration thereof received Rs.3037 crores.
  • The amount was in the nature of an advance and on a pro-rata basis an amount of Rs.63.28 crores for a period of 5 months from November 2003 to March, 2004 had been offered as taxable income for the assessment year 2004-05.

Tax Authority’s Contention:

  • There had been a sale and a difference of Rs.2635 crores (between market value of the shares and the face value of the shares) is assessable to tax as short term capital gain and the entire amount of Rs.3037 crores received as fees for IRC is income chargeable to tax for the assessment year 2005-06.
  •  The amount of Rs. 3037 crores received as IRC fees is the fees received for an indefeasible right and therefore the income has accrued in the Assessment year 2004-05. It is relevant to note that in that very year there was an addition of plant and machinery valued at Rs. 3040 crores and depreciation on the same was also claimed. Therefore the entire amount received as fees should be offered to tax


  • The Tribunal has on consideration of all facts concluded that there was no transfer of shares but only a pledge of shares for the purposes of obtaining a loan. This short term loan of Rs.50 crores was repaid on 24.12.2004 as is evident from audited accounts and annual reports for the assessment year 2004-05. Even the balance sheet of A.Y. 2005-06 shows that an amount of Rs.50 crores shown under the head other loans as on 31/3/2004 was shown as nil as on 31/3/2005. Even the Demat Account dated 24/12/2004 shows the return of 50 crores shares of Reliance Infocomm Limited to the respondent.
  • The revenue has not been able to show that the same was in any manner perverse. Consequently, question does not raise any substantial question of law and is dismissed.
  • With regard to the taxability of advance lease income, on examination of the agreement dated 30/4/2003 entered into between Reliance Infocomm Ltd. and the assessee, it is concluded that Reliance Infocomm Ltd. in terms of the agreement had only a right to use the net work during the tenure of the 20 year agreement. The Agreement dated 30/04/2003 was only in the nature/form of a lease agreement.
  • On application of the AS-19 a lease income arising from operating lease should be recognized in the statement of profit and loss in a straight line method over the term of the lease. The assessee had in terms of AS-19 correctly spread the entire fee of Rs. 3037 crores over the period of 20 years and to pay tax thereon over the entire period.
  • The Apex Court in the matter of J.K. Industries Ltd. v. CIT [2008] 297 ITR 176/[2007] 165 Taxman 323 (SC) has up held the theory of matching principles and application of accounting standards so as to avoid distortion of income.
  • In view of the above, question does not raise any substantial question of law and therefore is dismissed.

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