The telecommunication industry has seen substantial changes with the introduction of spectrum fees for the auction of airwaves. To address the tax treatment of these payments, the Finance Act, 2016 introduced Section 35ABA to the Income Tax Act. This section provides clarity on the amortization of capital expenditure incurred for acquiring the right to use spectrum for telecommunication services. Let’s delve deeper into the provisions and implications of this section.
What is Section 35ABA?
Section 35ABA deals with the tax treatment of spectrum fees paid by telecommunication service providers. It allows for the amortization of the capital expenditure incurred for acquiring the right to use the spectrum over the period for which the right is granted. This provision helps businesses manage the significant costs associated with spectrum acquisition by spreading the deduction over several years.
Key Provisions of Section 35ABA
Deduction for Spectrum Fee (Sub-section 1):
- Any capital expenditure incurred for acquiring the right to use spectrum for telecommunication services is allowed as a deduction.
- This deduction is divided equally across the relevant previous years, covering the entire period for which the right to use the spectrum is granted.
Application of Section 35ABB Provisions (Sub-section 2):
The provisions of sub-sections (2) to (8) of Section 35ABB, which deal with the amortization of license fees for telecommunication services, apply to the spectrum fees as well.
Consequences of Non-compliance (Sub-section 3):
- If an assessee fails to comply with any provisions of this section after claiming a deduction, the deduction is deemed to have been wrongly allowed.
- The Assessing Officer can re-compute the total income and make necessary rectifications.
- The provisions of Section 154 apply, with the four-year period for rectification starting from the end of the previous year in which the non-compliance occurred.
Explanation and Key Terms
Relevant Previous Years:
- If the spectrum fee is paid before the commencement of the business, it includes the previous years starting from the year the business commenced.
- In other cases, it starts from the previous year in which the spectrum fee was paid.
Appropriate Fraction:
The fraction for deduction is the amount of the expenditure divided by the total number of relevant previous years.
Actual Payment:
The actual payment of expenditure is considered irrespective of the year in which the liability was incurred.
Introduction and Applicability
- This section was introduced by the Finance Act, 2016, and is effective from 1st April 2017.
- The provisions are applicable from the assessment year 2017-18 onwards.
Detailed Tax Treatment of Spectrum Fee
The section provides detailed guidelines on the tax treatment of spectrum fees:
Amortization Over the Period of Right:
The fees paid for obtaining the right to use spectrum are amortized over the period for which the right is granted.
Transfer of Spectrum:
- If the spectrum is transferred and the proceeds are less than the unallowed expenditure, a deduction is allowed for the difference.
- If the proceeds exceed the unallowed expenditure, the excess is taxable as business profits.
Special Provisions
Amalgamation and Demerger:
The provisions apply to the amalgamated or resulting company as they would have applied to the amalgamating or demerged company.
No Double Deduction:
No deduction is allowed under Section 32(1) for the same expenditure in any year where a deduction has already been claimed under Section 35ABA.
Consequences of Non-compliance
Non-compliance with any provisions of Section 35ABA after claiming a deduction leads to:
- The deduction being deemed wrongly allowed.
- Re-computation of total income by the Assessing Officer.
- Application of Section 154 for rectification within four years from the end of the year of non-compliance.
FAQs on Section 35ABA
Q1: What is the purpose of Section 35ABA?
A1: Section 35ABA was introduced to provide clarity on the tax treatment of spectrum fees paid by telecommunication service providers, allowing for the amortization of the capital expenditure over the period for which the spectrum rights are granted.
Q2: How is the deduction for spectrum fees calculated?
A2: The deduction is calculated by dividing the total expenditure by the number of relevant previous years, spreading the deduction equally across these years.
Q3: What happens if the spectrum is transferred before the end of the amortization period?
A3: If the spectrum is transferred and the proceeds are less than the unallowed expenditure, a deduction is allowed for the difference. If the proceeds exceed the unallowed expenditure, the excess is taxable as business profits.
Q4: Are there any specific conditions for non-compliance with Section 35ABA?
A4: Yes, if an assessee fails to comply with any provisions after claiming a deduction, the deduction is deemed wrongly allowed, and the Assessing Officer can re-compute the total income and make necessary rectifications.
Q5: Does Section 35ABA apply to both resident and non-resident assessees?
A5: Yes, the provisions of Section 35ABA apply to all assessees, whether corporate or non-corporate, resident or non-resident, who are chargeable to tax under the head “Profits and gains of business or profession.”
Q6: How does Section 35ABA handle amalgamations and demergers?
A6: In cases of amalgamation and demerger, the provisions apply to the amalgamated or resulting company as they would have applied to the amalgamating or demerged company.
Q7: What is meant by “relevant previous years” in Section 35ABA?
A7: Relevant previous years refer to the years over which the spectrum fee is amortized. If the fee is paid before the business commences, it includes the year the business starts and subsequent years. In other cases, it starts from the year the fee is paid.
Q8: What does “actual payment” mean under Section 35ABA?
A8: Actual payment means the actual disbursement of funds for the spectrum fee, regardless of when the liability was incurred according to the accounting method employed by the assessee.
Conclusion
Section 35ABA of the Income Tax Act is a crucial provision for telecommunication service providers, ensuring that the significant costs associated with acquiring spectrum rights are spread over the period of use. This section provides much-needed clarity and avoids litigation and controversy by specifying the method of amortization and the consequences of non-compliance. Understanding and adhering to these provisions can help businesses manage their finances more effectively while complying with tax regulations.
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