Contingent Liability vs Laid Out Expense: Delhi HC Allows Vodafone To Claim ₹5.1 Crore Depreciation Over Estimated Costs To Restore Mobile Tower Sites

Though Asset reconstruction Cost (ARC) was laid out by Vodafone, the Assessing Officer had disallowed the claim, stating that the same is not 'ascertained liability'.

Rejecting this stance, a division bench of Justices Yashwant Varma and Harish Vaidyanathan Shankar cited Accounting Standard-29 and observed,

“The key takeaways from AS-29, is of an enterprise being entitled to create a provision if a liability is found to exist. A liability is explained to mean a present obligation arising from past events and the settlement of which is expected to result in an outflow of resources…Thus, as long as one is able to discern a positive obligation being placed upon an enterprise…as long as the probability of the obligation being liable to be discharged is found to exist, the requirements of AS-29 would stand attracted.”

The obligation herein was to restore the cell sites to their original condition at the end of the lease period.

The Department submitted that the provisions of AS-29 bar the creation of a provision in the case of a 'contingent liability'. It was submitted that since restoration is contingent upon damage, “if any”, that may be caused, the laid out expenditure cannot be allowed.

Disagreeing, the High Court said, “The contractual covenant cast a duty upon the assessee to remove the BTS equipment in such a manner that the aesthetics/structural design/architecture of the building is not disturbed. It was also placed under a positive obligation to restore the premises to its original state at its own cost.”

Court further said that usage of the phrase “if any damage is caused” in the lease agreement cannot be construed as detracting from the right of the assessee to provision for a liability. It said,

“In our opinion, the phrase “if any damage is caused” as it occurs in the agreement would only be germane to the issue of actual computation of the expenditure that would be incurred in the course of restoration. The qualificatory language as adopted in the agreement is thus liable to be viewed as merely being pertinent to identification of actual damage at the end of the lease term and the true or concrete expense to be incurred in repair and restoration. The said qualification would, in any case, have to be read in conjunction with the primary obligation to restore the premises to its original condition. The obligation to repair and restore forms the core of the contractual obligation which stood placed upon the assessee. It was therefore entitled to provision for such an expense provided it was considered probable and could be quantified on the basis of a reasonable estimation. The usage of the phrase “if any damage is caused” did not transform that obligation into a contingent liability.”

Significant to note that Vodafone had relied on M/S Vedanta Limited vs. The Joint Commissioner of Income Tax (2008) where the Madras High Court held that the words 'laid out' or 'expended' are not confined to an immediate expenditure but would also comprehend an expenditure which may arise in the future.

In its 70-page judgment, the High Court agreed and held that as per Section 37 of the Income Tax Act, 1961, any expenditure, provided it is not capital in character, when laid out or expended wholly and exclusively for the purposes of business, is liable to be taken into consideration while computing income chargeable under the head profits and gains of business or profession.

In the facts of the case, the Court noted that Vodafone had estimated the cost likely to be incurred in restoring the cell sites based on past experience and the inevitability. It observed,

“One cannot possibly doubt the imperative requirement of civil works being undertaken on premises in order to erect cell towers. This would necessarily be liable to be removed upon the end of the license term in light of the contractual obligation which stands imposed upon the assessee…Since this would necessarily entail dismantling as well as restoration of the site to its original condition, the assessee appears to have estimated…the evident probability of such a cost being incurred.”

As such, the plea was disposed of.

Appearance: Mr. Sachit Jolly, Sr. Adv. with Ms. Soumya Singh, Ms. Disha Jham and Mr. Abhyudaya Shankar Bajpai, Advs. for Appellant; Mr. Indruj Singh Rai, SSC with Mr. Sanjeev Menon, Mr. Rahul Singh, JSCs with Mr. Anmol Jagg, Mr. Gaurav Kumar and Ms. Varsha Sharma, Advs. for Respondent

Case title: Vodafone Mobile Services Ltd. v. Deputy Commissioner Of Income Tax

Citation: 2025 LiveLaw (Del) 314

Case no.: ITA 660/2018

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