ARC Obligation to Restore Cell Sites to Their Original Condition at End of Lease Period Is Allowable as Business Expense | HC

Case Details: Vodafone Mobile Services Ltd. vs. Deputy Commissioner of Income-tax - [2025] 172 taxmann.com 368 (Delhi)

Judiciary and Counsel Details

• Yashwant Varma & Harish Vaidyanathan Shankar, JJ.
• Sachit Jolly, Sr. Adv., Ms Soumya Singh, Ms Disha Jham & Abhyudaya Shankar Bajpai, Advs. for the Appellant.
• Indruj Singh Rai, SSC, Sanjeev Menon, Rahul Singh, JSCs, Anmol Jagg, Gaurav Kumar & Ms Varsha Sharma, Advs. for the Respondent.

Facts of the Case

Assessee-Vodafone, a company engaged in providing telecommunication services, entered into a lease agreement with the owners of various office spaces for setting up cell site towers. The lease agreement obligated the assessee to restore the site to its original condition at the expiry of the lease period.

The assessee capitalized certain sums on account of the asset reconstruction cost (ARC) obligation, which represented the estimated cost likely to be incurred at the network sites and office premises to restore them to their original condition at the end of the lease period. The assessee claimed depreciation in this respect.

The Assessing Officer (AO) disallowed the said provision holding that it was not an ascertained liability. The Tribunal upheld the order of AO. Aggrieved-assessee filed the instant appeal before the High Court.

High Court Held

The High Court held that the issue pertaining to ‘actual cost’ as it appears in Section 32(1) need not be considered. Upon a holistic examination of the rival submissions, it is manifest that it is the alternate plea based on Section 37 that alone would merit further consideration.

Section 37 focuses on expenditure “laid out” or “expended” as opposed to the identification of an actual cost and which constitutes the heart of Section 32. The Madras High Court had an occasion to review a similar situation in Vedanta Limited vs. The Joint Commissioner of Income Tax [Tax Case (Appeals) Nos. 2117 to 2119 of 2008].

It was held that the words ‘laid out’ or ‘expended’ are not confined to an immediate expenditure but would also comprehend an expenditure that may arise in the future. All that Section 37(1) requires is that the expenditure should be “laid out” or “expended” for the purposes of business.

Thus, the provisioning for ARC qualified the prescriptions of AS 29, and the assessee was justified in accounting for the same. The ARC obligation clearly met the test of a positive obligation flowing from a past event, being a conceivable probability as well as being measurable.

List of Cases Reviewed

• Order passed by ITAT dated 14-3-2018 Partly affirmed.

List of Cases Referred to

• Bharti Cellular Ltd. (now Bharti Airtel Ltd.) v. Asstt. CIT & Anr 2024 SCC OnLine SC 198 (para 3)
• Seagram Distilleries Pvt. Ltd. (Now Pernod Ricard India Pvt. Ltd.) v. CIT 2015 SCC OnLine Del 12586 (para 23)
• Rotork Controls India (P) Ltd. v. CIT 2009 SCC OnLine SC 1119 (para 25)
• United India Insurance Co. Ltd. v. Great Eastern Shipping Co. Ltd (2007) 7 SCC 101 (para 56)
• Nahar Poly Films Ltd. v. CIT [2011] 13 taxmann.com 41/201 Taxman 304 (Punjab & Haryana) (para 57)
• Challapalli Sugar Ltd. v. CIT 1974 SCC OnLine SC 332 (para 59)
• India Cements Ltd. v. CIT 2 SCR 944 (para 60)
• CIT v. Alembic Glass Industries 1975 SCC OnLine Guj 55 (para 63)
• CIT v. Monnet Industries Ltd 2008 SCC OnLine Del 1506 (para 63).