Holding

The variable licence fee and entry fee are capital expenditures and must be amortised under Section 35ABB; the High Court's apportionment into capital and revenue portions is erroneous.

Summary

The case concerned Bharti Hexacom Ltd. and other telecom operators who paid a variable annual licence fee to the Department of Telecommunications under the New Telecom Policy of 1999. The issue was whether these payments were capital in nature, requiring amortisation under Section 35ABB of the Income Tax Act, 1961, or revenue expenditures deductible under Section 37. The High Court of Delhi had split the fee into a capital component (up to 31 July 1999) and a revenue component (after that date). The Supreme Court examined the nature of the licence fee, emphasizing that the purpose of the payment—to acquire the right to establish, maintain and operate telecom services—determines its character, not the form or instalment schedule. It held that both the entry fee and the variable licence fee are capital expenditures and must be amortised under Section 35ABB. Consequently, the High Court’s apportionment was set aside and the appeals filed by the Revenue were allowed.

Issues considered

Whether the variable annual licence fee paid under the New Telecom Policy, 1999 is a capital expenditure subject to amortisation under Section 35ABB of the Income Tax Act, 1961.
Whether the High Court of Delhi was correct in apportioning the licence fee into capital and revenue components based on the date 31 July 1999.

Legislation cited

Income Tax Act, 1961s. 32, s. 35A, s. 35AB, s. 35ABA, s. 35ABB, s. 37
Indian Telegraph Act, 1885s. 4, s. 8
Indian Wireless Telegraphy Act, 1933
Telecom Regulatory Authority of India Act, 1997

Subjects

taxationcapital expenditurerevenue expenditurelicence feetelecomSection 35ABBSection 37Income Tax ActTelegraph Actamortisationvariable licence fee

Judgment

[2023] 13 S.C.R. 371 : 2023 INSC 917

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
371
372 SUPREME COURT REPORTS [2023] 13 S.C.R.

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
ﬁrst 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 proﬁts; 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 proﬁts, 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 into two periods, that is, before and after 31 July, 1999 and accordingly
holding that the licence fee paid or payable for the period upto 31 July, 1999
C.I.T., DELHI v. BHARTI HEXACOM LTD. 373

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.
The nature of payment being for the same purpose cannot have a diﬀerent
characterisation merely because of the change in the manner or measure of
payment or for that matter the payment being made on annual basis. In the
ultimate analysis, the nomenclature and the manner of payment is irrelevant.
The payment post 31 July, 1999 is a continuation of the payment pre 31
July, 1999 albeit in an altered format which does not take away the essence
of the payment. It is a mandatory payment traceable to the foundational
document i.e., the license agreement as modiﬁed post migration to the 1999
policy. Consequence of non-payment would result in ouster of the licensee
from the trade. Thus, this is a payment which is intrinsic to the existence
of the licence as well as trade itself. Such a payment has to be treated or
characterized as capital only. [Paras 26 and 27]
Tax / Taxation: Expenditure – Whether a given expenditure is
capital or revenue in nature – Determination of – Principles and Tests
– Considerations which are immaterial in determining the question –
Discussed. [Paras 19 and 21]
Tax / Taxation – Classiﬁcation of expenditure or receipts – Diﬃculty
of relying on a single precedent for purpose of classiﬁcation – Precedent.
Held: The propositions made in earlier cases, if sought to be applied
to a diﬀerent case which the authors of those propositions did not have in
mind, could lead to absurd results. It is trite that the words in a judgment
must not be construed in the same manner as those in a legislation. Hence,
it is neither wise nor suitable to extend the dictum of one case, premised
on the facts of the said case, to another fact-situation which is seemingly
similar but not really so. This is particularly so when there is no precedent
which has been rendered in an identical fact situation, as is the case in the
instant matters. [Para 23]
Tax / Taxation: Capital assets – Depreciation and Amortisation –
One of the exceptions to depreciation of capital assets is amortisation
– Income Tax Act, 1961 – ss.35A, 35AB, 35ABA and 35ABB.
Held: Amortisation is a form of depreciation, however, the distinction
between the two being that in the case of depreciation, an asset may be
374 SUPREME COURT REPORTS [2023] 13 S.C.R.

depreciated progressively, and may even be exhausted before the lifetime
expectancy of the asset in question, whereas, in the case of amortisation, the
value of the asset gets progressively depleted, matching with the expected
timeframe of the right. [Para 10.3]
Royalty – Distinction between payment made to acquire a right,
and payment of royalty for use of a right or asset – Discussed. [Para 20]

LIST OF CITATIONS AND OTHER REFERENCES

Jonas Woodhead and Sons Ltd. v. Commissioner of Income Tax (1997)
224 ITR 342; CIT, Madras v. Best and Co. (Pvt.) Ltd. (1966) 60 ITR 11;
Southern Switch Gear Ltd. v. CIT (1998) 232 ITR 359 and CIT v. Sarada
Binding Works, (1976) 102 ITR 187- held inapplicable.
Alembic Chemical Works Co. Ltd. v. CIT (1989) 3 SCC 329 : [1989]
2 SCR 302 and Mewar Sugar Mills Ltd. v. CIT, (1973) 3 SCC 143 : [1973]
2 SCR 429 – distinguished.
Empire Jute Co. Ltd. v. Commissioner of Income Tax (1980) 124
ITR 1; Assam Bengal Cement Co. Ltd. v. CIT, West Bengal (1955) 27
ITR 34; CIT v. Jalan Trading Co. Pvt. Ltd. (1985) 4 SCC 59 : [1985] 2
Suppl. SCR 517; Pingle Industries Ltd. v. CIT (1960) 40 ITR 67 (SC);
L.H. Sugar Factory and Oil Mills Pvt. Ltd. v. Commissioner of Income
Tax, U.P., (1980) 125 ITR 293; M/s. Devidas Vithaldas and Co. v. C.I.T.,
Bombay City (1972) 3 SCC 457 : [1972] 3 SCR 215; Commissioner of
Income Tax, Bombay City I v. CIBA India Ltd., (1968) 69 ITR 692 (SC);
Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax,
(1966) 62 ITR 566 and India Cements v. Commissioner of Income Tax,
60 I.T.R. 52 (SC) – relied on.
Board of Agricultural Income Tax, Assam v. Sindhurani Chaudurani
(1957) 32 ITR 169; Enterprising Enterprises v. Deputy Commissioner of
Income Tax, (2007) 293 ITR 437; Aditya Minerals Pvt. Ltd. v. Commissioner
of Income Tax (1999) 8 SCC 97 : [1999] 2 Suppl. SCR 233; Sundaram
Finance Ltd. v. State of Kerala [1966] 2 SCR 828; CIT, Bangalore v. J.H.
Gotla, A.I.R. 1985 SC 1698; Gotan Lime v. CIT, (1999) 239 ITR 718; and
CIT v. Modi Revlon Pvt. Ltd., 2012 SCC OnLine Del 4463 – referred to.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 375

The City of London Contract Corporation Ltd. v. Styles, (1887) 2 TC
239; Vallambrosa Rubber Co. Ltd. v. Farmer (1910) 5 T.C. 529; Ounsworth
(Surveyor of Taxes) v. Vickers Ltd. (1915) 3 K.B. 267; British Insulated
Helsby Cables Ltd. v. Atherton, (1926) AC 205; Henriksen v. Grafton
Hotel Ltd., (1942) 24 T.C. 453; John Smith & Son v. Moore, (1921) 12
T.C. 266; Mallet v. Staveley Coal and Iron Co., (1928) 2 K.B. 405; Anglo-
Persian Oil Co. v. Dale (1932) 1 K.B. 124; Van Den Berghs, Limited v.
Clark (H.M. Inspector of Taxes) (1935) 19 T.C. 390; Robert Addie & Sons
Collieries Ltd. v. Commissioners of Inland Revenue (1924) 8 T.C. 671; Sun
Newspapers Limited and the Associated Newspapers Limited v. The Federal
Commissioner of Taxation (1938) 61 C.L.R. 337; CIR v. Adam, (1928) 14
T.C. 34; Bonner v. Basset Mines Ltd., (1912) 6 T.C. 145; Rolfe v. Wimpy
Waste Management Ltd., (1989) 62 T.C. 399; Tucker v. Granada Motorway
Services Ltd., (1979) 53 T.C. 92; Lawson v. Johnson Matthey Plc., (1992)
65 T.C. 39; Dale; CIR v. Carron Company, (1968) 45 T.C. 18; Heather v.
PE Consulting Group Ltd., (1972) 48 T.C. 293; Walker v. The Joint Credit
Card Co., (1982) 55 T.C. 617; CIR v. Nchanga Copper Mines (1964) 1 All
ER 208;Commissioners of Inland Revenue v. Ramsay, 20 T.C. 79; Inland
Revenue v. Williams, 11 ITR Suppl. 84; Prendergast v. Cameron, 8 I.T.R.
Suppl. 75 (HL).- referred to.
Tata HydroElectric Agencies Ltd., Bombay v. Commissioner of Income-
tax, (1937) L.R. 64 IndAp 215; Mohanlal Hargovind of Jubbulpore v.
Commissioner of Income Tax, (1949) L.R. 76 IndAp 235;S Commissioner
of Income Tax, Bombay v. Century Spinning, Weaving and Manufacturing
Co., (1942) 10 ITR Suppl., Benarsidas Jagannath, In re, (1946) 15 ITR
185- referred to.
Wheatcroft’s treatise on The Law of Income Tax, Sur Tax and Proﬁts
Tax – referred to.
OTHER CASE DETAILS INCLUDING IMPUGNED
ORDER AND APPEARANCES

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 11128 of
2016.
From the Judgment and Order dated 19.12.2013 of the High Court of
Delhi at New Delhi in ITA No.1336 of 2010.
376 SUPREME COURT REPORTS [2023] 13 S.C.R.

With
Civil Appeal Nos.4902 of 2022, 162 of 2018, 159 of 2021, 4839 of
2017, 153 of 2021, 6897 of 2018, C.A. Diary No. 4178 of 2019, SLP (C)
Nos. 24740, 20863 of 2019, Civil Appeal Nos.158, 302, 303 of 2021, 11149,
11148, 11130, 11131, 11134, 11132, 11136, 11133, 11135, 11137, 11140,
11141, 11139, 11142, 11143, 11145, 11146, 11147 of 2016, 163 of 2018,
11129 of 2016 And C.A. Diary No. 24728 of 2023.
Appearances:
N Venkatraman, A.S.G., Arijit Prasad, Sr. Adv., V.C Bharati, Ms. Shruti
ShivKumar, Rahul VijayaKumar, Ms. Amritha C. Mouli, Raj Bahadur Yadav,
Rupesh Kumar, Mrs. Gargi Khanna, Rajesh Kumar Singh, Vikrant Yadav, S
A Haseeb, Manish Pushkarna, Mrs. Anil Katiyar, Advs. for the Appellant.
Arvind P. Datar, Ajay Vohra, Arvind Datar, Sr. Advs., Ms. Kavita
Jha, Vaibhav Kulkarni, Udit Naresh, Mahesh Agarwal, Ms. Sayaree Basu
Mallik, Abhinav Garg, Sachit Jolly, Ms. Anuradha Dutt, Ms. Disha Jham,
Ms. Soumya Singh, Ms. B. Vijayalakshmi Menon, Harpreet Singh Ajmani,
Aniket Deepak Agrawal, E. C. Agrawala, Advs. for the Respondent.

JUDGMENT / ORDER OF THE SUPREME COURT

JUDGMENT
NAGARATHNA, J.
Delay condoned.
2. Leave granted.
3. The judgment of the Division Bench of the High Court of Delhi,
dated 19 December, 2013 in ITA No. 1336 of 2010 and connected matters,
whereby the High Court of Delhi, conﬁrming the decision of the Income
Tax Appellate Tribunal, New Delhi (hereinafter, “Tribunal” for short) has
held that the variable licence fee paid by the respondents-assessees under
the New Telecom Policy, 1999 ((hereinafter referred to as “Policy of 1999”
for the sake of convenience), is revenue expenditure in nature and is to be
deducted under Section 37 of the Income Tax Act, 1961 (hereinafter referred
to as “the Act” for the sake of brevity) is assailed in these appeals. Some
of these appeals also arise from judgments passed by the High Courts of
C.I.T., DELHI v. BHARTI HEXACOM LTD. 377
[B. V. NAGARATHNA, J.]

Bombay and Karnataka, following the judgment of the Division Bench of
the High Court of Delhi, dated 19 December, 2013.
4. Since common questions of law and facts arise in these appeals,
they have been clubbed together and heard and disposed of by this common
judgment.
Bird’s eye view of the controversy:
5. The controversy in these cases revolves around the question, as to,
whether, the variable licence fee paid by the respondent-assessees to the
Department of Telecommunications (hereinafter referred to as “DoT”, for
short) under the New Telecom Policy of 1999 (Policy of 1999) is revenue
expenditure in nature and is to be allowed deduction under Section 37 of the
Act, or, whether the same is capital in nature, Section 35ABB of the Act.
Brief facts of the case:
6. The National Telecom Policy of 1994 was substituted by the New
Telecom Policy of 1999 dated 22 July, 1999. The said Policy of 1999
stipulated that the licencee would be required to pay a one-time entry fee and
additionally, a licence fee on a percentage share of gross revenue. The entry
fee chargeable would be the fee payable by the existing operator upto 31
July, 1999, calculated upto the said date and adjusted upon notional extension
of the eﬀective date. Subsequently, w.e.f. 01 August, 1999, licence fee
was payable on a percentage of Annual Gross Revenue (“AGR”, for short)
earned. The quantum of revenue share to be charged as licence fee was to be
ﬁnally decided after obtaining recommendation of the Telecom Regulatory
Authority of India (“TRAI”) but in the meanwhile, the Government of India
ﬁxed 15% of the gross revenue of the licencee as provisional licence fee.
On receipt of TRAI’s recommendation by the Government, adjustment of
the dues was to be made.
6.1. Clause 7 of the Policy of 1999 stipulated that upon migration
thereto, the licencees would forego the right of operating in a regime of
limited number of operators as per the existing licensing agreement and
would operate in a multiple licence regime, that is, additional licences
without any limit could be issued in a given service area. The period of
licence was stated to be twenty years from the eﬀective date of the existing
licence agreement, that is, the 1994 Agreement. Migration to the Policy of
378 SUPREME COURT REPORTS [2023] 13 S.C.R.

1999 was on the condition and premise that the conditions should be accepted
as a package in entirety and simultaneously and all legal proceedings shall
be withdrawn and no dispute relating to the period upto 31 July, 1999 shall
be raised at any future date. If all the terms were accepted, amendments to
the existing licence agreement would be signed. The respondents herein
migrated to the Policy of 1999. They had paid licence fee upto 31 July,
1999. The respondents treated the licence fee paid upto to 31 July, 1999
that is, the one-time licence fee as stipulated in the letter/communications
dated 22 July, 1999, as capital expenditure.
6.2. The respondent companies which are engaged in the business of
telecommunication services have procured licences in diﬀerent telecom
circles. Initially, the said licences were given under a licence agreement
executed in the year 1994 for a period of ten years subject to expansion of
one year or more at the discretion of the authorities. The said licence was
non-transferable and non-assignable. In case, there was a breach of any
term of the licence or default in payment, the licence could be revoked after
providing sixty days’ notice. The licence gave the right to operate the services
within a geographical area on a non-exclusive basis and the authorities
would have the right to modify the conditions of the licence as explained
in Schedule A and Schedule B of the licence agreement, in the interest of
general public or for security considerations. The schedules pertained to the
area of service, tariﬀ ceiling etc.
6.3. In the above backdrop, for the sake of convenience, the speciﬁc
facts of the lead matter, Civil Appeal No. 11128 of 2016 shall be narrated
hereinunder:
Pursuant to the request of the respondent-assessee, a licence was
granted to it, inter-alia on certain terms and conditions to establish, maintain
and operate cellular mobile services. Accordingly, having accepted the
Policy of 1999 and migrated thereto, after paying the licence fee upto 31
July, 1999, i.e., the one-time licence fee as stipulated in the Communication
dated 22 July, 1999, the respondent-assesee continued in the business of
cellular telecommunication and associated value added services, under the
regime governed by the Policy of 1999.
6.4. The respondent-assessee ﬁled its return of income on 01 November,
2004 for the assessment year 2003-2004 declaring nil income. The same
C.I.T., DELHI v. BHARTI HEXACOM LTD. 379
[B. V. NAGARATHNA, J.]

was processed under Section 143(1) of the Act on 30 March, 2006. The case
was selected for scrutiny and a notice was issued to the respondent-assessee
under Section 143(2) of the Act, on 20 October, 2005.
6.5. It was noted that an amount of Rs. 11,88,81,000/-, which was
the licence fee paid by the assessee on revenue sharing basis, was claimed
by the respondent-assessee as revenue expenditure. In that regard, vide
questionnaire dated 15 November, 2006, the assessee was required to explain
as to why the said amount may, instead, be treated as capital expenditure and
amortised over the remaining licence period of twelve years. The respondent-
assessee furnished its response to the questionnaire, on 04 December, 2006.
On consideration of the assessee’s response, an Assessment Order was passed
on 27 December, 2006 observing that the amount of Rs. 11,88,81,000/-, i.e.
the licence fee paid by the assessee on revenue sharing basis, which was
claimed as a revenue expense, ought to have instead been amortised over the
remainder of the licence period, i.e., twelve years. Accordingly, an amount
of Rs. 99,06,750/- was allowed as a deduction under Section 35ABB of the
Act and the remaining amount of Rs. 10,89,74,250/- was disallowed and
added back to the income of the respondent-assessee.
6.6. Being aggrieved, the respondent-assessee ﬁled an appeal before the
Commissioner of Income Tax (Appeal), New Delhi. In view of the decision
of the Commissioner of Income Tax (Appeal) in the assessee’s own case
for the assessment year 2003-2004, it was reaﬃrmed vide order dated 27
September, 2007 that the annual licence fee calculated on the basis of annual
gross revenue of the assessee would be revenue expenditure deductible
under Section 37 of the Act.
6.7. Aggrieved by the said order, the appellant-Revenue preferred an
appeal before the Tribunal, New Delhi. By order dated 24 July, 2009, the
Tribunal dismissed the Revenue’s appeal following its earlier order dated
29 May, 2009 in ITA No. 5335 (Del)/2003 in the case of Bharti Cellular
Ltd., for the assessment year 2000-2001, the facts of which case were held
to be identical to the facts of the case at hand. Being aggrieved, the Revenue
ﬁled an appeal before the High Court of Delhi.
6.8. Before the High Court, the Revenue made the following
submissions:
380 SUPREME COURT REPORTS [2023] 13 S.C.R.

That the respondents were granted a licence under the agreement
executed under the Indian Telegraph Act, 1885 (hereinafter referred to as
the “Telegraph Act” for the sake of brevity). This agreement stated that the
licence was granted on certain terms and conditions to establish, maintain
and operate cellular mobile services. That the signiﬁcance of the words
“establish, maintain and operate” in the original licence cannot be lost
sight of under the Telecom Policy of 1999. The nature and character of the
licence fee was not changed. What was changed was only the method of
computation. That the assessees had accepted the licence fee payable under
the 1994 Agreement as a capital expenditure. They cannot now dispute
the same under the Policy of 1999. That under the Policy of 1994, from
the fourth year onwards, the assessee had to pay a ﬁxed sum per hundred
subscribers. The only change that was made was in the measure, namely,
that under the Policy of 1999, the amount was modiﬁed to 15% of the gross
revenue, but the nature and character of the payment was the same. That
mere payment of an amount in instalments did not convert or change the
capital payment to a revenue payment. That in order to acquire the right
to operate telecom services, obtaining of licence was a sine qua non. The
term of the licence was twenty years from the date of commencement and
therefore the expenditure is in the nature of capital expenditure.
6.9. Per contra, the contention of the assessee before the High Court
was that the licence fee payable under the Policy of 1999 was in the nature
of revenue expenditure. This was because the earnings are shared and the
licence fee depends upon the gross revenue and is payable yearly. That
the new operators under the Policy of 1999 were issued licences and were
required to pay a one-time licence fee for entry and to start operations and in
addition, yearly turn over based licence fee was payable. One-time payment
of licence fee was capital expenditure in nature but yearly payable licence
fee was revenue expenditure. It was a running expense for maintaining and
operating the business of telecommunication and therefore, considered in
the commercial sense, the yearly payment was in the nature of revenue
expenditure.
6.10. Since the Tribunal had held that variable licence fee paid by the
assessees was properly deductible as revenue expenditure, the substantial
question of law raised by the High Court at the instance of appellant Revenue
C.I.T., DELHI v. BHARTI HEXACOM LTD. 381
[B. V. NAGARATHNA, J.]

was, “whether the variable licence fee paid by the respondents under the
Telegraph Act, and Indian Wireless Telegraphy Act, 1933 payable under
the New Telecom Policy 1999 or 1994 Agreement, is revenue expenditure
or capital expenditure which is required to be amortized under Section
35ABB of the Act?”
The pertinent observations of the High Court and the salient aspects
discussed in the judgment dated 19 December, 2013 are as under:
i. Section 35ABB applies when expenditure of a capital nature
is incurred by an assessee for acquiring a right for operating
telecommunication services. It is immaterial whether the
expenditure is/was incurred before or after commencement of
the business to operate telecommunication services but what is
material is that the payment should be actually made. That Section
35ABB is not a deeming provision but comes into operation and
is eﬀective when the expenditure itself is of a capital nature and is
incurred towards acquiring a right to operate telecommunication
services or for the purposes of obtaining a licence for the said
services. That Section 35ABB does not help in determining and
deciding the question, as to, whether licence fee paid under the
Policy of 1999 or under the 1994 Agreement, was/is capital or
revenue in nature.
ii. That there was no decision of the Supreme Court or any of the
High Courts directly applicable to the factual matrix of the case
and therefore, it would be useful to consider a number of decisions
of this Court including, Empire Jute Co. Ltd. vs. Commissioner
of Income Tax, (1980) 124 ITR 1 (“Empire Jute Co. Ltd.”);
Assam Bengal Cement Co. Ltd. vs. CIT, West Bengal, (1955)
27 ITR 34 (“Assam Bengal Cement Co. Ltd.”); Board of
Agricultural Income Tax, Assam vs. Sindhurani Chaudurani,
(1957) 32 ITR 169 (“Sindhurani”); Enterprising Enterprises
vs. Deputy Commissioner of Income Tax, (2007) 293 ITR 437
(“Enterprising Enterprises”).
iii. Having referred to the aforesaid decisions, three other judgments
were noticed by the Delhi High Court which, according to learned
ASG appearing for the appellant-Revenue were wrongly applied
382 SUPREME COURT REPORTS [2023] 13 S.C.R.

to the case at hand. The said judgments are, Jonas Woodhead and
Sons Ltd. vs. Commissioner of Income Tax, (1997) 224 ITR 342
(“Jonas Woodhead and Sons”), Southern Switch Gear Ltd. vs.
CIT, (1998) 232 ITR 359 (“Southern Switch Gear Ltd.”); CIT,
Madras vs. Best and Co. (Pvt.) Ltd., (1966) 60 ITR 11 (“Best and
Co.”).
iv. After considering all of the aforesaid judgments, the Delhi High
Court in paragraph 29 discerned the facts of the present case as
under:
“29. When we turn to the facts of the present case, the following position
emerges:
i. The licence was issued under a statutory mandate and was required
and acquired, before the commencement of operations or business,
to establish and also to maintain and operate cellular telephone
services.
ii. The licence was for initial setting up but, thereafter for maintaining
and operating cellular telephone services during the term of the
licence.
iii. Contrary to what was stated, under the licence agreement executed
in 1994 the considerations paid and payable were with the
understanding that there would be only two players who would
have unfettered right to operate and provide cellular telephone
service in the circle. The payment, therefore, had element of
warding oﬀ competition or protecting the business from third
party competition.
iv. Under the 1994 agreement, the licence was initially for 10
years extendable by one year or more at the discretion of the
Government/authority.
v. 1994 Licence was not assignable or transferable to a third party or
by way of a sub-licence or in partnership. There was no stipulation
regarding transfer or issue of shares to third parties in the company.
vi. Under the 1994 agreement, the licencee was liable to pay ﬁxed
licence fee for ﬁrst 3 years. For 4th year and onwards, the licencee
C.I.T., DELHI v. BHARTI HEXACOM LTD. 383
[B. V. NAGARATHNA, J.]

was liable to pay variable licence fee @ Rs. 5,00,000/- per 100
subscribers or part thereof, with a speciﬁc stipulation on minimum
licence fee payable for 4th to 6th year and with modiﬁed but similar
stipulations from 7th year onwards.
vii. The licence could be revoked at any time on breach of the terms
and conditions or in default of payment of consideration by
giving 60 days’ notice.
viii. The authority also reserved the right to revoke the licence in the
interest of public by giving 60 days’ notice.
ix. Under 1999 policy, the licencee had to forego the right of
operating in the regime of limited number of operators and agreed
to multiparty regime competition where additional licences could
be issued without limit.
x. There was lock in period on the present shareholding for a period
of 5 years from the date of licence agreement i.e. the eﬀective date
and even transfer of shareholding directly or indirectly through
subsidiary or holding company, was not permitted during this
period. This had the eﬀect of ‘modifying’ or clarifying the 1994
agreement, which was silent.
xi. Licence fee calculated as a percentage of gross revenue was
payable w.e.f. 1 August, 1999. This was provisionally ﬁ xed
at 15% of the gross revenue of the licensee but was subject
to ﬁnal decision of the Government about the quantum of
revenue share to be charged as licence fee after obtaining
recommendation of the Telecom Regulatory Authority of
India (TRAI).
xii. At least 35% of the outstanding dues including interest payable
as on 31 July, 1999 and liquidated damages in full, had to be
paid on or before 15 August, 1999. Dates for payments of arrears
were speciﬁed.
xiii. Past dues upto 31 July, 1999 along with liquidated damages
had to be paid as stipulated in the 1999 policy, on or before 31
January, 2000 or earlier date as stated.
384 SUPREME COURT REPORTS [2023] 13 S.C.R.

xiv. The period of licences under 1999 policy was extended to 20
years starting from the eﬀective date.
xv. Failure to pay the licence fee on yearly basis would result in
cancellation of licences. Therefore, to this extent licence fee was/
is payable for operating and continuing operations as cellular
telephone operator.”
v. On a consideration of the aforesaid aspects, the Delhi High Court
held that the payment of licence fee was capital in part and revenue
in part and that it would not be correct to hold that the whole fee was
capital or revenue in nature in its entirety. It was further observed
that the licencees/assessees in question required a licence in order
to start or commence business as cellular telephone operators; that
payment of a licence fee was a precondition for the assessees to
commence or set up the business. That it was a privilege granted
to the assessee subject to payment and compliance with the terms
and conditions. For immediate reference, paragraph Nos.31 to 36
of the said judgment are extracted as under:
“31. Licence fee under the 1994 agreement ensured that there would be
only two private operators in a circle and thus their limited monopoly
would be protected and competition by way of third-party private
players was warded oﬀ. Restricted monopoly of the licencees was
ensured. The licence fee ﬁxed included an element towards the said
right of the licencees. 1994 agreement, for ﬁrst three years postulated
a lump-sum payment irrespective of number of subscribers. Minimum
fee was also prescribed for later years. It appears that licencees were
unable to make payments as per the 1994 agreement and under the
1999 policy, were required to pay lump-sum payment for past arrears
before speciﬁed dates.
32. There was restriction under the 1994 agreement, on transfer of the
licence or even grant sub-licence but there was no speciﬁc restriction
on change of shareholding. 1999 policy ensured that even shareholding
did not change for a period of 5 years from the eﬀective date. The eﬀect
of acquiring the licence has been examined in paragraph 15 above. The
licence was not assignable or transferrable as such, but induction of
share capital, transfer of shares etc. was permitted subject to conditions
C.I.T., DELHI v. BHARTI HEXACOM LTD. 385
[B. V. NAGARATHNA, J.]

in the 1999 policy. In commercial sense the licence constituted and
continues to be the most valuable right which the company has and
possesses. Thus, the payment made is for acquiring the licence which
is essential and mandatory, prerequisite for establishing the business
and for operations or continuance and running of business. Yet, as
observed below, it cannot be equated with one time entry fee which
a person has to pay to establish the business. It therefore, represents
composite payment, both capital and revenue.
33. The licence fee was imposed and payable under the Indian
Telegraph Act and other statutory provisions and was/is mandatory.
Failure to pay the same would/will result in discontinuance or stoppage
of business operations. Under 1999 policy, the amount payable speaks
of sharing of gross revenue earned by the service provider from the
customers. 1994 agreement as noticed did have a provision for sharing
but with minimum payment stipulation. In case of non-payment
of licence fee, the licence could be revoked and licencee was not
permitted to carry on and continue cellular telephone service. Thus,
the licence fee payable was/is equally with the objective and purpose
to maintain and operate cellular telephone services. It was also an
operating expense and non payment can lead to cancellation as one
of the consequences. Endurement requires current expenses and is
subject to payment on revenue share. It will not be correct to hold or
propound that entire payment during the term of licence, is deferred
capital payment. This was/is not the intent under the 1994 agreement
or 1999 policy. The intent is to also share the gross earning to maintain
and operate the licence.
34. The licence fee as such is similar to both prospecting fee,
acquisition of right to lease as well as leases which enabled removal
of sand/tendu leaves, etc. as nothing has to be won over, or extracted.
Part payment was towards an initial investment which an assessee
had to make to establish the business. It was a precondition to setting
up of business. It has element and includes payment made to acquire
the ‘asset’ i.e. the right to establish cellular telephone service. But
the licence permits and allows the assessee to maintain, operate
and continue business activities. Payment of licence fee has certain
386 SUPREME COURT REPORTS [2023] 13 S.C.R.

ingredients and is like lease rent which is payable from time to time
to be able to use the licence.
35. The licence acquired was initially for 10 years and the term was
extended under the 1999 policy to 20 years but this itself does not
justify treating the licence fee paid on revenue sharing basis under
the 1999 policy as a capital expense made to acquire an asset. As
observed in Empire Jute Co. Ltd. (supra), the enduring beneﬁt test has
limitation and cannot be mechanically applied without considering
the commercial or business aspects. Practical and pragmatic view and
considerations rather than juristic classiﬁcation is the determinative
factor. The payment of yearly licence fee on revenue sharing basis is
for carrying on business as cellular telephone operator. It is a normal
business expense.
36. Read in this manner, the licence granted by the Government/
authority to the assessee would be a capital asset, yet at the same
time, the assessee has to make payment on yearly basis on the gross
revenue to continue, to be able to operate and run the business, it
would also be revenue in nature. Failure to make stipulated revenue
sharing payment on yearly basis would result in forfeiting the right
to operate and in turn deny the assessee, right to do business with the
aid of the capital asset. Non-payment will prevent and bar an assessee
from providing services.”
vi. In paragraph 36, it was observed that the licence granted by the
Government or the concerned authority to the assessee would be a
capital asset and yet, since the assessee had to make the payment
on a yearly basis on the gross revenue to continue to be able to
operate and run the business, it would also be in the nature of
revenue expenditure. Having opined thus, the High Court decided
to apportion the licence fee as partly revenue and partly capital and
divided the licence fee into two periods, that is, before and after
31 July, 1999 and observed that the licence fee that had been paid
or was payable for the period upto 31 July, 1999 i.e. the date set
out in the Policy of 1999, should be treated as capital expenditure
and the balance amount payable on or after the said date should
be treated as revenue expenditure. The reasons for the same were
C.I.T., DELHI v. BHARTI HEXACOM LTD. 387
[B. V. NAGARATHNA, J.]

stipulated in paragraphs 43 to 46 of the said judgment which reads
as under:
“43. Licence fee was payable for establishment, maintenance and
operation of cellular telephone service. Establishment and set up took
place in the initial years and thereafter the payments made were/are
for operation or maintaining the cellular telephone service. Initial
outlay and payment, therefore, is capital in nature, whereas the
outlays and payments made subsequently are to operate and maintain
the service. 1999 policy in the form of letter dated 22 July, 1999
also refers to one time entry fee which is chargeable and had to be
calculated as licence fee dues payable upto 31 July, 1999 and licence
fee was thereafter payable on percentage share of gross revenue. The
new licences issued to others also stipulated one time entry fee and
then licence fee payment on sharing basis. In view of the new 1999
policy, the earlier policy which restricted competition, underwent
a change and licencees forgo their right to operate in the regime
of limited number of operators. Another reason why we feel that
licence fee payable for the period on or before 31 July, 1999 should
be treated as capital and the amount payable thereafter as revenue, is
justiﬁed and appropriate in view of Section 35ABB. We have already
quoted the said section above. The provision provides that licence
fee of capital nature shall be amortized by dividing the amount by
number of remainder years of licences. Thus, the capitalized amount
of licence fee is to be apportioned as a deduction in the unexpired
period of the licence. The provision will have ballooning eﬀect with
amortized amount substantially increasing in the later years and in
the last year the entire licence fee alongwith the brought forward
amortized amount would be allowed as deduction. After a particular
point of time, deduction allowable under Section 35ABB would be
more than the actual payment by the assessee as licence fee for the
said year. This would normally happen after the mid-term of the
licence period. Section 35ABB, therefore, ensures that the capital
payment is duly allowed as a deduction over the term and once the
expenditure is allowed, it would be revenue or tax neutral provided
the tax rates remain the same during this period.
388 SUPREME COURT REPORTS [2023] 13 S.C.R.

44. ITA Nos. at serial Nos. 1 to 9 above primarily relate to variable
licence fee, which is to be shared under the 1999 Policy whereas,
ITA No. 417/2013 ﬁled against Hutchison Essar Ltd. relates to the
period of variable licence fee payable for the fourth year under the
1994 Agreement.
45. The effect thereof is that we are treating about 20% of the
expenditure in terms of the tenure as per the 1999 Policy as capital in
nature, whereas if we apply the 1994 Agreement, we would be treating
about 40% of the expenditure as per the tenure as payable towards
establishing or setting up of cellular business. By the time 1999 Policy
was implemented in the case of the respondents-assessees, the cellular
telephone business had already commenced and was in operation.
The 1999 Policy had the eﬀect of extending period of licence from
10 years to 20 years, but from the eﬀective date. The view, we have
taken, eﬀectively means that the entire licence fee paid in the initial ﬁrst
four years is treated as capital in nature i.e. the expenditure incurred to
establish cellular telephone business, whereas the balance expenditure
payable on year to year basis from 5 year onwards is treated as revenue
expenditure to run and operate cellular telephone business.
46. However, we would like to discuss two judgments relied upon
by Huthison Essar Pvt. Ltd. in support of their contention that the
variable fee even prior to 31 July, 1999 should be treated as revenue
expenditure. As noted above, this was the 4 year and the contention
of the assessee is that in this year even as per the 1994 agreement,
payment had to be made on revenue sharing basis subject to the
minimum guarantee. Learned counsel for the assessee had relied upon
CIT v. Sharda Motors Industry Ltd. (supra). In the said case reference
was made to J.K. Synthetics Ltd. (supra) to hold that no substantial
question of law arises. The Revenue had relied upon Southern Switch
Gear Ltd. v. CIT (1998) 232 ITR 359 (SC), but the said judgment was
distinguished on the ground that lump-sum royalty was paid and 25%
thereof was disallowed by the tribunal on the ground that it was capital
payment. In Sharda Motor Industries Ltd. (supra), royalty was to be
paid on quantity of goods produced calculated per piece. However, this
does not appear to be sole basis why the payment made was treated as
C.I.T., DELHI v. BHARTI HEXACOM LTD. 389
[B. V. NAGARATHNA, J.]

revenue expenditure. The court had relied upon other facts which are
noticed in paragraph 3 of the same judgment i.e. the payment was made
for running business. The question of apportionment and payment was
not made to establish business. In CIT v. Modi Revlon (P.) Ltd. (2012)
26 Taxmann.com 133 (Delhi), a Division Bench of this High Court
observed that the tests evolved over the period have disapproved the
applicability of the ‘once and for all’ payment and more structured
approach which would take into account several factors like the licence
tenure; whether licence created further rights; whether there was
restriction for use of conﬁdential information; whether beneﬁts were
transferred once and for all; whether after expiry of the licence, plans
and drawings were to be returned, etc. As held and observed above, it
is nature and object for which the payment is made which determines
the character of payment. In the said case, it was observed that there
was nothing to show or to suggest vesting of knowhow in the assessee
and therefore, the assessee did not derive any enduring beneﬁt. Thus,
the royalty payment was held to be revenue in nature.”
In view of the above discussion, the substantial question was answered
by the High Court in the following manner:
“47. In view of the aforesaid findings, the substantial question
mentioned above in item Nos. 1 to 9 is answered in the following
manner:
(i) The expenditure incurred towards licence fee is partly revenue
and partly capital. Licence fee payable upto 31 July, 1999 should
be treated as capital expenditure and licence fee on revenue
sharing basis after 1 August, 1999 should be treated as revenue
expenditure.
(ii) Capital expenditure will qualify for deduction as per Section
35ABB of the Act.
48. The appeal ITA No. 417/2013 by the Revenue in the case of
Hutchison Essar Pvt. Ltd., pertains to the assessment year 1999-2000
i.e. year ending 31 March, 1999. It is for the period prior to the period
31 July, 1999. As per the discussion above, the licence fee payable
on or before 31 July, 1999 should be treated as capital expenditure
390 SUPREME COURT REPORTS [2023] 13 S.C.R.

and the licence fee payable thereafter should be treated as revenue
expenditure. In view of the aforesaid position, the question of law
admitted for hearing in this appeal as recorded in the order dated 21
August, 2013, has to be answered in favour of the revenue and against
the respondent assessee.”
6.11. Aggrieved by the aforesaid reasoning and conclusions arrived
at by the High Court of Delhi in its judgment dated 19 December, 2013,
which has been followed by High Courts of Delhi, Bombay and Karnataka,
the appellant-Revenue has preferred these appeals.
Submissions:
7. We have heard the learned Additional Solicitor General of India
(ASG), Sri N. Venkataraman for the Revenue and learned senior counsel
Sri Ajay Vohra, Sri Arvind Datar and learned counsel Sri Sachit Jolly, for
the respondent-assessees and perused the material placed on record.
Submissions on behalf of the appellant-Revenue:
7.1. Learned ASG, at the outset, submitted that the judgment of the
High Court of Delhi dated 19 December, 2013 is incorrect inasmuch as it
has sought to dissect the payment of licence fee to hold that the entry fee
paid in the initial four years ought to be treated as capital expenditure and
amortised accordingly, while the fee payable on an annual basis from the
ﬁfth year onwards, as a percentage of the gross revenue of the assessees was
treated as revenue/business expenditure. It was further contended as follows:
i. That the schedule of payment cannot recharacterize the transaction
under income tax law, particularly when this Court had laid down
from time to time that the schedule of payment, whether lump-
sum or periodical, is immaterial in determining its classiﬁcation
under income tax law. The payment(s) towards the same purpose,
i.e., payment of licence fee, cannot be characterised partly as
capital and partly as revenue in nature by artiﬁcially deﬁning one
part as an entry fee and the remainder, payable annually, when
both types of payment was towards licence fees.
ii. That when the respondent-assessees have duly amortised the
licence fee paid annually as capital expenditure, under the 1994
C.I.T., DELHI v. BHARTI HEXACOM LTD. 391
[B. V. NAGARATHNA, J.]

licence regime as well as the entry fee under the Policy of 1999
regime, there was no basis to reclassify the same as revenue
expenditure insofar as variable licence fee is concerned for the
subsequent years. Variable payments made annually, based on
the annual gross revenue in the relevant year were also towards
licence fee. Therefore, there could not have been a shift in the
tax treatment thereof upon migration to a new regime, wherein
merely the payment schedule was revised while preserving the
character of the payment.
iii. That payments made, either of entry fee or of annual licence
fee, is in essence only towards securing a licence to establish,
maintain or operate a telegraph i.e. system. If either of the
aforesaid payments is not made, or short paid, the licence
would be revoked under Section 8 of the Telegraph Act.
Further, Section 4 of the said Act authorises the Government
to grant licence against a consideration. Therefore, both entry
fee as well as annual licence fee are included within the ambit
of ‘consideration’ chargeable under Section 4. Hence, any
submission that licence fee should be split into two components,
namely, entry fee for acquiring the licence and variable
licence fee for operating the licence, has no legal basis. Such a
fragmentation is neither statutorily permissible, nor prescribed
in the licence agreement.
iv. Referring to Section 35ABB of the Act, which allows
amortisation of expenditure incurred for obtaining a licence
to operate telecommunication services, it was contended that
the said provision applies in relation to payments made for
“acquiring any right to operate telecommunication services”
whether such payment was made “before the commencement
of the business to operate or thereafter at any time during the
previous year.” In view of the aforesaid expression, the mode
and manner of payment becomes irrelevant. As long as the
payment is towards licence fee, the expenditure so incurred will
be “in the nature of capital expenditure” as envisaged under
Section 35ABB of the Act.
392 SUPREME COURT REPORTS [2023] 13 S.C.R.

v. That the expression “either before the commencement of the
business to operate or thereafter” is also found in Section
35ABA of the Act which pertains to the right to use Spectrum,
similar to Section 35ABB which relates to licence to operate
telecommunication services. The legislative intent is therefore
clear that both these rights would flow from the Central
Government on payment, and further, the payment would be
partly lump-sum and partly in a deferred manner, considering
the nature of rights acquired.
vi. Reliance was placed on the decision of a Constitution-Bench
of this Court in Aditya Minerals Pvt. Ltd. vs. Commissioner of
Income Tax, (1999) 8 SCC 97 (“Aditya Minerals Pvt. Ltd.”) to
assert that the law laid down therein is that as long as payment
is towards a capital expenditure, it is immaterial whether it is
paid in lump-sum or as periodical payments, or, as a combination
of both. That the mode of payment will not be determinative in
identifying the nature of the expenditure, i.e., as to whether it is
capital or not.
vii. That the decision of this Court in Assam Bengal Cement Co. Ltd.
has clariﬁed that the aim and object of the expenditure would
determine the character thereof, while the source and manner of
payment would have no consequence.
viii. Referring to the cases of Jonas Woodhead and Sons, Southern
Switch Gear Ltd. and Best and Co., which have been referred to
by the High Court of Delhi in the impugned judgement, it was
submitted that reliance on the said cases is misplaced inasmuch as
the said cases did not deal with a single source/purpose towards
which payments in diﬀerent forms had been made. On the
contrary, in the said cases, the purpose of payments was traceable
to diﬀerent subject matters and accordingly, this Court held that
the payments could be apportioned. However, in the present case,
the licence issued under Section 4 of the Telegraph Act is a single
licence to establish, maintain and operate telecommunication
services. Since it is not a licence for divisible rights which
conceives of divisible payments, apportionment of the licence
C.I.T., DELHI v. BHARTI HEXACOM LTD. 393
[B. V. NAGARATHNA, J.]

fee by holding that the entry fee paid is towards establishment
and therefore, capital, while the licence fee paid as a percentage
of gross revenue is towards operation and maintenance and
therefore, Revenue, is without legal basis.
ix. Reliance was placed on the decision of this Court in CIT vs.
Jalan Trading Co. Pvt. Ltd., (1985) 4 SCC 59 (“Jalan Trading
Co.”) to submit that in the said case this Court had an occasion to
consider an annual payment in the form of proﬁt sharing towards
the right to carry on business. That in the said case, this Court
concluded that the annual payment of 75% proﬁt share would
still be a payment that was capital in nature, as the same was
paid as consideration under a deed of assignment for the right
to carry on business. That this judgement will squarely apply to
the facts of the present case since the annual payment based on
AGR is only towards licence fees and merely because it is paid
on the annual gross revenue, the payment cannot be construed
as a revenue expenditure.
With the aforesaid submissions, it was prayed that these appeals ﬁled by
the Revenue be allowed and the impugned judgments of the High Courts of
Delhi, Bombay and Karnataka, following the judgment of the Division Bench
of the High Court of Delhi dated 19 December, 2013, be set aside and it be
declared that the annual payment is in the nature of a capital expenditure.
7.2. Per contra, learned senior counsel, Sri Ajay Vohra, appearing
on behalf of the respondent-assessees in Civil Appeal No. 11130 of 2016,
supported the judgment of the Division Bench of the High Court of Delhi
dated 19 December, 2013 and submitted that the said judgment was passed
based on a correct appreciation of the facts of the case and the law and
therefore, the same would not call for any interference by this Court. It was
further submitted as follows:
i. That on a bare reading of the said provision and the mode of
amortisation of expenses, it is patently clear that the same would
be applicable only if the following cumulative conditions are
satisﬁed:
a) the expenditure is capital in nature;
394 SUPREME COURT REPORTS [2023] 13 S.C.R.

b) the expenditure is incurred by an assessee on acquisition of the
right to operate telecom services;
c) the expenditure represents payment actually made to obtain a
licence.
Thus, for attracting the provisions of Section 35ABB, it is necessary
that the expenditure under consideration must be capital in nature and is
incurred for acquiring or obtaining a licence, which gives the right to the
assessee to operate telecom services.
ii. That in the present case, the respondent-assessees had
obtained the licence in the year 1994 and had thereafter set
up the telecommunication infrastructure and started operating
telecommunication services. The payment of licence fee under
the ﬁxed regime, i.e., prior to migration to the Policy of 1999 was
for obtaining the licence, thereby resulting in the acquisition of
the right to operate telecommunication services. Therefore, the
ﬁxed licence fee upto 31 July, 1999 was amortised and allowed
in terms of Section 35ABB of the Act. On the other hand, the
variable licence fee payable w.e.f. 01 August, 1999, is a percentage
of the AGR. The same is not in the nature of capital expenditure
as it is not incurred with a view to acquire the right to operate
telecommunication services. The said services were already being
operated by the respondents by virtue of a licence which had been
obtained in the year 1994. The variable licence fee was, thus, for
continuing the right to operate telecommunication services, which
were already being operated and provided by the respondent-
assessees.
iii. Referring to the salient features of the Policy of 1999, it was
submitted that the said policy made a paradigm shift by making
qualitative changes in licence conditions. It facilitated the entry
of new players on payment of one-time entry fee and variable
revenue share. The policy document highlights and emphasises
the distinction between a one-time fee which is the payment for
obtaining the licence, on the one hand and the variable licence
fee, which is payment made on a recurring basis based on revenue
share, for continuing the right to operate telecommunication
C.I.T., DELHI v. BHARTI HEXACOM LTD. 395
[B. V. NAGARATHNA, J.]

services. Therefore, the one-time entry fee to be paid by a new
entrant obtaining a licence post 31 July 1999 is required to be
amortised under section 30ABB of the Act while the variable
licence fee payable as a revenue share would be admissible
business expenditure or revenue deduction.
iv. That the Policy of 1999 has not only changed the mechanism of
payment but also modiﬁed the rights accruing under the licence
already obtained vide the original agreement dated 29 November
1994, in lieu of the payment of variable licence fee. The tenure of
the licence was increased from ten to twenty years; the licence fee
was bifurcated into two parts, i.e., ﬁxed entry fee paid for obtaining
the licence and variable annual licence fee paid for continuing with
the licence. Thereby the whole complexion of the consideration
provided under the original agreement, was changed. That, since
the restriction of the number of players or operators in each region
was completely lifted, coupled with the fact that variable licence
fee was to be paid on an annual basis, in order to continue with the
right to operate telecommunication services, no enduring beneﬁt
was accruing to the respondent-assessees. Neither was there any
monopoly right, nor would the licence remain valid and subsist
for an indeﬁnite period of time. The licence would be valid only
so long as the annual payment of variable licence fee was made.
v. That the provisions of Section 35ABB of the Act were introduced
in the year 1996. At that time, the concept of variable licence
fee did not exist. Application of the said provision to variable
licence fee would give rise to absurd results, not intended by the
Legislature.
vi. That payment of variable licence fee from 01 August, 1999 is not
for “acquiring any right to operate telecommunication services”,
which right vested in and was being exploited by the assessees
pursuant to obtaining the licence in 1994 and setting up the
requisite infrastructure.
vii. Further, variable licence fee paid from 01 August, 1999 could not
be regarded as payment made “to obtain a licence”, so as to fall
within the ambit of Section 35ABB of the Act.
396 SUPREME COURT REPORTS [2023] 13 S.C.R.

That Section 35ABB of the Act would not be attracted in the present
case to require amortisation of the variable licence fee, because:
a) payment of variable licence fee is not in the nature of capital
expenditure;
b) such payment is not incurred for “acquiring any right to operate
telecommunication services”;
c) such payment has not been made “to obtain a licence”.
With the aforesaid submissions, it was prayed that the High Courts’
decision as to the inapplicability of Section 35ABB of the Act, to the facts
of the present case, be upheld, and these appeals be dismissed as being
devoid of merit.
7.3. Learned senior counsel, Sri Arvind P. Datar, appearing on behalf
of some of the respondent-assessees in Civil Appeal Nos. 11131 of 2016
and 153 of 2021 adopted the submissions of Sri Ajay Vohra and further
submitted as under:
i. That it would be incorrect to suggest that the annual licence fee
which is paid as a percentage of the revenue earnings is paid to
acquire the right and obtain the licence. That it is absurd to state that
every year, each telecom licencee acquires the right and obtains
a licence. Acquisition of the right and obtaining the licence is a
one-time event and the expenditure for acquisition of the licence
is always capital expenditure. Section 35ABB of the Act covers
this aspect of the transaction.
ii. That the annual licence fee, even though termed as a licence fee is
in essence, expenditure incurred to operate the telecommunication
services from year to year. Such expenditure is incurred annually to
earn revenue and consequently is an annual revenue expenditure.
In various sectors, such as mining, oil exploration, etc., the
licences are acquired on payment of a lump-sum amount. This
expenditure is to acquire a right and obtain licence to engage in
mining, oil exploration, and so on. Thereafter, annual amounts are
paid, depending on the quantities of minerals or petroleum that is
extracted. It was submitted that by analogy, the one-time entry fee
C.I.T., DELHI v. BHARTI HEXACOM LTD. 397
[B. V. NAGARATHNA, J.]

paid by existing telecom operators and the entry fee that was paid
by all the new entrants, was capital expenditure which resulted in
acquisition of rights and obtaining licence. However, the annual
licence fee, which varied according to the AGR in the relevant
year, was incurred annually on revenue earned and consequently
is an annual revenue expenditure.
iii. Referring to the decision of this Court in Mewar Sugar Mills Ltd.
vs. CIT, (1973) 3 SCC 143 (“Mewar Sugar Mills Ltd.”), it was
submitted that in the said case, the expenditure incurred by the
assessee was apportioned and it was held that the sums paid by
the assessee for acquisition of monopoly rights for manufacture of
sugar were in the nature of capital expenditure, while the royalty
paid on a yearly basis was revenue expenditure. It was submitted
in that context that the principle laid down in the said case would
directly apply to the case at hand. The one-time entry fee is payed
for acquiring the licence and is therefore in the nature of capital
expenditure; whereas, the annual licence fee is to operate the
licence and earn proﬁts, therefore, the same is revenue expenditure.
iv. That a similar view was taken in CIT vs. Sarada Binding Works,
(1976) 102 ITR 187 (“Sarada Binding Works”) wherein the
Madras High Court considered various judgments of this Court
and held that a lump-sum payment to acquire a right would be
capital expenditure, whereas any amount paid as royalty based
on annual earnings or proﬁt would be revenue expenditure. That
the payment of annual licence fee, in the present case, would be
similar to the payment of royalty as it relates to the annual turnover
and would therefore be revenue in nature.
v. That it could not be axiomatically held that the nomenclature
‘annual licence fee’ would itself indicate that the annual variable
licence fee was also incurred for the purpose of acquiring the
capital asset, i.e., the licence and therefore, had to be amortised
under Section 35ABB of the Act. The nomenclature does not
mean that a licence is acquired annually or the licence is obtained
annually. This amount is the expenditure incurred to operate the
398 SUPREME COURT REPORTS [2023] 13 S.C.R.

telecom licence and earn revenue or proﬁts. In this regard, reliance
was placed on the dictum of this Court in Sundaram Finance
Ltd. vs. State of Kerala, (1966) 2 SCR 828 to submit that the
use of a particular expression is not conclusive of the nature of a
transaction.
vi. That the judgment of this Court in Jalan Trading Co., sought to be
relied upon by the appellant-Revenue would have no application
to the facts of the present case as unlike in the case at hand, there
was no lump-sum payment in the said case. The agreement itself
provided for 75% of the net proﬁts to be paid for the assignment
of the right to carry on business. The aim or object of payment of
the said consideration was for the purpose of acquiring the right
to carry on business. However, in the present case, the annual
licence fee is paid not to acquire the licence, but to operate the
telecom licence and earn revenue or proﬁts. Hence, the decision
of this Court in Jalan Trading Co., turns on its own facts.
7.4. Sri Sachit Jolly, learned counsel appearing for the respondent-
assessees in Civil Appeal No. 4902 of 2022 adopted the submissions of
learned senior counsel, Sri Ajay Vohra and Sri Arvind P. Datar and further
contended as follows:
i. That merely because the DoT can rescind the licence owing to
non-payment of the variable licence fee, it does not mean that
the payment of such fee is towards the acquisition of the licence.
Violation of other conditions of licence like non-maintenance of
KYC of subscribers could also lead to cancellation of licence.
In fact, payment of licence fee for any one year, neither leads to
acquisition of any new asset nor to any enduring beneﬁt. Further,
the beneﬁt, if any, of the variable licence fee is only restricted to
one year to which the payment pertains. Hence, the same could
not be held to be capital expenditure or expenditure incurred for
acquisition of a capital asset.
ii. That the interpretation sought to be canvassed by the appellant
would result in a completely absurd result wherein the deduction
under Section 35ABB would exceed the actual payment made
by the assessee in a given year, in the later years. This aspect
C.I.T., DELHI v. BHARTI HEXACOM LTD. 399
[B. V. NAGARATHNA, J.]

of the matter was rightly appreciated by the Delhi High Court
in the impugned judgement and it was accordingly held that
the interpretation proposed by the appellant would give Section
35ABB a ballooning eﬀect with the amortised amount substantially
increasing in the later years and in the last year, the entire licence
fee along with the brought forward, amortised amount would be
allowed as deduction. It was rightly held that after a certain point
of time, deduction allowable under Section 35ABB would be more
than the actual payment made by the assessee as licence fee for
that year.
In this context, reliance was placed on the decision of this
Court in CIT, Bangalore vs. J.H. Gotla, A.I.R. 1985 SC 1698 to
contend that it is settled law that an interpretation which leads to
an absurd result should be avoided and such interpretation should
give way to a more harmonious interpretation so that the legislation
is given its desired result.
iii. With the aforesaid submissions, it was stated that the impugned
decision of the High Court of Delhi is detailed and well-reasoned.
It is not contrary to any principle laid down by this Court and
hence does not merit interference. It was prayed that the appeals
ﬁled by the Revenue be dismissed on the ground that there is no
inﬁrmity in the impugned judgment of the High Court of Delhi.
Reply arguments:
8. By way of reply, learned ASG, Sri N. Venkataraman, reiterated
his submissions while also contending that the judgment of this Court in
Mewar Sugar Mills Ltd. and the judgment of the Madras High Court in
Sarada Binding Works, relied upon by Sri Datar to substantiate the claim
that the same source of expenditure incurred by an assessee could be
construed as partly capital and partly revenue would not come to the aid of
the respondents-assessees in the present case. In this regard, it was further
submitted as follows:
i. That in both the aforesaid cases sought to be relied upon by Sri
Datar, a single source of expenditure was not split partly as capital
and partly as revenue expenditure. On the contrary, in both of
400 SUPREME COURT REPORTS [2023] 13 S.C.R.

those decisions, this Court examined two diﬀerent constituents of
expenditure and held one to be capital and the other to be revenue
in nature.
ii. That in Sarada Binding Works the facts were that the agreement
in question envisaged conveyances of two distinct aspects: ﬁrst,
the right to run the business of Chandamama Publications for a
consideration of a ﬁxed sum of Rs.5000/- per annum; second,
royalty on the sales equivalent to 10% of the net proﬁt of each
year of business. The High Court’s judgment categorically records
that annual payments based on the turnover had no nexus with the
payment made to acquire the right to carry on trade, which was
also paid annually at Rs.5000/- every year. However, in the facts
of the present case, the entry fee as well as the annual licence
fee payable as a percentage of AGR, are both towards the same
purpose, i.e., acquisition of licence to carry on telecommunication
operator services.
iii. That similarly, in the case of Mewar Sugar Mills Ltd., two diﬀerent
payments were made, relatable to two diﬀerent subject matters.
In the said judgment, this Court noted that the payment of royalty
based on quantity of sugar manufactured, was not with a view to
acquire monopoly rights. In the said case, there were two clearly
discernible purposes towards which the payment of lump-sum
consideration and payment of royalty were made. However, in the
present case, the purpose of payment of entry fee as well as the
annual licence fee, is singular, i.e., to acquire and retain the right
to carry on the business of rendering telecommunication services.
In light of the aforesaid submissions, Sri N. Venkataraman
urged that this Bench may allow the appeals ﬁled by the Revenue.
Points for consideration:
9. Having heard the learned counsel for the respective parties and on
perusal of the material on record, the following points would emerge for
our consideration:
i. Whether the variable annual licence fee paid by the respondents-
assessees to the DoT under the Policy of 1999 is revenue in nature
C.I.T., DELHI v. BHARTI HEXACOM LTD. 401
[B. V. NAGARATHNA, J.]

and is to be allowed deduction under Section 37 of the Act, or,
the same is capital in nature and is accordingly required to be
amortised under Section 35ABB of the Act?
ii. 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?
iii. What order?
Statutory Framework:
10. The statutory scheme and structure of the Act on the characterisation
of capital expenditure is as follows:
10.1. Section 32 of the Act identiﬁes tangible and intangible assets
which are capital in nature and prescribes the mode and manner of
depreciation. Section 32(1)(i) identiﬁes a list of tangible assets and Section
32(1)(ii), a set of intangible assets which includes licences. Explanation
3 to Section 32(1) deﬁnes ‘assets’ into two categories, i.e., tangible and
intangible. Licences are identiﬁed as intangible assets and are therefore,
capital in nature.
10.2. Any capital asset is depreciable in terms of Section 32 of the
Act, unless speciﬁcally dealt with elsewhere. One of the exceptions to
depreciation of capital assets is amortisation. Sections 35A, 35AB, 35ABA
and 35ABB form one cluster of exceptions wherein, the capital assets
referred to in the relevant sections have to be amortised in the manner and
mode prescribed therein.
10.3. Amortisation is a form of depreciation, however, the distinction
between the two being that in the case of depreciation, an asset may be
depreciated progressively, and may even be exhausted before the lifetime
expectancy of the asset in question, whereas, in the case of amortisation, the
value of the asset gets progressively depleted, matching with the expected
timeframe of the right.
402 SUPREME COURT REPORTS [2023] 13 S.C.R.

10.4. A brief overview of the provisions of the Act which provide for
amortisation as a prescribed method, is as under:
i. Section 35A of the Act provides for amortisation of expenditure
incurred on acquisition of patent rights or copyright which are
intangible assets.
ii. Section 35AB of the Act prescribes the method of amortisation in
the case of acquisition of know-how.
iii. Section 35ABA of the Act prescribes the method of amortisation
of expenditure incurred on obtaining the right to use spectrum.
iv. Section 35ABB of the Act provides for amortisation of
the expenditure incurred for obtaining a licence to operate
telecommunication services.
11. At this juncture, it would be useful to reproduce Section 35ABB
(1) of the Act, which reads as under:
“35ABB. Expenditure for obtaining licence to operate
telecommunication services.—
(1) In respect of any expenditure, being in the nature of capital
expenditure, incurred for acquiring any right to operate
telecommunication services either before the commencement of
the business to operate telecommunication services or thereafter
at any time during any previous year and for which payment has
actually been made to obtain a licence, there shall, subject to
and in accordance with the provisions of this section, be allowed
for each of the relevant previous years, a deduction equal to the
appropriate fraction of the amount of such expenditure.
Explanation.—For the purposes of this section,—
(i) “relevant previous years” means,—
(A) in a case where the licence fee is actually paid before the
commencement of the business to operate telecommunication
services, the previous years beginning with the previous year
in which such business commenced;
C.I.T., DELHI v. BHARTI HEXACOM LTD. 403
[B. V. NAGARATHNA, J.]

(B) in any other case, the previous years beginning with the
previous year in which the licence fee is actually paid,
and the subsequent previous year or years during which the
licence, for which the fee is paid, shall be in force;
(ii) “appropriate fraction” means the fraction the numerator of
which is one and the denominator of which is the total number
of the relevant previous years;
(iii) “payment has actually been made” means the actual payment
of expenditure irrespective of the previous year in which the
liability for the expenditure was incurred according to the
method of accounting regularly employed by the assessee.”
(2) Where the licence is transferred and the proceeds of the transfer
(so far as they consist of capital sums) are less than the expenditure
incurred remaining unallowed, a deduction equal to such
expenditure remaining unallowed, as reduced by the proceeds
of the transfer, shall be allowed in respect of the previous year
in which the licence is transferred.
(3) Where the whole or any part of the licence is transferred and
the proceeds of the transfer (so far as they consist of capital
sums) exceed the amount of the expenditure incurred remaining
unallowed, so much of the excess as does not exceed the diﬀerence
between the expenditure incurred to obtain the licence and
the amount of such expenditure remaining unallowed shall be
chargeable to income-tax as proﬁts and gains of the business in
the previous year in which the licence has been transferred.
Explanation.—Where the licence is transferred in a previous year
in which the business is no longer in existence, the provisions of
this sub-section shall apply as if the business is in existence in
that previous year.
(4) Where the whole or any part of the licence is transferred and the
proceeds of the transfer (so far as they consist of capital sums)
are not less than the amount of expenditure incurred remaining
unallowed, no deduction for such expenditure shall be allowed
404 SUPREME COURT REPORTS [2023] 13 S.C.R.

under sub-section (1) in respect of the previous year in which the
licence is transferred or in respect of any subsequent previous
year or years.
(5) here a part of the licence is transferred in a previous year and
sub-section (3) does not apply, the deduction to be allowed under
sub-section (1) for expenditure incurred remaining unallowed
shall be arrived at by—
(a) subtracting the proceeds of transfer (so far as they consist of
capital sums) from the expenditure remaining unallowed; and
(b) dividing the remainder by the number of relevant previous
years which have not expired at the beginning of the previous
year during which the licence is transferred.
(6) Where, in a scheme of amalgamation, the amalgamating company
sells or otherwise transfers the licence to the amalgamated
company (being an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply
in the case of the amalgamating company; and
(ii) the provisions of this section shall, as far as may be, apply
to the amalgamated company as they would have applied to
the amalgamating company if the latter had not transferred the
licence.
(7) Where, in a scheme of demerger, the demerged company sells or
otherwise transfers the licence to the resulting company (being
an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply
in the case of the demerged company; and
(ii) the provisions of this section shall, as far as may be, apply to
the resulting company as they would have applied to the demerged
company if the latter had not transferred the licence.
(8) Where a deduction for any previous year under sub-section (1) is
claimed and allowed in respect of any expenditure referred to in
that sub-section, no deduction shall be allowed under sub-section
C.I.T., DELHI v. BHARTI HEXACOM LTD. 405
[B. V. NAGARATHNA, J.]

(1) of section 32 for the same previous year or any subsequent
previous year.
11.1. Section 35ABB of the Act governs the treatment of expenditure
incurred by entities to obtain a licence for operating telecommunication
services in India. The provision addresses the tax treatment of such expenses
and ensures that they align with the income tax framework. With eﬀect from
1 April 1996, this provision provides for amortisation of capital expenditure
incurred for acquisition of any right to operate telecommunication services,
regardless of whether such cost is incurred before the commencement of
such business or thereafter. The cost is allowed to be amortised in equal
instalments in the years for which the licence is in force. The amortisation
commences from the year in which such business commences (where such
cost is incurred before the commencement of such business) or the year in
which such cost is actually paid, irrespective of the method of accounting
adopted by the assessee for such expenditure.
11.2. In order for Section 35ABB of the Act to be applicable, the
following cumulative conditions speciﬁed in Section 35ABB (1) of the Act
are to satisﬁed:
First, the expenditure must be capital in nature;
Second, the expenditure must be incurred by an assessee for the purpose
of acquisition of the right to operate telecom services;
Third, the expenditure must represent the payment actually made to
obtain a licence.
Thus, for attracting the provisions of Section 35ABB, it is necessary
that the expenditure under consideration must be capital in nature and is
incurred for acquiring or obtaining a licence which gives the right to the
assessee to operate telecommunication services. Section 35ABB of the Act
operates and is eﬀective when the expenditure itself is of a capital nature
and is incurred for acquiring a right to operate telecommunication services
or is made to obtain a licence for the said services.
Further, the deﬁnitions of “relevant previous years”, “appropriate
fraction” and “payment has actually been made” have been given by way
of an Explanation for the purpose of this Section. Sub-section (2) to (5) deal
406 SUPREME COURT REPORTS [2023] 13 S.C.R.

with deduction to be made accordingly when a licence is transferred and
the proceeds of the transfer (so far as they consist of capital sums) are
less than or exceed the expenditure incurred remaining unallowed. Sub-
section (6) to (7) deal with situation where, in a scheme of amalgamation,
demerger, etc. as to how the provisions of sub-section (2), (3) and (4) of
Section 35ABB would not apply but the provisions of this Section shall,
as far as may be, apply to the amalgamated company or to the demerged
company, apply to the resulting company as they would have applied to
the amalgamating company if the latter had not transferred the licence
or to the demerged company if the latter had not transferred the licence,
as the case may be. Sub-section (8) states that where a deduction for any
previous years under sub-section (1) is claimed and allowed in respect
of any expenditure referred to in that sub-section, no deduction shall be
allowed under the sub-section (1) of Section 32 for the same previous year
or any subsequent previous year.
11.3. The salient aspects of Section 35ABB (1) of the Act may be
read as under:
(i) Purpose and nature of expenditure - Capital expenditure incurred
for the purpose of obtaining licence to operate telecommunication
services.
(ii) Mode of amortisation of expenses - For each year of the relevant
previous years, a deduction equal to the appropriate fraction of
the amount of such expenditure, shall be allowed.
(iii) Conditions to be satisﬁed for applicability of the Provision –
(a) The expenditure must be capital in nature;
(b) The expenditure must be incurred by an assessee for the
purpose of acquisition of the right to operate telecom services;
(c) The said expenditure may be incurred before the
commencement of business to operate telecommunication
services, or thereafter at any time during any previous year;
(d) The expenditure must represent the payment actually made
to obtain a licence.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 407
[B. V. NAGARATHNA, J.]

12. Since the variable licence fee paid by the respondents-assessees
to the DoT under the Telecom Policy of 1999 is stated to be imposed and
collected on the strength of the Telegraph Act, the relevant provisions of
the said Act are extracted hereinunder for immediate reference:
“4. Exclusive privilege in respect of telegraphs, and power to grant
licences:-
(1) Within India, the Central Government shall have the exclusive
privilege of establishing, maintaining and working telegraphs:
Provided that the Central Government may grant a licence, on
such conditions and in consideration of such payments as it
thinks ﬁt, to any person to establish, maintain or work a telegraph
within any part of India:
Provided further that the Central Government may, by rules made
under this Act and published in the Oﬃcial Gazette, permit,
subject to such restrictions and conditions as it thinks ﬁt, the
establishment, maintenance and working-
(a) of wireless telegraphs on ships within Indian territorial waters
and on aircraft within or above India, or Indian territorial waters,
and
(b) of telegraphs other than wireless telegraphs within any part
of India.
Explanation.-- The payments made for the grant of a licence
under this subsection shall include such sum attributable to
the Universal Service Obligation as may be determined by the
Central Government after considering the recommendation
made in this behalf by the Telecom Regulatory Authority
of India established under sub-section (1) of section 3 of
the Telecom Regulatory Authority of India Act, 1997 (24 of
1997).
(2) The Central Government may, by notiﬁcation in the Oﬃcial
Gazette, delegate to the telegraph authority all or any of its
powers under the ﬁrst proviso to sub-section (1).
408 SUPREME COURT REPORTS [2023] 13 S.C.R.

The exercise by the telegraph authority of any power so delegated
shall be subject to such restrictions and conditions as the Central
Government may, by the notiﬁcation, think ﬁt to impose.”
(3) Any person who is granted a license under the ﬁrst proviso to
sub-section (1) to establish, maintain or work a telegraph within
any part of India, shall identify any person to whom it provides
its services by--
(a) authentication under the Aadhaar (Targeted Delivery of
Financial and Other Subsidies, Beneﬁts and Services) Act, 2016
(18 of 2016); or
(b) oﬄine veriﬁcation under the Aadhaar (Targeted Delivery of
Financial and Other Subsidies, Beneﬁts and Services) Act, 2016
(18 of 2016); or
(c) use of passport issued under section 4 of the PassportsAct,
1967 (15 of 1967); or
(d) use of any other oﬃcially valid document or modes of
identiﬁcation as may be notiﬁed by the Central Government in
thisbehalf.
(4) If any person who is granted a license under the ﬁrst proviso
to sub-section (1) to establish, maintain or work a telegraph
within any part of India is using authentication under clause (a)
of sub-section (3) to identify any person to whom it provides
its services, it shall make the other modes of identiﬁcation
under clauses (b) to (d) of sub-section (3) also available to
such person.
(5) The use of modes of identiﬁcation under sub-section (3) shall be
a voluntary choice of the person who is sought to be identiﬁed
and no person shall be denied any service for not having an
Aadhaar number.
(6) If, for identiﬁcation of a person, authentication under clause (a)
of sub-section (3) is used, neither his core biometric information
nor the Aadhaar number of the person shall be stored.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 409
[B. V. NAGARATHNA, J.]

(7) Nothing contained in sub-sections (3), (4) and (5) shall prevent
the Central Government from specifying further safeguards
and conditions for compliance by any person who is granted a
license under the ﬁrst proviso to sub-section (1) in respect of
identiﬁcation of person to whom it provides its services.
Explanation.-- The expressions “Aadhaar number” and “core
biometric information” shall have the same meanings as are
respectively assigned to them in clauses (a) and (j) of section
2 of the Aadhaar (Targeted Delivery of Financial and Other
Subsidies, Beneﬁts and Services) Act, 2016 (18 of 2016).
xxx xxx
“8. Revocation of licences:- The Central Government may, at
any time, revoke any licence granted under section 4, on the
breach of any of the conditions therein contained, or in default
of payment of any consideration payable there under.”
xxx xxx
“PART IV
PENALTIES
20. Establishing, maintaining or working unauthorized telegraph:–
(1) If any person establishes, maintains or works a telegraph
within India in contravention of the provisions of section 4 or
otherwise than as permitted by rules made under that section, he
shall be punished, if the telegraph is a wireless telegraph, with
imprisonment which may extend to three years, or with ﬁne, or
with both, and in any other case, with a ﬁne which may extend
to one thousand rupees.
(2) Not withstanding anything contained in the Code of Criminal
Procedure, 1898 (5 of 1898), oﬀences under this section in
respect of a wireless telegraph shall, for the purposes of the said
Code, be bailable and non-cognizable.
(3) When any person is convicted of an oﬀence punishable under this
section, the Court before which he is convicted may direct that
410 SUPREME COURT REPORTS [2023] 13 S.C.R.

the telegraph in respect of which the oﬀence has been committed,
or any part of such telegraph, be forfeited to Government.”
“20A. Breach of condition of licence:– If the holder of a licence
granted under section 4 contravenes any condition contained in
his licence, he shall be punished with ﬁne which may extend to
one thousand rupees, and with a further ﬁne which may extend
to ﬁve hundred rupees for every week during which the breach
of the condition continues.”
“21. Using unauthorized telegraphs:– If any person,
knowing or having reason to believe that a telegraph has been
established or is maintained or worked; in contravention of this
Act, transmits or receives any message by such telegraph, or
performs any service incidental thereto, or delivers any message
for transmission by such telegraph or accepts delivery of any
message sent thereby, he shall be punished with ﬁne which may
extend to ﬁfty rupees.”
12.1. The Telegraph Act is the parent legislation under which licences
to establish, maintain or work a telegraph are issued. Section 4(1) of the
Telegraph Act states that the Central Government shall have the exclusive
privilege of establishing, maintaining and working telegraphs. The proviso
to Section 4(1) indicates that the Central Government may grant a licence
to any person to establish, maintain or work a telegraph within any part of
India on such conditions and in consideration of such payment as it thinks ﬁt.
12.2. Section 8 of the Telegraph Act allows the Central Government to
revoke at any time any licence granted under Section 4 thereof, on breach
of any of the conditions therein contained or in default of payment of any
consideration payable thereunder.
12.3. Section 20 of the Telegraph Act declares that any person who
establishes, maintains or works a telegraph in contravention of the provisions
of Section 4 shall be punished with imprisonment, which may extend to three
years, or with ﬁne, or with both. Section 20A and 21 deal with breach of
conditions of licence and the consequences of using unauthorised telegraphs.
12.4. A bare perusal of the aforesaid provisions of the Telegraph Act
would throw light onto the following aspects:
C.I.T., DELHI v. BHARTI HEXACOM LTD. 411
[B. V. NAGARATHNA, J.]

i. The Central Government may grant a licence to establish,
maintain or work a telegraph, by granting a licence on payment of
a licence fee, under the proviso to Section 4(1) of the Telegraph
Act.
ii. The Central Government may, under Section 8, revoke any
licence issued under Section 4 of the Telegraph Act, on ground
of default in payment of consideration.
iii. Any contravention of Section 4 of the Telegraph Act, or of
conditions of the licence issued under Section 4, would invite
imprisonment and/or imposition of ﬁne.
13. We shall now refer to the terms of the Licence Agreement entered
into under the Policy of 1994 and the terms of migration of the existing
licencees to the New Telecom Policy, 1999 regime, with a view to examine
whether the nature and character of the licence fee was changed in light of
migration.
13.1. For ready reference, a specimen licence agreement dated 29
November, 1994, in favour of Bharti Cellular Ltd. is extracted hereinunder.
It is to be clariﬁed at this juncture that the date of agreement with each
respondents may be diﬀerent but the terms are identical:
“Licence Agreement under the Indian Telegraph Act
This Agreement made the 29th day of November, 1994 between the
President of India acting through the Director (TM-IX), Department
of Telecommunications (called the Licenser) of the ONE PART and
M/s. Bharti Cellular Ltd., registered under The Companies Act 1956
and having its registered oﬃce at 15th Floor, Devika Tower, 6 Nehru
Place, New Delhi-110 019. (hereinafter called the Licensee which
expression shall unless excluded by repugnant to this context be
deemed to include its successor in business) of the OTHER PART.
Whereas in exercise of the powers of the Central Government under
Sub Section 2 of Section 4 of the Indian Telegraph Act 1885, the Central
Government delegated its powers to Telegraph Authority (hereinafter
referred to as Authority) by GSR 806 Gazette of India, Part II, Section
3(i) dated 24th August 1985.
412 SUPREME COURT REPORTS [2023] 13 S.C.R.

And whereas pursuant to the request of the Licensee the Authority has
agreed to grant licence to the Licensee on the terms and conditions
appearing hereinafter to establish, maintain and operate Cellular
Mobile Telephone Service upto the subscriber’s terminal connection
(hereinafter called the Service) in the areas given in Schedule “A”
annexed hereto and the Licensee has agreed to accept the same on the
terms and conditions appearing hereinafter.
Now this Agreement witnesseth as follows:
1. In consideration of mutual covenants as well as the licence fee
payable in advance in terms of schedule ‘C’ and observations and/
or due performance of all the terms and conditions to be observed/
performed on the part of the licensee, the Licenser does hereby grant
licence to the Licensee to establish, maintain and operate Cellular
Mobile Telephone Service upto the subscriber’s terminal connection
in the areas given in Schedule “A” annexed hereto on the terms and
conditions mentioned in Schedule “C” annexed hereto.
2. The licence is granted initially for a period of 10 years extendible
for one year or more at a time at the discretion of the authority, on
such terms and conditions as the Authority may, at his sole discretion,
agree provided that the Licensee is not in default or has committed/
any breach of any terms and conditions of the Licence. The licence fee
payable is given in Schedule “C” condition 19 of this licence.
3. The licence is governed by the provisions of the Indian Telegraph
Act, 1885 and Indian Wireless Telegraphy Act, 1933 as modiﬁed from
time to time.
4. Unless otherwise mentioned in the subject or context appearing
hereinafter the main body of the agreement and all the Schedules
annexed hereto including the tender documents will form part and
parcel of this agreement provided however in case of conﬂict terms
of this agreement and those of schedules hereto will prevail over the
tender documents.
5. In this Agreement words and expressions will have the same meaning
as are respectively assigned to them in the Schedule “C” Part-I.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 413
[B. V. NAGARATHNA, J.]

6. The licensee should clearly indicate the speciﬁcations of the service
to the subscribers at the time of signing the contract with them.
7. The Ceiling Tariﬀ to be charged from the subscribers of the service
is given in Schedule “B” annexed hereto. Licensee can charge less
tariﬀ without any approval of the Authority.
8. The bank guarantees to be given by the licensee prior to the signing
of the Licence Agreement is given in Schedule “D” annexed hereto.
9. The Licensee will not assign or transfer its rights in any manner
whatsoever under the licence to a third party or enter into any
agreement for sub-licence and/or partnership relating to any subject
matter of the licence to any third party either in whole or in part i.e.
no sub-leasing /partnership/third party interest shall be created.
10. In case of interruption of service lasting for more than 72 hours,
an appropriate rebate shall be given to the users of the service by the
Licensee. The Authority reserves the right to, in case of a default,
impose any penalty as it may deem ﬁt.
11. The Authority may at any time revoke the licence on the breach
of any of the terms and conditions therein contained or in default of
payment of any consideration payable thereunder by giving a 60 days
notice.
12.1 The Licensee is not allowed to use any encryption in the network.
12.2 The Licensee is required to provide list of subscribers to the
Authority every quarter regularly and, as and when required by the
Authority.
12.3 The Authority or its representative will have an access to the
MSC as well as the technical facility provided by the Licensee for
monitoring, inspection etc. without giving any prior notice.
13. It is further agreed and declared by the parties that notwithstanding
anything contained hereinbefore, that
(i) The licence is issued on non-exclusive basis. The Authority
reserves the right to operate the service within the same geographical
area.
414 SUPREME COURT REPORTS [2023] 13 S.C.R.

(ii) The Authority reserves the right to modify at any time the terms and
conditions of the licence covered under Schedules “A”, “B”, “C”, and
“D”, annexed hereto, if in the opinion of the Authority it is necessary
or expedient to do so in the interests of the general public or for the
proper conduct of telegraphs or on security consideration.
(iii) The Authority reserves the right to revoke the licence at any time
in the interest of public by giving a 60 days’ notice.
(iv) Notwithstanding anything contained anywhere else in the licence
the Authority’s decision shall be ﬁnal.
(v) The authority reserves the right to take over the entire services and
networks of the licensee or revoke/ terminate /suspend the licence in
the interest of national security or in the event of a national emergency/
war or low intensity conﬂict type of situations.
In Witness whereof the parties hereto have caused this Agreement to
be executed through their respective authorized representatives the
day and year ﬁrst before written
Signed and Delivered
for and on behalf of
President of India”
(Emphasis by us)
13.2. The conditions on which the licence was granted were
stipulated in Schedule A and Schedule B of the licence agreement. The
payment of licence fee was in the following terms:
“PAYMENT OF LICENCE FEES
19.1 The Licence fee payable by licencee for each service area shall
be regulated as follows: -
Licence Fee For
Service Area 1st Year 2nd Year 3rd Year
(Rupees in Crores)
Bombay 3 6 12
C.I.T., DELHI v. BHARTI HEXACOM LTD. 415
[B. V. NAGARATHNA, J.]

Delhi 2 4 8
Calcutta 1.5 3 6
Madras 1 2 4
4th Year and onwards
@ Rs. 5 lakhs (ﬁve lakhs) per 100 (one hundred) subscribers or part
thereof; subject to the minimum shown below :-
Minimum Licence Fee for
Fourth to Sixth Year Seventh (for year) year onwards (for
Service Area each year) each year)
(Rs.in crores)
Bombay 18 24
Delhi 12 16
Calcutta 9 12
Madras 6 8
a) For purpose of charging the lump-sum Licence fee for the ﬁrst three
years, the year shall be reckoned as twelve months, beginning with
the date of commissioning of services or completion of 12 months
from date of signing of Licence Agreement, whichever is earlier.
b) The fourth year for purpose of charging the Licence fee shall be
the period from the completion of the third year as deﬁned above
to the 31st day of March succeeding. The annual Licence Fee for
the fourth year will therefore, be computed prorate with reference
to the actual number of days. Thereafter, the year for purpose of
levy of Licence fee shall be the ﬁnancial year i.e. 1st April to 31st
March and part of the year as balance period, if any.
c) For the purpose of calculation of Licence fee from the fourth year
onwards as indicated in para 19.1 above, the number of subscribers
at the end of each month shall be added for all the months of the
year and divided by the number of completed months.
XXX
416 SUPREME COURT REPORTS [2023] 13 S.C.R.

(f) The rate of Rs. ﬁve lakhs per hundred subscribers or part thereof
is based on the unit call rate of Rs. 1.10. Fourth year onwards,
as deﬁned in the clause 19.1(d), the rate of Rs. ﬁve lakhs will be
revised based on the prevalent unit call rate. The revision will be
limited to 75% of the overall increase in the unit rate during the
period preceding such revision.”
The Agreement further stipulated:
“19.2 On completion of three years from the date of commissioning/
provision of services; the Authority reserves the right to ﬁx the share
of the gross revenue from rental, air time charges for all other services
provided from the cellular network of the Licensee, as additional
licence fee.
19.3 The annual Licence fee as prescribed above does not include
Licence fees payable to WPC wing of Ministry of Communications
(WPC) for use of Radio Frequencies which shall be paid separately by
the Licensee on the rates prescribed by the WPC and as per procedure
speciﬁed by it (condition 20).”
13.3. The key features of the licence agreement under the 1994 Policy
regime may be enumerated as under:
i. The licence was granted enabling the licencee to establish,
maintain and operate cellular mobile telephone service, within a
given geographical area.
ii. The licence was granted for a period of ten years, which was
extendable for ﬁve years or more, at the discretion of the licensor,
i.e., the Central Government, unless terminated earlier.
iii. Fixed amount of licence fee was to be paid for the ﬁrst three
years, irrespective of the number of subscribers, as provided in
paragraph 19 of the agreement and such amounts was subject to
increase annually.
iv. From the fourth year onwards, the amount of licence fees to be
paid, was dependent on the number of subscribers, irrespective
of the revenue accrued by the licencee from such subscribers,
subject to the prescribed minimum.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 417
[B. V. NAGARATHNA, J.]

v. The consequence of non-payment of licence fee was termination
of the licence agreement.
vi. In accordance with the Policy of 1994, the condition of
maintaining duopoly in the market was formalised in the licence
agreement.
vii. The licence was non-assignable.
13.4. Subsequently, with a view to implement the Policy of 1999,
letters dated 27 July, 1999 were issued by the DoT proposing the package
for migration of existing licencees to the Policy of 1999 regime. It was stated
that the conditions prescribed therein are to be accepted as a package, in
entirety. Pursuant to the acceptance of the terms of migration, the original
licence agreement was amended. The relevant portions of a specimen letter
evidencing the amendments is extracted as under:
“GOVERNMENT OF INDIA

MINISTRY OF COMMUNICATIONS
DEPARTMENT OF TELECOMMUNICATIONS
(VAS CELL)
SANCHAR BHAWAN,
20, ASHOKA ROAD,
NEW DELHI-110001
No 842-47/2000-VAS/Vol. IV
Dated: January 29, 2001
To
M/s Bharti Cellular Ltd.
D-184, OKHLA Industrial Area, Phase-1,
New Delhi-110 020.
Subject:- Amendment in the Licence Agreement No 842-1893-TM
Dated 29.11.1994 for Cellular Mobile Telephone Service in Delhi
418 SUPREME COURT REPORTS [2023] 13 S.C.R.

Metro Service Area as a consequence to Migration to revenue sharing
regime of New Telecom Policy-1999 (NTP-99)
Sirs,
In consideration of the acceptance by the Licensee, of the terms
and conditions contained in the oﬀered Migration Package vide No.
842-153/99-VAS (Vol. V) (Pt.) dated 22.7.1999 for migration to the
revenue sharing regime under New Telecom Policy-1999, the license
agreement shall stand substituted and modiﬁed as follows with eﬀect
from 1.8,1999, notwithstanding anything contained in the License
Agreement:
(i) The Licensee shall forego the right of operating in the regime of
limited number of operators after 01.08.1999 and shall operate in a
multipoly regime, that is to say that the Licensor may issue additional
licenses for the Service without any limit in the Service Area where the
Licensee Company is providing Cellular Mobile Telephone Service.
(ii) Licence fee: With eﬀect from 1.8.1999, the payable license fee
shall be equal to prescribed percentage as share of gross revenue of
the Licensee Company. Provisionally the licensor has ﬁxed 15% of
the gross revenue as license fee and presently the gross revenue for
this purpose shall mean the total revenue of the Licensee Company
under the license excluding,
(a) the PSTN related call charges paid to Bharat Sanchar Nigam
Limited (BSNL)/MTNL or any other Telecom Service Provider and,
(b) service tax or charge collected by the Licensee on behalf of the
Government from their subscribers.
The Government will take a ﬁnal decision about the quantum of
revenue share, deﬁnition of revenue for this purpose, after taking into
consideration the recommendations of
(iii) Period of Licence: The period of license shall be twenty
years from the effective date of the existing license agreement
unless terminated for the reasons stated therein. The Licensor may
extend the period of license, if requested during 19th year from
C.I.T., DELHI v. BHARTI HEXACOM LTD. 419
[B. V. NAGARATHNA, J.]

the effective date for a period of 10 years at a time on mutually
agreed terms and conditions The decision of licensor shall be final
in regard to grant of extension.
(iv) The acceptance of the Migration Package shall be taken
and deemed as full and final settlement of all existing disputes
whatsoever, for the period upto 31.7.1999 (the cut-off date)
irrespective of whether they are related to the Migration Package
or not. No dispute or difference shall be raised by the licensee for
the said period at any later date.”
(Emphasis supplied)
13.5. Thereafter, the DoT introduced further amendments to the
licence agreement, w.e.f. 01 August, 1999. The relevant portions of a
specimen letter dated 25 September, 2001 evidencing the amendments
is extracted as under:
“GOVERNMENT OF INDIA
MINISTRY OF COMMUNICATIONS
DEPARTMENT OF TELECOMMUNICATIONS
(VAS CELL)
SANCHAR BHAWAN,
20, ASHOKA ROAD,
NEW DELHI-110 001
Dated 25 September, 2001
No.842-47/2000-VAS(Vol. IV) (Part)
To
M/s Bharti Cellular Ltd.
D-184, Okhla Industrial Area,
Phase-1, New Delhi-110020.

Subject: Amendment in the Licence Agreement No. 842-18/93-TM
dated 29.11.1994 for Cellular Mobile Telephone Service in Delhi
420 SUPREME COURT REPORTS [2023] 13 S.C.R.

Service Area as a consequence to Migration to revenue sharing
regime of New Telecom Policy-1999 (NTP-99).

In continuation of Amendment dated 29th January, 2001 of the
aforesaid License Agreement and more specifically Para (ii)
thereto, reserving the power to take a final decision on the quantum
of license fee and WPC charges; the licensor hereby decides the
following in pursuance of the said power which shall modify and
supersede whatever is contained and described in the Licence
Agreement or the above stated Amendment.

(i) Annual License fee at the rate of 15% of Adjusted Gross
Revenue (AGR) shall be payable by you, with effect from 1st
August, 1999.

(ii) In addition the cellular licenses shall pay spectrum charges,
with effect from (1.8.1999) the cut-off date of change over to
NTP-99 regime, on revenue share basis of 2% of AGR towards
WPC Charges covering royalty payment of the use of cellular
spectrum upto 4.4 MHz+4.4 MHz and Licence fee for Cellular
Mobile handsets & Cellular Mobile Base Stations and also for
possession of wireless telegraphy equipment as per the details
prescribed by Wireless Planning & Coordination Wing (WPC).
Any additional band width, if allotted subject to availability and
justification shall attract additional License fee as revenue share
(typically) 1% additional revenue share if Bandwidth allocated is
upto 6.2 MHz + 6.2 MHz is place of 4.4 MHz+4,4 MHz).”

(Emphasis supplied)

13.6. The pertinent qualitative changes effected in the licence
conditions, following migration into the Policy of 1999 regime, may
be presented in a tabular form, as under:
C.I.T., DELHI v. BHARTI HEXACOM LTD. 421
[B. V. NAGARATHNA, J.]

Sl. No. Parameters for National New Telecom
Distinction Telecom Policy, Policy, 1999
1994
1. Details of the payment i. Fixed licence i. One-time entry
to be made by the fee for the first fee paid by existing
operator: three years; telecom operators
and entry fee that
ii. From the
was paid by all the
fourth year
new entrants;
onwards, the
a m o u n t o f ii. Variable annual
licence fees to licence fee paid
b e p a id , w as as a percentage of
depe nde nt on AGR.
the number of
subscribers,
irrespective
of the revenue
account by the
licencee f rom
such subscribers,
subject to the
prescribed
minimum
2. Maximum number of Two No restriction
operators permissible
in a circle
3. Validity of the licence 10 years, subject 20 years, subject to
to extension. extension.
4. Right of the operator/ Licence was non- R e s t r i c t i o n o n
licencee to assign/ assignable and a s s i g n m e n t /
transfer the licence non-transferable. transfer of licence
was relaxed.
14. The discussion on the points set out above, in our view, must
begin with a detailed review of relevant case law detailing the nature and
422 SUPREME COURT REPORTS [2023] 13 S.C.R.

characteristics of capital expenditure and revenue expenditure and the tests
to identify the same.
14.1. In the impugned order, the High Court of Delhi found that there
was no decision of the Supreme Court or any of the High Courts directly
applicable to the factual matrix of the case and therefore, considered a
number of decisions of this Court which we shall refer to as under:
(a) At the outset, we preface our discussion by the observations of
this Court in Alembic Chemical Works Co. Ltd. vs. CIT, (1989) 3 SCC 329
(“Alembic Chemical Works Co. Ltd.”) wherein the transaction in question
was with regard to the one-time payment made under an agreement with a
foreign ﬁrm, by the assessee, to obtain technical know-how for increasing
yield of penicillin in its existing plant. While considering the nature of the
said transaction, this Court indicated that “in the inﬁnite variety of situational
diversities in which the concept of what is capital expenditure and what is
revenue arises,” it is not possible “to formulate any general rule even in the
generality of cases, suﬃciently accurate and reasonably comprehensive, to
draw any clear line of demarcation”. This Court further held that there is
no single deﬁnitive criterion which by itself demarcates whether a particular
outlay is capital or revenue. Therefore, the “once for all” test as well as
the test of “enduring beneﬁt” may not be conclusive. Consequently, the
various terms and conditions of the agreement, the advantages derived by
an assessee under the agreement, the payment made by the assessee under
the agreement are all to be taken into account and then it has to be decided
whether the whole or a part of the payment thus made is a capital expenditure
or a revenue expenditure.
This Court observed that courts have applied diﬀerent tests like
starting of a new business on the basis of technical know-how received
from the foreign ﬁrm; exclusive right of the company to use the patent or
trademark which it receives from the foreign ﬁrm; the payments made by
the company to the foreign ﬁrm whether, a deﬁnite one or dependent upon
certain contingencies; right to use the technical know-how for production
even after the completion of the agreement; obtaining enduring beneﬁt
for a considerable part on account of the technical information received
from a foreign ﬁrm, payment whether made “once for all” or in diﬀerent
installments co-relatable to the percentage of gross turnover of the product,
C.I.T., DELHI v. BHARTI HEXACOM LTD. 423
[B. V. NAGARATHNA, J.]

etc. to ultimately ﬁnd out whether the expenditure or payment thus made
makes an accretion to the capital asset(s) and after the court comes to the
conclusion that it does, then, has to be held to be a capital expenditure.
It was further observed that no single deﬁnitive criterion by itself would
be determinative and therefore, bearing in mind the changing economic
realities of business and the varieties of situational diversities, the various
clauses of the agreement are to be examined.
On fact, as regards the question as to whether “once for all” payment
made under an agreement with a foreign ﬁrm by the assessee to obtain
technical knowhow, for increasing yield of penicillin in its existing plant
with a condition to keep the said know-how conﬁdential, constituted business
expenditure allowable for deduction, this Court held in the aﬃrmative.
M.N. Venkatachalia, J. (as the learned Chief Justice then was) held that
in computing the income chargeable under the head “Proﬁts and Gains of
Business or Profession”, Section 37 of the Act enables the deduction of any
expenditure laid out or expended wholly and exclusively for the purpose
of the business or profession, as the case may be. The fact that an item of
expenditure is wholly and exclusively laid out for purposes of the business,
by itself, is not suﬃcient to entitle its allowance in computing the income
chargeable to tax. In addition, the expenditure should not be in the nature
of a capital expenditure.
(b) In Empire Jute Co. Ltd., the question which arose was whether
the sale of loom hours was to be held to be in the nature of capital receipt
and hence not taxable. he transaction involved one jute mill transferring
loom hours to another for consideration, subject to certain conditions.
It was observed in the said case that a capital expenditure would be for
securing an enduring beneﬁt but when it comes to acquiring an advantage
in the commercial sense, the enduring beneﬁt test should not be applied
mechanically. In the said case, another test was adopted, i.e., ﬁxed and
circulating capital test. It was observed that the purchase of loom hours
was not like circulating capital (labour, raw material, power etc.) but loom
hours were also not part of ﬁxed capital. It was observed that whether an
expenditure is revenue or capital should depend upon practical and business
considerations rather than juristic classiﬁcation of legal rights. That the
test to be adopted was whether the expenditure was in view of a business
424 SUPREME COURT REPORTS [2023] 13 S.C.R.

necessity or expediency, i.e., was the expenditure a part of assessee’s working
expenditure or a part of process of proﬁt earning; whether the expenditure
was necessary to acquire a right of permanent character, the possession of
which was a condition for carrying on trade was highlighted.
(c) Insofar as lease agreements are concerned, this Court in Assam
Bengal Cement Co. Ltd., in the context of acquiring lease of mining stone
quarries for manufacture of cement for twenty years on payment of yearly
rent as well as protection fee to ward oﬀ competition held the same to be
capital expenditure. It was observed in the said case that the consideration
payable was per annum but was for the entire or whole duration of the
lease and it protected and gave right to the assessee to carry on business
unfettered from outsiders. It was held that the expenditure was not a part
of the working or operational expenses but for acquiring a capital asset.
(d) In Sindhurani, salami or lump-sum payment of non-recurring
nature made by the prospective tenant to the landlord as consideration for
settlement of agricultural land and parting with certain rights paid anterior
to landlord and tenant relationship was held not to be in the nature of rent
and thus capital payment. It was held that the payment was not for use of
land but for the land to be put to use by the assessee. Salami was not rent
paid in advance.
(e) In Enterprising Enterprises, this Court aﬃrmed the decision of
Madras High Court after referring to Pingle Industries Ltd. vs. CIT, (1960)
40 ITR 67 (SC) (“Pingle Industries Ltd.”); Gotan Lime vs. CIT, (1999)
239 ITR 718 (“Gotan Lime”) and Aditya Minerals Pvt. Ltd. to hold that
there is a distinction between a payment of royalty or rent and where the
entire amount of lease premium was paid either at one time or in instalments.
Royalty or rent is a revenue expenditure whereas the payment of a lease
premium either at one time or in instalments would be a capital expenditure.
14.2. Having referred to the aforesaid decisions, three other judgments
were noticed by the Delhi High Court which, according to learned ASG
appearing for the appellant-Revenue were erroneously applied to the case
at hand. They could be alluded to as under:
(a) In Jonas Woodhead and Sons, the question was whether 25%
of the gross revenue paid as royalty to the foreign company for technical
C.I.T., DELHI v. BHARTI HEXACOM LTD. 425
[B. V. NAGARATHNA, J.]

information/know-how relating to setting up of a plant for manufacture
of products, was capital expenditure. The issue depended upon several
factors including whether the assessee had set up an entirely new business,
or whether the technical knowhow was for the betterment of the product
which was already being produced; whether it was a part and parcel of
the existing business or a new business?; whether on expiry of the period
of agreement, the assessee was required to give back the plans, drawings
etc., which were obtained from the foreign company or could continue to
manufacture the products? The assessing oﬃcer in the said case had treated
25% of the amount paid as royalty as capital and the balance amount was
treated as revenue expenditure.
The question that came up for consideration before this Court was,
whether, on the facts and in the circumstances of the said case, the Tribunal
was right in holding that 25% of the amount paid by the assessees therein as
royalty to Jonas Woodhead and Sons was capital expenditure and therefore
not allowable as revenue expenditure under the provisions of the Act for
the Assessment years 1961-1968 and 1968-1969.
It was observed that this question would depend upon several factors
stated above and the cumulative eﬀect of a construction of the various terms
and conditions of the agreement; whether the assessee derived beneﬁts
coming to its capital for which the payment was made or not so.
Considering the diﬀerent clauses of the agreement in the said case,
it was concluded that the agreement with the foreign ﬁrm was to set up a
new business by the assessee and the foreign ﬁrm had not only furnished
information and technical know-how but had also rendered valuable services
in setting up of the factory itself and even after the expiry of the agreement,
there was no embargo on the assessee to continue to manufacture the product
in question. Therefore, it was diﬃcult to hold that the entire payment made
was a revenue expenditure merely because the payment was required to be
made on a certain percentage of the rates of the gross turnover of the products
of the income as royalty. That alone did not make it a revenue expenditure.
Therefore, the question raised was answered in favour of the Revenue and
the appeals ﬁled were dismissed.
b) In Southern Switch Gear Ltd., this Court aﬃrmed the decision of
the Madras High Court, wherein royalty payable was apportioned and 25%
426 SUPREME COURT REPORTS [2023] 13 S.C.R.

thereof was treated as capital payment or expenditure on the ground that
the right to manufacture certain goods exclusively in India should be taken
as an independent right secured by the assessee from the foreign company
and this right was of enduring nature.
(c) In Best and Co., the respondent assessee therein was carrying on
business and had innumerable agencies and compensation was received
on account of cancellation of one agency and the question was, whether,
the said compensation was capital or revenue receipt in nature; whether
by the termination of an agency the asseessee therein had lost an earning
asset and the compensation paid for the destruction of such an asset was
a capital receipt and therefore not liable to tax. K. Subba Rao. J. (as
the learned Chief Justice then was) speaking for a three-Judge Bench
observed that the question, as to, whether, the compensation received
by an assessee for the loss of agency is a capital receipt or a revenue
receipt depends upon the circumstances of each case. This is because
many questions have to be asked and answered, particularly, whether the
loss of an agency was an ordinary incidence in the course of business or
did it amount to loss of an enduring asset causing an unabsorbed shock
dislocating the entire or a part of the earning apparatus or structure.
It was held that if a loss of a particular agency was incidental to the
business, compensation received would be a revenue receipt but if it was
compensation received for the loss of an enduring asset, then it would
be a capital receipt. But for this, the previous history of the business and
relative importance of the agency lost and the position of the business
after the loss of the said agency have to be scrutinized by the department.
While considering the said issue, on the facts of the said case, it was
held that the asseessee therein was a well-established and long standing
company in South India which had taken up innumerable agencies in
diﬀerent lines and one such agency had been taken from the Imperial
Chemical Industries (Exports) Limited, Glasgow. When there was no
material to show that the loss of the said agency was so large that the
business of the agency was dislocated, on considering the facts of the
said case, this Court observed that the loss of the said agency by the
assessee was only a normal trading loss and the income it received was
revenue receipt.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 427
[B. V. NAGARATHNA, J.]

Another question which was considered was whether compensation
received by the assessee in lieu of a restrictive covenant was a capital receipt.
It was observed that the non-compete clause came into operation after the
termination of the agency and it was an independent obligation undertaken
by the assessee therein not to compete with the new agent in the same
ﬁeld for a speciﬁed period and therefore, the compensation received was
attributable to the restrictive covenant and was a capital receipt and hence
not assessable to tax.
The majority judgment answered the said question by observing
that compensation on cancellation of an agency could be both capital and
revenue depending upon facts of each case and whether, the cancellation
had aﬀected the earning apparatus or structure from a physical, ﬁnancial,
commercial and administrative point of view. In the said case,
compensation received was held to be revenue receipt as the respondent
assessee had innumerable agencies in diﬀerent lines and had given up
only one to continue business in other lines. Loss of an agency, it was
observed, was in the normal course of business and a part of normal
business, therefore, the amount received as compensation was revenue
in nature. At the same time, it was accepted that the compensation paid/
received on account of a restrictive covenant for a speciﬁed period on
which the assessee had undertaken not to take up competitive agency was
a capital receipt and therefore, not taxable.
14.3. In Alembic Chemical Works Co. Ltd., on facts, it was observed
that the improvisation in the process and technology in some areas of the
enterprise was supplemental to the existing business and there was no
material to hold that it amounted to a new or fresh venture. That the further
circumstance that the agreement pertained to a product already in the line of
the established business of the assessees and not to a new product indicated
that what was stipulated was an improvement in the operations of the existing
business and its eﬃciency and proﬁtability not removed from the area of
the day-to-day business of the assessee.
In the above context, it was held that the expenditure was in the nature
of a revenue expenditure and not capital expenditure. It was further observed
that there was no material before the Tribunal to hold that the area of
improvisation was not a part of the existing business or that the entire existing
428 SUPREME COURT REPORTS [2023] 13 S.C.R.

manufacturing operations for the commercial production of penicillin in the
assessees existing plant had become obsolete or inappropriate in relation
to the exploitation of the new sub-cultures of the high-yielding strains of
penicillin supplied by a company, Meiji and that the mere introduction of
the new bio-synthetic source required the erection and commissioning of a
totally new and diﬀerent type of plant and machinery.
14.4. Another case which has been discussed by the High Court in the
impugned Judgment and relied upon by the appellant–Revenue is Pingle
Industries Ltd. In the said case, the majority judgment stated that the
payment in question therein was made with a view to acquire a long-term
lease and a right to mine stones and the lease was conveyed to the assessee
who had to extract the stones and convert them as a stock-in-trade. That
the expenditure was incurred towards securing a capital asset from which,
after extraction, stones could be converted into stock-in-trade. The payment,
though periodic, in fact, was neither rent nor royalty but a lump-sum payment
in instalments for acquiring a capital asset of enduring beneﬁt to his trade.
In this view of the matter, the High Court treated the outgoings as on capital
account. On facts, it was observed that the assessee therein had made a down
payment of Rs.96,000/- and for the remaining amount for the acquisition of
lease had asked for easy terms. The remaining amount was paid every month
but it was not for acquisition of the right from month to month. According
to this Court “it was really the entire sum chopped into small payments for
his convenience.” Hence, the amount could not be described as a business
expense, because the outgoings every month were not to be taken as spent
over purchase of stones but in discharge of the entire liability to the jagir.
This was because the lease was taken to excavate stones from certain quarries
in six villages from the quarry situated therein.
The assessee had undertaken not to manufacture cement and not to
allow any other person to excavate stones in the area of those six villages.
The lease was in the nature of exclusive right and a monopoly. In case of
any default of the instalment, the contract would be re-auctioned after one
month’s notice to the contractor, who would be responsible for any shortfall
but would not have the beneﬁt of any extra amount.
14.5. Learned ASG also relied upon the judgment in Jalan Trading
Co. In the said case, a manufacturing company gave its sole selling agency
C.I.T., DELHI v. BHARTI HEXACOM LTD. 429
[B. V. NAGARATHNA, J.]

to a ﬁrm, namely, Jalan Trading Company for two years with a right to
renew by an agreement under a deed of assignment. The beneﬁt of the
agreement was assigned to the assessee on its payment of 75% of its
proﬁt and commission, remuneration and other moneys received under the
said agreement or any further agreement. The assessees therein claimed
the payment of 75% of their proﬁts in the relevant assessment year as
a business deduction. The question was, whether, the payment was a
revenue expenditure or a capital expenditure. It was observed, on facts,
that the assessee therein was a new company and it had acquired under the
contract the right to carry out a business on a long-term basis subject to
the renewal of the agreement on payment of 75% of its annual net proﬁts.
The question was whether the assessee had acquired a capital asset and
therefore, the payment was not admissible as a deduction under Section
10(2)(vii) of the Act. On perusing the clauses of the deed of assignment,
this Court held that the payment of 75% of the proﬁts and commission
paid under the said agreement was in the nature of a capital expenditure
and the same was not allowable as a deduction under the Act.
14.6. Learned senior counsel Sri Datar relied upon four decisions
which we shall discuss as under:
(a) In Travancore Sugars and Chemicals Ltd. vs. Commissioner of
Income-tax, (1966) 62 ITR 566 (SC) (“Travancore Sugars and Chemicals
Ltd.”), the facts were that three undertakings run by the Government of
Travancore were taken over by a company under an agreement wherein the
assets of the three undertakings were agreed to be sold by the Government
to the new company. Cash consideration for the sale of the assets of the
three undertakings was to be paid and also 20% of the annual net proﬁt
subject to a maximum of Rs.40,000/- was to be paid to the Government.
The said 20% was later reduced to 10% by an amendment of the terms
of the agreement. The question was, whether, the said payment was
allowable under Section 10 of the Act. The High Court held that the
amount constituted a capital expenditure. However, this Court held that
the payment in question was in the nature of revenue expenditure for the
following reasons:
i) The payment was for an indeﬁnite period and had no limitation
of time attached to it.
430 SUPREME COURT REPORTS [2023] 13 S.C.R.

ii) The payment was related to the annual proﬁts which ﬂowed from
the trading activities of the appellant-company and had no relation
to the capital value of the assets and;
iii) The payment was not related to or tied up, in any way, to any
ﬁxed sum agreed between the parties as part of the purchase price
of the three undertakings.
This Court held that the real nature of the transaction had to be
gathered not only from concerned documents but also from the surrounding
circumstances.
(b) In M/s. Devidas Vithaldas and Co. vs. C.I.T., Bombay City,
(1972) 3 SCC 457, (1972) 184 ITR 277 (SC) (“Devidas Vithaldas
and Co.”) this Court was dealing with the question regarding
acquisition of a running business and whether, the acquisition
of goodwill of the business would amount to an acquisition of a
capital asset and the purchase price will be a capital expenditure.
This Court also considered the question whether, it would make
any diﬀerence whether, the consideration is paid in lump-sum, or
at one time, or in instalments, distributed over a deﬁnite period.
It was held that where the acquisition is not of the goodwill itself
but for the right to use it, the expenditure would be a revenue
expenditure. It was further observed that if the payment is in the
nature of royalty it has to be treated as a revenue expenditure. The
main reason for holding that the transaction did not amount to
the sale of goodwill was that the duration of the payment as also
the amount of consideration was indeﬁnite as they depended on
the rise and fall in the proﬁts of the business. In the said case, it
was observed by a majority of 3:1 that “in distinguishing between
capital and revenue expenditure, the courts have applied in
diﬀerent cases diﬀerent tests. Nonetheless, it is recognised that
none of them by itself is conclusive and the determination one
way or the other has to be made on the facts and circumstances
of each case.
However, Sikri, C.J. in his dissenting opinion reasoned
that the mode of payment of purchase price of any capital asset
cannot convert the capital payment into a revenue payment in
C.I.T., DELHI v. BHARTI HEXACOM LTD. 431
[B. V. NAGARATHNA, J.]

the hands of the vendee. The mode of payment may aﬀect the
character of the receipt in the hands of the vendor but as far as the
vendee is concerned, what is obviously a capital payment cannot
be converted to a revenue payment. However, the majority held
that the transaction did not amount to a sale and that the payment
of consideration for the use of the goodwill of the business which
is indeﬁnite and depends on the proﬁts earned by the company
each year can be a revenue expenditure.
(c) Reliance was also placed on Sarada Binding works by Sri
Datar. In the said case, a registered ﬁrm carrying on business
as a book binder and publisher had entered into an agreement
with “B” under which it obtained the right to run the business
of a publication concern for a consideration of a ﬁxed sum of
Rs.5,000/- per annum plus a sum equivalent to 10% of the net
proﬁts of each year of business. The assessee claimed the said
amount as a business expenditure. The Madras High Court held
that where the transaction in question amounted to a purchase of
the business, the consideration paid partly as a ﬁxed annual sum
and partly a periodical payment on a certain percentage of the
proﬁts earned by the assessee from the said business could not
be treated entirely as capital payment. The ﬁxed annual sum
payable was a capital payment but the periodical payments of
sums which were indeﬁnite depending upon the future proﬁts
earned could not be treated as capital in nature. In the said case,
the following extract from Wheatcroft’s treatise on The Law of
Income Tax, Sur Tax and Proﬁts Tax, was quoted wherein three
types of cases where the purchase price may be paid periodically
or in instalments and the points of distinction between them were
quoted:
“First, there are cases where all the payments must be treated
as income of the recipient and the payer is entitled to deduct tax
on payment and to a deduction in computing his total income.
Secondly, there are cases where the payments are all treated as
capital and are neither taxable to the recipient nor deductible in
computing the payer’s total income. Thirdly, there are cases where
432 SUPREME COURT REPORTS [2023] 13 S.C.R.

the payments must be dissected into an income content and a
capital content so that the former part is taxable and deductible
whilst the latter is not.”
On facts, the case before was classiﬁed as falling under the third
category and it was held that the question, whether, the payment is capital
or revenue has to be considered in relation to the facts of each case and the
true nature of the payment has to be ascertained from the documents and
all the surrounding circumstances with the important features to consider
being the nature of the original obligation, the period of time during which
the payments are to continue, whether or not they are expressed in the form
of instalments of some capital sum and what provisions, if any, are made
for commutation.
Further, four tests in deciding the question, whether, a particular
expenditure is allowable or not were also quoted from the same treatise.
The said extract is as under:
“In general, however, in order to decide whether some particular
expenditure of a trader should be brought into account, four tests,
similar to those considered in relation to receipts, should be applied.
First, is the expenditure wholly and exclusively laid out for the purposes
of the trade? If not, it will be excluded. Secondly, is the expenditure
of a revenue, and not of a capital nature ? Unless it is of a revenue
nature it will be excluded. Thirdly, may tax be deducted and retained
on payment ? If so, it will be excluded. Finally, is there some other
special provision of the Income-tax Act which permits, or requires,
the payment to be brought in, or left out of account ?”
Therefore, in the said case, the Madras High Court held that the
payments were of revenue character and that there were no elements
present which would justify the court in attributing to the payments a capital
character. The payments were ﬁxed with reference to the proﬁts which were
indirectly related to the turnover. The payments were not related to any
speciﬁed sum which was agreed upon by the parties as purchase price of the
business. The decision of the Madras High Court was upheld by this Court.
(d) Sri Datar has also referred to the decision of this Court in Mewar
Sugar Mills Ltd. In the said case, a licence was granted by the then
C.I.T., DELHI v. BHARTI HEXACOM LTD. 433
[B. V. NAGARATHNA, J.]

ruler of Udaipur State for the manufacture of sugar which was
to be a monopoly enduring to the assessee’s beneﬁt for thirty
two years. One of the conditions was that no permission would
be granted to any other person for starting a sugar factory for
a period of thirty-two years from the date of the said order.
Another condition was that royalty must be charged on the
sugar manufactured in the factory. No other tax was to be
charged. After the grant of the monopoly, a limited company
was ﬂoated called the Mewar Industries Ltd. and the company
took steps to set up a factory, obtained requisite machinery
and installed it. After completion of the factory, production
could not be started on account of ﬁ nancial diﬃculties. As a
result, an agreement was entered into with two other persons
to acquire from the company all the rights and assets held
by it for the unexpired period of twenty-eight years and to
run the business in consideration of the payment of 10% of
the net proﬁts. Before this Court, two controversies arose,
namely, i) relating to the deduction of the payments made by
the appellant therein for monopoly rights and ii) concerning
the payment to the State of the royalty of the price of sugar
manufactured by the company. The challenge to the question
as to the disallowance of the payments made by the assessee
in respect of the monopoly rights was given up. The only other
question being that the payment of 2% royalty on the price
of sugar manufactured by the appellant therein was relatable
to the monopoly rights and therefore was capital expenditure
was considered.
It was found that the payment of the 2% royalty on
the price of sugar manufactured by the appellant therein had
no relationship with the payment referable to the monopoly
conferred under the grant. It was observed that on the facts and
circumstances of the said case, the expenditure incurred, that
is, payment of 2% royalty payment on the sugar manufactured
was a revenue expenditure while the payment made in respect
of the monopoly rights obtained was of a capital nature.
434 SUPREME COURT REPORTS [2023] 13 S.C.R.

The applicability of the judgments discussed hereinabove
to the case at hand, shall be examined at a later juncture.
15. A tabular representation outlining the classiﬁcation of diﬀerent
transactions by this Court in various cases, is as under:
S l . Citation Transaction In Classification R e a s o n s f o r
No. Question o f t h e classiﬁcation:
Tr a n s a c t i o n
in Question by
this Court:
1. Assam Ben gal Pa ym e nt m a d e C a p i t a l It was held that the
Cement Co. Ltd. vs. by the assessee expenditure expenditure was not
Commissioner of for acquiring a part of working or
Income Tax, West a lease of mine operational expenses,
Bengal, (1955) 27 stone quarries for but was for acquiring
ITR 34 (SC). the manufacture a capital asset. The
of cement, for a e x p e n di t u r e w a s
We s t B e n g a l ,
period of twenty held to be a capital
(1955) 217 ITR 34
years, on payment expenditure although
(SC).
of yearly rent as it was payable per
well as a protection annum, as it protected
fee to ward off and gave the right to
competition. the assessee to carry
on business unfettered
by outsiders.

2. Member of L u m p- s u m C a p i t a l It was held that such
the Board of pa yme nt ( no n- expenditure payment was not in
Agricultural recurring) made the nature of rent,
Income Tax, Assam by the prospective but in the nature of
v s. Si n d h ur a ni tenant to the capital expenditure
Chaudurani, landlord as a s t he sa me w a s
(1957) 32 ITR 169 consideration incurred prior to the
(SC). for settlement of coming into eﬀect of
agricultural land. the landlord-tenant
relationship.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 435
[B. V. NAGARATHNA, J.]

3. Pingle Industries L u m p- s u m C a p i t a l That the asse ssee
L t d . v s . amount, payable expenditure had acquired through
Commis sioner i n i ns t a l m e nt s the long term lease,
of Income Tax, for acquiring the right to extract
(1960) 40 ITR 67 e x c l u s i v e stones and that the
(SC). monopoly rights lease conveyed to the
to ex trac t fl ag assessee a part of the
stones from land. The lease was
certain quarries. held to be a capital
asset, which could be
converted into stock-
in-trade.

4. Commissioner of Re ce i p t of t he Capital receipt Tha t t he su r p lu s
Income Tax, U.P. assessee on sale l oom- h our s we r e
v s Ma he sh wa ri of loom-hours. disposed of by the
Devi Jute Mills assessee and n o
Ltd., (1965) 57 ITR intere st rema ine d
36 (SC). t h e r e i n w it h t h e
assessee. It was not
a case of exploitation
of the loom hours
by pe rm i tt in g a n
additional user, while
retaining ownership.
Therefore, receipt by
sale of loom hours
must be regarded as
a capital receipt.

5. R.B. Seth P r o s p e c t i n g Capital That 1/20th of the
Moolchand licence fee and expenditure licence fee could not
Suganchand vs. tender money be claimed as revenue
Commissioner of for mica mining ex p en dit ure on a
Income Tax, Delhi, rights for a period yearly basis. That the
(1973) 3 SCC 257. of twenty years. lease in question was
for a long period; the
amount paid was for
acquiring a right of
enduring nature to
extract and remove
the Mica and bring it
to the surface.
436 SUPREME COURT REPORTS [2023] 13 S.C.R.

6. CIT, Bombay vs. 7 5 % p r o f i t C a p i t a l That what was
Jalan Trading Co., sh a r e , p a id a s expenditure conveyed was the
(1985) 4 SCC 59. c o n s i d e r a t i o n right to carry on the
under a deed of whole business and
assignment, for what was agreed to be
the right to carry paid was a proﬁt share
on business. of 75% every year,
as consideration to
acquire this right. The
fact that the payments
were made annually
would have no
bearing on the nature
of the transaction.

7. Commis sioner L u m p- s u m C a p i t a l That the payment
of In co m e Tax consideration paid expenditure was for sterilisation
vs. Bombay by the assessee of the proﬁt-making
Burmah Trading for surrender of apparatus, i.e., the
Corporation, export rights in a capital asset. The
(1986) 161 ITR forest lease, where pa ym e nt wa s no t
386 (SC). the assessee had only with a view
the right to extract to earn profit in a
and cut ti mbe r new form, but was
and remove them made to structure
on pa yme nt of the assessee’s proﬁt-
royalty. making apparatus and
aﬀected the conduct
of business.
8. Aditya Minerals Advance rent for C a p i t a l That the rent paid by
Pvt. Ltd. vs. ﬁfteen years to be expenditure the assessee was in
Commis sioner paid, calculated the nature of a deposit
of Income Tax, at the rate of Rs. and was adjustable
(1999) 239 ITR 35/- per month, against the rent of
817. for lease of land each month. Since
for ex ca va t ion the rent for the entire
of minerals period of lease was
a nd s ub sidi a ry paid in advance, the
purposes. expenditure would be
capital expenditure.
Reliance was placed
on Pingle Industries
Ltd.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 437
[B. V. NAGARATHNA, J.]

9. Enterprising P r o p o r t i o n a t e C a p i t a l A c qui s it i o n of a
Enterprises le ase rent paid expenditure leasehold right to
vs. Deputy by mining lessee extract minerals.
Commis sioner for acquiring
of Income Tax, le asehold right
(2007) 293 ITR for extracting
437 (SC). m i ne r a l s f r om
mineral bearing
land.

10. M/s Gotan Lime Royalty paid by R e v e n u e That the lease was
Syndicate vs. the assessee per expenditure for excavation of
Commis sioner annum in lieu of limestone alone and
of Income Tax, a mining lease/ no other rights were
(1966) 59 ITR 718 rights to excavate created in immovable
(SC). li m es to ne in a property. That the
certain area. royalty paid was not a
payment for securing
enduring advantage
but was a payment in
order to obtain raw
material and hence,
was in the nature of a
revenue expenditure.

11. Commissioner Compensation R e v e n u e That the assessee had
of In co m e Tax r e c e i v e d b y receipt innumerable agencies
vs. Best and Co. the assessee in diﬀerent lines and
(Pvt.) Ltd. (1966) o n a c c ou nt o f had given up only
60 ITR 11 (SC). cancellation of one on e , t o c o nt i nue
of its agencies. busine ss in other
lines. Loss of agency
was in the normal
course of business
and a part of normal
business, therefore,
the amount received
as compensation was
revenue in nature.
438 SUPREME COURT REPORTS [2023] 13 S.C.R.

12. Travancore Sugars Payment of 20% R e v e n u e That the payment
and Chemicals Ltd. of the annual net expenditure was to be made for
vs. Commissioner profits subject to an indefinite period
of In c o m e - t ax , a ma ximum of and had no limitation
(1966) 62 ITR 566 Rs.40,000/- which of time attached to
(SC). was to be paid to it; The payment was
the Government related to the annual
by the assessee, proﬁts which ﬂowed
in addition to a fr om the t r a di n g
o ne - t i m e c a s h a c t i v i ti e s o f t he
consideration, on appellant-company
taking over three and had no relation
undertakings run to the capital value of
by the Government the assets.
of Travancore.

13. Commis sioner Contribution R e v e n u e That the assessee did
of Income Tax, payab le by the expenditure not become entitled,
Bombay City I vs. assessee at the rate even for the period of
CIBA India Ltd., of 6% of the net the agreement to the
(1968) 69 ITR 692 selling price, to the patents and trademark
(SC). Swiss Company, of the Swiss
on receiving the Company. That the
formula, scientiﬁc assessee merely had
data, working rules a licence to trade and
and prescriptions access to the patents
pertaining to the and trademark of the
m a nu f a c t ur i n g Swiss Company for
and proce ssing the limited period
of products of the agreement.
discovered and That the asse ssee
developed in the did not acquire any
Swiss Company’s asset or advantage of
laboratories. enduring nature.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 439
[B. V. NAGARATHNA, J.]

14. Jabbar (M.A.) vs. Payment made for R e v e n u e That the lease was for
Commis sioner a short term lease expenditure a short period and the
of Income Tax, of eleven months expenditure incurred
Andhra Pradesh, for quarrying and by the assessee was
(1968) 68 ITR 493 to c ar r y awa y, not related to the
(SC). sell and dispose ac qu isiti on of a n
of s a nd w hi ch asset or of a right
was lying on the of enduring nature,
surface of a river but merely to obtain
bed. stock-in-trade in the
form of sand.

15. Lakshmiji Sugar Expenditure R e v e n u e That the said
Mills Co. Pvt. Ltd. i n c u r r e d o n expenditure e x p e n di t u r e w a s
vs. Commissioner construction and incur red for the
of Income Tax, development of purpose of providing
(1972) 82 ITR 376 ro ad s b e t we en ease of transportation
(SC). diﬀerent sugarcane to the assessee and
p ro d uc i ng facilitating the
centres and sugar assessee’s business.
factories. There was no
evidence to show that
without such roads,
the assessee would
be unable to carry on
business. Therefore,
the expenditure was
incurred merely
for commercial
expediency.
440 SUPREME COURT REPORTS [2023] 13 S.C.R.

16. Devidas Vithaldas Purchase price (as R e v e n u e That the transaction
and Co. vs. C.I.T., a percentage of Expenditure did not amount to
B o m b a y C i t y, profits), paid on the sale of goodwill,
(1972) 3 SCC 457. acquisition of a as the du rat ion
running business, of the payment as
as consideration also the amount of
for the right to use consideration was
the goodwill of the indefinite as they
business. depended on the rise
and fall in the proﬁts
of the business. It was
held that where the
acquisition is not of
the goodwill itself but
for the rights to use
it, the expenditure in
the nature of royalty
would be a revenue
expenditure.

17. Mewar Sugar Mills i. Payment made Payment of two That payment of the
Ltd. vs. CIT, (1973) by the assessee percent royalty two per cent royalty
3 SCC 143. to acquire on t he sugar on the price of sugar
monopoly rights manufacture manufactured by the
to manufacture was held to a pp el l ant the rei n
sugar in Udaipur; be reve nue had no relationship
ex pendit ure with the payment
i i. 2% r oya l ty
while the in reference to the
paid to the ruler
payment made monopoly conferred
of Udaipur State
in respect of under the grant
on the price
the monopoly
of the sugar
rights obtained
manufactured.
was held to
be of capital
nature.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 441
[B. V. NAGARATHNA, J.]

18. Empire Jute Payment made by R e v e n u e The payment made
Co. Ltd vs. the assessees for Expenditure by the assessees for
Commis sioner purchase of loom purchase of loom
of Income Tax, hou rs , a nd f o r hours was held to be
(1980) 124 ITR 1 allotment of hours expenditure incurred
(SC). of work per week, as part of the process
under a contractual of proﬁt earning. The
agreemen t said e xpe nse was
between various ca tegorise d as a n
mills, restricting outlay of a business
the right of every in order to carry it
mill to work at full on and to earn proﬁt
capacity. out of the expense. It
was concluded that
the expense was a
part of the cost of
operating the proﬁ t
earning apparatus
and was clearly in
the nature of revenue
expenditure.
19. L.H. Sugar i A s s e s see ’s i. Merely ani. That the assessee’s
Factory and Oil contribution contribution towards
ac t o f g oo d
Mills Pvt. Ltd. vs. towards the citizenship and
the constructio n
Commissioner of construction of a of a dam, carried
not deductible
Income Tax, U.P., dam, pursuant to no a dva nta ge for
expenditure”.
(1980) 125 ITR
the request of the the business of the
293. ii. Revenue
Collector; assessee. The same
expenditure
was contributed
ii. Exp enditure
without any
incurred by the
obligation to do so
assessee towards
and was simply an act
the construction
of good citizenship
of roads in the area
and hence not
around its factory,
deductible.
under a Sugarcane
Development ii. That construction of
Scheme floated around the assessee’s
by the State factory would
Government. be c onsi derabl y
advantageous to
the business of the
assessee as it would
facilitate transport
442 SUPREME COURT REPORTS [2023] 13 S.C.R.

of sugarcane into
th e facto ry and
manufactured
su ga r ou t of t he
f a c t o r y. H e n c e ,
suc h exp end iture
was i ndu bi tabl y
connected with the
business activity of
the assessee.
20. Commis sioner Expenditure R e v e n u e That the advantage
of Income Tax incurred by the expenditure secured by the
vs. Associated as s ess ee unde r assessee by making
C e m e n t a tripartite the ex penditure
Companies Ltd., agreement with the wa s the s ec uri ng
(1988) 172 ITR
State Government of a b s ol ut i o n o r
257 (SC).
and Municipality immunity from
of Shahabad, liabil ity to pay
to supply water municipal rates and
and electricity to taxes for a period of
Shahabad and to ﬁfteen years. If these
concrete the road liabilities had been
from the factory to paid, the payments
the railway station. would have been on
In consideration of revenue account and
these amenities to hence the advantage
be provided by the secured was in the
assessee company, ﬁeld of revenue and
the assessee not capital. As a result
secured immunity of the expenditure
from payment for there was no addition
a pe ri od of 15 to the capital assets of
years. the assessee company
and no change in its
ca p it a l st ruc ture .
The pipelines which
came into existence
as a result of the
expenditure belonged
to the Municipality.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 443
[B. V. NAGARATHNA, J.]

21. Alembic Chemical One-time payment R e v e n u e First, that the
Works Co. Ltd. made unde r an expenditure e x p e n di t u r e w a s
vs. Commissioner agreement with incur red for the
of Income Tax, a foreign ﬁrm by purpose of existing
Gujarat (1989) the assessee to day-to-day business,
177 ITR 377 (SC).
obtain technical i.e., manufacture of
know how, for penicillin and not
increasing yield for an entirely new
of penicillin in its venture unconnected
existing plant with or diﬀerent from the
a condition to keep existing business;
the said know-how Second, that given the
conﬁdential rapid advancements
in the field of
medicine, a degree
of du rab ility and
permanence cannot
be attributed to the
technical knowhow,
particularly when
it is not a case of
exclusive acquisition.
22. Jonas Woodhead i. Payment T h e Under the agreement
and Sons. made towards consol idated w i t h the f or e ig n
India Ltd. vs. accessing the payments company, what was
Commis sioner know-how made were set up by the assessee
of Income Tax, and technical ap p or t i o n e d was a new business
(1997) 224 ITR in for ma ti on and 25% an d the foreign
342 (SC).
regarding the t h e r e o f w as company had not only
setting up of a held to be in furnished information
plant; the nature and technical know-
of capital how but had also
ii. Pa y m e nt i n
ex pendit ure rendered valuable
the f orm of
while 75%, services in the setting
royalty for the
payable on up of the fac tory
services to be
services, it s el f. Tha t e ve n
re nder e d to
w as h e l d t o after expiry of the
the assessee
be re venue agreement there was
by the foreign
expenditure. no embargo on the
ﬁrm.
assessee to continue
to manufacture the
product.
444 SUPREME COURT REPORTS [2023] 13 S.C.R.

23. Commissioner Expenditure R e v e n u e That the asset
of Income Tax incurred by expenditure created, though of
vs. Madras Auto the assessee on an enduring nature,
Services Pvt. Ltd., demolishing an did not belong to the
(1998) 233 ITR existing building assessee.
468 (SC). and constructing
a new building,
during the
subsistence of
a 39 year lease,
whereafter,
the assessee
continued to be
a lessee in the
building which
belonged to the
lessor.

24. Honda Siel Cars Lump-sum fee Revenue That the payment
India Ltd. vs. payable by the expenditure was made by the
Commissioner assessee to M/s assessee, not to
of Income Tax, Honda Motors set up the plant to
Ghaziabad, (2017) Company Ltd., manufacture Honda
8 SCC 170. Japan in ﬁve cars but so as to
continuous obtain the licence
instalments after to manufacture
commencement Honda cars in India,
of commercial which were its stock
production of in trade. That the
Honda cars by agreement was
the assessee, framed in a manner
under a licensing as to give licence
and technical for a limited period,
assistance having no enduring
agree ment nature.
between the
parties.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 445
[B. V. NAGARATHNA, J.]

Details of certain decisions of various High Courts, which have also
been considered are presented in the table hereinbelow:
S l . Cause Title and Transaction in Classiﬁcation of Reasons for
No. Citation Question the Transaction classiﬁcation:
in question by the
High Court:
1. Mohan Meakin Annual payment C a p i t a l That but for the
Breweries made to the State expenditure licence so obtained,
Ltd. vs. towards licence the assessee could
Commissioner fee for working/ not have established
of Income operating of a the distillery.
Tax, (1997) distillery.
220 ITR 878.
(High Court
of Himachal
P r a d e s h ,
Shimla)

2. Commissioner i. Payment made i. The That payments
of Income by the assessee, expenditure calculated as a
Tax vs. Sarada of a ﬁxed sum of i n c u r r e d certain percentage
Binding Works, Rs. 5000/- per towards the of proﬁts of a
(1976) 102 ITR annum to acquire right to run business for an
187 (Madras the right to run the business of indeﬁnite period
High Court) the business of ‘Chandamama of time cannot be
‘Ch an da mama Publications’ treated as payments
Publications’; was held to by instalments of
ii.Royalty paid be Capital a capital sum. The
annually on sales expenditure; payment of royalty
equivalent to 10% ii. was related to the
of the annual net Royalty was future proﬁts of the
proﬁts. held to be in assessee and had
the nature no nexus with the
of revenue capital sum.
expenditure.
446 SUPREME COURT REPORTS [2023] 13 S.C.R.

3. Commissioner i. Payment of i. T e c h n i c a l That by making
of Income Tax technical collaboration a payment of
vs. Southern collaboration/ fee was held royalty, the assessee
Switch Gear technical to be capital had acquired an
Ltd., (1984) aid fees by expenditure; exclusive privilege
148 ITR 272 the assessee ii. 25% of the to manufacture and
(Madras High to a foreign royalty was sell the products.
Court) company; held to be Therefore, the said
D e c i s i o n ii. Royalty capital in expenditure was to
aﬃrmed by payable in ﬁve nature, while be treated partly as
this Court instalments for 75% was capital and partly
in Southern the acquisition stated to revenue. The value
Switch Gear of an exclusive be revenue of the royalty related
Ltd. vs. CIT, privilege of expenditure. to the acquisition
(1998) 232 ITR manufacturing of the right of
35 (SC). and selling the enduring nature
products. was estimated at
25% and treated as
capital expenditure,
while the rest was
stated to be revenue
expenditure.

4. CIT vs. Saw Service charges Revenue That the service
Pipes Ltd., paid by the expenditure lines did not
(2008) 300 assessee to belong to the
ITR 35 (High Maharashtra assessee but to the
Court of State Electricity MSEB and were
Delhi) Board (MSEB) laid out to enable
to set up a the assessee
service line to conduct its
for supplying business more
e l e c t r i c i t y, eﬀectively. Hence,
as part of an the same was
arrangement to be regarded
wherein the as revenue
ownership of expenditure.
the cables would
remain with the
MSEB.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 447
[B. V. NAGARATHNA, J.]

5. CIT vs. J.K. Payment made R e v e n u e That the assessee
Sy n th e ti c s , by the assessee expenditure only acquired
(2009) 309 under an “access” to
ITR 371 agreement to the technical
(High Court access technical information
of Delhi) informat ion which related
of a foreign to the process
co mpa ny, of manufacture,
whereby there which was not
would be no related to any
transfer of secret process
ownership of or intellectual
the know-how property rights.
in favour of the The products in
assessee, and question were
the access was already being
granted on a manufactured
non- exclusive by the assessee
basis. and the know-
how would
only increase
the assessee’s
p r o f i t a b i l i t y.
Therefore, the
expenditure
would be in the
nature of revenue
expenditure.
6. Commis- Royalty pay- R e v e n u e That since royal-
sioner of In- able annually by expenditure ty was payable on
come Tax vs. the assessee, on the quantity of the
Sharda Mo- the number of good produced,
tors, (2009) pieces manufac- the same would be
319 ITR 109 tured, to a Ko- revenue expendi-
(High Court rean Co. which ture.
of Delhi) had provided
technical know-
how to the as-
sessee.
448 SUPREME COURT REPORTS [2023] 13 S.C.R.

7. CIT vs. Modi R o y a l t y Revenue expen- That notwith-
Revlon Pvt. cons i de rat i on diture standing the fact
Ltd., 2012 paid by the that the assessee
SCC OnLine a s s e s s e e was the sole licen-
Del 4463 annually, as cee of the brand
(High Court a percentage within a given
of Delhi) of sales price, territory, expen-
to Revlon diture would be
Mauritius Ltd. revenue in na-
for supply ture because the
of technical ownership of the
know-how to brand continued
manu fa cture to be with Revlon
goods. Mauritius. That
there was nothing
in the agreement
suggestive of any
vesting of the
know-how or part
of it, or the good-
will of the brand,
in the assessee.

16. We may also refer to some decisions of the Courts in England, with
a view to cull-out certain tests, which, although should not be treated as
over-exacting, may suggest some broad and general guidelines to ascertain
as to which side of the line the outlay in any particular case might reasonably
be held to fall.
16.1. The City of London Contract Corporation Ltd. vs. Styles,
(1887) 2 TC 239 is the ﬁrst of the line of cases where courts in England
considered the issue as to the categorisation of expenditure, as capital or
revenue. Bowen, L.J. broadly indicated that the outlay on the “acquisition of
the concern” would be capital while an outlay in “carrying on the concern”
is revenue.
16.2. In Vallambrosa Rubber Co. Ltd. vs. Farmer, (1910) 5 T.C.
529, Lord Dunedin observed that a proposition could be stated “in a rough
way”, to the eﬀect that capital expenditure is a thing that is going to be
spent once and for all and income expenditure is a thing which will incur
every year.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 449
[B. V. NAGARATHNA, J.]

This test was adopted by Rowalatt J. in Ounsworth (Surveyor of
Taxes) vs. Vickers Ltd., (1915) 3 K.B. 267 (“Vickers Ltd.”) wherein it was
observed that the real test was between expenditure which was made to
meet a continuous demand for expenditure as opposed to an expenditure
which was made once and for all. In the course of the judgment however,
it was suggested that what was determinative was whether the particular
expenditure could be put against any particular work or whether it was to
be regarded as an enduring expenditure to serve the business as a whole.
16.3. The latter guideline laid down in Vickers Ltd. served as the
foundation for the test prescribed by Viscount Cave L.C. in the oft-cited case
on the subject, British Insulated Helsby Cables Ltd. vs. Atherton, (1926)
AC 205 (“Atherton”), wherein it was observed that when an expenditure is
made, not only once and for all, but with a view to bringing into existence an
asset or an advantage for the enduring beneﬁt of trade, such an expenditure
is property attributable to capital and not to revenue.
16.4. The expression “enduring beneﬁt of a trade” was further
explained as meaning not “everlasting”, but “in the way capital endures”
vide Du Parcq, L.J., in Henriksen vs. Grafton Hotel Ltd., (1942) 24 T.C.
453. In the said case, Lord Greene stated that if the sum payable is not in
the nature of revenue expenditure, it cannot be made so by permitting it to
be paid by annual instalments. The payments by instalments in respect of
monopoly value do not have the quality of annual payments or the grant of
the annual excise licence, but are of a diﬀerent character altogether.
16.5. Viscount Haldane however, in John Smith & Son vs. Moore,
(1921) 12 T.C. 266, suggested another test- the test of ﬁxed or circulating
capital. Fixed capital being what the owner turns to proﬁt by keeping in
his possession; circulating capital is what the assessee makes proﬁt from
by parting or letting the product/asset change hands. However, in the said
case, it was observed that the demarcation line between assets out of which
proﬁts were earned and the proﬁt made upon assets or with assets, was thin
and diﬃcult to draw in several cases.
16.6. It was clariﬁed in Mallet vs. Staveley Coal and Iron Co., (1928)
2 K.B. 405 (“Mallet”) that where the expenditure is to bring into the hands
of the company a necessary ingredient of their existing business, which is
important but still ancillary to the business, the expenditure is to be debited
450 SUPREME COURT REPORTS [2023] 13 S.C.R.

to the circulating capital rather than to the ﬁxed capital, which is employed
in and sunk in the permanent assets of the business.
16.7. The test of ﬁxed or circulating capital was also adopted by Lord
Hanworth, M.R. in Anglo-Persian Oil Co. vs. Dale, (1932) 1 K.B. 124
(“Dale”) wherein it was observed:
“I am inclined to think that the question whether the money paid is
provided from the ﬁxed or the circulating capital comes as near to
accuracy as can be suggested.”
In further elucidation of the principle, it was laid down as follows:
a) The expenditure is to be attributed to capital if it be made “with a
view” to bringing an asset or advantage into existence, however,
it is not necessary that it should always achieve the intended result
in order to be held to be capital in nature. Thus the sum spent in
trying to procure an agency agreement or a licence, may be capital
expenditure though the intended agency or licence may not be
ultimately secured.
b) By ‘enduring’, it is meant “enduring in the way that ﬁxed capital
endures” and it does not connote a beneﬁt that endures in a sense
that for a good number of years it relieves the assessee of a revenue
payment.
However, in Van Den Berghs, Limited vs. Clark (H.M. Inspector
of Taxes), (1935) 19 T.C. 390, Lord Macmillan veered round to the test of
enduring beneﬁt and expressed reservations regarding the test of ﬁxed and
circulating capital. That “where the character of the expenditure shows that
what has resulted is something which is to be used in the way of business,
the test may be useful; but in cases close to the dividing line, the test seems
useless.”
16.8. A third test was propounded in Robert Addie & Sons Collieries
Ltd. vs. Commissioners of Inland Revenue, (1924) 8 T.C. 671, while
determining whether a given expenditure is capital or revenue in nature:
“Is it part of the Company’s working expenses, is it expenditure laid
out as part of the process of proﬁt-earning? or, on the other hand, is
it a capital outlay, is it expenditure necessary for the acquisition of
C.I.T., DELHI v. BHARTI HEXACOM LTD. 451
[B. V. NAGARATHNA, J.]

property or of rights of a permanent character, the possession of which
is a condition of carrying on its trade at all?”
The said test was adopted by the Privy Council in Tata Hydro-
Electric Agencies Ltd., Bombay vs. Commissioner of Income-tax, (1937)
L.R. 64 IndAp 215 wherein it was stated that the expenditure which is part
of the working expenses in ordinary commercial trading was not capital
but revenue. It was further observed that the determinative question would
be whether the expenditure is “a part of the company’s working expenses;
is it expenditure laid out as part of the process of proﬁt earning ?”
Referring to the facts of the said case, the Privy Council came to the
conclusion that the obligation to make the payments was undertaken by
the appellants therein in consideration of their acquisition of the right and
opportunity to earn proﬁts, i.e., of the right to conduct the business and
not for the purpose of producing proﬁts in the conduct of the business.
The distinction was thus made between the acquisition of an income-
earning asset and the process of the earning of the income. Expenditure
in the acquisition of that asset was capital expenditure and expenditure in
the process of the earning of the proﬁts was revenue expenditure. It was
further observed that on acquisition of a business and when a liability
to pay yearly sums is taken over, those yearly sums were not deductible
in computing future proﬁts for tax purposes, as they form a part of the
consideration for the acquisition of the business.
16.9. A similar guideline was expressed in Sun Newspapers Limited
and the Associated Newspapers Limited vs. The Federal Commissioner of
Taxation, (1938) 61 C.L.R. 337, wherein it was stated that the expenditure
incurred towards establishing, replacing and enlarging the proﬁt yielding
subject must be contrasted with the continual ﬂow of working expenses,
which ought to be supplied continually out of the returns of revenue.
While the former category of expenditure would be capital in nature,
the latter would be revenue. It was further held that while applying the
‘enduring beneﬁt’ test the words, ‘permanent’ or ‘enduring’ are not to be
understood to mean ever-lasting. The distinction which is drawn is that
between more or less recurrent expenses involved in running a business
and an expenditure for the beneﬁt of the business as a whole.
452 SUPREME COURT REPORTS [2023] 13 S.C.R.

16.10. Certain supplementary tests have been laid down by the Judicial
Committee in Mohanlal Hargovind of Jubbulpore vs. Commissioner of
Income Tax, (1949) L.R. 76 IndAp 235 wherein the assessee had paid
for purchasing tendu leaves from the forest, which right included the
right of entry and coppicing and pollarding. The said expenditure was for
acquiring the raw materials for the manufacturing business and thus a capital
expenditure. In the said case, the assessee was a paid manufacturer who
had obtained short-term contracts with the Government and other forest
owners to obtain tendu leaves from the forests. The Judicial Committee held
that these contracts were, in a business sense, for the purpose of securing
supplies to the manufacturers of one of the raw materials of his business.
They granted no interest in land or the plants or trees and therefore, the
expense incurred in this regard was not a capital expenditure.
17. A study of the aforesaid decisions of the Courts of England
would reveal that the following factors have guided the Courts in the said
jurisdiction in determining the nature of transactions:
i. Periodicity of payments: In the broadest sense, capital expenditure
is a thing that is going to be spent once and for all and income
expenditure is a thing which will incur every year. However,
expenditure which is not ‘once and for all’ may nevertheless
be capital. Expenditure of a recurring nature on the acquisition
of assets which are clearly ﬁxed rather than circulating capital,
remains capital. Moreover, an outgoing does not cease to be of a
capital nature merely because it is payable in instalments, vide CIR
vs. Adam, (1928) 14 T.C. 34. The test is therefore to determine,
whether, the payment is made as a matter of such frequent
recurrence that it is a part of ordinary working expenditure, Bonner
vs. Basset Mines Ltd., (1912) 6 T.C. 145.
ii. Object of the expenditure: The Atherton test looks to the
purpose or motive of expenditure. For expenditure to be capital
it must be spent for the acquisition, improvement or disposal of
a capital asset, vide Rolfe vs. Wimpy Waste Management Ltd.,
(1989) 62 T.C. 399; Tucker vs. Granada Motorway Services Ltd.,
(1979) 53 T.C. 92 (“Tucker”); Mallet, respectively. However,
the relationship between the expenditure and the acquisition,
C.I.T., DELHI v. BHARTI HEXACOM LTD. 453
[B. V. NAGARATHNA, J.]

improvement or disposal of a capital asset must be proximate and
not remote. For instance, payment made to staﬀ could not be said
to be payment made for acquisition of goodwill and hence capital
in nature, although, the staﬀ by serving well may help create the
goodwill, vide Lawson vs. Johnson Matthey Plc., (1992) 65 T.C.
39.
iii. Identiﬁable asset test: It is necessary to identify a speciﬁc capital
asset for which the expenditure is incurred, vide Tucker. When
the asset is an intangible beneﬁt (licences, trading agreements
etc.) it will be necessary to ask whether the identiﬁable asset is of
a suﬃciently substantial and enduring nature to count as capital,
vide Dale; CIR vs. Carron Company, (1968) 45 T.C. 18; Heather
vs. PE Consulting Group Ltd., (1972) 48 T.C. 293.
iv. Expenditure on commercial advantages generally: Expenditure
on commercial advantages dependent on a particular trading
relationship is likely to be capital only if a permanent advantage,
such as the closing down of a potentially damaging competitor,
is secured by the payment, Walker vs. The Joint Credit Card
Co., (1982) 55 T.C. 617. However, expenditure which is incurred
towards general business convenience (such as to facilitate
transport, supply-chain management, obtain temporary advantage
over a competitor etc.) is of revenue nature, CIR vs. Nchanga
Copper Mines, (1964) 1 All ER 208 (“Nchanga Copper Mines”).
v. Eﬀect, if any, of the expenditure on the proﬁt-making structure:
The question to consider is, whether, the payment was made with
a view to earn proﬁt in a new form, or to structure the assessee’s
proﬁt making apparatus. While the former category of expenditure
would be revenue in nature, the latter would be capital.
18. The test that was adopted, almost universally, in the early decisions
in India, is akin to the one laid down by Viscount Cave L.C. in Atherton.
18.1. In Commissioner of Income Tax, Bombay vs. Century
Spinning, Weaving and Manufacturing Co., (1942) 10 ITR Suppl., M.C.
Chagla J. observed that the legal touchstone which is most familiarly
applied in the Indian context is that of Viscount Cave in Atherton’s case.
454 SUPREME COURT REPORTS [2023] 13 S.C.R.

18.2. In Benarsidas Jagannath, In re, (1946) 15 ITR 185, a Full
Bench of the Lahore High Court attempted to reconcile the tests referred
to hereinabove and deduced the following broad tests for distinguishing
capital expenditure from revenue expenditure:
“It is not easy to deﬁne the term ‘capital expenditure’ in the abstract or
to lay down any general and satisfactory test to discriminate between
a capital and a revenue expenditure. Nor is it easy to reconcile all the
decisions that were cited before us for each case has been decided on
its peculiar facts. Some broad principles can, however, be deduced
from what the learned Judges have laid down from time to time. They
are as follows :-
1. Outlay is deemed to be capital when it is made for the initiation of a
business, for extension of a business, or for a substantial replacement
of equipment : vide Lord Sands in Commissioners of Inland Revenue
v. Granite City Steamship Company (1927) 13 T.C. 1, 14). In City of
London Contract Corporation v. Styles ((1887) 2 T.C. 239), at page
243, Bowen, L.J. observed as to the capital expenditure as follows :
“You do not use it ‘for the purpose of’ your concern, which
means, for the purpose of carrying on your concern, but you use
it to acquire the concern.”
2. Expenditure may be treated as properly attributable to capital when
it is made not only once and for all, but with a view to bringing into
existence an asset or an advantage for the enduring beneﬁt of a trade :
vide Viscount Cave, L.C., in Atherton v. British Insulated and Helsby
Cables Ltd. ((1925) 10 T.C. 155). If what is got rid of by a lump sum
payment is an annual business expense chargeable against revenue,
the lump sum payment should equally be regarded as a business
expense, but if the lump sum payment brings in a capital asset, then
that puts the business on another footing altogether. Thus, if labour
saving machinery was acquired, the cost of such acquisition cannot
be deducted out of the proﬁts by claiming that it relieves the annual
labour bill, the business has acquired a new asset, that is, machinery.
The expressions ‘enduring beneﬁt’ or ‘of a permanent character’ were
introduced to make it clear that the asset or the right acquired must
have enough durability to justify its being treated as a capital asset.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 455
[B. V. NAGARATHNA, J.]

3. Whether for the purpose of the expenditure, any capital was
withdrawn, or, in other words, whether the object of incurring the
expenditure was to employ what was taken in as capital of the business.
Again, it is to be seen whether the expenditure incurred was part of
the ﬁxed capital of the business or part of its circulating capital. Fixed
capital is what the owner turns to proﬁt by keeping it in his own
possession. Circulating or ﬂoating capital is what he makes proﬁt of
by parting with it or letting it change masters. Circulating capital is
capital which is turned over and in the process of being turned over
yields proﬁt or loss. Fixed capital, on the other hand, is not involved
directly in that process and remains unaﬀected by it.”
19. It may be useful at this juncture, to attempt to cull out the broad
principles/tests that have been forged and adopted by this Court from time
to time, while determining whether a given expenditure is capital or revenue
in nature:
i. Capital expenditure is one met with a view to bring into existence
an asset for the enduring beneﬁt of the trade. However, this rule is
not applicable in every case. The nature of the advantage acquired
has to be considered in the commercial sense and only when the
advantage is in the capital ﬁeld, deduction on the said expenditure
could be disallowed by applying the enduring beneﬁt test. If the
advantage consists merely of facilitating trading operations or
enabling the management or conduct of business more eﬀectively
or proﬁtably, while leaving the ﬁxed capital untouched, the said
expenditure would be on revenue account, though the advantage
may endure for an indeﬁnite period, vide Empire Jute Co. Ltd.
Therefore, the enduring beneﬁt test is not conclusive and cannot
be mechanically applied without considering the commercial
aspect of the transaction involving the expenditure in question.
ii. Where the expenditure is made for the initial outlay or for
extension of a business, or a substantial replacement of the
equipment, it is capital expenditure. If the expenditure is for
running the business or working it with a view to produce proﬁts,
it is revenue expenditure, vide Assam Bengal Cement Co. Ltd.
What also follows from this test is that expenditure which relates
456 SUPREME COURT REPORTS [2023] 13 S.C.R.

to the very framework or structure or ediﬁce of the taxpayer’s
business is capital expenditure.
iii. The ﬁxed and circulating capital test provides that where the
expenditure is to bring into the hands of the assessee a necessary
ingredient of their existing business, which is important but still
ancillary to the business, the expenditure is to be debited to the
circulating capital (revenue account) rather than to the ﬁxed
capital (capital account).
iv. Where there is no enlargement of the permanent structure
or of capital assets and the expenditure essentially relates to
the operation or working of the existing apparatus, such an
expenditure would be on revenue account, vide Empire Jute Co.
Ltd.
v. The question as to whether an expenditure is capital or revenue
in nature is to be judged in every case in the context of business
necessity or expediency. The ﬁrst aspect to be considered is
whether, the expenditure is a part of the assessee’s working
expenditure or a part of profit earning. Further, an inquiry
must be made as to, whether, the expenditure was necessary to
acquire a right of permanent character, the possession of which
is a condition precedent for carrying on a particular trade. In
the event that the answer to the ﬁrst question is in the negative
and the second question is in the aﬃrmative, the expenditure is
inarguably capital in nature. In this context, we are of the view
that the decision of this Court in Alembic Chemical Works Co.
Ltd. must turn on its own peculiar facts.
vi. Thus, the aspect to be considered is whether the expenditure
is incurred for the purpose of the existing day-to-day business
of the assessee, or with a view to commence an entirely new
venture. Where the expenditure incurred is merely to enhance
the productivity or proﬁtability of an existing business, without
making signiﬁcant changes to the structure of the assessee’s proﬁt
making apparatus, the same is revenue in nature. Alembic Chemical
Works Co. Ltd. was decided on the above premise.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 457
[B. V. NAGARATHNA, J.]

vii. It is not necessary that in all cases, once and for all payment would
result in an enduring beneﬁt, nor it is a ﬁrm rule that periodical
payment would not carry with it an enduring beneﬁt.
viii. Mere payment of an amount in instalments does not convert or
change a capital payment into a revenue payment. Similarly,
lump-sum payment can represent revenue expenditure if it is
incurred for acquiring circulating capital though payment is
made once and for all. Likewise, payment made in instalments
can be for acquiring a capital asset, the price of which is paid
over a period of time. Therefore, what is relevant is the nature
of the original obligation and whether the subsequent payment
made in instalments relates to or has a nexus with such original
obligation or not. Where the subsequent payments, are towards a
purpose which is identiﬁably distinct from the original obligation
of the assessee, the same would constitute revenue expenditure.
However, where each of the successive instalments relate to the
same obligation or purpose, the cumulative expenditure would
be capital in nature.
ix. The general principle that expenditure on the creation of a capital
asset is on capital account applies only where the capital asset
belongs to the assessee. An amount spent by the assessee may be
deductible on revenue account even if it results in the acquisition
of a capital asset by a third party, vide L.H. Sugar Factory and
Oil Mills Pvt. Ltd. vs. Commissioner of Income Tax, U.P., (1980)
125 ITR 293.
x. Another pertinent question to consider is, whether, the expenditure
is incurred towards purchase of an asset, or merely of the right to
use the asset for a given period of time on payment of a certain
consideration for the period of intended use, vide Devidas
Vithaldas and Co. Where the asset is not purchased or is not
vested with the assessee, but the assessee has simply acquired a
right to use the asset, the payment would be of revenue nature,
vide CIT vs. Modi Revlon Pvt. Ltd., 2012 SCC OnLine Del 4463
(“Modi Revlon Pvt. Ltd.”).
458 SUPREME COURT REPORTS [2023] 13 S.C.R.

Payment of royalty:
20. In the present case, before considering the issue as to categorisation
of the variable licence fee payable as a percentage of gross revenue, it is
also necessary to understand the distinction between a payment made to
acquire a right, and payment of royalty in a broad sense. Stated in the most
simplistic manner, acquisition of a right would mean purchase of an asset,
tangible or intangible, for the enduring advantage of the purchaser. When
a right is said to be acquired, it means that the ownership of the said right
vests with the purchaser. By contrast, payment of royalty is to use a right
or asset. The right or asset is not per se acquired by the person or entity
authorised to use it but continues to vest with the owner of the right. In case
of royalty, payment is made merely to secure the right to use an asset for a
stipulated duration. When the payment of royalty ceases, in most cases, the
right to use the asset also ceases. Most often, the amount of royalty to be
paid is dependent on the annual sales vide Commissioner of Income Tax,
Bombay City I vs. CIBA India Ltd., (1968) 69 ITR 692 (SC) (“CIBA India
Ltd.”); Modi Revlon Pvt. Ltd.; annual proﬁts vide Travancore Sugars and
Chemicals Ltd.; or such other variable. Further, in order to qualify as royalty,
the payment must have no nexus with the acquisition of a capital asset, vide
Travancore Sugars and Chemicals Ltd.; Mewar Sugar Mills Ltd.
20.1. The decision of this Court in Gotan Lime is highly instructive
while attempting to draw a distinction between payment made to acquire
a right, and payment of royalty for use of a right or asset. In the said case,
this Court considered the issue as to the classiﬁcation of the annual payment
made by the assessee therein, in lieu of the right to excavate limestone in a
certain area. This Court, while holding that the payment in question therein
was revenue expenditure, reasoned that the payment was not for securing
an enduring advantage but was a royalty payment in order to obtain raw
material and hence, a revenue expenditure. The pertinent observations of
this Court are extracted hereinunder:
“We are of the opinion that in the present case the royalty payment
is not a direct payment for securing an enduring advantage; it has
relation to the raw material to be obtained. Ordinarily, a mining
lease provides for a capital sum payment; but the fact that there is no
lumpsum payment here cannot by itself lead to the conclusion that
C.I.T., DELHI v. BHARTI HEXACOM LTD. 459
[B. V. NAGARATHNA, J.]

yearly payments to be made under the mining lease have relation to the
acquisition of the advantage. No material has been placed on the record
as to how any part of the royalty must, in view of the circumstances
of the case, be treated as premium and be referable to the acquisition
of the mining lease.”
The above dictum is clear on the aspect of the distinction between
payment made to acquire a right and payment of royalty inasmuch as it lays
down in express terms that if a payment is made, not towards securing an
enduring advantage or asset, but towards a right to use an asset, the same
would be royalty. It has further been stated in no unclear terms that where
a payment is not referrable to the acquisition of a capital asset (particularly,
mining lease in the said case), but only secures a right to use the asset, the
same would be royalty and hence classiﬁable as a revenue expenditure.
20.2. Relying on the decision in Gotan Lime, this Court in Mewar
Sugar Mills Ltd. while considering a transaction wherein the assessee therein
paid: (a) Lump-sum payment to acquire monopoly rights for manufacture
of sugar in Udaipur; and (b) payment to the ruler of Udaipur State, at the
rate of 2% of the price of the sugar manufactured, held that the payment of
the 2% royalty on the price of sugar manufactured by the appellant therein
had no relationship with the payment referable to the monopoly conferred
under the grant and hence, it was in the nature of revenue expenditure.
20.3. Another ingredient of payment as royalty is that in most cases, it
relates to and is dependent on the proﬁt earned or sales made by working an
asset, rather than the acquisition of the asset itself. Such periodic payments,
particularly those which are based on turnover of proﬁt and which are not
related to any predetermined lump-sum are towards royalty and correctly
deductible as revenue expenditure.
20.4. In CIBA India Ltd., this Court held that payments made for the
right to have access to technical knowledge and the fruits of continuing
research and experience of a foreign company and to use its patents
and trademarks would be chargeable on revenue account. This would
demonstrate that even where technical know-how is a capital asset, amounts
paid for its mere use, or for the use of a trademark, trade name or the right
to manufacture and sell certain goods, are allowable as revenue expenditure
460 SUPREME COURT REPORTS [2023] 13 S.C.R.

in the nature of royalty as the payment is made for the use of the asset and
not for its acquisition. In such cases, the payment of royalty, has no relation
to the capital value of the asset authorised to be used.
21. In our view, the following considerations are immaterial in
determining the question, as to, whether, a payment is a capital disbursement
or in the nature of a revenue expenditure:
i. Lump-sum and periodical payment: Lord Greene in Inland
Revenue vs. Williams, 11 ITR Suppl. 84 famously remarked,
“There is no magic in the distinction between a lump-sum and
periodic sums”. That the expense is a periodic expense or a
lump-sum payment is immaterial for the purpose of determining
its nature. A lump-sum payment may be revenue expenditure, for
instance, when it represents the commutation of a series of annual
revenue payments; and a recurring periodic payment may be
capital expenditure, for instance when it represents the payments
by instalments of a capital sum, vide Assam Bengal Cement Co.
Ltd.
ii. Magnitude of payment: The magnitude of a disbursement is
immaterial for the purpose of determining its nature, for, magnitude
is a relative term, vide Prendergast vs. Cameron, 8 I.T.R. Suppl.
75 (HL).
iii. Entries in books of accounts: That an item of expenditure is
debited in an entity’s books of account to revenue account is by
no means conclusive of its nature. Businesses frequently prefer to
debit to the revenue account, payments which are in their nature
to be carried to capital account. Conversely, an assessee may be
entitled to a revenue deduction in respect of expenditure which is
capitalised in the accounts, vide India Cements vs. Commissioner
of Income Tax, 60 I.T.R. 52 (SC).
22. In considering whether an item of expenditure is of a capital or
revenue nature, we reiterate that 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, vide Assam Bengal Cement Co. Ltd.
Attention must be paid not only to the form of the transaction, but also its
C.I.T., DELHI v. BHARTI HEXACOM LTD. 461
[B. V. NAGARATHNA, J.]

substance. Where the transaction takes the form of a contract or other deed,
it depends upon a proper construction of the terms of the contract whether a
payment made thereunder is a capital disbursement or revenue expenditure.
The true nature of a transaction must be gathered by placing emphasis on
the business aspect of the transaction. What is an outgoing of capital and
what is an outgoing on account of revenue depends on what the expenditure
is calculated to eﬀect from the practical and business point of view. This
aspect of the transaction is then, to be reconciled with juristic classiﬁcation
of the legal rights, if any, secured, employed, or exhausted in the process.
22.1. Therefore, 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 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 instalments.
22.2. 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 ﬁrst 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 proﬁts; 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 dictum of
this Court in Pingle Industries Ltd., is relevant in this regard. In the said
case, the majority judgment stated that the payment in question therein was
made with a view to acquire a long-term lease and a right to mine stones,
and the lease was conveyed to the assessee who had to extract the stones
and convert them as a stock-in-trade. That the expenditure was incurred
towards securing a capital asset from which, after extraction, stones could
be converted into stock-in-trade. The payment, though periodic, in fact, was
neither rent nor royalty but a lump-sum payment in instalments for acquiring
a capital asset of enduring beneﬁt to the assessee’s trade. According to this
Court “it was really the entire sum chopped into small payments for his
462 SUPREME COURT REPORTS [2023] 13 S.C.R.

convenience.” Hence, the amount could not be described as a business
expense, because the outgoings every month were not to be taken as spent
over purchase of stones but in discharge of a singular original obligation
to the jagir. These observations clearly establish the diﬀerence between a
revenue expenditure on the one hand and capital expenditure incurred in
instalments on the other hand.
22.3. Similarly, in Jalan Trading Co., this Court while considering
the issue as to classiﬁcation of periodic payments of 75% proﬁt share, as
consideration under a deed of assignment, for the right to carry on business,
held that the same would be capital expenditure. It was observed that the
assessee therein was a new company and it had acquired under the contract
the right to carry on a business on long- term basis subject to the renewal
of the agreement on payment of 75% of its annual net proﬁts. That since
the assessee had acquired a capital asset (right to carry out the business
of the assignor), any payment made towards securing such a right would
be capital in nature. This dictum would clearly demonstrate that when an
expenditure is in its core capital in nature, neither the fact that the same
was paid in instalments, nor the fact that the quantum of expenditure was
dependent on the revenue or proﬁt of the assessee, would warrant a change
in the classiﬁcation of the transaction.
23. Before proceeding to consider the facts of the present case in
light of the precedents discussed hereinabove, it is necessary to preface
our views by stating that it is perhaps one of the most familiar arguments
in Courts (particularly in matters involving an issue as to classiﬁcation
of expenditure or receipts), that the case at hand bears close resemblance
to another case falling on one or the other side of the line, and must
therefore be decided in the same manner. This thought was conveyed by
Lord Radcliﬀe in Nchanga Copper Mines wherein it was pointed out that
“in considering allocation of expenditure between capital and income
accounts, it is almost unavoidable to argue from analogy.” In that context,
we must highlight the diﬃculty of relying on any single precedent in search
for the true classiﬁcation, and attempting to draw similarities between the
facts of the said case and the facts of the case at hand. We think that the
propositions made in earlier cases, if sought to be applied to a diﬀerent
case which the authors of those propositions did not have in mind, could
lead to absurd results.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 463
[B. V. NAGARATHNA, J.]

Further, it is trite that the words in a judgment must not be construed
in the same manner as those in a legislation. Hence, it is neither wise nor
suitable to extend the dictum of one case, premised on the facts of the said
case, to another fact-situation which is seemingly similar but not really so.
This is particularly so when there is no precedent which has been rendered
in an identical fact situation, as is the case in the instant matters.
23.1. In such situations, the solution may not be found in any one
precedent. It has to be derived from many aspects of the whole set of
circumstances some of which may point in one direction, while some to
the other. It is an appreciation of all guiding factors, premised in common
business sense, which must provide the ultimate answer, rather than mere
analogy or comparison. It is with such an approach that we shall proceed to
consider the facts of the case at hand in light of certain precedents referred
to or/and relied upon by the High Court of Delhi as well as those cited at
the Bar.
23.2. We also wish to refer to the dictum of the King’s Bench Division
in Commissioners of Inland Revenue vs. Ramsay, 20 T.C. 79. The facts
of the said case were that the assessee therein agreed to purchase a dental
practice for a primary consideration of £15,000 subject to increase or
diminution as therein provided. The primary price was to be satisﬁed by
payment of £5000 on the exchange of the agreement, and as to the balance,
by payment each year for ten years of a sum equal to 25% of the net proﬁts
of the practice for each year. If the amounts so paid over the ten years, were
in the aggregate, more or less than the balance of the primary purchase price,
that price was to be treated as correspondingly increased or diminished. The
Court while considering an issue as to the classiﬁcation of the payments
made each year held that the annual sums paid under the agreement, were
instalments of capital and were not admissible as revenue deductions.
23.3. Similarly, as discussed hereinabove, this Court in Jalan Trading
Co. had the occasion to consider the issue pertaining to classiﬁcation of an
annual payment based on proﬁt sharing towards the right to carry on business.
This Court concluded that since the annual payment of 75% proﬁt share was
paid by the assessee in consideration of the right to carry on the business
of the assignors, the payment would be capital in nature. In doing so, this
Court examined the contention of the assessee therein that, since what was
464 SUPREME COURT REPORTS [2023] 13 S.C.R.

paid as consideration was not a pre-determined lump-sum amount but an
annual payment out of proﬁts, such a payment should be held to be revenue
in nature. The three-Judge Bench of this Court rejected the said contention
suggesting that when an expenditure is in its core capital in nature, neither
the fact that the same was paid in instalments, nor the fact that the quantum
of expenditure was dependent on the revenue or proﬁt of the assessee, would
warrant a change in the classiﬁcation of the transaction.
This judgment will apply on all fours in deciding the case at hand,
since the annual payment of variable licence fee is only towards licence fees
and merely because it is paid in annual instalments based on the 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).
23.4. This conclusion is also consistent with the view of this Court in
Pingle Industries Ltd., wherein by a majority of 2:1 held that the payment,
towards acquisition of a long-term lease to win mine stones, though periodic,
was neither rent nor royalty but a lump-sum payment in instalments for
acquiring a capital asset of enduring beneﬁt to trade. This Court refused to
hold that the periodic payments were towards purchase of stones, but instead
opined that the payments were in discharge of a singular original obligation
to the jagir. Therefore, it emerges that 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 proﬁts, gross revenue or sales.
24. Hence, we are of the considered view that 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. We shall
consider the case law sought to be relied upon by the learned senior counsel
and learned counsel for the respondents-assessees, so as to distinguish the
same from the present case.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 465
[B. V. NAGARATHNA, J.]

24.1. We shall ﬁrst advert to the decision of this Court in Jonas
Woodhead and Sons. Paragraph 2 of the said judgment, in no unclear terms
captures two underlying transactions arising out of the agreement in the said
case; the ﬁrst transaction relating to the know-how and technical information
regarding setting up of the plant and the second transaction relating to the
services to be rendered to the assessee by the foreign ﬁrm, the consideration
for the second prong being in the nature of royalty. It is in that backdrop
that the consolidated payment was apportioned and 25% thereof was held
to be in the nature of capital expenditure while 75%, payable on services,
was held to be revenue expenditure.
Further, it is also relevant to note that in the said case the exercise of
apportionment into the aforesaid fractions was carried out by the Madras
High Court. Against the judgment of the High Court, the Revenue did not
prefer an appeal before this Court on the ﬁndings pertaining to apportionment
of 75% towards services. What was appealed against by the assessee was
with regard to categorisation of 25% of the consolidated expenditure as
capital expenditure. The assessee alone was the appellant before this Court.
Therefore, the question as to apportionment of 75% towards services, was
not considered and decided by this Court in the said case.
We are of the view that the judgment of this Court in Jonas Woodhead
and Sons would not come to the aid of the respondent-assessees because
the issue before this Court in the said case did not relate to a single right
wherein the payment made towards the same was held to be partly capital
and partly revenue. The purpose of payments in the said case was traceable
to two diﬀerent subject matters and therefore apportionment between capital
and revenue expenditure. However, in the present case, the entry fee as well
as variable licence fees are traceable to the same source.
24.2. Similarly, in Best and Co., this Court decided the nature of
expenditure on two separate transactions, though payments made were
consolidated in nature. The ﬁrst transaction related to the compensation
paid by the principal for the termination of agency business, while the
second was with respect to the payment made towards the non-compete
clause. On the ﬁrst aspect, namely, the compensation received for the loss
of agency, it was held that what would be determinative was whether loss
of agency would aﬀect the entire business structure, resulting in a loss of
466 SUPREME COURT REPORTS [2023] 13 S.C.R.

enduring nature, or, whether it was a loss due to an ordinary incident in
the course of business. If it was the former, it would be capital, and if
it was the latter, it would be revenue in nature. It was concluded vis-à-
vis the ﬁrst transaction that the loss of the said agency by the assessee
was only a normal trading loss and therefore the income received in this
regard was a revenue receipt. As regards the non-compete clause it was
held that the same was a restrictive covenant and was therefore, capital
in nature. In paragraph 14 of the judgment of this Court, it was recorded
in unequivocal terms that the “compensation paid was in respect of two
distinct matters, one taking the character of a capital receipt and the
other of a revenue receipt.” Therefore, Best and Co. is a case where two
independent transactions were considered, one of which was held as capital
and the other as revenue. This case did not decide the expenditure towards
the same right to be partly capital and partly revenue.
24.3. We shall now consider the decision of the Madras High Court
aﬃrmed by this Court in Southern Switch Gear Ltd. Paragraph 2 of the
judgment of the High Court records two distinct transactions: one, for
provision of technical know-how for the manufacture of switch gear products
and the second, was to share modern developments and also train necessary
personnel in the factory in United Kingdom. The consideration was ﬁxed
£20,000 payable in ﬁve instalments of £4000 each. Paragraph 5 of the
judgement of the High Court referred to clause 6 of the agreement which
dealt with know-how and clause 7 thereof, which dealt with supervision and
direction, besides recommending appointment or dismissal of employees and
also training them in the factory. In paragraph 6, it was held that expenditure
on technical know-how is capital in nature and should be apportioned at
25% and the services rendered relatable to 75% of the consideration was
revenue in nature. When the assessee therein ﬁled an appeal before this
Court against the ﬁnding that technical know-how is capital in nature and
should be apportioned at 25%, the appeal was dismissed.
Therefore, it is clear that the said case also did not pertain to one source
of expenditure being split, partly as capital and partly as revenue in nature.
In the said case, the Courts have examined two diﬀerent constituents of
expenditure and held one component to be capital in nature while the other
to be revenue in nature.
C.I.T., DELHI v. BHARTI HEXACOM LTD. 467
[B. V. NAGARATHNA, J.]

24.4. Next, we advert to the facts in Sarada Binding Works on
which heavy reliance was placed by learned senior counsel Mr. Datar.
The agreement relevant to the said case envisaged conveyances of two
aspects: ﬁrst, the right to run the business of ‘Chandamama Publications’
on payment of a ﬁxed sum of Rs. 5000/- per annum; second, royalty to be
paid annually on sales equivalent to 10% of the annual net proﬁts. The High
Court held that the right to run the business is capital in nature, whereas,
the sharing of 10% proﬁt per annum is revenue in nature. In the concluding
paragraph, the High Court made the following ﬁrm conclusions as to why
10% proﬁt sharing would constitute a revenue expenditure:
i. That payments calculated as a certain percentage of proﬁts of
a business for an indeﬁnite period of time as royalty cannot be
treated as payments by instalments of a capital sum;
ii. The payment of royalty was related to the future proﬁts of the
assessee and had no nexus with the capital sum.
In the said case, there are clear ﬁndings to the eﬀect that the payment
of royalty in instalments, in the absence of any deﬁnitive duration, cannot
be linked to the right to carry on trade. That the payment of royalty had
no nexus with the capital sum. However, in the present case, it cannot be
said that the variable licence fee payable annually has no nexus with the
acquisition of the capital asset, i.e., the licence to render telecom services,
as, it is the payment of entry fee as well as the variable licence fees which
together enable the assessees to carry on the said business. Hence the
aforesaid case would not apply to the present case having regard to its
distinct facts.
24.5. Sri Datar has also sought to rely upon the decision of this Court
in Mewar Sugar Mills Ltd. However, we do not see how this judgment
would bolster up the respondents’ case. In the said case, the grant of licence
by an agreement dated 05 April, 1932 contemplated two diﬀerent aspects:
ﬁrst, a monopoly right to cultivate sugarcane and produce sugar, and
second, payment of 2% royalty on the price of the sugar manufactured. In
that backdrop, this Court held that the payment of 2% royalty on the sugar
manufactured was revenue expenditure while the payment made in respect
of the monopoly rights obtained was of capital nature. It was observed
that payment of the 2% royalty on the price of sugar manufactured by the
468 SUPREME COURT REPORTS [2023] 13 S.C.R.

appellant therein had no relationship with the payment referable to the
monopoly conferred under the grant.
In the said case, this Court’s dictum is clear to the eﬀect that royalty
based on manufacture was in no way connected to the acquisition of
monopoly rights. But such a ﬁnding would be erroneous in the facts of the
present case since what is paid is only for acquisition of a right by way of
licence fee. Further, in the said case, royalty payment had been divorced
from the payment for the right to carry on business since any failure to pay
royalty could not have, by any stretch, resulted in the withdrawal of the right
to carry on trade. The right to carry on trade would have remained unaﬀected
whether or not royalty payment was made. Failure to make royalty payment,
could have at the most, led to civil consequences, but not a revocation of the
right to carry on trade, whereas, in this batch of matters, the position is not
the same. Admittedly, any failure to pay the annual variable licence fee will
inevitably lead to revocation of the licence under Section 8 of the Telegraph
Act. Further, the respondents will be disabled from carrying on the business
of oﬀering telecommunication services, even for a day in the absence of
a valid licence. Continuation of the right to carry on the said business is
contingent on the payment of both, entry fee, as well as variable licence fee.
Therefore, we are unable to rely upon the dictum in Mewar Sugar
Mills Ltd. to hold in favour of the respondent-assessees in this batch of cases.
25. In light of the aforesaid discussion and having regard to the tests and
principles forged by this Court from time to time, as detailed in paragraphs
hereinabove, we shall proceed to consider 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, i.e. before and after 31 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.
We answer the said question in the negative, against the assesses and
in favour of the Revenue for the following reasons:
i. Reliance placed by the High Court on the decisions of this Court
in Jonas Woodhead and Sons and Best and Co. and the decision
C.I.T., DELHI v. BHARTI HEXACOM LTD. 469
[B. V. NAGARATHNA, J.]

of the Madras High Court in Southern Switch Gear Ltd. as
approved by this Court appear to be misplaced inasmuch as the
said cases did not deal with a single source/purpose to which
payments in diﬀerent forms had been made. On the contrary, in
the said cases, the purpose of payments was traceable to diﬀerent
subject matters and accordingly, this Court held that the payments
could be apportioned. However, in the present case, the licence
issued under Section 4 of the Telegraph Act is a single licence to
establish, maintain and operate telecommunication services. Since
it is not a licence for divisible rights that conceive of divisible
payments, apportionment of payment of the licence fee as partly
capital and partly revenue expenditure is without any legal basis.
ii. Perhaps, the decision of the High Court could have been sustained
if the facts were such that even if the respondents-operators did
not pay the annual licence fee based on AGR, they would still
be able to hold the right of establishing the network and running
the telecom business. However, such a right is not preserved
under the scheme of the Telegraph Act which we have detailed
above. Hence, the apportionment made by the High Court is not
sustainable.
iii. The fact that failure to pay the annual variable licence fee leads
to revocation or cancellation of the licence, vindicates the legal
position that the annual variable licence fee is paid towards
the right to operate telecom services. Though the licence fee
is payable in a staggered or deferred manner, the nature of the
payment, which ﬂows plainly from the licensing conditions,
cannot be recharacterized. A single transaction cannot be split
up, in an artiﬁcial manner into a capital payment and revenue
payments by simply considering the mode of payment. Such a
characterisation would be contrary to the settled position of law
and decisions of this Court, which suggest that payment of an
amount in instalments alone does not convert or change a capital
payment into a revenue payment.
iv. It is trite that where a transaction consists of payments in two
parts, i.e., lump-sum payment made at the outset, followed up
470 SUPREME COURT REPORTS [2023] 13 S.C.R.

by periodic payments, the nature of the two payments would be
distinct only when the periodic payments have no nexus with
the original obligation of the assessee. However, in the present
case, the successive instalments relate to the same obligation, i.e.,
payment of licence fee as consideration for the right to establish,
maintain and operate telecommunication services as a composite
whole. This is because in the absence of a right to establish,
maintenance and operation of telecommunication services is not
possible. Hence, the cumulative expenditure would have to be
held to be capital in nature.
v. Thus, the composite right conveyed to the respondents-assessees
by way of grant of licences, is the right to establish, maintain
and operate telecommunication services. The said composite
right cannot be bifurcated in an artiﬁcial manner, into the right
to establish telecommunication services on the one hand and the
right to maintain and operate telecommunication services on the
other. Such bifurcation is contrary to the terms of the licensing
agreement(s) and the Policy of 1999.
vi. Further, it is to be noticed that even under the 1994 Policy regime
the payment of licence fee consisted of two parts:
a) A ﬁxed payment in the ﬁrst three years of the licence regime;
b) A variable payment from the fourth year of the licence regime
onwards, based on the number of subscribers.
Having accepted that both components, ﬁxed and variable, of the
licence fee under the 1994 Policy regime must be duly amortised, there was
no basis to reclassify the same under the Policy of 1999 regime as revenue
expenditure insofar as variable licence fee is concerned.
26. As per the Policy of 1999, there was to be a multi-licence regime
inasmuch as any number of licences could be issued in a given service
area. Further, the licence was for a period of twenty years instead of ten
years as per the earlier regime. The migration to the Policy of 1999 was
on the condition that the entire policy must be accepted as a package and
consequently, all legal proceedings and disputes relating to the period upto
31 July, 1999 were to be closed. If the migration to the Policy of 1999
C.I.T., DELHI v. BHARTI HEXACOM LTD. 471
[B. V. NAGARATHNA, J.]

was accepted by the assessees herein or the other service providers, then
all licence fee paid upto 31 July, 1999 was declared as a one time licence
fee as stated in the communication dated 22 July, 1999 which was treated
to be a capital expenditure. The licence granted under the Policy of 1999
was non-transferable and non-assignable. More importantly, if there was a
default in the payment of the licence fee, the entire licence could be revoked
after sixty days notice. The provisions of the Telegraph Act particularly
Section 8 thereof are also to the same eﬀect. Having regard to the aforesaid
facts and in light of the aforesaid conclusions, we hold that 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. In our view, 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 into two periods, that
is, before and after 31 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. The nature of
payment being for the same purpose cannot have a diﬀerent characterisation
merely because of the change in the manner or measure of payment or for
that matter the payment being made on annual basis.
27. Therefore, in the ultimate analysis, the nomenclature and the
manner of payment is irrelevant. The payment post 31 July, 1999 is a
continuation of the payment pre 31 July, 1999 albeit in an altered format
which does not take away the essence of the payment. It is a mandatory
payment traceable to the foundational document i.e., the license agreement
as modiﬁed post migration to the 1999 policy. Consequence of non-payment
would result in ouster of the licensee from the trade. Thus, this is a payment
which is intrinsic to the existence of the licence as well as trade itself. Such
a payment has to be treated or characterized as capital only.
28. In the result, the judgment of the Division Bench of the High
Court of Delhi, dated 19 December, 2013 in ITA No. 1336 of 2010 and
connected matters, is hereby set aside. The judgments passed by the High
Courts of Delhi, Bombay and Karnataka, following the judgment of the
472 SUPREME COURT REPORTS [2023] 13 S.C.R.

Division Bench of the High Court of Delhi, dated 19 December, 2013, are
also consequently set aside.
The appeals ﬁled by the appellant(s)-Revenue are allowed.
Parties to bear their respective costs.
Pending applications, if any, stand disposed of in the aforesaid terms.

Headnotes prepared by: Appeals allowed.
Bibhuti Bhushan Bose
Assisted by: Shubhanshu Das, LCRA