The question before the Apex Court was  whether, the variable licence fee paid by the respondent assesses  to the Department of Telecommunicators (DOT) for under the New Telecom Policy of 1999 (Policy of 1999) is revenue expenditure and is to be allowed deduction under section 37 of the Act, or whether the same is capital in nature under section 35ABB of the Act.

Allowing the appeals  of the Revenue  the Court held that   since the annual payment of variable licence fee was only towards licence fees, merely because it was paid in annual instalments based on the annual gross revenue, the payment could not be construed as revenue. The annual payments of licence fee as also the entry fee related to a singular purpose, i. e., the acquisition of the right to carry on the business of rendering telecommunications services. This right being in the nature of a capital asset, any payment made towards the acquisition of the right, whether in a lump sum or in annual instalments dependent on the annual gross revenue, would be in the nature of capital disbursement. Since the entry fee as well as variable licence fees were 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 was paid in a staggered manner. Admittedly, any failure to pay the annual variable licence fee would inevitably lead to revocation of the licence under section 8 of the 1885 Act and the assessees would be disabled from carrying on the business of offering telecommunications services, even for a day in the absence of a valid licence. Continuation of the right to carry on the business was contingent on the payment of both, entry fee, as well as the variable licence fee. The payment of entry fee as well as the variable annual licence fee paid by the assessees to the Department of Telecommunications under the 1999 Policy were capital in nature and may be amortised in accordance with section 35ABB of the Act.

 That the High Court was wrong in apportioning the licence fee as partly revenue and partly capital by dividing the licence fee into two periods, i. e., before and after July 31, 1999 and accordingly holding that the licence fee paid or payable for the period up to July 31, 1999, i. e., the date set out in the 1999 Policy should be treated as capital and the balance amount payable on or after the said date should be treated as revenue. The licence issued under section 4 of the 1885 Act was a single licence to establish, maintain and operate telecommunication services. Since it was not a licence for divisible rights that conceived of divisible payments, apportionment of payment of the licence fee as partly capital and partly revenue expenditure was without any legal basis. The right of establishing the network and running the telecommunications business was not preserved under the scheme of the 1885 Act. Though the licence fee was payable in a staggered or deferred manner, the nature of the payment, which flowed plainly from the licensing conditions, could not be recharacterised. The successive instalments related to the same obligation, i. e., payment of licence fee as consideration for the right to establish, maintain and operate telecommunications services as a composite whole. Thus, the composite right conveyed to the assessees by way of grant of licences, was the right to establish, maintain and operate telecommunications services. The composite right could not be bifurcated in an artificial manner, into the right to establish telecommunications services on the one hand and the right to maintain and operate telecommunications services on the other. Such bifurcation was contrary to the terms of the licensing agreements and the 1999 Policy. Further, even under the 1994 Policy regime the payment of licence fee consisted of two parts : a fixed payment in the first three years of the licence regime and 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 it under the 1999 Policy regime as revenue expenditure in so far as variable licence fee was concerned. The migration to the 1999 Policy 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 up to July 31, 1999 were to be closed. If the migration to the 1999 Policy was accepted by the assessees or the other service providers, then all licence fee paid up to July 31, 1999 declared as a one time licence fee as stated in the communication dated July 22, 1999 which was treated to be a capital expenditure. The licence granted under the 1999 Policy was non-transferable and non-assignable. The payment post July 31, 1999 was a continuation of the payment pre-July 31, 1999 albeit in an altered format which did not take away the essence of the payment. It was a mandatory payment traceable to the foundational document, i. e., the licence agreement as modified post migration to the 1999 Policy. Court held that the Licences are identified as intangible assets and are therefore, capital in nature.  All important case laws on the subject of capital or revenue are discussed, such as, Cameron v. Prendergast (Inspector of Taxes)(1940) 8 ITR (EC) 75 (HL)    Inland Revenue Commissioners v. D. H. Williams Executors (1943) 11 ITR (EC) 84 (CA)   Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC),  Pingle Industries Ltd. v. CIT (1960)  40 ITR 67 (SC)  Gotan Lime Syndicate v. CIT (1966) 59 ITR 718 (SC)  India Cements Ltd. v. CIT (1966)) 60 ITR 52 (SC)  CIT v. Ciba of India Ltd (1968) 69 ITR 692 (SC)    Travancore Sugars and Chemicals Ltd. v. CIT (1966) 62 ITR 566 (SC)   Devidas Vithaldas and Co. v. CIT (1972) 84 ITR 277 (SC)   Mewar Sugar Mills Ltd. v. CIT (1973) 87 ITR 400 (SC), Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC), L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT (1980) 125 ITR 293 (SC))   CIT v. Jalan Trading Co. P.  Ltd.(1985) 155 ITR 536 (SC)    Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC)    (AY.2003-04)