2011 (2) TMI 1363 - AT - Income Tax

Nature of Expenditure Capital Or Revenue - Expenditure incurred on workstations improvement of interiors and electrical works cabling and networking of computers other miscellaneous work etc on the leasehold premises - Depreciation on the Automated Teller Machines (ATMs) and Encoders - Deduction on account of shortage in stock on physical verification write offs etc - Change in revenue recognition policy. Expenditure incurred on workstations improvement of interiors and electrical works cabling and networking of computers other miscellaneous work etc on the leasehold premises - Nature of Expenditure - Capital Or Revenue - CIT(A) restricting the depreciation at 15 per cent only instead of granting the allowance of the expenditure proportionately over the lease period - HELD THAT - These expenditure may give some benefit to the assessee but the premises being leased premises and that too for a period of three years only it cannot be said that it is giving enduring benefit. Further the enduring benefit is not the only test for determining the nature of the expenditure. As held by the Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. 1997 (4) TMI 5 - SUPREME COURT if the expenditure is so related to the carrying on of or the conduct of the business it has to be treated as revenue expenditure. Undoubtedly the assessee cannot carry on the business in the leased premises without making improvement to the interiors and electrical works cabling and networking etc. In view of the same we hold that the expenditure is to be allowed u/s 37 as revenue expenditure. Thus ground No.2 of the assessee s appeal is allowed. Ground No.3 which is an alternative ground to ground No.2 is rejected. Depreciation on the Automated Teller Machines (ATMs) and Encoders - HELD THAT - We find that this issue is more or less covered by the decision of the Special Bench in the case of Datacraft India Ltd. 2010 (7) TMI 642 - ITAT MUMBAI wherein it has been held that as long as the functions of the computer are performed along with other functions and the other functions are dependent upon the functions of the computer it is a computer entitled to the higher rte of depreciation. The Special Bench has also stated that all the input and output devices of the computer such as key board mouse monitor etc are to form part of the block of computers. Its functions are not limited to the location at which it is placed but it also records the increase or decrease of the balance in the assessee s account in the bank consequent to such deposit or withdrawal and all this is done instantly. In the case before us also the ATM machine is doing both the logical arithmetic and memory functions by manipulations of electronic magnetic or optical impulses giving debit or credit cash and thereafter dispenses the cash and gives a printed receipt. Thus as can be seen the computer is an intergral part of the ATM machine and on the basis of the information processed by the computer in the ATM machine only the mechanical functions of the dispensation of cash or deposit of cash is done. Thus it involves the use of internet facilities also to discharge the above functions. However as regards the encoders are concerned we find that they are used for encoding the cheques but whether any processing activity is involved is not clear from the orders of the authorities below. Therefore we direct the AO to consider if the Encoders also involve any processing activity such as the ATM machine as mentioned above and if it is found to be involving such activity the AO is directed to allow depreciation at 60% otherwise at 25%. This ground is accordingly partly allowed. In view of the same we are inclined to hold that the ATM machines are computers and the assessee is entitled to depreciation at the rate of 60%. Deduction on account of shortage in stock on physical verification write offs etc - computing the income under the head profits and gains of business or profession - HELD THAT - We find that the assessee has claimed an exorbitant amount of Rs. 13 crores and odd as damage in stock or shortage in stock and wrote it off and has by itself offered an amount of Rs. 8, 06, 49, 024/- for the next assessment year. It is the duty of the assessee to prove its claim with evidence but it has not been able to substantiate its claim before the authorities below as to the components of shortage of stock and what steps were taken by it to identify the shortage of stock and as to how there is shortage of stock. Even before us the assessee has not been able to produce any evidence as to the reasons for the shortage of stock. In view of the same we are not inclined to accept the contention of the assessee and therefore we confirm the addition confirmed by the CIT(A). This ground of appeal is accordingly rejected. Change in revenue recognition policy - change in the nature of contract from the contracts entered into in earlier years and the change in method of execution of the contract - HELD THAT - The present system being followed by the assessee on recognizing the revenue only after the ATM machines have been properly installed at the premises in our view is the correct method of recognizing the revenue as it would be in accordance with the matching principle and the correct income of the assessee can be computed. The learned counsel for the assessee has submitted that the assessee has followed this method after the relevant assessment year and as long as the AO is able to compute the correct income of the assessee from the method of accounting followed by the assessee the assessee is entitled to change the method of accounting from the method of accounting followed by the assessee as the assessee is entitled to change the method of accounting. To take this view we draw strength from the decision of the jurisdictional High Court in the case of Syndicate Bank 2002 (12) TMI 56 - KARNATAKA HIGH COURT . In view of the same we allow this ground of appeal. In the result the assessee s appeal is partly allowed.

Summary

Issues Involved:
1. Classification of expenditure on leasehold improvements as capital or revenue expenditure.
2. Depreciation rate applicable to Automated Teller Machines (ATMs) and Encoders.
3. Deduction for shortage in stock on physical verification and write-offs.
4. Change in revenue recognition policy.

Detailed Analysis:

1. Classification of Expenditure on Leasehold Improvements:
The primary issue was whether the expenditure incurred by the assessee on workstations, improvement of interiors, electrical works, cabling, and networking of computers on leasehold premises should be classified as capital or revenue expenditure. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] classified it as capital expenditure, granting depreciation at 15%. The assessee argued that the lease was for three years, and the improvements were essential to make the premises fit for business, citing the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. vs. CIT. The Tribunal concluded that the expenditure was related to the carrying on of the business and should be treated as revenue expenditure, thus allowing the assessee's appeal on this ground.

2. Depreciation Rate on ATMs and Encoders:
The assessee claimed depreciation at 60% on ATMs and Encoders, classifying them under 'computers'. The AO and CIT(A) allowed depreciation at 25%, classifying them as 'plant and machinery'. The Tribunal referred to the Special Bench decision in DCIT vs. Datacraft India Ltd., which held that devices performing computer functions should be classified as computers. The Tribunal found that ATMs perform logical, arithmetic, and memory functions integral to their operation and thus should be classified as computers, eligible for 60% depreciation. However, for Encoders, the Tribunal directed the AO to verify if they involve similar processing activities and to allow 60% depreciation if they do.

3. Deduction for Shortage in Stock and Write-offs:
The assessee claimed a deduction for a shortage in stock and write-offs amounting to Rs. 136,700,515. The AO disallowed this due to a lack of detailed evidence supporting the claim. The CIT(A) upheld the disallowance but granted relief for Rs. 8,06,49,024, which was written back in the subsequent year. The Tribunal found that the assessee failed to substantiate the shortage with evidence and upheld the disallowance of Rs. 5,60,51,491. The Tribunal directed the AO to consider the alternative ground regarding the adjustment of the opening stock for the subsequent year.

4. Change in Revenue Recognition Policy:
The assessee changed its revenue recognition policy, recognizing revenue after the installation of ATMs instead of at dispatch. The AO added Rs. 52,69,13,636 to the income, rejecting the change due to a lack of evidence showing a difference in contracts. The Tribunal found that the new method aligned with the matching principle and accurately reflected the assessee's income, as revenue was recognized only after installation and acceptance tests. The Tribunal allowed the assessee's appeal on this ground, validating the change in revenue recognition policy.

Conclusion:
The Tribunal allowed the appeal on the grounds of classifying leasehold improvement expenditure as revenue expenditure and recognizing ATMs as computers eligible for 60% depreciation. It upheld the disallowance of the stock shortage claim due to insufficient evidence but directed the AO to adjust the opening stock for the subsequent year. The Tribunal also approved the change in the revenue recognition policy, ensuring accurate income computation. The appeal was partly allowed.