TMI Blog2008 (11) TMI 432X X X X Extracts X X X X X X X X Extracts X X X X ..... inciples laid down by the Special Bench. After hearing the assessee, AO will decide the question whether the expenditure is capital or revenue expenditure. If on such examination, AO comes to the conclusion that the expenditure is capital expenditure, then the question regarding allowing depreciation will be decided in accordance with the principles laid down - Therefore, matter is restored back to the file of the AO. Disallowance of expenditure incurred on lease hold improvements - HELD THAT:- The expenditure was claimed u/s 37(1) which provide that any expenditure, not in the nature described under sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure and which is laid out wholly and exclusively for the purpose of business, shall be allowed in computing the income chargeable under the head Profit and gains of business and profession . The nature of expenditure which was on account of refurbishment, wooden partition/panelling, flooring, plumbing work, electric work, laying down of cables etc., are essentially revenue in nature. As the expenditure were incurred on lease hold premises, assessee did not get any enduring benefit on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1 (Disallowance of Expenditure incurred on leasehold improvements amounting to Rs. 2,46,57,910); That on facts and in law the CIT(A) erred in upholding the disallowance of the expenditure of Rs. 2,46,57,910 incurred on leasehold improvements as capital expenditure. 2.Ground No. 2 (disallowance of software expenses amounting to Rs. 24, 79,134) : ( a )That on facts and in law the CIT(A) erred in confirming the disallowance of Rs. 24,79,134 incurred by the appellant for acquiring application software treating it as capital expenditure. ( b )Without prejudice to the above, the CIT(A) erred on facts and in law in upholding the action of the Assessing Officer in not allowing depreciation on such software at the rate of 60 per cent being the rate at which computer hardware is eligible for depreciation under the Income-tax Rules, 1962. ( c )That the CIT(A) has erred in not dealing with the ground concerning the action of the Assessing Officer in not allowing depreciation amounting to Rs. 5,04,623 [being 60 per cent of Rs. 8,41,039 (WDV-Rs.2,004,105 - Rs. 1,163,066)] in respect of expenditure incurred on application software amounting to Rs. 2,004,105 for assessment year 2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied to decide the nature of expenditure. The computer software, whether it is capital or revenue, matter is restored to the Assessing Officer to examine the question whether expenditure on computer software is capital or revenue in the light of following observations of Special Bench : "The advantage which an assessee derives has to be seen. The nature of advantage has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of assessee s business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account. The following factors would be relevant to determine whether the advantage operates in the capital field or revenue field. ( i )Nature of Business of the assessee : It is necessary to obtain an understanding of the business function or effect of a concern s software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights comprised in the license. The decision of the Hon ble Supreme Court in the case of TCS ( supra ) supports the view that software contained in a disk is tangible property by itself. The use by the assessee of such software in his business is enough to allow the claim for depreciation. The rights which an assessee acquires by purchasing the disk or magnetic medium containing the computer software with limited or absolute right to use the same by itself would satisfy the requirements of the Plant. The assessee s ownership of limited right over the tangible asset is sufficient to conclude that the assessee is the owner of the Plant. There is therefore no difficulty in allowing depreciation claim at 25 per cent under section 32(1)( i ) read with Appendix-I, Part-A Division III(1) to the Income-tax Rules, 1962. With effect from 1-4-2003. Computer Software has been classified as a tangible asset under the heading "Plant" in Appendix-I to the Income-tax Rules entitled to depreciation at 60 per cent. The assessee would be entitled to depreciation 60 per cent from 1-4-2003. The Assessing Officer will examine the issue in the light of the principle laid down by the Special Bench as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring into existence the asset of enduring nature, and the expenditure so incurred was on account of commercial expediency, for commercial use of the leased premises and also to give proper outlook to the office and to create international standard and good working environment as per the multinational work culture. After spending various expenses on refurbishment such as wooden partition, panelling, flooring, plumbing etc., he contended that these expenses were incurred in respect of leased premises from where assessee did not get any enduring benefit. Our attention was also drawn to the clause in the lease deed according to which vacant possession was required to be given to the landlord, meaning thereby whatever temporary renovation/refurbishment was done, was required to be removed while giving possession back to the landlord. Reliance was placed on the decision of Hon ble Supreme Court in case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 wherein it was observed that even if a benefit spread over a number of years, the expenditure would be on revenue account, where the expenditure merely facilitate assessee s trading operation or enabling the management and control of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owned by the assessee. Accordingly, he held that expenditure incurred for renovation, improvement, of any structure in the building is in the nature of capital expenditure and the same are eligible only for claim of depreciation. As per the details filed, we found that the expenditure were incurred on flooring, partition, wiring, false ceiling, roofing, entire work of air-conditioning duct, networking for computer purposes, electric wiring etc. As the assessee company was operating as per concept of multinational companies, there were no concept of providing separate rooms and only wooden partition were provided. After going through the nature of expenditure so incurred, we found that by incurring these expenditure except expenditure. Air-conditioning duct and furniture, no new asset has come into existence and the expenditure so incurred was on account of commercial expediency and for the commercial use of the lease hold premises and to give proper outlook to the office and to create international standard of good working environment on multinational work culture. The expenditure was claimed under section 37(1) which provide that any expenditure, not in the nature described under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by making the administrative staff work in a cramped space. By no stretch of imagination and without violence to the language, can it be urged that the assessee, by constructing the loft, was seeking to bring into existence an asset of a permanent nature because on the surrender of the lease, the option of the lessor of the premises in which the same improvements are made is either to pay compensation and taken over the improvement or to permit the lessee to take away and remove the improvement. We do not think, having regard to the nature of the tenure of the lessee in the premises and the internal structural changes made therein, and particularly the sole aim and purpose of such changes, that it can be successfully claimed, what is sought to be claimed by the revenue, that the expenses are of capital nature. . . ." 9. Even the expenditure on construction of rooms and improvements for enjoyment of lease hold premises, the Hon ble Madras High Court in case of Malabar Mills 288 ITR 815 ( sic ) held that expenditure so incurred was of revenue in nature as the assessee carried some improvements for better enjoyment of the property. Since the benefits derived by the assessee wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. As we have already restored the matter of treatment of expenditure on computer software, the ground No. 3 taken by the revenue is also restored back to decided afresh after taking into account the principles laid down by the Special Bench in assessee s own case, as discussed hereinabove. 14. With regard to addition of Rs. 14,82,000 which was charged to VP-1 stock, to the P L account, the contention of the assessee was that VP-1 was an application docket, which was purchased by distributors to enroll their prospects as new distributors with the company. As VP-1, was a stationery items, the cost was charged to P L account and the adjustment entry was made to transfer the cost of VP-1 from cost of sale to printing and stationery. However, the Assessing Officer did not accept the assessee s explanation, therefore, added an amount of Rs. 14.28 lakhs as income of the assessee as closing stock at the end of the year. 15. By the impugned order, CIT(A) deleted the addition by observing that VP-1 stock of Rs. 14.82 lakhs was actually consumed during the year and the assessee has merely reclassified the said consumption from the cost of sale account to printing and stationery ..... X X X X Extracts X X X X X X X X Extracts X X X X
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