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2015 (6) TMI 395 - ITAT HYDERABAD

2015 (6) TMI 395 - ITAT HYDERABAD - [2015] 40 ITR (Trib) 287 (ITAT [Hyd]) - Disallowance of expenditure towards purchase of software - Held that:- AO at least in the case of one of the software, viz., MPC 4 data preparation software has observed that it enhances the technical capacity of the computers. If that is the case, then it cannot be said that it brings in a radical change to the operations of assessee or part of the profit making apparatus. Further, though, AO has observed that software .....

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apital in nature. As the departmental authorities have not done the aforesaid exercise, we are inclined to remit the matter back to the file of the AO for deciding afresh keeping in view the decision of the Special Bench of ITAT, Delhi referred to above. Needless to say AO must afford a reasonable opportunity of being heard to the assessee in the matter. - Decided in favour of assessee for statistical purposes.

Disallowance of expenditure incurred on repairs and maintenance - Held tha .....

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has brought into existence certain new assets. Therefore, the expenditure incurred being of enduring nature, it has to be treated as 'Capital Expenditure'. Similarly, the expenditure of ₹ 16,100/- has not been explained by the assessee with proper evidence. Therefore, on over all consideration of facts and materials on record, we direct the AO to allow the expenditure incurred towards replacement of flooring. - Decided partly in favour of assessee.

Disallowance of depreciation .....

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change fluctuations can be adjusted towards cost of the asset. In that view of the matter, we do not see any reason to disturb the finding of the Ld.CIT(A). - Decided against assessee.

Disallowance of expenditure towards subscriptions - Held that:- On verifying the details of expenditure incurred, we are of the view that the subscription fees paid on behalf of the Directors cannot be allowed as expenditure at the hands of the assessee-company. However, as far as the amount of ₹ .....

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een from the explanation of the assessee before the departmental authorities, assessee has claimed that such expenditures were incurred on employees when they were sent out station. However, considering the fact that the expenditures incurred were not supported by any authentic bills/vouchers, some amount of inflation by the assessee while claiming this expenditure cannot be ruled out. In these circumstances, disallowance of 25% of the expenditure claimed in our view is reasonable and need not b .....

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general in nature, do not require any specific adjudication. In ground No.2, assessee has challenged disallowance of expenditure amounting to ₹ 89,47,827/- towards purchase of software. 3. Briefly the facts relating to this issue are, assessee a company is engaged in the business of printing of all High Security Documents and Business Forms. For the assessment year under consideration, assessee filed its return of income on 05-02-2010, declaring total income of ₹ 1,15,60,760/-. Durin .....

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Revenue Expenditure'. The Assessing Officer (AO) after considering the submissions of assessee and on examining the details furnished, found that assessee had purchased two types of software viz., KMPC 4 Data preparation Software & MPS Data preparation Software from Kodak Versamark. The AO accessing information from the internet found that KMPC 4 data preparation Software is a vector-based processing and onchip memory service to super charge the performance of adhoc reports and query res .....

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OMR Forms, Courier Way Bills, Marks Statements and Certificates. The AO opined that as the business activity of the assessee is printing of highly secured documents, Phone Billing Statements, Recharge Voucher Coupons, Digital Variable Data with variable data, scanning, processing etc, the software acquired by the assessee makes a definite value addition to this particular activity, hence it has got enduring value. As far as MPS data preparation software is concerned, AO observed, it is useful f .....

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nent feature in printing software will be installed to the system. Thus, being of the opinion that the softwares purchased by the assessee are of enduring nature, AO treated the expenditure as 'capital' and disallowed the deduction claimed by the assessee. Being aggrieved of such disallowance, assessee preferred appeal before the Ld.CIT(A). Ld.CIT(A) after considering the submissions of the assessee observed that whether a particular expenditure is 'capital' or 'revenue' .....

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nguage which bring about a total paradigm shift in the existing operations. It gives knowledge and technology to the appellant which was hitherto unavailable. 6.13 From the point of view of functional tests, it is seen that these new software systems change the very core operations of the appellant with a significant change in technology. They also enable the appellant to conduct operations which were hitherto not possible. 6.14 On the other hand, the software systems are not just upgrade, rathe .....

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to be sustained and the assessing officer is directed to allow depreciation as per law". Being aggrieved, assessee is before us. 4. The Ld. AR more or less reiterating what was stated before the departmental authorities submitted that the software purchased being in nature of application software is allowable as 'Revenue Expenditure'. The Ld. AR submitted even though it was explained before the AO that the software purchased merely enhanced the performance of the work which the AO .....

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gly supporting the reasoning of the AO and Ld.CIT(A) submitted before us that the software purchased by assessee is part of profit making apparatus as without the software, assessee could not have carried out its activity. The Ld. DR submitted that the software is not the replacement of earlier software but it completely overhauls the system. Hence, in fact it is a new system acquired by the assessee. Thus, the software purchased being of enduring nature, the expenditure incurred on acquiring su .....

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ether expenditure incurred on a particular software is revenue or capital will not only depend upon its ownership and enduring nature but also the functionality. The ITAT Delhi Special Bench in case of Amway India Enterprises Vs. DCIT (111 ITD 112) observed, for determining whether expenditure in acquiring software is revenue or capital, the advantage which an assessee derives has to be seen in a commercial sense. If the advantage is in the capital field, then the same would be capital expenditu .....

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ture of expenditure which are as under: i. If the software forms part of profit making apparatus of assessee's business, it is to be treated as capital. ii. If the software is more expensive and if there are associated capital expenditure like purchase of new computer for manning the software, it is more likely to be a central tool of the business and it will be more enduring in nature adding to the profit earning apparatus. iii. If the acquisition of software radically changes the way opera .....

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t of the profit making apparatus. Further, though, AO has observed that software packages are going to give benefit to the assessee in the ensuing years, hence are of enduring nature, but he has not examined the exact life span of the software packages. Ld.CIT(A) has also not examined these aspects. In our view, without examining the nature of software purchased by applying the tests laid down by the Special Bench of ITAT, Delhi in case of Amway International Vs. DCIT (supra), it cannot be condu .....

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.3 relates to disallowance of an amount of ₹ 23,10,434/- claimed as expenditure incurred on repairs and maintenance. Briefly, the facts relating to the issue are during the assessment proceedings, the AO noticed that assessee has claimed an amount of ₹ 1,05,07,020/- as expenditure towards repairs and maintenance. On verifying the details/informations submitted by the assessee, the AO observed that out of the total expenditure incurred, an amount of ₹ 23,10,434/- is capital in n .....

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e the Ld.CIT(A). Ld.CIT(A) however, sustained the addition. The Ld. AR drawing our attention to the details of expenditure incurred submitted before us that replacement of flooring cannot be considered to be a 'Capital Expenditure' as no new asset of enduring benefit has come into existence. As far as false ceiling and partition charges is concerned, Ld. AR submitted that they are also of the same nature and cannot be considered to be of any enduring benefit to the assessee. He therefore .....

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ns of the parties and perused the materials on record. On examining the details of expenditure, we are of the view that expenditure incurred towards replacement of flooring cannot be considered to be a 'Capital Expenditure' as no new asset comes into existence as a result of such expenditure, rather, the expenditures incurred is more in the nature of maintenance of a capital asset. However, as far as false ceiling and partition charges are concerned, admitted fact is these were not exist .....

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ised is considered to be partly allowed. 9. The next issue as raised in ground No. 4 & 5 relates to disallowance of depreciation on Plant & Machinery due to foreign exchange fluctuation. Briefly, the facts relating to this issue are on verifying the material on record, the AO noticed that during the year, assessee has imported Plant and Machinery worth of ₹ 7,35,66,480/- from M/s. Muller Martini (Singapore) P. Ltd., He observed that assessee has capitalized foreign exchange fluctua .....

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nery. He observed that the assessee did not produce any supporting evidence to establish the foreign exchange loss due to fluctuation. The AO therefore disallowed the proportionate depreciation amounting to ₹ 7,36,183/- claimed on the capitalized foreign exchange fluctuation loss of ₹ 49,07,886/-. Similarly, AO observed that assessee has imported computers during the relevant previous year from another foreign company namely M/s. Atlantic Zeiser P. Ltd., for ₹ 33,57,500/-. In r .....

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added back the amount of ₹ 52,791/-. When the assessee challenged the disallowances before the First Appellate Authority, Ld.CIT(A) after considering the submissions of the assessee in the light of account standard 11 as well as the provisions of Section 43A held that, as per the statutory provision, the change in the value of the asset can be recognized only at the time of payment and not before that. Thus, he approved the view of the AO that no adjustment to the cost of asset can be made .....

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f the asset on account of such notional loss/gain on account of foreign exchange fluctuations as the assessee has not made any payment during the year. Only when the assessee makes payment any loss or gain on account of foreign exchange fluctuations can be adjusted towards cost of the asset. In that view of the matter, we do not see any reason to disturb the finding of the Ld.CIT(A). 11. In ground No.6, the assessee has challenged the disallowance of expenditure for an amount of ₹ 93,928/- .....

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of Commerce. The assessee further explained that these subscriptions were made to promote the activities of business. The AO however, was not convinced with the explanation of the assessee. The AO treating the expenditure incurred as the 'personal expenditure' of the Directors, disallowed the same and added back to the income of the assessee. Ld.CIT(A) also confirmed the addition. Ld. AR submitted before us that out of the aforesaid amount claimed as expenditure an amount of ₹ 50,0 .....

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000/- claimed to be towards insurance payment of earlier years is concerned, the Ld. DR submitted that the assessee never brought this fact to the notice of the departmental authorities. 12. We have heard the parties and perused the materials on record. On verifying the details of expenditure incurred, we are of the view that the subscription fees paid on behalf of the Directors cannot be allowed as expenditure at the hands of the assessee-company. However, as far as the amount of ₹ 50,000 .....

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8377; 2,82,600/- under the head 'Miscellaneous Expenditure'. Briefly, the facts are during the assessment proceedings, the AO found that assessee has claimed an amount of ₹ 20,14,022/- towards miscellaneous expenses. When AO called upon the assessee to explain the nature of expenditure with supporting evidences, the assessee submitted the details of expenditure with supporting vouchers. However, on verification of the information submitted, the AO noticed that expenditure booked un .....

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