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2016 (10) TMI 992 - ITAT AHMEDABAD

2016 (10) TMI 992 - ITAT AHMEDABAD - TMI - Disallowance of expenses which were considered to be capital in nature by the AO - Held that:- We find that the ld.CIT(A) while deciding the issue has given a finding that considering the nature of activities undertaken by assessee, there is lot of wear and tear to the building which necessitates incurring of expenditure and the expenses were normal repair expenditure. He has further noted that going by the nature of expenses incurred it cannot be state .....

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tal expenses - Held that:- Revenue has not placed on record any material to demonstrate that the expenditure incurred by assessee is for the purchase any new software nor has pointed out any distinguishing feature in the facts of the case in the year under consideration and the facts of the case for earlier years. Before us Revenue has also not placed any material to demonstrate that order of the Coordinate Bench of Tribunal in assessees own case for earlier years has been set aside by higher j .....

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ls by the Revenue and the Assessee are directed against the order of the Commissioner of Income Tax(Appeals)-VI, Ahmedabad dated 23/08/2013 passed for Assessment Year (AY) 2008- 09. 2. The relevant facts as culled out from the materials on record are as under:- 2.1. Assessee is a company stated to be engaged in the business of manufacturing of hydraulic equipment and its parts. Assessee filed its return of income for AY 2008-09 on 24/09/2008 declaring total income of ₹ 37,19,74,788/-. The .....

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e ld.CIT(A), Revenue and Assessee are in appeal(s) before us. 2.2. The Revenue in ITA No.2479/Ahd/2013 has raised the following grounds:- 1. The CIT(A) has erred in law and on facts by considering the capital expenses of ₹ 2.27 crores as revenue expenses. 2. The CIT(A) has overlooked the fact that the expenses in question are not recurring in nature and have given benefit of enduring nature of the assessee, such expenses cannot be regarded as current repairs and are therefore, not deductib .....

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hase of operating software allowable as revenue expenditure u/s 37 of the Act. It is submitted that it be so held now. 2.1. Learned Commissioner has erred in not allowing the said expenses u/s 37 of the Act by wrongly relying upon the order of Hon'ble CIT(A) for A.Y. 2007-08 which was based on wrong interpretation of facts that these software are purchased as part of computers and therefore requires capitalization and hence eligible for depreciation. Learned Commissioner has erred in not app .....

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ed Commissioner has erred in not giving direction to the learned AO to allow the depreciation at the rate of 60% on the software expenditure disallowed in the AY 2007-08 & 2006-07, while computing total income for the year under consideration. 3. We first take up Revenue s appeal in ITA No.2479/Ahd/2013. 3.1. Both the grounds raised by Revenue being inter-connected are considered together. 3.2. During the course of assessment proceedings and on perusing the details of manufacturing and other .....

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rical fittings, etc. AO was of the view that the benefit of expenses resulted in benefit of enduring nature and the expenses were of capital nature expenses. He accordingly considered the aggregate amount of ₹ 2,27,84,281/- (Rs.1,12,17,505 + ₹ 1,15,66,776) as being capital in nature and disallowed the same. He however, allowed depreciation @10% and accordingly made an addition on net amount of ₹ 2,05,05,853/-. Aggrieved by the order of the AO, assessee carried the matter before .....

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y explanation as to why the expenditure should not be treated as capital expenditure; the said expenditure was capital in nature and accordingly it was being capitalized and depreciation was being allowed @ 10%. Accordingly, AO made the impugned disallowance. 7.6. The contentions of the Ld.A.R are that all the invoices for the value of Rs,5,000/- and more were submitted to the A.O vide the letters 10/11/2011 & 08/12/2011; other repairs included furniture repairs, sanitary & plumbing repa .....

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of any new asset; repairs were carried out at the 2 factory buildings at Ahmedabad. & Bangalore and the office buildings at Mumbay, Delhi, Calcutta & Bangalore; the invoices exceeding ₹ 50,000/- in respect of the building repairs show that the payments were made to 23 different parties through which different types of repair works were carried out; since the company is in the business of manufacture of heavy engineering industrial goods like hydraulic crane [which are heavy equipm .....

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ure did not create any new asset; the Ahmedabad Vatva office was taken on 99 years lease in the year 1978 i.e. 30 years ago; as may be seen from point 3.1 of page-12 of the lease agreement appellant is responsible to keep the premises in good and tenable repair; as may be seen from resolution dtd. 26/11/2008 it was decided to purchase land at Sanand with a view to shifting the factory to that place/which indicates that the appellant would not have incurred any capital expenditure in respect of t .....

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(i) the amount paid on account of current repairs to machinery, plant or furniture is allowable deduction. As per the explanation below both the sections, inserted by the Finance Act 2003 w.e.f. 01/04/2004, such expenditure shall not include any capital expenditure. In the instant case all the premises of the appellant are rented premises. The amount of expenditure incurred towards repairs of buildings is ₹ 1,12,17,505/-. As stated by the A.O himself at para-2 of page-8 of the assessment o .....

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penditure of over 72 lakhs compared to the expenditure of around 112 lakhs in the year under consideration. The appellant is in the business of manufacturing of heavy engineering industrial goods like hydraulic crane involving huge wear and tear to the buildings. Going by the nature of expenses incurred it cannot be stated that any new asset has come into existence. As regards other repairs of ₹ 1,15,66,776/-, it was in connection with the furniture, sanitary plumbing, A/C and Water cooler .....

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disallowance of building repairs and other repairs is not in accordance with law. Reliance is placed in this regard on the case of ACIT Vs. M.P. Warehousing & Logistic Corpn. Ltd 52 SOT 40 (Indore) (2012). In the said case the assessment years involved were 2005-06 to 2008-09, i.e. after insertion of Explanation below Sec.30 & 31. In the said case Tribunal held as under: "To decide the applicability of section 31(i) the primary test is not whether the expenditure is revenue or capit .....

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the meaning of current repairs. The object of repair and maintenance is to preserve and maintain existing asset and not to bring a new asset into existence. The total replacement of damaged machinery/ship or an asset may not constitute repair, but substitution of old/worn out parts of a machine/building/factory, etc., is an expenditure of deductible nature, meaning thereby for claiming the deduction under the provisions of the Act, no new asset should come into existence and the expenditure must .....

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cted to allow the expenditure claimed towards building and other repairs and withdraw the depreciation allowed in the assessment order. This ground of appeal is allowed. 4. Aggrieved by the order of ld.CIT(A), Revenue is now in appeal before us. 4.1. Before us, ld.Sr.DR supported the order of AO. Ld.AR on the other hand reiterated the submissions made before the AO and the ld.CIT(A) and further submitted that the necessary details were filed before the AO and also before the ld.CIT(A). Ld.AR fur .....

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le on record and gone through the orders of the authorities below. The issue in the present is with respect to disallowance of expenses which were considered to be capital in nature by the AO. We find that the ld.CIT(A) while deciding the issue has given a finding that considering the nature of activities undertaken by assessee, there is lot of wear and tear to the building which necessitates incurring of expenditure and the expenses were normal repair expenditure. He has further noted that goin .....

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of ld.CIT(A). In view of the aforesaid facts, we see no reason to interfere with the order of ld.CIT(A) and thus this ground of Revenue is dismissed. 6. In the result, Revenue s appeal in ITA No.2479/Ahd/2013 for AY 2008-09 is dismissed. 7. Now, we take up Assessee s appeal in ITA No.2463/Ahd/2013 for AY 2008-09. 7.1. First ground being general requires no adjudication. 7.2. Second ground is with respect to software expenses:- 7.3. During the course of assessment proceedings, AO noticed that ass .....

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tical issue arose in the immediately preceding A.Y. 2007-08 in appellant s own case. Vide the order dtd. 06/02/2013 in appeal No.CIT(A)-VI/DCIT (OSD)/R-1/293/10-11, it was held by me as under:- 4.2. Identical issue arose in the immediately preceding A.Y. 2006-07 in appellant s own case. Vide the order dtd. 17/02/2011 in appeal No.CIT(A)-VI/Addl.CIT.R-1/299/09- 10, my predecessor held as under. 5.3. I have considered the facts of the case, assessment order and appellant s submission. Appellant pu .....

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eligible for depreciation, claiming the same @100 percent is not correct. In view of this, the addition made by the assessing officer is confirmed. Following the said order, impugned disallowance is upheld. This ground of appeal is dismissed. Facts remaining the same, following my order for A.Y. 2007-08, impugned disallowance is upheld. This ground of appeal is dismissed. 8. Aggrieved by the order of ld.CIT(A), assessee is now in appeal before us. 8.1. Before us, at the outset, ld.AR submitted t .....

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the ld.CIT(A) and since in AY 2007-08 the issue has been decided in assessee s favour by the Coordinate Bench and therefore following the order of the Coordinate Bench, the ground of the assessee be allowed. Ld.Sr.DR on the other hand supported the orders of lower authorities. 9. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The issue in the present is whether the software expenses are allowable are Revenue ex .....

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:- 8. We have heard the rival contentions and perused the material on record. The sole grievance of the assessee in this appeal is against the action of the ld. CIT(A) in treating the expenditure of ₹ 35,30,328/- towards purchasing and upgrading software as capital expenditure which has been claimed by the assessee as revenue expenditure in its return of income. The itemize break-up of the impugned expenditure of ₹ 35,30,328/- is as under:- Sr. No. Particulars Amount (Rs.) 1. Softwar .....

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he only footing that the assessee will receive the benefit for more than a year and has also allowed 60% depreciation on this expenditure of ₹ 35,30,328/- and a disallowance of ₹ 14,21,131/- has been made. However, from going through the submissions of the ld. Authorized Representative, we are able to understand that the impugned expenditure of ₹ 35,30,328/- has not been incurred to purchase any new software but they are either application software to run the existing software .....

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dealt with the similar issue in assessee s own case for Assessment Year 2006-07 in ITA Nos. 1328 & 1310/Ahd/2011, dated 29.04.2014, dealing with the software expenditure of ₹ 8,73,485/- as to whether it is a capital or revenue expenditure, allowed the assessee s appeal by observing as under:- 14. We have heard the rival submissions and perused the material on record. It is an admitted fact that Assessee had incurred ₹ 8,73,485/- on software expenses and was claimed as revenue exp .....

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onsidered to be capital expenditure, the Assessee will have to be granted depreciation @ 60% on WDV basis in A.Y. 06-07 and also in subsequent years. The depreciation of WDV for subsequent years will work out to ₹ 2,09,630/- (for A.Y.07-08), ₹ 83,854 (for A.Y. 08-09), ₹ 33,542(for A.Y. 09-10) and so on. Considering the totality of the facts, the total taxable income of ₹ 35.85 crore as determined by the AO, the changes that would be required to be made in subsequent asses .....

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d (supra) has also dealt with the similar issue, wherein the assessee incurred revenue expenditure towards application software to be run on oracle application and the decision was given in favour of the assessee by observing as under:- The test of enduring benefit is not a certain or a conclusive test which the Courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation affixed capital for the ass .....

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xpense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably, leaving the fixed assets untouched, would be an expenditure in the nature of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would, thus, collapse in such like cases. It would be only truer in cases which deal with technology and software application, which do not i .....

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e Tribunal, which is decidedly the final fact finding authority, has after noticing the material on record observed that the expenditure was incurred under various sub-heads, which included licence fee, annual technical support fee, professional charges, data entry operator charges, training charges and travelling expenses. The final figure was a consolidation of expenses incurred under these sub-heads. The Tribunal rightly came to the conclusion that none of these resulted in either creation of .....

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all, the extent of the expenditure cannot be a decisive factor in determining its nature. As observed by the Tribunal, the assessee in the relevant assessment year had a turnover of ₹ 150 crores and that even without this expenditure it would have continued to achieve the said turnover, though the expenditure in issue would have enabled it to run its business more efficiently. Therefore, the rationale supplied by the Assessing Officer in support of its order is flawed and, hence, it would .....

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found in the software installed in the earlier assessment year, and that out of a sum of ₹ 1.71 crores, a sum of ₹ 49 lakhs was incurred to modify, customize and upgrade the software installed, while the balance expenditure was used for development and implementation, it returned a finding that the expenses were incurred to upgrade and run the system. In view of these findings, the Assessing Officer discovered an erroneous principle on the basis of which he denied the exemption to th .....

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e being: network software and language software. The network software enables groups of computers to communicate with each other, while language software provides with tools required to write programmes. [Para 11] The aforesaid would show that what the assessee acquired through A was an application software which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance. The fact that the application software would have to be updated from time to time based on t .....

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nded or intended ingress into the system - ought not give a colour to the expenditure incurred as one expended on capital account. Given the fact that there are myriad factors which may call for expenses to be incurred in the field of software I applications, it cannot be said that either the extent of the expense or the expense being incurred in close proximity, in the subsequent years, would be conclusively determinative of its nature. The Assessing Officer has erred precisely for these very r .....

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terminative of the nature of the expense. An assessee cannot be denied a claim for deduction which is otherwise tenable in law on the ground that the assessee had treated it differently in its books. [Para 13 & 13.1] Therefore, the aforesaid contention is of no avail to the revenue. [Para 13.2] Therefore, the Tribunal was correct in law in holding that the expenditure incurred by the assessee on account of software and professional expenses was a revenue expenditure. [Para 14] 11. Applying t .....

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