This appeal has been preferred by the assessee against the order of learned CIT (A) dated 12-9-2003 relating to the assessment year 2000-01.
2. Ground Nos. 1 to 6 relate to confirming the disallowance of expenditure of Rs. 46,29,600 incurred on software and claimed as a revenue expenditure by the CIT (A). The grounds taken by the assessee are as under: "1. That the learned CIT (A)-XII has erred both in law and on facts in confirming the disallowance of an expenditure of Rs. 46,29,600 incurred on software and claimed as a revenue expenditure.
2. That the learned CIT (A) has erred on facts and in law in holding that the expenditure incurred by the appellant on the acquisition of accounting systems package/module is in the nature of capital expenditure disregarding the aforesaid expenditurehad not been incurred in acquiring any capital asset or further also such an expenditure had not been incurred in capital fielearned 3. That the learned CIT (A) has erred on facts and in law in holding that the revenue expenses incurred by the appellant on accounting software will provide to the appellant an advantage of enduring nature and that accounting software can be used for a number of years with slight modifications and upgradation. Even assuming the aforesaid finding was correct (though was disputed) the expenditure incurred even then ought to have been allowed as a business expenditure, as claimed.
4. That without prejudice to the above and in the alternative the learned CIT (A) has erred even in holding that even in the event the expenditure is taken as capital expenditure, the appeflantis not entitled for depreciation, as the rate applicable to "intangible assets' under the provisions under section 32(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) are not applicable to capital expenditure on purchase of .software' disregarding his own findings.
5. That further in the circumstances of the case and in law, the learned CIT (A) has erred even in disregarding the finding of the assessing officer that the expenditure on software is to be allowed in four years. In fact the entire amount incurred ought to have been held as allowable. The adverse findings recorded by the learned CIT (A) are highly illogical and is contrary to well settled proposition of law and facts of the case that the learned ACIT allowed the claim partially and no enhancement was made to such an allowance.
6. That the learned CIT (A) has also failed to apply correctly variousjudicial pronouncements cited by the appellant, wherein it has been held that the benchmark for determining capital or revenue nature should be governed by changing economic realities and nature of assessee's business." The assessee, during the year had purchased a software package from Ws.
Sumitomo Corporation, Japan for an amount of Rs. 61,72,800 and had claimed it as revenue expenditure under section 37(1) of the Income Tax Act. It was stated before the assessing officer that it was an accounting software having features of general accounting systems like vouchers creation, printing of balance sheet, profit and loss account etc. and it could be compared with the MS-Office software. The assessee was using SAS-S2.0 version of the software which was an upgraded version of 1.0, purchased by the assessee in financial year 1999-2000.
The assessee had submitted that the software was used for updating, rationalizing the existing data processing expediency and the benefits derived therefrom where not permanent in nature as it did not result in acquisition of an asset and the expenditure was exclusively revenue in nature. In support of its argument the assessee had relied on judicial pronouncements in the cases of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC) Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC) Bank of Punjab Ltd. v. Jt. CIT (2002) 122 Taxman 235 (Chd.) (Mag.); Media Vedio Ltd. v. Jt. CIT (2002) 122 Taxman 28 (Delhi) (Mag.); Business Information Processing Services v. Assu. CIT(20001 73 ITD 304 (JP). The assessing officer did not accept the contention of the assessee and in his opinion the software package acquired by the assessee was not similar to some maintenance software of the computer but it was a system which would continue to be used by the assessee for a number of years with little future modification and upgradations. The assessing officer while agreeing that the expenses incurred on upgrading and maintenance of this package were allowable as revenue expenditure took the view that insofar as the expenses relating to the acquisition of theaccounting software were concerned, these were not allowable as revenue expenses since the assessee company would continue to derive benefit of enduring nature from. this software for a number of years. Since the assessee had iricurred these expenses for the business purposes, the assessing officer accordingly held that the ex.
penses would be spread over a period of four years and in each of the year 1/4th of the expenses would be allowed. The assessing officer accordingly allowed 1/4th of the expenditure in the year under consideration and the remaining expenditure was added to the income of the assessee. With regard to the alternate contention of the assessee that in case the expenditure was held to be capital in nature, the assessee should be allowed depreciation thereon at the rates applicable on intangible assets under section 32(1)(ii) of the Income Tax Act, the assessing officer was of the view that the provisions contained in section 32(1)(ii) did not cover software for the purposes of depreciation and hence the assessee was not entitled to any depreciation thercon.
Aggrieved by this order of the assessing officer the assessee went in appeal before the first appellate authority. Before the CIT (A) the assessee reiterated the arguments made before the assessing officer and submitted that the expenditure on software was necessitated due to fast changing technology and on the ground of commercial expediency. This expenditure had not resulted in creation of any asset which would generate more business to the assessee. It was also submitted by the authorised representative of the assessee that it was an accepted principle that an expenditure which results in saving of revenue expenditure is itself a revenue expenditure. Further, these expenses were incurred in the course of business and wholly and exclusively for the purposes of business, for better management, smooth processing of information and did not result in any enduring benefits to the assessee company. Reliance was placed by the learned counsel on the ratio of decisions in the cases of Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC); CIT v. CIBA of India Ltd. ( 1968) 69 ITR 692 (SC); Bombay Steam Navigation Co. (1953) (P) Ltd. v. CIT (1965) 56 ITR 52 (SC); CITv. Rex Talkies (1984) 148 ITR 560 (Kar.); CIT v. Premier Cotton Spg.
Mills Ltd. 233 ITR 440 (sic). After considering the submissions of the assessee, the learned CIT (A) agreed with the findings of the assessing officer and confirmed the order passed by him, treating these expenditures as capital in nature. He further held that there was no specific provision under the Act allowing amortization of this expenditure and therefore the entire expenditure was to be disallowed during the year of accrual ie. the year under appeal. The alternate ground of the assessee that in case the entire expenditure on software is treated as capital then the assessee should be allowed depreciation at the rate applicable to an intangible asset was also dismissed as in the assessment year under appeal there was no provision under section 32 of the Act and the depreciation schedule in the Income Tax Rules for allowing depreciation on software. Aggrieved, by this order of the learned CIT (A) now the assessee is in appeal before the Tribunal.
At the time of hearing the learned counsel for the assessee submitted that expenditure of Rs. 61,72,800 incurred on software is duly supported by copy of invoice and foot note and has been incurred under an agreement dated 23-7-1999 for providing to the assessee an accounting software. According to article 5 of the Agreement, the software SASS provided to the assessee M/s. Sumitorno Corporation, Japan could be used at all personal computers in the business use at its offices located in India. Article 7 provides certain restrictions for the use of software acquired by it. It is thus evident that the expenditure was a business expenditure of the nature of revenue expenditure and was thus to be allowed as revenue expenditure. He further argued that assessing officer himself has admitted it to be revenue expenditure, but he has erred in holding the same as deferred revenue expenditure. It is not a case where the assessee is seeking expenditure to be allowed to it by treating the same as deferred revenue expenditure. The finding that the advantage is of enduring benefit is not a sufficient ground to hold an expenditure to be capital expenditure. The assessee has not acquired any asset. He relied on the ratio of decisions in the case of CIT v. SLM Maneklal Industries Ltd. (1977) 107 ITR 133 (Guj.) and CIT v. Jyoti Ltd. (1979) 118 ITR 499 (Guj.) to show that even an expenditure incurred for purchase of plant may be a revenue expenditure. According to learned counsel, in the case of Scientific Engg. House (P) Ltd. v. CIT (1986) 157 ITR 86 (SC). The Honble Apex Court has held that expenditure incurred on acquiring know-how could be regarded as an expenditure on plant and machinery. In the instant case expenditure incurred is nonetheless a revenue expenditure as assessee has not acquired any capital assets and on the contrary by acquiring the accountancy package it has enabled in facilitating the management and conduct of the assessee's business more efficiently and more profitably. It was further submitted that software expenditure was incurred by the assessee for updating, rationalizing the existing data processing system of the company and as such was allowable in view of the ratio of decision of Honble Delhi High Court in the case of CIT v. K & Co. (2003) 181 CTR (Del) 378. According to the counsel, the CIT (A) has failed to appreciate that the software expenses were revenue expenditure and have no high obsolescence value and as such, could not be contended to be held to be capital expenditure. It was further submitted that assessee company derived no enduring benefit by incurring the aforesaid expenditure on software and in any case even if it is held that some enduring benefit was derived, the test of enduring benefit is not the sole test to determine the character of the expenditure. In this regard reliance was placed on the ratio of decision of Honble Apex Court in the case of Empire Jute Co.
Ltd. (supra). The assessee's counsel also drew our attention to the new Income Tax Rules substituted by the I.T. (Twenty-fourth Amendment) Rules, 2002 with effect from 1-4-2003 which provide that computer software in the block of assets relating to computers is eligible for 60% depreciation. It was submitted that the Legislature has only now provided that expenses towards acquisition. of computer software were to be capitalized in the block of assets of computers and will be eligible for 60% depreciation and as such the amendment is only prospective i.e. from assessment year 2003-04 and not retrospective.
Therefore, the contention of the assessee that the expenditure incurred on computer software during the year under consideration was not required to be capitalized but it was to be allowed as revenue expenditure, was supported from the aforesaid amendment in the Income Tax Rules, 1962.
The learned counsel for the assessee further relied on the new accounting standard 26 on intangible assets, issued by the Institute of Chartered Accountants of India and effective from accounting periods commencing on or after 1-4-2003 to demonstrate that the same clearly provides that the software acquired for internal use are revenue expenditure unless it meets the specified conditions only from the financial year 2003-04 and onwards. Thus, the accounting standard too prescribes the capitalization prospectively from financial year 2003-04 and not retrospectively. It is settled law that in absence of statutory provisions, accounting practices laid out by professional bodies should be adopted for computing the income of the assessee company. In support of this argument the learned counsel relied on the ratio of decision of Honble Apex Court in the cases of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC) and CIT v. Indo Nippon Chemicals Co. Ltd. (2003) 261 ITR 275 (SC). In view of this it was submitted that merely the expenditure incurred by the assessee on software to facilitate the operations of the company could not be basis to hold that the expenditure was capital in nature and it was, therefore, prayed that the entire expenditure incurred on software of Rs. 61,72,800 be held as revenue expenditure.
Learned Departmental Representative, on the other hand, supported the orders of authorities below and argued that since new software had been purchased by the assessee company which was in the nature of providing enduring benefit to the assessee, the expenditure may be treated as of capital nature.
Heard both the parties and perused the record available on file. Case laws relied upon by both the parties were also carefully gone through.
We have also gone through the details of software expenses and copy of agreement dated 23-7-1999. We are of the considered opinion that the assessee had incurred these expenditures for updating, rationalizing the existing data processing system of the assessee company. In fact by incurring this expenditure he has been able to save recurring expenditure of this nature in earlier years. The software by its own nature is a thing which requires ongoing expenses for its upgradation if it is to be used for efficient functioning of the office work in a business and, therefore, cannot be said to be an expenditure of deriving enduring benefit to the assessee. The various case laws relied upon by the learned counsel for the assessee support this contention and therefore we have no hesitation in holding this expenditure being revenue in nature. Accordingly, the addition made by the assessing officer and sustained by the learned CIT (A) on this count is deleted.
Ground Nos. 7 & 8 relate to expenditure incurred on repair and maintenance of building amounting to Rs. 26,40,167. The grounds taken are as under: "7. That the learned CIT (A) has further erred in law and has thus erred in upholding the findings of the assessing officer that the expenditure incurred on "repair and maintenance" of building amounting to. Rs. 26,40,167 in the nature of capital expenditure as they are incurred for "structural changes' in the leased premises. The findings and conclusions both are in disregard of the facts on record and the conclusion is also unsustainable.
8. That the learned CIT (A) has failed to appreciate the expenditure incurred was on repair and maintenance and as such the amount claimed aggregating to Rs. 26,40,167 ought to have been allowed as a deduction while computing the total income of the assessee company." The assessing officer, from the details of repairs and maintenance expenses, incurred by the assessee on two buildings, noticed that the assessee had shown an amount of Rs. 19,13,000 as site expenses and Rs. 10 20,518 as maintenance charges of CMD House. The assessee explained before the assessing officer that the expenses of Rs. 10,20,518 were incurred on laying of water pipes, taps and other accessories purchased for water maintenance and the amount of Rs. 19,13,000 had been incurred on dismantling and structural repairs of the premises of a building in Mumbai taken on lease for the purpose of making the premises congenial and better in ambience as per the needs of the business operation. The assessing officer had noted that the assessee company had capitalized certain expenses incurred on renovation, repairs and fixtures and some of the minor expenses were claimed as revenue expenses. From the scrutiny of the details of the expenses the assessing officer found that there were no minor expenses but had been incurred on structural changes in the premises. The assessing officer accordingly capitalized these expenses and allowed depreciation thereon at the rate of 10% applicable to buildings and the balance amount of Rs. 26,40,167 were added to the income of the assessee.
Aggrieved, the assessee filed appeal before the first appellate authority. Before the CIT (A) the assessee submitted that the quantum of expenditure had nothing to do with the determination of its nature.
Even a major expenditure could be revenue in nature. The predominant intention had to be ascertained by taking an overall view of the situation. Both the above premises were taken on lease and expenditure incurred which resulted in permanent enhancement of the value of the structure were capitalized by the assessee himself, even though, there were numerous decisions where it had been held that expenditure incurred on leasehold premises could be claimed as revenue expenditure.
These decisions were based on the premise that the value of this expenditure ends with the termination of the lease and by incurring this expenditure company saves on the rental outgo, which is revenue in nature. The assessee himself capitalized the expenditure which might result in enhancement of the value of the property and treated only the repair and minor modification in the external layout of the leased premises as revenue expenditure. It did not acquire any capital asset.
The expenditure was incurred for the purpose of facilitating and carrying on of its business and is therefore of a revenue nature. It was further submitted that there was no addition expansion of the profit making apparatus was done. The assessee could not have laid any structural changes in the building/preffiises per the stipulations contained Ph the lease agreement. The learned counsel relied upon various judicial pronouncements in support of its submissions before the CIT (A), namely, Bylam Ltd. v. CIT (1973) 87 ITR 310 (AP); Alembic Chemical Works Co. Ltd. case (supra), Empire Jute Co. Ltds case (supra); Assam Bengal Cement Co. Ltd.'s case (supra); CIT v. Madras Auto Service (R) Ltd. (1998) 233 ITR 468 (SC) and Girdhari Dass & Sons v. CIT The learned CIT (A) was in complete agreement with the findings of the assessing officer to hold that expenditure incurred by the assessee on structural changes of the premises was in the nature of capital expenditure; it was a one time expenditure which would result in enduring benefit to the assessee. He, therefore, confirmed the order of the assessing officer.
Aggrieved by this order of the learned CIT (A) the assessee is in appeal before the Tribunal. At the time of hearing the learned counsel for the assessee reiterated the stand taken by the assessee before the lower authorities. It was contended that the expenditure incurred should be held to be revenue as it had been incurred on premises taken on lease and expenses are on repairs and maintenance and are also small expenses. It was emphasized that the expenditure had been incurred in respect of the premises taken on lease and are admittedly being used for the purpose of business and as such revenue in nature. In support reliance was placed on the ratio of decision of Honble Apex Court in the case of Madras Auto Services (P) Ltd. (supra), wherein it was held that even in a case of construction of a property on land leased for 39 years, for which the assessee was paying a very low rent the assessee did not acquire a capital asset but was only having a business advantage with the result that the entire, construction cost was admissible as a revenue expenditure. In coming to the conclusion the Apex Court felt that its own earlier decision in Assam Bengal Cement Co. Ltd.'s case (supra) following the English decision in Atherton v.British Insulated & Heisby Cables Ltd. 10 TC 155 (HL), would support its conclusion. A lump sum payment in lieu of an annual business expenditure chargeable against the revenue, it was felt, could be regarded as normal revenue expenditure relating to business.
Contribution for construction of roads in the case of a sugar mill was held to be revenue expenditure in L.H. Sugar Factory & Oil Mills (P) Ltd. v. CIT P (1980) 125 ITR 293 (SC). Contribution to the State Housing Board for construction of tenements for its workers was similarly held to be revenue expenditure in CIT v. Bombay Dyeing & Mfg.
Co. Ltd. (1996) 219 ITR 521 (SC). Learned counsel also relied upon the ratio of decisions in the cases of CIT v. Rama Krishna Steel Rolling Mills ( 1974) 95 ITR 97 (Del); Girdhari Dass & Sons (supra), CIT v.Oxford University Press (1977) 108 ITR 166 (Bom); CIT v. ICI (India) (P) Ltd. (1983) 139 ITR 105 (Cal.); Addl. CIT v. Delsukhrai Jaidayal (1979) 117 ITR 466 (All.); CIT v. Bhagat Industries Corpn. Ltd. (1980) 126 ITR 645 (Punj. & Har.); CITv. Kisenchand Chellaram (India) (P) Ltd (1981) 130 ITR 385 (Mad.); CITv. Delhi Cloth &GeneralMills Co. Ltd. (1981) 131 ITR 641 (Del); CIT v. S. Zoraster & Co. (1982) 133 ITR 559 (Raj.); Allied Metal Products v. CIT (1982) 137 ITR 689 (Punj. & Han); Hotel Alankar v. CIT (1982) 133 ITR 866 (Guj.); Nila Products Ltd v.CIT (1984) 148 ITR 99 (Bom.); Permali Wallace Ltd v. CIT (1985) 151 ITR 43 (MP); CITv. Bengal Jute Mills Co. Ltd. (1987) 165 ITR 631 (Cal.); CIT v. Jay Engg. Works (1988) 172 ITR 341, (Del); CIT v. Dewars Garage (India) (P) Ltd. (1993) 204 ITR 763, 773 (Cal.).
The learned counsel further submitted that in CIT v. Sakthi Textiles Ltd, (2001) 250 ITR 449 (Mad.) it has been held that even the cost of installation of a dust extraction plant to protect the health of the workmen is a revenue expenditure. Likewise, in the case of Hindustan- Electro Graphites v. CIT (1996) 218 ITR 688 (MP) the Hon'ble Madhya Pradesh High Court has held that the expenditure on plantation in the factory and the residential quarters of the assessee with a view to making the atmosphere pollution free, is also a revenue expenditure.
It was, therefore, submitted that the CIT (A) failed to appreciate that the expenditure incurred was allowable as revenue expenditure and could not by any stretch of imagination be held to be capital expenditure.
According to him the ratio of decision laid down in the case of Madras Auto Services (P) Ltd. (supra) is directly applicable to the facts of the case in hand as the expenditure has not resulted into any expansion of the profit making apparatus of the assessee. Various clauses of lease deeds of the building showed that no structural change was permitted in leased premises and therefore the entire amount was revenue expenditure. Learned counsel also relied on the decision in the cage of CIT v. Shri Ram Refrigeration Industries Ltd. (2002) 253 ITR 783 (Del) wherein the Jurisdictional High Court has further held that expenditure towards extension, renovation or improvement of building taken on lease is a revenue expenditure and are to be allowed under section 37 of the Act. Similar view has been taken by Income Tax Appelate Tribunal Hyderabad Bench in the case of Smt. S. Premalata v.Dy. CIT (1995) 53 ITD 69 (Hyd) in which the assessee took certain premises from YMCA on lease for 25 years, constructed building thereon at its own cost and in view of that assessee got the right to sub-lease the same. The ownership of the constructed property remained with the lessor brick by brick. The rent received by the assessee by sub-letting the said property was held to be assessable as a business income but it was not considered to be the capital expenditure by the revenue.
Accordingly, it was prayed that the expenditure incurred by the assessee, be directed to be allowed as business expenditure.
Learned Departmental Representative, on the other hand, relied on the orders of lower authorities and vehemently argued that the expenditure so incurred, onrepair and maintenance be capital ' ized and depreciation be allowed.'He also relied on the case law in the case of Ballimal Naval Kishore v. CIT (1997) 224 ITR 414 (SC).
In reply, the learned counsel submitted that the case law relied upon by the learned Departmental Representative was on different facts and was not applicable to the facts of the case.
Heard both the parties. Perused the record available on file and have gone through the case laws relied upon by both the parties. We find that the case law relied upon by the learned Departmental Representative is distinguishable on facts. In that case the assessee purchased a building for a sum of Rs. 17,000 in 1937 which at the time was a ginning factory. He ran the factory till 1940. In the year 1945, he converted it into a cinema theatre and exhibited films therein.
During the period October 1960 to March 1961, the assessee extensively repaired the theatre by expending substantial amounts. The amounts spent by him were on machinery Rs. 16,002, on new furniture Rs. 27,889, on sanitary fittings Rs. 5,225 and on replacement of electrical wiring Rs. 13,604. In addition thereto, a total amount of Rs. 62,977 was spent on extensive repairs to the walls, to the hall, to the flooring and roofing, to doors and windows and to the stage sides. The theatre had to be closed during the period the repairs were effected. It was held by the Honble Supreme Court that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building.
It was further held that by no stretch of imagination could the said repairs qualify as 'current repairs' within the meaning of Income Tax Act. In the instant case the agsessee has incurred the expenditure on repairs and maintenance of premises taken on lease by him for business purposes. The nature and magnitude of the expenditure on repairs and maintenance of these leased premises is such that it cannot be said that expenditure was one time, which would result in enduring benefit to the assessee. The case laws relied by the assessee and discussed earlier in our order support the contention of the assessee squarely.
Therefore, the addition made by the assessing officer and sustained by the CIT (A) on this count is deleted.
In ground No. 9 the assessee has challenged the charging of interest under sections 234B and 234C. Admittedly the charging of interest under the aforesaid sections is consequential. The assessing officer shall recalculate the charging of interest, if any, while giving effect to appellate order.
Ground No. 10 is general in nature and requires no specific adjudication.