2004 (7) TMI 602 - AT - Income Tax

Tribunal Rules Software, Repairs as Revenue Expenditure; Orders Recalculation of Interest Under Secs 234B, 234C.

The Tribunal allowed the appeal, determining that the software expenditure should be treated as revenue expenditure and the repair and maintenance ... Huge amount Expenditure on software treated as 'Revenue or Capital expenditure' - Repair and maintenance expenditure on building treated as 'Revenue or Capital expenditure' - HELD THAT:- 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 D.R. 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 Hon’ble 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 assessee 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 the result, assessee’s appeal stands allowed. Issues Involved:1. Disallowance of software expenditure as revenue expenditure.2. Expenditure on repair and maintenance of building treated as capital expenditure.3. Charging of interest u/s 234B and 234C.Summary:1. Disallowance of Software Expenditure as Revenue Expenditure:The assessee purchased a software package from M/s. Sumitomo Corporation, Japan for Rs. 61,72,800 and claimed it as revenue expenditure u/s 37(1) of the I.T. Act. The Assessing Officer (AO) disallowed this claim, treating the expenditure as capital in nature, providing enduring benefits, and allowed only 1/4th of the expenditure for the year under consideration. The CIT(A) upheld the AO's decision, stating there was no provision for amortization of such expenditure and denied depreciation u/s 32(1)(ii). The Tribunal, after reviewing the arguments and case laws, concluded that the expenditure was for updating and rationalizing the existing data processing system, did not result in enduring benefits, and thus should be treated as revenue expenditure. The addition made by the AO and sustained by the CIT(A) was deleted.2. Expenditure on Repair and Maintenance of Building Treated as Capital Expenditure:The assessee incurred Rs. 26,40,167 on repair and maintenance of leased buildings, which the AO treated as capital expenditure, allowing depreciation at 10%. The CIT(A) agreed with the AO, stating the expenditure resulted in enduring benefits. The Tribunal, however, noted that the expenditure was for repairs and maintenance of leased premises and did not result in structural changes or enhancement of the profit-making apparatus. The Tribunal held that the expenditure was revenue in nature and deleted the addition made by the AO and sustained by the CIT(A).3. Charging of Interest u/s 234B and 234C:The assessee challenged the charging of interest u/s 234B and 234C. The Tribunal noted that the charging of interest is consequential and directed the AO to recalculate the interest while giving effect to the appellate order.Conclusion:The Tribunal allowed the appeal, treating the software expenditure as revenue expenditure and the repair and maintenance expenditure as revenue in nature, and directed the AO to recalculate the interest u/s 234B and 234C accordingly.