2012 (12) TMI 787 - HC - Income Tax

High Court affirms Tribunal decision favoring revenue over assessee on capital expenses and income classification.

The High Court upheld the Tribunal's decision, ruling in favor of the revenue and against the assessee on all three issues. The installation expenditure ... Installation expenditure - Revenue v/s Capital - Held that:- This Court recalls the judgment of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1974 (10) TMI 3 - SUPREME COURT] that whether an expenditure necessary to bring an asset into existence and to put it in working condition was capital or revenue - The test “all expenditure necessary to bring such aspects into existence and to put them in a working condition” is a determinative test for installation and other charges needed to effectuate the working condition of the leased equipment. In this case clearly the authorities have applied the test and held the expenditure in question (Rs.1,35,05,869/-) to be properly falling in the capital field. No reason to differ with them - in favour of the revenue. Software expenses - Revenue v/s Capital - Held that:- The Tribunal had the benefit of considering all the documents which included the lease agreement with Bharti Telenet and the license agreement dated 11.11.1996 whereby the assessee secured license to exploit the software, provided it procured hardware as per agreed specification and also complied with order by the lessor UB Vest. The software as well as hardware were made an integral part of the arrangement. The software apparently caters to the hardware. In this case, it is necessary for the kind of software to cater to diverse activities such as billing regarding user and analyzing such like activities to promote speed and efficiency. That the parties chose to have a composite arrangement is one factor which the Tribunal was entitled to take into consideration. The Tribunal in our opinion correctly held that the test to discern whether the expenditure incurred by the assessee in this regard was capital or revenue did not in any manner differ from the content or character which were applicable while considering issue No.1 - no reason to differ from the Tribunal - in favour of the revenue. Write off as bad debt as a business loss - Held that:- As held by Tribunal MOA & AOA shows sufficiently the intention of the assessee to pursue certain main objects. The frequency of the activity is sought to be highlighted as giving rise to a continuous and organized activity. As held by AO the main activity of the assessee company was the business of promoting, establishing telecom services. By no stretch of imagination can it be said that the assessee was engaged in the business of money lending. Since the business of the assessee was not that of money lending, it cannot be said that the sum in question represents money lent in the ordinary course of the business of money lending carried on by the assessee. Therefore, the claim of the assessee did not fall within the parameters of provisions of section 36(1)(vii) r.w.s. 36(2). The sum in question should be allowed as a deduction as a business loss cannot also be accepted, since the sum in question was not incurred as expenditure in the ordinary course of business of the assessee - as decided in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997 (7) TMI 4 - SUPREME COURT] inter-corporate deposit was not a trade debt or part of any money-lending business - no error in the findings by the Tribunal on this - in favour of Revenue. Issues Involved:1. Whether the Tribunal erred in holding that Rs.1,35,05,869/- paid by the assessee as installation expenditure was capital in nature.2. Whether the Tribunal erred in holding that software expenses of Rs.2,69,35,669/- incurred by the assessee were capital in nature.3. Whether the Tribunal was justified in disallowing the sum of Rs.2,33,76,671/- as bad debt or business loss.Detailed Analysis:Issue 1: Installation Expenditure as Capital NatureThe primary issue was whether the installation expenditure of Rs.1,35,05,869/- should be considered capital in nature. The assessee argued that the expenditure did not confer any capital advantage and should be treated as revenue expenditure. The counsel for the appellant relied on the Supreme Court decisions in CIT v. Associated Cement Company Ltd. and Empire Jute Co. Ltd., which stated that if the expenditure facilitates trading operations without touching fixed capital, it should be treated as revenue expenditure.However, the revenue argued that the installation cost was intrinsically connected with the plant and machinery, making it part of the 'actual cost' necessary to bring the asset into working condition, thus capital in nature. The High Court considered the test of 'enduring benefit' and referred to the Supreme Court judgment in Challapalli Sugars Ltd. v. CIT, which held that expenditure necessary to bring an asset into existence and put it in working condition is capital in nature. The Court concluded that the installation expenditure fell within the capital field and upheld the Tribunal's decision, answering the first question in favor of the revenue.Issue 2: Software Expenses as Capital NatureThe second issue concerned whether the software expenses of Rs.2,69,35,669/- were capital in nature. The assessee contended that the software was pre-designed and not customized, thus should be treated as revenue expenditure. The Tribunal had considered the lease agreement and the license agreement, noting that the software was an integral part of the hardware arrangement, essential for the equipment's functioning.The High Court observed that the software catered to activities such as billing and analysis, promoting speed and efficiency. Given the composite arrangement and the integral nature of the software to the hardware, the Tribunal correctly held that the software expenses were capital in nature. The Court found no reason to interfere with the Tribunal's decision and answered the second question in favor of the revenue.Issue 3: Disallowance of Bad Debt or Business LossThe third issue was whether the Tribunal was justified in disallowing Rs.2,33,76,671/- as bad debt or business loss. The assessee claimed that the amount was written off as bad debt in the course of its money-lending business. The Tribunal, however, held that the assessee's main business was promoting telecom services and not money lending. The inter-corporate deposits were not part of a money-lending business but an efficient utilization of surplus funds.The High Court referred to the test articulated in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which emphasized that income from different sources, including interest from surplus funds, should be assessed under appropriate heads. The Tribunal's findings that the inter-corporate deposit was not a trade debt and the interest was rightly assessed as 'income from other sources' were upheld. The Court answered the third question in favor of the revenue.Conclusion:The High Court dismissed the appeal, answering all three questions in favor of the revenue and against the assessee, with no order as to costs.