2014 (6) TMI 742 - AT - Income Tax

ITAT Partially Allows Revenue's Appeal on Capital Loss but Upholds CIT(A) Decisions on Expenditures (A)

ACIT (OSD), Cir. 8, Ahmedabad Versus Sarkar Jewellers P. Ltd.

The ITAT partially allowed the Revenue's appeal regarding the short term capital loss on the motor car, reducing the claim amount. However, the decisions ... Deduction of expenses of shop renovation – Current repairs – Withdrawal of depreciation – Held that:- No new asset has come into being on account of expenditure incurred by the assessee on replacement of old tiles, wooden partition, pest control, colouring, rolling shutter, flat glass, plywood, sanitary ware, hardware and labour charges - The business premises of the assesse were taken on lease - there is no mistake in the order of the CIT(A) in holding that the expenditure incurred by the assessee essentially were revenue in nature and not for acquisition of new asset – Decided against Revenue. Deletion of computer software maintenance expenses – Withdrawal of depreciation allowance – Held that:- The expenditure incurred by the assessee on replacement of old software for ₹ 69,187/- and rest of the expenditure on account of annual maintenance charges - The replacement of latest version of the software does not result in creation of a new capital asset or in expansion of the capital base – thus, it has to be allowed as revenue expenditure u/s 37(1) as decided in CIT(A)’s order – Decided against Revenue. Allowability of STCG on motor car u/s 50 of the Act – Held that:- The assessee has not explained the reason that why the motor car was sold at an amount less than ₹ 84,174/- than the WDV of the car to its own director - CIT(A) has deleted the addition by observing that the motor car shown by the assessee in its balance sheet in the previous year and the department has allowed admissible depreciation in the hands of the assessee – thus, the assessee could not satisfactorily explain the reason for selling the motor car to its own director at a price less than the WDV as per the record of the assessee – thus, the claim of the assessee of short term capital loss on sale of motor car is restricted to ₹ 40,000/- as against the claim of ₹ 84,174/- allowed by the CIT(A) – Decided partly in favour of Revenue. Issues:1. Allowance of deduction for shop renovation and current repairs expenditure.2. Treatment of computer software maintenance expenses as revenue or capital expenditure.3. Allowance of short term capital loss on the sale of a motor car.Issue 1: Shop Renovation and Current Repairs ExpenditureThe Revenue appealed against the CIT(A)'s order allowing the deduction of the entire amount spent on shop renovation and repairs. The Revenue argued that the expenditure on renovation should not be considered revenue expenditure as new assets were created. The assessee contended that the expenses were for replacement and maintenance, not for acquiring new assets. The ITAT held that no new asset was created, as the premises were leased, and the expenses were revenue in nature. Therefore, the CIT(A)'s decision was upheld, dismissing the Revenue's appeal.Issue 2: Computer Software Maintenance ExpensesThe Revenue challenged the CIT(A)'s decision to delete the addition made by the AO for computer software maintenance expenses. The Revenue claimed that the software replacement was capital in nature. The assessee argued that it was a mere update for business purposes and did not create a new asset. The ITAT found that the software replacement did not result in a new capital asset and allowed the expenses as revenue under section 37(1). Consequently, the CIT(A)'s decision was confirmed, and the Revenue's appeal was dismissed.Issue 3: Short Term Capital Loss on Motor CarThe Revenue disputed the CIT(A)'s direction to allow the claim of short term capital loss on the sale of a motor car. The Revenue contended that the assessee failed to explain why the car was sold below its written down value (WDV) to its director. The assessee argued that selling old vehicles to employees was a common practice. The ITAT noted the lack of satisfactory explanation from the assessee and restricted the capital loss claim to Rs.40,000 instead of the allowed Rs.84,174. The Revenue's appeal was partly allowed on this ground.In conclusion, the ITAT partially allowed the Revenue's appeal concerning the short term capital loss on the motor car while upholding the decisions of the CIT(A) on the shop renovation expenditure and computer software maintenance expenses issues.