2011 (3) TMI 1833 - AT - Income Tax

Tax Tribunal Partly Allows Appeals on Depreciation, Bad Debts, Software Expenses, Office Repairs, and PF Contributions.

The ITAT ruled on cross appeals by the Assessee and the Revenue concerning an assessment order under the Income Tax Act for AY 2001-02. The Assessee's ... Depreciation on stock exchange membership as a commercial right akin to a licence - treatment of software expenditure: revenue expenditure v. capital expenditure (remand for fresh adjudication) - refurbishment and repairs in leased premises treated as revenue expenditure (exceptions for enduring assets) - allowance of bad debts under section 36(1)(vii) read with section 36(2) - deductibility of employees' provident fund contribution paid before the due date for filing under section 43BDepreciation on stock exchange membership as a commercial right akin to a licence - Assessee entitled to depreciation on acquisition/WDV of stock-exchange membership card. - HELD THAT: - The Tribunal, following the decision of the Apex Court in Techno Shares and Stocks Ltd v CIT , held that stock-exchange membership is a commercial right used in the business, akin to a licence, and therefore eligible for depreciation. Respectfully applying that ratio, depreciation on the cost/WDV of the membership card was allowed in favour of the assessee. [Paras 2]Depreciation on the stock-exchange membership card is allowed.Treatment of software expenditure: revenue expenditure v. capital expenditure (remand for fresh adjudication) - Portion of software expenditure requires fresh adjudication by the AO in light of Special Bench authority; matter remitted for reconsideration. - HELD THAT: - The Tribunal noted that the CIT(A) had allowed part of the software expenditure as revenue and treated the balance as capital. The Tribunal declined to decide the disputed portion itself and remitted the issue to the file of the Assessing Officer for fresh consideration in the light of the Special Bench decision in DCIT v Amway Enterprises , after giving the assessee a reasonable opportunity to be heard. The same remand was directed in the Revenue's cross-appeal. [Paras 3, 10]Issue remitted to the Assessing Officer for fresh adjudication.Refurbishment and repairs in leased premises treated as revenue expenditure (exceptions for enduring assets) - Expenditure on breaking of flooring, false ceiling, painting, partitions etc., in leased premises is revenue in nature; expenditure on acquisition of enduring assets remains capital. - HELD THAT: - The Tribunal endorsed the CIT(A)'s approach distinguishing between expenditure that creates enduring assets and expenditure incurred for redesigning/refurbishing premises to facilitate day-to-day business. Noting that the works were carried out on leased premises for limited periods and that items like flooring, false ceilings, painting and partitions do not create assets of enduring benefit, the Tribunal held such expenditure to be revenue in nature. Conversely, expenditure for acquiring furniture or other tangible assets would be capital. The Tribunal therefore upheld the CIT(A)'s finding that Rs. 15,78,972 represented capital expenditure while the balance was allowable as revenue (a conclusion also sustained in the Revenue appeal). The Tribunal relied on earlier judicial authorities on the characterisation of refurbishment expenses as revenue. [Paras 5, 11]Refurbishment/repair work (flooring, false ceiling, painting, partitions) is revenue expenditure; expenditure on acquiring enduring assets is capital. The CIT(A)'s classification is upheld.Allowance of bad debts under section 36(1)(vii) read with section 36(2) - Amount written off as bad debts comprising unrealised dues from clients on share transactions is allowable under section 36(1)(vii). - HELD THAT: - The Assessing Officer had disallowed part of the write-off and the CIT(A) increased the disallowance on the ground that the amounts had not been offered as income in earlier years so requirements of section 36(1)(vii) read with section 36(2) were not satisfied. The Tribunal, following the Special Bench decision of the Mumbai ITAT in Shreyas S. Morakhia , held that the entire amount written off by the assessee qualifies as a bad debt allowable under section 36(1)(vii) and accordingly allowed the deduction. [Paras 6, 7]Bad debts of the amount written off are allowed as a deduction under section 36(1)(vii).Deductibility of employees' provident fund contribution paid before the due date for filing under section 43B - Employees' provident fund contribution paid after due date for deposit but before the due date for filing the return is deductible. - HELD THAT: - The Tribunal followed the Supreme Court's decision in CIT v Alom Extrusions Ltd and the Delhi High Court in CIT v AIMIL Ltd , holding that payment of employees' contribution to the provident fund made before the due date for filing the return cannot be disallowed under section 43B. Consistent with those authorities, the Tribunal upheld the CIT(A)'s allowance of the deduction. [Paras 12]Deduction for employees' PF contribution paid before the due date for filing the return is allowed.Final Conclusion: For Assessment Year 2001-02 the Tribunal allowed depreciation on the stock-exchange membership, allowed the bad-debt claim, allowed deduction for PF contribution paid before filing due date, upheld the CIT(A)'s classification of refurbishment expenses as revenue (with capital treatment only for enduring assets), and remitted the disputed portion of software expenditure to the Assessing Officer for fresh adjudication in the light of the Special Bench authority; the appeals are disposed of accordingly (partly allowed for statistical purposes). Issues involved: The judgment involves cross appeals by the Assessee and the Revenue against the order of assessment u/s 143(3) of the Income Tax Act, 1961 for the Assessment Year 2001-02.Assessee's Appeal:1. The Assessee appealed against the refusal of depreciation on the cost of stock exchange card. The ITAT held in favor of the Assessee based on the decision of the Apex Court in the case of Techno Shares and Stocks Ltd v CIT, allowing depreciation u/s 32(1)(ii) on the membership in the stock exchange. 2. The appeal addressed the treatment of software expenses. The ITAT set aside this issue for fresh assessment by the AO in light of the decision in the case of DCIT v Amway Enterprises, providing the Assessee with a reasonable opportunity. 3. The Assessee contested the treatment of office repairs and maintenance expenses as capital expenditure. The ITAT upheld the decision of the CIT(A) regarding the capital expenditure incurred on office premises redesigning and allowed the balance as revenue expenditure.4. The issue of bad debts disallowance was raised. The ITAT allowed the entire amount written off by the Assessee as a bad debt u/s 36(1)(vii) based on the decision of the Special Bench in the case of Shreyas S. Morakhia.Departmental Appeal:1. The Revenue appealed against the allowance of software expenses as revenue expenditure. The ITAT remitted the issue to the AO for fresh assessment in line with the decision in the case of DCIT v Amway Enterprises. 2. The appeal addressed the repairs and maintenance expenses. The ITAT upheld the decision that such expenses are revenue in nature, dismissing the Revenue's appeal on this issue. 3. The deduction of employees' contribution to P.F. paid before the due date was contested. The ITAT upheld the deduction based on precedents, dismissing the Revenue's appeal on this issue.In conclusion, both the Assessee's and the Revenue's appeals were partly allowed for statistical purposes. The judgment was pronounced on March 31, 2011.