ACIT, Faridabad V. M/s. Voith Paper Fabrics India Ltd., Faridabad

ITA 1412/DEL/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3516 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 15-07-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 01-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS BANITA DEVI NAOREM
• Assessee Lawyers: SANTOSH KUMAR AGGARWAL
• Keywords: Depreciation; Revenue expenditure
• Section: 64

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `H : NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT AND SHRI C.L. SETHI, JUDICIAL MEMBER. I.T.A.NO.1412/DEL/2010 ASSESSMENT YEAR : 2005-06 ASSTT. COMMISSIONER OF INCOME-TAX, M/S. VOITH P APER FABRICS INDIA LTD., CIRCLE-II, FARIDABAD. VS. FORMERLY PORRITTS & SPENCER (ASIA) LTD., PLOT NO.113-114 SECTOR-24, FARIDABAD. (APPELLANT) (RESPONDENT) APPELLANT BY : MRS. BANITA DEVI NAOREM, SR. DR. RESPONDENT BY : SHRI SANTOSH KUMAR AGGARWAL, ADVOCATE. O R D E R PER C.L. SETHI, JUDICIAL MEMBER. THE PRESENT APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER DATED 8 TH FEBRUARY, 2010 OF THE LEARNED COMMISSIONER OF INCOM E-TAX (APPEALS) PERTAINING TO THE ASSESSMENT YEAR 2005-06. 2. GROUND NO.1 IS DIRECTED AGAINST THE CIT(A)S ORD ER IN DELETING THE ADDITION OF RS.2,72,954/- MADE BY THE ASSESSING OFF ICER BY TREATING THE AIR- 2 CONDITIONER, REFRIGERATOR AND OFFICE EQUIPMENTS TO BE IN THE NATURE OF FURNITURE AND FIXTURE AS AGAINST PLANT AND MACHINER Y CLAIMED BY THE ASSESSEE, FOR THE PURPOSE OF APPLYING RATE OF DEPRECIATION AL LOWABLE UNDER THE ACT. IN THIS CASE, THE ASSESSEE CLAIMED DEPRECIATION ON AIR -CONDITIONER, REFRIGERATOR AND OFFICE EQUIPMENTS AT 25% BY TREATING THE SAME A S A PART OF PLANT AND MACHINERY. HOWEVER, THE AO WAS OF THE VIEW THAT TH ESE ITEMS WOULD COME UNDER THE HEAD `FURNITURE AND FITTINGS. 3. ON AN APPEAL FILED BY THE ASSESSEE, THE LEARNED CIT(A) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING THAT ALL THESE ITEMS ARE COVERED BY THE CLASSIFICATION OF PLANT. HIS FINDING AND CON CLUSION IS AS UNDER:- 7. I HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF THE LD. AR AND PERUSED THE ORDER OF ASSESSMENT. I HAVE ALSO S TUDIED THE INCOME TAX RULES, 1962 AND THE SCHEDULE PERTAINING TO THE DEPRECIATION TABLES. I FIND THAT THE ASSETS IN QUES TION I.E. AIR CONDITIONER, REFRIGERATION AND OFFICE EQUIPMENT ARE THE EQUIPMENTS THAT CLEARLY DEMONSTRATE THE NATURE AS PLANT AND MACHINERY AND NOT FURNITURE AND FITTINGS. THE AO S RELIANCE UPON THE PRIVY COUNCIL CASE IS TOTALLY MISCONCEIVED AND HENCE IRRELEVANT. I COMPLETELY CONCUR WITH THE DEFINITIO N OF PLANT AS DISCUSSED BY THE LD. AR ABOVE IN THE CASES OF CIT V S. ELECON ENGINEERING CO. LTD. AND HINTON VS. MADEN & IRELAND LTD. (SUPRA). THEREFORE, THE AO IS NOT JUSTIFIED IN APP LYING THE RATE OF 15% ON SUCH ASSETS AS THE RATE APPLICABLE FOR DE PRECIATION ON SUCH EQUIPMENTS WHICH IS TO BE TREATED IN TERMS OF PLANT ATTRACTS THE RATE OF DEPRECIATION OF 25% IN THE BLOCK OF PL ANT AND MACHINERY. THEREFORE, THE EXCESSIVE DEPRECIATION WORKED OUT BY THE AO IS INCORRECT ON FACTS AND LAW. HENCE, TH E DISALLOWANCE OF RS.2,72,954/- IS DELETED. 3 4. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY GON E THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IN THE PRESENT CASE, THE AO HAS FAILED TO CONSIDER THE WIDER MEANING OF PLANT USED IN THE SCHEDULE O F INCOME-TAX RULES FOR THE PURPOSE OF GRANTING DEPRECIATION. IN THE CASE OF ELECON ENGINEERING CO. LTD. (1974) 96 ITR 672, UPON WHICH RELIANCE HAS BEE N PLACED BY THE LEARNED CIT(A), THE WORD PLANT HAS BEEN DEFINED TO BE, IN ITS ORDINARY MEANING, A WORD OF WIDE IMPORT AND IN THE CONTEXT OF SEC. 32, IT MUST BE BROADLY CONSTRUED. IT INCLUDES ANY ARTICLE OR OBJECT FIXED OR MOVABLE, LIVE OR DEAD USED BY A BUSINESSMAN FOR CARRYING ON HIS BUSINESS. IT IS NOT NECESSARILY CONFINED TO AN APPARATUS, WHICH IS USED FOR MECHANI CAL OPERATIONS OR PROCESSES OR IS EMPLOYED IN MECHANICAL OR INDUSTRIA L BUSINESS. THE RELEVANT TEST TO DECIDE WHETHER THE PARTICULAR ASSET IS PLAN T OR NOT, WOULD BE THAT WHETHER DOES IT FULFILL THE FUNCTION OF A PLANT IN ASSESSEES TRADING ACTIVITY OR IS THE TOOL OF ITS TRADE, AND IF IT IS SO, THEN IT IS PLANT, NO MATTER THAT IT IS NOT VERY LONG-LASTING OR DOES NOT CONTAIN WORKING PARTS SUCH AS A MACHINE DOES AND PLAYS A MERELY PASSIVE ROLE IN THE ACCOMPLISHME NT OF THE TRADING PURPOSE. IN THIS VIEW OF THE MATTER, THE LEARNED C IT(A) HAS RIGHTLY DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING THAT THE ASSESSEE IS ENTITLED TO DEPRECIATION @ 25% WHICH IS APPLICABLE TO THE BLOCK OF PLANT AND MACHINERY. THUS, THIS GROUND RAISED BY THE REVENUE IS REJECTED. 4 5. THE NEXT GROUND IS DIRECTED AGAINST THE CIT(A)S ORDER IN DELETING THE ADDITION OF RS.4,90,000/- MADE BY THE AO ON ACCOUNT OF SOFTWARE EXPENSES. THIS ISSUE HAS BEEN DISCUSSED AND DECIDED BY THE CI T(A) IN PARA 8 TO 10 OF HIS ORDER. THE AOS OBSERVATION AND ASSESSEES SUB MISSIONS ARE NARRATED IN PARA 8 & 9 OF HIS ORDER AND AFTER CONSIDERING THE A SSESSEES SUBMISSIONS AND THE AOS ORDER, THE LEARNED CIT(A) HAS TAKEN A VIEW THAT THE SOFTWARE EXPENSES WERE RECURRING EXPENDITURE HAVING NO ENDUR ING BENEFIT AND THEREFORE, THE EXPENSES ARE TO BE ALLOWED IN FULL A S REVENUE EXPENDITURE. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE O RDERS OF THE AUTHORITIES BELOW. IT IS NOT IN DISPUTE THAT SUM OF RS.12,39,000/- WAS INCURRED BY THE ASSESSEE TOWARDS COMPUTER SOFTWARE LICENCE IN RESPECT OF THE SOFTWARE SERVER WHICH WAS PURCHASED DURING THE YEAR . THE AO TREATED THEM TO BE OF CAPITAL IN NATURE AND ALLOWED DEPRECIATION @ 60% WHICH COMES TO RS.7,43,400/-. THE REMAINING AMOUNT OF RS.4,95,600 /- WAS DISALLOWED BY THE AO. 7. ON AN APPEAL, IT WAS FOUND BY THE CIT(A) THAT AL L THE SOFTWARE PROGRAMMES WERE NECESSARY FOR OPERATING THE SYSTEM AND NO NEW ASSET OF ENDURING BENEFIT CAME INTO EXISTENCE. IT WAS ALSO NOTED THAT THE LICENCE TO USE COMPUTER SOFTWARE WAS NOT TRANSFERRED AS SUCH T O THE ASSESSEE. THE SOFTWARE SERVERS, WHICH WERE PURCHASED BY THE ASSES SEE, WERE TO BE UPDATED 5 FROM TIME TO TIME. NO NEW COMPUTER HARDWARE WAS PU RCHASED SO AS TO TREAT THE SAME AS CAPITAL IN NATURE. CERTAIN DECISIONS W ERE CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE THE LEARNED CIT(A), WHICH WERE REITERATED BEFORE US. THESE DECISIONS WERE REFERRED TO BY THE CIT(A) WHERE IT WAS HELD THAT THE AMOUNTS SPENT ON COMPUTER SOFTWARE NEEDED TO BE REPLACED FROM TIME TO TIME, WERE TO BE AS REVENUE IN NATURE. IN THIS VIEW OF THE MATTER, WE THEREFORE, UPHOLD THE ORDER OF CIT(A) IN DELETING T HE ADDITION OF RS.4,95,600/-. HOWEVER, DEPRECIATION GRANTED BY TH E AO SHALL BE WITHDRAWN AND WHOLE OF THE EXPENDITURE OF RS.12,39,000/- SHAL L BE ALLOWED AS REVENUE EXPENDITURE. THE CLOSING WDV OF RS.4,95,600/- WHIC H HAS BEEN WORKED OUT BY THE AO SHALL ALSO NOT BE ELIGIBLE FOR DEPRECIATI ON IN SUBSEQUENT YEAR INASMUCH AS WHOLE OF THE EXPENDITURE HAS BEEN ALLOW ED AS REVENUE EXPENDITURE IN THIS YEAR OF PURCHASE ITSELF. THE A O SHALL MODIFY THE ASSESSMENT ORDER ACCORDINGLY. 8. THE THIRD GROUND RAISED BY THE REVENUE IS AGAINS T THE CIT(A)S ORDER IN DELETING THE ADDITION OF RS.16,78,579/- MADE BY THE AO BY TREATING THE REPAIR AND MAINTENANCE OF BUILDING EXPENSES TO BE O F CAPITAL IN NATURE. IN THIS CASE, A SUM OF RS.18,65,087/- WAS INCURRED BY THE ASSESSEE TOWARDS RECONSTRUCTION OF RCC ROOF OF ITS EXISTING BUILDING . THE ASSESSEE CLAIMED THE DEDUCTION TO BE OF REVENUE IN NATURE. HOWEVER, THE ITO TREATED THE 6 EXPENDITURE TO BE OF CAPITAL IN NATURE AND ALLOWED ONLY DEPRECIATION 10% THEREUPON AND DISALLOWED THE REMAINING AMOUNT OF RS .16,78,579/-. 9. ON APPEAL, THE LEARNED CIT(A) DELETED THE ADDITI ON BY HOLDING THE EXPENDITURE INCURRED BY THE ASSESSEE TO BE OF REVEN UE IN NATURE. IT WAS FOUND BY THE CIT(A) THAT THE EXPENDITURE WAS INCURRED IN CONNECTION WITH DISMANTLING OF THE ROOF AND CONSTRUCTION OF FRESH R CC ROOF. THE CIT(A), THEREFORE, HELD THAT NO NEW ASSET DID COME INTO EXI STENCE BUT MERELY AN EXISTING ROOF WAS REPLACED BY DISMANTLING THE SAME WHICH WAS NECESSARY FOR CARRYING ON THE BUSINESS. 10. AFTER HEARING BOTH THE PARTIES AND HAVING REGAR D TO THE NATURE OF EXPENDITURE INCURRED BY THE ASSESSEE, WE FIND THAT THE ASSESSEE HAS SPENT THE AMOUNT TOWARDS REPAIRING AND MAINTENANCE OF THE BUI LDING WHICH WAS ALREADY IN EXISTENCE. NO NEW STRUCTURE WAS PUT UP. WHAT WAS DONE WAS TO REPLACE THE DILAPIDATED ROOF BY FRESH RCC ROOF INAS MUCH AS THE THEN EXISTING ROOF WAS NOT CONDUCIVE. IN THIS RESPECT OF THE MATT ER, WE FIND THAT THE LEARNED CIT(A) HAS RIGHTLY DELETED THE ADDITION. HOWEVER, DEPRECIATION ALLOWED BY THE AO SHALL BE WITHDRAWN IN THE YEAR UNDER CONSIDE RATION AS WELL AS IN THE SUBSEQUENT YEAR ON THIS ACCOUNT AS WHOLE OF THE AMO UNT INCURRED BY THE ASSESSEE STANDS ALLOWED AS REVENUE EXPENDITURE. 7 11. LAST GROUND IN THIS APPEAL IS AGAINST THE CIT(A )S ORDER IN DELETING THE ADDITION OF RS.1,45,864/- MADE BY THE AO ON ACCOUNT OF UP-GRADATION OF SERVER. IN THE PRESENT CASE, THE ASSESSEE INCURRED EXPENDITURE OF RS.3,64,659/- ON ACCOUNT OF UP-GRADATION OF IBW FRO M 64 KBPS TO 256 KBPS AND CLAIMED THE SAME AS REVENUE EXPENDITURE. THE ASSESSEE HAD INCREASED THE UP-GRADATION TO ENHANCE THE SPEED OF THE MACHINE BY INSTALLING NEW LEASE LINE. WHILE THE AO HAS TREATED THE SAME TO BE OF CAPITAL IN NATURE AND ALLOWED DEPRECIATION @ 60% WHICH COMES TO RS.2, 18,795/- AND THE REMAINING AMOUNT OF RS.1,45,864/- WAS DISALLOWED. 12. ON APPEAL, THE CIT(A) DELETED THE ADDITION BY T REATING THE EXPENDITURE OF REVENUE IN NATURE. THE CIT(A)S ORDER READS AS UNDER:- 15. I HAVE CAREFULLY CONSIDERED THE CONTENTIONS O F THE LD. AR AND PERUSED THE ORDER OF ASSESSMENT. I HAVE ALSO G ONE INTO THE NATURE OF THE UPGRADATION OF THE SERVER EXPENSES AN D SINCE SUCH EXPENDITURE DID NOT BRING ANY ENDURING BENEFIT CONS IDERING THE OWNERSHIP AND THE FUNCTION OF SUCH EXPENDITURE, THI S EXPENDITURE CANNOT BE TREATED AS CAPITAL AND HENCE IN VIEW OF THE DELHI HIGH COURTS DECISION IN THE CASE OF SUMI TOMO CORPORATION INDIA PVT. LTD. VS. CIT (2005) 150 SOT 91 (DEL) WHERE IT HAS BEEN HELD THAT SOFTWARE EXPENSES BY TH EIR OWN NATURE ARE REVENUE EXPENDITURE, THE DISALLOWANCE OF RS.1,45,864/- BEING WITHOUT ANY MERITS IS DELETED. 13. AFTER CONSIDERING THE TOTALITY, FACTS AND CIRCU MSTANCES OF THE CASE, AND NATURE OF THE EXPENDITURE INCURRED BY THE ASSESSEE, WHERE THE ASSESSEE HAS UPGRADED THE SERVER FOR BETTER FUNCTIONING OF ITS B USINESS ACTIVITIES, WE ARE IN 8 FULL AGREEMENT WITH THE LEARNED CIT(A) IN DELETING THE ADDITION. THEREFORE, THIS GROUND RAISED BY REVENUE IS ALSO REJECTED. 14. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THIS DECISION IS PRONOUNCED IN THE OPEN COURT ON 23 RD JULY, 2010. SD/- SD/- (G.E. VEERABHADRAPPA) (C.L. SETHI) VICE PRESIDENT JUDICIA L MEMBER DATED: 23RD JULY, 2010. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.