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

ITA 4380/DEL/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5599 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 02-03-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 16-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: S K AGGARWAL
• Keywords: Capital asset; Depreciation; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H: NEW DELHI BEFORE SHRI VIMAL GANDHI, PRESIDENT AND SHRI DEEPAK R. SHAH, ACCOUNTANT MEMBER I.T.A.NO.4380/DEL/2009 ASSESSMENT YEAR : 2006-07 M/S. VOITH PAPER FABRICS INDIA LTD., ADDL. COMMISS IONER INCOME-TAX, [FORMERLY PORRITS & SPENCER VS.RANGE-II, FAR IDABAD (HARYANA). (ASIA) LTD.], 113-114A, SECTOR-24, FARIDABAD. PAN: AABCP0441Q (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.K. AGGARWAL, ADVOCATE. RESPONDENT BY : SHRI N.K. CHAND, SR. DR. O R D E R PER DEEPAK R. SHAH, ACCOUNTANT MEMBER. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS), KARNAL, DATED 15.09.2009 FOR THE ASSESSMENT YEAR 2006-07 IN AN APPEAL AGAINST ASSESS MENT FRAMED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (THE ACT ). 2. THE ASSESSEE IS A PUBLIC LIMITED COMPANY. IT IS CARRYING ON BUSINESS OF MANUFACTURING AND SALE OF FELTS USED IN PAPER IN DUSTRY. THE ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INCOME OF OVER RS. 17.48 CRORES. 2 3. THE FIRST GROUND OF APPEAL IS AGAINST DISALLOWAN CE OF SUM OF RS.24,33,772/- BEING CLAIMED AS REPAIRS AND MAINTEN ANCE EXPENSES OF BUILDING. 4. THE ASSESSEE CLAIMED SUM OF RS.40,38,892/- UNDER THE HEAD BUILDING REPAIRS. THE DETAILS WERE FILED AND EXAMINED. TH E ASSESSING OFFICER CARVED OUT CERTAIN EXPENSES AND REQUIRED THE ASSESS EE TO EXPLAIN AS TO WHY THE SAME BE NOT TREATED AS CAPITAL EXPENDITURE. TH E ASSESSEE SUBMITTED THAT SUM OF RS.14,70,455/- WAS SPENT ON VARIOUS DATES FO R LAYING KOTA STONES ON THE FLOOR. THE ASSESSEE EXPLAINED THAT EARLIER THE FLOOR USED TO GATHER DUST IN THE HOLES ON IT AND THE COST OF WASHING THE FELT WA S TOO HIGH. THEREFORE, KOTA STONES WERE FIXED IN DIFFERENT DEPARTMENTS. T HE ASSESSEE EXPLAINED THAT A SUM OF RS.2,59,450/- WAS SPENT TO MAKE BRICK ROAD WITHIN THE DEPARTMENTS. IT WAS EXPLAINED THAT THERE USED TO BE UNEVEN PLACE ON WHICH IT WAS DIFFICULT TO LOAD FELTS AND TO MOVE THEM FROM ONE DEPARTMENT TO OTHER. THEREFORE, BRICKS WERE LAID TO AVOID LOSS IN SHIFTING FELTS. THE ASSESSEE ALSO EXPLAINED THAT A SUM OF RS.2,10,128/- WAS SPENT ON MAKING BRI CK ROAD (KHARANJA LAYING) TO CONNECT ALL THE DEPARTMENTS SO AS TO MAK E EASY MOVEMENT OF FELTS. IT WAS EXPLAINED THAT A SUM OF RS.2,67,555/- WAS SP ENT ON WATER PROOFING OF ROOF TO AVOID RAIN WATER SEEPING IN. IT WAS ALSO E XPLAINED THAT SUM OF RS.2,02,954/- WAS SPENT IN FRAMES DISMANTLING AND M AKING PARTITIONS FOR THE 3 SMOOTH OPERATION. IT WAS ALSO EXPLAINED THAT BY IN CURRING SUCH EXPENSES NO NEW PREMISES IS BUILT BUT ONLY MODIFICATION IS DONE IN THE EXISTING PREMISES FOR BETTER FUNCTIONING AND EASY OPERATIONS. THE AS SESSING OFFICER HELD THAT THE EXPENSES RESULTED INTO ACQUISITION/BUILDING OF ASSETS OF ENDURING NATURE. THEREFORE, THE SAME ARE TO BE TREATED AS CAPITAL EX PENDITURE AND ONLY DEPRECIATION AT APPROPRIATE RATE IS ALLOWABLE. THE SAME WAS CONFIRMED BY THE LEARNED CIT(A). 5. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI S.K. AGGARWAL INVITED OUR ATTENTION TO THE EXPENSES INCURRED AND ALSO EXPLAIN ED THE NATURE OF EXPENSES TO BUTTRESS THE FACT THAT THE EXPENSES DID NOT BRIN G INTO EXISTENCE ANY NEW CAPITAL ASSET AND ALL ADDITIONS OF ENDURING NATURE DO NOT BRING INTO EXISTENCE ANY CAPITAL ASSET. HE SUBMITTED THAT THE PREMISES OF THE ASSESSEE ARE HUGE AND DUE TO MOVEMENTS OF TRUCKS FLOOR GETS DAMAGED A ND HENCE NEEDS TO BE REPAIRED YEAR AFTER YEAR. EVEN IN EARLIER YEAR THE EXPENSES WERE INCURRED FOR RENOVATING MAIN SHED BUILDING AND FOR BRICKWORK, WA TER PROOFING ETC. AND THE SAME WERE HELD TO BE REVENUE EXPENDITURE BY THE TRIBUNAL. THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2001-0 2 WAS FILED BEFORE US. IT WAS ALSO SUBMITTED THAT THE HONBLE PUNJAB & HARYAN A HIGH COURT IN ASSESSEES OWN CASE REPORTED IN 257 ITR 49, HELD TH AT THE WORD RENOVATE IN ITS ORDINARY SENSE MEANS TO RESTORE TO LIFE TO A FO RMER STATE AND SUCH A 4 PROCESS DOES NOT BRING NEW ASSET INTO EXISTENCE. H E ACCORDINGLY PLEADED THAT THE EXPENSES OF REVENUE IN NATURE ARE ALLOWABLE AS SUCH. 6. THE LEARNED DR SHRI N.K. CHAND ON THE OTHER HAND , SUBMITTED THAT THE EXPENSES ARE CLAIMED UNDER SECTION 31. UNDER SECTI ON 31 WHAT IS ALLOWABLE IS EXPENSES ON CURRENT REPAIRS ONLY. THIS VIEW H AS BEEN HELD BY THE HONBLE SUPREME COURT IN THE CASE OF BALLIMAL NAVAL KISHORE VS. CIT, 224 ITR 414. HE ALSO INVITED OUR ATTENTION TO THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILL S P. LTD., 293 ITR 201 WHICH HAS ALSO BEEN FOLLOWED BY HONBLE SUPREME COU RT IN THE CASE OF CIT VS. SRI MANGAYARKARASI MILLS P. LTD., 315 ITR 114 F OR THE PROPOSITION THAT WHERE AFRESH ADVANTAGE OF ENDURING NATURE IS OBTAIN ED, THE EXPENSES ARE TO BE TREATED AS CAPITAL. HE ALSO SUBMITTED THAT EVEN UNDER SEC. 31 AFTER THE INSERTION OF EXPLANATION BY FINANCE ACT, 2003 WITH EFFECT FROM 1.4.2004 ANY AMOUNT PAID ON ACCOUNT OF CURRENT REPAIR SHALL NOT INCLUDE ANY EXPENDITURE IN THE NATURE OF CAPITAL EXPENDITURE. THEREFORE, T HE EXPENSES HAVING THE NATURE OF CAPITAL EXPENSES ARE NOT ALLOWABLE AS SUC H. HE FURTHER SUBMITTED THAT PRIOR TO LAYING DOWN KOTA STONES THERE WAS NO STONE AND HENCE IT IS THE EXPENSES FOR THE FIRST TIME ON LAYING STONE AND HEN CE CAPITAL EXPENDITURE. SIMILARLY PRIOR TO LAYING BRICKS, THE SURFACE WAS R OUGH AND JUST TO SMOOTHEN THE SURFACE NEW BRICKS ARE LAID, WHICH AMOUNTS TO C APITAL EXPENDITURE. 5 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. LOOKI NG TO THE NATURE OF BUSINESS AND VOLUME OF OPERATION, THE ASSESSEE IS M AINTAINING HUGE PREMISES FOR ITS MANUFACTURING PROCESS. THE ROAD WHICH WAS UNEVEN WITHIN THE FACTORY PREMISES, IS REQUIRED TO BE EVENED OUT FOR THE SMOOTH OPERATION AND FUNCTIONING. HOWEVER, BY LAYING DOWN SUCH STONES, THE ASSESSEE MERELY FACILITATES THE CARRYING ON THE EXISTING BUSINESS M ORE EFFICIENTLY BUT DID NOT ACQUIRE ANY NEW BUILDING OR ROAD. THE ROAD WAS EXI STING IN THE PREMISES BUT DUE TO THE FACT THAT THE SAME WAS NOT CONDUCIVE TO USE IT IN A WAY, IT IS DESIRED THAT THE ROAD WITHIN THE FACTORY AND DEPART MENT WAS REQUIRED TO BE BETTER PLACED BY LAYING STONES AND BRICKS ON THE SA ME. AS RIGHTLY CONTENDED BY THE LEARNED AR, ALL THE EXPENSES WHICH GIVE AN E NDURING BENEFIT, DO NOT AMOUNT TO CAPITAL EXPENDITURE. THIS WAS SO HELD BY THE HONBLE SUPREME COURT IN THE CASES OF EMPIRE JUTE CO. LTD. VS. CIT, 124 ITR 1 AND ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT, 177 ITR 377. BY I NCURRING SUCH EXPENSES THE BUSINESS WAS CARRIED MORE EFFICIENTLY, BUT DID NOT BRING INTO EXISTENCE ANY CAPITAL ASSET. THEREFORE, THE EXPENS ES ON LAYING KOTA STONE AND BRICKS ON THE FLOOR USED IN THE FACTORY PREMISE S ARE ALLOWABLE AS REVENUE EXPENDITURE. AS REGARDS EXPENSES ON WATER PROOFING THOUGH THE ASSESSEE HAS ACCEPTED THE SAME TO THE EXTENT OF RS.2 LAKHS BUT N OT ENTIRELY. THE EXPENSES OF RS.2,67,555/- BEING INCURRED ON WATER PROOFING O F ROOF TO AVOID THE RAIN 6 WATER WHICH SEEPED IN IS PURELY REVENUE EXPENSES AN D DO NOT BRING INTO EXISTENCE ANY CAPITAL ASSET. THEREFORE, ALL THESE EXPENSES ARE ALLOWABLE AS REVENUE EXPENDITURE. WE, THEREFORE, DELETE THE DIS ALLOWANCE OF RS.24,33,772/-. THE DECISION OF HONBLE SUPREME CO URT IN THE CASE OF SARAVANA SPINNING MILLS P. LTD. (SUPRA) RELIED UPON BY THE LEARNED DR WILL NOT APPLY TO THE PRESENT SET OF FACTS. IN THE SAID CASE THE ENTIRE MACHINERY WAS SOUGHT TO BE REPLACED WHEREAS IN THE PRESENT CA SE, THE MACHINERY IS NOT REPLACED BY ACQUISITION OF NEW MACHINERY BUT ONLY S URFACE OF THE ROAD WITHIN THE FACTORY PREMISES IS RE-LAID BY LAYING KOTA STON E AND BRICKS ON THE GROUND. IT IS NOT NECESSARY THAT TO CLAIM THE EXPE NSES, THERE SHOULD ONLY BE REPLACEMENT OF KOTA STONE WITH KOTA STONE OR BRICK WITH BRICK. EVEN IF THE FLOOR WAS NOT COVERED WITH ANY OBJECT BUT IS RECOVE RED WITH LAYING STONE OR BRICK ON THE SAME, STILL THE ROAD REMAINS THE ROAD AND DO NOT BRING INTO EXISTENCE ANY CAPITAL ASSET. WE, THEREFORE, HOLD T HE EXPENSES TO BE REVENUE IN NATURE. 8. NEXT GROUND OF APPEAL IS AGAINST DISALLOWANCE O F RS.6,25,000/- BEING CLAIMED AS MODIFYING EXISTING SOFTWARE WHICH WAS HELD AS CAPITAL IN NATURE. 9. THE ASSESSEE SPENT A SUM OF RS.3 LAKHS ON CUSTO MIZING AND MODIFYING EXISTING MODULE OF ITS SOFTWARE SO AS TO MAKE IN TUNE WITH CHANGE 7 IN THE CURRENT TAXATION OR PROCEDURAL MATTERS ACCOR DING TO NEW REQUIREMENT. THE ASSESSEE ALSO SPENT A SUM OF RS.3,25,000/- TO D EBUG THE PRESENT SOFTWARE TO RUN IT SMOOTHLY. IT WAS EXPLAINED THAT DUE TO C HANGE IN THE TECHNOLOGY AND IN THE WORKING NEEDS BASED ON THE CURRENT TAXAT ION AND PROCEDURAL REQUIREMENT, THE EXISTING SOFTWARE WERE MODIFIED AN D THEREFORE, THE EXPENSES WERE REVENUE IN NATURE. THE ASSESSING OFFICER HELD THAT THE ASSESSEE ACQUIRED COMPUTER SOFTWARE AND HENCE IT IS ENTITLED TO ONLY DEPRECIATION. THE SAME WAS CONFIRMED BY THE LEARNED CIT(A) AND HE NCE THIS APPEAL. 10. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SUM OF RS.3 LAKHS WAS INCURRED FOR BRINGING THE SOFTWARE I NTO PRESENT WORKING CONDITION DUE TO CHANGE IN SITUATION AND NOT BY BRI NING INTO EXISTENCE ANY NEW SOFTWARE. SIMILARLY ANOTHER SUM OF RS.3,25,000 /- WAS SPENT FOR REMOVING AN EXISTING SOFTWARE BUGS BUT NOT FOR ACQU ISITION OF ANY NEW SOFTWARE. THEREFORE, THE EXPENSES ARE ALLOWABLE AS SUCH. THE LEARNED DR ON THE OTHER HAND, SUBMITTED THAT EVEN IF THE ASSES SEE ACQUIRES A LICENCE TO USE THE SOFTWARE, THE SAME IS HELD TO BE CAPITAL EX PENSES BY SPECIAL BENCH OF ITAT IN THE CASE OF AMWAY INDIA ENTERPRISES VS. DCI T, 111 ITD 112 (DEL). THE ASSESSEE GETS DEDUCTION OF OVER 84% IN JUST 2 Y EARS OF OPERATION, WHICH MEANS THAT ALMOST ENTIRE AMOUNT IS BEING ALLOWED TO BE WRITTEN OFF AND HENCE THE ACTION NEEDS TO BE UPHELD. 8 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE ISSUE BEFORE US IS WHETHER THE EXPENSES ARE CAPITAL OR REVENUE EXPE NDITURE AND NOT WHETHER IN HOW SHORT PERIOD THE EXPENSES ARE ALLOWED TO BE AMORTIZED. FROM THE DETAILS FILED WE FIND THAT A SUM OF RS.3 LAKH WAS I NCURRED IN RELATION TO CHANGE THE SOFTWARE TO SUIT THE NEW REQUIREMENT DUE TO CHANGE IN TAXATION OR OTHER PROCEDURAL CHANGES. THE SOFTWARE IS CUSTOMIZ ED ACCORDING TO NEW REQUIREMENT FOR WHICH THE AMOUNT IS PAID. BY SPEND ING SUCH SUM ONLY THE EXISTING SOFTWARE IS MODIFIED AND HENCE ARE ALLOWAB LE AS REVENUE EXPENDITURE. ANOTHER SUM OF RS.3,25,000/- WAS INCU RRED TO DEBUG THE PRESENT SOFTWARE TO RUN IT SMOOTHLY. BY INCURRING SUCH EXP ENSES THERE WERE MODIFICATION IN THE EXISTING SOFTWARE BUT NOT ACQUI SITION OF NEW SOFTWARE. THEREFORE, THE EXPENSES ARE REVENUE IN NATURE AND H ENCE ALLOWABLE AS SUCH. WE, THEREFORE, DELETE THE DISALLOWANCE OF RS.3,25,0 00/-. 12. THE NEXT GROUND OF APPEAL IS AGAINST DISALLOWA NCE OF BAD DEBTS AMOUNTING TO RS.3,79,802/- IN RESPECT OF FOLLOWING TWO PARTIES:- 1. M/S. WAPI PAPER MILLS P. LTD. RS.1,86,067/- 2. M/S. NATHANI PAPER MILLS P. LTD. RS.1,93,735/- 13. THE ASSESSEE CLAIMED SUM OF RS.13,68,382/- UND ER THE HEAD IRRECOVERABLE BALANCES WRITTEN OFF. THE ASSESSEE WAS ASKED TO EXPLAIN. THE ASSESSEE WAS ALSO ASKED TO FURNISH COPY OF ACCO UNT OF DEBTORS WRITTEN OFF 9 AS BAD DEBT. THE ASSESSEE FILED THE SAME. THE ASS ESSING OFFICER OBSERVED THAT NO EXPLANATION WAS FURNISHED TO JUSTIFY CLAIM OF BAD DEBTS. THE ASSESSING OFFICER HELD THAT SINCE NO EXPLANATION HA S BEEN OFFERED AS TO HOW THE AMOUNT HAS BECOME BAD DEBT, THE AMOUNT OF RS.3, 779,802/- WAS DISALLOWED. THE LEARNED CIT(A) HELD THAT THE CONDITION OF SECTI ON 36(2) IS NOT FULFILLED AND HENCE CLAIM IS NOT ALLOWABLE. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS PER THE COPY OF ACCOUNT FILED, THE ASSESSEE HAS WRITTEN OFF THE AMO UNT AS BAD DEBT BY DEBITING PROFIT & LOSS ACCOUNT AND CREDITING THE RESPECTIVE PARTYS ACCOUNT. THE ASSESSEE HAS DEBITED THE SUM AS THE CHEQUE ISSUED B Y THE PARTY WAS DISHONORED. THE AMOUNTS RECEIVABLE BY THE ASSESSEE WERE TOWARDS SALES EFFECTED TO THESE PERSONS. SINCE THE AMOUNT RELATE S TO SALES A DEBT CAN BE SAID TO HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTING T HE INCOME OF THE ASSESSEE IN THE YEAR OF SALE AND THEREFORE, THE CONDITION OF SECTION 36(2) IS FULFILLED. RECENTLY THE HONBLE SUPREME COURT IN THE CASE OF T RS LTD. HELD THAT AFTER THE AMENDMENT BROUGHT IN WITH EFFECT FROM 1.4.1999 WRITING OFF AN AMOUNT AS IRRECOVERABLE IN THE ACCOUNTS IS A SUFFICIENT CO MPLIANCE FOR CLAIMING DEDUCTION UNDER SEC. 36(1)(VII) OF THE ACT. SIMILA R VIEW HAS ALSO BEEN HELD BY THE HONBLE DELHI HIGH COURT IN THE FOLLOWING CA SES:- 10 (1) CIT VS. AUTOMETERS LTD., 292 ITR 345 (DEL); & (2) CIT VS. MORGAN SECURITIES & CREDITS P. LTD., 292 IT R 339 (DEL). SINCE THE AMOUNT HAS BEEN WRITTEN OFF IN THE ACCOUN TS AS BAD DEBT AND SINCE DEBT PERTAINS TO THE SALES MADE EARLIER, CONDITIONS OF SECTION 36(1)(VII) AS WELL AS SECTION 36(2) ARE FULFILLED AND HENCE THE C LAIM OF BAD DEBT OF RS.3,79,802/- IS ALLOWABLE AS SUCH. WE, THEREFORE, DELETE THE DISALLOWANCE IN RESPECT OF BAD DEBTS CLAIMED. 15. IN THE RESULT, THE APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 5 TH MARCH, 2010. SD/- SD/- (VIMAL GANDHI) (DEEPAK R. SHAH) PRESIDENT ACCOUNTANT MEMBER DATED: 5 TH MARCH, 2010. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.