Appeal details
Counselvise Citation
4722514 RSA 2014
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 4 month(s) 4 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
15-05-2015
Appeal Filed By
Assessee
Bench Allotted
B
Next Hearing Date
28-04-2015
Assessment Year
2009-2010
Appeal Filed On
10-01-2014
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER I.T.A. NO. 47/HYD/2014 ASSESSMENT YEAR: 2009-10 M/S. K.L. HITECH SECURE PRINT LTD., JUBILEE HILLS, HYDERABAD [PAN: AAACK4241N] VS THE JT. COMMISSIONER OF INCOME TAX , RANGE-8, HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI A.V.RAGHURAM, AR FOR REVENUE : S HRI RAMA KRISHNA, BANDI, DR DATE OF HEARING : 2 9 - 0 4 - 201 5 DATE OF PRONOUNC EMENT : 15 - 0 5 - 2015 O R D E R PER SAKTIJIT DEY, J.M. : THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 13-11-2013 PASSED BY LD. COMMISSIONER OF INCOME TAX (APPEALS)-III, HYDERABAD FOR THE ASSESSMENT YEAR (AY) 2009-10. 2. ASSESSEE HAS RAISED IN TOTAL 8 GROUNDS. GROUND NO. 1 & 8 BEING GENERAL IN NATURE, DO NOT REQUIRE ANY SPECIFIC ADJU DICATION. IN GROUND NO.2, ASSESSEE HAS CHALLENGED DISALLOWANCE OF EXPEN DITURE AMOUNTING TO RS. 89,47,827/- TOWARDS PURCHASE OF SOFTWARE. 3. BRIEFLY THE FACTS RELATING TO THIS ISSUE ARE, AS SESSEE A COMPANY IS ENGAGED IN THE BUSINESS OF PRINTING OF ALL HIGH SEC URITY DOCUMENTS AND I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 2 -: BUSINESS FORMS. FOR THE ASSESSMENT YEAR UNDER CONS IDERATION, ASSESSEE FILED ITS RETURN OF INCOME ON 05-02-2010, DECLARING TOTAL INCOME OF RS. 1,15,60,760/-. DURING THE ASSESSMENT PROCEEDINGS, AO WHILE EXAMINING THE P&L A/C NOTICED THAT ASSESSEE HAS DEBITED AN AM OUNT OF RS. 89,47,827/- TOWARDS 'SOFTWARE EXPENSES'. HE ISSUED A NOTICE TO THE ASSESSEE CALLING UPON TO SHOW CAUSE WHY THE EXPENSE S INCURRED SHOULD NOT BE TREATED AS 'CAPITAL EXPENDITURE'. IN REPLY TO THE SAID SHOW CAUSE NOTICE, AS NOTED BY THE AO, THE ASSESSEE SUBMITTED THAT SOFTWARE PURCHASED BEING APPLICATION SOFTWARE AND NOT SYSTEM SOFTWARE IT HAS TO BE ALLOWED AS 'REVENUE EXPENDITURE'. THE ASSESSING OFFICER (AO) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE AND ON EXAM INING THE DETAILS FURNISHED, FOUND THAT ASSESSEE HAD PURCHASED TWO TY PES OF SOFTWARE VIZ., KMPC 4 DATA PREPARATION SOFTWARE & MPS DATA PREPARA TION SOFTWARE FROM KODAK VERSAMARK. THE AO ACCESSING INFORMATION FROM THE INTERNET FOUND THAT KMPC 4 DATA PREPARATION SOFTWARE IS A VE CTOR-BASED PROCESSING AND ONCHIP MEMORY SERVICE TO SUPER CHARG E THE PERFORMANCE OF ADHOC REPORTS AND QUERY RESPONSE TIMES BY UP TO 70 TIMES FASTER WITH NO NEW EQUIPMENT. THE SOFTWARE HELPS IN ANALYZING MORE DATA AND GETTING RAPID RESULTS TO CRITICAL DATA QUERIES. IT ALSO AUTOMATICALLY REDUCES THE COST OF PROCESSING AND EMPOWERS THE END USERS TO EASILY ANSWER ADHOC QUESTIONS FASTER. THE AO OBSERVED, THE FEATURES OF THE SOFTWARE ENABLE THE USERS TO ACCESS THE DATA ASSETS AND INCREASES THE SPEED OF DATA PROCESSING AND ANALYSIS. HE NOTED TH AT THE SOFTWARE IS USEFUL FOR PRINTING VDP JOBS LIKE RECHARGE CARDS, O MR FORMS, COURIER WAY BILLS, MARKS STATEMENTS AND CERTIFICATES. THE AO OPINED THAT AS THE BUSINESS ACTIVITY OF THE ASSESSEE IS PRINTING O F HIGHLY SECURED DOCUMENTS, PHONE BILLING STATEMENTS, RECHARGE VOUCH ER COUPONS, DIGITAL VARIABLE DATA WITH VARIABLE DATA, SCANNING, PROCESSING ETC, THE SOFTWARE ACQUIRED BY THE ASSESSEE MAKES A DEFINITE VALUE ADDITION TO THIS PARTICULAR ACTIVITY, HENCE IT HAS GOT ENDURING VALU E. AS FAR AS MPS DATA I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 3 -: PREPARATION SOFTWARE IS CONCERNED, AO OBSERVED, IT IS USEFUL FOR PRINTING THE COMPLEX VDP JOBS LIKE ACCOUNT STATEMENTS, TELEP HONE/MOBILE BILLS, CERTIFICATES WITH PHOTOGRAPHS ETC. AO OBSERVED THA T SINCE THE BENEFIT OF THE SOFTWARE IS DERIVED BY THE ASSESSEE NOT FOR A S INGLE YEAR BUT FOR ENSUING YEARS, THE EXPENDITURE INCURRED IS NOT TO B E TREATED AS 'REVENUE' BUT AS 'CAPITAL EXPENDITURE'. AO NOTED THAT THE SO FTWARE WILL NOT ONLY ENHANCE THE TECHNICAL CAPACITY OF THE COMPUTERS WHE RE DATA MERGING AND CUSTOMIZED LAY OUT WILL BE USED BUT A PERMANENT FEATURE IN PRINTING SOFTWARE WILL BE INSTALLED TO THE SYSTEM. THUS, BE ING OF THE OPINION THAT THE SOFTWARES PURCHASED BY THE ASSESSEE ARE OF ENDU RING NATURE, AO TREATED THE EXPENDITURE AS 'CAPITAL' AND DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE. BEING AGGRIEVED OF SUCH DISALLOWA NCE, ASSESSEE PREFERRED APPEAL BEFORE THE LD.CIT(A). LD.CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT WHETHER A PARTICULAR EXPENDITURE IS 'CAPITAL' OR 'REVENUE' HAS TO BE DEC IDED ON THE BASIS OF THE FACTS INVOLVED IN THAT CASE. THEREAFTER, LD.CIT(A) EXAMINING THE FUNCTIONALITY AND THE NATURE OF SOFTWARE PURCHASED BY THE ASSESSEE AND APPLYING THE TESTS LAID DOWN IN VARIOUS JUDICIAL PR ECEDENTS UPHELD THE DISALLOWANCE BY OBSERVING AS UNDER: '6.12 IT IS CLEAR FROM ABOVE THAT THE SOFTWARE PURC HASED IS NOT JUST AN ENHANCEMENT OVER THE EXISTING SYSTEMS MEANT ONL Y TO IMPROVE EFFICIENCY. RATHER, IT IS ENTIRELY NEW SET OF TOO LS AND DESCRIBED AS A COMPLETE LANGUAGE WHICH BRING ABOUT A TOTAL PARADI GM SHIFT IN THE EXISTING OPERATIONS. IT GIVES KNOWLEDGE AND TECHNO LOGY TO THE APPELLANT WHICH WAS HITHERTO UNAVAILABLE. 6.13 FROM THE POINT OF VIEW OF FUNCTIONAL TESTS, I T IS SEEN THAT THESE NEW SOFTWARE SYSTEMS CHANGE THE VERY CORE OPERATIO NS OF THE APPELLANT WITH A SIGNIFICANT CHANGE IN TECHNOLOGY. THEY ALSO ENABLE THE APPELLANT TO CONDUCT OPERATIONS WHICH WERE HIT HERTO NOT POSSIBLE. 6.14 ON THE OTHER HAND, THE SOFTWARE SYSTEMS ARE N OT JUST UPGRADE, RATHER THEY ARE COMPLETE AND NEW SOLUTIONS IN THEM SELVES. THEY ARE DESIGNED TO LAST MUCH MORE THAN TWO YEARS BEING TE CHNOLOGY ALTERING IN SCOPE. I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 4 -: 6.15 THUS, BOTH FROM THE POINT OF VIEW OF FUNCTION ALITY AS WELL AS FROM THE ECONOMIC TIME SPAN THE NEW SOFTWARE SYSTE MS PASS THE TESTS OF CAPITAL EXPENDITURE. I HAVE THEREFORE NO HESITATION IN HOLDING THAT THE EXPENDITURE IN QUESTION IS CAPITA L IN NATURE AND IT HAS BROUGHT ABOUT A DISTINCT CAPITAL ASSET INTO EX ISTENCE. THE ADDITION ON THIS ACCOUNT IS ORDERED TO BE SUSTAINE D AND THE ASSESSING OFFICER IS DIRECTED TO ALLOW DEPRECIATIO N AS PER LAW'. BEING AGGRIEVED, ASSESSEE IS BEFORE US. 4. THE LD. AR MORE OR LESS REITERATING WHAT WAS STA TED BEFORE THE DEPARTMENTAL AUTHORITIES SUBMITTED THAT THE SOFTWAR E PURCHASED BEING IN NATURE OF APPLICATION SOFTWARE IS ALLOWABLE AS 'REV ENUE EXPENDITURE'. THE LD. AR SUBMITTED EVEN THOUGH IT WAS EXPLAINED B EFORE THE AO THAT THE SOFTWARE PURCHASED MERELY ENHANCED THE PERFORMA NCE OF THE WORK WHICH THE AO ALSO HAS ACCEPTED BUT WE STILL TREATED IT AS CAPITAL IN NATURE AND DISALLOWED THE EXPENDITURE. THE LD. AR SUBMITTED, ANY SOFTWARE WHICH MERELY ENHANCES THE WORKING OR PERFO RMANCE CANNOT BE TREATED AS OF ENDURING BENEFIT AS THE DURATION OF T HE SOFTWARE IS OF VERY SHORT SPAN AND HAS TO BE ALLOWED AS 'REVENUE EXPEND ITURE'. THE LD. AR SUBMITTED THAT CIT(A) ALSO WITHOUT PROPERLY EXAMINING THE FUNCTIONALITY AND WORKING OF THE SOFTWARE HAS UPHEL D THE DISALLOWANCE. LD. DR ON THE OTHER HAND STRONGLY SUPPORTING THE RE ASONING OF THE AO AND LD.CIT(A) SUBMITTED BEFORE US THAT THE SOFTWARE PURCHASED BY ASSESSEE IS PART OF PROFIT MAKING APPARATUS AS WITH OUT THE SOFTWARE, ASSESSEE COULD NOT HAVE CARRIED OUT ITS ACTIVITY. THE LD. DR SUBMITTED THAT THE SOFTWARE IS NOT THE REPLACEMENT OF EARLIER SOFTWARE BUT IT COMPLETELY OVERHAULS THE SYSTEM. HENCE, IN FACT IT IS A NEW SYSTEM ACQUIRED BY THE ASSESSEE. THUS, THE SOFTWARE PURCH ASED BEING OF ENDURING NATURE, THE EXPENDITURE INCURRED ON ACQUIR ING SUCH SOFTWARE HAS TO BE TREATED AS 'CAPITAL EXPENDITURE'. I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 5 -: 5. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS TH E OTHER MATERIAL ON RECORD. AS RIGHTLY OBSERVED BY LD.CIT(A), WHETHER A PARTICULAR EXPENDITURE IS 'CAPITAL' OR 'REVENUE' WILL DEPEND U PON THE FACT OF EACH INDIVIDUAL CASE AND NO STRAIT JACKET FORMULA CAN BE ADOPTED FOR DECIDING THE ISSUE. THE SAME ALSO APPLIES TO THE EXPENDITURE INCURRED ON SOFTWARE. WHETHER EXPENDITURE INCURRED ON A PARTIC ULAR SOFTWARE IS REVENUE OR CAPITAL WILL NOT ONLY DEPEND UPON ITS OW NERSHIP AND ENDURING NATURE BUT ALSO THE FUNCTIONALITY. THE ITAT DELHI SPECIAL BENCH IN CASE OF AMWAY INDIA ENTERPRISES VS. DCIT (111 ITD 112) O BSERVED, FOR DETERMINING WHETHER EXPENDITURE IN ACQUIRING SOFTWA RE IS REVENUE OR CAPITAL, THE ADVANTAGE WHICH AN ASSESSEE DERIVES HA S TO BE SEEN IN A COMMERCIAL SENSE. IF THE ADVANTAGE IS IN THE CAPIT AL FIELD, THEN THE SAME WOULD BE CAPITAL EXPENDITURE. IF THE ADVANTAGE CON SISTS MERELY IN FACILITATING ASSESSEE'S TRADING OPERATIONS OR ENABL ING THE MANAGEMENT AND CONDUCT OF ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY AND MORE PROFITABLY, WHILE LEAVING THE FIXED CAPITAL UN TOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT. THE SPECI AL BENCH HOWEVER, OBSERVED, IF ASSETS/ADVANTAGE IS PART OF PROFIT EAR NING APPARATUS, IT IS CAPITAL. OBSERVING AS ABOVE, THE SPECIAL BENCH LAI D DOWN CERTAIN BROAD PARAMETERS FOR DETERMINING THE NATURE OF EXPENDITUR E WHICH ARE AS UNDER: I. IF THE SOFTWARE FORMS PART OF PROFIT MAKING APPARAT US OF ASSESSEE'S BUSINESS, IT IS TO BE TREATED AS CAPITAL . II. IF THE SOFTWARE IS MORE EXPENSIVE AND IF THERE ARE ASSOCIATED CAPITAL EXPENDITURE LIKE PURCHASE OF NEW COMPUTER F OR MANNING THE SOFTWARE, IT IS MORE LIKELY TO BE A CEN TRAL TOOL OF THE BUSINESS AND IT WILL BE MORE ENDURING IN NATURE ADDING TO THE PROFIT EARNING APPARATUS. I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 6 -: III. IF THE ACQUISITION OF SOFTWARE RADICALLY CHANGES TH E WAY OPERATIONS HITHERTO WAS CARRIED ON, THE EXPENDITURE WILL BE CAPITAL. IV. IF THE LIFE SPAN OF THE SOFTWARE IS MORE THAN TWO Y EARS, THE EXPENDITURE WILL BE CAPITAL. REVERTING BACK TO THE FACTS OF THE PRESENT CASE, AS COULD BE SEEN THE AO AT LEAST IN THE CASE OF ONE OF THE SOFTWARE, VIZ., MPC 4 DATA PREPARATION SOFTWARE HAS OBSERVED THAT IT ENHANCES THE TECHNICA L CAPACITY OF THE COMPUTERS. IF THAT IS THE CASE, THEN IT CANNOT BE SAID THAT IT BRINGS IN A RADICAL CHANGE TO THE OPERATIONS OF ASSESSEE OR PAR T OF THE PROFIT MAKING APPARATUS. FURTHER, THOUGH, AO HAS OBSERVED THAT S OFTWARE PACKAGES ARE GOING TO GIVE BENEFIT TO THE ASSESSEE IN THE EN SUING YEARS, HENCE ARE OF ENDURING NATURE, BUT HE HAS NOT EXAMINED THE EXA CT LIFE SPAN OF THE SOFTWARE PACKAGES. LD.CIT(A) HAS ALSO NOT EXAMINED THESE ASPECTS. IN OUR VIEW, WITHOUT EXAMINING THE NATURE OF SOFTWARE PURCHASED BY APPLYING THE TESTS LAID DOWN BY THE SPECIAL BENCH O F ITAT, DELHI IN CASE OF AMWAY INTERNATIONAL VS. DCIT (SUPRA), IT CANNOT BE CONDUSIVELY SAID THAT EXPENDITURE INCURRED ON SOFTWARE IS CAPITAL IN NATURE. AS THE DEPARTMENTAL AUTHORITIES HAVE NOT DONE THE AFORESAI D EXERCISE, WE ARE INCLINED TO REMIT THE MATTER BACK TO THE FILE OF TH E AO FOR DECIDING AFRESH KEEPING IN VIEW THE DECISION OF THE SPECIAL BENCH O F ITAT, DELHI REFERRED TO ABOVE. NEEDLESS TO SAY AO MUST AFFORD A REASONA BLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN THE MATTER. THIS GR OUND IS ALLOWED FOR STATISTICAL PURPOSES. 6. THE NEXT ISSUE AS RAISED IN GROUND NO.3 RELATES TO DISALLOWANCE OF AN AMOUNT OF RS. 23,10,434/- CLAIMED AS EXPENDITURE INCURRED ON REPAIRS AND MAINTENANCE. BRIEFLY, THE FACTS RELATI NG TO THE ISSUE ARE DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTICED T HAT ASSESSEE HAS CLAIMED AN AMOUNT OF RS. 1,05,07,020/- AS EXPENDITU RE TOWARDS REPAIRS I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 7 -: AND MAINTENANCE. ON VERIFYING THE DETAILS/INFORMAT IONS SUBMITTED BY THE ASSESSEE, THE AO OBSERVED THAT OUT OF THE TOTAL EXPENDITURE INCURRED, AN AMOUNT OF RS. 23,10,434/- IS CAPITAL IN NATURE. THE DETAILS OF SUCH EXPENDITURE IS AS UNDER: RS. FALSE CEILING 1,80,000 FLOORING (REPLACEMENT) 4,07,936 FLOORING (REPLACEMENT) 11,58,530 FLOORING (REPLACEMENT) 1,91,973 FLOORING (REPLACEMENT) 14,580 PARTITION CHARGES 1,88,560 SELF MADE VOUCHER 16,100 7. THE AO COMMENTING THAT THE EXPENDITURES INCURRED ARE OF ENDURING NATURE TREATED THE SAME AS 'CAPITAL EXPEND ITURE' AND DISALLOWED THE CLAIM OF THE ASSESSEE. BEING AGGRIE VED, ASSESSEE CHALLENGED THE SAME IN THE APPEAL PREFERRED BEFORE THE LD.CIT(A). LD.CIT(A) HOWEVER, SUSTAINED THE ADDITION. THE LD. AR DRAWING OUR ATTENTION TO THE DETAILS OF EXPENDITURE INCURRED SU BMITTED BEFORE US THAT REPLACEMENT OF FLOORING CANNOT BE CONSIDERED TO BE A 'CAPITAL EXPENDITURE' AS NO NEW ASSET OF ENDURING BENEFIT HA S COME INTO EXISTENCE. AS FAR AS FALSE CEILING AND PARTITION C HARGES IS CONCERNED, LD. AR SUBMITTED THAT THEY ARE ALSO OF THE SAME NATURE AND CANNOT BE CONSIDERED TO BE OF ANY ENDURING BENEFIT TO THE ASS ESSEE. HE THEREFORE SUBMITTED THAT ASSESSEE'S CLAIM SHOULD BE ALLOWED. THE LD. DR ON THE OTHER HAND SUBMITTED THAT AS FAR AS REPLACEMENT OF FLOORING IS CONCERNED, THE SAME HAS TO BE TREATED AS 'CAPITAL EXPENDITURE' AS REPLACEMENT OF A CAPITAL ITEM WILL ALWAYS BE A 'CAPITAL EXPENDITURE' . AS FAR AS FALSE CEILING AND PARTITION CHARGES ARE CONCERNED, LD. DR SUBMITT ED THAT AS THEY ARE COMPLETELY NEW ITEMS, THEY HAVE TO BE TREATED AS 'C APITAL EXPENDITURES'. I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 8 -: 8. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIALS ON RECORD. ON EXAMINING THE DETAILS OF EXPENDITURE, WE ARE OF THE VIEW THAT EXPENDITURE INCURRED TOWARDS REPLA CEMENT OF FLOORING CANNOT BE CONSIDERED TO BE A 'CAPITAL EXPENDITURE' AS NO NEW ASSET COMES INTO EXISTENCE AS A RESULT OF SUCH EXPENDITUR E, RATHER, THE EXPENDITURES INCURRED IS MORE IN THE NATURE OF MAIN TENANCE OF A CAPITAL ASSET. HOWEVER, AS FAR AS FALSE CEILING AND PARTIT ION CHARGES ARE CONCERNED, ADMITTED FACT IS THESE WERE NOT EXISTING EARLIER. THUS, THE EXPENDITURE INCURRED BY THE ASSESSEE HAS BROUGHT IN TO EXISTENCE CERTAIN NEW ASSETS. THEREFORE, THE EXPENDITURE INCURRED BE ING OF ENDURING NATURE, IT HAS TO BE TREATED AS 'CAPITAL EXPENDITUR E'. SIMILARLY, THE EXPENDITURE OF RS. 16,100/- HAS NOT BEEN EXPLAINED BY THE ASSESSEE WITH PROPER EVIDENCE. THEREFORE, ON OVER ALL CONSIDERAT ION OF FACTS AND MATERIALS ON RECORD, WE DIRECT THE AO TO ALLOW THE EXPENDITURE INCURRED TOWARDS REPLACEMENT OF FLOORING. THE GROUND RAISED IS CONSIDERED TO BE PARTLY ALLOWED. 9. THE NEXT ISSUE AS RAISED IN GROUND NO. 4 & 5 REL ATES TO DISALLOWANCE OF DEPRECIATION ON PLANT & MACHINERY D UE TO FOREIGN EXCHANGE FLUCTUATION. BRIEFLY, THE FACTS RELATING TO THIS ISSUE ARE ON VERIFYING THE MATERIAL ON RECORD, THE AO NOTICED TH AT DURING THE YEAR, ASSESSEE HAS IMPORTED PLANT AND MACHINERY WORTH OF RS. 7,35,66,480/- FROM M/S. MULLER MARTINI (SINGAPORE) P. LTD., HE O BSERVED THAT ASSESSEE HAS CAPITALIZED FOREIGN EXCHANGE FLUCTUATION OF RS. 49,07,886/- TO THE RESPECTIVE MACHINERY AS DUES PAYABLE AND CLAIMED DE PRECIATION ON THE SAID AMOUNT. WHEN THE AO CALLED UPON THE ASSESSEE TO SUBMIT THE PROOF OF PAYMENT MADE TO THE FOREIGN COMPANIES, ASSESSEE SUBMITTED A LEDGER EXTRACT OF THE MACHINERY WHEREIN THE AMOUNT OF RS. 49,07,886/- WAS CREDITED TO THE ASSET ACCOUNT. ON VERIFYING THE DE TAILS, AO OBSERVED THAT THE FOREIGN EXCHANGE FLUCTUATION IS ONLY A NOTIONAL LOSS WHICH THE I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 9 -: ASSESSEE HAS ADDED TO THE VALUE OF THE MACHINERY. HE OBSERVED THAT THE ASSESSEE DID NOT PRODUCE ANY SUPPORTING EVIDENCE TO ESTABLISH THE FOREIGN EXCHANGE LOSS DUE TO FLUCTUATION. THE AO T HEREFORE DISALLOWED THE PROPORTIONATE DEPRECIATION AMOUNTING TO RS. 7,3 6,183/- CLAIMED ON THE CAPITALIZED FOREIGN EXCHANGE FLUCTUATION LOSS O F RS. 49,07,886/-. SIMILARLY, AO OBSERVED THAT ASSESSEE HAS IMPORTED C OMPUTERS DURING THE RELEVANT PREVIOUS YEAR FROM ANOTHER FOREIGN COMPANY NAMELY M/S. ATLANTIC ZEISER P. LTD., FOR RS. 33,57,500/-. IN R ESPECT OF THIS ASSET ALSO ASSESSEE HAS CAPITALIZED AN AMOUNT OF RS. 87,985/- TOWARDS FOREIGN EXCHANGE FLUCTUATION LOSS AND CLAIMED DEPRECIATION ON THE SAID AMOUNT. HOWEVER, SINCE THE ASSESSEE COULD NOT PRODUCE ANY E VIDENCE TO SUBSTANTIATE ITS CLAIM, AO OBSERVED THAT LOSS ON AC COUNT OF FOREIGN EXCHANGE FLUCTUATION BEING NOTIONAL DEPRECIATION ON THAT ACCOUNT CANNOT BE ALLOWED. ACCORDINGLY, HE DISALLOWED DEPRECIATIO N ON FOREIGN EXCHANGE FLUCTUATION LOSS CAPITALIZED TO THE VALUE OF COMPUT ER AND ADDED BACK THE AMOUNT OF RS. 52,791/-. WHEN THE ASSESSEE CHALLENG ED THE DISALLOWANCES BEFORE THE FIRST APPELLATE AUTHORITY, LD.CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN THE LIGHT OF ACCOUNT STANDARD 11 AS WELL AS THE PROVISIONS OF SECTION 43 A HELD THAT, AS PER THE STATUTORY PROVISION, THE CHANGE IN THE VALUE OF THE ASSET CAN BE RECOGNIZED ONLY AT THE TIME OF PAYMENT AND NOT BEFO RE THAT. THUS, HE APPROVED THE VIEW OF THE AO THAT NO ADJUSTMENT TO T HE COST OF ASSET CAN BE MADE ON NOTIONAL LOSSES OR GAINS. IN THIS CONTE XT, HE RELIED UPON A DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD., [312 ITR 254]. 10. WE HAVE HEARD THE PARTIES AND PERUSED THE ORDER S OF THE REVENUE AUTHORITIES AS WELL AS THE OTHER MATERIALS ON RECOR D. IT IS MANIFEST FROM RECORD THAT DEDUCTION CLAIMED BY THE ASSESSEE IS ON THE BASIS OF NOTIONAL LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION. IN OUR V IEW, NO ADDITION OR I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 10 -: DEDUCTION CAN BE MADE TO THE COST OF THE ASSET ON A CCOUNT OF SUCH NOTIONAL LOSS/GAIN ON ACCOUNT OF FOREIGN EXCHANGE F LUCTUATIONS AS THE ASSESSEE HAS NOT MADE ANY PAYMENT DURING THE YEAR. ONLY WHEN THE ASSESSEE MAKES PAYMENT ANY LOSS OR GAIN ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS CAN BE ADJUSTED TOWARDS COST OF THE AS SET. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY REASON TO DISTURB THE FINDING OF THE LD.CIT(A). 11. IN GROUND NO.6, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF EXPENDITURE FOR AN AMOUNT OF RS. 93,928/-. BRIEFLY , THE FACTS ARE, THE AO IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, WHILE VERIFYING THE P&L A/C NOTICED THAT ASSESSEE HAS DEBITED AN AMOUNT OF RS. 93,928/- TOWARDS SUBSCRIPTIONS. ON VERIFYING THE DETAILS OF EXPENDI TURE, AO NOTICED THAT THE EXPENDITURE IS TOWARDS SUBSCRIPTION FEE PAID FO R THE MEMBERSHIP OF THE DIRECTOR AND HIS FAMILY MEMBERS TO HYDERABAD GO LF ASSOCIATION, ALL INDIA FEDERATION OF LOTTERY TRADE AND ALLIED INDUST RIES, THE INDIAN HOTELS CO. LTD., AND GERMAN CHAMBER OF COMMERCE. T HE ASSESSEE FURTHER EXPLAINED THAT THESE SUBSCRIPTIONS WERE MAD E TO PROMOTE THE ACTIVITIES OF BUSINESS. THE AO HOWEVER, WAS NOT CO NVINCED WITH THE EXPLANATION OF THE ASSESSEE. THE AO TREATING THE E XPENDITURE INCURRED AS THE 'PERSONAL EXPENDITURE' OF THE DIRECTORS, DIS ALLOWED THE SAME AND ADDED BACK TO THE INCOME OF THE ASSESSEE. LD.CIT(A ) ALSO CONFIRMED THE ADDITION. LD. AR SUBMITTED BEFORE US THAT OUT OF T HE AFORESAID AMOUNT CLAIMED AS EXPENDITURE AN AMOUNT OF RS. 50,000/- RE LATES TO PAYMENT OF INSURANCE FOR THE EARLIER YEARS AND TRANSFERRED IN THE IMPUGNED ASSESSMENT YEAR. AS FAR AS OTHER EXPENDITURES ARE CONCERNED, THE LD. AR REITERATED THAT SINCE THE SUBSCRIPTIONS WERE MAD E FOR THE PURPOSE OF BUSINESS, THEY ARE ALLOWABLE AS 'REVENUE EXPENDITUR E'. THE LD. DR ON THE OTHER HAND SUBMITTED BEFORE US THAT EXPENDITURE INCURRED BEING PERSONAL EXPENDITURES OF THE DIRECTORS CANNOT BE AL LOWED AS I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 11 -: EXPENDITURES OF THE COMPANY. AS FAR AS THE AMOUNT OF RS. 50,000/- CLAIMED TO BE TOWARDS INSURANCE PAYMENT OF EARLIER YEARS IS CONCERNED, THE LD. DR SUBMITTED THAT THE ASSESSEE NEVER BROUGH T THIS FACT TO THE NOTICE OF THE DEPARTMENTAL AUTHORITIES. 12. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD. ON VERIFYING THE DETAILS OF EXPENDITURE INCURRED, W E ARE OF THE VIEW THAT THE SUBSCRIPTION FEES PAID ON BEHALF OF THE DIRECTO RS CANNOT BE ALLOWED AS EXPENDITURE AT THE HANDS OF THE ASSESSEE-COMPANY . HOWEVER, AS FAR AS THE AMOUNT OF RS. 50,000/- CLAIMED TO BE TOWARDS INSURANCE PAYMENT RELATING TO EARLIER YEARS IS CONCERNED, WE ARE OF T HE VIEW THAT THE SAME REQUIRES EXAMINATION BY THE AO. THEREFORE, TO THE LIMITED EXTENT OF VERIFYING THE PAYMENT OF RS. 50,000/-, WE REMIT THE ISSUE BACK TO THE FILE OF AO TO VERIFY AND ALLOW THE EXPENDITURE IF ASSESS EE'S CLAIM IS FOUND TO BE CORRECT. THIS GROUND IS PARTLY ALLOWED FOR STAT ISTICAL PURPOSES. 13. IN GROUND NO.7, ASSESSEE HAS CHALLENGED THE DIS ALLOWANCE OF EXPENDITURE AMOUNTING TO RS. 2,82,600/- UNDER THE H EAD 'MISCELLANEOUS EXPENDITURE'. BRIEFLY, THE FACTS ARE DURING THE AS SESSMENT PROCEEDINGS, THE AO FOUND THAT ASSESSEE HAS CLAIMED AN AMOUNT OF RS. 20,14,022/- TOWARDS MISCELLANEOUS EXPENSES. WHEN AO CALLED UPO N THE ASSESSEE TO EXPLAIN THE NATURE OF EXPENDITURE WITH SUPPORTING E VIDENCES, THE ASSESSEE SUBMITTED THE DETAILS OF EXPENDITURE WITH SUPPORTING VOUCHERS. HOWEVER, ON VERIFICATION OF THE INFORMATION SUBMITT ED, THE AO NOTICED THAT EXPENDITURE BOOKED UNDER THE HEADS 'BUSINESS P ROMOTION' AMOUNTING TO RS. 5,20,815/- AND MISCELLANEOUS EXPEN SES OF RS. 6,09,491/- ARE THROUGH SELF-MADE VOUCHERS AND ARE N OT SUPPORTED BY ANY AUTHENTIC BILLS. WHEN THE AO PROPOSED TO DISAL LOW THESE EXPENDITURES, ASSESSEE SUBMITTED THAT WHEN EMPLOYEE S WERE DEPLOYED ON OUTSIDE DUTIES, THE COMPANY REIMBURSES THE EXPEN DITURE INCURRED BY I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 12 -: THEM. THE AO HOWEVER, NOT BEING FULLY CONVINCED WI TH THE SUBMISSION OF THE ASSESSEE, DISALLOWED 25% AMOUNTING TO RS. 2,82, 600/- OUT OF THE AFORESAID TWO ITEMS OF EXPENDITURE. BEING AGGRIEVE D, ASSESSEE CHALLENGED THE SAME IN APPEAL. LD.CIT(A) ALSO CONFIRMED THE D ISALLOWANCE. 14. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD. AS CAN BE SEEN, OUT OF THE TOTAL AMOUNT CLAIMED TOW ARDS 'MISCELLANEOUS EXPENSES', THE AO HAS RESTRICTED THE DISALLOWANCE T HAT TOO @ 25% TO TWO ITEMS OF EXPENDITURE VIZ. 'BUSINESS PROMOTION EXPEN SES' OF RS. 5,20,815/- AND MISCELLANEOUS EXPENSES RS. 6,09,491/ - FOR THE REASON THAT THEY ARE SUPPORTED BY SELF-MADE VOUCHERS ONLY. AS CAN BE SEEN FROM THE EXPLANATION OF THE ASSESSEE BEFORE THE DEP ARTMENTAL AUTHORITIES, ASSESSEE HAS CLAIMED THAT SUCH EXPENDITURES WERE IN CURRED ON EMPLOYEES WHEN THEY WERE SENT OUT STATION. HOWEVER , CONSIDERING THE FACT THAT THE EXPENDITURES INCURRED WERE NOT SUPPOR TED BY ANY AUTHENTIC BILLS/VOUCHERS, SOME AMOUNT OF INFLATION BY THE ASS ESSEE WHILE CLAIMING THIS EXPENDITURE CANNOT BE RULED OUT. IN THESE CIR CUMSTANCES, DISALLOWANCE OF 25% OF THE EXPENDITURE CLAIMED IN O UR VIEW IS REASONABLE AND NEED NOT BE INTERFERED WITH. ACCORDINGLY THIS GROUND IS DISMISSED. 15. IN THE RESULT, ASSESSEE'S APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 15 TH MAY, 2015 SD/- SD/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 15 TH MAY, 2015 TNMM I.T.A. NO. 47/HYD/2014 M/S. K.L. HITECH SECURE PRINT LTD., :- 13 -: COPY TO : 1. M/S. K.L. HITECH SECURE PRINT LTD., PLOT NO.230, ROAD NO.36, JUBILEE HILLS, HYDERABAD. C/O. K.VASANTKUMAR & A.V.RAGHURAM, ADVOCATES, 610, 6 TH FLOOR, BABHUKHAN ESTATE, BASHEERBAGH, HYDERABAD. 2. THE JT. COMMISSIONER OF INCOME TAX, RANGE-8, I.T .TOWERS, HYDERABAD. 3. CIT(APPEALS)-III, HYDERABAD. 4. CIT-II, HYDERABAD. 5. D.R. ITAT, HYDERABAD
