2013 (10) TMI 1459 - AT - Income Tax

Expenditure claimed towards purchase of application software - capital or revenue expenditure - Disallowance of provision for 'Sheraton Preferred Guest Scheme' - HELD THAT - Since as per old appendix-1 as well as new appendix-1 under the income-tax rules 1962 computer software is a depreciable asset, in our view, the CIT (A) as well as the Assessing Officer are correct in disallowing assessee's claim of expenditure on purchase of such assets. In aforesaid view of the matter, we do not find any reason to interfere with the order passed by the CIT (A) in this regard. Accordingly, we uphold the same by dismissing the grounds raised by the assessee. Construction of compound wall - On perusal of the draft notification dated 16-9-2005 issued by the revenue department, Government of A.P, copy of which is at page-92 of the paper book, it is seen that the said notification was made for acquiring land for the purpose of widening of the road in which a part of assessee's land has also been notified. On the basis of the aforesaid draft notification, the assessee wrote a letter dated 8-8-2006 to the Commissioner, MCH, consenting to handover the land under draft notification to the MCH. The letter dated 29-9-2005 of MCH to the land acquisition Officer also clearly mentions about the consent given by the assessee for handing over of the land for the purpose of road widening at free of cost to the MCH. Thus, as can be seen the assessee had to part with its portion of land for road widening purposes of the MCH and accordingly the existing compound wall has to be demolished and a new boundary wall has to be constructed by incurring expenditure of ₹ 2,06,443/-. From these facts, it is clear that the purpose of construction of boundary wall is not to bring a new asset but only for the purpose of preserving and maintaining an already existing asset. Therefore, in our view the expenditure claimed towards construction of the compound wall is allowable as revenue expenditure. The Assessing Officer is directed to delete the addition of ₹ 2,06,443.00. The ground raised is allowed. Disallowance of provision for 'Sheraton Preferred Guest Scheme' - On a consideration of totality of facts and circumstances, we are inclined to remit the matter back to the file of the Assessing Officer for the purpose of verifying whether actually the assessee has paid the provision made and whatever provision was not paid was offered as income in the subsequent assessment years. If on verification of facts and materials on record the assessee's claim is found to be correct, there will be no case for disallowance of the provision made. The order passed by the CIT (A) to this extent is set aside and the issue is remitted to the file of the Assessing Officer. The Assessing Officer, of course shall afford a reasonable opportunity of being heard to the assessee in the matter. Hence the appeal is treated as partly allowed. In the result, appeal filed by the assessee is treated as partly allowed and appeal of the department stands dismissed.

Summary

Issues Involved:
1. Treatment of expenditure on computer software as capital or revenue expenditure.
2. Treatment of expenditure on construction of compound wall as capital or revenue expenditure.
3. Disallowance of provision for 'Sheraton Preferred Guest Scheme'.

Issue 1: Treatment of expenditure on computer software as capital or revenue expenditure

The assessee claimed expenditure of Rs. 1,94,220/- on computer software as revenue expenditure. The Assessing Officer (AO) treated it as capital expenditure, allowing depreciation at 60% as per the amended IT Rules from the assessment year 2003-04. The CIT (A) upheld the AO's decision. The Tribunal noted that the amendment to the IT Rules specifically treats computer software as a depreciable asset, thus supporting the AO and CIT (A)'s decision to treat the expenditure as capital expenditure. The Tribunal dismissed the assessee's grounds, stating that the decisions relied upon by the assessee were not applicable as they pertained to periods before the amendment.

Issue 2: Treatment of expenditure on construction of compound wall as capital or revenue expenditure

The assessee incurred Rs. 2,06,443/- on constructing a compound wall after the existing wall was demolished for road widening by the municipality. The AO treated this as capital expenditure. The CIT (A) upheld this, noting that the municipality had dropped the land acquisition. The Tribunal, however, found that the expenditure was for preserving an existing asset and not for creating a new one. It allowed the expenditure as revenue expenditure and directed the AO to delete the addition.

Issue 3: Disallowance of provision for 'Sheraton Preferred Guest Scheme'

The assessee made a provision of Rs. 38,76,997/- for the Sheraton Preferred Guest Scheme, which the AO disallowed, considering it an unascertained liability. The CIT (A) upheld the disallowance, stating that the liability was not capable of being estimated with reasonable certainty. The Tribunal remitted the matter back to the AO for verification of whether the provision made was actually paid and any unutilized provision was offered as income in subsequent years. If verified, the provision should be allowed as a deduction.

Department's Appeal:

The department appealed against the CIT (A)'s decision to allow expenditure on repairs of building and machinery as revenue expenditure. The Tribunal upheld the CIT (A)'s decision, noting that the expenditures were for maintenance of existing assets and did not create new assets or provide enduring benefits. The department's appeal was dismissed.

Conclusion:

The assessee's appeal was partly allowed, and the department's appeal was dismissed.