2021 (8) TMI 369 - AT - Income Tax

Disallowance of depreciation - assessee company was yet to set up and commence its business activities - HELD THAT - The assessee was duly granted registration by the RBI and as per the terms of the Registration the assessee was to commence the business within six months Except for the surmises and conjectures, AO s hypothesis has no legs to stand. There is no law that there is a presumption that if the assessee earns a smaller income, commencement of business should be doubted. The claim that the issue of CIR to 32 persons is an arrangement is not backed by any inquiry whatsoever from those 32 persons by the AO. AO has clearly misled himself. No case has made out that there was any examination of assessee s infrastructure and it was found lacking In our considered opinion the Assessing Officer has no technical qualification whatsoever in commenting upon the technological preparation of the assessee in delivering output. In our considered opinion learned CIT(A) has passed a correct order and has analysed all the facts pointed out by the AO. Nature of expenses - technology recharge cost - whether the assessee s claim of technology recharge cost is revenue expenditure or capital expenditure? - HELD THAT - It may be gainful to refer to the exposition in the case of Empire Jute Co. Ltd. 1980 (5) TMI 1 - SUPREME COURT wherein it was observed that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. On the touchstone of the above said Hon'ble Supreme Court decision and on the facts and circumstances of the case in our considered opinion learned CIT(A) has taken correct view of the matter and it does not need any interference in our part. Appeals of the Revenue stands dismissed

Summary

Issues Involved:
1. Depreciation Claim on Assets.
2. Technology Recharge Cost as Revenue Expenditure.

Issue-wise Detailed Analysis:

1. Depreciation Claim on Assets:

The primary issue concerns whether the assessee commenced its business within six months of receiving the certificate of registration from the RBI as required under CICRA, 2005. The Assessing Officer (AO) observed that the assessee claimed to have started its business operations on 12/8/2010, which was beyond the six-month period stipulated by the RBI. The AO argued that the business activities could not have commenced as the necessary database and software were not fully operational by the claimed date. The AO further contended that the issuance of Credit Information Reports (CIR) to 32 persons, resulting in a small fee of ?4004/-, was merely an arrangement to meet RBI norms.

Upon appeal, the learned CIT(A) disagreed with the AO, stating that the appellant had entered into Membership Agreements with 25 banks/FIs by the claimed commencement date, which provided a substantial database. The CIT(A) noted that even a limited database could generate CIR reports, and the small number of CIRs issued did not negate the commencement of business. The CIT(A) referenced the decision in Pinebridge Investments Capital India (P.) Ltd. v. Income Tax Officer, emphasizing that business setup is determined by readiness to commence operations, not the volume of transactions.

The Tribunal upheld the CIT(A)'s decision, stating that the AO's conclusions were based on conjectures without concrete evidence. The Tribunal noted that the AO lacked the technical expertise to assess the technological readiness of the assessee's infrastructure. Consequently, the Tribunal ruled in favor of the assessee, allowing the depreciation claim.

2. Technology Recharge Cost as Revenue Expenditure:

The second issue revolves around whether the technology recharge cost of ?4,07,89,789/- should be treated as revenue expenditure or capital expenditure. The AO classified the entire technology recharge cost as capital expenditure, arguing that these costs were related to the creation of intangibles crucial for the company's business operations and provided enduring benefits.

The assessee contended that the technology costs included software maintenance fees, hardware installation and maintenance costs, CBV2 support and maintenance costs, technical service recharges, and GVAP annual license and support fees. These expenses were integral to the profit-earning process and not for acquiring a permanent asset.

The learned CIT(A) agreed with the assessee, stating that these expenses were necessary for the smooth functioning and maintenance of the business infrastructure, akin to repair and maintenance costs in a traditional business setup. The CIT(A) referenced the Supreme Court decision in Empire Jute Company Ltd., which held that expenditures facilitating trading operations or enabling more effective business management, even if providing enduring benefits, could be considered revenue expenditures.

The Tribunal upheld the CIT(A)'s decision, finding that the AO's classification of the expenses as capital expenditure was based on surmises without substantial evidence. The Tribunal emphasized that the nature of the advantage in a commercial sense should determine the classification of the expenditure. Since the expenses facilitated the assessee's business operations without altering the fixed capital, they were rightly treated as revenue expenditures.

Conclusion:

The Tribunal dismissed the Revenue's appeals on both issues, affirming the CIT(A)'s decisions to allow the depreciation claim and classify the technology recharge cost as revenue expenditure. The judgments emphasized the importance of concrete evidence and a clear understanding of the business operations and technological requirements in determining the commencement of business and the nature of expenditures.