2006 (1) TMI 64 - HC - Income Tax

Capital or revenue expenditure - Assessing Officer while completing the assessment made the following disallowances/additions (i) disallowance of telex rent telephone rent postal franking machine rent rates and taxes (ii) disallowance of the prepaid expenditure (iii) computer software and hardware upgradation expenses was treated as capital expenditure and (iv) addition under section 41(1) - What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression asset or advantage of an enduring nature was evolved to emphasise the element of a sufficient degree of durability appropriate to the context - held that the phrase enduring benefit is not thinking of advantages that are permanent. There is a difference between the lasting and the everlasting expenditure incurred by the assessee has therefore to be treated as revenue expenditure - revenue appeal dismissed

Summary

Issues:
1. Allowability of deductions for telex rent, telephone rent, postal franking machine rent, rates, and taxes.
2. Allowability of deductions for prepaid expenditure.
3. Treatment of addition under section 41(1) as cessation of liability.
4. Allowability of deduction for payment made for the purchase of new computers.

Analysis:

Issue 1 & 2:
The court referred to a Division Bench decision in CIT v. Southern Roadways Ltd., where it was held that expenses actually incurred and revenue in nature for the business should be allowed as deductions, regardless of the accounting method followed by the assessee. The court emphasized that any expenditure not being capital or personal expenses and laid out exclusively for the business should be allowed. Therefore, the court ruled in favor of the assessee regarding the deductions for telex rent, telephone rent, postal franking machine rent, rates, taxes, and prepaid expenditure.

Issue 3:
Regarding the addition under section 41(1), the court cited the decision in CIT v. Sugauli Sugar Works P. Ltd., stating that the section contemplates the obtaining of an amount or benefit by the assessee as a prerequisite for its application. Mere unilateral entries in the accounts without a benefit to the assessee do not trigger section 41(1). Consequently, the court ruled in favor of the assessee on this issue.

Issue 4:
In the matter of the deduction for payment made for the purchase of new computers, the court noted that the expenditure was for upgrading existing computers, not for installing new ones. The court highlighted that the improvements were made to enhance efficiency and achieve better results without creating new machinery or enduring benefits. Referring to the Supreme Court's decision in Alembic Chemical Works Co. Ltd. v. CIT, the court concluded that the expenditure was revenue in nature as it did not result in an enduring benefit. Therefore, the court ruled in favor of the assessee on this issue as well.

In conclusion, the court dismissed both appeals, upholding the decisions in favor of the assessee on all the issues raised.