2012 (9) TMI 190 - AT - Income Tax

Repairs & maintenance expenses including purchase of computer accessories - revenue or capital expenditure - Held that - Amount paid for purchase of switch 16 port used in plugging, batteries, UPS, flexible pipes, 44 ports to enable use of computer are in fact computer accessories & are of capital nature being items of enduring nature and therefore are held to be of capital nature eligible for higher depreciation @ 60%. However, amount paid for granite polishing, table polishing and change of wall panel are building repaid expenses, and thus in the nature of current repairs eligible as revenue expenditure. Also, amount paid as license fees for system administration training expenses is clearly revenue expenditure - Decided partly in favor of assessee Interest on service tax - dis-allowance on ground of it being penal in nature - Held that - Interest on service tax is compensatory in nature and not in the nature of penalty and dis-allowance cannot be made u/s 37(1) - Decided in favor of assessee. Dis-allowance u/s 14A - assessee contended that no expense was incurred for earning of exempt income and all investments were made from own resources of the assessee and investments related to earlier years and no interest cost was incurred for earning of exempt income - Held that - Sub section (2) of section 14A deals with the cases where assessee specifies a positive amount of expenditure and sub section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. AO in the present case has not made such findings and he only proceeded on the basis of assumptions that some expenditure must have been incurred for earning of exempt income. Matter restored back

Summary

Issues Involved:
1. Disallowance of repairs and maintenance expenses as capital expenditure.
2. Disallowance of interest on service tax as penal in nature.
3. Disallowance under Section 14A read with Rule 8D for expenses related to earning tax-free income.

Issue-wise Detailed Analysis:

1. Disallowance of Repairs and Maintenance Expenses as Capital Expenditure:
The assessee claimed Rs.15,28,527/- as repairs and maintenance expenses. The Assessing Officer considered Rs.6,66,774/- of these expenses to be capital in nature, allowing depreciation on these items. The CIT(A) upheld this decision except for Rs.2,52,862/- for software updates, which was allowed as revenue expenditure. The Tribunal analyzed each item of expense, concluding that:
- Rs.60,000/- for system administration training and Rs.5,396/- for computer cable maintenance were revenue expenditures.
- Rs.64,501/- for granite polishing, table polishing, and wall panel changes were also revenue expenditures as they were current repairs.
- Other items like switch boards, batteries, and flexible pipes were capital in nature, eligible for higher depreciation at 60%.

2. Disallowance of Interest on Service Tax as Penal in Nature:
The assessee incurred Rs.5,48,061/- as interest on delayed service tax payment. The Assessing Officer disallowed this amount under Section 37, considering it penal for violating the law. The CIT(A) upheld this view. However, the Tribunal referred to judicial precedents, such as Mahalaxmi Sugar Mills Co. v. CIT and DCIT v. Messee Duysseldorf India (P) Ltd., which established that interest on service tax is compensatory, not penal. Therefore, the Tribunal allowed this expenditure as a deduction.

3. Disallowance Under Section 14A Read with Rule 8D:
The assessee earned tax-free income from long-term capital gains and dividends. The Assessing Officer disallowed Rs.26,83,457/- under Section 14A, assuming some expenditure was incurred to earn this income. The CIT(A) upheld this disallowance. The Tribunal noted that the Assessing Officer did not specifically identify any expenses incurred for earning the exempt income and relied on assumptions. Referring to Maxop Investment Ltd. v. CIT, the Tribunal emphasized that the Assessing Officer must first be satisfied with the correctness of the assessee's claim regarding expenses. The Tribunal set aside this issue for fresh consideration by the Assessing Officer, who must make clear findings about the expenses incurred for earning exempt income before making any disallowance under Section 14A.

Conclusion:
The Tribunal partly allowed the assessee's appeal, deciding in favor of the assessee on the issues of repairs and maintenance expenses and interest on service tax. The issue of disallowance under Section 14A was remitted back to the Assessing Officer for fresh consideration. The order was pronounced in the open court on 20.7.2012.