2012 (11) TMI 989 - AT - Income Tax

Repairs and Maintenance of Residential flats and office buildings - capital expenditure - held that - most of the expenditure is incurred on the existing buildings or structures in the nature of repairs for maintenance of the asset as such, except the expenditure incurred on Mohandev Building, item No.8, 9 and 10 listed in the CIT (A) s order. As seen from the details the amount of Rs. 11.00 lakhs and Rs. 4,85,970/- were incurred in connection with the sofa, recreation central table etc., which seems to be for creation of new assets and cannot be considered as repairs of the existing assets. Likewise the amount of Rs. 3.00 lakhs was spent on electrical fittings and Rs. 1.00 lakhs was spent for design consultancy and supervision charges. Therefore, in our view this expenditure is in the nature of capital expenditure and therefore, we uphold the disallowance to that extent. - AO directed to allow depreciation on capital expenditure - Decided partly in favor of assessee. Disallowance of amount spent on computer software - held that - this matter should be referred to AO for fresh adjudication in the light of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises v DCIT, 2008 (2) TMI 454 - ITAT DELHI , as was done in earler years - issue is restored to the file of AO for fresh adjudication in accordance with the law and the principles governing this issue and after giving due opportunity of being heard to assessee. Unclaimed liabilities - accrual of liability or cessation of liability during the year - diference of opening and closing balance of unclaimed liability account - held that - As and when the parties seek the amount which cannot be recognized as income, assessee is refunding the amount and once client does not seek any adjustment the same is accepted as income of the year after the end of three years limitation period as per assessee s own accounting method. - No reason for supporting the action of AO in bringing to tax the entire credit in the account as income of the year without examining the principles governing the method of accounting followed by assessee and accrual of income. Addition u/s 92CA(3) - selection of comparable - Payment was made for purchase of software for use in the business of advertising and media services. - Assessee claimed deduction u/s 37(1) for purchase of software and reported it as related international transactions. - held that - determination of ALP at nil cannot be sustained. - assessee could not furnish necessary documents evidencing service - in the interest of justice we restore the issue to the file of TPO to examine the said payment for customized software afresh and determine the appropriate method for arriving at the ALP after giving due opportunity to assessee.

Summary

Issues Involved:
1. Treatment of expenditure on repairs as capital or revenue expenditure.
2. Disallowance of expenses on computer software.
3. Disallowance under section 14A.
4. Taxation of unclaimed liabilities.
5. Addition under section 92CA(3) related to international transactions.

Detailed Analysis:

1. Treatment of Expenditure on Repairs as Capital or Revenue Expenditure:
The assessee incurred Rs. 95,54,601/- on repairs and maintenance of various properties. The AO categorized Rs. 33,12,482/- as capital expenditure. The CIT (A) upheld this, except for Rs. 62,341/- treated as revenue expenditure. The Tribunal found most expenses were for maintenance of existing assets, except for new assets like sofa and electrical fittings, which were capital in nature. The Tribunal directed the AO to allow depreciation on capitalized amounts and treated the rest as revenue expenditure, citing past Tribunal decisions favoring the assessee.

2. Disallowance of Expenses on Computer Software:
The assessee's claim on software expenses was referred back to the AO for fresh adjudication in light of the Special Bench decision in Amway India Enterprises v. DCIT. The Tribunal restored this issue to the AO for re-evaluation according to the law and principles governing the issue.

3. Disallowance under Section 14A:
The assessee withdrew this ground, and it was treated as not pressed and withdrawn.

4. Taxation of Unclaimed Liabilities:
The AO added Rs. 7,81,80,823/- to the income, questioning the assessee's method of writing back unclaimed liabilities after two years. The CIT (A) upheld this addition. The Tribunal found that the opening balance of Rs. 7,83,32,994/- was more than the closing balance, indicating no new accrual or cessation of liability in the current year. The Tribunal noted the consistent accounting method followed by the assessee and directed the AO to delete the addition, emphasizing no postponement of tax liability.

5. Addition under Section 92CA(3) Related to International Transactions:
The AO referred transactions with associate enterprises to the TPO, who made adjustments for commission received from IM Hamburg and payments to Initiative Media Technologies, Paris.

(I) Transactions with IM Hamburg:
The TPO compared the commission rate with Indian clients and adjusted the income by Rs. 15,53,105/-. The Tribunal found the comparison with Eveready Industries, which had a fixed fee arrangement, inappropriate. It directed the AO/TPO to exclude Eveready Industries and re-calculate the mean commission rate. The Tribunal also rejected the addition of Rs. 13,22,632/- for excess credit period, noting the assessee's policy of not charging interest to any client.

(II) Payments to Initiative Media Technologies, Paris:
The TPO set the ALP at nil due to lack of evidence for services received. The Tribunal restored this issue to the TPO for fresh examination, emphasizing that ALP cannot be nil as per the Delhi High Court's decision in EKL Appliances Ltd.

Conclusion:
The appeal was partly allowed, with directions for fresh adjudication on specific issues and deletion of certain additions. The Tribunal emphasized the need for consistency in accounting practices and proper evaluation of international transactions.