2012 (12) TMI 732 - AT - Income Tax

Capitalization of product improvement expenses - CIT(A) deleted the disallowance - Held that - CIT (A) has rightly observed that the expenditure in question was incurred as a matter of routine, for the business and commercial expediency of the assessee s business, i.e., consultancy business. The CIT (A) has also declared that the capitalization of such expenses in preceding years was for the period prior to the commencement of the assessee s business. Right from the commencement of the business of the assessee, the expenses started being claimed as revenue, every year. The allowance of similar expenditure in the earlier as well as subsequent years, it is pertienent to note, was made in scrutiny assessments - CIT(A) placed reliance on the case laws CIT vs. Asahi India Safety Glass Ltd. 2011 (11) TMI 2 - DELHI HIGH COURT & Assam Bengal Cement Company Limited Versus Commissioner Of Income-Tax, West Bengal 1954 (11) TMI 2 - SUPREME COURT - no error in the order of the CIT (A) in this regard - against revenue. Treatment of leased property improvement expenses as capital expenditure - CIT(A) deleted the addition - Held that - The detail of expenditure filed shows that as shown before the taxing authorities, the expenditure was incurred on networking, fire fighting, electricity cabling, flooring, tiling, sanitary partitions, etc. The premises on which the office of the assessee was situated was a rented premises taken by the assessee and the assessee was not an owner thereof. The expenditure, no doubt, was incurred in the ordinary course of business of the assessee. No addition whatsoever, was made to the structure on the rented premises. The assessee never got to acquire any new asset or advantage by expending the amount - thus CIT (A) rightly deleted the addition wrongly made by the Assessing Officer - against revenue. Foreign Exchange loss - disallowance of claim by CIT(A) - Held that - As decided in CIT, Delhi-II, New Delhi versus M/s L.G. Electronics India Pvt. Ltd. 2008 (8) TMI 10 - HIGH COURT DELHI oss on account of foreign exchange rate fluctuation is an allowable business expenditure u/s 37 - rightly been contended on behalf of the assessee that current assets and liabilities in foreign exchange in accordance with the AS 11, are required to be revalued as per the rate applicable at the end of the year. Undoubtedly, forex revaluation has to be done every time. Therefore, CIT (A) clearly erred in upholding the disallowance wrongly made by the AO - in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance on account of capitalization of product improvement expenses.
2. Deletion of addition on account of treatment of leased property improvement expenses as capital expenditure.
3. Disallowance of foreign exchange loss.

Detailed Analysis:

1. Deletion of Disallowance on Account of Capitalization of Product Improvement Expenses:

The department contended that the CIT (A) erred in deleting the disallowance of Rs. 2,74,75,159/- on account of capitalization of product improvement expenses. The assessee, engaged in providing value-added services to mobile telephone service providers, claimed Rs. 6,86,87,898/- as product improvement expenses incurred in the ordinary course of business. The Assessing Officer (AO) held these expenses to be capital in nature, disallowing Rs. 2,74,75,159/- after allowing 60% depreciation on the expenditure.

The CIT (A) deleted the disallowance, treating the expenses as revenue in nature, emphasizing the rule of consistency since similar expenses were allowed in preceding and succeeding years. The tribunal upheld this decision, noting that the expenses were routine business expenditures necessary for providing value-added services, and no capital asset was acquired. The CIT (A) relied on case laws such as "CIT vs. Asahi India Safety Glass Ltd.," "Assam Bengal Cement Co. Ltd. vs. CIT," and "CIT vs. J.K. Synthetics Ltd.," which supported the view that such expenditures, incurred for running the business, should be treated as revenue expenses.

2. Deletion of Addition on Account of Treatment of Leased Property Improvement Expenses as Capital Expenditure:

The AO treated the leased property improvement expenses of Rs. 1,27,95,082/- as capital expenditure, allowing 10% depreciation. The expenses included networking, fire fighting, electricity cabling, flooring, tiling, and sanitary partitions in a rented office space. The CIT (A) deleted the addition, treating the expenses as revenue in nature.

The tribunal upheld the CIT (A)'s decision, noting that the expenses were incurred to make the leased premises suitable for business purposes and did not result in acquiring any new asset or long-term advantage. The tribunal referenced the case "CIT vs. Hi Line Pens (P) Ltd.," which held that expenses incurred for repairing rented premises for business purposes are allowable as revenue expenditure.

3. Disallowance of Foreign Exchange Loss:

The assessee claimed a foreign exchange loss of Rs. 10,09,662/- due to the revaluation of current assets/liabilities in foreign currency as on 31.03.2007. The AO disallowed this, considering it a notional and contingent loss. The CIT (A) upheld the disallowance.

The tribunal, however, accepted the assessee's cross-objection, noting that foreign exchange revaluation is a standard practice and must be done annually. The tribunal cited "CIT vs. L.G. Electronics India (P) Ltd." and "CIT vs. Woodward Governors India Pvt. Ltd.," which support the allowance of foreign exchange losses as business expenditures. The tribunal concluded that the CIT (A) erred in upholding the disallowance, as the revaluation of current assets/liabilities is a legitimate business practice.

Conclusion:
The tribunal dismissed the department's appeal and allowed the assessee's cross-objection, confirming the CIT (A)'s deletion of disallowances related to product improvement and leased property improvement expenses and reversing the disallowance of the foreign exchange loss.