2015 (8) TMI 134 - HC - Income Tax

Expenses incurred in obtaining club membership - revenue v/s capital expenditure - Held that - It is not in dispute that various decisions of the Tribunal had followed the decision of this Court in the matter of Otis Elevator Co. (India) Ltd. (1991 (4) TMI 53 - BOMBAY High Court a) and allowed entrance fees of club as revenue expenditure. Further, this Court has also in numerous matters applied the decision of Otis Elevator Co. (India) Ltd. (supra) to the cases were entrance fees of club membership was an issue in dispute and held that the same is allowable as revenue expenditure - Decided in favour of assessee. Computer software expenses - revenue v/s capital expenditure - Held that - The expenses were incurred to obtain the application software which gets upgraded from time to time due to change in technology. This licence being for limited period would have to be renewed from time to time. In the aforesaid circumstances, the Tribunal held that considering the nature of the software licence i.e. application software, the same has to be allowed as a revenue expenditure. In view of the finding of fact arrived at further by the Tribunal that the expenses have been incurred on application software which is for a limited time frame and has to be renewed from time to time, we see no reason to entertain question B as framed by the revenue.- Decided in favour of assessee. Compensation paid by the assessee for pre-closure of agreement entered with M/s. Industrial Oxygen Limited (INOX) for supply of nitrogen - revenue v/s capital expenditure - Held that - The contract was terminated by the respondent-assessee for commercial expediency as the quality if nitrogen gas and timely supplies by M/s. INOX was an issue leading to respondent setting up its own plant. The agreement was cancelled by the respondent-assessee approximately 10 months prior to the culmination of the agreement. Further the break up of the compensation which was paid to INOX for cancellation of the agreement was for compensation for fixed facility charges for the balance period of 10 months; compensation for short lifting of gas for the balance period of 10 months and compensation for pipe line rental paid to MIDC. Thus, the aforesaid heads of compensation were in the nature of revenue expenditure and not capital expenditure.- Decided in favour of assessee. Diallowance of Bad debts - ITAT allowed claim - Held that - Yhe issue stands covered in favour of the assessee and against the revenue by the decision of TRF Ltd. (2010 (2) TMI 211 - SUPREME COURT). Accordingly, no reason to entertain question.- Decided in favour of assessee.

Summary

Issues:
1. Club membership expenses - revenue or capital nature
2. Computer software expenses - revenue or capital expenditure
3. Compensation for pre-closure of agreement - revenue or capital expenditure
4. Allowability of bad debts written off

Analysis:

Club Membership Expenses (Question A): The primary issue here is whether the entrance fees for club memberships should be considered as revenue or capital expenditure. The revenue argues that it is of capital nature, while the respondent contends it is revenue and should be allowed as expenses. The Tribunal, following the decision in Otis Elevator Co. (India) Ltd. v. CIT, held that entrance fees for club membership should be treated as revenue expenditure. The Tribunal emphasized that despite the enduring benefit, it cannot be considered capital as no asset was created. The Court noted that previous decisions consistently supported this view, and hence, declined to entertain the question raised by the revenue.

Computer Software Expenses (Question B): The issue revolves around whether the expenses incurred for computer software should be categorized as revenue or capital expenditure. The Tribunal determined that the expenses for obtaining application software, which required periodic upgrades due to technological advancements, should be treated as revenue expenditure. Since the software license was for a limited period and needed renewal, the Tribunal concluded that it should be allowed as a revenue expenditure. Consequently, the Court found no reason to entertain the question posed by the revenue.

Compensation for Pre-Closure of Agreement (Question C): The dispute focuses on whether the compensation paid for the pre-closure of an agreement should be considered as revenue or capital expenditure. The Tribunal analyzed the circumstances leading to the termination of the agreement with M/s. INOX and concluded that the compensation paid was for commercial expediency. The breakdown of the compensation indicated that it was related to fixed facility charges, short lifting of gas, and pipeline rental, all of which were deemed revenue expenditure. The Court found the Tribunal's decision reasonable and declined to entertain this question.

Allowability of Bad Debts Written Off (Question D): Regarding the allowance of bad debts written off, the Tribunal relied on the decision in T.R.F. Ltd. v. CIT. Both parties agreed that the issue was settled in favor of the assessee by the aforementioned decision. Consequently, the Court saw no reason to delve into this question and dismissed the appeal without costs.

In conclusion, the High Court upheld the Tribunal's decisions on all the issues raised by the revenue for the assessment year 2004-05, emphasizing the nature of expenses and compensations as revenue expenditures based on the specific circumstances and legal precedents cited.