2015 (10) TMI 949 - HC - Income Tax

Interest paid on assets prior to their installation - whether can be taken as their cost of installation and permitting deduction under section 43(1)? - Held that - The first question is covered in favour of the assessee in view of the judgment of the Supreme Court of India in Deputy Commissioner of Income-tax Vs. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT OF INDIA particularly the principles of law laid down in paragraphs 11, 13 and 14 thereof wherein held Interest on borrowings utilized for purchase of machines are allowed to be deducted because these machines have been used in business which is not disputed by Mrs. Soma Chatterjee, learned Advocate for the appellant. Therefore the question no.1 is answered in the affirmative, against the Revenue and in favour of the assessee. Expenses incurred for replacing non-Y2K compliant computer with Y2K compliant computer - whether can be claimed as a deduction under section 36(1)(xi)? - Held that - From a reading of the definition of computer system it is evident that it is a device or collection of devices which includes input and output support devices and is capable of being used in conjunction with external files or more which contain computer programmes, electronic instructions, input data and output data. In the instant case the Tribunal, being the ultimate fact finding authority, found that Therefore, on the basis of the facts and circumstances as brought on record, we are of the view that the capital expenditure required to replace the entire computer but within a network system should be allowed as an expenditure as was the intention of the legislation in the Finance Act, 1999 by inserting section 36(1)(xi). Thus the expenditure was for replacement of a system within a larger system which is permissible in law. Hence, the Tribunal was justified in allowing the claim of the appellant. The judgment in CIT vs. Asian Paints Ltd. (2013 (1) TMI 768 - BOMBAY HIGH COURT) supports the stand of the respondent. - Decided in favour of the assessee.

Summary

Issues:
1. Whether interest paid on assets prior to installation can be considered as the cost of installation under section 43(1) of the Income Tax Act, 1961?
2. Whether expenses incurred for replacing a non-Y2K compliant computer with a Y2K compliant computer can be claimed as a deduction under section 36(1)(xi) of the Act?

Analysis:

*Issue 1:* The first question raised in the appeal pertains to whether interest paid on assets before installation can be treated as the cost of installation under section 43(1) of the Income Tax Act, 1961. The respondent argued that the issue is settled in favor of the assessee based on the judgment of the Supreme Court in Deputy Commissioner of Income-tax Vs. Core Health Care Ltd. The court accepted this argument, citing relevant principles of law from the mentioned judgment. Consequently, the first question was answered in the affirmative, against the Revenue and in favor of the assessee.

*Issue 2:* The second question revolves around whether expenses incurred for replacing a non-Y2K compliant computer with a Y2K compliant computer are eligible for deduction under section 36(1)(xi) of the Act. The appellant contended that since the existing computer system was wholly replaced with a new system, the deduction should not be allowed. However, the respondent argued that the expenditure was made to make the computer system Y2K compliant, which falls under the provisions of section 36(1)(xi). The court referred to the relevant section and explanations, emphasizing that the expenditure must be incurred to make the system Y2K compliant. The court analyzed the definition of a "computer system" and concluded that the expenditure for replacing a system within a larger network system is permissible under the law. The court upheld the Tribunal's decision to allow the claim of the appellant, citing a judgment supporting the respondent's position. Therefore, the second question was answered in the affirmative, against the Revenue and in favor of the assessee.

In conclusion, the High Court of Calcutta dismissed the appeal, upholding the Tribunal's decision in favor of the assessee on both issues. Justices Soumitra Pal and Ishan Chandra Das concurred with the judgment, providing a detailed analysis of the legal provisions and precedents supporting their decision.