2020 (6) TMI 439 - HC - Income Tax

Expenditure incurred on lease hold property for improvements - revenue or capital expenditure - expenditure towards purchase of workstations, improvement of interiors and electrical works, fee paid to the architect, cabling work for networking of computers in connection with setting up of office - HELD THAT - It is evident that the assessee had taken the premises on lease for a period of three years and had incurred expenditure for improvements in the lease premises. The premises did not belong to the assessee and the expenditure did not bring into existence any capital asset for the assessee. The expenses were incurred for conducting the business of the assessee more profitably and more successfully. The assessee therefore, got the business advantage and therefore, the tribunal has rightly treated the expenses incurred as revenue expenditure incurred for improvement in leasehold property as revenue expenditure. Depreciation on ATM - whether ATMs are computers and are eligible for 60% depreciation? - HELD THAT - The tribunal by placing reliance on the decision of DCIT VS. DATA CRAFT INDIA LTD. 2010 (7) TMI 642 - ITAT, MUMBAI has held that so long as functions of the computers are performed with other functions and other functions are dependant on the functions of the computer, ATMs are to be treated as computers and are entitled to higher rate of depreciation. It has further been held that computer is integral part of ATM machine and on the basis of information processed by the computer in ATM machine only, the mechanical function of the dispensation of cash or deposit of cash is done. Therefore, it was held that ATMs are computers and are entitled to higher rate of depreciation. Change in method of accounting - HELD THAT - The Supreme Court in BILAHARI INVESTMENTS (P) LTD. 2008 (2) TMI 23 - SUPREME COURT has held that in every case of substitution of one method by another method it has been held that burden is on the department to prove that the method in vogue is not correct and distorts the profit of a particular year. From perusal of the order passed by the assessing officer as well Commissioner of Income Tax (Appeals), it is evident that revenue has failed to discharge the aforesaid burden. Therefore, the tribunal has rightly held that the assessee is entitled to change the method of accounting.

Summary

Issues:
1. Whether expenditure on leasehold improvements is revenue or capital expenditure?
2. Whether ATMs qualify as computers for depreciation purposes?
3. Whether the change in accounting method by the assessee is justified?
4. Whether the revenue's contentions regarding the above issues are valid?

Analysis:
1. The primary issue in this case was whether the expenditure incurred by the assessee on leasehold improvements should be treated as revenue or capital expenditure. The assessing officer initially disallowed the expenditure, considering it as capital in nature. However, the Income Tax Appellate Tribunal held that the expenditure qualifies as revenue expenditure under Section 37 of the Income Tax Act, as it was incurred for the improvement of leasehold property to conduct business more profitably. The tribunal's decision was based on established legal principles distinguishing between capital and revenue expenditure, as outlined in various court judgments.

2. The second issue revolved around whether ATMs should be considered as computers for the purpose of claiming depreciation at a higher rate. The tribunal, relying on a decision of the Bombay High Court, concluded that ATMs are indeed computers and are entitled to a higher rate of depreciation. This determination was based on the integral role of computers in ATM machines and the dependency of ATM functions on computer processing, aligning with the provisions of the Income Tax Act and the classification of computers as plant and machinery in the Income Tax Rules.

3. The third and fourth issues pertained to the change in the assessee's accounting method and its impact on profit calculation. The Supreme Court's precedent in Bilahari Investments (P) Ltd. emphasized that the burden lies on the revenue to prove that the existing accounting method distorts profits. In this case, the revenue failed to demonstrate such distortion, leading the tribunal to allow the change in the accounting method by the assessee. The tribunal's decision was supported by legal principles and established precedents regarding accounting method changes.

4. The arguments presented by both parties were carefully considered by the court. The revenue contended that the leasehold improvements created enduring benefits and should be treated as capital expenditure, and that ATMs do not qualify as computers for depreciation purposes. However, the court upheld the tribunal's findings, emphasizing that the expenses were revenue in nature, ATMs are computers for depreciation purposes, and the change in accounting method by the assessee was justified. The court dismissed the appeal, ruling in favor of the assessee based on a thorough analysis of the legal principles and factual circumstances presented in the case.