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TMI Blog2015 (6) TMI 395X X X X Extracts X X X X X X X X Extracts X X X X ..... ter back to the file of the AO for deciding afresh keeping in view the decision of the Special Bench of ITAT, Delhi referred to above. Needless to say AO must afford a reasonable opportunity of being heard to the assessee in the matter. - Decided in favour of assessee for statistical purposes. Disallowance of expenditure incurred on repairs and maintenance - Held that:- On examining the details of expenditure, we are of the view that expenditure incurred towards replacement of flooring cannot be considered to be a 'Capital Expenditure' as no new asset comes into existence as a result of such expenditure, rather, the expenditures incurred is more in the nature of maintenance of a capital asset. However, as far as false ceiling and partition charges are concerned, admitted fact is these were not existing earlier. Thus, the expenditure incurred by the assessee has brought into existence certain new assets. Therefore, the expenditure incurred being of enduring nature, it has to be treated as 'Capital Expenditure'. Similarly, the expenditure of ₹ 16,100/- has not been explained by the assessee with proper evidence. Therefore, on over all consideration of facts and materials on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER PER SAKTIJIT DEY, J.M. : This is an appeal by the assessee against the order dated 13-11-2013 passed by Ld. Commissioner of Income Tax (Appeals)-III, Hyderabad for the Assessment Year (AY) 2009-10. 2. Assessee has raised in total 8 grounds. Ground No. 1 8 being general in nature, do not require any specific adjudication. In ground No.2, assessee has challenged disallowance of expenditure amounting to ₹ 89,47,827/- towards purchase of software. 3. Briefly the facts relating to this issue are, assessee a company is engaged in the business of printing of all High Security Documents and Business Forms. For the assessment year under consideration, assessee filed its return of income on 05-02-2010, declaring total income of ₹ 1,15,60,760/-. During the assessment proceedings, AO while examining the P L A/c noticed that assessee has debited an amount of ₹ 89,47,827/- towards 'Software Expenses'. He issued a notice to the assessee calling upon to show cause why the expenses incurred should not be treated as 'Capital Expenditure'. In reply to the said show cause notice, as noted by the AO, the assessee submitted that software purchased bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Ld.CIT(A). Ld.CIT(A) after considering the submissions of the assessee observed that whether a particular expenditure is 'capital' or 'revenue' has to be decided on the basis of the facts involved in that case. Thereafter, Ld.CIT(A) examining the functionality and the nature of software purchased by the assessee and applying the tests laid down in various judicial precedents upheld the disallowance by observing as under: 6.12 It is clear from above that the software purchased is not just an enhancement over the existing systems meant only to improve efficiency. Rather, it is entirely new set of tools and described as a complete language which bring about a total paradigm shift in the existing operations. It gives knowledge and technology to the appellant which was hitherto unavailable. 6.13 From the point of view of functional tests, it is seen that these new software systems change the very core operations of the appellant with a significant change in technology. They also enable the appellant to conduct operations which were hitherto not possible. 6.14 On the other hand, the software systems are not just upgrade, rather they are comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for deciding the issue. The same also applies to the expenditure incurred on software. Whether expenditure incurred on a particular software is revenue or capital will not only depend upon its ownership and enduring nature but also the functionality. The ITAT Delhi Special Bench in case of Amway India Enterprises Vs. DCIT (111 ITD 112) observed, for determining whether expenditure in acquiring software is revenue or capital, the advantage which an assessee derives has to be seen in a commercial sense. If the advantage is in the capital field, then the same would be capital expenditure. If the advantage consists merely in facilitating assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently and more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account. The Special Bench however, observed, if assets/advantage is part of profit earning apparatus, it is capital. Observing as above, the Special Bench laid down certain broad parameters for determining the nature of expenditure which are as under: i. If the software forms part of profit making apparatus of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in nature. The details of such expenditure is as under: Rs. False ceiling 1,80,000 Flooring (Replacement) 4,07,936 Flooring (Replacement) 11,58,530 Flooring (Replacement) 1,91,973 Flooring (Replacement) 14,580 Partition charges 1,88,560 Self made voucher 16,100 7. The AO commenting that the expenditures incurred are of enduring nature treated the same as 'Capital Expenditure' and disallowed the claim of the assessee. Being aggrieved, assessee challenged the same in the appeal preferred before the Ld.CIT(A). Ld.CIT(A) however, sustained the addition. The Ld. AR drawing our attention to the details of expenditure incurred submitted before us that replacement of flooring cannot be considered to be a 'Capital Expenditure' as no new asset of enduring benefit has come into existence. As far as false ceiling and partition charges is concerned, Ld. AR s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein the amount of ₹ 49,07,886/- was credited to the asset account. On verifying the details, AO observed that the foreign exchange fluctuation is only a notional loss which the assessee has added to the value of the machinery. He observed that the assessee did not produce any supporting evidence to establish the foreign exchange loss due to fluctuation. The AO therefore disallowed the proportionate depreciation amounting to ₹ 7,36,183/- claimed on the capitalized foreign exchange fluctuation loss of ₹ 49,07,886/-. Similarly, AO observed that assessee has imported computers during the relevant previous year from another foreign company namely M/s. Atlantic Zeiser P. Ltd., for ₹ 33,57,500/-. In respect of this asset also assessee has capitalized an amount of ₹ 87,985/- towards foreign exchange fluctuation loss and claimed depreciation on the said amount. However, since the assessee could not produce any evidence to substantiate its claim, AO observed that loss on account of foreign exchange fluctuation being notional depreciation on that account cannot be allowed. Accordingly, he disallowed depreciation on foreign exchange fluctuation loss capitalized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfirmed the addition. Ld. AR submitted before us that out of the aforesaid amount claimed as expenditure an amount of ₹ 50,000/- relates to payment of insurance for the earlier years and transferred in the impugned assessment year. As far as other expenditures are concerned, the Ld. AR reiterated that since the subscriptions were made for the purpose of business, they are allowable as 'Revenue Expenditure'. The Ld. DR on the other hand submitted before us that expenditure incurred being personal expenditures of the Directors cannot be allowed as expenditures of the company. As far as the amount of ₹ 50,000/- claimed to be towards insurance payment of earlier years is concerned, the Ld. DR submitted that the assessee never brought this fact to the notice of the departmental authorities. 12. We have heard the parties and perused the materials on record. On verifying the details of expenditure incurred, we are of the view that the subscription fees paid on behalf of the Directors cannot be allowed as expenditure at the hands of the assessee-company. However, as far as the amount of ₹ 50,000/- claimed to be towards insurance payment relating to earlier yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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