Tax Case (Appeals) Nos. 1397 and 1398 of 2005 and T.C.M.P No. 1207 of 2005
Decided on January 20, 2006
The Judgment of the Court was delivered by
P.D Dinakaran, J.:— The above tax case appeals are directed against the order of the Income-tax Appellate Tribunal in I.T.A Nos. 1687 and 1837.Mds/97 dated December 28, 2004.
2. The Revenue is the appellant. The assessment year involved is 1994-95. The case of the appellant is that the assessee/respondent herein, engaged in the business of goods transport, filed its return declaring a total income of Rs. 87,94,210. The Assessing Officer while completing the assessment, inter alia, made the following disallowances/additions : (i) disallowance of telex rent, telephone rent, postal franking machine rent, rates and taxes Rs. 4,74,649, (ii) disallowance of the prepaid expenditure Rs. 59,53,330, (iii) computer software and hardware upgradation expenses was treated as capital expenditure, and (iv) addition under section 41(1) Rs. 6,21,863. Not satisfied with the order of the Assessing Officer dated December 6, 1996, the assessee filed an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) partly allowed the appeal holding that what is claimed under the head “Upgradation” is only expenditure relating to existing computers for changing certain parts and adding to their efficiency. There is no structural alteration as such. The change has been made only for the purpose of achieving business results in a fast changing scientific scenario. The Commissioner of Income-tax (Appeals) partly dismissed the appeal with regard to the expenditure incurred towards telephone and telex rent.
3. Aggrieved against the order of the Commissioner of Income-tax (Appeals) dated June 2, 1997, both the assessee and the Revenue have filed appeals before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal.
4. Aggrieved by the same, the Revenue has preferred these appeals raising the following substantial questions of law:
“(i) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the telex rent, telephone rent, postal franking machine rent, rates and taxes amounting to Rs. 4,74,649 is allowable as a deduction?
(ii) Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the prepaid expenditure of Rs. 58,53,330 is allowable as a deduction?
(iii) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the addition under section 41(1) amounting to Rs. 6,21,863 cannot be treated as a cessation of liability, when the amounts were being merely carried forward for years and no details were submitted by the assessee?
(iv) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that Rs. 24,12,000 paid to HCL for purchase of new computers allowable as a deduction as a revenue expenditure?”
5. Learned counsel for the Revenue contends that the Tribunal ought to have appreciated that the amounts towards telex rent, telephone rent, postal franking machine rent, rates and taxes were claimed even before they became due. She also contends that even though the assessee follows the mercantile system of accounting, they have not charged the prepaid expenses in the profit and loss account, but, have, for the purpose of income-tax, claimed the prepaid expenses as deduction from income. She further contends that the Tribunal ought to have appreciated that the software and hardware upgradation expenses are to be treated as a capital expenditure, as the assessee had got an enduring effect.
Issues Nos. 1 and 2 can be considered together.
“(i) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the telex rent, telephone rent, postal franking machine rent, rates and taxes amounting to Rs. 4,74,649 is allowable as a deduction?
(ii) Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the prepaid expenditure of Rs. 58,53,330 is allowable as a deduction?”
6. The above issues are squarely covered by a Division Bench decision of this court in the case of Commissioner Of Income-Tax v. Southern Roadways Ltd. reported in [2004] 265 ITR 404, wherein it has been held as follows (page 407):
“The assessee paid a sum of Rs. 26,729 out of which a sum of Rs. 22,034 has been paid towards postage, telegram, telephone, etc., and a sum of Rs. 4,695 has been paid as rates and taxes. The assessee-company in its accounts treated them as prepaid and showed it as an asset in its balance-sheet. However, the payments were made in pursuance of demands raised by the postal, telephone and telegraph departments, etc., the same was claimed as a deduction in computing the income from business. The Assessing Officer negatived the claim for deduction of such expenses. In the appeal, the Commissioner of Income-tax accepted the contention of the appellant. On second appeal, the Tribunal held that in principle, the assessee is entitled to the revenue deduction either on the basis of the ‘matching principle’ or with reference to section 43B of the Act, that the said sum of Rs. 26,729 is not governed by either, thereby it set aside the decision of the Commissioner of Income-tax, and to that extent, restored the order of the Assessing Officer.
The case of the assessee is that they are following the mercantile system of accounting, the amount has been actually incurred for which liability to pay has arisen in that accounting year. There is no dispute in this case that the amount has been actually paid. In the statement of case also, it is stated that the assessee-company in its accounts treated the above said amount as prepaid and showed it as an asset in its balance-sheet. However, the payments were made in pursuance of demands raised by the postal, telephone and telegraph departments, etc., and claimed as deduction in computing the income from business. The expenditure actually incurred and revenue in nature relating to the business is allowable. Any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession should be allowed. Hence, we are of the view that the actual expenditure incurred has to be allowed notwithstanding the method of accounting the assessee followed.”
7. Hence, applying the above said ratio, the first and second questions are answered in favour of the assessee and against the Revenue.
8. Issue No. 3:
“(iii) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the addition under section 41(1) amounting to Rs. 6,21,863 cannot be treated as a cessation of liability, when the amounts were being merely carried forward for years and no details were submitted by the assessee?”
9. It is fairly conceded by learned counsel appearing for the Revenue that the above issue is covered by a decision of the apex court in the case of CIT v. Sugauli Sugar Works P. Ltd. reported in [1999] 236 ITR 518 wherein the apex court has held as follows (pages 520, 523):
“It will be seen that the following words in the section are important : ‘the assessee had obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him’. Thus, the section contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section. The mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that section 41(1) would apply and the amount should be included in the total income of the assessee.
The principle that expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled…. If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the section.”
10. In view of the above settled proposition, the third question is answered in favour of the assessee and against the Revenue.
Issue No. 4:
“(iv) Whether in the facts and circumstances of the case, the Tribunal was right in holding that Rs. 24,12,000 paid to HCL for purchase of new computers allowable as a deduction as a revenue expenditure?”
11. In so far as fourth question is concerned, it is not in dispute that the assessee did not claim any expenditure for installation of new computers, but claimed the expenditure for the upgradation of the existing computers. Further, the expenditure was incurred for improving the efficiency of the existing system with a view to keep pace with improvement of technology and no machinery was brought into existence. As rightly pointed out by the Appellate Tribunal, there was no complete structural alteration and, on the other hand, there were only changes in certain areas for improving efficiency and achieving good results. The assessee has not achieved any enduring benefit.
12. The Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT, [1989] 177 ITR 377, after referring to B.P Australia Ltd. v. Commr. of Taxation of the Commonwealth of Australia, [1966] AC 224 (PC), held that (page 386):
“What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression ‘asset or advantage of an enduring nature’ was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.”
13. It was also held that the phrase “enduring benefit” is not thinking of advantages that are permanent. There is a difference between the lasting and the everlasting. In the light of the above ratio laid down by the Supreme Court, we are of the view that upgradation of computers by changing certain parts thereby enhancing the configuration of the computers for improving their efficiency, but, without making any structural alterations is not of an enduring nature. Further, the assessee had not acquired any computer software. The expenditure incurred by the assessee has, therefore, to be treated as revenue expenditure. Accordingly, the question is answered in the affirmative, against the Revenue and in favour of the assessee.
14. In the result, both the appeals stand dismissed. Consequently, TCMP No. 1207 of 2005 is also dismissed.