Income Tax Appellate Tribunal - Delhi
Amway India Enterprises, vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : 'A' NEW DELHI
BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT AND
SHRI RAJPAL YADAV, JUDICIAL MEMBER
I.T.A No. 164/Del/2008
Asstt. year - 2003-04
Amway India Enterprises Vs. Deputy Commissioner of Income
Tax, Circle 1 (1),
Plot No. 5, DDA Shopping Centre,
New Delhi.
Okhla Commercial Complex,
New Delhi.
(Appellant) (Respondent)
Appellant by: Shri Tarankeep Singh, CA
Respondent by: Shri Ashok Pandey, CIT, DR
ORDER
PER RAJPAL YADAV, JM:
The assessee is in appeal before us against the order of Ld. CIT(A) dated 15.11.2007 passed for asstt. Year 2003-04. The grounds of appeal taken by the assessee are not in consonance with the rule 8 of ITAT rules. They are descriptive and argumentative in nature. Ld. Counsel for the assessee at the time of hearing placed on record a chart in tabular 2 ITA No. 164/Del/2008 Asstt. year 2003-04 form indicating the grievance of assessee and how the issues are covered in favour or against the assessee.
2. The first grievance of the assessee taken in ground No. 1 to 1.2 is that Ld. CIT(A) has erred in upholding the disallowance of Rs.
1,47,71,172/- incurred on leasehold improvements by holding it as a capital expenditure. The Ld. Counsel for the assessee submitted that similar issue arose in asstt. Year 2001-02 wherein a disallowance of Rs.
2,46,57,910/- was made. This disallowance has been deleted by the Tribunal. He placed on record copy of the Tribunal's order and submitted that there is no difference in the facts and circumstances in this year. Ld. DR was unable to controvert the contention of Ld. Counsel for the assessee.
3. We have duly perused the record and gone through the order of Tribunal in asstt. Year 2001-02. The Tribunal has made following observation while considering this issue :-
"4. A common ground has been taken both by assessee and revenue with regard to treatment of expenditure incurred on leasehold improvement. With regard to disallowance of expenditure incurred on lease hold improvements amounting to Rs. 2,46,57,910, the Assessing Officer has observed that on 3 ITA No. 164/Del/2008 Asstt. year 2003-04 perusal of the details of lease hold improvement filed by the assessee company, it is seen that expenditure has been incurred on flooring, partition, wiring, plumbing, false ceiling, roofing, interior work, air-conditioning duct, networking for computer purposes, electric wiring etc. As per Assessing Officer the argument of the assessee that no capital asset came into existence is not correct as most of the work, which have been done will give enduring benefit to the assessee. For example, flooring, false ceiling, air-conditioning duct, network cabling and electrical fittings etc., do not get bad in a year or even in three/four years time. It is not important to note that these buildings are not owned by the assessee company as it is having same premises for lasts several years and intends to keep these premises for coming years also. In fact, modern offices maintained by Multinational companies like the assessee company, there is no concept of providing separate rooms. In these offices, only wooden partitions are provided. Just because they are made of wood or aluminium, they cannot be said to be of temporary in nature because wood of the highest quality is used in their construction. Further, the assessee has also claimed expenditure on account of AC unit, furniture etc. In this lease hold improvement, which came to notice only when the details were called for. Moreover, the expenditure on carpets, Venetian blinds, LAN installation cannot be said to be of revenue in nature. By the impugned order, CIT(A) upheld the action of the Assessing Officer.
5. It was contended by the Ld. A.R. after highlighting the details of the renovation expenditure as placed on record with respect to various premises taken by it on lease and claimed as revenue expenditure that all these expenses do not bring into existence the asset of enduring nature, and the expenditure so incurred was on account of commercial expediency, for commercial use of the leased premises and also to give proper outlook to the office and to create international standard and good working environment as per the multinational work culture. After spending various expenses on refurbishment such as wooden partition, panelling, flooring, plumbing etc., he contended that these expenses were incurred in respect of leased premises from where assessee did not get any enduring benefit. Our attention was also drawn to the clause in the lease deed according to which vacant possession was required to be given to the landlord, meaning thereby whatever temporary renovation/refurbishment was done, was required to be removed while giving possession back to the landlord. Reliance was placed on the decision of Hon'ble Supreme Court in case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 11 wherein it was observed that even if a benefit spread over a number of years, the expenditure would be on revenue account, where the expenditure merely facilitate assessee's trading 4 ITA No. 164/Del/2008 Asstt. year 2003-04 operation or enabling the management and control of the assessee's business to be carried on more efficiently and more profitability while leaving the physical capital untouched, such expenditure would be on revenue account even though the advantage may endure for an indefinite future. Accordingly, test of enduring benefit was held to be not to apply blindly and mechanically without regard to the particular facts and circumstances of the given case. Reliance was also placed on the decision of Delhi High Court in case of Modi Spg. & Wvg. Mills Co. Ltd. v. CIT [1993] 200 ITR 544, wherein the revenue expenditure incurred on lease hold improvement for the purpose of facilitating the business was held to be revenue in nature.
6. On the other hand, contention of Ld. D.R. was that huge expenditure have been incurred, which resulted into enduring benefit, therefore, the same was correctly held as capital in nature and lower authorities were justified in allowing claim of depreciation thereon. Reliance was also placed on the decision of ITAT Delhi Bench in case of Asian Hotels wherein expenditure on renovation and refurbishing the hotel building was held to be capital expenditure.
7. We have considered the rival contentions, carefully gone through the orders of authorities below and also deliberated on the case laws referred to by the lower authorities in their respective orders and cited by the Ld. A.R. and Ld. D.R. during the course of hearing before us, in the context of factual matrix of the instant case. From the records, we found that assessee- company is engaged in the business of direct selling of personal care, home care, cosmetic, nutrition and wellness products through its chain of distributors all over India. During the course of scrutiny assessment, the Assessing Officer found that assessee has claimed huge expenditure on account of lease hold improvement amounting to Rs. 2.59 crores in respect of its Delhi, Mumbai and Calcutta offices. As required by the Assessing Officer, the assessee filed complete details of lease hold improvements incurred in respect of different offices. The premises on which the alleged expenditure was incurred were undisputedly not owned by the assessee but were on lease, the Assessing Officer observed that as per Explanation (1) to section 32, the provisions of section 32 applies even in the cases where the building, on which capital expenditure is incurred, is not owned by the assessee. Accordingly, he held that expenditure incurred for renovation, improvement, of any structure in the building is in the nature of capital expenditure and the same are eligible only for claim of depreciation. As per the details filed, we found that the expenditure were incurred on flooring, partition, wiring, false ceiling, roofing, entire work of air-conditioning duct, networking for computer purposes, electric wiring etc. As the assessee company was operating as per concept of multinational companies, there were no concept of providing separate rooms and only wooden partition 5 ITA No. 164/Del/2008 Asstt. year 2003-04 were provided. After going through the nature of expenditure so incurred, we found that by incurring these expenditure except expenditure. Air- conditioning duct and furniture, no new asset has come into existence and the expenditure so incurred was on account of commercial expediency and for the commercial use of the lease hold premises and to give proper outlook to the office and to create international standard of good working environment on multinational work culture. The expenditure was claimed under section 37(1) which provide that any expenditure, not in the nature described under sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure and which is laid out wholly and exclusively for the purpose of business, shall be allowed in computing the income chargeable under the head "Profit and gains of business and profession". The nature of expenditure which was on account of refurbishment, wooden partition/panelling, flooring, plumbing work, electric work, laying down of cables etc., are essentially revenue in nature. As the expenditure were incurred on lease hold premises, assessee did not get any enduring benefit on account of such expenditure. The expenditure so incurred could not be removed or reused at the time of vacating the leased premises. In case of Modi Spg. & Wvg. Mills Co. Ltd. (supra), the Hon'ble Delhi High Court has observed that where assessee had taken two flats of the building for a period of 11 months, but renewable for 10 periods of 11 months each, the expenditure incurred by the assessee on items like fixing false ceiling, painting, making some structural changes, fixing of doors in the common walls between the flats etc. it was held to be incurred for the purpose of facilitating carrying out of its business, accordingly revenue in nature.
8. Where assessee was running business of road transport, constructed a loft in the ground floor of the office premises taken on lease and which was disallowed by the Assessing Officer on the ground of expenditure being capital in nature, the Hon'ble High Court observed that expenditure incurred on construction of loft was neither for existing nor for addition to the premises. The assessee was putting the available office space to its optimum use for accommodating the large staff of 30 members, which would result in greater efficiency by improving the working conditions by constructing the loft and the assessee did not bring into existence any asset of a permanent nature because on the surrender of lease, the option of the lessor of the premises in which the improvements were made, was either to pay compensation of the taken over improvements or to permit the lessee to remove the improvements. Following was the observation of the Hon'ble High Court :
"We have no doubt in our mind, that the aim and purpose of this item of expenses entailed in the construction of a loft is to attain greater efficiency and avoid inefficiency that may result by making the 6 ITA No. 164/Del/2008 Asstt. year 2003-04 administrative staff work in a cramped space. By no stretch of imagination and without violence to the language, can it be urged that the assessee, by constructing the loft, was seeking to bring into existence an asset of a permanent nature because on the surrender of the lease, the option of the lessor of the premises in which the same improvements are made is either to pay compensation and taken over the improvement or to permit the lessee to take away and remove the improvement. We do not think, having regard to the nature of the tenure of the lessee in the premises and the internal structural changes made therein, and particularly the sole aim and purpose of such changes, that it can be successfully claimed, what is sought to be claimed by the revenue, that the expenses are of capital nature. . . ."
9. Even the expenditure on construction of rooms and improvements for enjoyment of lease hold premises, the Hon'ble Madras High Court in case of Malabar Mills 288 ITR 815 (sic) held that expenditure so incurred was of revenue in nature as the assessee carried some improvements for better enjoyment of the property. Since the benefits derived by the assessee were co- terminus with the lease, there could not be any; enduring benefit to the assessee, the same was therefore, held to be deductible as revenue expenditure. Contention of the revenue to allow the claim of depreciation was dismissed.
10. A fine distinction was made by the Ld. A.R. with respect to the expenditure incurred on 'repairs' and 'current repairs'. He submitted that under clause (1) of sub-section (a) of section 30, assessee is eligible to claim expenditure on account of repairs if the premises are occupied as a tenant whereas under clause (ii) if the premises are occupied otherwise then as a tenant, meaning thereby as owner, the amount paid by him on account of only current repairs of the premises is to be allowed. Thus, in case of 'owners' occupied property only current repairs is to be allowed whereas in case of occupants other than owners, all repairs whether current or accumulated repairs, is to be allowed as deduction under section 30. Taking the same analogy, we are inclined to agree with the contention of Ld. A.R. that since assessee was in occupation of the building on lease, whole of the repairs is required to be allowed and not only the 'current repairs'. For this purpose reliance was placed on decision of Hon'ble Delhi High Court in the case of CIT v. Hi Line Pens (P.) Ltd. [2008] 175 Taxman 132, order dated 15-9-2008, wherein it was held that there is a clear distinction between expression repairs and current repairs and the word 'repair' is much wider then expression current repairs. What the assessee has done in the present case, can be construed to be repairs, it has not brought about any new asset nor advantage of enduring benefit. The expenditure incurred by the assessee was towards repairing and upgraded of the premises taken on lease so as to make it more conductive to its business activities.
7 ITA No. 164/Del/2008Asstt. year 2003-04
11. Recently, Hon'ble Delhi High Court in case of Export Finance Ltd. 206 (IT4)-GJX-0341-Delhi, held that expenditure incurred on providing wooden partition, painting, glass work and other repairs to the lease hold premises was revenue expenditure.
12. In view of the above discussion, we do not find any merit in the action of lower authorities for disallowing assessee's claim for expenditure incurred on improvement of the lease hold premises, except the expenditure incurred on air-conditioning unit and furniture."
4. In the present year according to the assessee, it has incurred a sum of Rs. 1,47,71,172/- towards improvement of lease hold premises at Mumbai, Calcutta, Bangalore. The expenses were incurred on improvement on various items namely flooring work, false ceiling, erection of temporary partition painting work and change of sanitary fittings etc. In Asstt. Year 2001-02 similar expenses were incurred. The Tribunal while considering this issue has observed that expenses will be allowed to the assessee as revenue expenses except the expenditure incurred on air condition unit and furniture. The item which we have noticed are some of the items. There must be many other expenses incurred on similar improvements. Therefore we set aside the issue to the file of AO for verification of all the expenses in the light of Tribunal's order in asstt. Year 2001-02. He will disallow the claim of assessee in respect of air condition unit or furniture if any incurred. We find that while treating these expenses as capital in nature a depreciation has 8 ITA No. 164/Del/2008 Asstt. year 2003-04 been allowed to the assessee. Once the expenses are to be allowed as a revenue expenditure, consequently depreciation will not be admissible on such amount. Therefore AO shall verify this aspect and in case depreciation is allowed to the assessee same will be withdrawn. Ground No. 1 is allowed.
5. Ground No. 2: In this ground the grievance of assessee is that Ld. AO has erred in treating the liability pertaining to distributors as income chargeable to tax u/s 41(1) of the Income Tax Act. Ld. CIT(A) while examining this aspect has observed in paragraph No. 11.c that AO shall verify the facts and limit his disallowance to the extent of amount of liability which is barred by time limit of three years period. The balance for which the limit of three years not lapsed has to be deleted. In the chart assessee has pleaded that AO has passed order u/s 250 read with section 143(3) on 18th November, 2008 while giving effect to Ld. CIT(A)'s order and after this order it has no grievance on this issue. In view of this statement placed on record ground No. 2 raised by the assessee is rejected.
9 ITA No. 164/Del/2008Asstt. year 2003-04
6. Ground No. 3 :- The grievance of the assessee in this ground relates to disallowance of Rs. 6,53,598/-, which is an expenditure incurred on computer software license. The AO has treated it as a capital expenditure and disallowed to the assessee. Ld. Counsel for the assessee submitted that similar issue has arisen in asstt. year 2001-2002 and 2002-03. This issue was even travelled to the special bench of the Tribunal in the case of assessee reported in 111 ITD
112. The issue be set aside to the file of AO for fresh examination in view of the special bench decision. Ld. DR was unable to controvert this submission of the assessee. We find that this issue was considered by the Tribunal in asstt. year 2001-02 and the Tribunal has made following observation :-
"2. In respects of disallowance of software expenses amounting to Rs. 24,79,134, the Ld. A.R. placed on record the order of ITAT Special Bench in assessee's own case wherein issue has been dealt with. The facts in brief are that during the year under consideration, assessee-company incurred expenditure on obtaining license for use of software amounting to Rs. 24.79 lakhs. The contention of Ld. A.R. was that these licenses are essential for the purpose of use of application software and not normally come in the compact disc (CD), which is containing the license agreement existing terms and conditions for use of software. As per the Ld. A.R. while installing these softwares from the CD, this license agreement is displayed on the screen, and usage of computer is given an option to either accept or not to accept the terms and conditions for the license of agreement. Actual ownership of the software always rests with the licensing company. These softwares call for constant upgradation and as and when the user based problem occurs, pitches to a licensed user are made available.10 ITA No. 164/Del/2008
Asstt. year 2003-04 Technological progress is replied and so it is becoming obsolete. The issue with regard to determine whether the expenditure on such license is capital or revenue in nature, was considered by the Special Bench in the assessee's own case which was reported in Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112 (Delhi) and it was held that computer software in a disc is tangible asset, tests of enduring benefit, ownership test and the functional test are to be applied to decide the nature of expenditure. The computer software, whether it is capital or revenue, matter is restored to the Assessing Officer to examine the question whether expenditure on computer software is capital or revenue in the light of following observations of Special Bench :
"The advantage which an assessee derives has to be seen. The nature of advantage 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 the assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account.
The following factors would be relevant to determine whether the advantage operates in the capital field or revenue field.
(i) Nature of Business of the assessee : It is necessary to obtain an understanding of the business function or effect of a concern's software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment.
(ii) As a general rule it may be stated that the more expensive the computer software the more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there are associated capital expenditure like purchase of new computer equipment for running the software developed under a project, then it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but necessary for this purpose.
(iii) Degree of associated organisational change : Similarly the degree of change intended in the way operations are carried out as a result of the computer software, for example, savings in the number, and changes in the location, of staff used to provide 11 ITA No. 164/Del/2008 Asstt. year 2003-04 services to customers will have a bearing. The more radical the changes, the more likely the expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerised.
(iv) It has to be borne in mind that computer software industry is of a fast changing nature. Therefore whatever software purchased by an assessee would become outdated much earlier than expected.
The assessee has therefore to upgrade his software. An element of upgrading does not automatically make the expenditure capital. The presence of an element of upgrading, therefore, will not necessarily cause the expenditure in question to be capital. In all cases, the Assessing Officer will examine the question whether expenditure on computer software is capital or revenue expenditure in the light of the principles laid down above. After hearing the assessee, the Assessing Officer will decide the question whether the expenditure is capital or revenue expenditure. If on such examination, the Assessing Officer comes to the conclusion that the expenditure is capital expenditure, then the question regarding allowing depreciation will be decided in accordance with the principles laid down in the subsequent paragraphs.
On the question whether depreciation would be allowed on computer software, if treated as capital expenditure, the Special Bench has held as follows :
Though a licensee, the person purchasing the disk or other medium containing the software is owner to the extent of the rights comprised in the license. The decision of the Hon'ble Supreme Court in the case of TCS (supra) supports the view that software contained in a disk is tangible property by itself. The use by the assessee of such software in his business is enough to allow the claim for depreciation. The rights which an assessee acquires by purchasing the disk or magnetic medium containing the computer software with limited or absolute right to use the same by itself would satisfy the requirements of the Plant. The assessee's ownership of limited right over the tangible asset is sufficient to conclude that the assessee is the owner of the Plant. There is therefore no difficulty in allowing depreciation claim at 25 per cent under section 32(1)(i) read with Appendix-I, Part-A Division III(1) to the Income-tax Rules, 1962. With effect from 1-4-2003. Computer Software has been classified as a tangible asset under the heading "Plant" in Appendix-I to the Income-tax Rules entitled to depreciation 12 ITA No. 164/Del/2008 Asstt. year 2003-04 at 60 per cent. The assessee would be entitled to depreciation 60 per cent from 1-4-2003.
The Assessing Officer will examine the issue in the light of the principle laid down by the Special Bench as above and affording the assessee opportunity of being heard decide the issue afresh."
3. In view of above, the matter is restored back to the file of the Assessing Officer for deciding as per the observations made by the Special Bench in the aforesaid order, as discussed hereinabove."
7. In view of the Tribunal's order we set aside this issue to the file of AO for readjudication .
8. Ground No. 4 :- In this ground grievance of the assessee is that Ld. CIT(A) has erred in not deleting the addition of Rs.
59,05,537/-. In the chart Ld. Counsel for the assessee submitted that this issue was referred to the AO for verification and after the order of the AO dated 11.11.2008 it has no grievance. Since AO himself redressed the grievance of assessee while giving effect to the order of Ld. CIT(A). This ground no more survive hence rejected.
13 ITA No. 164/Del/2008Asstt. year 2003-04
9. Ground No. 5 :-In this ground of appeal the grievance of assessee is that Ld. CIT(A) has erred in upholding the allowance of depreciation on UPS @ 25% as against 60% claimed by the assessee. In the chart the Ld. Counsel for the assessee at the time of hearing conceded to the preposition that this issue has been decided against the assessee by the ITAT in the case of Nestle India Ltd. reported in 111 TTJ 498 (Delhi) wherein it has been held that depreciation on UPS would be admissible at 25% and not at 60%. In view of the above this ground of appeal is rejected.
10. Ground No. 6 :- The grievance of the assessee in this ground is that Ld. CIT(A) has erred in upholding the disallowance of Rs.1,84,824/-. The brief facts of the case are that assessee claimed a sum of Rs. 6,45,78,916/- on account of liquidated damages on accrual basis.
11. In the case of one party namely M/s. Naisa Industries there was a difference of Rs. 1,84,824/-. That party has given a 14 ITA No. 164/Del/2008 Asstt. year 2003-04 confirmation on 24th January 2006 pointing out this difference.
According to the assessee it was following accrual system of accounting and it had made provision about liquidated damages based on estimation of its liability at the time of finalising of accounts for the year ended on 31st March, 2003. After discussion it was felt that excess provision was made, assessee itself suomoto offered this amount of Rs. 1,84,824/- for taxing in the financial year relating to asstt. year 2004-05. The AO disallowed the provision made in this year on the ground that there was no basis for making this provision. This was reversed immediately in succeeding months. Ld. CIT(A) confirmed the view of the AO.
12. Ld. Counsel for the assessee submitted that Rs. 1,84,824/- has been disallowed by the AO in this year and assessee itself has offered for tax in the next year. It will amount to double taxation.
He prayed that suitable direction be given to the AO for allowing this claim in the next asstt. year. Ld. DR on the other hand relied upon the order of the AO.
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13. We have duly considered the rival contention and gone through the record carefully. As far as allowability of this amount in the present year is concerned it is not allowable because there is no basis for making the provision which was reversed immediately in the succeeding months. The assessee also failed to bring any material or point out any reason in support of its claim in this asstt.
year. As far as allowaiblity of the claim in the next year is concerned that asstt. year is not before us but it is true that same amount should not suffer tax twice. We relegate the assessee to approach the AO for suitable remedy by filing appropriate application. The AO shall consider the prayer of assessee sympathetically and in accordance with law.
14. Ground No. 7 :- In this ground assessee has pleaded that Ld. CIT(A) has erred in directing the AO to include surcharge / turnover tax, Luxury tax, entry tax ,miscellaneous tax in the value of closing stock u/s 145 A of the Act. The assessee did not press this ground of appeal hence it is rejected.
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15. Ground No. 8 :- In this ground of appeal the grievance of assessee relates to levy of interest u/s 234B and 234D of the Income Tax Act . Ld. Counsel for the assessee submitted that as far as charging of interest u/s 234 is concerned it is consequential in nature. However interest u/s 234D cannot be charged in asstt.
Year 2003-04 because special bench of the ITAT in the case of Ekta Promoters reported in 305 ITR 1(AT) (Delhi) has held section 234D is prospective in nature. This issue has not been examined by the AO with this angle. Therefore we set aside this issue to the file of AO for readjudication in accordance with the law and he shall keep into account the order of the ITAT's special bench or consider any other judgment available to him on this point.
16. In the result appeal of the assessee is partly allowed.
Order pronounced in the open court on 30.6.2010.
[G.E. VEERABHADRAPPA ] [RAJPAL YADAV]
VICE PRESIDENT JUDICIAL MEMBER
Dated:
17 ITA No. 164/Del/2008
Asstt. year 2003-04
Veena
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT TRUE COPY By Order,
Deputy Registrar,