Income Tax Appellate Tribunal - Delhi
Acl Wireless Ltd., New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : A : NEW DELHI
BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER
AND
SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
ITA No.1330/Del/2012
Assessment Year : 2007-08
ITO, Vs. ACL Wireless Ltd.,
Coy. Ward 1(2), 104-107, Hemkunt Tower,
Room No.398-B, 98, Nehru Place,
CR Building, IP Estate, New Delhi.
New Delhi.
PAN : AACCA7370G
CO No.167/Del/2012
(ITA No.1330/Del/2012)
Assessment Year : 2007-08
ACL Wireless Ltd., Vs. ITO,
104-107, Hemkunt Tower, Coy. Ward 1(2),
98, Nehru Place, Room No.398-B,
New Delhi. CR Building, IP Estate,
New Delhi.
PAN : AACCA7370G
(Appellant) (Respondent)
Assessee by : Shri R.S. Singhvi, CA
Revenue by : Mrs. Anuradha Misra, CIT, DR
ORDER
PER A.D. JAIN, JUDICIAL MEMBER
The appeal is filed by the department and the Cross Objections by the assessee. They are directed against the order of the CIT (A)-IV, New Delhi dated 05.01.2012 for Assessment Year 2007-08.
2. The department, in its appeal, has taken the following effective grounds of appeal:-
2 ITA No.1330/Del/2012 CO No.167/Del/2012"1. The ld. CIT (A) has erred on facts and in law in deleting disallowance of ` 2,74,75,159/- on account of capitalization of product improvement expenses.
2. The ld. CIT (A) has erred on facts and in law in deleting addition of ` 1,27,95,082/- on account of treatment of leased property improvement expenses as capital expenditure.
The CIT (A) has ignored the fact that the assessee has taken office space on rent. This space, as mentioned by the assessee in its letter dated 19.11.2009 was raw. Before this raw office space i.e., a shell building could be put to use by the assessee as a business asset, the assessee had incurred expenditure on flooring, tiling, partitioning the space and sanitary fitting etc. The office created with these expenses, though on a rented premises has brought into existence a capital advantage. The new office is a part of assessee's apparatus for conducting its business. The expenditure therefore is capital in nature."
3. Apropos ground No.1, the facts as per the relevant orders are that the assessee company is engaged in the business of providing value added services to various mobile telephone service providers, like M/s Bharti Airtel Ltd. and M/s Hutchison Max Telecom Pvt. Ltd. For the year under consideration, the assessee claimed an amount of ` 6,86,87,898/- on account of product improvement expenses, claiming the said expenditure to have been incurred in the ordinary course of the business of the assessee. This expenditure comprised the following:-
"i) The technology platform was evolved by refactoring the utility classes and back end APIs of the platform into service interfaces.
ii) Profiling and optimization resulting from the findings was done to the data object layer in order to achieve greater scalability of the platform.3 ITA No.1330/Del/2012 CO No.167/Del/2012
iii) Based on feedback from users of the service, some user flows were modified which includes changes for different languages in which services is deployed.
iv) Product integration with the telecom network element (SMSC, DP, etc.) was achieved in several operator networks.
v) R&D was done on some new product initiatives (like Yahoo Mobile IM for Reliance network)"
4. Before the Assessing Officer, it was explained that the aforesaid expenditure had been incurred regularly as per the assessee's required business expediency on a recurring basis, to keep pace with the fast changing technology in the mobile phone industry, as per the agreements made with the service provider. The expenditure was claimed to be a revenue expenditure.
5. The Assessing Officer, however, held the expenditure to be capital in nature and disallowed it, holding that the assessee had amortized the said expenditure over a period of three years in its books of account whereas in its computation of income, the assessee had claimed the same as a revenue expenditure. The Assessing Officer allowed depreciation of 60% on the aforesaid expenditure. This amounted to ` 4,12,12,739/-. The remaining amount of ` 2,74,75,159/- was disallowed by the Assessing Officer.
6. By virtue of the impugned order, the Ld. CIT (A) deleted the disallowance, holding it to be revenue expenditure. It was observed that since similar expenditure had been allowed by the Assessing Officer in scrutiny assessments for preceding and succeeding years, the rule of consistency also demanded the expenditure for the year under consideration also be allowed.
4 ITA No.1330/Del/2012 CO No.167/Del/20127. Aggrieved, the department has raised ground No.1 before us.
8. Ld. DR, in this regard, has contended that the Ld. CIT (A) erred in deleting the disallowance correctly made by the Assessing Officer on account of capitalization of product improvement expenses; that while doing so, the Ld. CIT (A) has failed to consider the observations of the Assessing Officer to the effect that whereas the assessee had amortized the expenditure over three years in its books of account, the same had been claimed as revenue expenditure in the computation of income of the assessee; that further, the Ld. CIT (A) has failed to appreciate that the Assessing Officer had allowed depreciation of 60% on the expenditure, which amounted to ` 4,12,12,739/-.
9. In this regard, having considered the rival contentions in the light of the material available on record, we find that for Assessment Year 2003-04, similar expenditure had been disallowed. The ITAT allowed the same. For Assessment Years 2004-05 to 2006-07, the Assessing Officer himself allowed similar expenditure. Likewise, for Assessment Years 2008-09 and 2009-10 also the Assessing Officer himself allowed the said expenditure. It is taking into account such allowance by the Assessing Officer himself, in the earlier as well as succeeding Assessment Years, that the Ld. CIT (A) has and, in our considered opinion, rightly so, deleted the disallowance. It remains undisputed that as observed by the Ld. CIT (A), the expenditure was incurred in terms of the agreement for production of value added service to mobile phone operators. The corresponding receipts therefrom were shown by the assessee as its trading receipts and were duly offered to tax. The expenses, the details of which as given above, consists of rent, electricity, vehicle maintenance, communication, insurance, provisional expenses, salary and other benefits to the employees, etc. The Assessing Officer nowhere made out the assessee to have 5 ITA No.1330/Del/2012 CO No.167/Del/2012 acquired any asset of capital nature or to have derived any advantage for long-term by incurring the expenditure. It is patent on record that the assessee renders consultancy services and does not require any significant capital assets. The expenses were undoubtedly incurred in the course of the day-to-day business operations of the assessee, such operations being routine in nature, by way of providing value added services to its customers. It was also never the case of the Assessing Officer that the services so provided by the assessee were ever used by the assessee and not by the mobile operators. Further, it is common knowledge that mobile services required continued upgradation and monitoring. As such, the Ld. CIT (A) has rightly observed that the expenditure in question was incurred as a matter of routine, for the business and commercial expediency of the assessee's business, i.e., consultancy business. The Ld. CIT (A) has also declared that the capitalization of such expenses in preceding years was for the period prior to the commencement of the assessee's business. Right from the commencement of the business of the assessee, the expenses started being claimed as revenue, every year. The allowance of similar expenditure in the earlier as well as subsequent years, it is pertienent to note, was made in scrutiny assessments. While deleting the disallowance, the Ld. CIT (A) has placed reliance on the following case laws:-
i) "CIT vs. Asahi India Safety Glass Ltd.", 64 DTR (Del) 63;
ii) "Assam Bengal Cement Co. Ltd. vs. CIT", 27 ITR 34 (SC); &
iii) "CIT vs. J.K. Synthetics Ltd.", 309 ITR 371 (Del).
10. In "Asahi India" (supra), it has been observed, inter alia, considering the nature of expenditure on software, that the test of enduring benefit is not a certain or conclusive test; that what is required to be seen is the real intent and purpose of the expenditure 6 ITA No.1330/Del/2012 CO No.167/Del/2012 and as to whether the expenditure results in creation of fixed capital by the assessee, an expenditure which enables the profit making structure to work more efficiently, leaving the source of the profit making structure untouched, would be revenue expenditure.
11. In "Assam Bengal Cement Co. Ltd." (supra), it has been observed that if the expenditure is incurred for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is capital expenditure; that if such expenditure, on the other hand, is incurred for the purpose of bringing into existence any such asset or advantage, but for running the business or working it with a view to produce profits, it is a revenue expenditure.
12. Lastly, in "CIT vs. J.K. Synthetics Ltd." (supra), it was held that the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, but if it is incurred while the business is carrying on, it would have to be ascertained if the expenditure is incurred for acquiring or bringing into existence an asset or advantage of an enduring benefit for the business and if that be so, it would be in the nature of capital expenditure; that if, on the other hand, the expenditure is for running the business or working it with a view to produce profits, it would be in the nature of revenue expenditure.
13. In view of the above, we do not find any error in the order of the Ld. CIT (A) in this regard, for which, the said order is confirmed.
14. Ground No.1 raised by the department is rejected.
15. Apropos ground No.2, according to the said ground, the Ld. CIT (A) has erred in deleting the addition of ` 1,27,95,082/-, made on 7 ITA No.1330/Del/2012 CO No.167/Del/2012 account of treatment of leased property improvement expenses as capital expenditure.
16. The Assessing Officer treated the leased property improvement expenses claimed by the assessee to the tune of ` 1,27,95,082/- and disallowed the same. This was done by treating the expenditure of ` 1,42,16,758/- claimed by the assessee as capital expenditure and allowing depreciation of 10% amounting to ` 14,21,676/- thereon. It was observed by the Assessing Officer that the assessee had taken space on rent and had incurred various expenses on networking, fire fighting, electricity cabling, flooring, tiling, sanitary partitions, etc.; that the assessee, in its books of account had amortised the said expenses over a period of three years, whereas in the computation of income, the assessee had claimed the expense as being revenue in nature.
17. The Ld. CIT (A), having deleted the addition made by the Assessing Officer, the department has raised ground No.2 before us.
18. The Ld. DR contended that while wrongly deleting the addition correctly made by the Assessing Officer, the Ld. CIT (A) overlooked the fact that the assessee had taken office space on rent; that even as per the assessee's own letter dated 19.11.2009 filed before the Assessing Officer, the said space was raw space, in the shape of a shell building; that in order to make use of the said raw office space, i.e., to put the said space to use as a business asset, the assessee had incurred the expenditure in question; that though the premises on which the office of the assessee got thereby credit, by incurrence of such expenditure, it brought into existence a capital advantage of the assessee, which was wrongly overlooked by the Ld. CIT (A). That the Ld. CIT (A) failed to appreciate that the new office of the assessee was a part of the assessee's apparatus in conducting its business; and that therefore, 8 ITA No.1330/Del/2012 CO No.167/Del/2012 the Assessing Officer had correctly treated the expenditure involved as capital expenditure.
19. The ld. counsel for the assessee, on the other hand, has placed strong reliance on the impugned order in this regard. The details of the expenditure have been filed before us. It has been submitted that the premises in which the office of the assessee exist, was a rented premises; that no new asset was brought into existence by incurring the expenditure; that it was only to make the leased premises suitable for the assessee's business purposes that the expenditure in question was incurred; that moreover, the Tribunal, in the case of M/s Angelique International Ltd., vide order dated 13.07.2012, passed for Assessment Year 2007-08 in ITA No.481/Del/2011 (copy is placed on record), i.e., for the same year as under consideration herein, has allowed similar expenditure; that further, in "CIT vs. Hi Line Pens (P) Ltd." 306 ITR 182 (Del), it has been held that where the expense is incurred towards repairing the rented premises for the business activity of the assessee, and there is no intention of the assessee to bring in new capital asset into existence, such expenses fall within the expression "repairs to premises" in Section 30 (a) (i) of the IT Act, which is an allowable expenditure; that still further, the assessee is running into heavy losses and no advantage was derived from the incurrence of the expenditure in question.
20. We have heard the parties on this issue and have perused the material on record with regard thereto. The detail of expenditure filed before us shows that as shown before the taxing authorities, the expenditure was incurred on networking, fire fighting, electricity cabling, flooring, tiling, sanitary partitions, etc. The premises on which the office of the assessee was situated was a rented premises taken by the assessee and the assessee was not an owner thereof. The 9 ITA No.1330/Del/2012 CO No.167/Del/2012 expenditure, no doubt, was incurred in the ordinary course of business of the assessee. No addition whatsoever, was made to the structure on the rented premises. In fact, the whole idea of the incurrence of the expenditure was to make the leased premises suitable for the assessee's business purposes. The assessee never got to acquire any new asset or advantage by expending the amount. The Ld. CIT (A) has duly taken into consideration these facts while rightly deleting the addition wrongly made by the Assessing Officer.
21. For the above, we concur with the findings recorded by the Ld. CIT (A) and the same are upheld. Ground No.2 is also rejected.
22. In the Cross Objections, the assessee has raised the following ground:-
"1. That on the facts and circumstances of the case the CIT (A) was not justified in not accepting claim of Foreign Exchange loss amounting to Rs.10,09,662/- even though same is relating to trading asset and permissible deduction under the law."
23. The Assessing Officer disallowed an amount of ` 10,09,662/- representing provision for interest loss. While doing so, the Assessing Officer observed that the loss was on account of revaluation of current assets/liabilities in foreign currency as on 31.03.2007. This, according to the Assessing Officer, was a notional and contingent loss. During the year, the assessee had profit on account of foreign interest rate fluctuation in respect of actual receipts.
24. The Ld. CIT (A) upheld the disallowance made by the Assessing Officer.
25. In this regard, the ld. counsel for the assessee has contended that the loss suffered is a forex loss, holding it to be on account of re-
10 ITA No.1330/Del/2012 CO No.167/Del/2012valuation of current assets/liabilities in foreign currency as on 31.03.2007, amounting to a notional and contingent loss; that foreign exchange revaluation has to be done every year; that the matter stands squarely covered in favour of the assessee by the following decisions:-
i) "CIT vs. L.G. Electronics India (P) Ltd.", 309 ITR 265 (Del); and
ii) "CIT vs. Woodward Governors India Pvt. Ltd.", 312 ITR 254 (SC)
26. The Ld. DR, on the other hand, has strongly relied on the impugned order in this regard, contending that there is no error whatsoever in the order of the Ld. CIT (A) with regard to the cross objections raised by the assessee; that the loss undisputedly was on account of revaluation of current assets/liabilities in foreign currency as on 31.03.2007; that this was, undoubtedly, a notional and contingent loss; that during the year, the assessee had earned profit on account of foreign exchange rate fluctuation in respect of actual receipts; that the provision of ` 10,09,662/- was set off by the assessee against the said profit; that the Ld. CIT (A) has correctly observed that the transactions having not been completed during the year under consideration, the loss has been shown by the assessee as "provision"
and the provisional loss on account of the year end restatement of closing balances cannot be allowed to be set off against actual profit earned by the assessee on account of foreign exchange rate fluctuation regarding transactions completed during the year under consideration; that contingent notional liability cannot be allowed as a deduction, where there is no backing of actual remittances and completion of transactions; that as such, the order of the Ld. CIT (A) in this regard requires to be confirmed while dismissing the cross objection filed by the assessee.
11 ITA No.1330/Del/2012 CO No.167/Del/201227. We have heard the parties on this issue and have perused the material with regard thereto. In "L.G. Electronics" (supra), it has been held that loss on account of foreign exchange rate fluctuation is an allowable business expenditure u/s 37 of the IT Act.
28. In "Woodward Governors" (supra) also, it has been held, affirming the decision in "CIT vs. Woodward Governors India Pvt. Ltd.", 294 ITR 451 (Del), that for valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant; that this is because profit/loss is embedded in the closing stock; that while anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits/actual realization; that this is the theory underlying the rule that closing stock is to be valued at cost or market price, whichever is lower.
29. In the case of the assessee, during the year, the assessee had earned profit on account of interest rate fluctuation in respect of actual receipts. It had set off provision for interest loss, amounting to ` 10,09,662/- on account of revaluation of current assets/liabilities in foreign currency against the profit earned on actual receipts. It has rightly been contended on behalf of the assessee that current assets and liabilities in foreign exchange in accordance with the AS 11, are required to be revalued as per the rate applicable at the end of the year. Undoubtedly, forex revaluation has to be done every time. Therefore, the Ld. CIT (A) clearly erred in upholding the disallowance wrongly made by the Assessing Officer.
30. Hence, finding it to be justified, the cross objection raised by the assessee is accepted.
12 ITA No.1330/Del/2012 CO No.167/Del/201231. In the result, the appeal of the department is dismissed, whereas cross objection raised by the assessee is allowed.
The order pronounced in the open court on 19.10.2012.
Sd/- Sd/-
[T.S. KAPOOR] [A.D. JAIN]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 19.10.2012.
dk
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches