Income Tax Appeal No. 777 of 2010 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 777 of 2010 Date of decision: 7.2.2011 Commissioner of Income Tax, Faridabad --- Appellant Versus M/s. Voith Paper Fabrics India Ltd. --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present: Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant-Revenue. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-Tax Act, 1961 (for short “the Act”) has been filed by the Revenue against the order dated 5.3.2010, passed by the Income Tax Appellate Tribunal Delhi Bench, Delhi Bench ‘H’, New Delhi (in short “the Tribunal”) in ITA No. 4380/Del/2009, relating to the assessment year 2006-07. The following substantial questions of law have been claimed for determination by this Court: 1- “Whether on the facts and in the circumstances of the case the learned ITAT was right in law in deleting the disallowance of Rs. 24,33,772/- made by the Assessing Officer on account of capital nature of building repair expenses even though the expenditure resulted in the Income Tax Appeal No. 777 of 2010 2 improvement in the earning capacity of the assessee by way of improving efficiency of the operations or resulted in creation of new assets and advantage of enduring nature benefit of which cannot be limited to the year under consideration only? 2- Whether on the facts and in the circumstances of the case the learned ITAT was right in law in deleting the addition of Rs. 2,50,000/- made by the Assessing Officer on account of capital nature of software expenses even though the expenditure was of capital nature and it was not a repair or improvement only of the existing software and both the software were of enduring value and customised for the assessee? 3- Whether on the facts and in the circumstances of the case the learned ITAT was right in law in deleting the addition of Rs. 3,79,802/- made by the Assessing Officer on account of bad debts written off even though the assessee had failed to fulfil the conditions of Section 36(1)(vii)/36(2) of the Income Tax Act, 1961 as mere claim for bad debts is not sufficient, particularly, when the case was being scrutinised and the assessee has failed to discharge the obligation to file details both before the A.O. & the CIT(A) that the conditions of Section 36(1)(vii)/36(2) were satisfied?” The facts, in brief, necessary for adjudication as narrated in the appeal, are that the respondent-assessee is engaged in the Income Tax Appeal No. 777 of 2010 3 manufacturing of felts which are used in paper industry. The assessee filed return on 28.11.2006, declaring taxable income of Rs. 17,48,86,985/-. The assessment was finalised under Section 143(3) of the Act at an income of Rs. 17,77,07,220/-. It was found by the assessing officer that the assessee had mentioned a sum of Rs. 40,38,892/- under the head ‘Building Repair Expenses’. Out of this, expenditure of Rs. 24,33,772/- was held to be of capital nature and, therefore, 10% depreciation was allowed thereon. The assessing officer, thus, after considering the matter ordered disallowance of a sum of Rs. 21,90,435/- being expenses of capital nature by order dated 22.12.2008. The assessing officer further ordered disallowance of a sum of Rs. 2,50,000/- out of the total amount claimed by the assessee under the head “Software Expenses”. Yet another disallowance was made by the assessing officer, i.e. of an amount of Rs. 3,79,802/- out of the total claim of the assessee on account of bad debts under the head ‘irrecoverable balances written-off”. The Commissioner of Income-tax (Appeals) {in short “the CIT(A)”} dismissed the appeal preferred by the assessee, by order dated 15.9.2009. The assessee carried further appeal before the Tribunal. The Tribunal accepted the plea of the assessee, vide the order under appeal and this is how the Revenue is now in appeal before this Court. We have heard learned counsel for the appellant- Revenue and have perused the record. In this appeal, the Revenue has challenged the findings of the Tribunal on the three disallowances which were made by the assessing officer: Income Tax Appeal No. 777 of 2010 4 i) Disallowance of Rs. 21,90,435/- on account of repair of road etc. in the factory premises of the assessee; ii) The expenses amounting to Rs. 2,50,000/- incurred on software. iii) Bad debts amounting to Rs. 3,79,802/- claimed by the assessee. It would be advantageous to refer to the findings of the Tribunal in respect of the above three disallowances, which are: (A) Disallowance of Rs. 21,90,435/- on account of repair of road etc. “7. We have considered the rival submissions. Looking to the nature of business and volume of operation, the assessee is maintaining huge premises for its manufacturing process. The road which was uneven within the factory premises, is required to be evened out for the smooth operation and functioning. However, by laying down such stones, the assessee merely facilitates the carrying on the existing business more efficiently but did not acquire any new building or road. The road was existing in the premises but due to the fact that the same was not conducive to use it in a way, it is desired that the road within the factory and department was required to be better placed by laying stones and bricks on the same. As rightly contended by the learned AR, all the expenses which give an enduring benefit do not amount to capital expenditure. This was so held by the Hon’ble Supreme Income Tax Appeal No. 777 of 2010 5 Court in the cases of Empire Jute Co. Ltd. Vs. CIT, 124 ITR 1 and Alembic Chemical Works Co. Ltd. vs. CIT, 177 ITR 377. By incurring such expenses the business was carried more efficiently, but did not bring into existence any capital asset. Therefore, the expenses on laying Kota Stone and bricks on the floor used in the factory premises are allowable as revenue has accepted the same to the extent of Rs. 2 lakhs but not entirely. The expenses of Rs. 2,67,555/- being incurred on water proofing of roof to avoid the rain water which seeped in is purely revenue expenses and do not bring into existence any capital asset. Therefore, all these expenses are allowable as revenue expenditure. We, therefore, delete the disallowance of Rs. 24,33,772/-. The decision of Hon’ble Supreme Court in the case of Saravana Spinning Mils P. Ltd. (supra) relied upon by the learned DR will not apply to the present set of facts. In the said case the entire machinery was sought to be replaced whereas in the present case, the machinery is not replaced by acquisition of new machinery but only surface of road within the factory premises is re-laid by laying Kota Stone and bricks on the ground. It is not necessary that to claim the expenses, there should only be replacement of Kota Stone with Kota Stone or brick with brick. Even if the floor was not covered with any object but is covered with laying stone or brick on the same, still the road remains the road and do not bring into existence any Income Tax Appeal No. 777 of 2010 6 capital asset. We, therefore, hold the expenses to be revenue in nature. (B) Expenditure incurred by the assessee on ‘Software’ 11. We have considered the rival submissions. The issue before us is, whether the expenses are capital or revenue expenditure and not whether how short period the expenses are allowed to be amortized. From the details filed we find that a sum of Rs. 3 lakh was incurred in relation to change of software to suit the new requirement due to change in taxation or other procedural changes. The software is customised according to new requirement for which the amount is paid. By spending such sum only the existing software is modified and hence are allowable as revenue expenditure. Another sum of Rs. 3,25,000/- was incurred to debug the present software to run it smoothly. By incurring such expenses there were modification in the existing software but not acquisition of new software. Therefore, the expenses are revenue in nature and hence allowable as such.” (C) Claim of assessee relating to bad debts 14. We have considered the rival submissions. As per the copy of account filed, the assessee has written off the amount as bed debt by debiting Profit and Loss account and crediting the respective party’s account. The assessee has debited the sum as the cheque issued by the party Income Tax Appeal No. 777 of 2010 7 was dishonoured. The amounts receivable by the assessee were towards sales effected to these persons. Since the amount relates to sales a debt can be said to have been taken into account in computing the income of the assessee in the year of sale and, therefore, the condition of section 36(2) is fulfilled. Recently, the Hon’ble Supreme Court in the case of “TRS Ltd.” held that after the amendment brought in with effect from 1.4.1999, writing off an amount is irrecoverable in the accounts is a sufficient compliance for claiming deduction under Section 36(1) (vii) of the Act. Similar view has also been held by the Hon’ble Delhi High Court in the following cases: (1) CIT vs. Autometers Ltd. 292 ITR 345 (Del); and (2) IT vs. Morgan Securities & Credits P. Ltd. 292 ITR 339 (Del). “Since the amount has been written off in the accounts as bad debt and since debt pertains to the sales made earlier, conditions of section 36(1(vii) as well as Section 36(2) are fulfilled and hence, the claim of bad debt of Rs.3,79,802/- is allowance as such.” We, therefore, delete the disallowance in respect of bad debts claimed.” A perusal of the aforesaid finding clearly shows that the assessee had incurred expenses on account of repair of road in its factory premises and said expenses had not been incurred for acquiring a new building or the road. It was further recorded that the road was existing in the premises and since the same was not Income Tax Appeal No. 777 of 2010 8 conducive to use in a way it was desired, certain repairs were required to be carried out. On the basis of these findings, the expenses incurred thereon were held to be revenue in nature. No error or perversity could be pointed out by the counsel for the appellant in the aforesaid finding. Adverting to the expenses incurred on software, the Tribunal held the same to be revenue in nature as the amount was paid for customising the software according to new requirement whereby only a modification of the existing software was brought about and the amount was not spent for acquisitioning of the new software. No illegality could be pointed out by the learned counsel for the appellant that may warrant interference with the said finding. Lastly, the bad debts claimed by the assessee were held to be allowable as the cheque which was issued by the party was dishonoured and it was recorded that the amount was not recoverable by the assessee. Learned counsel for the Revenue was unable to pin-point any illegality in the said finding or to show that the same was based on misreading of evidence so as to persuade this Court to interfere therewith. This finding being based on material on record could not be held to be unjustified. No substantial question of law, thus, arises for consideration by this Court. In view of the above, the appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) February 7, 2011 JUDGE *rkmalik* Income Tax Appeal No. 777 of 2010 9