Commissioner Of Income Tax, Faridabad v. M/S. Voith Paper Fabrics India Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 777 of 2010Date of decision: 7.2.2011 Commissioner of Income Tax, Faridabad Versus --- Appellant M/s. Voith Paper Fabrics India Ltd. --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Ms. Urvashi Dhugga, Senior Standing Counselfor the appellant-Revenue.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 theorder dated 5.3.2010, passed by the Income Tax Appellate TribunalDelhi Bench, Delhi Bench ‘H’, New Delhi (in short “the Tribunal”) in ITANo. 4380/Del/2009, relating to the assessment year 2006-07. The following substantial questions of law have beenclaimed for determination by this Court: 1-“Whether on the facts and in the circumstances of thecase the learned ITAT was right in law in deleting thedisallowance of Rs. 24,33,772/- made by the AssessingOfficer on account of capital nature of building repairexpenses even though the expenditure resulted in thecase the learned ITAT was right in law in deleting thedisallowance of Rs. 24,33,772/- made by the AssessingOfficer on account of capital nature of building repairexpenses even though the expenditure resulted in the improvement in the earning capacity of the assessee byway of improving efficiency of the operations or resulted increation of new assets and advantage of enduring naturebenefit of which cannot be limited to the year underconsideration only? Whether on the facts and in the circumstances of the casethe learned ITAT was right in law in deleting the addition ofRs. 2,50,000/- made by the Assessing Officer on accountof capital nature of software expenses even though theexpenditure was of capital nature and it was not a repair orimprovement only of the existing software and both thesoftware were of enduring value and customised for theassessee? Whether on the facts and in the circumstances of the casethe learned ITAT was right in law in deleting the addition ofRs. 3,79,802/- made by the Assessing Officer on accountof bad debts written off even though the assessee hadfailed to fulfil the conditions of Section 36(1)(vii)/36(2) ofthe Income Tax Act, 1961 as mere claim for bad debts isnot sufficient, particularly, when the case was beingscrutinised and the assessee has failed to discharge theobligation to file details both before the A.O. & the CIT(A)that the conditions of Section 36(1)(vii)/36(2) weresatisfied?” The facts, in brief, necessary for adjudication as narratedin the appeal, are that the respondent-assessee is engaged in the Whether on the facts and in the circumstances of the casethe learned ITAT was right in law in deleting the addition ofRs. 3,79,802/- made by the Assessing Officer on accountof bad debts written off even though the assessee hadfailed to fulfil the conditions of Section 36(1)(vii)/36(2) ofthe Income Tax Act, 1961 as mere claim for bad debts isnot sufficient, particularly, when the case was beingscrutinised and the assessee has failed to discharge theobligation to file details both before the A.O. & the CIT(A)that the conditions of Section 36(1)(vii)/36(2) weresatisfied?” The facts, in brief, necessary for adjudication as narratedin the appeal, are that the respondent-assessee is engaged in the manufacturing of felts which are used in paper industry. The assesseefiled 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 theassessing 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 assessingofficer, thus, after considering the matter ordered disallowance of asum of Rs. 21,90,435/- being expenses of capital nature by orderdated 22.12.2008. The assessing officer further ordered disallowanceof a sum of Rs. 2,50,000/- out of the total amount claimed by theassessee under the head “Software Expenses”. Yet anotherdisallowance was made by the assessing officer, i.e. of an amount ofRs. 3,79,802/- out of the total claim of the assessee on account of baddebts under the head ‘irrecoverable balances written-off”. TheCommissioner of Income-tax (Appeals) {in short “the CIT(A)”}dismissed the appeal preferred by the assessee, by order dated15.9.2009. The assessee carried further appeal before the Tribunal.The Tribunal accepted the plea of the assessee, vide the order underappeal 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 ofthe Tribunal on the three disallowances which were made by theassessing officer: i)Disallowance of Rs. 21,90,435/- on account of repair ofroad etc. in the factory premises of the assessee; road etc. in the factory premises of the assessee; ii)The expenses amounting to Rs. 2,50,000/- incurred onsoftware.software. iii)Bad debts amounting to Rs. 3,79,802/- claimed by theassessee.assessee. It would be advantageous to refer to the findings of theTribunal in respect of the above three disallowances, which are: (A) Disallowance of Rs. 21,90,435/- on account ofrepair of road etc. “7.We have considered the rival submissions. Lookingto the nature of business and volume of operation, theassessee is maintaining huge premises for itsmanufacturing process. The road which was uneven withinthe factory premises, is required to be evened out for thesmooth operation and functioning. However, by layingdown such stones, the assessee merely facilitates thecarrying on the existing business more efficiently but didnot acquire any new building or road. The road wasexisting in the premises but due to the fact that the samewas not conducive to use it in a way, it is desired that theroad within the factory and department was required to bebetter placed by laying stones and bricks on the same. Asrightly contended by the learned AR, all the expenseswhich give an enduring benefit do not amount to capitalexpenditure. This was so held by the Hon’ble Supreme Court in the cases of Empire Jute Co. Ltd. Vs. CIT, 124ITR 1 and Alembic Chemical Works Co. Ltd. vs. CIT, 177ITR 377. By incurring such expenses the business wascarried more efficiently, but did not bring into existence anycapital asset. Therefore, the expenses on laying KotaStone and bricks on the floor used in the factory premisesare allowable as revenue has accepted the same to theextent of Rs. 2 lakhs but not entirely. The expenses of Rs.2,67,555/- being incurred on water proofing of roof to avoidthe rain water which seeped in is purely revenue expensesand do not bring into existence any capital asset.Therefore, all these expenses are allowable as revenueexpenditure. We, therefore, delete the disallowance of Rs.24,33,772/-. The decision of Hon’ble Supreme Court inthe case of Saravana Spinning Mils P. Ltd. (supra) reliedupon by the learned DR will not apply to the present set offacts. In the said case the entire machinery was sought tobe replaced whereas in the present case, the machinery isnot replaced by acquisition of new machinery but onlysurface of road within the factory premises is re-laid bylaying Kota Stone and bricks on the ground. It is notnecessary that to claim the expenses, there should only bereplacement of Kota Stone with Kota Stone or brick withbrick. Even if the floor was not covered with any object butis covered with laying stone or brick on the same, still theroad remains the road and do not bring into existence any capital asset. We, therefore, hold the expenses to berevenue in nature. (B) Expenditure incurred by the assessee on‘Software’ 11.We have considered the rival submissions. The issuebefore us is, whether the expenses are capital or revenueexpenditure and not whether how short period theexpenses are allowed to be amortized. From the detailsfiled we find that a sum of Rs. 3 lakh was incurred inrelation to change of software to suit the new requirementdue to change in taxation or other procedural changes.The software is customised according to new requirementfor which the amount is paid. By spending such sum onlythe existing software is modified and hence are allowableas revenue expenditure. Another sum of Rs. 3,25,000/-was incurred to debug the present software to run itsmoothly. By incurring such expenses there weremodification in the existing software but not acquisition ofnew software. Therefore, the expenses are revenue innature and hence allowable as such.” (C) Claim of assessee relating to bad debts 14. We have considered the rival submissions. As perthe copy of account filed, the assessee has written off theamount as bed debt by debiting Profit and Loss accountand crediting the respective party’s account. The assesseehas debited the sum as the cheque issued by the party was dishonoured. The amounts receivable by theassessee were towards sales effected to these persons.Since the amount relates to sales a debt can be said tohave been taken into account in computing the income ofthe assessee in the year of sale and, therefore, thecondition of section 36(2) is fulfilled. Recently, the Hon’bleSupreme Court in the case of “TRS Ltd.” held that after theamendment brought in with effect from 1.4.1999, writing offan amount is irrecoverable in the accounts is a sufficientcompliance for claiming deduction under Section 36(1) (vii)of the Act. Similar view has also been held by the Hon’bleDelhi 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 asbad debt and since debt pertains to the sales made earlier,conditions of section 36(1(vii) as well as Section 36(2) arefulfilled and hence, the claim of bad debt of Rs.3,79,802/-is allowance as such.” We, therefore, delete thedisallowance in respect of bad debts claimed.” (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 asbad debt and since debt pertains to the sales made earlier,conditions of section 36(1(vii) as well as Section 36(2) arefulfilled and hence, the claim of bad debt of Rs.3,79,802/-is allowance as such.” We, therefore, delete thedisallowance in respect of bad debts claimed.” A perusal of the aforesaid finding clearly shows that theassessee had incurred expenses on account of repair of road in itsfactory premises and said expenses had not been incurred foracquiring a new building or the road. It was further recorded that theroad was existing in the premises and since the same was not conducive to use in a way it was desired, certain repairs were requiredto be carried out. On the basis of these findings, the expensesincurred thereon were held to be revenue in nature. No error orperversity could be pointed out by the counsel for the appellant in theaforesaid finding. Adverting to the expenses incurred on software, theTribunal held the same to be revenue in nature as the amount waspaid for customising the software according to new requirementwhereby only a modification of the existing software was broughtabout and the amount was not spent for acquisitioning of the newsoftware. No illegality could be pointed out by the learned counsel forthe appellant that may warrant interference with the said finding. Lastly, the bad debts claimed by the assessee were held tobe allowable as the cheque which was issued by the party wasdishonoured and it was recorded that the amount was not recoverableby the assessee. Learned counsel for the Revenue was unable topin-point any illegality in the said finding or to show that the same wasbased on misreading of evidence so as to persuade this Court tointerfere therewith. This finding being based on material on recordcould 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) JUDGE