Ita/242/2011 Of Commissioner Of Income Tax-Iii v. M/S Ncr Corporation Pvt Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 16 DAY OF JUNE 2020| PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE M. NAGAPRASANNA| LT.A. NO.242 OF ZO1L1 BETWEEN: 1.COMMISSIONER OF INCOME TAX-IIIC.R BUILDINGS,C.R BUILDINGS, QUEENS ROAD, BANGALORE-56000 1. 2 |ASSISTANT COMMISSIONER. OF INCOME TAX, CIRCLE12 (1), BANGALORE ... APPELLANTS (By Sri.E.I.LSANMATHI, ADV.,) AND: M/S NCR CORPORATION PVT LTD11, 3RD FLOOR, NITON BUILDING,PALACE ROAD,,BANGALORE42 .. RESPONDENT (By Sri.T.SURYANARAYANA, ADV.) - - - THIS ITA IS. FILED UNDER SECTION 260-A OFIL.T.ACT, 1961 ARISING OUT OF THE ORDER DATED 28.02.2011PASSED IN ITA NO.353/BANG/2010 FOR THE ASSESSMENT YEAR| 2003-04, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED|TO:.TO:. (1)FORMULATE THE SUBSTANTIAL QUESTIONS OF|LAW STATED THEREIN. LAW STATED THEREIN. (II)SET ASIDE THE ORDERS PASSED BY THE IIAT,.“ASBENCH,|BANGALOREIN|ITANO.353/BANG/2010DATED20.07.7Z01LASSOUGHT FOR IN THIS APPEAL, IN THE INTEREST.OF JUSTICE AND EQUITY.“ASBENCH,|BANGALOREIN|ITANO.353/BANG/2010DATED20.07.7Z01LASSOUGHT FOR IN THIS APPEAL, IN THE INTEREST.OF JUSTICE AND EQUITY. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY,ALOK ARADHE J.,DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax|Act, 1961 (hereinafter referred to as tne Act for short)has been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2003-04.The appeal was admitted by a bench of this Court videorder dated 06.02.2012 on the following substantialquestions of law:| (I)Whether the tribunal is correct on facts|andIn|lawIn.holdingthattheexpenditure said to have been incurredDy theaASSCSSCEamountingtORs.89,23,817/-OP)improvement.ofinteriors, electrical works, modeling andnetworking of computers, work stations|andIn|lawIn.holdingthattheexpenditure said to have been incurredDy theaASSCSSCEamountingtORs.89,23,817/-OP)improvement.ofinteriors, electrical works, modeling andnetworking of computers, work stations| and other miscellaneous works In @|leased premises is revenue expenditure|without appreciating that this one-timeexpenditureincurredIn|providing|necessary infrastructure resulted in a|benefit of enduring nature which will De|available to the assessee for many|years? (iI)Whether the tribunal is correct on facts|and in law in holding that ATMs and|encoders are computers eligible for 60%depreciation even when they dodo not|provide processing activity and do not|contain all features of computers and|such cannot be called as computers?and in law in holding that ATMs and|encoders are computers eligible for 60%depreciation even when they dodo not|provide processing activity and do not|contain all features of computers and|such cannot be called as computers? (iI)Whether the tribunal its Justified inaccepting the change in the method ofaccounting adopted by the assessee|when such change would not bring out|or enable ascertainment of true and|correct profits of the ass. for the|accounting year in question? accepting the change in the method ofaccounting adopted by the assessee|when such change would not bring out|or enable ascertainment of true and|correct profits of the ass. for the|accounting year in question? (iv)Whether the tribunal is correct [In law toaccept the change in the method of|accounting adopted by the assessee|withouttaking Into.accounttheprovisions of sale of goods Act as per|which the delivery is the point of time.when the sale is complete?accept the change in the method of|accounting adopted by the assessee|withouttaking Into.accounttheprovisions of sale of goods Act as per|which the delivery is the point of time.when the sale is complete? (iv)Whether the tribunal is correct [In law toaccept the change in the method of|accounting adopted by the assessee|withouttaking Into.accounttheprovisions of sale of goods Act as per|which the delivery is the point of time.when the sale is complete?accept the change in the method of|accounting adopted by the assessee|withouttaking Into.accounttheprovisions of sale of goods Act as per|which the delivery is the point of time.when the sale is complete? 2 |Facts giving rise to filing of this appeal brieflystated are that assessee is engaged in the business ofmanufacture of automated teller machines (ATMs) anddistribution of NCR book products and commissions inIndia. The assessee filed the return of income on01.17.7003|declaringtaxable.incomeofRs.4,66,32,6/0/-. The return was processed underSection 143(1) and was selected for scrutiny and noticeunder Section 143(2) of the Act was issued. Theassessee had taken premises on lease for a period of.three years. The assessee claimed expenditure ofRs.89,23,817/- on account of leasehold improvementsas revenue expenditure in the computation of income. The assessing officer by an order dated 31.03.2006 interalia held that leasehold improvements expenditure isincurredtowardspurchaseofworkstations,improvement of interiors and electrical works, fee paidto the architect, cabling work for networking ofcomputers in connection with setting up of office. Thus,the expenditure was incurred to bring into existence anasset or an advantage for enduring benefit of Dusiness,nis property is computable as capital expenditure.Accordingly, the leasehold improvement for an amountof Rs.89,23,817/- was disallowed and added back anddepreciation towards furniture and fitting at the rate of15% was allowed. The assessing officer further heldthat the assessee has changed the revenue recognitionmethod and therefore it is not possible to ascertain trueand correct profit of the assessee for the accountingyear in question. It was further held that ATMs cannotbe termed as computers and therefore are eligible fordepreciation to the extent of 25%. Being aggrieved, the assessee preferred an appeal. The order wasaffirmed in appeal by the assessee 3. The assessee assailed the order passed by the)Commissioner of Income Tax (Appeals) before theIncome Tax Appellate Tribunal. The Income _ TaAppellate Tribunal by an order dated 28.02.2011 interalia held that the expenditure incurred by the assesseefor leasehold improvements has to be treated asrevenue expenditure under Section 37 of the Act. It wasfurther held that ATMs are computers and therefore,|assessee is eligidDle to depreciation of 60%. It wasfurther held that even though the assessee had changedthe method of revenue recognition, Nowever, he isentitled to change the method of accounting as theSame has no impact on the revenue. Accordingly, theappeal preferred by the assessee was partly allowed.Being aggrieved, the revenue is in appeal before us. | 4 l|earned counsel for the revenue submitted that.the assessee had created an asset resulting in enduringbenefit for business, which was capital in nature andtherefore, the tribunal grossly erred in treating the sameto be a revenue expenditure and that the asset wascapital in nature. In support of aforesaid submission,reliance has been placed on decision of Supreme Courtin ‘CIT VS. MADRAS AUTO SERVICES (P) LTD.,’,|233 ITR 468|and a decision of this court In‘D.P.CHIRANIA ANDCOMPANYVS.COMMISSIONER OF INCOME-TAX, MYSORE’, 112ITR 12.It is further submitted that ATMs are notsComputers and the tribunal erred in holding that ATMsare computers and assessee is entitled to deduction tothe extent of 60%. In support of aforesaid submission,reliance has been placed on decision of this court in/DIEBOLD SYSTEMS PVT. Ltd. VS, COMMISSIONER|OFCOMMERICALTAXES(KARNATAKA);,ILR|(KAR )-2005-0-2210It is also urged that change of accounting method is impermissible as the same hasresulted in a loss to the revenue. of accounting method is impermissible as the same hasresulted in a loss to the revenue. 5. On the other hand, learned counsel for the)assessee has pointed out that premises were taken onlease for a period of three years and expenditure wasincurredtowardspurchaseofworkstations,improvement of interiors and electrical works, fee paidto the architect, cabling work for networking ofcomputers in connection with setting up of office. —Therefore, the same cannot be treated as capital asset. ©It is further submitted that the assessee only derivedbusiness advantage on account of expenditure incurredon lease hold property for improvements. In support ofaforesaid submission, reliance has been placed onMADRAS AUTO SERVICES (P) LTD.supra. It is also.pointed out that reliance placed by the revenue on thedecision rendered in|DIEBOLD SYSTEMS PVT. LTD7Supra iS misconceived as the aforesaid decision hasbeen rendered in the context of provisions under the Karnataka Sales Tax Act, 1957. It is also urged that theprovisions of Karnataka Sales Tax Act, 1957 and the.Income Tax Act, 1961, are not pari materia and.therefore, no reliance can be placed on aforesaidcecision. Learned counsel nas also invited our attentionof Appendix 1 to the Income Tax Rules and has pointedout that computer has been included under plant andmachinery. In support of aforesaid submission, relianceNas been placed on decision in tne case of —CIT VS. SARASWAT INFOTECH LTD.,’, ITA NO.1243/2012.It is also argued that the words and expression definedin anotner statute cannot be used for construction ofSame words or expression used in the other statuteunless both the statutes are in pari materia. In supportof aforesaid submission, reliance nas been placed ondecision of the Supreme Court in ~JAGATRAM AHUJAVS. COMMISSIONER OF GIFT-TAX, (2000) 113°TAXMAN 459 (SC).It is also submitted that it is open.for the assessee to change the method of accounting and the burden is on the department to prove that themethod in vogue is not correct and distorts the profits ofa particular year. It is also argued that in the instantcase the aforesaid Durden has not been discharged bythe revenue. In support of aforesaid submission,reliance has been placed on a decision of the SupremeCourt In ‘COMMISSTONER OF INCOME-TAX VS.|BILAHARI INVESTMENT (P.) LTD.,’, (2008) 168TAXMAN 95 (SC). 6. We have considered the submissions made on.both the sides and have perused the record. Admittedly,Intheinstant CdaSe€theaSS@SSCEChadincurred|expenditure of Rs.89,23,81/7/- towards purchase ofworkstations, improvement of interiors and electricalworks, fee paid to the architect, cabling work fornetworking of computers in connection with setting upof office. The test for distinguishing capital expenditureand revenue expenditure was laid down by the SupremeCourt In"ASSAM BENGAL CEMENT CO. LTD., VS. CIT’, (1955) 27 ITR 34,which laid down the text,|which reads as under: qTOutlay is deemed to be capital when It Ismade for the initiation of a business, for|extension of a business, or for asubstantial replacement of equipment.made for the initiation of a business, for|extension of a business, or for asubstantial replacement of equipment. CIT’, (1955) 27 ITR 34,which laid down the text,|which reads as under: qTOutlay is deemed to be capital when It Ismade for the initiation of a business, for|extension of a business, or for asubstantial replacement of equipment.made for the initiation of a business, for|extension of a business, or for asubstantial replacement of equipment. 2.Expenditure may be treated as properly|attributable to capital when it is made|not only once and for all, but with a viewto bringing into existence an asset or anadvantage for the enduring benefit of atrade. If what is got rid of by a lump|sum payment is an annual business|expense Chargeable against revenue, tnelump sum payment should equally be|regarded as a business expense, but if|the lump sum payment brings in acapitalasset,then|that|putsthebusiness on another footing altogether.attributable to capital when it is made|not only once and for all, but with a viewto bringing into existence an asset or anadvantage for the enduring benefit of atrade. If what is got rid of by a lump|sum payment is an annual business|expense Chargeable against revenue, tnelump sum payment should equally be|regarded as a business expense, but if|the lump sum payment brings in acapitalasset,then|that|putsthebusiness on another footing altogether. 3.Whether.fortheDUrFDOSEoftheexpenaiture, any capital was withnarawn,or, in other words, whether the object ofincurring the expenditure was to employ|expenaiture, any capital was withnarawn,or, in other words, whether the object ofincurring the expenditure was to employ| what was taken in as capital of the.business. Again, it is to be seen whether|the expenditure incurred was part of thefixed capital of the business or part of itscirculating capital. 7. The aforesaid principles were referred to with) approval in.MADRAS AUTO SERVICES (P) LTD.,SUDFaon the touchstone of aforesaid well settled legalprinciple, if the facts of the case in hand is examined, itis evident that the assessee had taken the premises onlease for a period of three years and had incurred.expenditure of Rs.89,23,817/- for improvements in thelease premises. The premises did not belong to theassessee and the expenditure did not bring’ intoexistence any capital asset for the assessee. Theexpenses were incurred for conducting the business ofthe assessee more profitably and more successfully. Theassessee therefore, got the business advantage andtherefore, the tribunal has rightly treated the expensesincurredas|revenueexpenditure|incurredfor. improvementInleaseholdpropertyas|revenue|expenditure. | 8. This takes us to the second substantial question|of law whether ATMs are computers and are eligible for60% depreciation. It is pertinent to note that provisionsof the Karnataka Sales Tax Act, 1957 and provisions ofIncome Tax Act, 1961 are not pari materia provisions.The classification of goods has been provided only forthe purposes of sales tax whereas, the provisions of theincome tax levy tax on income. It is pertinent tomention here that Appendix 1 to Income Tax Rules, thecomputer has been treated as plant and machinery.Therefore, the decision relied upon by the revenue inDIEBOLD|SYSTEMSPVT.LTD.,SUDPIdhasNo|application to the fact situation of the case. The tribunalby placing reliance on the decision of Bombay HighCourt In“‘DCIT VS. DATA CRAFT INDIA LTD.,’,(2010) 40 SOT 295has held that so long as functionsof the computers are performed with other functions and other functions are dependant on the functions ofthe computer, ATMs are to be treated as computers and.are entitled to higher rate of depreciation. It has furtherbeen held that computer is integral part of ATM machineand on the basis of information processed by thecomputer in ATM machine only, the mechanical functionof the dispensation of cash or deposit of cash is done.Therefore, it was held that ATMs are computers and areentitled to higher rate of depreciation. The aforesaidfinding of fact has been recorded on correct analysis ofthe material available on record and by placing relianceon decision of the Bombay High Court. and other functions are dependant on the functions ofthe computer, ATMs are to be treated as computers and.are entitled to higher rate of depreciation. It has furtherbeen held that computer is integral part of ATM machineand on the basis of information processed by thecomputer in ATM machine only, the mechanical functionof the dispensation of cash or deposit of cash is done.Therefore, it was held that ATMs are computers and areentitled to higher rate of depreciation. The aforesaidfinding of fact has been recorded on correct analysis ofthe material available on record and by placing relianceon decision of the Bombay High Court. 9. We may now deal with substantial question of|law nos. 3 and 4. The Supreme Court inBILAHART|INVESTMENTS (P) LTD., supra has held that in everycase of substitution of one method by another method ithas been held that burden is on the department toprove that the method in vogue is not correct anddistorts the profit of a particular year. From perusal of the order passed by the assessing officer as wellCommissioner of Income Tax (Appeals), it is evidentthat revenue has failed to discharge the aforesaidburden. Therefore, the tribunal Nas rightly held that theassessee is entitled to change the method of accounting. In view of the preceding analysis the substantial|questions of law framed by this court are answeredagainst the revenue and in favour of the assessee. Inthe result we do not find any merit in the appeal. Thesame fails and is hereby dismissed. Sd/-JUDGE Sd/-|JUDGE