Commissioner of Income Tax vs Voith Paper Fabrics India Ltd.

Ajay Kumar Mittal, J.—This appeal u/s 260A of the income tax Act, 1961 (for short "the Act"), has been filed by the Revenue against the order dated March 5, 2010, passed by the income tax Appellate Tribunal Delhi Bench, Delhi Bench "H", New Delhi (in short "the Tribunal") in I.T.A. 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:

Whether, on the facts and in the circumstances of the case, the learned income tax Appellate Tribunal 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 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 ?

Whether, on the facts and in the circumstances of the case, the learned income tax. Appellate Tribunal 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 income tax Appellate Tribunal 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 Assessing Officer and the Commissioner of income tax (Appeals) 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 manufacturing of felts which are used in paper industry. The assessee filed its return on November 28, 2006, declaring taxable income of Rs. 17,48,86,985. The assessment was finalised u/s 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 per cent, 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 December 22, 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 September 15, 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 :

(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.

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 authorised representative, all the expenses which give an enduring benefit do not amount to capital expenditure. This was so held by the hon''ble Supreme Court in the cases of Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, and Alembic Chemical Works Co. Ltd. Vs. Commissioner of Income Tax, Gujarat, 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 stones 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 the hon''ble Supreme Court in the case of The Commissioner of Income Tax, Madurai, Vs. Saravana Spinning Mills Pvt. Ltd., relied upon by the learned Departmental representative 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 stones 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 capital asset. We, therefore, hold the expenses to be revenue in nature.

(B) Expenditure incurred by the assessee on "software"

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 lakhs 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 modifications 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 the assessee relating to bad debts

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 the profit and loss account and crediting the respective party''s account. The assessee has debited the sum as the cheque issued by the party 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 TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, held that after the amendment brought in with effect from April 1, 1999, writing off an amount as irrecoverable in the accounts is a sufficient compliance for claiming deduction u/s 36(1)(vii) of the Act. Similar view has also been held by the hon''ble Delhi High Court in the following cases :

(1) Commissioner of Income Tax Vs. Autometers Ltd.,

(2) Commissioner of Income Tax Vs. Morgan Securities and Credits (P) Ltd.,

''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 allowable 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 the 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 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 the 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.