THE issues before the Bench are - Whether when the assessee leases out plant and machinery, the installation costs incurred to bring the assets into working conditions can be claimed as revenue expenditure and Whether when the assessee procures software compatible with the hardware leased out, such expenditure is to be construed as capital in nature. And the verdict goes against the assessee.
Facts of the case
A) Assessee engages itself in the promotion and establishing telecom services and allied activities, including mobile and
cellular services. Pursuant to its main object it leased to M/s. Bharti Telenet certain plant and machinery. Bharti Telenet had obtained licence for the purpose of providing cellular services in Himachal Pradesh. The lease arrangement entered into between the assessee and Bharti Telenet was scrutinized. The assessing officer noticed that the cost of plant and machinery given on lease by the assessee was Rs. 10,57,25,094/- which was reflected in the balance sheet of the assessee under the head “plant and machinery given on lease”. That apart the assessee had incurred an expenditure to the tune of Rs. 1,35,05,869/- towards installation of these plant and machinery; in addition to it had incurred a sum of Rs. 2,69,35,669/- towards software expenses. The assessee claimed the installation expenses as a deduction, debiting it to the profit and loss account. The software expenses on the other hand were treated in the accounts as deferred revenue expenditure and a sum of Rs. 15,05,446/- was written off in the previous order. In the computation of income accompanying the return the software expenses of Rs. 2,69,35,669/- were claimed as a deduction. The assessing officer disallowed both these amounts. The assessee carried the matter unsuccessfully in appeal. As far as the first issue i.e. installation expenses were concerned, the CIT (Appeals) confirmed the assessing officer's order holding that the expenditure fell properly in the capital field. The Tribunal confirmed the same.
In appeal before the HC, the counsel argued that the expenditure on installation of Rs. 1,35,05,869/- did not confer any capital advantage. He argued that since no enduring benefit ensued as a result of this expenditure and a separate lease rental was obtained from the M/s. Bharti Telenet, the expenditure towards installation had to be considered in the light of the decisions which laid down the test as to whether commercially, they conferred any advantage.
B) The second issue concerns software expenses to the tune of Rs. 2,69,35,669/-. The assessee's contention was that this was a pre-design software and not customized to suit its particular requirements. The counsel highlighted the fact that the lower authorities particularly the Tribunal were influenced by the consideration that a composite amount was charged for such software in the lease arrangement. It was submitted that whether such charges were an integral part of financing should not obscure the real nature of the software for which again the test is whether it would fall in the revenue filed. Counsel in this regard relied upon the license agreement entered between the assessee and M/s. UB Vest (Usha Bethron Ltd.) whereby the latter agreed to license its software.
Having heard the parties, the HC held that,
A) ++ the test of “enduring benefit” which was perceived as the true and applicable test to judge whether an expenditure fell in capital field has been, over the years, considered as a self-limiting one. The Courts have held that a proper approach has to be adopted and in doing so the nature of the advantage in a commercial sense and whether it falls properly in the capital field in a commercial sense has to be considered. In the present extent, however, this Court recalls the judgment of the Supreme Court in Challapalli Sugars Ltd. v. CIT. The Court there had occasion to consider whether an expenditure necessary to bring an asset into existence and to put it in working condition was capital or revenue. The Court held that expenditure necessary to bring into existence and to put the assets in a working condition would be capital in nature. In case money is borrowed by a newly started company, the interest incurred prior to the commencing of production would be part of the actual cost of the plant and machinery. It was noted that the accepted rule of accountancy for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and put them in working condition. Therefore, the test “all expenditure necessary to bring such aspects into existence and to put them in a working condition” is a determinative test for installation and other charges needed to effectuate the working condition of the leased equipment. In this case clearly the authorities have applied the test and held the expenditure in question (Rs. 1,35,05,869/-) to be properly falling in the capital field;
++ we see no reason to differ with them. The Tribunal's reasoning is unexceptionable. Its order needs no interference and the first substantial question of law is answered in favour of the revenue and against the assessee;
B) ++ this Court notices that the lower authorities and the Tribunal had the benefit of considering all the documents which included the lease agreement with Bharti Telenet and the license agreement dated 11.11.1996 whereby the assessee secured license to exploit the software, provided it procured hardware as per agreed specification and also complied with order by the lessor UB Vest. The software as well as hardware were made an integral part of the arrangement. The software apparently caters to the hardware. In this case, it is necessary for the kind of software to cater to diverse activities such as billing regarding user and analyzing such like activities to promote speed and efficiency. That the parties chose to have a composite arrangement is one factor which the Tribunal was entitled to take into consideration. The Tribunal in our opinion correctly held that the test to discern whether the expenditure incurred by the assessee in this regard was capital or revenue did not in any manner differ from the content or character which were applicable while considering issue No.1. This Court finds no reason to differ from the Tribunal; there is certainly no reason to interfere with the Tribunal and accordingly the second question is answered in favour of the revenue and against the assessee.
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