High Court of Karnataka

Commissioner Of Income Tax vs M/S Ncr Corporation Pvt Ltd

MANU/KA/2258/2020

16.06.2020

Direct Taxation

ATMs are to be treated as computers, entitled to a high rate of depreciation

Assessee is engaged in the business of manufacture of automated teller machines (ATMs) and distribution of NCR book products and commissions in India. The assessee filed the return of income declaring taxable income of Rs.4,66,32,670. The return was processed under Section 143(1) of Income Tax Act, 1961 and was selected for scrutiny and notice under Section 143(2) of the Act was issued. The assessee had taken premises on lease for a period of three years. The assessee claimed expenditure of Rs.89,23,817 on account of leasehold improvements as revenue expenditure in the computation of income.

The assessing officer by an order held that leasehold improvements expenditure is incurred towards purchase of workstations, improvement of interiors and electrical works, fee paid to the architect, cabling work for networking of computers in connection with setting up of office. Thus, the expenditure was incurred to bring into existence an asset or an advantage for enduring benefit of business, his property is computable as capital expenditure. Accordingly, the leasehold improvement for an amount of Rs.89,23,817 was disallowed and added back and depreciation towards furniture and fitting at the rate of 15% was allowed. The assessing officer further held that the assessee has changed the revenue recognition method and therefore it is not possible to ascertain true and correct profit of the assessee for the accounting year in question. It was further held that ATMs cannot be termed as computers and therefore are eligible for depreciation to the extent of 25%. Being aggrieved, the assessee preferred an appeal.

The assessee assailed the order passed by the Commissioner of Income Tax (Appeals) before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal by an order held that, the expenditure incurred by the assessee for leasehold improvements has to be treated as revenue expenditure under Section 37 of the Act. It was further held that ATMs are computers and therefore, assessee is eligible to depreciation of 60%. It was further held that even though the assessee had changed the method of revenue recognition, however, he is entitled to change the method of accounting as the same has no impact on the revenue. Accordingly, the appeal preferred by the assessee was partly allowed. Being aggrieved, the Revenue is in appeal before present Court.

Learned counsel for the revenue submitted that the assessee had created an asset resulting in enduring benefit for business, which was capital in nature and therefore, the tribunal grossly erred in treating the same to be a revenue expenditure and that the asset was capital in nature.

If the facts of the case in hand is examined, it is evident that the assessee had taken the premises on lease for a period of three years and had incurred expenditure of Rs. 89,23,817 for improvements in the lease premises. The premises did not belong to the assessee and the expenditure did not bring into existence any capital asset for the assessee. The expenses were incurred for conducting the business of the assessee more profitably and more successfully. The assessee therefore, got the business advantage and therefore, the tribunal has rightly treated the expenses incurred as revenue expenditure incurred for improvement in leasehold property as revenue expenditure.

Another question is whether ATMs are computers and are eligible for 60% depreciation. It is pertinent to note that provisions of the Karnataka Sales Tax Act, 1957 and provisions of Income Tax Act, 1961 are not pari materia provisions. The classification of goods has been provided only for the purposes of sales tax whereas, the provisions of the income tax levy tax on income. It is pertinent to mention here that in Appendix 1 to Income Tax Rules, the computer has been treated as plant and machinery. The Tribunal by placing reliance on the decision of Bombay High Court in 'DCIT vs. Data Craft India Ltd.,' has held that so long as functions of the computers are performed with other functions and other functions are dependent on the functions of the computer, ATMs are to be treated as computers and are entitled to higher rate of depreciation. It has further been held that computer is integral part of ATM machine and on the basis of information processed by the computer in ATM machine only, the mechanical function of the dispensation of cash or deposit of cash is done. Therefore, it was held that ATMs are computers and are entitled to higher rate of depreciation.

The Supreme Court in COMMISSIONER OF INCOME-TAX vs. Bilahari Investments (P) Ltd., has held that in every case of substitution of one method by another method, it has been held that burden is on the department to prove that the method in vogue is not correct and distorts the profit of a particular year. From perusal of the order passed by the assessing officer as well Commissioner of Income Tax (Appeals), it is evident that revenue has failed to discharge the aforesaid burden. Therefore, the tribunal has rightly held that the assessee is entitled to change the method of accounting. In view of the preceding analysis the substantial questions of law framed by this court are answered against the revenue and in favour of the assessee. Appeal dismissed.

Tags : Assessment Expenditure Depreciation

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