1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 16TH DAY OF JUNE 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE M. NAGAPRASANNA I.T.A. NO.242 OF 2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX-III C.R BUILDINGS, QUEENS ROAD, BANGALORE-560001. 2. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE12 (1), BANGALORE APPELLANTS (By Sri.E.I.SANMATHI, ADV.,) AND: M/S NCR CORPORATION PVT LTD 11, 3RD FLOOR, NITON BUILDING, PALACE ROAD,BANGALORE-42 RESPONDENT (By Sri.T.SURYANARAYANA, ADV.) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 28.02.2011 PASSED IN ITA NO.353/BANG/2010 FOR ASSESSMENT YEAR 2 2003-04, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: (I) FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (II) SET ASIDE ORDERS PASSED BY ITAT, BENCH, BANGALORE IN ITA NO.353/BANG/2010 DATED 28.02.2011 AS SOUGHT FOR IN THIS APPEAL, IN INTEREST OF JUSTICE AND EQUITY. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for short) has been preferred by revenue. subject matter of appeal pertains to Assessment year 2003-04. appeal was admitted by bench of this Court vide order dated 06.02.2012 on following substantial questions of law: (i) Whether tribunal is correct on facts and in law in holding that expenditure said to have been incurred by assessee amounting to Rs.89,23,817/- on improvement of interiors, electrical works, modeling and networking of computers, work stations 3 and other miscellaneous works in leased premises is revenue expenditure without appreciating that this one-time expenditure incurred in providing necessary infrastructure resulted in benefit of enduring nature which will be available to assessee for many years? (ii) Whether 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? (iii) Whether tribunal is justified in accepting change in method of accounting adopted by assessee when such change would not bring out or enable ascertainment of true and correct profits of ass. for accounting year in question? 4 (iv) Whether tribunal is correct in law to accept change in method of accounting adopted by assessee without taking into account provisions of sale of goods Act as per which delivery is point of time when sale is complete? 2. Facts giving rise to filing of this appeal briefly stated are that assessee is engaged in business of manufacture of automated teller machines (ATMs) and distribution of NCR book products and commissions in India. assessee filed return of income on 01.12.2003 declaring taxable income of Rs.4,66,32,670/-. return was processed under Section 143(1) and was selected for scrutiny and notice under Section 143(2) of Act was issued. assessee had taken premises on lease for period of three years. assessee claimed expenditure of Rs.89,23,817/- on account of leasehold improvements as revenue expenditure in computation of income. 5 assessing officer by order dated 31.03.2006 inter alia held that leasehold improvements expenditure is incurred towards purchase of workstations, improvement of interiors and electrical works, fee paid to architect, cabling work for networking of computers in connection with setting up of office. Thus, expenditure was incurred to bring into existence asset or advantage for enduring benefit of business, his property is computable as capital expenditure. Accordingly, leasehold improvement for amount of Rs.89,23,817/- was disallowed and added back and depreciation towards furniture and fitting at rate of 15% was allowed. assessing officer further held that assessee has changed revenue recognition method and therefore it is not possible to ascertain true and correct profit of assessee for accounting year in question. It was further held that ATMs cannot be termed as computers and therefore are eligible for depreciation to extent of 25%. Being aggrieved, 6 assessee preferred appeal. order was affirmed in appeal by assessee 3. assessee assailed order passed by Commissioner of Income Tax (Appeals) before Income Tax Appellate Tribunal. Income Tax Appellate Tribunal by order dated 28.02.2011 inter alia held that expenditure incurred by assessee for leasehold improvements has to be treated as revenue expenditure under Section 37 of 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 assessee had changed method of revenue recognition, however, he is entitled to change method of accounting as same has no impact on revenue. Accordingly, appeal preferred by assessee was partly allowed. Being aggrieved, revenue is in appeal before us. 7 4. Learned counsel for revenue submitted that assessee had created asset resulting in enduring benefit for business, which was capital in nature and therefore, tribunal grossly erred in treating same to be revenue expenditure and that asset was capital in nature. In support of aforesaid submission, reliance has been placed on decision of Supreme Court in CIT VS. MADRAS AUTO SERVICES (P) LTD., , 233 ITR 468 and decision of this court in D.P.CHIRANIA AND COMPANY VS. COMMISSIONER OF INCOME-TAX, MYSORE , 112 ITR 12. It is further submitted that ATMs are not Computers and tribunal erred in holding that ATMs are computers and assessee is entitled to deduction to extent of 60%. In support of aforesaid submission, reliance has been placed on decision of this court in DIEBOLD SYSTEMS PVT. Ltd. VS. COMMISSIONER OF COMMERICAL TAXES (KARNATAKA) , ILR (KAR)-2005-0-2210. It is also urged that change 8 of accounting method is impermissible as same has resulted in loss to revenue. 5. On other hand, learned counsel for assessee has pointed out that premises were taken on lease for period of three years and expenditure was incurred towards purchase of workstations, improvement of interiors and electrical works, fee paid to architect, cabling work for networking of computers in connection with setting up of office. Therefore, same cannot be treated as capital asset. It is further submitted that assessee only derived business advantage on account of expenditure incurred on lease hold property for improvements. In support of aforesaid submission, reliance has been placed on MADRAS AUTO SERVICES (P) LTD. supra. It is also pointed out that reliance placed by revenue on decision rendered in DIEBOLD SYSTEMS PVT. LTD., supra is misconceived as aforesaid decision has been rendered in context of provisions under 9 Karnataka Sales Tax Act, 1957. It is also urged that provisions of Karnataka Sales Tax Act, 1957 and Income Tax Act, 1961, are not pari materia and therefore, no reliance can be placed on aforesaid decision. Learned counsel has also invited our attention of Appendix 1 to Income Tax Rules and has pointed out that computer has been included under plant and machinery. In support of aforesaid submission, reliance has been placed on decision in case of CIT VS. SARASWAT INFOTECH LTD., , ITA NO.1243/2012. It is also argued that words and expression defined in another statute cannot be used for construction of same words or expression used in other statute unless both statutes are in pari materia. In support of aforesaid submission, reliance has been placed on decision of Supreme Court in JAGATRAM AHUJA VS. COMMISSIONER OF GIFT-TAX , (2000) 113 TAXMAN 459 (SC). It is also submitted that it is open for assessee to change method of accounting 10 and burden is on department to prove that method in vogue is not correct and distorts profits of particular year. It is also argued that in instant case aforesaid burden has not been discharged by revenue. In support of aforesaid submission, reliance has been placed on decision of Supreme Court in COMMISSIONER OF INCOME-TAX VS. BILAHARI INVESTMENT (P.) LTD., , (2008) 168 TAXMAN 95 (SC). 6. We have considered submissions made on both sides and have perused record. Admittedly, in instant case, assessee had incurred expenditure of Rs.89,23,817/- towards purchase of workstations, improvement of interiors and electrical works, fee paid to architect, cabling work for networking of computers in connection with setting up of office. test for distinguishing capital expenditure and revenue expenditure was laid down by Supreme Court in ASSAM BENGAL CEMENT CO. LTD., VS. 11 CIT , (1955) 27 ITR 34, which laid down text, which reads as under: 1. Outlay is deemed to be capital when it is made for initiation of business, for extension of business, or for substantial 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 view to bringing into existence asset or advantage for enduring benefit of trade. If what is got rid of by lump sum payment is annual business expense chargeable against revenue, lump sum payment should equally be regarded as business expense, but if lump sum payment brings in capital asset, then that puts business on another footing altogether. 3. Whether for purpose of expenditure, any capital was withdrawn, or, in other words, whether object of incurring expenditure was to employ 12 what was taken in as capital of business. Again, it is to be seen whether expenditure incurred was part of fixed capital of business or part of its circulating capital. 7. aforesaid principles were referred to with approval in MADRAS AUTO SERVICES (P) LTD., supra on touchstone of aforesaid well settled legal principle, if facts of case in hand is examined, it is evident that assessee had taken premises on lease for period of three years and had incurred expenditure of Rs.89,23,817/- for improvements in lease premises. premises did not belong to assessee and expenditure did not bring into existence any capital asset for assessee. expenses were incurred for conducting business of assessee more profitably and more successfully. assessee therefore, got business advantage and therefore, tribunal has rightly treated expenses incurred as revenue expenditure incurred for 13 improvement in leasehold property as revenue expenditure. 8. This takes us to second substantial question of law whether ATMs are computers and are eligible for 60% depreciation. It is pertinent to note that provisions of Karnataka Sales Tax Act, 1957 and provisions of Income Tax Act, 1961 are not pari materia provisions. classification of goods has been provided only for purposes of sales tax whereas, provisions of income tax levy tax on income. It is pertinent to mention here that Appendix 1 to Income Tax Rules, computer has been treated as plant and machinery. Therefore, decision relied upon by revenue in DIEBOLD SYSTEMS PVT. LTD., supra has no application to fact situation of case. tribunal by placing reliance on decision of Bombay High Court in DCIT VS. DATA CRAFT INDIA LTD., , (2010) 40 SOT 295 has held that so long as functions of computers are performed with other functions 14 and other functions are dependant on functions of 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 basis of information processed by computer in ATM machine only, mechanical function of 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. aforesaid finding of fact has been recorded on correct analysis of material available on record and by placing reliance on decision of Bombay High Court. 9. We may now deal with substantial question of law nos. 3 and 4. Supreme Court in BILAHARI INVESTMENTS (P) LTD., supra has held that in every case of substitution of one method by another method it has been held that burden is on department to prove that method in vogue is not correct and distorts profit of particular year. From perusal of 15 order passed by assessing officer as well Commissioner of Income Tax (Appeals), it is evident that revenue has failed to discharge aforesaid burden. Therefore, tribunal has rightly held that assessee is entitled to change method of accounting. In view of preceding analysis substantial questions of law framed by this court are answered against revenue and in favour of assessee. In result we do not find any merit in appeal. same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss Commissioner of Income-tax-III, Bangalore / Assistant Commissioner of Income-tax, Circle-12(1), Bangalore v. NCR Corporation Pvt. Ltd