Tuesday, 13 October 2015

Whether capital expenditure incurred for replacement of a computer system within a large network can be allowed as business expenditure u/s 36(1)(xi) - YES: HC

THE bone of contention is - Whether the capital expenditure incurred for replacement of a computer system within a large network can be allowed as a business expenditure under section 36(1)(xi). YES is the answer.
Facts of the caase
The assessee is a tea manufacturer. It was submitted by the assessee's counsel that since u/s 36(1)(xi) deduction can be granted so as to make the existing computer system as Y2K compliant system and as the existing computer system was wholly replaced with the purchase of a new computer system, the assessee was not entitled to the deduction. Referring to Section 36(1)(xi) and Explanation (a) and (b) thereof assessee's counsel submitted that as the expenditure was made to make the computer system Y2K compliant computer system, some modifications and replacements were made with the network system as stipulated under the law, it was an allowable expenditure. In this regard reliance has been placed on an unreported judgment of the Bombay High Court delivered on 14th January, 2013 being ITA No.4782 of 2010 (Commissioner of Income Tax Vs. Asian Paints (India) Ltd.).
Held that,
++ in computing the income, the said section provides for deduction if such expenditure is incurred by the assessee, on or after 1st day of April, 1999 but before 1st day of April, 2000, wholly and exclusively in respect of a non-Y2K compliant computer system, owned by the assessee and used for the purposes of his business or profession, so as to make such computer system Y2K compliant computer system. There is no dispute that the expenditure was made in between 1st April, 1999 and before 1st April, 2000. There is also no dispute that after such expenditure was made, as required under the law, a certificate was granted under Section 288(2) by the Chartered Accountant. The issue is whether the entire computer system was replaced to make it Y2K compliant computer system or whether some parts of the system were changed. From a reading of the definition of “computer system” it is evident that it is a device or collection of devices which includes input and output support devices and is capable of being used in conjunction with external files or more which contain computer programmes, electronic instructions, input data and output data. In the instant case the Tribunal, being the ultimate fact finding authority, found that “Therefore, on the basis of the facts and circumstances as brought on record, we are of the view that the capital expenditure required to replace the entire computer but within a network system should be allowed as an expenditure as was the intention of the legislation in the Finance Act, 1999 by inserting section 36(1)(xi).” Thus the expenditure was for replacement of a system within a larger system which is permissible in law. Hence, the Tribunal was justified in allowing the claim of the appellant. The judgment in CIT vs. Asian Paints Ltd. supports the stand of the respondent. Therefore, the question no.2 is answered in the affirmative, against the revenue and in favour of the assessee. The appeal is dismissed.

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