THE issue is - Whether consideration paid to acquire unexpired portion of service agreements which will generate revenue for the assessee, is required to be treated as revenue expenditure. YES is the answer.
Facts of the case
A) The assessee is an Indian multinational information technology service, consulting and business solutions company. During the concerned year, it had paid Rs. 85,00,000/- to Citi Corp Information Technology Industries Ltd (CITIL) for purchase of their processing division. This amount was amortized over the period of 25 months being balance unexpired period of contract. The assessee thereafter duly filed the copy of assignment agreement effective from 1st August 1998 with the AO. The AO however held that no where it was mentioned in the contract that the said amount was paid to CITIL for surrendering their processing division. The processing service division had entered into several contracts with its clients which were secured by CITIL in its ordinary course of business. The assessee had also taken over rights and obligations under the contract. The AO held that the said amount was not mentioned in the agreement executed between the assessee company and CITIL, and further the amount of Rs. 40,80,000/- paid for the period of 12 months out of total payment of Rs.85,00,000/- paid for 25 months was to be held as capital expenditure being the acquisition of processing division of the CITIL and disallowed as revenue expenditure as claimed by the assessee.
On appeal, the CIT(A) held that the assessee had acquired the processing service division of CITIL and thus the expenditure was for the purpose of extension of business and hence income earning asset in the form of processing service division had been acquired by the assessee. The CIT(A) therefore held that this is incurred for purchase of processing contract which is capital in nature being intangible asset to be classified as business or commercial rights and entitled to depreciation at the rate of 25%.
B) The assessee is also doing business of leasing of cars. At the time of filing of return, the assessee had shown lease rentals as income and claimed depreciation on the leased cars. Since the cars were leased by the assessee to its associated concerns and not to outsiders, the AO held that this was nothing but financial transaction for purchase of car and only the name was given by the assessee as leasing transaction to get the benefit of depreciation and also get the benefit to its associated enterprises by way of lease rent paid and also claim depreciation on car leased. The AO held that the lease rental was nothing but principle component plus interest component which was spread over for particular months to recover the loan amount along with the interest. The AO held that after the expiry of loan period, the assessee was selling the cars at very nominal amount at Rs. 2,000 to 3,000. The AO held that the maximum lease period was 36 months and if the car was sold after completion of 36 months, then it will fetch in the market not less than 50% of the original cost. The AO held that in the hands of lessor, only interest component would be taxed and no depreciation would be available and in the hands of the lessee only deduction would be available in respect of interest paid on installment and depreciation. The AO held that the lessee was claiming lease rental charges which contains principle component and interest component and had also claimed depreciation and unless and until the principal component was not disallowed out of lease rental charges claimed as deduction, the lessor would also not get any deduction. Accordingly, the depreciation of Rs.3,00,52,849/- claimed on the car leased was disallowed and added to the income of the assessee.
On appeal, CIT(A) held that the lessees have rented the cars and the assessee had only provided funds. The lessee was using the cars for the entire economic life and all risks and rewards incidental to ownership had been transferred to the lessee. The lease was for a fixed period and non cancellable and thereby he held that the lease was a financial lease and hence depreciation was rightly disallowed by the AO keeping in view Special Bench decision of Mumbai Tribunal in the Indus Ind Bank Limited, as the assessee company was not owner of the assets.
C) The assessee during concerned year, had incurred expenditure of Rs. 3,198,207/- on repair and maintenance of the computers. The AO noted that the assessee had purchased computer for office after 1.10.1998 amounting to Rs. 5,29,709/- and before 1.10.1998 of Rs.51,502, therefore the total cost of computer used in the office premises comes to Rs.5,81,211/- while computers given on lease which was purchased after 1.10.1998 amounting to Rs. 32,88,246/- which had been treated as finance transaction and no repair was to be carried on by the assessee. The AO held that nobody would incur expenditure on computer repair at Rs. 3,198,307/- of which the cost of computer was only 5,81,211/- and he disallowed Rs. 30 lacs out of the said expense.
On appeal, the CIT(A) restricted the disallowance to Rs. 4,40,000/- after holding that LAN administrative charges of Rs.9,68,002/- ought to be allowed as a deduction being in the nature of networking maintenance charges which was not computer maintenance charges and of the balance Rs.22,00,000/-, the CIT(A) held that it would be fair to restrict the disallowance to 20% of the repair and maintenance charges .
Having heard the parties, the Tribunal held that,
Acquisition of service division
++ it is observed that assessee company vide assignment agreement effective from 01.08.1998, has acquired the service agreement entered into between CITI Bank and CITIL whereby all the liabilities, rights and obligation and interest in the aforestated agreement were acquired by the assessee. Since these are service agreement from which the revenue is to be generated over a period of unexpired 25 months and the assesse's counsel has drawn our attention to the audited accounts to the fact that the revenue of Rs. 9,06,10,908/- being transaction processing and administrative fees is received by the asssesee company out of these assigned agreement/contracts only during the period ended 30th June 1999 and no processing division/assets under these agreements was acquired nor there is any slump sale happening in favour of the assessee company rather it is merely assignment of agreements in favour of the assessee company whereby the unexpired period revenue generated contracts are assigned in favour of the assessee. The entire consideration of Rs. 85 lac is paid to acquire the unexpired portion of the service agreements which will generate revenue for the assessee company during the unexpired period of this service agreement i.e., 25 months. Keeping in view the principle of matching concepts of revenue and expenditure and also that these assignment of agreements are towards revenue field, we hold that assessee company has rightly charged as revenue expenses, 7 months expenses out of 25 months unexpired period of contract being Rs. 23,80,000/- and hence additions made by the AO to the tune of Rs.23,80,000/- to the income of the assessee and as confirmed by the CIT(A) is hereby deleted;
Depreciation on leased cars
++ it is observed that to claim depreciation, the asset should be owned by the assessee and it should be used for the purpose of business of the assessee. In this case, the assessee company is owning the asset i.e. cars till the same are sold to the associated concern/employees. The assessee company by giving these cars on lease is in fact using the same for its own business. The Judgment of Supreme Court in the case of ICDS Ltd. is directly applicable in the facts and circumstances of the present case and the assessee company has rightly claimed the depreciation on the cars leased by it. The assessee company has also stated that it has brought on record before the CIT(A), the evidence that no depreciation is claimed by the lessee on these leased cars and the CIT(A) has given finding of the fact that there was no basis for the AO to conclude that the lessee's have claimed depreciation on these leased assets i.e. cars. Hence in view of the above, we hold that assessee company has rightly claimed the depreciation on the leased assets i.e. cars and the disallowance of Depreciation of Rs.3,00,52,049/- claimed by the assessee company on leased asset i.e. cars as disallowed by the AO and as confirmed by the CIT(A) is hereby deleted;
Computer repairs & maintenance expenses
++ it is observed that the assessee company has duly incurred these expenses of Rs. 31,98,307/- and no defect has been pointed out by the AO or by the CIT(A) in the books of account maintained by the assessee nor the books of accounts are rejected by the AO or by the CIT(A). We note that during the A.Y, the assessee company transitioned from being a NBFC to a processing company. A major component of the income of the assessee is from transaction processing business. The assessee company has duly demonstrated that these expenses are to be incurred for the purposes of its business. The assessee company has demonstrated that the expenses incurred are mainly LAN administration charges paid to CMS, Microbanker AMC, Microland AMC and Toner cartridge purchases-computer consumabes, which aggregates to Rs.27,20,914/- out of total expenses of Rs.31,98,307/- and hence constitute majority of expenses while as well for the rest of the expenses the details are submitted by the assessee company, which are stated to be connected with the computer equipment repairs and maintenance . We, therefore, hold that these expenses are to be fully allowed as they are incurred for the purpose of business of the assessee company and hence the disallowance of Rs.4,40,000.00/- as upheld by the CIT(A) is deleted.