June 2008
(a) S. 37(1) — Expenditure on implementation of new ERP package is revenue expenditure. (b) Only expenditure of capital nature on repairs of leased premises is covered by Explanation 1 to S. 32(1)
By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
Reading Time 3 mins
fiogf49gjkf0d
New Page 1
22 (2007) 112 TTJ 94 (Chd.)
Glaxo Smith Kline Consumer Healthcare Ltd. v.
ACIT
ITA Nos. 379 & 534 (Chd.) of 2004 and 309 & 310 (Chd.) of
2005
A.Ys. 1998-99 to 2001-02. Dated : 21-3-2007
(a) S. 37(1) of the Income-tax Act, 1961 —
Expenditure on implementation of new ERP package is revenue expenditure.
(b) S. 30 & S. 32(1) of the Income-tax Act 1961 —
Only expenditure of capital nature incurred on repairs of leased premises is
covered by Explanation 1 to S. 32(1).
Implementation of ERP package :
The Assessing Officer rejected the assessee’s claim for
deduction of expenses incurred on implementation of a new ERP package for
recording of manufacturing and accounting transactions. The Assessing Officer
held that such expenditure was capital in nature, since it would provide the
assessee with enduring benefits. The CIT(A), however, allowed the assessee’s
claim.
The Tribunal allowed the assessee’s claim. The Tribunal noted
as under :
1. The majority of the expense was relating to salaries,
travelling and other routine business expenses.
2. The expenditure does not result in acquisition of any
asset in the hands of the assessee.
3. An efficient and reliable recording of activities of
accounting, finance, inventory management, processing of purchases, sales,
etc. would enable the assessee to be more efficient and profitable in carrying
out its main business activity of manufacturing. Where the assessee incurs
expenditure to further improve and upgrade its manner of recording of
accounting and other related transactions, it does have an impact on
generation of income, since the assessee acquires improved inputs to take
business decisions.
4. However, it does not add to the capital apparatus of the
assessee. Therefore, the resultant benefits, in the shape of carrying on
business more efficiently and smoothly, cannot be said to be an advantage
accruing in the capital field.
Renovation of leased premises :
In respect of expenditure incurred by the assessee on
renovation of office premises taken on lease, the Assessing Officer and the
CIT(A) held that in terms of Explanation 1 appended to S. 32(1) of the Act, any
expenditure incurred towards the renovation/ improvement of leased building is
to be held as capital in nature.
The Tribunal, relying on a plethora of cases, held that only
‘capital expenditure’ is covered within the purview of the said Explanation —
each and every expenditure does not fall within the realm of the Explanation.
The Tribunal noted as under :
(1) The expenditure envisaged in the Explanation, inter
alia, includes expenditure by way of renovation or expansion or of
improvement to the building, provided of course that the same is to be of
capital nature.
(2) If it is found that the expenditure is revenue
expenditure, then notwithstanding that it is incurred on a leased building,
the same will not fall within the purview of the Explanation 1 to S. 32(1).
