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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
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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).

 

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