CIT (Large Tax Payer Unit) vs Lubrizol India Ltd.

In this appeal by the revenue for the assessment year 2004-05, the following questions of law have been raised for our consideration:-

A. Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that expenses incurred in obtaining club membership is revenue in nature as held by the assessing officer and confirmed by CIT(A)?

B. Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that computer software expenses incurred by the assessee were revenue in nature and not capital expenditure as held by the assessing officer and confirmed by CIT(A)?

C. Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that compensation paid by the assessee for pre-closure of agreement entered with M/s. Industrial Oxygen Limited (INOX) for supply of nitrogen was revenue in nature and not capital expenditure as held by the assessing officer and confirmed by CIT(A)?

D. Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that bad debts written off is allowable even though the assessee failed to produce evidence from which it could be inferred that the said debts had become bad?

So far as question A is concerned, the dispute relates to payment of entrance fees for club memberships. The case of the revenue is that the entrance fees is of capital nature while the respondent contends that it is revenue and should be allowed as expenses. The Tribunal in the impugned order has followed the decision of this Court in the case of Otis Elevator Co. (India) Ltd Vs. Commissioner of Income Tax, holding that the entrance fees for the membership of a club would be considered as revenue expenditure.

The Tribunal observed that though the entrance fee would have an enduring benefit, it cannot be considered to be capital in nature as no asset was created. Mr. Vimal Gupta, senior counsel on behalf of the revenue submits that the decision of this Court in the matter of Otis Elavator Co. Ltd. (India) (supra) would not be applicable as it did not deal with the payment of entrance fees for membership of the club.

However, it is not in dispute that various decisions of the Tribunal had followed the decision of this Court in the matter of Otis Elavator Co. Ltd. (India) (supra) and allowed entrance fees of club as revenue expenditure. Further, this Court has also in numerous matters applied the decision of Otis Elavator Co. Ltd. (India) (supra) to the cases were entrance fees of club membership was an issue in dispute and held that the same is allowable as revenue expenditure. In view of the above, we do not entertain the question as formulated.

So far as question B is concerned, the Tribunal has held that the computer software expenses incurred by the respondent assessee was revenue in nature. The expenses were incurred to obtain the application software which gets upgraded from time to time due to change in technology. This licence being for limited period would have to be renewed from time to time. In the aforesaid circumstances, the Tribunal held that considering the nature of the software licence i.e. application software, the same has to be allowed as a revenue expenditure. In view of the finding of fact arrived at further by the Tribunal that the expenses have been incurred on application software which is for a limited time frame and has to be renewed from time to time, we see no reason to entertain question B as framed by the revenue.

So far as question C is concerned, the dispute is, whether the compensation paid by the respondent for pre-closure of the agreement to receive nitrogen gas from one M/s. INOX would be allowable as revenue expenditure or be capitalised as a part of the respondents nitrogen gas plant. The Tribunal has held that the contract was terminated by the respondent-assessee for commercial expediency as the quality if nitrogen gas and timely supplies by M/s. INOX was an issue leading to respondent setting up its own plant.

The agreement was cancelled by the respondent-assessee approximately 10 months prior to the culmination of the agreement.

Further the break up of the compensation which was paid to INOX for cancellation of the agreement was for compensation for fixed facility charges for the balance period of 10 months; compensation for short lifting of gas for the balance period of 10 months and compensation for pipe line rental paid to MIDC. Thus, the aforesaid heads of compensation were in the nature of revenue expenditure and not capital expenditure. We find that the finding of the Tribunal is a reasonable one and does not lead to any question of law. In the circumstances, question C is not entertained.

So far question D is concerned, the Tribunal has followed the decision of the Apex Court in the case of TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, . Counsel for the parties state that the issue stands covered in favour of the assessee and against the revenue by the decision of TRF Ltd. (supra). Accordingly, we see no reason to entertain question D. Therefore, the appeal is dismissed with no order as to.