Case Law Details

Case Name : ACIT Vs Kerala Communicators Cable Ltd. (ITAT Cochin)
Appeal Number : IT Appeal No. 271 (Coch.) of 2018
Date of Judgement/Order : 30/04/2019
Related Assessment Year : 2014-15
Courts : All ITAT (6332) ITAT Cochin (109)

ACIT Vs Kerala Communicators Cable Ltd. (ITAT Cochin)

The Assessing Officer granted depreciation at the rate of 15% being machinery and plant other than those covered by sub-items (2), (3) and (8). According to the assessee, it is covered under sub-item (8)(ix)(E)(k). Sub-item (ix) of item (8) is energy saving device and (E) is electric equipment. For claiming higher rate of depreciation of 80%, assessee has to prove that the STB’s are energy saving devices being electrical equipment.

In the absence of proving so, STB’s would be entitled for depreciation under general category of `machinery and plant’ and not a sub-item mentioned under (8) i.e. energy saving device being electric equipment. The finding rendered by the CIT(A) is insufficient to come to a conclusion that the assessee is entitled to the depreciation at the rate of 80%.

The order of the assessment relied on by the assessee for assessment year 2015-2016 stating that the Assessing Officer had granted depreciation on STB’s at the rate of 80% for that year has been revised by the Commissioner u/s 263 of the I.T.Act and is no longer in existence.

Therefore, the assessee cannot place reliance on the assessment order for assessment year 2015-2016, wherein the assessee was granted depreciation at the rate of 80%. As per TRAI regulations dated 01.04.2015, the depreciation on the price of customer premises equipment (which included Set Top Box and remote control for Set Top Box) shall be calculated using straight line method at the rate not exceeding 1.7% for every completed calendar month or part thereof.

Therefore, the rate of depreciation at the rate of 15% allowed by the Assessing Officer treating the same as Plant and Machinery is in tune with TRAI regulations. Set Top Box is a device connected to a TV and which allows a subscriber to receive in unencrypted and descrambled form subscribed channels through an addressable system and unless assessee proves that STB’s comes within Rule 8(ix)(E)(k), it cannot claim higher depreciation of 80%.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal at the instance of the Revenue and cross objection preferred by the assessee are directed against CIT(A)’s order dated 28.03.2018. The relevant assessment year is 2014-2015.

2. The solitary issue that is raised in the appeal filed by the Revenue is whether the CIT(A) is justified in granting  depreciation on Set Top Boxes (STB) at the rate of 80% instead of 15% granted by the Assessing Officer? In the cross objection filed by the assessee, apart from supporting the order of CIT(A) in granting depreciation on Set Top Boxes (STB) @ 80%, the assessee has also raised an alternative contention that expenditure incurred on purchase of STB should be allowed as a revenue expenditure.

3. The brief facts of the case are as follows:

The assessee is a private limited company. It is engaged in the business of distribution of signals and internet supply to cable networking. For the assessment year 2014-2015, the assessee filed return of income on 11.08.2014 disclosing loss of Rs.26,39,45,530. The assessment u/s 143(3) was completed vide order dated 31.12.2016 assessing the total income at Rs.36,42,10,219. One of the disallowances made by the A.O. was depreciation on STB. The assessee had claimed depreciation on STB at Rs.36,13,86,286 at the rate of 100%. The A.O. restricted the claim of depreciation to 15% [being Machinery and Plant not covered under sub-items (2), (3) and (8) of new Appendix – I, [i.e., table of rates at which the depreciation is admissible]. The A.O. in paragraphs 28 and 29 of the impugned assessment was of the view that the assessee had recouped the cost of STB in the name of installation charges from its customers, and handed over possession of the same. Hence the A.O. was of the view that the assessee was not entitled to depreciation on STB. However, in paragraph 28 of the impugned assessment order, the A.O. contradicts the view taken in paragraphs 26 and 27 and holds that the assessee is entitled for depreciation at 15% being machinery and plant and not at the rate of 100% claimed by the assessee. It is also to be mentioned, in the course of assessment proceedings, the A.R. had furnished a revised depreciation statement claiming depreciation on STB at the rate of 80% in place of 100% claimed in the return of income. The relevant findings of the Assessing Officer in granting depreciation at 15% on STB and making disallowance of Rs.30,65,10,789 reads as follows:-

“26. The depreciation so claimed requires to be disallowed as no capital expenditure is incurred for the asset and the cost of the set top box is deemed to have been collected along with installation charges since admittedly the cost of STB’s is negligible. It is claimed by the assessee’s A.R that the charges so collected are installation charges and 100% depreciation is claimed on set top boxes since the assessee is not having control over the same after handing over the possession to the customer. The assessee’s A.R admits that physical possession of the set top boxes is handed over to the customer, charges for the STB’s are collected from the customers in the name of installation charges, the cost factor of set top box is admittedly negligible, and Set top box has no resale value in the market. Therefore, expenditure is revenue in nature. Hence there is no necessity to claim, capital expenditure and depreciation on the same. When this was pointed out, the assessee’s A.R, furnished a revised depreciation statement claiming depreciation on set top boxes @ 80% in place of 100% claimed, which comes to Rs.35,16,93,816/-. The A.R. stated that the assessee has to attend to the repairing work of the set top boxes as and when needed and the deprecation has been claimed as the possession of the instruments are handed over to the customer and the ownership lies with the assessee. It is to be noted that the assessee has been claiming repair charges from the customer as and when any repair is made on the set top boxes. The additions made during the year as per form 3CD was Rs.54,78,24,795/- in the nomenclature of “building: and the depreciation claimed on the same is at Rs.36,13,86,286/- @ 100% based on the date of put to use. Since the assessee is not having possession of the set top boxes and charges for installation of the same stands collected which includes cost of STB, the claim of depreciation on set top boxes was proposed to be disallowed as per pre-Assessment notice dated 14/12/2016 referred to above. The assessee’s A.R., at the time of hearing on 19/12/1016 reiterated the same stand as has been taken earlier.

27. I am not able to accept the contention of the assessee’s A.R. The total depreciation claimed on set top boxes comes to Rs.54,78,24,795/- which has to be disallowed since the assessee has collected the cost of STBs and possession of the same has already been handed over. In view of these facts, there is no asset in the possession of the assessee and the assessee is not eligible to claim any depreciation on an item the cost of which has already been collected in the name of Installation charges.

28. Even if the claim of assessee for depreciation on STB is treated to be admissible, it cannot at any rate be admissible at 100% or 80% as claimed in form 3CD treating it as “building”. The assessee also claims that form 3CD is generated online and in the depreciation blocks there is no item specified 100% other than head building, it was an accidental omission. The argument of the assessee’s A. R is not true and correct and not acceptable. Being a responsible Chartered Accountant who is supposed to certify correctness of entries in the statutory form 3CD, the assessee’s A.R is supposed to be well aware of the rate of depreciation of various block of assets specified under section 32 including building when the rate of depreciation on building is only 10% and not 100%. The equipments like STB can be considered, if at all admissible for depreciation, to be @ 15% under the “Plant & Machinery” and not @ 100%. In this view of the matter, if at all depreciation can be treated as admissible, it shall not exceed 15%. As discussed above, though the assessee is not entitled for any depreciation on STB in the absence of supporting evidence, taking a lenient view in favour of the assessee, I am allowing depreciation on the set top boxes @ 15% admissible to “Plant & Machinery” as against 100% claimed in the form 3CD under “building”.

The balance claim stands disallowed. The allowance of depreciation @ 15% is worked out as under:

Cost of Set Top Boxes purchased upto 17/09/2013 Rs.173182050

Cost of Set Top Boxes purchased from 01/10/13 to 31/03/2014 Rs.37,46,42,746

15% of the same comes to Rs.5,61,96,411

One and One half for use for less than 180 days (balance WDV 346544540) Rs.28098205

Total depreciation allowed @ 15% Rs.54075512

This is allowed in place of Rs.36,05,86,301/-claimed.

Disallowance comes to Rs.306510789/-

(Rs.360586301 – 54075512)

Disallowance Rs.306510789/-. The depreciation table indicating WDV is attached separately.”

4. Aggrieved by the assessment order, the assessee preferred an appeal to the first appellate authority. The CIT(A) was of the view that the STB belongs to the assessee and it is a capital asset of the assessee. The CIT(A) held that the assessee was entitled to depreciation for the same. The CIT(A) took the above view after perusing the customer Registration form. As regards the rate of depreciation, the CIT(A) held that the assessee is entitled to depreciation at the rate of 80% on the STB as per sub Item No.(8), (ix) (E)(k) of Part A item III being machinery and plant [new Appendix – I, which prescribes the table of rates at which the depreciation is admissible]. Therefore, the CIT(A) partly allowed the claim of the assessee. The relevant finding of the CIT(A) as regards the STB being the capital asset of the assessee-company and the findings that the assessee is entitled for depreciation at the rate of 80%, reads as follows:-

“7.8 I have gone through the assessment order and the submissions of appellant. In para 27 of the Assessment order, the assessing officer concluded that the total depreciation claimed on set top boxes has to be disallowed since the appellant has collected the cost of STBs and possession of the same has already been handed over. The AO also observed that there is no asset in the possession of the appellant and the appellant is not eligible to claim any depreciation on an item the cost of which has already been collected in the name of Installation charges. However, the AO allowed the depreciation @ 15% to the appellant on said set top boxes. This would mean that the Assessing Officer has treated the said Set top Boxes as Capital Asset owned by the appellant. The treatment so given by AO is clearly at variance with the conclusions held by him in para 27

7.9 Coming to merits of the case I have perused the Customer Registration Form. As per the Terms and Conditions of the said document the said boxes are the property of KCCL i.e. the appellant. These boxes are to be used by customer himself and at the address given in the Registration Form. Further, the customer is not allowed to alter the STB and in case of any loss or damage to STB, customer is liable to make up the loss. Further, on termination of agreement the customer is required to return the STB to the appellant company. These terms clearly indicate that the Set Top Boxes is the property of the appellant company. I also find force in the contention of appellant that if these Set top boxes are not treated as assets of the appellant company but the property of the customer then the entire cost of these set top boxes which are sold during the year is allowable as revenue expenditure. Therefore on overall reading of the agreement between appellant and its customers and in totality of facts, I treat the STBs as the assets of the appellant company.

7.10 Now coming to the rate of depreciation, the appellant company claims that admissible rate is 80% on these assets. In its submissions, it has quoted rule 5 of IT rules as under

“In Rule-5, Income-tax Rules

Rates of depreciation in PART A, III MACHINERY AND

PLANT 8(ix)(E) (k) classifies set top boxes under

Remote terminal units/intelligent electronic devices, computer hardware/software, router/bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and distribution management systems for power transmission system”

7.11 Considering the submissions of appellant and the legal provisions, I am of the view that the Set Top Boxes are squarely covered within the above definition and entitled for rate of deprecation as per this rule. Therefore I direct the Assessing officer to allow depreciation @80% on these STBs depending on the period for which these are put to use. This ground is, therefore, partly allowed.”

5. The Revenue being aggrieved by the order of the CIT(A) granting depreciation at the rate of 80% instead of 15% granted by the Assessing Officer, is in appeal before the Tribunal, raising the following grounds:-

“1. The order of the learned Commissioner of Income Tax (Appeals) in ITA No.1356/16-17 dated 28.03.2018 for the Assessment year 2014-15 is erroneous in law, facts and circumstances of the case.

2. The learned Commissioner of Income Tax (Appeals) erred in deleting the addition of Disallowance of depreciation of Rs.30,65,10,789/- on set top boxes and directing to allow the depreciation at the rate of 80% instead of 15% allowed by Assessing Officer.

3. The learned Commissioner of Income Tax (Appeals) erred in directing to allow depreciation at the rate of 80% on set top box instead of 15%. Depreciation at the rate of 80% is allowable as per new Appendix – 1(8)E(k) to IT Rules, 1962 to the following.

“Remote terminal units/intelligent electronic devices, computer hardware/software, router/bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and distribution management systems for power transmission systems”.

The Set Top Box is not coming under any of the categories mentioned above. Hence depreciation on the same is applicable at the rate of 15% only. As per TRAI regulations dated 01.04.2015 the depreciation on the price of customer premises equipment (which included Set Top Box and remote control for Set Top Box) shall be calculated using straight line method at the rate not exceeding 1.7% for every completed calendar month or part thereof. Thus the rate of depreciation at the rate of 15% allowed by Assessing Officer treating the same as Plant and Machinery is as per the provisions of the Act and in tune with TRAI regulations. Depreciation claimed by the assessee under Rule 8(ix)(E)(k) is not applicable to Set Top Box, a device connected to a TV and which allows a subscriber to receive in unencrypted and descrambled form subscribed channels through an addressable system.

4. For these and other grounds that may be urged at the time of hearing, the order of the CIT(A) may be set aside and that of the Assessing Officer be restored.

5. The appellant craves leave to add or amend any ground of appeal before it is finally disposed off.”

5.1 The assessee has filed Cross Objection in CO No. 55/Coch/2018 raising following grounds of appeal:

i) The entire issue regarding allowability of depreciation at the higher rate has been considered by the CIT(A) in detail, after peruse of all the evidences and the assessment order of the Assessing Officer as well as averments of the AR of the assessee, and thus, the same does not call for any disturbance.

2) Assessing Officer allowed 80% depreciation on Set Top boxes as depreciation in FY 2014-15 (assessment year 2015-16), and also in earlier year, in F.Y. 2012-13 in detailed scrutiny/verification proceedings. Therefore, the same needs to be followed consistently and is binding.

3. Digital set top boxes are electrical equipments being Remote terminal Units are energy saving device, as such, falls within rates of depreciation (under plant & Machinery, clause-8(ix) Energy saving devices, sub-clause(E) Electrical equipments and sub-category-(k), and eligible for depreciation at 80%. The data carried in signal/telecommunications, always and without exception, is energy, associated with frequencies.

The contention that TRAI is allowing 1.70% depreciation per month on straight line basis is totally irrelevant for the purpose of depreciation under the income-tax Act.

Items falling within Energy saving device category as per sl no. (3) above, then application of general rate of depreciation at 15% is excluded.

4) In view of principles of accounting, taxation and natural justice vide section 14A of the Income Tax Act, revenue and expense shall follow matching concept, the claim of assessee of depreciation at such higher rates is proper.

5) Alternatively, cost of digital set top boxes shall be allowed in full as revenue expenditure.

6) It is not true that needed documents/details were not furnished to the Assessing Officer. All needed and available documents/details were furnished as and when called for:

7) The appeal filed by the appellant in this case is time-barred as filed beyond the 60 days time limit allowed by law.

8) Such other grounds as may be urged at the time of hearing.

6. The learned Departmental Representative strongly relied on the assessment order and the grounds raised.

6.1 The learned AR, on the other hand, had filed written submission and also a paper book enclosing balance sheet for the year ending 31.03.2014, ledger account of SET TOP BOX, bill issued for activation charges etc. The Ld. AR submitted that the assessee is entitled for higher rate of depreciation as it is a capital expenditure for the following reasons:-

1. Claim for Depreciation at 80%-Depreciation.

32. (1) In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be_prescribed”. (See rule_5(1A) and Appendix IA of the Income-tax Rules.)

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed”:(See rule 5(1) and Appendix I of Income-tax Rules.)

6.2 He drew our attention to the following:

Appendix I of Income-tax Rules.

Rates of depreciation

III Machinery and Plant

Machinery and plant other than those covered by sub-items (2), (3) and (8) below : 15% Machinery:

….some mechanical contrivances which by themselves or in combination with one more other mechanical contrivances, by combined movement and interdependent operation of the respective parts generate power, or evoke, modify, apply or direct natural forces with the object in each case effecting so definite or specific result ….

6.3 The Ld. AR relied on the following judgments of the Supreme Court:

THE PRIVY COUNCIL in Corporation of Calcutta v Chairman Cossipore & Chitpon AIR 1922 PC 27.

CIT vs Mir Mohammed Ali 1964-53 ITR 165-SC. It was held as under:

43(3) “plant includes ships, vehicles, books, scientific apparatus and surgical equipment Used for the purposes of the business or profession but does not include tea bushes or livestock or buildings or furniture and fittings;

8. (ix) Energy saving devices, being—

E. Electrical equipment:

(k) Remote terminal units/intelligent electronic devices, computer hardware/software, router / bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and distribution management systems for power transmission systems.

Power includes

power is the rate of doing work or transferring heat, the amount of energy transferred or converted per unit time. It includes Electrical, Mechanical, Chemical powers

6.4 The Ld. AR submitted that the operation of the company is all about data transfers only, through the cable network by way of signals. Various types of data routinely transferred in cable/satellite telecommunications can be broadly classified into three categories – audio data, video data and textual data. Whatever the type of data, data of all kinds are basically lifeless and, therefore, lack spontaneous movement of its own. To cause transfer/movement of such data from one place to another, some specific carrier (energy) is indispensably required. Without such carrier, the data cannot even be imagined to move an inch forward, let alone at the speed of light, such data carrier energy is the artificially created light energy (ACLE) which is acting as the sole driving force behind every type of data transfer in communications. ACLE is possessable in the same sense as the electrical energy, as the customers can use it any time they want the data to any destination, according to his choice of customers. The fact that the network consists of mainly computers, fibres, boosters and set top boxes as a whole. The light carrier/ACLE works very much as “electrical energy”. In simple terms, electrical energy is a “flow of electrons” while ACLE is a “flow of protons”. They operate in a very similar way, but with different and distinct properties, utilities and fields of application. Therefore, if flow of electrons is energy , the flow of protons also gives energy in the network. The plain actual fact is that after reaching the first the control room connections, the data gets carried to the destination, only by OFC’s invariably. The scientific reason for this is that radio frequencies have limited transmission capacity, and, therefore, can carry data on electromagnetic energy.

6.5 It was submitted that the data carrier in signal/telecommunications, always and without exception, is energy, associated with the frequencies, and not the frequencies themselves. The difference between frequencies and the energy is comparable to the difference between goods vehicle carrying parcel loads on the roads, parcel loads being comparable to data, goods vehicle to the data carrier energy, frequencies being comparable to roads. It is nowhere mentioned in the Act/Rules or Appendix that POWER and ENERGY means ELECTRICAL POWER only or ELECTRICAL ENERGY only.

6.6 According to the Ld. AR, the lexical ambiguity in meaning as well as in sense has to addressed accordingly. The power is not used in its general meaning or sense but in terms of technology. Then it is to be addressed in scientific terms only.

6.7 He submitted that the set top box device, subject matter in this issue, is a digital set top box and compared to analog technology devices is far superior and power saving and energy efficient device, capable of multiple high definition channel delivery at speeds and volume that was not possible under the analog technology scenario, and is a chip (micro-processor based) system rather than Board based analog technology devices. It was submitted that the assessee was having more than 2500000 connections in entire state, these connections are linked with nearly 10000 kisoks. The energy consumption and energy savings in a kiosk is electricity bill for a Kiosk in the cable TV net work. There is substantial deduction in cost due less usage of energy.

6.8 The ld. AR contended that the assessee is entitled to depreciation claimed u/s. 8(ix)(E)(k) being energy devices and electric equipments. He also submitted that it is entitled to claim of depreciation under (8) (ix) (B) (c). It was submitted that alternatively, the device also fits in the below description in Appendix-I Rates of Depreciation which reads as follows:

(8) (ix) Energy saving devices, being—

B. Instrumentation and monitoring system for monitoring energy flows:

(c) Micro-processor based control systems

A White paper by BROADCOMM, which is a international technology leader in this field (manufacturer and supplier of 1C chipset for Set top boxes). As these devices are not manufacture of India, the same are imported from China, the suppliers from China use 1C chipsets from across the globe (like Broadcomm, Motorola etc. among several others) , this white paper details the superior advantage and benefits of digital technology based on 1C chipsets as compared to older analog RF tuners, are self explanatory, needs no further recourse. In page-2, para-2 , “Since analog tuners consume the largest amount power in the RF front end, the overall system power increases and the footprint for four RF tuners account for considerable board size and increased costs.”

And in page-4 , para-4, gives the real benefits of use of DIGITAL devices using modem technology- “with the removal of the power-hungry analog cable tuners, overall system power is reduced enabling small, attractive form factors. Reduced power enables green products and allows systems to meet current and future energy consumption standards ”

6.9 It was submitted that in the present instance, the basis of claim for higher depreciation and as allowed by the assessing officer, is in line with the decision of jurisdictional Kerala High Court in the case of Commissioner Of Income-Tax  Vs. Cochin Refineries Limited, (1988) (173 ITR 461) in which the high court had adopted a liberal view and held as follows:

“6. The assessee had claimed depreciation and development rebate at the higher rate on certain assets such as waste ponds, fresh water tank, pipe racks, alloy piping, jetty facilities, cherry picker cranes, etc. The assessee claimed depreciation and development rebate on these items at the higher rate applicable to the refinery plant. The Income-tax Officer, however, allowed depreciation and development rebate only at the lower rate applicable to each of the assets, depending upon whether it represented building, machinery, etc. The Appellate Assistant Commissioner, on appeal, allowed depreciation and development rebate at the higher rate in respect of certain items, but allowed only lower rates in respect of other items. On further appeal by the assessee, the Tribunal allowed the higher rate of depreciation and development rebate for all the items. In our view, the Tribunal was light in doing so, for by the very nature of the assets in question, no doubt that they form part of the refinery plant and are as such entitled to these allowances at the higher rate. Accordingly, we answer question No. 3 in the affirmative, that is, in favour of the assessee and against the Revenue.”

He also relied on the judgment of the Madhya Pradesh High Court in Dy. CIT vs. Vippy Solvex Products Ltd. dated 29 March, 2017.

6.9.1 Further, he submitted as follows:

2. Claim for higher depreciation on part of computer – Set Top Box (STB) is a customer premise device acting as REMOTE TERMINAL UNIT in the control and enforcement of a set computer equipments installed central unit. CAS (Conditional access system) through which the Operating company (This assessee) can supply control and monitor and activate/deactivate signals from the control centre COMPUTER system which keeps track of the usage signals and channels viewed/accessed and duration of each of these. STB is a 2-way communicating unit at the customer end connected to the transmission and distribution system of the assessee company.

6.9.2 The Ld. AR relied on the order of the Tribunal in the case of Ushodaya Enterprises Ltd. vs. ACIT in ITA No.1241/Hyd/2008 dated 31/10/2013 wherein it was held that “various items like Editing equipments, charter generators and v. Sat equipments i.e., DVC transfer recorder, player, satellite receivers, encoders, vidilink transmit and receivers and fibre optic link work etc. are part of computer and eligible for higher depreciation at 60%. He also relied on the decision of the Tribunal in the case of Pankaj Almadi vs. DCIT in ITA No. 6883/Del/2015 dated 28/08/2017 and DCIT vs. Datacraft India Ltd., ITAT Mumbai.

6.9.3 He also submitted that the statutory compliance cost should be allowed as revenue expenditure. It was submitted that this cost towards set top boxes were necessitated by legal compulsion for the replacement of existing analog to digital set top boxes to fulfil the requirement of cable television Digitisation policy of the government of India, so as to keep the assessee statutory compliant in its business (Cable Television Networks (Regulation) Amendment Act, 2011 had mandated a switch-over of the existing analogue cable TV networks to digital addressable system (DAS) in four phases.

Phase -I Four Metros of___Delhi,_Mumbai, Kolkata. Chennai 31.10.2012

Phase-ll Cities with population more than one million 31.12.2013

Phase III all urban areas 31.12.2015

Phase IV Rest of India 31.12.2016

It was submitted that the consumers of 4 metros & 38 cities who were covered under phase-l & II of digitalization are getting the benefits of Digital Cable TV services. As mentioned above, the cut off date in respect of phase-Ill, which covers remaining urban areas, is 31st December 2015, after which no analog signal transmission or re-transmission of TV channels will be permitted. The list of urban areas, covered under phase-Ill of digitalisation, is available on the website of the Ministry of Information & Broadcasting.

6.9.4 The Ld. AR also submitted that expenses incurred in connection with legal compulsion should be treated as revenue expenditure. For this purpose, he relied on the judgment of the Supreme Court in the case of Empire Jute Co. vs. CIT reported in 124 ITR 1 (SC), where their Lordships had duly distinguished the enduring benefit in the revenue field and enduring benefit in the capital field. They had held that pursuant to incurrence of expenses , if there is some enduring benefit in the revenue field , then the same would only amount to revenue expenditure. We hold that the expenditure incurred by the assessee towards technology upgradation charges which requires frequent replacement due to rapid change in technology and constant need for upgradation would only be revenue in nature. Hence we do not find any infirmity in the order of the ld. CIT(A) in this regard. Accordingly, the Ground No. 1 raised by the revenue is dismissed.”

He also relied on the judgment of the Supreme Court in the case of Lakshmiji Sugar Mills Co. vs. CIT, 1972 AIR 159 (SC)

6.9.5 The Ld. AR also referred to the claim for 100% deduction as Revenue expenditure- Technical upgradation. He relied on the order of the Tribunal , Kolkata Bench in the case of DCIT vs. M/s. Alliance Broad Band Services in ITA No. 1318/Kol/2015 dated 6th December, 2017 wherein it was held that cost towards necessitated by technological up gradation due to compulsion for the replacement technology of existing Analog to digital to fulfill the requirement of cable television digitalisation policy of the government of India, so this is a technological up gradation so this capital expenditure should be treated as a revenue expenditure

6.9.6 He relied on the following case laws:

1. DCIT v. McLeod Russel India Ltd (2013) (24 lTR(Trib)262) (Kol)

2. Amway India Enterprises vs.Deputy CIT (2008) (301 ITR(AT)(Delhi)

3.CIT v Janakiram Mills Ltd (2005) (275 ITR 403) (Mad)

4.CIT V Sundram Clayton Ltd (2010) (321 ITR 69) (Mad)

5.DCIT v Lasik Centre (India) P Ltd (2013) (22 ITR (Trib)462) Chennai

6.9.7 The Ld. AR further relied on the judgment of the Supreme Court in the case of CIT vs. Vegetable Products Ltd. [(1972) (88 ITR 192) wherein it was held that “if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted”. This principle has been consistently followed by the various authorities as also by the Supreme Court itself.

7. We have heard the rival submissions and perused the record. The issue involved in the appeal filed by the Revenue and the Cross Objection filed by the assessee is with regard to expenses incurred by the assessee on installation of set top boxes is revenue expenditure or capital expenditure. If it is capital expenditure, whether the assessee is entitled for depreciation on set top boxes at 80% or 15% as granted by the Assessing Officer. The Ld. AR submitted that expenses incurred on purchase of set top boxes is revenue expenditure and it is to be allowed. The assessee claimed expenses on purchase of set top boxes as revenue expenditure. The assessee had raised this issue before the CIT(A). This issue was discussed by the CIT(A) in para 7.9 as follows:

“Coming to the merits of the case I have perused the Customer Registration Form. As per the Terms and Conditions of the said document the said boxes are the property of KCCL, i.e., the appellant. These boxes are to be used by the customer himself and at the address given in the Registration Form. Further, the customer is not allowed to alter the STB and in case of any loss or damage to STB, customer is liable to make up the loss. Further, on termination of agreement the customer is required to return the STB to the appellant company. These terms clearly indicate that the Set Top Boxes is the property of the appellant company. I also find force in the contention of appellant that if these Set Top Boxes are not treated as assets of the appellant company but the property of the customer then the entire cost of these set top boxes which are sold during the year is allowable as revenue expenditure. Therefore, on overall reading of the agreement between appellant and its customers and in totality of facts, I treat the STBs as the assets of the appellant company.”

7.1 It was brought on record by the Assessing Officer that the assessee collected the installation charges at the time of supply of STB which included cost of STB. It was also brought on record that maintenance charges were collected in  advance as AMC for the repairs/maintenance as and when required. The Assessing Officer observed that the assessee had been collecting cost of the set top boxes from the customers in the name of “installation charges” apart from monthly charges of subscription for the connections and also annual service maintenance contract charges on each of the set top box installed. The Assessing Officer noted that the assessee did not produce sale bill or invoices showing installation charges of subscription for the connections and also annual service maintenance even after repeated requests and that the physical possession of set top boxes were handed over to the customers at the time of its installation and therefore installation charges collected included cost of set top boxes as per copy of bills produced in the case of Asianet Satellite Communication Ltd. The Assessing Officer observed that when the cost of STB was collected from the customers on its first installation, possession of the instrument stands handed over to the customers at the time of installation and subscription charges and annual maintenance charges are also collected, the claim of the assessee of having ownership over the same for that matter, the claim of depreciation @ 100% on the set top boxes is not justified. This was disallowed by the Assessing Officer in para 26 of the order as follows:

“26. The depreciation so claimed required to be disallowed as no capital expenditure is incurred for the asset and the cost of the set top box is deemed to have been collected along with installation charges since admittedly the cost of STB is negligible. It is claimed by eh assessee’s AR that the charges so collected are installation charges and 100% depreciation is claimed on set top boxes since the assessee is not having control over the same after handing over the possession to the customer. The assessee’s AR admits that physical possession of the set top boxes is handed over to the customer, charges for the STB are collected from the customers in the name of installation charges, the cost factor of the set top box is admittedly negligible, and set top box has no resale value in the market. Therefore, expenditure is revenue in nature. Hence there is no necessity to claim capital expenditure and depreciation on the same. When this was pointed out, the assessee’s AR furnished a revised depreciation statement claiming depreciation on set top boxes @80% in place of 100% claimed, which comes to Rs.35,16,93,816/-. The AR stated that the assessee has to attend to the repairing work of the set top boxes as and when needed and the depreciation has been claimed as the possession of the instruments are handed over to the customer and the ownership lies with the assessee. It is to be noted that the assessee has been claiming repair charges from the customer as and when any repair is made on the set top boxes. The additions made during the year as per Form 3CD was Rs.54,78,24,795/- in the nomenclature of “building” and the depreciation claimed on the same is Rs.36,13,86,286/- @ 100% based on the date of put to use. Since the as sis not having possession of the set top boxes and charges for installation of the same stands collected which includes cost of STB , the claim of depreciation on set top boxes was proposed to be disallowed as per pre-Assessment notice dated 14/12/2016 referred to above. The assessee’s AR, at the time of hearing on 19/12/2016 reiterated the same stand as has been taken earlier.

27. I am not able to accept the contention of the assessee’s AR. The total depreciation claimed on set top boxes comes to Rs.54,78,24,795/- which has to be disallowed since the assessee has collected the cost of STBs and possession of the same has already been handed over. In view of these facts, there is no asset in the possession of the assessee and the assessee is not eligible to claim any depreciation on an item the cost of which has already been collected in the name of installation charges”.

7.2 However the Assessing Officer allowed 15% depreciation by observing as follows:

28. Even if the claim of assessee for depreciation on STB is treated to be admissible, it cannot at any rate be admissible at 100% or 80% as claimed in Form 3CD treating it as “”building”. The assessee also claims that Form 3CD is generated online and in the depreciation blocks there is no item specified 100% other than head ‘building’, it was an accidental omission. The argument of the assessee’s AR is not true and correct and not acceptable. Being a responsible chartered accountant who is supposed to certify correctness of entries in the statutory form 3CD, the assessee’s AR is supposed to be well aware of the rate of depreciation of various block of assets specified under section 32 including building when the rate of depreciation on building is only 10% and not 100%. The equipments like STB can be considered if at all admissible for deprecation, to be @ 15% under the “plant and machinery” and not @ 100%. In this view of the matter, if at all depreciation can be treated as admissible, it shall not exceed 15%. As discussed above, thought the assessee is not entitled for any depreciation on STB in the absence of supporting evidence, taking a lenient view in favour of the assessee I am allowing depreciation on the set top boxes @15% admissible to “Plant and Machinery” as against 100% claimed in the form 3CD under “building”. The balance claim stands disallowed. The allowance of depreciation @15% is worked out as under.”

7.3 Now the contention of the assessee is that expenditure incurred on purchase of set top boxes is to be allowed as revenue expenditure. It is a well-accepted legal preposition that no test of universal application can be laid down to determine the question whether an expenditure incurred by the assessee is revenue or capital. It depends on the overall facts and circumstances of each case. Such matters have to be decided from a practical view and on application of the proper principles of law. A few principles in this regard can be enumerated as under-

i) One of the guidelines for distinguishing revenue expenditure from capital expenditure is that if the expenditure is incurred for obtaining an advantage of enduring benefit it would be capital expenditure. But, the test of enduring benefit is not a certain or conclusive test and it is not be applied blindly and mechanically. In other words every advantage of enduring nature acquired by an assessee is not covered by the said concept. In a given case, the test of enduring benefit might break down. The idea of once for all payment and enduring benefit are not something akin to statutory conditions; nor are the notions of capital or revenue a judicial fetish. Concepts of capital/revenue expenditure are not eternal verities, but are flexible ones.

ii).What is material in this regard is to consider the type, nature and character of the advantage in a commercial sense on one hand and on the other to look in to the aim, intended object, effect of the expenditure and in the larger context of necessity and expediency. Legal rights secured in the process are also relevant in deciding the issue.

iii).If the expenditure is related to the carrying on or conduct of the business or is intrinsically connected with the running of a business the expenditure is to be regarded as revenue expenditure even though the advantage may endure for some indefinite future.

iv. A payment made with a view to obtain the benefit of technical assistance for running the assessee’s business more efficiently so as to earn more profits and ‘not by way of transfer of fruits of research once and for all’, can be treated as an item of revenue expenditure

v. Expenditure incurred in connection with the profit earning apparatus would be revenue expenditure.

vi. Where the advantage is on the capital field the expenditure would be treated a capital Expenditure. If the advantage leaves the fixed capital untouched, the expenditure would be on revenue account.

vii. Expenditure in the acquisition of a concern would be capital expenditure; expenditure in carrying on the concern would be revenue expenditure.

xi. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would fall in the category of capital expenditure.

xii. If the amount is spent for preserving and maintaining the present asset in existence, it cannot be said that the expenditure so incurred is capital in nature

xiii. Where the object of incurring an expenditure is to effect a capital structure as a result of which certain incidental advantage flows, the expenditure will be of capital nature. Capital expenditure can be incurred after a company is floated or after it starts its business.

xiv).Ordinarily, the word capital expenditure refers to the expenditure which is of a permanent nature or securing tangible or intangible property, corporeal or incorporeal right.

7.4 As discussed earlier, in this case, the assessee had not produced the copy of purchase bill and sale bill of the set top boxes on which depreciation has been claimed. Hence, the Assessing Officer produced sale bill from similar income generating company indicating the details of sale of set top boxes in order to ascertain the sale value of set top boxes. From that he came to the conclusion that the assessee is entitled to depreciation at 15%. But from the available records, in our opinion, it transpires that the expenditure incurred for acquisition of set top boxes and not for trading it. In other words, it was incurred for securing tangible asset on which the assessee collected annual maintenance charges. The acquisition brought into existence a new asset and the assessee obtained a new advantage. It is to be noted that not only advantage flowed from such acquisition and the investment is in the capital field but the expenditure has also effected the fixed capital of the assessee. In our opinion, expenditure was incurred in connection with the profit earning apparatus which generated permanent source of income for the assessee by way of annual service maintenance charges. Thus, we are of the opinion that the expenditure incurred by the assessee was capital in nature and it cannot be said that it is revenue expenditure. Accordingly, the assessee is entitled for depreciation on the same.

8. Now the question is with regard to rate of depreciation on set top boxes at 15% only.

8.1 The assessee in the return of income had claimed depreciation at the rate of 100% on STB’s. The STB’s were purchased on different dates during the relevant assessment year 2014-2015. The total depreciation claimed was Rs.36,13,86,286/- taking into account the period they were put to use. Depreciation at the rate of 100% was claimed for more than 180 days amounting to Rs.17,47,76,077 and 50% on remaining items purchased from 01.10.2013 to 31.03.2014. The assessee was not able to point out the basis on which 100% depreciation was claimed on these STB’s. In the course of assessment proceedings, the assessee furnished revised depreciation statement claiming depreciation at 80% in lieu of 100% already claimed in the return of income. In paragraphs 26 and 27 of the assessment order, the Assessing Officer was of the view that the depreciation claimed cannot be allowed to the assessee since the assessee had collected cost of STB’s and the possession of the same was already handed over to its customers. However, the A.O. contradicted his earlier position mentioned in paragraphs 26 and 27 of the assessment order and in paragraph 28 concluded that the assessee was entitled to depreciation at the rate of 15% treating the cost of STB’s as normal `plant and machinery’, as per new Appendix I Part A-III(1). In holding so, the A.O. states at para 28 of the impugned assessment order that he is taking a lenient view for granting depreciation at the rate of 15%. However, the contention of the assessee is that it is entitled to depreciation under the new Appendix – I Part III  (8) (ix)(E)(k), wherein the rate of depreciation provided for energy saving device being electrical equipments is at the rate of 80% (now 40% with effect from 01.04.2017). The CIT(A), while allowing depreciation at the rate of 80%, had not given an elaborate finding. The relevant finding of the CIT(A) as regarding the grant of depreciation at the rate of 80% reads as follows:-

“7.10 Now coming to the rate of depreciation, the appellant company claims that admissible rate is 80% on these assets. In its submissions, it has quoted rule 5 of IT rules as under

“In Rule-5, Income-tax Rules

Rates of depreciation in PART A, III MACHINERY AND

PLANT 8(ix)(E) (k) classifies set top boxes under

Remote terminal units/intelligent electronic devices, computer hardware/software, router/bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and distribution management systems for power transmission system”

7.11 Considering the submissions of appellant and the legal provisions, I am of the view that the Set Top Boxes are squarely covered within the above definition and entitled for rate of deprecation as per this rule. Therefore I direct the Assessing officer to allow depreciation @80% on these STBs depending on the period for which these are put to use. This ground is, therefore, partly allowed.” 

8.2 To understand the controversy in issue, the relevant provision needs to be reproduced:-

Depreciation.

32.(1) In respect of depreciation of –

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1stday of April, 1998,

Owned, wholly or partly, by the assessee and used for the purpose of the business or profession, the following deductions shall be allowed –

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed (see rule 5(1A) and Appendix IA of the Income-tax Rules)

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed. (emphasis supplied)

7.2 The prescription in Rule 5(1) and Appendix I of Income-tax Rules and the same reads as follows:-

Appendix I of Income-tax Rules.

Rates of depreciation

III. Machinery and Plant

Machinery and plant other than those covered by sub-items (2)(3) and (8) below : 15%.

8.3 The Assessing Officer granted depreciation at the rate of 15% being machinery and plant other than those covered by sub-items (2), (3) and (8). According to the assessee, it is covered under sub-item (8)(ix)(E)(k). Sub-item (ix) of item (8) is energy saving device and (E) is electric equipment. For claiming higher rate of depreciation of 80%, assessee has to prove that the STB’s are energy saving devices being electrical equipment. In the absence of proving so, STB’s would be entitled for depreciation under general category of `machinery and plant’ and not a sub-item mentioned under (8) i.e. energy saving device being electric equipment. The finding rendered by the CIT(A) is insufficient to come to a conclusion that the assessee is entitled to the depreciation at the rate of 80%. The order of the assessment relied on by the assessee for assessment year 2015-2016 stating that the Assessing Officer had granted depreciation on STB’s at the rate of 80% for that year has been revised by the Commissioner u/s 263 of the I.T.Act and is no longer in existence. Therefore, the assessee cannot place reliance on the assessment order for assessment year 2015-2016, wherein the assessee was granted depreciation at the rate of 80%. As per TRAI regulations dated 01.04.2015, the depreciation on the price of customer premises equipment (which included Set Top Box and remote control for Set Top Box) shall be calculated using straight line method at the rate not exceeding 1.7% for every completed calendar month or part thereof. Therefore, the rate of depreciation at the rate of 15% allowed by the Assessing Officer treating the same as Plant and Machinery is in tune with TRAI regulations. Set Top Box is a device connected to a TV and which allows a subscriber to receive in unencrypted and descrambled form subscribed channels through an addressable system and unless assessee proves that STB’s comes within Rule 8(ix)(E)(k), it cannot claim higher depreciation of 80%.

8.4 In view of the above, we uphold the order of the lower authorities and direct the Assessing Officer to allow depreciation on STB at 15% only.

9. In the result, appeal filed by the Revenue is allowed and the Cross Objection filed by the assessee is dismissed.

Order pronounced on this 30th day of April, 2019.

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