2011 (8) TMI 1060 - AT - Income Tax

Expenditure on replacement cost of yarn clearers - revenue or capital expenditure - addition u/s 40(a)(ia) - the payment made to M/s.Infinite India (P) Ltd. was subject to TDS, being technical services - tds u/s 194J - requirements of provisions of section 36(1)(vii)

Summary

Issues Involved:
1. Denial of expenditure on replacement cost of yarn clearers.
2. Disallowance of Rs. 35,00,000/- under section 40(a)(ia) for payments made to M/s. Infinite India (P) Ltd.
3. Disallowance of Rs. 3,90,64,745/- as bad debt or business loss.
4. Treatment of unrealizable amount of Rs. 3,90,64,745/- in the computation of book profit under section 115JB.
5. Levy of interest under section 234B.

Detailed Analysis:

1. Denial of Expenditure on Replacement Cost of Yarn Clearers:
The assessee replaced old mechanical yarn clearers with electronic ones, incurring an expenditure of Rs. 99,33,995/-. The Assessing Officer treated this as capital expenditure, arguing it provided an enduring benefit. The Commissioner of Income-tax (Appeals) upheld this, referencing the Supreme Court's judgment in CIT vs. Saravana Spinning Mills P. Ltd., which distinguished between current repairs and capital expenditure. The assessee argued that the replacement was necessary for maintaining production quality and should be considered current repairs. The Tribunal found that the replacement did not create a new asset or advantage but preserved the existing manufacturing system. Thus, the expenditure was allowed as revenue expenditure or current repairs under section 31.

2. Disallowance of Rs. 35,00,000/- under Section 40(a)(ia):
The assessee paid Rs. 35,00,000/- to M/s. Infinite India (P) Ltd. for ERP software implementation, which was disallowed by the Assessing Officer under section 40(a)(ia) for non-deduction of TDS. The Commissioner of Income-tax (Appeals) allowed Rs. 27,50,000/- as revenue expenditure but upheld the disallowance of Rs. 35,00,000/-. The Tribunal found that the entire payment was part of an indivisible turnkey project for software purchase, not technical services. Therefore, section 194J was not applicable, and the disallowance was deleted.

3. Disallowance of Rs. 3,90,64,745/- as Bad Debt or Business Loss:
The assessee wrote off Rs. 3,90,64,745/- as unrealizable from overdue finance receivables taken over from CLIF. The Assessing Officer disallowed this, but the Tribunal found that the assignment agreements were genuine and the write-off was a legitimate business loss. The Tribunal directed the Assessing Officer to allow the deduction.

4. Treatment of Unrealizable Amount of Rs. 3,90,64,745/- in Computation of Book Profit under Section 115JB:
Since the disallowance of Rs. 3,90,64,745/- was deleted, this issue became infructuous and was rejected.

5. Levy of Interest under Section 234B:
This issue was deemed consequential to the principal grounds and did not require specific adjudication.

Conclusion:
The Tribunal partly allowed the appeal, granting relief on the issues of replacement cost of yarn clearers, disallowance under section 40(a)(ia), and write-off of finance receivables as business loss. The other issues were either rejected or deemed consequential.