2014 (10) TMI 906 - AT - Income Tax

Addition of pre-operative expenses - assessee claimed it in the P&L Account for the year ending 31st March, 2006 as deferred revenue expenditure written off and not a preoperative expenses - Held that - We find from the nature of the expenditure that these are in the nature of revenue expenditure being repairs and maintenance expenses carried out from earlier year as the assessee has shown in the Balance Sheet as on 31.03.2005 under the head miscellaneous expenses to the tune of ₹ 87.54 lacs. Out of the above stated expenses, assessee claimed to the tune of ₹ 61.93 lac and the AO has misunderstood this as preoperative expenses. We find that the assessee has incurred these expenses on account of repair and maintenance and there is no preoperative expenses being carried forward as deferred revenue expenditure to the extent not written off or adjusted. In view of the given facts and circumstances, we feel that the CIT(A) has rightly deleted the addition and we confirm the same - Decided in favour of assessee Disallowance invoking the provisions of section 40A(3) - Held that - We find from the provisions of section 40A(3) that the disallowance can be made only on any expenditure in respect of which the payment or aggregate payment made to a person in a day in cash exceeds ₹ 20000/-. Here in the present case, the assessee has made payment of ₹ 20000/- or less than that amount. The assessee before us now produced complete ledger copy from pages 78 to 271 of assessee s paper book, which clearly reveals that none of the payment is exceeding ₹ 20,000/-. These papers were produced before the lower authorities by the assessee. Once this is the position, we find that the CIT(A) has rightly deleted the addition and we confirm the same - Decided in favour of assessee Disallowance of claim of expenditure on account of major repairs and maintenance - Held that - As contended by assessee that due to unsatisfactory financial position of the company for few years in the past, it could not undertake the repair and maintenance of plant and machinery and its capacity utilisation was in the range of 37.46% against the industry average of 90. According to him, to make the situation improve, the assessee company in FY 2006-07 relevant to AY 2007-08 undertook the overdue repairs and maintenance for plant and machinery and repair and replacement of internal control purpose was started. The assessee company has not increased in the rated capacity of any of the plant/equipment by virtue of this repair and maintenance. Factually, the assessee has carried out repairs and maintenance, as is evident from the above discussion. - Decided in favour of assessee Addition on account of provision for non moving stores - Held that - The assessee drew our attention to page 55 of assessee s paper book, which is Schedule 7 of the Balance Sheet, is described inventories and from the store there is a reduction of provision of non-moving store at ₹ 70 lacs. Ld. counsel for the assessee drew our attention to earlier year s Balance Sheet i.e. as on 31.03.2006 the similar entry was there. Ld. counsel for the assessee stated that this entry is moving from AY 2003-04 and nothing new has provided in the current year. We find from the records that the plea of the assessee is quite reasonable for the reason that this entry being carried forward from AY 2003-04 and nothing new is provided in this year. Once this is the position, the addition on account of provisions of non-moving store cannot be added to the returned income of the assessee. The CIT(A) has rightly deleted the addition and we confirm the same. - Decided in favour of assessee

Issues Involved:
1. Deletion of addition made by AO of pre-operative expenses.
2. Deletion of disallowance made by AO by invoking the provisions of section 40A(3) of the Act in making cash payments.
3. Deletion of disallowance of claim of expenditure on account of major repairs and maintenance.
4. Deletion of addition made by AO on account of provision for non-moving stores.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by AO of Pre-operative Expenses:
The first issue revolves around the deletion of an addition of Rs. 61.93 lakhs made by the AO as pre-operative expenses. The AO disallowed the entire amount except for 1/5th of the expenses, citing the absence of details. However, the CIT(A) deleted the disallowance, stating that the amount was claimed under deferred revenue expenditure written off and not as pre-operative expenses. The CIT(A) noted that no plant and machinery were installed or commissioned during the relevant financial year, thus negating the existence of pre-operative expenses. The Tribunal upheld the CIT(A)'s decision, confirming that the expenses were indeed for repairs and maintenance and not pre-operative.

2. Deletion of Disallowance Made by AO by Invoking Provisions of Section 40A(3):
The second issue pertains to the disallowance made by the AO under section 40A(3) of the Act for cash payments exceeding Rs. 20,000 in aggregate on a single day. The AO observed that the payments were segregated into several vouchers of Rs. 20,000 each to avoid the provisions of section 40A(3). However, the CIT(A) deleted the addition, stating that the payments did not exceed Rs. 20,000 per occasion. The Tribunal confirmed the CIT(A)'s decision, emphasizing that the provisions of section 40A(3) apply only when the aggregate payment to a person in a day exceeds Rs. 20,000, which was not the case here.

3. Deletion of Disallowance of Claim of Expenditure on Account of Major Repairs and Maintenance:
The third issue involves the deletion of disallowance of Rs. 526.46 lakhs claimed as major repairs and maintenance expenses. The AO disallowed the amount, considering it as capital expenditure. However, the CIT(A) allowed the claim, noting that the expenses were for keeping the plant and machinery in running condition without enhancing its capacity or efficiency. The Tribunal upheld the CIT(A)'s decision, citing that the repairs were necessary due to the unsatisfactory financial position of the company in previous years, and the expenses were indeed revenue in nature.

4. Deletion of Addition Made by AO on Account of Provision for Non-moving Stores:
The fourth issue concerns the deletion of an addition of Rs. 70 lakhs made by the AO for the provision of non-moving stores. The AO considered this provision as a mere contingency and disallowed it. However, the CIT(A) deleted the addition, stating that the provision was a carried forward figure from previous years and not a new provision made in the current year. The Tribunal confirmed the CIT(A)'s decision, agreeing that the provision was indeed carried forward from earlier years and no new provision was made during the relevant financial year.

Conclusion:
In conclusion, the Tribunal dismissed both appeals by the revenue, upholding the CIT(A)'s decisions on all issues. The Tribunal confirmed that the expenses in question were either revenue in nature or appropriately accounted for, and the provisions of section 40A(3) were not violated.

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