2009 (9) TMI 633 - HC - Income Tax

Scrutiny - Revision - Revenue or capital expenditure - Solitary objection of the Commissioner related to the expenditure on tools and dies aggregating to Rs. 10,56,69,367, which was claimed as revenue expenditure and was allowed as such - The Commissioner of Income-tax opined that die costing over Rs. 2 crores was not a small item and its life span was not a few days, but still a year, but could even be more - the tools and dies had a very short span of life and it could produce up to maximum one lakh permissible shorts and have to be replaced thereafter to retain accuracy, as explained by the assessee before the Commissioner of Income-tax duly noted by the Commissioner of Income-tax in his order whether the expenditure incurred by the assessee in the replacement of dies and tools is to be treated as revenue expenditure or not - The assessee had also explained that since these parts are manufactured for the automobile industry, which have to work on complete accuracy at high speed for a longer period, replacement of these parts at short intervals becomes imperative to retain accuracy - Decided in the favour of the assessee

Issues Involved:
1. Jurisdiction of the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961.
2. Classification of expenditure on tools and dies as revenue or capital expenditure.
3. Adequacy of inquiry by the Assessing Officer.
4. Validity of the Commissioner of Income-tax's order to remit the case back for re-examination.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961:
The core issue was whether the Commissioner of Income-tax (CIT) correctly assumed jurisdiction under section 263 to revise the assessment order under section 143(3). The CIT argued that the assessment order was perfunctory, erroneous, and prejudicial to the interest of the Revenue because the Assessing Officer (AO) did not conduct a detailed investigation. The Tribunal, however, found that the AO had made inquiries and accepted the assessee's explanation, implying that the AO had applied his mind to the issue. The Tribunal held that the CIT's power under section 263 could not be invoked merely because he had a different opinion or thought the inquiry was inadequate. The Tribunal emphasized the distinction between "lack of inquiry" and "inadequate inquiry," stating that only in cases of "lack of inquiry" could the CIT exercise his power under section 263.

2. Classification of expenditure on tools and dies as revenue or capital expenditure:
The CIT questioned the accounting practice of the assessee, which treated the expenditure on tools and dies as revenue expenditure. The CIT believed that the dies, having a life span of a year or more, should be treated as capital assets. However, the Tribunal found that the assessee had consistently followed this accounting practice, which had been accepted by the Revenue in previous and subsequent years. The Tribunal noted that the dies were part of the machinery and needed constant replacement due to their short life span, which did not bring any new asset into existence or provide an enduring benefit. Therefore, the Tribunal concluded that the expenditure was correctly treated as revenue expenditure.

3. Adequacy of inquiry by the Assessing Officer:
The CIT argued that the AO did not properly investigate the matter, as the assessment order did not discuss the expenditure on tools and dies. However, the Tribunal found that the AO had called for an explanation from the assessee and accepted it after due consideration. The Tribunal cited the case of Gabriel India Ltd., stating that if the AO had made inquiries and applied his mind, the assessment order could not be deemed erroneous simply because it lacked detailed reasoning. The Tribunal concluded that the AO had conducted an inquiry and accepted the assessee's explanation, which was sufficient.

4. Validity of the Commissioner of Income-tax's order to remit the case back for re-examination:
The CIT remitted the case back to the AO for re-examination of the allowability of tools and dies expenses, without giving a definite finding on whether the expenditure was capital or revenue in nature. The Tribunal found this approach problematic, as the CIT did not conclusively determine that the AO's order was erroneous and prejudicial to the Revenue. The Tribunal noted that the CIT's order suggested that two views were possible, and when the AO had taken one of the possible views, the order could not be held to be prejudicial to the Revenue. The Tribunal relied on the Supreme Court's decision in Malabar Industrial Co. Ltd., which held that when two views are possible, the AO's order cannot be deemed erroneous.

Conclusion:
The Tribunal concluded that the AO had made adequate inquiries and accepted the assessee's explanation, which was a plausible view. The CIT's order under section 263 was not justified as it did not conclusively establish that the AO's order was erroneous and prejudicial to the Revenue. The Tribunal's decision to set aside the CIT's order was upheld, and the appeal was dismissed with costs.

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