2012 (5) TMI 43 - HC - Income Tax

Expenditure on current repair, maintenance and replacement on the leased Thermal power station - ITAT treated it as revenue expenditure and not a capital expenditure Held that - The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to preserve and maintain an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage - No new asset came into existence and the expenditure was incurred to make the plant operational and functional - the clause of lease agreement conveys that what the assessee is entitled on the expiry of lease is only written down value of the additions and alterations to the building, station or additional machinery and none of the items represents addition or alteration to the building, station or additional machinery against revenue.

Summary

Issues Involved:
1. Classification of expenditure as revenue or capital expenditure.
2. Nature and character of the expenses incurred by the assessee.
3. Interpretation of the lease agreement clauses.
4. Determination of whether the expenses provided an enduring benefit or created a capital asset.

Issue-wise Detailed Analysis:

1. Classification of Expenditure as Revenue or Capital Expenditure:
The core issue revolves around whether the expenditure of Rs. 31,54,844/- incurred by the respondent-assessee is to be classified as revenue expenditure or capital expenditure. The Assessing Officer (AO) initially classified the expenditure as capital, arguing that it provided an enduring benefit over the lease period of 10 years. The CIT (Appeals) upheld this view. However, the Income Tax Appellate Tribunal (ITAT) reversed this, classifying it as revenue expenditure.

2. Nature and Character of the Expenses Incurred by the Assessee:
The ITAT examined the nature and character of the expenses, which included lubrication oil, replacement of steel hammer, turbine fluid, lead acid stationery cell batteries, mechanical parts, and other replacement items. The Tribunal concluded that these expenses were necessary for the regular operation and maintenance of the plant, and did not create any new capital asset. The expenses were related to normal wear and tear and were necessary to make the plant operational.

3. Interpretation of the Lease Agreement Clauses:
The lease agreement between the respondent-assessee and Central Coalfield Limited stipulated that the assessee was responsible for the maintenance and operation of the thermal power station. The ITAT noted that the lease required the assessee to incur expenses for current repair and maintenance to make the plant operational. The lease was for a period of 20 years with a monthly rent of Rs. 32,00,000/- starting from the next financial year. Clause 17.3 of the lease agreement stated that upon expiration or termination, the lessee must surrender the plant in good running condition, and the lessor would pay the written down value of any additions or alterations.

4. Determination of Whether the Expenses Provided an Enduring Benefit or Created a Capital Asset:
The Tribunal determined that the expenses did not provide any enduring benefit or create a capital asset for the assessee. The expenses were for day-to-day repairs and maintenance, necessary to keep the plant operational. The Tribunal referred to the Supreme Court's decision in Commissioner of Income Tax v. Saravana Spg. Mills (P) Ltd., which emphasized that the test for current repairs is whether the expenditure was incurred to preserve and maintain an already existing asset, rather than to bring a new asset into existence.

Conclusion:
The Tribunal concluded that the expenses were in the nature of current repairs and did not create any new asset or provide an enduring benefit. The High Court upheld this view, noting that the expenses were necessary to make the plant operational and functional. The Court also highlighted that the plant generated and sold power during the assessment year, supporting the classification of the expenses as revenue expenditure. The question of law was answered in favor of the respondent-assessee, and the appeal was dismissed without any order as to costs.