2012 (6) TMI 377 - AT - Income Tax

Revenue or capital expenditure - repairs and maintenance of building and plant & machinery as capital expenditure - renewal, replacement or modification of an asset or part of an asset - held that - Repairs were incurred to preserve and maintain an existing asset. The object of the expenditure was not bringing into existence an another new asset. By the incurring of the said expenditure, the assessee has not obtained a new advantage. It is also necessary to find out whether a particular repair was really needed and in the present case we have noticed that it was a decision of the assessee to take appropriate measure to repair the building for its maintenance as also for safety purposes. - Decided in favor of assessee. It was found that new machinery, new furniture, new sanitary fittings, new electrical wirings were installed. Besides that, an extensive repair in the structure of the building was carried out. Therefore, it was held by the Hon ble Court that due to total renovation the expenditure in question was capital in nature. Facts of the said cited precedent can be distinguished from the facts of the assessee, that the assessee s case was not a total renovation or the entire new machinery, new furniture, etc. were brought to the existence. - this ground of the Revenue is partly allowed. Delayed payment of employee s contribution to PF - held that - whether the provisions of sec.36 and the provisions of 43B are independent of each other, now a decision of Honble S.C of CIT vs Alom Extrusion Ltd. 2009 (11) TMI 27 (SC) is available. But this decision is dated 25 Nov.2009 , however, the order of the A.O. is dated 27.11.2006, hence it was not available at the assessment stage. - Matter remanded back. Disallowance u/s.36(1)(iii) being interest cost incurred by the assessee on the advances given for non-business purposes Held that - Assessing Officer has stated that the assessee was unable to demonstrate that the non-interest bearing funds were utilized towards investment for earning dividend income. On the other hand, the argument of the assessee was that there were sufficient reserves and share capital out of which the said investment was made. However, the findings of the Assessing Officer have not been dealt with by Learned CIT(Appeals) in their right perspective and one of the reasons of the disallowance of the invocation of section 14A of the I.T.Act has also not been dealt with, therefore, ground remanded back to the stage of Learned CIT(Appeals) to decide De novo. ground of the Revenue may be treated as allowed for statistical purposes Notional loss - Exchange Fluctuation Loss Held that - increase in liability due to Exchange fluctuation is not notional or contingent liability, hence, allowable. Since the Assessing Officer has not dealt with the issue in the light of the law pronounced and proceeded without recording any specific finding about the nature of the liability, therefore, such an addition based upon a hypothetical reasoning or merely on surmises, thus do not survive in the eyes of law. ground of the Revenue is dismissed

Summary

Issues Involved:
1. Deletion of addition on account of repairs and maintenance of building and plant & machinery as capital expenditure.
2. Deletion of addition on account of delayed payment of employee's contribution to PF and ESI.
3. Deletion of disallowance under section 36(1)(iii) for interest cost on advances given for non-business purposes.
4. Deletion of addition on account of foreign exchange loss.
5. Deletion of disallowance under section 36(1)(iii) on interest-free loans/advances to sister concerns.

Issue-wise Detailed Analysis:

1. Repairs and Maintenance as Capital Expenditure:
Facts and Arguments:
The Revenue challenged the deletion of an addition of Rs. 15,67,382/- made on account of repairs and maintenance of building and plant & machinery, treating it as capital expenditure. The AO observed that the material purchased was for fabrication, construction, and flooring, thus capital in nature. The CIT(A) found that the expenditure was for current repairs necessary due to the corrosive nature of sulphuric acid used in manufacturing, which harmed the civil structure and machinery.

Judgment:
The Tribunal upheld the CIT(A)'s decision, noting that the repairs were preventive and necessary to maintain the factory in good condition, thus qualifying as current repairs. The Tribunal emphasized that the repairs did not bring a new asset into existence or provide an enduring advantage.

2. Delayed Payment of Employee's Contribution to PF and ESI:
Facts and Arguments:
The AO disallowed Rs. 12,73,555/- for PF and Rs. 1,67,583/- for ESI due to delayed payment, invoking section 36(1)(va) read with section 2(24)(x). The CIT(A) allowed the appeal, citing amendments by the Finance Act 2003, which extended due dates to the date of filing returns under section 139(1).

Judgment:
The Tribunal remanded the issue back to the AO for reconsideration in light of the Supreme Court's decision in CIT vs. Alom Extrusions Ltd., which held that amendments to section 43B were retrospective, allowing payments made before the due date of filing returns.

3. Disallowance of Interest Cost under Section 36(1)(iii):
Facts and Arguments:
The AO disallowed Rs. 13,86,222/- as interest cost on advances given for non-business purposes, arguing that the borrowed funds were used for investments yielding exempt income under section 10. The CIT(A) deleted the addition, stating that the investments were made from internal accruals and not borrowed funds.

Judgment:
The Tribunal found the CIT(A)'s order cryptic and remanded the issue for a detailed examination. It directed the CIT(A) to consider the provisions of section 14A and the nexus between non-interest bearing funds and investments.

4. Foreign Exchange Loss:
Facts and Arguments:
The AO disallowed Rs. 6,79,458/- on account of foreign exchange loss, treating it as a contingent liability. The CIT(A) allowed the appeal, stating that the loss was real and incurred due to exchange rate fluctuations, in line with accounting standards.

Judgment:
The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's decision in CIT vs. V.S. Dempo & Co. Pvt. Ltd., which held that devaluation loss is a revenue loss if related to stock-in-trade or circulating capital. It also cited the Delhi High Court's decision in CIT vs. Woodward Governor India (P) Ltd., which allowed exchange fluctuation losses as non-contingent liabilities.

5. Interest-Free Loans/Advances to Sister Concerns:
Facts and Arguments:
The AO disallowed Rs. 9,86,209/- under section 36(1)(iii) for interest-free loans/advances to sister concerns. The CIT(A) deleted the disallowance, stating that the advances were from internal funds.

Judgment:
The Tribunal remanded the issue back to the AO for reconsideration, similar to the treatment of interest cost disallowance in the previous year, directing a detailed examination of the facts and the applicability of section 14A.

Conclusion:
The Tribunal partly allowed the Revenue's appeals, remanding certain issues for reconsideration while upholding the CIT(A)'s decisions on others. The judgments emphasized the necessity of detailed factual examination and adherence to judicial precedents in determining the nature of expenditures and liabilities.