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2012 (10) TMI 751 - AT - Income TaxRevenue or Capital expenditure replacement / overhauling / rejuvenation - Assessee is engage in the business of generation of electricity and mining of Lignite Expenditure incurred towards replacement of various components in boilers and components of BWE under the LEP - Assessee claimed such expenditure as revenue AO s view was that this is one time expenditure at the end of life span of the asset with a view to give new life Held that - What was replaced was only the parts of machinery and the expenditure was incurred only to preserve and maintain the existing assets and therefore, the expenditure on such repairs is allowable as deduction under current repairs. Following the decision in case of Saravana Spinning Mills P. Ltd. (2007 (8) TMI 16 - SUPREME COURT OF INDIA) that when an expenditure was incurred to preserve and maintain already existing asset and such expenditure is not bringing any new asset into existence or obtaining new advantage such expenditure is allowable as current repairs. Appeal decides in favour of assessee
Issues Involved:
1. Allowability of expenses incurred on Life Extension Program (LEP) of Thermal Power Station I (TPS-I) as revenue expenditure. 2. Allowability of expenses incurred on rejuvenation of Bucket Wheel Excavators (BWE) as revenue expenditure. 3. Determination of whether the expenses were capital or revenue in nature. 4. Examination of whether the expenses resulted in an increase in production capacity. Detailed Analysis: 1. Allowability of Expenses on LEP of TPS-I: The core issue is whether the expenses incurred on the Life Extension Program (LEP) of Thermal Power Station I (TPS-I) are allowable as revenue expenditure. The assessee, engaged in electricity generation and lignite mining, claimed these expenses under sections 31(i) and 37 of the Income Tax Act. The Assessing Officer (AO) treated these expenses as capital expenditure, arguing they were one-time expenses aimed at extending the life of the asset, thus providing an enduring benefit. The Commissioner of Income Tax (Appeals) (CIT(A)) initially upheld this view, but upon further appeal, the Tribunal directed the AO to re-examine the nature of repairs. 2. Allowability of Expenses on Rejuvenation of BWE: Similarly, the expenses on rejuvenation of Bucket Wheel Excavators (BWE) were claimed as revenue expenditure. The AO again treated these as capital expenses, citing an increase in production capacity and the enduring nature of the benefit derived. The CIT(A) later found that the AO wrongly presumed an increase in production capacity and that the replacement and overhauling of parts did not confer an enduring advantage, thus allowing these expenses as revenue expenditure. 3. Determination of Capital vs. Revenue Nature: The Tribunal examined whether the expenses incurred were in the capital field or revenue field. The Tribunal noted that the expenses were for replacing parts of machinery and overhauling equipment, not for acquiring new machinery. The Tribunal emphasized that the expenses were aimed at preserving and maintaining existing assets rather than bringing new assets into existence or obtaining new advantages. The Tribunal relied on the decision in CIT v. Janakiram Mills Ltd., which held that expenses aimed at restoring machinery to its original efficiency without increasing capacity should be treated as revenue expenditure. 4. Examination of Increase in Production Capacity: The AO's contention that the expenses led to an increase in production capacity was crucial. However, the CIT(A) and the Tribunal found that there was no increase in production capacity. The Tribunal reviewed the production data and technical reports, concluding that the expenses were necessary for the continued safe operation of the plant and did not result in any new capacity. The Tribunal also noted that the expenditure was not substantial compared to the total project cost, further supporting the view that these were revenue expenses. Conclusion: The Tribunal upheld the CIT(A)'s decision, affirming that the expenses on LEP of TPS-I and rejuvenation of BWE were revenue in nature. The Tribunal dismissed the Revenue's appeals, concluding that the expenses were aimed at preserving and maintaining existing assets without resulting in new assets or advantages. The Tribunal's decision was based on the principle that expenses incurred to maintain the efficiency of existing machinery, without increasing capacity, should be treated as revenue expenditure. The Tribunal's reliance on the decision in CIT v. Saravana Spinning Mills (P) Ltd. further supported this conclusion.
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