2015 (8) TMI 599 - AT - Income Tax

Disallowance of cost of 339 units of yarn clearers - revenue v/s capital expenditure - AO treated the cost of two comber machines and one auto coner as capital expenditure as against the claim of the assessee as revenue expenditure confirmed by CIT(A) and also adjudicated that cost of 339 units of yarn clearers is also capital expenditure - Held that - Commissioner of Income-tax (Appeals) probably by overlooking the fact that the issue to be decided pursuant to the direction of the hon ble Supreme Court in the case of CIT v. Sri Mangayarkarasi Mills P. Ltd. 2009 (7) TMI 17 - SUPREME COURT is only the disallowance of the cost of two comber machines and one auto coner, proceeded to adjudicate that even the cost of 339 units of yarn clearers is capital expenditure, even though the said issue was not before the hon ble Supreme Court. Since the issue is not arising out of the orders of any of the lower authorities originally is decided by the Commissioner of Income-tax (Appeals) which is not only incorrect but also beyond his jurisdiction. It is a mistake apparent from record also. Thus we modify the order of the Commissioner of Income-tax (Appeals) restricting the disallowance only to cost of two comber machines and one auto coner. Ground No. (ii) raised by the assessee is allowed. Since the Commissioner of Income-tax (Appeals) has no jurisdiction to decide the issue which is not before the lower authorities at any stage originally, he could have rectified his order on the application filed by the assessee. The assessee preferred an appeal against the order of the Commissioner of Income-tax (Appeals) in rejecting the petition filed under section 154 of the Act. In view of our above findings, we allow the appeal of the assessee filed against the order under section 154 of the Commissioner of Income-tax (Appeals). - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of cost of two comber machines claimed as revenue expenditure
2. Disallowance of cost of 339 units of yarn clearers claimed as revenue expenditure
3. Disallowance of cost of one auto coner claimed as revenue expenditure
4. Charging of interest under sections 234B and 234C of the Act

Analysis:

1. The appellant filed appeals against the Commissioner of Income-tax (Appeals)-II's orders for the assessment year 1997-98. The effective grounds included the disallowance of the cost of two comber machines claimed as revenue expenditure. During the hearing, the appellant withdrew the grounds related to the comber machines and auto coner. The only remaining issue was whether the cost of 339 units of yarn clearers constituted revenue or capital expenditure.

2. The appellant argued that the Assessing Officer initially accepted the cost of 339 units of yarn clearers as revenue expenditure. However, the Commissioner of Income-tax (Appeals) later deemed it as capital expenditure, in line with the treatment of the comber machines and auto coner. The appellant contended that the Supreme Court's direction was solely to determine the capital or revenue nature of the comber machines and auto coner, not the yarn clearers. The Commissioner rejected the rectification petition regarding the yarn clearers, prompting the appellant to appeal.

3. The Departmental representative supported the lower authorities' decisions. Upon review, the Tribunal found that the Assessing Officer had previously accepted the yarn clearers' cost as revenue expenditure due to their nature and frequent replacement requirement. The Tribunal noted the history of the case, where the Commissioner wrongly treated the yarn clearers as capital expenditure despite the Supreme Court's directive limited to the comber machines and auto coner. Consequently, the Tribunal modified the Commissioner's order, restricting the disallowance to the comber machines and auto coner, and allowed the appellant's appeal on this ground.

4. The Tribunal emphasized that the Commissioner lacked jurisdiction to decide on an issue not raised before the lower authorities initially. The appellant's petition under section 154 of the Act was rejected by the Commissioner, leading to an appeal. Given the Commissioner's error in extending the decision to the yarn clearers, the Tribunal allowed the appellant's appeal against the Commissioner's order under section 154. As a result, the Tribunal partially allowed the appeal in I.T.A. No. 1354 and fully allowed the appeal in I.T.A. No. 2399.

This detailed analysis of the judgment highlights the issues, arguments presented, historical context, and the Tribunal's decision, providing a comprehensive understanding of the legal proceedings.