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2016 (5) TMI 1504 - AT - Income TaxExpenses incurred on repair and maintenance of building and tubewell - capital expenditure OR revenue expenditure - HELD THAT - Whether a particular repair is really needed or not or what amount to be spent, the matter is to be decided by the assessee as it is the prerogative of the assessee to take appropriate repair at appropriate time. The repairs may be major repairs, spending considerable amount of money, which amount would not take away character of repair. In our opinion, the quantum of expenditure cannot be the deciding factor as to whether the expenditure is capital or revenue in nature. There is no material on record that the assessee has created any new asset so that they could be of a lasting or enduring benefit to the enterprise in issue. CIT (Appeals) has observed that an amount spent on repairs of cabin - as observed that the assessee must have got changed everything in the cabin, which amounts to replacement of the old cabin and expenditure has to be treated as capital in nature. The findings of the learned CIT (Appeals) are based on presumptions and assumptions. He has not given any cogent reason in this regard. Thus, considering the entire facts and circumstances of the present case, we are of the view that the authorities below have not correctly appreciated the facts of the present case and also settled legal position. Accordingly, we set aside the findings of the authorities below on this issue and allow the ground raised by the assessee. Accordingly, we direct the AO to allow the entire expenditure claimed by the assessee under the head repairs and maintenance of the building (old shed), tubewell and cabin. We also direct the Assessing Officer to withdraw the amount of depreciation, if any, allowed to the assessee on the amount spent on repair of tubewell. Addition u/s 14A - HELD THAT - Assessee had invested a sum of ₹ 10,87,172/- in the shares of various companies. The contention of the assessee is that the investments in shares had been made out of the capital and outstanding reserves of the company and that no separate amount had been borrowed for making the said investments. The assessee further claimed that no substantial expenditure was incurred for earning dividend income. Revenue Authorities have not given any finding that the assessee had earned any exempt income in this year. AO has not recorded any satisfaction to the effect that the interest bearing funds have been used to earn tax free income. There is no finding that the interest bearing funds were used for making the investments in the shares. Thus, in view of the judgment of the Hon'ble Jurisdictional in the case of Kapsons Associates 2015 (8) TMI 1277 - PUNJAB AND HARYANA HIGH COURT we direct the Assessing Officer to delete the addition of ₹ 76,075/- made under section 14A of the Act. This ground of appeal raised by the assessee is allowed. Disallowance u/s 36(1)(iii) - HELD THAT - The proviso to section 36(1)(iii) of the Act provides that where any amount of interest was paid in respect of capital borrowed for acquisition of assets, then such interest which is relatable to the period beginning from the date on which capital was borrowed for acquisition of asset till the date on which asset was put to use, shall not be allowed as a deduction. In the instant case, the assessee had not borrowed any capital for the purposes of investments in capital assets for extension of exiting business. It is also not the case of the Revenue that the assessee had diverted the funds borrowed on interest for the purpose of advancing the same to the aforesaid company. It is evident from the record that there were sufficient free funds and reserves available with the assessee to advance the money to the aforesaid company. Recently, the Hon'ble Supreme Court in the case of Hero Cycles P. Ltd. Vs. CIT 2015 (11) TMI 1314 - SUPREME COURT held that no disallowance of interest under section 36(1)(iii) can be made if the advances are out of own funds. In this view of the matter also, the disallowance made by the Assessing Officer and confirmed by the learned CIT (Appeals) is uncalled for. This ground of appeal raised by the assessee is allowed.
Issues Involved:
1. Classification of repair and maintenance expenses as capital or revenue expenditure. 2. Disallowance under Section 14A of the Income Tax Act, 1961. 3. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Classification of Repair and Maintenance Expenses: The primary issue was whether the expenses incurred by the assessee on repair and maintenance of the building, tubewell, and cabin, totaling ?25,01,147/-, should be treated as capital expenditure or revenue expenditure. The assessee argued that the repairs were essential for preserving and maintaining existing assets and did not result in the creation of new assets or provide any new advantage. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT (A)] treated these expenses as capital in nature, allowing only depreciation on the amounts spent. Upon review, the Tribunal found that the repairs were due to wear and tear and were necessary for the preservation and maintenance of the existing assets. The Tribunal noted that the factory building was in a depleted condition, and the repairs were needed to prevent damage to the materials stored. The Tribunal concluded that the expenses were incurred in the normal course of business and were essential for the efficient and profitable operation of the business. Therefore, the Tribunal directed the AO to treat the expenses as revenue expenditure and allow the entire amount claimed by the assessee. 2. Disallowance under Section 14A: The second issue was the disallowance of ?76,075/- under Section 14A of the Income Tax Act, 1961, which pertains to expenses incurred in relation to income not includible in total income. The AO disallowed the amount based on the investments made by the assessee in shares, which would yield exempt dividend income. The CIT (A) upheld this disallowance. The Tribunal, however, noted that the assessee had sufficient interest-free funds available and that the investments were not made out of interest-bearing loans. The Tribunal referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Kapsons Associates, which held that the AO must record satisfaction that interest-bearing funds were used to earn tax-free income. In the absence of such a finding and given the availability of interest-free funds, the Tribunal directed the AO to delete the disallowance of ?76,075/-. 3. Disallowance under Section 36(1)(iii): The third issue involved the disallowance of ?2,16,136/- under Section 36(1)(iii) of the Income Tax Act, 1961, which pertains to interest on borrowed capital used for business purposes. The AO disallowed the interest on the grounds that the advance given to M/s Sodeme France for machinery purchase, which was not delivered due to the company's bankruptcy, lacked commercial expediency. The CIT (A) upheld this disallowance. The Tribunal, however, noted that the advance was given for a business purpose and that the assessee had filed a suit in France, which was dismissed due to the bankruptcy of the company. The Tribunal referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Suraj Dev Dada, which held that notional interest could not be disallowed when the principal amount was not recoverable. Additionally, the Tribunal observed that the assessee had sufficient own funds and reserves, and no borrowed funds were used for the advance. Citing the Hon'ble Supreme Court's decision in Hero Cycles P. Ltd. Vs. CIT, the Tribunal concluded that no disallowance under Section 36(1)(iii) was warranted and directed the deletion of the addition of ?2,16,136/-. Conclusion: The Tribunal allowed the appeal of the assessee, directing the AO to treat the repair and maintenance expenses as revenue expenditure, delete the disallowance under Section 14A, and delete the disallowance under Section 36(1)(iii). The judgment emphasized the importance of the nature and purpose of expenses in determining their classification and the necessity of proper satisfaction and evidence in making disallowances.
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