2010 (9) TMI 1285 - AT - Income Tax

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Deletion of addition by treating purchase of 'Rolls' as revenue expenditure instead of capital expenditure.
3. Deletion of additions on account of deemed dividend under section 2(22)(e) of the Income Tax Act.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal for the Assessment Year 2005-06 was time-barred by four days. The revenue filed a condonation petition explaining the delay. After hearing both parties and reviewing the petition, the delay was condoned, and the appeal was taken up for hearing on merits.

2. Deletion of Addition by Treating Purchase of 'Rolls' as Revenue Expenditure:
Assessment Year 2005-06:
- The Assessing Officer (AO) observed that the assessee claimed the purchase of 'Rolls' as revenue expenses under 'stores & spares'. According to the Income-Tax Rules, 'Rolls' in iron and steel industries are eligible for 80% depreciation.
- The AO allowed normal depreciation for purchases up to 30th September 2004 and for the period from 1st October 2004 to 31st March 2005, disallowing the balance claim, resulting in an addition of Rs. 1,35,48,466 to the income.
- The CIT(A) deleted the addition, and the revenue appealed against this decision.

Assessment Year 2006-07:
- Similar disallowance was made for an addition of Rs. 1,18,50,085 due to excess expenses claimed for the replacement of steel rolls.
- The CIT(A) deleted this addition as well, and the revenue appealed.

Arguments and Judgment:
- The revenue argued that the CIT(A) erred in deleting the additions without appreciating the fact that 80% depreciation is available on rolls.
- The assessee contended that 'Rolls' are parts of machinery replaced frequently and should be treated as revenue expenditure, not capital expenditure.
- The Tribunal found that the facts of the case were identical to CIT vs. Malhotra Industrial Corporation (2002) 254 ITR 635, where expenditure on replacement of rolls was treated as revenue expenditure.
- The Tribunal upheld the CIT(A)'s decision, confirming that the expenditure incurred on replacement of rolls was in the nature of current repairs and not capital in nature. Thus, the grounds of appeal of the revenue for both assessment years were dismissed.

3. Deletion of Additions on Account of Deemed Dividend under Section 2(22)(e):
Assessment Year 2005-06:
- The AO observed that the assessee took a loan of Rs. 5,45,00,000 from a sister concern and treated it as deemed dividend under section 2(22)(e).
- The AO argued that the company giving the loan was not a company in which the public are substantially interested, making the loan a deemed dividend.
- The CIT(A) deleted the addition, stating that the lending company was indeed a company in which the public are substantially interested, as more than 58% of its shares were held by widely held companies.

Assessment Year 2006-07:
- A similar addition of Rs. 18,32,228 was made and subsequently deleted by the CIT(A).

Arguments and Judgment:
- The revenue argued that the CIT(A) erred in deleting the additions.
- The assessee maintained that the lending company was a company in which the public are substantially interested, thus section 2(22)(e) did not apply.
- The Tribunal upheld the CIT(A)'s decision, confirming that the lending company was a company in which the public are substantially interested, and thus, the loans could not be treated as deemed dividends. Consequently, the grounds of appeal of the revenue for both assessment years were dismissed.

Conclusion:
The appeals of the revenue were dismissed, with the Tribunal upholding the CIT(A)'s decisions on both the deletion of additions by treating the purchase of 'Rolls' as revenue expenditure and the deletion of additions on account of deemed dividend under section 2(22)(e).