2016 (4) TMI 675 - HC - Income Tax

Expenses incurred on Life Extension Program (LEP) of Thermal Power Station - revenue v/s capital expenditure - Held that - The question whether a particular expenditure would fall within the definition of the expression current repairs under Section 31(i) or not does not depend upon what the assessee did or did not. After all if the expenditure is capitalised the assessee takes the benefit of depreciation. If the expenditure is treated as revenue expenditure it is either taken as an expenditure under Section 37(1) for computing income chargeable under the head Profits and gains of business or profession or treated as current repairs entitled to deduction under Section 31(i). Therefore the contention of the learned Standing Counsel cannot be accepted. There was a clear finding in the order of assessment that the assessee had two options. The first option was to install a new plant which would have costed about 4.5 Crores per MW with a longer gestation period. The second option was to go in for the life extension program at a cost of 0.44 Crores per MW with a shorter gestation period. These findings of fact recorded by the Assessing Officer is accepted by the Revenue. Therefore what follows out of these findings of fact is the question to be addressed. After having found that there were two options open to the assessee and that the assessee had gone in for a cheaper option (almost 1/10th of the cost of first option) the Assessing Officer fell into an error in treating both options to be of the same nature. This error in the reasoning of the Assessing Officer was rejected by both the Appellate Authorities on the basis of the principles of law enunciated in various cases which we have discussed above. Therefore we are of the considered view that the CIT (Appeals) as well as the Tribunal were right to found that the amount of expenditure actually incurred by the assessee could not be taken to be of such a huge nature as to project it as capital expenditure. - Decided in favour of the assessee.

Summary

Issues Involved:
1. Whether the expenses incurred on Life Extension Program (LEP) of Thermal Power Station (TPS-1) for the assessment years 1993-94 and 1994-95 should be considered as revenue expenditure.
2. Whether the expenses incurred on LEP of TPS-1 and rejuvenation of Bucket Wheel Excavators (BWE) for the assessment years 1995-96 to 1999-2000 should be considered as revenue expenditure.
3. Whether each machine in the Thermal Power Station should be treated as an independent entity or as part of a composite asset.

Detailed Analysis:

1. Whether the expenses incurred on Life Extension Program (LEP) of Thermal Power Station (TPS-1) for the assessment years 1993-94 and 1994-95 should be considered as revenue expenditure.

The assessee, a Public Sector Undertaking engaged in electricity generation and lignite mining, incurred substantial expenditure on the LEP of TPS-1 during the assessment years 1993-94 and 1994-95. The assessee claimed this expenditure as revenue expenditure allowable under Section 37 or as current repairs under Section 31(i) of the Income Tax Act. The Assessing Officer (AO) classified these expenses as capital in nature, arguing that they provided an enduring advantage, citing the Supreme Court decision in Ballimal Naval Kishore v. Commissioner of Income Tax [224 ITR 414]. The Commissioner of Income Tax (Appeals) confirmed this view. However, the Tribunal remanded the matter back to the AO, who again disallowed the expenditure as capital in nature. Upon appeal, the Commissioner of Income Tax (Appeals) allowed the claim, noting no increase in production capacity post-LEP, thus treating it as revenue expenditure. The Tribunal upheld this view, concluding that the expenditure was for preserving and maintaining existing assets, not creating new ones.

2. Whether the expenses incurred on LEP of TPS-1 and rejuvenation of Bucket Wheel Excavators (BWE) for the assessment years 1995-96 to 1999-2000 should be considered as revenue expenditure.

For the assessment years 1995-96 to 1999-2000, the assessee incurred significant expenditure on both LEP of TPS-1 and rejuvenation of BWE. The AO again classified these expenses as capital in nature. The Tribunal, however, dismissed the Revenue's appeals, holding that the expenditure was for maintaining and preserving existing assets rather than creating new ones. The Tribunal relied on the decisions in Commissioner of Income Tax v. Renu Sugar Power Co. Ltd. [298 ITR 94] and Commissioner of Income Tax v. Saravana Spinning Mills (P) Ltd. [293 ITR 201], which supported the view that such expenditures are revenue in nature.

3. Whether each machine in the Thermal Power Station should be treated as an independent entity or as part of a composite asset.

The Revenue argued that each machine in the Thermal Power Station should be treated independently, citing the Supreme Court's decision in Mangayarkarasi Mills (P) Ltd. [315 ITR 114], which held that each machine should be treated independently and not as part of a composite asset. However, the Tribunal concluded that each machine in the TPS is not capable of generating power independently and should be viewed as a composite asset. This conclusion was based on the nature of the repairs and replacements carried out, which were aimed at preserving and maintaining the existing asset rather than creating a new one.

Conclusion:

The High Court upheld the Tribunal's decision, concluding that the expenses incurred on LEP of TPS-1 and rejuvenation of BWE should be treated as revenue expenditure. The Court noted that the expenditure was for preserving and maintaining existing assets and did not result in the creation of new assets or provide a new or different advantage. The Court also agreed with the Tribunal's view that the TPS should be treated as a composite asset rather than each machine being treated independently. The appeals filed by the Revenue were dismissed, and the questions of law were answered against the Revenue.