2016 (5) TMI 959 - AT - Income Tax

Treatment of expenditure - whether CIT (A) deleting addition made by the AO by capitalizing expenses on Furniture & Fixtures, machine Spares and Repair & Maintenance, which were claimed as revenue expenses by the assessee? - Held that - It is well settled law that in deciding the enduring benefit of an expenditure the nature of business carried out by assessee assumes importance. In assessee s case the firm was doing vacuum heat treatment for various parties on job work basis. The nature of work consisted of 3 types of heat treatment of die steel and aerospace components, such as (i) vacuum heat treatment; (ii) plasma ion nitriding; and (iii) sub zero treatment. From the assessee s submissions, reproduced above, it is evident that heating of items in furnace was done at a temperature up to 1200ċ and also at sub zero temperature. The ld. CIT(A) has very rightly observed that it is obvious that the items loaded in the furnace can suffer major damage due to the extreme temperature. It was explained before ld. CIT(A) that the fixtures were mostly those items on which the products whose heat treatment were to be carried out were loaded and then both the fixture and the product were put inside the furnace. In such a situation ld. CIT(A) has rightly observed that fixtures would suffer major damage and, therefore, the assessee s claim that they could be used only for 2-3 times, could not be brushed aside. Under such circumstances, merely because assessee had used not only stainless steel, but mild steels and graphite items, could not be a basis for concluding that fixtures would have a very long life, because the life of the item would depend upon the use to which it was put. Ld. CIT(A) has also pointed out that ten items of fixtures listed at page 3 of the assessment order, showed that these were mostly cables, pipes, thermocouple, MCB etc., which did not have any independent existence and would be a part of other machineries. Therefore, merely there being grouped under fixtures, it could not be concluded that they were capital in nature. All these facts noted by ld. CIT(A) have not been controverted by the department and, therefore, we do not find any reason to interfere with the findings of ld. CIT(A). Accordingly, order of ld. CIT(A) is upheld. - Decided in favour assessee.

Issues:
1. Capitalization of expenses on Furniture & Fixtures, Machine Spares, and Repair & Maintenance
2. Justification for capitalization of expenses by the Assessing Officer (AO)
3. Treatment of expenses allowed in the previous assessment year
4. Nature of expenses claimed by the assessee as revenue in nature

Analysis:

Issue 1: Capitalization of expenses on Furniture & Fixtures, Machine Spares, and Repair & Maintenance
The Revenue appealed against the order of the ld. CIT(A) that deleted the addition of expenses totaling Rs. 59,12,897 made by the AO by capitalizing expenses on Furniture & Fixtures, Machine Spares, and Repair & Maintenance, which were claimed as revenue expenses by the assessee. The AO treated these expenses as capital in nature, leading to the dispute. The ld. CIT(A) allowed the assessee's appeal by considering the nature of activities carried out by the assessee and the enduring benefit of the expenses. The Tribunal upheld the ld. CIT(A)'s decision, emphasizing that the extreme temperatures involved in the furnace work would result in major damage to the fixtures, justifying the treatment of expenses as revenue in nature.

Issue 2: Justification for capitalization of expenses by the Assessing Officer (AO)
The AO did not accept the assessee's contention that the expenses should be treated as revenue in nature. The AO observed that the assessee's AR admitted the difficulty in estimating the accurate life of fixtures and highlighted the use of stainless steel sheets with a longer life compared to mild steel. Despite the AR's admission, the Tribunal upheld the ld. CIT(A)'s decision to delete the addition, emphasizing the specific nature of the activities carried out by the assessee and the short lifespan of the fixtures due to extreme working conditions.

Issue 3: Treatment of expenses allowed in the previous assessment year
The assessee raised a point regarding the treatment of expenses allowed as revenue in the previous assessment year, arguing that these should not have been added back in the current assessment year. The Tribunal did not find merit in this argument, as the nature of the expenses and their treatment in different assessment years were distinct, leading to the dismissal of this ground of appeal.

Issue 4: Nature of expenses claimed by the assessee as revenue in nature
The assessee provided detailed reasons for treating the expenses on Furniture & Fixtures, Machine Spares, and Repair & Maintenance as revenue in nature. The nature of the work carried out by the assessee, involving vacuum heat treatment and various heat treatment processes, was crucial in determining the treatment of these expenses. The Tribunal considered the specific details provided by the assessee regarding the expenses and the nature of the business activities to uphold the decision of the ld. CIT(A) in deleting the addition of these expenses.

In conclusion, the Tribunal dismissed the departmental appeal, upholding the decision of the ld. CIT(A) to treat the expenses as revenue in nature based on the specific circumstances and nature of the activities carried out by the assessee.

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