2017 (5) TMI 251 - AT - Income Tax

Addition on account of major repair expense - Held that - As decided in assessee s own case for previous AY 2006-07 & 2007-08 held there was no enhancement in the capacity of the plant and machinery as well as no increase in the efficiency. There was no purchase of any new equipment under the category of plant and machinery. Thus no enduring benefit was created by the assessee out of the aforesaid expense, thus the entire expenditure was revenue in nature and thereby allowable - Decided in favour of assessee Debts written back - Gain received on account of settlement of the loan - whether the loan amount written off is income as per the provisions to section 28(iv)? - Held that - The provisions of section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite whether convertible into money or not arising from business or the exercise of a profession shall be chargeable as income under the head Profits and gains of business or profession . In the instant case the fact that the loan was utilized for the capital transactions has not been disputed by the AO. Thus it is clear that the instant loan was not utilized for the trading liability of the assessee and therefore the waiver off the same cannot amount to income which is chargeable to tax. See CIT v. Tosha International Ltd. 2008 (9) TMI 31 - HIGH COURT DELHI - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer (AO) for ?32,44,228/- on account of major repair expense.
2. Deletion of addition made by AO for ?5.66 crores on account of debts written back.

Detailed Analysis:

Issue 1: Deletion of Addition for Major Repair Expense
Facts and Arguments:
- The assessee, a limited company engaged in cement manufacturing, claimed an expense of ?32,44,228/- under "major repairs" in the profit and loss account.
- The AO classified these expenses as capital in nature, arguing that they involved the replacement of machinery components, thus adding the amount to the total income of the assessee.
- The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that the expenses did not enhance the capacity or efficiency of the plant and machinery, nor involved the purchase of new equipment, and thus should be treated as revenue expenses.

CIT(A) Decision:
- CIT(A) referenced a similar issue from the assessee’s case for the assessment year 2007-08, where such expenses were deemed revenue in nature and allowable.
- Consequently, CIT(A) deleted the addition made by the AO.

Tribunal’s Analysis:
- The Tribunal noted that a similar issue was decided in favor of the assessee in previous years (ITA No.1396 & 1397/Kol/2011 for A.Y. 2006-07 & 2007-08).
- The Tribunal cited the Hon'ble Bombay High Court case of CIT vs. Chowgule & Co. Pvt. Ltd., which clarified the nature of "current repairs" and concluded that the expenses did not result in a new or different advantage and were thus revenue in nature.
- The Tribunal upheld CIT(A)'s order, dismissing the Revenue's appeal on this ground.

Issue 2: Deletion of Addition for Debts Written Back
Facts and Arguments:
- The assessee settled a loan from M/s Asset Reconstruction Company Ltd. (ARCL), resulting in a waiver of ?5.66 crores, which was initially credited to the profit and loss account.
- During assessment, the assessee revised its computation, excluding the waived amount from income, arguing it was never claimed as a deduction.
- The AO added the waived amount to the total income, treating it as income under section 28(iv) of the Income Tax Act.

CIT(A) Decision:
- CIT(A) found that the waived amount was not shown in the main profit and loss account and had not been claimed as a deduction in previous years.
- Citing judicial precedents, CIT(A) held that the waiver of a principal loan amount does not constitute income under sections 28(iv) or 41(1) of the Act and deleted the addition.

Tribunal’s Analysis:
- The Tribunal emphasized that the waived loan amount represented the principal amount used for capital transactions, not trading liabilities.
- It referenced the Hon'ble Delhi High Court case of CIT v. Tosha International Ltd., which held that the waiver of a principal loan amount utilized for capital purposes does not constitute taxable income under sections 28(iv) or 41(1).
- The Tribunal upheld CIT(A)'s decision, dismissing the Revenue's appeal on this ground.

Conclusion:
The appeal by the Revenue was dismissed on both grounds. The Tribunal upheld the CIT(A)'s decisions that:
1. The major repair expenses were revenue in nature and allowable as deductions.
2. The waiver of the principal loan amount did not constitute taxable income under the relevant sections of the Income Tax Act.