2019 (3) TMI 633 - AT - Income Tax

Expenditure incurred as repairs - Deduction while computing income from business under the head current repairs - assessee had carried out major replacement and by doing so had derived an enduring benefit and the expenditure was capital in nature - whether an expenditure is revenue or capital? - HELD THAT - What would constitute the repairs as current repairs and whether replacement of parts of a machine can be said to be current repairs are questions which will depend on facts and circumstances of each case. We have already set out the nature and description of the item that was used on SMG Feintool Germany. Similarly for other items of machinery, the description is contained in assessee s PB. Without a reference to the nature of expenses, it is not possible to decide the question whether the expenditure in question is current repairs or capital expenditure or revenue expenditure. In our view, it will be just and proper to set aside the order of revenue authorities on this issue and remand the question for fresh consideration by the AO in the light of principles laid down in the case of Super Spinning Mills 2013 (9) TMI 88 - MADRAS HIGH COURT in the decision cited supra. AO will afford opportunity of being heard to the assessee, before deciding the issue. The relevant grounds of appeal are decided accordingly. TDS u/s 194C - payment to transporters - benefit of section 194C(6) / 194C(7) - payment in question was a payment for carrying out of works for which assessee ought to have deducted tax at source on such payment - addition u/s. 40(a)(ia) - HELD THAT - We find that identical issue had come up for consideration before the Calcutta Bench of the Tribunal in the case of Soma Rani Ghosh v. DCIT 2016 (10) TMI 55 - ITAT KOLKATA as held authorities below are not justified in treating the expense incurred by the assessee for Carriage inward and carriage outward as disallowable under section 40(a)(ia) of the Act, and adding back claimed expense towards Carriage Inward and expense towards Carriage Outward, and such additions shall stand deleted. - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of ?39,81,198 claimed as deduction under 'current repairs.'
2. Disallowance of ?71,76,751 under section 40(a)(ia) for non-deduction of tax at source on payments to transporters.

Detailed Analysis:

1. Disallowance of ?39,81,198 Claimed as Deduction Under 'Current Repairs':

The assessee, engaged in the manufacture of tools and tubes, claimed a deduction of ?39,81,198 for repairs to machinery. The Assessing Officer (AO) disallowed this claim, viewing the expenditure as capital in nature due to the substantial amount compared to the purchase consideration and Written Down Value (WDV) of the machinery. The AO allowed depreciation on the disallowed amount, resulting in an addition of ?34,21,193 to the assessee's total income. The AO's computation was as follows:

"Accordingly only depreciation is permissible on this expenditure. Accordingly, the Total amount of expenditure claimed of ?39,81,198 /- is disallowed and depreciation thereon which comes to ?5,60,005/- is allowed. While calculating the depreciation allowed full depreciation is given for those Plant and Machinery which exceeded 180 days and 50% depreciation is given to the Plant and Machinery which is below 180 days. Accordingly the difference amount of ?34,21,193/- (39,81,198 - ?5,60,005) is added to the, in some returned by the assessee."

The CIT(Appeals) upheld the AO's decision, stating that the expenditure resulted in an enduring benefit and was thus capital expenditure. The CIT(A) cited the example of the SMG Feintool Germany machine, where the replacement of the hydraulic system with an electrical control panel was considered to provide an enduring benefit.

The Tribunal, after reviewing the principles laid down by the Hon’ble Madras High Court in Super Spinning Mills v. ACIT, 357 ITR 720, noted that the determination of whether an expenditure is revenue or capital depends on the facts of each case. The Tribunal found that the CIT(A) did not adequately discuss the nature of the expenses for other items and remanded the issue back to the AO for fresh consideration, emphasizing the need to evaluate the nature of the expenses in light of the principles laid down by the High Court.

2. Disallowance of ?71,76,751 Under Section 40(a)(ia) for Non-Deduction of Tax at Source on Payments to Transporters:

The assessee made payments totaling ?71,76,751 to various transporters without deducting tax at source. The AO disallowed the deduction under section 40(a)(ia), considering these payments as contractual obligations requiring tax deduction under section 194C. The AO's reasoning was:

"From the above it is evident that the assessee has incurred freight expenses to big transport companies. Clearly section 194C(6) & 194C(7) are not meant for these transport companies but these sections are applicable to small transport operators who owns very few trucks. Further the repeated payment to the, same transport company clearly indicates that the assessee was in contractual obligation with these transport companies and he is liable to deduct the TDS U/s. 194C of I.T. Act at the prescribed rates. These payments were to be paid after deducting tax at the source."

The CIT(Appeals) upheld the AO's decision but did not address the assessee's argument regarding section 194C(6).

The Tribunal, referencing the decision in Soma Rani Ghosh v. DCIT, 74 taxmann.com 90 (Kolkata Trib.), held that compliance with section 194C(6) suffices to avoid disallowance under section 40(a)(ia), even if section 194C(7) is not met. Since the assessee had obtained the necessary declarations from the transporters, the Tribunal directed the deletion of the disallowance.

Conclusion:

The appeal by the assessee was partly allowed. The issue of disallowance of ?39,81,198 was remanded to the AO for fresh consideration, while the disallowance of ?71,76,751 was deleted based on compliance with section 194C(6).