2019 (4) TMI 576 - AT - Income Tax

Expenditure for repairs and maintenance to plant & machinery - Revenue or capital expenditure - current repair - HELD THAT - If the expenditure incurred by the assessee would not result in replacement of old machinery with new, then it may come within the ambit of current repair, but expenditure on such a magnitude which ultimately replaces full machinery within one or two years, then it would not come under concept of current repair . AO has observed that the assessee has incurred expenditure to the extent of 60.93% of the value of the machinery in the AY 2010-11 and 31.58% in A.Y.2011-12, meaning thereby, by way of this method, almost 92% expenditure were incurred in two years on the value of the plant & machinery. It amounts to replacement. CIT(A) in this background has rightly observed that other companies in similar line were incurred expenditure to the extent of 2% to 6%, whereas the assessee has incurred expenditure at 43%. The CIT(A) rightly upheld disallowance of expenditure partly by treating it in the capital field. We do not find any error in the order of the CIT(A) in both years on this issue. An alternative contention has been raised that in case expenditure is not allowed as revenue expenditure, then depreciation on the disallowed amount be granted to the assessee. We remit this aspect to the file of the AO. He will work out and grant depreciation to the assessee on the addition made by disallowing the current repairs. This alternative contention of the assessee is accepted. - Decided partly in favour of assessee.

Summary

Issues:
1. Cross appeals between Assessee and Revenue for Asstt.Year 2010-11 and 2011-12.
2. Maintainability of Revenue's appeal based on tax effect.
3. Disallowance of repair and maintenance expenses by AO.
4. Appeal against disallowance by Assessee.
5. Interpretation of current repairs under Section 31 of the Income Tax Act.
6. Comparison with relevant case laws.
7. Granting of depreciation on disallowed amount.

Issue 1: Cross Appeals
The judgment involves cross appeals between the Assessee and Revenue for the assessment years 2010-11 and 2011-12. The Assessee is in appeal against the order of the ld.CIT(A) dated 3.12.2015, while the Revenue is also appealing against the same order for the Asstt.Year 2010-11.

Issue 2: Maintainability of Revenue's Appeal
The tax effect involved in the Revenue's appeal is below the monetary limit set by the CBDT for filing appeals before the ITAT. The Assessee argued that the tax effect being below ?20 lakhs, the appeal is not maintainable. The Tribunal, considering the CBDT circular and provisions of the Income Tax Act, dismissed the Revenue's appeal.

Issue 3: Disallowance of Repair Expenses
The AO disallowed a portion of repair and maintenance expenses claimed by the Assessee, treating them as capital expenditure instead of revenue expenditure. The disallowance was based on the understanding that the repairs gave rise to enduring benefits to the Assessee in the plant & machinery.

Issue 4: Appeal Against Disallowance
The Assessee appealed against the disallowance, arguing that the repairs were necessary for the continuous operation of the plant & machinery and should be treated as revenue expenditure. The ld.CIT(A) partially allowed the appeal by disallowing 25% of the claimed expenditure.

Issue 5: Interpretation of Current Repairs
Section 31 of the Income Tax Act allows for the deduction of expenditure on current repairs to plant & machinery. The judgment discusses the definition of current repairs and the distinction between current repairs and capital expenditure based on the nature of the expenditure.

Issue 6: Comparison with Case Laws
The judgment compares the facts of the case with relevant case laws such as CIT Vs. Sesa Resources Ltd. and CIT Vs. Sarvana Spg. Mills P.Ltd. to determine whether the repairs qualify as current repairs or capital expenditure based on the impact on the machinery and the nature of the expenditure.

Issue 7: Granting of Depreciation
An alternative contention raised by the Assessee was to grant depreciation on the disallowed amount if the expenditure was not allowed as revenue expenditure. The Tribunal accepted this contention and remitted the aspect to the AO for further action.

In conclusion, the judgment dismissed the Revenue's appeal due to the tax effect, partially allowed the Assessee's appeal against the disallowance of repair expenses, and provided guidance on the interpretation of current repairs and the granting of depreciation on disallowed amounts.