2019 (7) TMI 675 - HC - Income Tax

Nature of expenditure - expenditure incurred on replacement of Rotor assembly Impeller assembly Gas Chromatograph Relay and control Panel - revenue or capital expenditure - HELD THAT - Proposed question is no longer res-integra in view of the judgement of this Court in the case of the very same assessee rendered 2019 (4) TMI 1723 - GUJARAT HIGH COURT found that the expenditure claimed as revenue expenditure is in respect of components of the machinery which cannot be treated as the independent machinery in itself as they are not capable of functioning independently. It was further held that the chemical and fertilizer plant was very large plant within which again there are large machines and within the machine there are components requiring replacement due to wear and tear that was different plants within the fertilizers and chemical plant. - Decided against revenue

Summary

Issues Involved:

1. Whether the expenditure on the replacement of Rotor assembly, Impeller assembly, Gas Chromatograph, Relay, and Control Panel should be treated as revenue expenditure or capital expenditure.

Issue-wise Detailed Analysis:

1. Replacement of Rotor Assembly and Impeller Assembly:

The CIT(A) found that the Rotor assembly valued at ?13,294,744 and the Impeller assembly valued at ?25,20,570 were parts of existing turbines (X-701 and X-103 respectively). The CIT(A) concluded that these expenditures were for the replacement of existing parts and did not create new assets. Therefore, they were treated as revenue expenditures. This conclusion was based on the fact that the replacement did not enhance the capacity of the existing facilities but merely restored them to their original state of efficiency.

2. Replacement of Gas Chromatograph and Relay and Control Panel:

The CIT(A) also held that the expenditure on the Gas Chromatograph (?12,44,744) and the Relay and Control Panel Board (?1,32,44,486) was for the replacement of obsolete or damaged existing assets. This replacement was necessary to maintain the original efficiency of the facilities. The CIT(A) referenced a previous decision for the assessment year 2010-11, where similar expenditures were treated as revenue expenditures. Consequently, the AO was directed to delete the addition of ?2,31,99,073 to the total income of the appellant.

3. Examination by the Assessing Officer (AO):

The AO, in the remand proceedings, did not provide clear findings or material evidence to establish that the replaced parts were independent machines providing enduring benefits. The AO's remand report, based on physical verification and technical inspections, concluded that the replaced parts (Turbine Rotor, Gear Shaft with Gear Part, and Nozzle Ring) were not independent machines but integral parts of the main equipment (Steam Turbine X-1301). Therefore, the expenditure on these parts was treated as revenue expenditure.

4. Replacement of 415V, 3000AMP, 3PH - 40W PMCC for CHP:

The AO's remand report did not provide a definite finding on this part. The appellant argued that the panel was a component of the Coal Handling Plant and could not function independently. The CIT(A) accepted this argument, noting that the replacement was due to deterioration and obsolescence, and did not enhance the capacity of the existing facilities. Therefore, the expenditure was allowable as revenue expenditure.

5. Tribunal's Affirmation:

The tribunal affirmed the findings of the CIT(A), referencing earlier orders of the ITAT in similar cases where such expenditures were treated as revenue expenditures. The tribunal noted that the AO had accepted this treatment in set-aside assessment proceedings for previous years (e.g., A.Y. 1999-2000). The tribunal dismissed the revenue's appeal, emphasizing that the replacement of damaged parts did not constitute the acquisition of new machinery but was necessary to maintain the efficiency of the existing machinery.

6. High Court's Conclusion:

The High Court concluded that the proposed question was no longer res-integra, referencing a previous judgment in the same assessee's case (Tax Appeal No.1360 of 2018). The court observed that the replacement of worn-out parts did not create new assets or increase capacity but restored the machinery to its original efficiency. Therefore, the expenditure was rightly treated as revenue expenditure. The High Court dismissed the tax appeal, affirming the decisions of the CIT(A) and the tribunal.

Result:

The appeal of the revenue was dismissed, affirming that the expenditures on the replacement of Rotor assembly, Impeller assembly, Gas Chromatograph, Relay, and Control Panel were correctly treated as revenue expenditures.