2019 (7) TMI 676 - HC - Income Tax

Nature of expenses - Disallowance of expenses on consumption and replacement of stores and spares - revenue expenditure OR capital expenses - HELD THAT - The proposed question is no longer res-integra in view of the judgement of this Court in the case of the very same assessee rendered in Tax Appeal 2019 (4) TMI 1723 - GUJARAT HIGH COURT as CIT-A 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. Reference was also made to past history of disallowance wherein the Tribunal had set aside the issue to the Assessing Officer for the assessment years 1998-99 to 2002-03, who in turn accepted the explanation furnished by the appellant in de novo assessment proceedings and no additions were made. On perusal of the facts noted by the CIT (Appeals) as well as affirmed by the Tribunal, it is clear that question (a) raised by the revenue is a pure question of fact and in the absence of any perversity being pointed out in the concurrent findings of fact recorded by the Tribunal, does not give rise to any question of law.

Summary

Issues Involved:
1. Whether the ITAT erred in deleting the addition on account of disallowance of expenses on consumption and replacement of stores and spares by treating them as revenue expenditure instead of capital expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Expenses:

Findings of CIT:
The CIT examined the facts and submissions of the appellant, the order under section 143(3) r.w.s. 254, and the remand report of the AO. The AO did not provide any material evidence to establish that the parts replaced were independent machines providing enduring benefits. The ITAT had directed the AO to examine whether the replaced parts were independent machines or parts of a larger machine. The AO’s remand report concluded that the parts in question, such as the Conversion Kit for Pump Block and Set of Impellers for Naraxno Rotor, were not independent machines but parts of larger machinery. The CIT agreed with the appellant's submission that the replacement was made to restore the machinery to its original efficiency and thus should be treated as revenue expenditure. The CIT directed the AO to treat the expenditure as revenue expenditure, not capital expenditure.

Affirmation by ITAT:
The ITAT affirmed the CIT's findings, noting that the issue was covered by earlier orders of the ITAT in the assessee’s own case for previous assessment years. The ITAT found no infirmity in the CIT’s order and dismissed the revenue's appeal, reiterating that the parts replaced were not independent machinery but parts of a larger system. The ITAT also distinguished this case from the case of Shri Mangayarkasi Mills (P) Ltd, where the replacement of old machinery with new machinery was treated as capital expenditure.

High Court's Decision:
The High Court noted that the issue was no longer res-integra in view of its judgment in the case of the same assessee in Tax Appeal No.1360 of 2018. The Court observed that the replacement of components did not create new assets or increase capacity but restored the machinery to its original efficiency. The CIT(A) had found that the expenditure was for components of machinery that were not independent machines. The High Court concluded that the question raised by the revenue was a pure question of fact, and no perversity was pointed out in the concurrent findings of the CIT(A) and the ITAT. Consequently, the High Court dismissed the tax appeal.

Conclusion:
The High Court upheld the decisions of the CIT and ITAT, confirming that the expenditure on the replacement of parts should be treated as revenue expenditure, not capital expenditure. The appeal by the revenue was dismissed, affirming that the replaced parts were not independent machinery but parts of a larger system, and the expenditure was necessary to maintain the machinery's efficiency.