2020 (9) TMI 917 - AT - Income Tax

Loss of precious metal - Notional loss or actual loss - replenishing the loss in precious metal on account of wear and tear - HELD THAT - There is no doubt that assessee has entered into lease agreement with its parent company for utilisation of their specialised machineries and reimburse the actual loss due to wear and tear. During this assessment year assessee has already quantified and reimburse the same. During this year as submitted by the assessee due to abnormal circumstances assessee has to replace feeder/nozzles due to frequent leakages in the feeder. These are all abnormal and special circumstances in which utilisation of metal has increased abnormally during this assessment year when compared to previous assessment year however when we compare the loss in the subsequent assessment year it does not look abnormal. We do not have any record of subsequent assessment year to appreciate the loss incurred by the assessee. Considering the abnormal situation existed during this year in our considered view the loss of precious metal during this year is abnormal. The abnormal utilisation of precious metal however big it is utilised as machinery consumables only it does not or will not increase the life of the machinery. Abnormal loss incurred by the assessee can be treated as revenue expenditure to be allowable during this year or the abnormal loss can be amortised in 2 to 3 years. In our considered view no doubt the losses considerably high we direct assessing officer to amortise the abnormal loss in 2 years that is 50% during this assessment year and balance in the next assessment year. With regard to observation of the assessing officer that assessee has purchased from the vendor and the documentation does not show that it is refurbished the machineries. We observe from the certificate issued by technical engineers from the company that assessee has purchased these precious metals and the internal technical department has carried out the respective work of re-fabrication of damaged feeders/nozzles. Therefore we do not notice anything wrong in purchasing of the precious metals and carrying on repair work of the machineries internally by the assessee. Accordingly ground No. 2 raised by the assessee is partly allowed. Substantial repair of the internal road inside the factory - AO disallowed the above expenditure with the observation that assessee has not carried out repairs to the road at its factory but it is a case of complete construction of new road right from dismantling the existing road excavation of entire road up to depth of 1.5 m and filling the excavated area by soil placing a layer of plain cement concrete et cetera with top layer with RCC. This nature of work does not constitute petty repairs - HELD THAT - Laying of new road and construction/finishing surrounding work results in benefit of enduring nature to the assessee. Accordingly he treated the above expenses as capital expenses. Considering the substantial amount of expenses incurred to re-lay the road and it will certainly give enduring benefit to the assessee and we are in agreement with the findings of assessing officer that it is capital expenses. Since he treated the expenses as capital in nature incurred for the purpose of smooth functioning of the business therefore these expenses were incurred for the purpose of business only. In our considered view assessee is eligible to claim depreciation on the cost of construction of Road. Therefore we are directing the assessing officer to allow the depreciation on the expenditure incurred to construct the road. Accordingly ground raised by the assessee is partly allowed.

Issues Involved:
1. Disallowance of loss incurred on precious metal.
2. Disallowance of expenses incurred on repair of road.

Detailed Analysis:

Issue 1: Disallowance of Loss Incurred on Precious Metal

Background:
The assessee filed a return of income declaring total income at Rs. Nil and book profit of ?11,19,51,325/-. During the assessment proceedings, the AO noted that the assessee claimed ?1,92,30,918/- as a loss of precious metal. The assessee explained that this amount was paid to its parent company for loss in precious metal leased from them and for replenishing the loss due to wear and tear.

Assessing Officer's Findings:
The AO observed that the actual loss of precious metal determined by M/s Schott AG was ?46,57,540/-, and the additional amount of ?1,45,75,945/- was for the purchase of precious metals, not for refining or re-melting. Hence, the AO disallowed the excess amount, treating it as capital expenditure, and added ?1,45,75,945/- to the total income of the assessee.

Dispute Resolution Panel (DRP) Findings:
The DRP upheld the AO's decision, stating that the AO had provided valid reasoning for the disallowance.

Appellate Tribunal's Analysis:
The Tribunal noted that the assessee had increased its production capacity, leading to higher consumption of precious metals. It was also observed that due to abnormal circumstances such as leakages, the assessee had to replace feeder/nozzles frequently. The Tribunal found that the loss of precious metal during the year was abnormal but necessary for maintaining production. It directed the AO to amortize the abnormal loss over two years, allowing 50% in the current assessment year and the balance in the next year.

Conclusion:
The Tribunal partly allowed the assessee's claim, directing the AO to amortize the abnormal loss over two years.

Issue 2: Disallowance of Expenses Incurred on Repair of Road

Background:
The assessee claimed repairs and maintenance expenses of ?31,62,765/- for repairing roads within its factory premises.

Assessing Officer's Findings:
The AO disallowed the expenses, treating them as capital expenditure, stating that the work involved complete construction of a new road, including dismantling the existing road, excavation, and laying a new RCC top layer, which provided an enduring benefit to the assessee.

Dispute Resolution Panel (DRP) Findings:
The DRP upheld the AO's decision, agreeing that the expenses were capital in nature.

Appellate Tribunal's Analysis:
The Tribunal agreed with the AO's findings that the expenses were substantial and provided enduring benefits, thus constituting capital expenditure. However, it noted that since the expenses were incurred for business purposes, the assessee should be allowed to claim depreciation on the cost of constructing the road.

Conclusion:
The Tribunal directed the AO to allow depreciation on the expenditure incurred for constructing the road, thus partly allowing the assessee's claim.

Summary:
The appeal filed by the assessee was partly allowed. For the loss incurred on precious metal, the Tribunal directed the AO to amortize the abnormal loss over two years. For the expenses incurred on road repair, the Tribunal upheld the capital nature of the expenses but directed the AO to allow depreciation on the cost of constructing the road.

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