2021 (12) TMI 54 - AT - Income Tax

Nature of expenditure - reconditioning/repair of plant and machinery - revenue or capital expenditure - HELD THAT - As from the production chart available it is proved that machine was not operating state in April, 2010; that from the inspection and investment proposal note dated 02.03.2010 it is proved that there was a problem of size variation affecting the repair of the machine; that from the internal production report regarding WMB Internal Grinding machine which was giving problem due to size variation, proposal for overhauling the machine was put up and on the basis of which order was placed with Sharpline Automation for supply of CNC Control panel and to do various jobs at the cost of ₹ 36,35,125/- whereas for purchase of new similar machine of Euro equivalent was costing ₹ 2.98 crores as per quotations available that it was a business decision of the assessee that overhauling old machine for ₹ 36,35,125/- as against cost of new machine of ₹ 2.98 crores is a prudent business decision. In view of order passed by the coordinate Bench of the Tribunal in assessee s own case for AYs 1995-96 to 1999-00 and following the decision rendered in case of Neyelli Lignite Corporation Ltd. 2016 (4) TMI 675 - MADRAS HIGH COURT , we are of the considered view that it was a case of merely overhauling machine by replacing its old parts as it was having problem due to size variation. Overhauling the old machine at less than of 1/6th of its price as a new unit i.e. for ₹ 36,35,125/- as against new unit for ₹ 2.98 crores is a prudent business decision and by overhauling the old machinery, no new asset has been created and as such, these are to be treated as revenue expenses - so long as only part of the machinery has been replaced as in the instant case to preserve and operate the existing machinery/assets without any enduring advantage, it would be treated as revenue expenditure - expenditure incurred by the assessee for reconditioning of plant and machinery are to be treated as revenue expenditure - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality and factual correctness of the CIT (A)'s order.
2. Disallowance of repair expenses as capital expenditure.
3. Disallowance of leave encashment under Section 43B of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Legality and Factual Correctness of the CIT (A)'s Order:
The appellant, M/s. Bharat Gears Limited, challenged the orders passed by the Commissioner of Income Tax (Appeals)-24, New Delhi, for the Assessment Years (AY) 2013-14 and 2014-15. The appellant contended that the orders were "bad in law & on facts." The Tribunal noted that Ground No.1 for both AYs 2013-14 and 2014-15 were general in nature and did not require adjudication.

2. Disallowance of Repair Expenses as Capital Expenditure:
The primary contention revolved around whether the expenditure of ?36,35,125/- incurred for reconditioning and repairing plant and machinery should be treated as capital expenditure or revenue expenditure. The Assessing Officer (AO) had treated this expenditure as capital in nature, relying on a previous decision by the Hon'ble jurisdictional High Court in the assessee’s own case for AY 1994-95. The AO allowed depreciation on this amount but disallowed it as revenue expenditure.

The Tribunal found that the AO did not dispute the details and explanations provided by the assessee regarding the reconditioning/repair of plant and machinery. The Tribunal also noted that similar disallowances made in AY 1995-96 onwards, including AY 2012-13, had been deleted by the CIT (A). The Tribunal emphasized that the facts of the current case were distinguishable from those of AY 1994-95, as the machinery in question was operational until April 2010, whereas in AY 1994-95, the machinery was idle.

The Tribunal reviewed various documents, including production charts, inspection and investment proposal notes, purchase orders, and quotations for new machinery. These documents supported the assessee's claim that the repairs were necessary to maintain operational efficiency and did not result in the creation of a new asset.

The Tribunal referred to its own decision in the assessee's case for AYs 1995-96 to 1999-00, where it had held that repairs which restore operational efficiency without creating a new asset should be treated as revenue expenditure. The Tribunal also cited the Hon'ble Madras High Court's decision in Neyelli Lignite Corporation Ltd., which supported the view that expenditure incurred to preserve and maintain existing assets without any enduring advantage should be treated as revenue expenditure.

Based on these findings, the Tribunal concluded that the expenditure of ?36,35,125/- for reconditioning the plant and machinery should be treated as revenue expenditure. Thus, Ground No.3 for AY 2013-14 was determined in favor of the assessee.

3. Disallowance of Leave Encashment under Section 43B:
For AY 2013-14, the CIT (A) had confirmed the disallowance of ?32,95,425/- on account of leave encashment under Section 43B of the Income Tax Act, 1961. For AY 2014-15, a similar disallowance of ?58,41,637/- was confirmed. However, during the hearing, the assessee did not press these grounds. Consequently, Ground No.2 for AY 2014-15 and Ground No.3 for AY 2013-14 were dismissed as not pressed.

Conclusion:
The appeal for AY 2013-14 was partly allowed, with the Tribunal ruling in favor of the assessee regarding the treatment of repair expenses as revenue expenditure. The appeal for AY 2014-15 was dismissed as the grounds were not pressed. The Tribunal's decision emphasized the importance of distinguishing between capital and revenue expenditure based on the specific facts and circumstances of each case. The order was pronounced in open court on November 25, 2021.