2022 (4) TMI 642 - AT - Income Tax

Nature of expenditure - Replacement of parts in machineries treated as capital in nature - reference to Technical Write Up, Details of spares consumed at regular intervals for various Asst. years - HELD THAT - We need not labour ourself in coming to a conclusion that the Replacement of parts in machineries treated as Not Capital but Revenue in nature for a power generating company, these bucket spares are in the nature of consumables spares only notwithstanding its high cost. The buckets are designed with special profile of airfoil cross section for efficient energy conversion.Due to high working temperature of around 800' C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine. As seen from the Original Equipment Manufacturer namely BHEL/General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine - also stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased. Replacement of parts is Capital or Revenue is No more Res integra based on the observation made by the Hon ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills 2007 (8) TMI 16 - SUPREME COURT and CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 2009 (7) TMI 17 - SUPREME COURT wherein held that when certain parts of an air-conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Applying the same logic to the facts of the assessee s case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power. Replacement of spares in the machineries would be allowable as Revenue expenditure only and addition made by the AO is directed to be deleted. Thus the Department ground is rejected. Claim of deduction u/s.80IA - initial assessment year - additional claim of deduction in respect of profit of 250MW Power Station denied on the ground that assessee neither obtained or filed audit report nor claimed deduction under s.80IA of the Act at the time of filing of original return of income - HELD THAT - The issue is now settled by the Circular No.1/2016 issued by the CBDT that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. The Circular further clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 80IA for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80IA. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. Thus the Assessing Officers are directed to allow deduction u/s 80IA in accordance with this clarification and Standing Counsels/D.R.s are suitably instructed pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in subsection (5) of section 80IA Following this Circular the SLP filed by the department was also dismissed against High Court's ruling that loss in year earlier to initial assessment year already absorbed against profit of other business cannot be notionally brought forward and set off against profits of eligible business as no such mandate is provided in section 80-IA(5) reported in Assistant Commissioner of Income-tax, Tirupur -Vs- Velayudhaswamy Spinning Mills (P.) Ltd. 2016 (11) TMI 373 - SC ORDER - Following the same we hereby reject the Grounds of appeal filed by the Revenue and allow the claim of deduction u/s.80IA in favour of the assessee. Disallowance under s.14A r.w.r. 8D - HELD THAT - The issue is now settled by the Hon ble Supreme Court in the case of Maxopp Investment Ltd. Vs- Commissioner of Income Tax, New Delhi 2018 (3) TMI 805 - SUPREME COURT wherein it clearly held that Rule 8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted w.e.f. March 24, 2008 vide Income Tax (Fifth Amendment) Rules, 2008. Further jurisdictional High Court in the case of Principal Commissioner of Income-tax-4 Vs- Sintex Industries Ltd. 2017 (5) TMI 1160 - GUJARAT HIGH COURT wherein it is clearly held that the Expenditure incurred in relation to income not includible in total income (Administrative expenses) - Whether where assessee already had its own surplus fund against which minor investment was made, no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A arose and, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses under rule 8D - Thus we clear in our mind the direction given by the Ld CIT A to apply Rule 8D is not proper and there being the surplus funds were invested by the assessee and there were no administrative expenses, the disallowance made u/s.14A is unwarranted and liable to be deleted. Thus the Cross Objection filed by the assessee is allowed by deleting the addition made u/s.14A Depreciation on Managing Director s residence - HELD THAT - As the building is used for official-cumresidential purpose by the Managing Director, with all office facilities we find that 10% depreciation can be granted on this Building and direct the AO to allow the same. Accordingly the CO filed on this ground is allowed. Disallowance of contribution made to various organizations - CIT A granted relief in cases were the assessee has submitted Certificate of Registration of 80G in respect of payments made to SVADES and DEEP and balance amount was confirmed - HELD THAT - In our considered view the CIT A has granted appropriate relief to the assessee, which does not require any further inference. Accordingly the CO filed on this ground is dismissed. Claim of deduction under 43B - interest payable to Power Finance Corporation which was not paid as per the provisions of section 43B of the Act disallowed - HELD THAT - CIT(A) correctly by his detailed order has held that the AO was correct in not allowing the deduction of interest amounting to ₹ 2,49,82,597/-. However, the AO is directed to allow this as a deduction in AY 2008-09. Similarly, the interest payment disallowed in the earlier year, which was actually paid in the PY corresponding to AY 2007-08 should be allowed as deducting in this year.

Summary

Issues Involved:
1. Replacement of parts in machinery treated as capital expenditure.
2. Additional claim under section 80IA of the Income Tax Act.
3. Disallowance under Section 14A of the Income Tax Act.
4. Depreciation on building used for Managing Director’s residence.
5. Disallowance of contributions made to various organizations.
6. Claim of disallowance under Section 43B of the Income Tax Act.

Detailed Analysis:

1. Replacement of Parts in Machinery Treated as Capital Expenditure:
The primary issue was whether the replacement of parts in machinery should be treated as capital expenditure or revenue expenditure. The Assessing Officer (AO) treated the replacement of parts as capital expenditure, leading to a net addition of ?3,83,02,228/- after allowing depreciation. However, the CIT(A) and ITAT held that the replacement of parts did not create new assets or increase the plant's capacity, thus qualifying as revenue expenditure. The ITAT emphasized that replacement of parts is essential for maintaining the machinery's efficiency and does not result in an enduring benefit. The decision was supported by technical write-ups and previous judgments, including CIT v. Saravana Spinning Mills Pvt. Ltd.

2. Additional Claim Under Section 80IA:
The AO denied the assessee’s additional claim for deduction under section 80IA due to the non-submission of the audit report with the original return and not setting off previous years' losses. The CIT(A) allowed the claim, stating that filing the audit report before the assessment's finalization suffices. The ITAT upheld this view, referencing the CBDT Circular No. 1/2016, which allows the assessee to choose the initial assessment year for claiming deductions. The ITAT concluded that the assessee met all conditions for the deduction, allowing the claim.

3. Disallowance Under Section 14A:
The AO disallowed 10% of the exempt income under Section 14A, attributing it to financial and administrative expenses. The CIT(A) directed the AO to re-compute the disallowance as per Rule 8D. However, the ITAT noted that Rule 8D is prospective and not applicable for assessment years before 2007. Additionally, the ITAT found that the assessee had sufficient surplus funds and no administrative expenses were incurred for earning tax-free income. Thus, the disallowance under Section 14A was deleted.

4. Depreciation on Building Used for Managing Director’s Residence:
The AO allowed depreciation at 5% for the Managing Director’s residence, treating it mainly as a residential building. The assessee claimed 10% depreciation, arguing the building was used for both residential and office purposes. The ITAT agreed with the assessee, noting the building’s dual use and directed the AO to allow 10% depreciation.

5. Disallowance of Contributions Made to Various Organizations:
The AO disallowed contributions made to various organizations, citing a lack of business obligation. The CIT(A) allowed contributions where the assessee provided Certificates of Registration under Section 80G. The ITAT upheld the CIT(A)’s decision, granting relief for contributions with proper documentation and disallowing the rest.

6. Claim of Disallowance Under Section 43B:
The AO disallowed ?2,49,82,597/- under Section 43B for interest payable to Power Finance Corporation, as it was not paid before the due date for filing the return. The CIT(A) upheld the disallowance but directed the AO to allow the deduction in the subsequent assessment year when the payment was actually made. The ITAT agreed with the CIT(A), affirming the decision.

Conclusion:
The ITAT dismissed the appeals filed by the Revenue and partly allowed the cross objections filed by the assessee. The decisions were based on detailed analysis and adherence to judicial precedents, ensuring compliance with the Income Tax Act’s provisions.