2023 (6) TMI 524 - AT - Income Tax

Nature of expenditure - current repairs - replacement of decayed parts - expenditure on repairs to machineries - treated as capital expenditure by revenue - HELD THAT - Merely because the description of expenditures states to be replacement of certain parts or machinery, it cannot lead to the conclusion that the expenditure was not for the purpose of maintaining or preserving of an asset, and it resulted in creation of a new asset or new advantage to the assessee. Assessee had explained that it was in the business of manufacturing various acids which corroded its plant machinery speedily, and therefore, its plant machinery needed to be repaired and part of it replaced so as to maintain its working capability. Assessee had incurred huge expenses to the tune of Rs. 2.68 crores towards repairs maintenance of plant machinery and expenses only to the extent of Rs. 37.50 lakhs have been found to be capital in nature. Not in agreement with the Revenue that expenses were not in the nature of current repairs to be allowed in terms of section 31 of the Act particularly when the assessee had explained that considering the nature of manufacturing done by it, machinery parts corroded frequently warranting their replacement so as to maintain the machineries in working condition, which has not been controverted by the Revenue. And the finding of the Revenue of the expenses being capital in nature /noncurrent is based on mere description of the expense as replacement of certain machinery with no facts emanating from the records before us to substantiate the same. No reason to uphold order of the ld.CIT(A) confirming the disallowance of repairs maintenance expenditure - Appeal of assessee allowed.

Summary

Issues Involved:
The judgment deals with the disallowance of repairs to machineries amounting to Rs. 37,50,699/-, treating it as capital expenditure under the Income Tax Act, 1961 for the Assessment Year 2017-18.

Issue 1: Disallowance of Repairs to Machineries

The appeal was filed against the order passed by the ld. Commissioner of Income Tax(Appeals) pertaining to the disallowance of repairs to machineries amounting to Rs. 37,50,699/-, treating it as capital expenditure. The assessment order revealed that certain expenses incurred by the assessee were in the nature of replacement and not repairs. The Assessing Officer (AO) disallowed repairs and maintenance expenses to the tune of Rs. 72,79,477/-, considering them as capital expenditure. The AO relied on the decision in the case of Ballimal Naval Kishore Vs. CIT to support his finding. The assessee argued that due to the corrosive nature of the products manufactured, machinery parts needed to be repaired and replaced to maintain working capability. The ld.CIT(A) partially upheld the AO's order, restricting the disallowance to Rs. 37,50,699/-, finding only a portion of the expenses to be related to replacement. The Tribunal disagreed with the Revenue's conclusion that the replacement expenses were not in the nature of current repairs, emphasizing that the expenses were for preserving and maintaining existing assets. The Tribunal allowed the appeal, stating that there was no reason to uphold the disallowance of repairs and maintenance expenditure.

Conclusion:
The Tribunal allowed the appeal of the assessee, overturning the disallowance of repairs and maintenance expenditure to the tune of Rs. 37,50,699/-.