2009 (10) TMI 505 - HC - Income Tax

Capital or Revenue Expenditure Agreement with NTPC for power supply - The assessee also put up its power plant at that place for generation of electricity for its aluminium plant. - Since the expenditure for creating these systems were huge assessee decided to share the facilities available with NTPC. held that - expenditure incurred are revenue in nature. Deferment of revenue expenditure period of five years. - held that - no doubt till 1991-92, the part of the expenditure was allowed every year. It was loosely called as depreciation. What can be said is that the revenue expenditure was allowed every year at the rates on which depreciation is allowed. Since this was wrong practice adopted, the C&AG rightly advised the assessee to change the accounting method to bring it in tune with ICAI guidelines. What is done now from the Assessment Year in question is that it is the. correct step as it should have been taken in accordance with law and therefore, this could have been deprecated and claimed disallowed totally as done by the AO. Decided in favor of assesse. Admission of additional grounds by the tribunal u/s 254 held that - both the conditions for raising this additional ground stood satisfied, viz., ground related to the tax proceedings of the assessee for the Assessment Year under consideration and the necessary facts were also available on record. Decided in favor of assesse. Depreciation on non-operating plant and machinery held that - the PSL equipment was purchased and put to use by the assessee in previous year relevant to the Assessment Year 1990-91 and the same had entered into the block asset in that year. It thus lost individual identity for the allowance of depredation in that year. Since It is not in dispute for the year in question and block of assets was used, the assessee was rightly given the benefit of deprecation in the years in question. The question stands answered against the Revenue.

Issues Involved:
1. Treatment of Rs.3.76 Crores as revenue expenditure.
2. Allowing additional grounds by the Tribunal.
3. Depreciation on non-operating plant and machinery.
4. Provision for leave encashment.
5. Exclusion of excise duty for calculating total turnover under Section 80HHC.
6. Deferred revenue expenditure on generator repair and cryolite.
7. Provision for bad debts written back.

Detailed Analysis:

1. Treatment of Rs.3.76 Crores as Revenue Expenditure:
The main issue was whether the expenditure of Rs.3.76 Crores by the assessee should be treated as capital or revenue expenditure. The assessee had contributed Rs.22.68 Crores to NTPC for shared facilities, initially claiming depreciation on this amount. Later, based on CAG and ICAI guidelines, the assessee amortized the remaining Rs.15.07 Crores over five years. The Assessing Officer disallowed this, treating it as capital expenditure. However, CIT(A) and the Tribunal allowed it as revenue expenditure under Section 37 of the Act, citing that no tangible asset was acquired by the assessee. The High Court upheld this view, referencing several Supreme Court judgments that supported treating such expenditures as revenue when they do not result in ownership of tangible assets.

2. Allowing Additional Grounds by the Tribunal:
The Tribunal allowed the assessee to raise additional grounds based on applications filed, as these grounds arose from existing tax proceedings and facts on record. The Tribunal referenced the Supreme Court's judgment in NTPC Vs. CIT, which permits the Tribunal to consider additional grounds if they have a bearing on the tax liability and facts are on record. The High Court found no fault in the Tribunal's approach, emphasizing that the Tribunal had provided reasons and supported its decision with relevant judgments.

3. Depreciation on Non-Operating Plant and Machinery:
The issue was whether depreciation could be claimed on non-operating plant and machinery. The Tribunal allowed this claim, stating that once an asset is part of a block of assets, it loses its individual identity, and depreciation is allowed on the block as a whole. The High Court agreed, explaining that the concept of block assets simplifies depreciation calculations and that the use of the block, not individual assets, is relevant.

4. Provision for Leave Encashment:
The assessee had made a provision for leave encashment based on AS-15, which was disallowed by the AO as it related to earlier years. The Tribunal allowed this provision, referencing the Supreme Court's judgment in Bharat Earth Movers Vs. CIT, which held that such provisions are ascertained liabilities. The High Court upheld this decision, noting that the provision was made for the first time and was based on actuarial valuation.

5. Exclusion of Excise Duty for Calculating Total Turnover under Section 80HHC:
The issue was whether excise duty should be excluded from the total turnover for calculating deductions under Section 80HHC. The High Court referenced the Supreme Court's judgment in CIT Vs. Lakshmi Machine Works, which ruled in favor of excluding excise duty from total turnover, thus dismissing the appeal on this ground.

6. Deferred Revenue Expenditure on Generator Repair and Cryolite:
The assessee incurred significant expenses on generator repair and cryolite, claiming them as deferred revenue expenditure over five years. The AO treated these as capital expenditures, but the Tribunal and CIT(A) allowed them as revenue expenditures, noting they were for repairs and maintenance. The High Court upheld this view, referencing its judgment in CIT Vs. Sunbeam Auto Ltd., which supported treating such expenditures as revenue.

7. Provision for Bad Debts Written Back:
The assessee had written back Rs.69.24 lakhs from provisions for bad debts, which the AO added back to the total income due to lack of reconciliation. The CIT(A) and Tribunal allowed the deduction after the assessee provided reconciliation. The High Court upheld this decision, noting that the necessary reconciliation was provided and the provision was not claimed as an expenditure in previous years.

Conclusion:
The High Court dismissed all appeals, affirming the decisions of the Tribunal and CIT(A) on all issues. The judgments were based on established legal principles and relevant case laws, ensuring that the expenditures and provisions were correctly classified and allowed under the Income Tax Act.

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