2012 (5) TMI 395 - AT - Income Tax

Revenue or capital expenditure - current repairs u/s 31 - overhead expenditure on construction - held that - total replacement of damaged machinery/ship or an asset may not constitute repair. - but substitution of old/worn out parts of a machine/building/factory etc. is an expenditure of deductible nature, meaning thereby for claiming the deduction under the provisions of this Act, no new asset should come into existence and the expenditure must have been incurred on the existing asset. - Decided in favor of assessee. Claim of bad debts - held that - there is uncontroverted finding in the impugned order that the assessee in fact write off the bad debt in its books of accounts. - after 1.4.1989, it is not necessary for the assessee to establish that the debt in fact has become irrecoverable, it is enough if the bad debt is written off as irrecoverable in accounts of the assessee. - Decided in favor of assessee.

Issues Involved:
1. Deletion of addition on account of overhead expenditure on construction treated as revenue expenses.
2. Deletion of addition on account of bad debts.

Detailed Analysis:

1. Deletion of Addition on Account of Overhead Expenditure on Construction Treated as Revenue Expenses

The Revenue challenged the deletion of additions totaling Rs. 67,58,381, Rs. 57,42,716, Rs. 65,93,548, and Rs. 58,49,314 for the assessment years 2005-06, 2006-07, 2007-08, and 2008-09 respectively. These additions were made by the Assessing Officer (AO) on the grounds that the overhead expenditure on construction was capital in nature and not substantiated as revenue expenses by the assessee.

The assessee, a statutory corporation established under the Warehousing Corporation Act, 1962, argued that the overhead expenses were apportioned between capital and revenue as per consistent accounting practices. The AO disallowed these expenses, claiming they were not supported by necessary details and treated them as capital expenditure.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] found that the assessee had provided complete details of the overhead expenses and their apportionment. The CIT(A) observed that the expenses were incurred on salaries and other allowances of the construction division staff, which were apportioned between construction of new godowns (capitalized) and repairs/maintenance of existing godowns (claimed as revenue expenditure). The CIT(A) concluded that the expenses related to repairs and maintenance of existing godowns, numbering more than one thousand, could not be of capital nature as no new asset was created and no enduring benefit was derived.

The Tribunal agreed with the CIT(A), noting that the assessee had systematically apportioned the expenses and maintained separate records for construction and repairs. The Tribunal also referenced judicial precedents, including CIT v. Hi-line Pens Private Limited and CIT v. Saravana Spinning Mills Private Limited, to support the view that expenses incurred for repairs and maintenance of existing assets are deductible as revenue expenses. The Tribunal affirmed the CIT(A)'s decision, stating that the expenses did not result in the creation of new assets or provide any enduring benefit to the assessee.

2. Deletion of Addition on Account of Bad Debts

The Revenue also contested the deletion of additions on account of bad debts amounting to Rs. 26,41,725, Rs. 12,24,593, Rs. 38,75,551, and Rs. 1,62,950 for the assessment years 2005-06, 2006-07, 2007-08, and 2008-09 respectively. The AO had made these additions on the grounds that the assessee did not furnish adequate details to substantiate the bad debts written off.

The assessee contended that the details of bad debts written off were duly charged to the profit and loss account and furnished before the AO. The CIT(A) found that the necessary details were evidenced in the balance sheet and books of accounts, and thus deleted the additions.

The Tribunal upheld the CIT(A)'s decision, referencing the amendment to section 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961, effective from 1.4.1989. The Tribunal noted that it is sufficient for the assessee to write off the bad debt as irrecoverable in its accounts, without needing to establish that the debt had become bad in the previous year. This view was supported by judicial precedents, including TRF Limited v. CIT and CIT v. Auto Meters Limited. The Tribunal found no infirmity in the CIT(A)'s decision and affirmed the deletion of the additions.

Conclusion

The appeals of the Revenue were dismissed, with the Tribunal affirming the CIT(A)'s decisions on both issues:
1. The overhead expenditure on construction was correctly treated as revenue expenses.
2. The bad debts were properly written off and substantiated by the assessee.

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