2014 (1) TMI 104 - AT - Income Tax

Nature of Expenses Revenue OR Capital Expenditure Replacement of Machinery Held that - The order of the CIT(A) upheld - The expenditure incurred on machinery is revenue in nature and is allowable under section 37 of the Act - The remaining expenditure incurred on replacement of machinery has either resulted in giving enduring benefit or upgradation of the existing machinery or replacement of the worn out machinery which is capital in nature - the assessee has incurred expenditure for the efficient working of the existing machinery - The expenditure incurred on replacement of parts of the existing machinery in order to make the machinery work more efficiently has to be capitalized - The assessee is entitled to claim depreciation on the same in accordance with the provisions of the Act Following Commissioner of Income-tax, Madurai Versus Madura Coats 2011 (12) TMI 293 - MADRAS HIGH COURT decided against Assessee. Levy of Interest u/s 220(2) of the Act Held that - where an assessment order is cancelled u/s.146 or cancelled/set aside by an appellate/ revisional authority and the cancellation/setting aside becomes final, no interest under section 220(2) can be charged pursuant to the original demand notice. The necessary corollary of this position will be that even when the assessment is reframed, interest can be charged only after the expiry of 35 days from the date of service of demand notice pursuant to such fresh assessment order - Following The Commissioner of Income Tax-1, Mumbai Versus M/s. Chika Overseas Pvt. Ltd 2011 (11) TMI 118 - BOMBAY HIGH COURT Interest u/s 220 of the act could not be sustained Order of the CIT(A) set aside Decided in favour of Assessee. Interest u/s 234B and 234C of the Act Held that - Levy of interest u/s 234B and 234C in mandatory in nature - the interest is charged for contravening the provisions of the Act i.e. non-payment of advance tax within the stipulated time - The provision is compensatory in nature inasmuch as the Revenue is deprived of such payment which should not have been made on an earlier date there was no infirmity in the order of the CIT(A) Decided against Assessee.

Summary

Issues Involved:
1. Disallowance of expenditure incurred on replacement of machinery.
2. Levy of interest under section 220(2) of the Income Tax Act, 1961.
3. Levy of interest under sections 234B and 234C of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Expenditure Incurred on Replacement of Machinery:
The assessee, engaged in the business of manufacture and sale of cotton yarn and fabric and generation of wind power, filed its return of income for the assessment year 2006-07. The Assessing Officer disallowed Rs. 6,20,07,785/- claimed as revenue expenditure on account of replacement of machinery, treating it as capital expenditure. The CIT(A) initially allowed the expenditure as revenue but the Tribunal remitted the issue back to the Assessing Officer, who again treated it as capital expenditure.

The CIT(A) in the second round partly allowed the expenditure as revenue to the extent of Rs. 40,17,571/-, directing the balance to be treated as capital expenditure with depreciation allowed as per the Act. The assessee argued that the replacement did not increase production capacity or provide enduring benefits, and was necessary due to wear and tear and changing technology. The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenditure for efficient working of existing machinery should be capitalized. The Tribunal cited the judgment of the Hon'ble jurisdictional High Court in the case of Madura Coats, affirming that replacement of machinery parts results in enduring benefits and should be treated as capital expenditure.

2. Levy of Interest Under Section 220(2) of the Income Tax Act, 1961:
The Assessing Officer levied interest under section 220(2) for the period from 1.2.2009 to 31.12.2011. The assessee contended that interest should not be charged from the date of the original assessment order, which was set aside, but from the date of the fresh assessment order. The Tribunal agreed with the assessee, referencing Circular No.334 dated 3.4.1982 and judgments from the Hon'ble Bombay High Court and the Hon'ble Supreme Court, concluding that interest under section 220(2) should be charged from the date of the fresh assessment order. Therefore, this ground of appeal was allowed in favor of the assessee.

3. Levy of Interest Under Sections 234B and 234C of the Income Tax Act, 1961:
The assessee argued that interest under sections 234B and 234C should not be levied as it was not mentioned in the original assessment order. The Tribunal, however, upheld the CIT(A)'s decision, stating that interest under these sections is mandatory and compensatory in nature, meant to cover the delay in payment of advance tax. The Tribunal emphasized that no specific order is required for charging such interest, and dismissed this ground of appeal.

Conclusion:
The Tribunal partly allowed the appeal of the assessee. The disallowance of expenditure incurred on replacement of machinery was upheld as capital expenditure, with depreciation allowed. The levy of interest under section 220(2) was directed to be recalculated from the date of the fresh assessment order. The levy of interest under sections 234B and 234C was upheld as mandatory and compensatory.