2014 (9) TMI 163 - AT - Income Tax

Expenses incurred on normal repairs and maintenance nature of expenses capital or not - Whether the expenses incurred so qualifies u/s 31(1) - Enhancement of assessed income Procedure u/s 251(2) not followed Held that - The assessee made contract with NHAI to construct, operate and maintain 90 KMs N.H. between Jaipur to Kishangarh and incurred total cost more than ₹ 590 crores - The assessee collected total revenue from the toll is more than ₹ 136 crores and shown net income more than ₹ 59 crores from this project assessee had already got constructed earthen shoulder road on both sides of road and fencing but on used by the heavy traffic, it got damaged and is not remained in good condition to be used smoothly by the heavy traffic, therefore, nominal tear and wear is required - The assessee incurred 3.86 crores expenditure on normal repair and maintenance including expenditure on repairing of fencing - This highway was taken on contract on BOT basis for 18 years - The assessee has to recover his cost as well as profit on investment within given time, which hardly extended by the NHAI - assessee had to maintain the national highway in good condition to attract the traffic to increase toll collection, so profit can be maximized. Expenditure on replacement is also a revenue expenditure - If the expenditure is treated capital expenditure, it cannot be recovered in 18 years of period of contract - it required to incur expenditure every year and under which section, the assessee would claim last years repair and maintenance expenditure as full - the normal repair expenditure on earthen shoulder road on both sides of highway with normal tear wear on fencing has been claimed by the assessee and allowable u/s 31(1) of the Act - the assessee has exceptional circumstances of constructing highways on BOT basis - The expenditures are not capital expenditure as no new assets has been created - the assessee has only constructive ownership for the period of 18 years on it the AO has allowed the expenditures as revenue in AYs 2009-10 and 2010-11 Decided partly in favour of assessee. Depreciation on road construction Rate of depreciation on EDP equipment @ 60% or 15% - Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the depreciation @ 10% is allowed on expenditure incurred on road by considering the amendment made in item number building in depreciation schedule in favour of the assessee - the order of the CIT(A) is upheld Decided against Revenue.

Summary

Issues Involved:
1. Deductibility of expenditure on repairs and maintenance under Sections 31(1) and 37(1) of the Income Tax Act, 1961.
2. Nature of the expenditure incurred (capital vs. revenue).
3. Enhancement of assessed income by the CIT(A).
4. Depreciation on road construction.

Issue-wise Detailed Analysis:

1. Deductibility of Expenditure on Repairs and Maintenance:
The assessee claimed Rs. 3,86,81,256/- as expenditure on normal repairs and maintenance under Section 31(1) of the Income Tax Act, 1961. The CIT(A) disallowed this, holding that the expenditure did not qualify as "current repairs" and was capital in nature. The CIT(A) analyzed the nature of the repairs, including refurbishment of earthen shoulders and replacement of fencing poles, concluding that these were extensive repairs resulting in enduring benefits and thus capital in nature. The Tribunal, however, found that the repairs were necessary for maintaining the road in good condition for heavy traffic and did not create new assets. The Tribunal referred to the Supreme Court's definition of "current repairs" in Ballimal Nawal Kishore vs. CIT and concluded that the expenditure should be allowed under Section 31(1) as it was for preserving an already existing asset.

2. Nature of the Expenditure Incurred:
The CIT(A) characterized the expenditure on earthen shoulders and fencing as capital, citing their extensive nature and the enduring benefit derived. The Tribunal disagreed, emphasizing that the repairs were routine and essential for the road's operation. The Tribunal noted that the expenditure did not result in a new asset or different advantage, aligning with the Supreme Court's interpretation in Ballimal Nawal Kishore vs. CIT. The Tribunal also considered the business context, where the assessee had to maintain the highway to attract traffic and maximize toll revenue.

3. Enhancement of Assessed Income by the CIT(A):
The assessee argued that the CIT(A) enhanced the assessed income without following the procedure laid down in Section 251(2) of the Income Tax Act, 1961, which requires providing a reasonable opportunity of being heard. The Tribunal noted that the CIT(A) issued a show-cause notice, thus following due process. However, the Tribunal ultimately found that the CIT(A)'s enhancement was unjustified as the expenditure was rightly deductible under Section 31(1).

4. Depreciation on Road Construction:
The Revenue appealed against the CIT(A)'s decision to allow depreciation of Rs. 36,09,51,960/- on road construction, treating it as a building. The Tribunal upheld the CIT(A)'s decision, referencing its own prior rulings in the assessee's favor for earlier assessment years (2006-07 and 2007-08), where 10% depreciation on road construction was allowed. The Tribunal noted that the matter was pending before the Rajasthan High Court but maintained its stance based on the consistency of its earlier decisions.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the deductibility of repair and maintenance expenditure under Section 31(1), treating it as revenue expenditure. It dismissed the Revenue's appeal on the depreciation issue, upholding the CIT(A)'s decision to allow 10% depreciation on road construction. The Tribunal's order emphasized the necessity of the repairs for business operations and the consistency of its prior rulings on depreciation.