2015 (2) TMI 118 - HC - Income Tax

Nature of expenses - Expenses incurred for replacement of membrane cells-II disallowed - ITAT deleted the addition treating the same as capital expenditure by following the rule of consistency - Held that - We do not find that the approach on the part of the department to take up a different stand in absence of any material or valid reason could be said as justified. The consistency expected on the part of the Revenue in taxation matter is not unknown but rather is expected so as to make the Assessee aware about the taxable liability. We do not mean to say that if the legal position is changed or there is cogent material available, the Revenue cannot take a different stand or make a valid departure but at the same time, in absence of any such circumstances, namely, any material leading to different conclusion or change in legal position, the consistency on the part of the Revenue should be adhered to. The attempt to contend that life of membrane would be spread over from 3 to 5 years or that the amount involved for replacement of membrane is huge and, therefore, the departure on the part of the Revenue could be said as justified, in our view, cannot be countenance for two reasons. One is that the amount involved would not make difference for chargability of the tax but the nature of expenditure would be relevant for the chargability of tax. It hardly matters whether the amount is more or less. Further, on the aspect of life of the membrane, nothing is referred to by the A.O. nor by C.I.T. (Appeals) that earlier, such aspect, namely, life of the membrane spread over from 3 to 5 years was not considered or it had missed or otherwise. - Decided in favour of the Assessee.

Summary

Issues:
1. Whether the Appellate Tribunal was right in law in deleting the addition made on account of expenses incurred for replacement of membrane cells-II, treating the same as capital expenditure, by following the rule of consistency and without considering the issues on merits?

Analysis:
The judgment by the Gujarat High Court involved the consideration of Tax Appeal Nos.817 of 2013 to 818 of 2013, Tax Appeal No.18 of 2014, and Tax Appeal No.149 of 2014. The main issue revolved around whether the Appellate Tribunal was correct in deleting the addition of expenses for membrane replacement and categorizing it as capital expenditure based on the rule of consistency without delving into the merits of the case. The case concerned the treatment of expenditure for membrane replacement in the books of accounts by the Assessee and the subsequent decisions by the Assessing Officer (A.O.) and the Commissioner of Income Tax (C.I.T. Appeals).

The facts of the case indicated that the A.O. had treated the expenditure for membrane replacement as capital expenditure for the assessment year 1999-2000. The C.I.T. (Appeals) upheld this decision, but the Tribunal, citing the rule of consistency based on previous years' treatment of similar expenditure as revenue expenditure, allowed the appeal. The Revenue, dissatisfied with this decision, filed Tax Appeal No.798 of 2010. A similar situation arose for the assessment year 2000-2001, leading to Tax Appeal No.799 of 2010. The Revenue argued that the Tribunal should have considered the reasoning behind the A.O. and C.I.T. (Appeals) decisions to determine the nature of the expenditure. The Revenue contended that the expenses should be treated as capital expenditure due to the significant amount involved and the expected life of the membrane.

On the other hand, the Assessee's counsel argued in favor of adhering to the rule of consistency, emphasizing that the Revenue had previously treated such expenditures as revenue in earlier assessment years without any change in circumstances. The Assessee's counsel also highlighted the impermissibility of the Revenue's dual stand on the nature of the expenditure, citing relevant legal precedents. The High Court referred to the decision of the Apex Court in a specific case to analyze the concept of "current repairs" and distinguish between revenue and capital expenditures.

The High Court ultimately agreed with the Tribunal's decision to follow the rule of consistency in treating the expenses for membrane replacement as revenue expenditure. The Court emphasized the importance of consistency in tax matters unless there are valid reasons or material supporting a different approach. The Court noted that the Revenue's argument regarding the amount involved or the life of the membrane did not justify departing from the consistent treatment of such expenditures. Consequently, the Court dismissed both appeals, upholding the Tribunal's decision in favor of the Assessee against the Revenue.