2016 (3) TMI 584 - AT - Income Tax

Addition made on account of expenditure incurred on repairs and maintenance treating the same as capital expenditure - Held that - in the present case simply because there was massive repairs and substantial expenditure incurred by assessee on repairs the same cannot be treated as capital in nature for the reason that there was no expansion of the coke ovens but the number of ovens remained the same at 46 as in 1989. No new coke ovens were add-up by incurring the expenditure and moreover there was no vacant space in the factory to set up additional coke ovens. The expenditure was incurred only on fire bricks, fire clay and tiles and no expenditure on steel and other materials were required for construction of new coke ovens as is evident from bills and vouchers. Secondly, repairing was done from outer side of the ovens and the platform from where the heated coal is dragged out after production. This repair necessitated due to use of high V.M. and low ash contents of imported coal, which resulted in increase in temperature, repair had to be done by using good quality of fire bricks to safeguard the ovens from melting, bending and other damages. In view of these facts, we consider the repairs carried out by the assessee as revenue in nature and we confirm the order of CIT(A) on this issue. - Decided in favour of assessee Disallowance made by AO u/s. 35D - Held that - We find that the assessee has claimed deduction of expenditure at one-fifth u/s. 35D of the Act in respect of expenditure of ₹ 75,000/- incurred in FY 2001-02 relevant to AY 2002-03 and subsequent years the same has all along been allowed being one-fifth as per the provisions of section 35D of the Act. We find no infirmity in the order of the CIT(A) in allowing this claim of assessee. Disallowance u/s 40(a)(ia) of the Act for non-deduction of TDS on the expenses of security guard and import expenses as well as interest on loan - Held that - We find from the order of the CIT(A) that the assessee has made payments of TDS and these payments are made within the due date of filing of return of income by the assessee as is evidenced from the details given before the CIT(A). We find that this issue is squarely covered in favour of the assessee by the decision of Hon ble Calcutta High Court in the case of CIT v Virgin Creations 2011 (11) TMI 348 - CALCUTTA HIGH COURT - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of expenditure on repairs and maintenance as capital or revenue expenditure.
2. Disallowance of amortization of share issue expenses under Section 35D.
3. Disallowance under Section 40(a)(ia) for non-deduction of TDS on certain expenses.

Issue-wise Detailed Analysis:

1. Treatment of Expenditure on Repairs and Maintenance:
The primary issue was whether the expenditure incurred on repairs and maintenance of coke ovens should be treated as capital or revenue expenditure. The assessee incurred significant expenses on repairs and maintenance of ovens during the Assessment Years (AY) 2004-05 and 2005-06. The Assessing Officer (AO) treated this expenditure as capital in nature, allowing depreciation instead. The AO's rationale was that the extensive repairs provided an enduring benefit to the business, akin to substantial reconstruction, thus qualifying as capital expenditure under Sections 31 and 37(1) of the Income Tax Act, 1961.

The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, ruling that the repairs were extensive but necessary for the optimal use of the ovens due to increased business activity. The CIT(A) held that the expenditure was revenue in nature, allowable under Section 31, and deleted the AO's additions.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the repairs did not result in the creation of a new asset or an expansion of the existing capacity. The repairs were necessitated by the old age of the ovens and the need to handle increased production due to imported coal. The Tribunal referenced several judicial pronouncements, including CIT Vs. Chowgule And Co. Pvt. Ltd. (1995) and CIT Vs. Kalyanji Mavji & Co. (1980), to support the view that extensive repairs can still be considered revenue expenditure if they do not result in a new asset or an enduring benefit beyond normal maintenance.

2. Disallowance of Amortization of Share Issue Expenses under Section 35D:
The second issue involved the disallowance of amortization of share issue expenses claimed by the assessee under Section 35D. The AO disallowed the claim, citing the Supreme Court decisions in Punjab State Industrial Development Corporation Ltd. Vs. CIT and Brooke Bond (India) Ltd. Vs. CIT, which held that such expenses are capital in nature.

The CIT(A) allowed the claim to the extent of Rs. 15,000, noting that the assessee had been allowed this deduction in prior years. The Tribunal found no infirmity in the CIT(A)'s order, acknowledging that the assessee had consistently claimed one-fifth of the expenditure incurred in FY 2001-02, and upheld the allowance of Rs. 15,000.

3. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:
The third issue pertained to the disallowance of certain expenses under Section 40(a)(ia) due to non-deduction of TDS. The AO disallowed expenses related to security guard services, import expenses, and interest on loans. The CIT(A) set aside the disallowance for verification, noting that the assessee had made the TDS payments within the due date for filing the return of income.

The Tribunal referred to the Calcutta High Court decision in CIT v Virgin Creations, which held that the amendment to Section 40(a)(ia) by the Finance Act 2010, allowing payments made before the due date of filing the return, had retrospective effect. The Tribunal found that the assessee had indeed made the TDS payments within the due date and upheld the CIT(A)'s order, dismissing the revenue's appeal on this issue.

Conclusion:
The Tribunal dismissed both appeals by the revenue, upholding the CIT(A)'s decisions on all issues. The expenditure on repairs and maintenance was deemed revenue in nature, the amortization of share issue expenses was allowed to the extent of Rs. 15,000, and the disallowance under Section 40(a)(ia) was overturned due to timely TDS payments.