2017 (5) TMI 472 - AT - Income Tax

Determination of nature of expenditure incurred for renovation of factory building - eligibility for deduction in terms of section 30(a)(ii) - capital expenditure or revenue expenditure - Held that - The amount spent cannot be said to be a capital expenditure as made out by the revenue. The expenditure might have secured some enduring benefit to the assessee because of the renovation. However, the test of enduring benefit per se is not a certain or conclusive test and cannot be applied blindly and mechanically with regard to the particular facts and circumstances of the given case. The assessee has spent money on replacement of flooring, plastering, doors, plumbing etc. Such amount incurred in strengthening of existing layout cannot be regarded as a capital expenditure. The expenditure on repairs of the building is merely incurred to refurnish and renovate the existing structure and is not in the nature of creation of a capital asset. No structural changes is shown to have been made by the assessee while incurring such expenditure. A repair ordinarily involves renewal and restoration of the existing wear and tear. Such expenditure, in our view, is in the nature of current repair in spite of major expenses alleged to have been incurred - Decided against revenue. Contravention of section 145A while valuing the closing stock for determination of taxable income - unutilized CENVAT credit not been included in the valuation of closing stock of raw-material - Held that - no reason to interfere with the order of the CIT(A). The CIT(A) has found the entire exercise to be revenue neutral. Secondly, to give effect to section 145A, both the opening stock and closing stock are required to be simultaneously brought in parity as a matter of legitimate expectation. See case of Dy.CIT vs. Balvant Lallubhai Rotliwala 2016 (3) TMI 444 - ITAT AHMEDABAD where on similar facts, addition made under s.145A was deleted by the ITAT. The guidance note issued by the ICAI also supports the case of the assessee for the proposition that there is no impact on ultimate profit by resorting to exclusive method of accounting for the purpose of valuation of stock as adopted by the Assessee. The Revenue has not brought on record anything contrary to the assertions made by the CIT(A) in favour of assessee Disallowance of bad debt - .AR submitted in the alternative that the aforesaid claim ought to have been allowed as business loss under s.28 - Held that - The assessee has not been able to prove that the impugned amount was given as advance for business purpose except for bald assertions made to this effect. Therefore the nature of alleged advance given is not known. Hence, whether the debt was attributable to trade or commerce of the assessee is not known at the first place. The claim towards bad debts has been therefore rightly rejected by the Revenue. The alternative ground towards business loss also does not merit acceptance for the similar reason. The loss is required to be proved to be emanating from business of the assessee. Secondly, the loss is required to be proved to have been crystallized during the year. No material or evidence has been brought on record to this effect. - Decided against assessee. Disallowance under s.14A computation - Held that - The disallowance under s.14A is restricted to the extent of dividend income earned.

Summary

Issues:
1. Nature of expenditure for renovation of factory building.
2. Valuation of closing stock for taxable income determination.
3. Disallowance of business loss and under s.14A of the Act.

Issue 1: Nature of expenditure for renovation of factory building:
The Revenue appealed against the Commissioner of Income Tax(Appeals)'s order regarding the nature of expenditure for renovation of a factory building. The Revenue contended that the expenditure was capital in nature and not eligible for deduction under section 30(a)(ii) of the Income Tax Act. The Assessing Officer argued that the expenses incurred were major repairs, bringing enduring value to the premises. However, the Assessee argued that the expenses were overdue repairs to maintain operational efficiency and did not create a new asset. The Tribunal held that the expenditure on repairs, including replacement of flooring and doors, was revenue in nature and not capital expenditure. The Tribunal dismissed Ground No.1 of the Revenue's appeal.

Issue 2: Valuation of closing stock for taxable income determination:
The Revenue's second ground of appeal related to the alleged contravention of section 145A while valuing the closing stock for taxable income determination. The Assessing Officer added unutilized CENVAT credit to the total income of the Assessee, contending that it was not included in the valuation of closing stock. However, the CIT(A) found the action of the Assessee to be tax-neutral by following an exclusive method of accounting for stock valuation. The Tribunal upheld the CIT(A)'s decision, emphasizing that both opening and closing stock must be brought in parity to give effect to section 145A. The Tribunal noted that the exclusive method of accounting did not impact the ultimate profit, as supported by ICAI guidance. Therefore, Ground No.2 of the Revenue's appeal was dismissed.

Issue 3: Disallowance of business loss and under s.14A of the Act:
The Assessee filed Cross Objections regarding the disallowance of a claimed bad debt and under section 14A of the Act. The Assessee argued that the amount written off as bad debt should be allowed as a deduction under relevant sections. However, the Tribunal found no merit in the contentions, stating that the nature of the alleged advance was not proven to be for a business purpose. The Tribunal also dismissed the alternative claim for business loss due to lack of evidence. Regarding the disallowance under section 14A, the Tribunal partially allowed the Cross Objection, restricting the disallowance to the extent of dividend income earned. Consequently, the Cross Objection was partly allowed.

In conclusion, the Tribunal dismissed the Revenue's appeal while partly allowing the Cross Objection filed by the Assessee. The judgment clarified the nature of expenditure for renovation, the valuation of closing stock, and the disallowance of business loss and under section 14A of the Income Tax Act.