2018 (1) TMI 936 - AT - Income Tax

Section 41(1) addition of cessation of liability - Held that - There is not dispute that the AO had invoked Section 41(1) of the Act on the ground that the relevant limitation period expired much earlier than the impugned assessment year. It has come on record that hon ble jurisdictional high court s judgment in case of Bhogilal Ramjibhai Atara (2014 (2) TMI 794 - GUJARAT HIGH COURT) has held in identical circumstances that the said sole reason does not ipso facto attract Section 41(1). We therefore see no reason to concur with learned Departmental Representative s vehement contention in seeking to revive the impugned addition. The Revenue s first substantive ground fails accordingly. Allowance of factory repairing expenses - revenue or capital expenses - Held that - We find that the Assessing Officer had invoked Section 30 explanation to disallow the impugned expenditure after concluding that the relevant repairs involving plastering, flooring, structuring etc. amounted to capital expenditure. Learned Departmental Representative fails to dispute that the CIT(A) has followed his identical finding in said earlier assessment year concluding that the impugned expenditure is in the nature of routine wear and tear associated with use of old factory building. We therefore adopt consistency in the impugned assessment year as well to confirm the CIT(A) s findings under challenge qua this second issue. Unutilized CENVAT credit addition u/s 145A - Held that - CIT(A) has followed his findings in assessment year 2010-11 deleting an identical addition on the ground that it is mainly revenue neutral case stating that unutilized CENVAT credit cannot be subject matter of addition under Section 145A of the Act being tax neutral.

Summary

Issues Involved:
1. Cessation of liability under Section 41(1) of the Income Tax Act.
2. Disallowance of factory repairing expenses.
3. Addition of unutilized CENVAT credits under Section 145A of the Income Tax Act.

Detailed Analysis:

1. Cessation of Liability under Section 41(1) of the Income Tax Act:
The first issue pertains to the addition of ?2,15,000/- under Section 41(1) of the Income Tax Act, concerning M/s. Gujarat Machinery. The Assessing Officer (AO) added this amount, arguing that the liability ceased to exist as the limitation period under the Limitation Act, 1963 had expired. The CIT(A) reversed this action, stating that the liability was still shown in the assessee's books and had not been written back, thus not attracting Section 41(1). The CIT(A) relied on the Gujarat High Court decisions in CIT vs. Bhogilal Ramjibhai Atara and CIT vs. Nitin S Garg, which held that merely because liabilities were outstanding for several years, it could not be inferred that they had ceased to exist. The Tribunal upheld the CIT(A)’s decision, finding no reason to concur with the Revenue’s contention.

2. Disallowance of Factory Repairing Expenses:
The second issue involves the disallowance of ?9,40,688/- claimed as factory repairing expenses, which the AO treated as capital expenditure. The CIT(A) deleted this disallowance, referencing a tribunal order for the assessment year 2010-11, which concluded that similar expenses for renovation could not be considered capital expenditure. The Tribunal confirmed the CIT(A)’s findings, noting that the repairs were routine wear and tear associated with the use of an old factory building, thus not capital in nature.

3. Addition of Unutilized CENVAT Credits under Section 145A:
The third issue concerns the addition of ?27,99,678/- made by the AO for unutilized CENVAT credits under Section 145A. The CIT(A) reversed this addition, explaining that the adjustment of duty, tax, cess, etc., should be made not only in the closing stock but also in the opening stock, purchases, and sales. The CIT(A) cited the Gujarat High Court decisions in Narmada Chematur Petrochemicals and CIT vs. Unique Industries, which held that if purchases debited to the P&L account are exclusive of excise duty, then including excise duty in the closing stock does not arise. The Tribunal noted that the CIT(A) had followed his findings from the assessment year 2010-11, where a similar addition was deleted as revenue-neutral. The Tribunal upheld the CIT(A)’s decision, agreeing that the entire exercise was revenue-neutral and consistent with the exclusive method of accounting adopted by the assessee.

Conclusion:
The Tribunal dismissed the Revenue’s appeal, confirming the CIT(A)’s decisions on all three issues. The Tribunal upheld that the cessation of liability under Section 41(1) could not be inferred merely due to the passage of time, the factory repairing expenses were routine and not capital in nature, and the addition of unutilized CENVAT credits was revenue-neutral and thus not warranted.

Pronouncement:
The judgment was pronounced in the open court on January 18, 2018.