2021 (7) TMI 801 - AT - Income Tax

Nature of expenditure - new dyes expenditure claims - The dies are made as per project wise or the product wise and keeps changing for the other project - AO treated the impugned expenditure as a capital item eligible for depreciation than revenue expenditure as per assessee s stand adopted throughout - HELD THAT - No merit in Revenue s preceding arguments. This is firstly for the reason that the above stated depreciation schedule only talks about the specified items than all kinds of dyes involving metal items. We make it clear that the assessee s dyes in issue are not made out either of rubber or plastic material. We thus adopt stricter constructions going by hon ble apex court s recent landmark judgement in CIT vs Dilip Kumar and Co 2018 (7) TMI 1826 - SUPREME COURT to decline Revenue s former argument and hold that assessees dyes are not covered under the foregoing items in the depreciation schedule. Coupled with this, it has come on record that hon ble Madras high court s decision in M/s TVS Motors Ltd. 2014 (2) TMI 522 - MADRAS HIGH COURT has already held; after considering all relevant case laws, that such dyes come under revenue head of expenditure than capital only. We therefore see no reason to interfere with the CIT(A) s findings having correctly appreciated relevant facts / law. - Decided against revenue.

Issues Involved:
1. Classification of expenditure on new dyes as capital or revenue expenditure.
2. Applicability of Section 31 (current repairs) versus Section 32 (depreciation) of the Income Tax Act, 1961.
3. Interpretation of depreciation schedule under Income Tax Rules for "rubber and plastic goods factories - moulds."

Issue-wise Detailed Analysis:

1. Classification of Expenditure on New Dyes as Capital or Revenue Expenditure:
The Revenue's primary grievance was the treatment of the assessee's expenditure on new dyes, amounting to ?2,45,64,703/-, ?2,49,18,838/-, ?3,64,61,700/-, and ?3,49,81,040/- for the respective assessment years, as revenue expenditure instead of capital expenditure. The Assessing Officer (AO) argued that the dyes constituted a new asset and should be treated as part of plant and machinery, thus qualifying for depreciation rather than being fully expensed in the year of purchase. The AO contended that the dyes had an independent description and number, indicating their nature as assets rather than consumables.

Conversely, the assessee maintained that the dyes were consumables with a short lifespan, typically less than one year, and were specific to customer orders, rendering them useless after the order's execution. The assessee argued that the dyes should be treated as revenue expenditure, consistent with industry practice and previous years' assessments.

2. Applicability of Section 31 (Current Repairs) Versus Section 32 (Depreciation) of the Income Tax Act, 1961:
The assessee relied on the decision in M/s TVS Motors Ltd. (364 ITR 1), where the expenditure on dies and moulds was considered under Section 31 as current repairs rather than capital expenditure under Section 32. The CIT(A) accepted this argument, noting that the expenditure on dyes fell under "current repairs" as per Section 31(1) and was allowable as revenue expenditure. The CIT(A) referenced the Madras High Court's decision, which held that replacement of dies and moulds did not constitute the installation of new machinery but was necessary for maintaining the existing machinery's functionality.

The CIT(A) also considered the Supreme Court's decision in CIT vs. Sri Mangayarkarasi Mills Pvt. Ltd. (315 ITR 114), which emphasized that replacement expenditure could not be classified as current repairs if it resulted in a new asset or enduring advantage. However, the CIT(A) distinguished the facts of the present case, noting that the dyes were consumables with no enduring benefit, thus qualifying as current repairs.

3. Interpretation of Depreciation Schedule Under Income Tax Rules for "Rubber and Plastic Goods Factories - Moulds":
The Revenue argued that the depreciation schedule under the Income Tax Rules specified a higher depreciation rate (40%) for "rubber and plastic goods factories - moulds," indicating that such items should be treated as capital assets. However, the CIT(A) clarified that this schedule applied specifically to rubber and plastic moulds, not to metal dyes used by the assessee. The CIT(A) adopted a stricter interpretation, supported by the Supreme Court's judgment in CIT vs. Dilip Kumar and Co. (2018) 9 SCC 1, to conclude that the assessee's metal dyes did not fall under the specified items in the depreciation schedule.

Conclusion:
The Tribunal found no merit in the Revenue's arguments and upheld the CIT(A)'s findings, which correctly appreciated the relevant facts and legal principles. The Tribunal dismissed all the Revenue's appeals, affirming that the expenditure on new dyes should be treated as revenue expenditure under Section 31(1) of the Income Tax Act, 1961, and not as capital expenditure eligible for depreciation under Section 32.

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