2022 (4) TMI 320 - AT - Income Tax

Disallowance of maintenance expenditure to plant machinery - Allowable revenue expenses or capital expenditure - HELD THAT - On perusal of the material placed by the assessee before us, it indicates these are parts which require occasional replacement for smooth and efficient operation of main machineries. By incurring expenditure for purchase of such items, no new separate and distinct asset came into existence, and that there is no replacement of existing machinery as a whole so to consider the same to capital expenditure. The revenue was simply carried away by the size amount rather than nature and import of the items purchased. There is no basis with the revenue authorities, which indicates that the impugned expenditure was in the nature of capital. Therefore, keeping in view overall nature of items purchased by the assessee, we are of the considered view that whatever expenditure incurred for purchasing of these items were the business expenditure, and wholly and exclusively incurred for running day-to-day operational necessity in order to keep the entire plant machinery functional and efficient. We allow claim of the assessee to treat the impugned expenditure as revenue expenditure. Disallowance of foreign travelling expenses incurred by the Directors of the company to China, Germany and other countries -HELD THAT - The factum visit to China and Germany, and the nature of the business engaged by the assessee have not been disputed by the Revenue. Assessee has submitted a list of parties to whom the business has business relation in China and Germany, Greece, Span, Belgium Italy, Japan etc. were furnished. Details of tickets, visa, bills etc. were also furnished to support its case about the genuineness and necessity of undertaking such foreign trips. were also furnished. Revenue authorities have not brought anything on record to show that either details provided by the assessee were bogus or the claim of the assessee that it has imported material from other countries for its production line was found to be incorrect. Therefore, having regard to entire factual scenario and the nature of business assessee s business i.e. being pharmaceutical company, we are of the view that impugned foreign travel expenses incurred by the assessee are genuine requirement and for business purpose, and therefore, the impugned addition is directed to be deleted. Appeal of the assessee is allowed

Summary

Issues Involved:
1. Disallowance of maintenance expenditure to plant & machinery.
2. Disallowance of foreign travelling expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Maintenance Expenditure to Plant & Machinery:
The assessee company, engaged in manufacturing organic and inorganic chemicals, filed a return of income declaring NIL income. During scrutiny, the Assessing Officer (AO) noted that the assessee had debited ?75,53,855 under "Repairs and Maintenance," including expenditures on plant & machinery. The AO found some items purchased under this head to be capital in nature rather than revenue, leading to an addition of ?11,10,580 after granting 15% depreciation.

The assessee argued before the Commissioner of Income-tax (Appeals) [CIT(A)] that the AO's decision was based solely on the cost of items, ignoring the business exigencies and the nature of the business. The CIT(A) partly confirmed the AO's addition, treating some items like agitators, condensers, PP Plates, and fabricated structures as capital assets, while accepting filter plates as revenue expenditure.

Before the Tribunal, the assessee reiterated that these items were integral parts of the main machinery and required occasional replacement for smooth operation. The Tribunal found that the CIT(A)'s decision lacked scientific examination and was based on general considerations. It referred to the ITAT Hyderabad's decision in DCIT vs. AP Gas Power Corporation Ltd., which supported the view that replacing parts of machinery does not amount to creating a new asset. The Tribunal concluded that the expenditure was for business purposes and should be treated as revenue expenditure, allowing the assessee's claim.

2. Disallowance of Foreign Travelling Expenses:
The second issue involved the disallowance of foreign travel expenses incurred by the Directors for business purposes. The AO and CIT(A) doubted the necessity and business purpose of these trips. The assessee contended that the trips to China and Germany were for attending conventions and exploring business opportunities, and provided detailed notes and evidence of business transactions with foreign parties.

The Tribunal noted that the visits were not disputed by the Revenue and were in line with the assessee's business activities. It acknowledged the necessity of such trips for a pharmaceutical company and found the expenses to be genuine and for business purposes. The Tribunal directed the deletion of the impugned addition, allowing the assessee's claim.

Conclusion:
The Tribunal allowed the appeal of the assessee, treating the maintenance expenditure as revenue in nature and accepting the foreign travel expenses as genuine business expenditures. The judgment emphasized the importance of considering the nature of business and the necessity of expenditures in determining their classification for tax purposes.