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2022 (6) TMI 364 - AT - Income TaxDisallowance u/s 14A in computation of book profit u/s 115JB - HELD THAT - AO is not correct in disallowing while computing book profit u/s 115JB by invoking the provisions of section 14A read with Rule 8D. Nature of expenditure - Replacement of parts in machinery treated as capital in nature - HELD THAT - Classification of items in the books is not relevant for deciding the treatment of such items while computing taxable income as held by the Hon ble Supreme Court in the case of Kedarnath Jute Manufacturing Co Ltd 1971 (8) TMI 10 - SUPREME COURT Thus the book entries are not conclusive for determining the nature of expenditure. The provisions of law prevail over the book entries. Accordingly, consumption of spares being only replacement of spare parts would qualify under the head current repairs and treated as Revenue Expenditure For a power generating company, these bucket spares are in the nature of consumables spares only notwithstanding its high cost. The buckets are designed with special profile of airfoil cross section for efficient energy conversion.Due to high working temperature of around 800' C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine. It is also seen from the Original Equipment Manufacturer namely BHEL/General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine. Further it is also stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer out side India and the assessee company procures the same by import and thus attracts custom duty, air freight, insurance etc. Further the replacement of parts is Capital or Revenue is No more Res integra based on the observation made by the Hon ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills 2007 (8) TMI 16 - SUPREME COURT and CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 2009 (7) TMI 17 - SUPREME COURT wherein held that when certain parts of an air-conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Thus it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power - replacement of spares in the machineries would be allowable as Revenue expenditure only and addition made by the AO is directed to be deleted. Additional claim under section 80IA - Initial assessment year - HELD THAT - As the issue is now settled by the Circular No.1/2016 issued by the CBDT that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. The Circular further clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80IA. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. Thus the Assessing Officers are directed to allow deduction u/s 80IA in accordance with this clarification and Standing Counsels/D.R.s are suitably instructed pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in subsection (5) of section 80IA of the Act. Disallowance under Section 14A - HELD THAT - Directions of CIT-A to apply Rule 8D is not proper and there being the surplus funds were invested by the assessee and there were no administrative expenses, the disallowance made u/s.14A is unwarranted and liable to be deleted. Depreciation on building used for Managing Director s residence - HELD THAT - As the building is used for official-cumresidential purpose by the Managing Director, with all office facilities we find that 10% depreciation can be granted on this Building and direct the AO to allow the same. Accordingly the CO filed on this ground is allowed. Disallowance of contribution made to various organizations - HELD THAT - The assessee claimed payment to SVADES, to DEEP and to various NGOs the same were disallowed by the AO. But the Ld CIT A granted relief in cases were the assessee has submitted Certificate of Registration of 80G in respect of payments made to SVADES and DEEP and balance amount was confirmed - In our considered view the CIT A has granted appropriate relief to the assessee, which does not require any further inference. Disallowance u/s 43B - CIT(A) by his detailed order has held that the AO was correct in not allowing the deduction of interest however, the AO is directed to allow this as a deduction in AY 2008-09 - Similarly, the interest payment disallowed in the earlier year, which was actually paid in the PY corresponding to AY 2007-08 should be allowed as deducting in this year - HELD THAT - In our considered view the CIT A has granted appropriate relief to the assessee, which does not require any further inference.
Issues Involved:
1. Disallowance under Section 14A. 2. Addition of capital expenditure in respect of spares. 3. Addition of repairs and maintenance expenses. 4. Deduction under Section 80IA. 5. Reopening of assessment under Section 147. 6. Depreciation on Managing Director’s residence. 7. Disallowance of contribution to various organizations. 8. Disallowance under Section 43B. 9. Charging of interest under Sections 234B, 234C, and 234D. 10. Initiation of penalty proceedings under Section 271(1)(c). Issue-wise Detailed Analysis: 1. Disallowance under Section 14A: The Tribunal addressed the disallowance of Rs. 72,96,816/- under Section 14A while computing book profit under Section 115JB. The CIT(A) deleted the disallowance, referencing decisions where it was held that disallowance under Section 14A cannot be added to book profits under Section 115JB. The Tribunal upheld this view, confirming that the adjustment made by the AO was not as per law. 2. Addition of Capital Expenditure in Respect of Spares: The Tribunal considered whether the replacement of parts of machines should be treated as capital expenditure. The assessee argued that these spares are consumables and do not provide enduring benefits. The Tribunal agreed, referencing the Supreme Court’s decision in CIT vs. Saravana Spinning Mills, which held that replacing parts of machinery does not amount to replacing the entire unit. The Tribunal concluded that such replacements are revenue expenditures. 3. Addition of Repairs and Maintenance Expenses: The Tribunal reviewed the disallowance of repair and maintenance expenses claimed by the assessee. It was argued that these expenses do not provide enduring benefits and are necessary for the regular operation of the business. The Tribunal found that these expenses should be treated as revenue expenditures, following the logic applied in previous cases. 4. Deduction under Section 80IA: The Tribunal discussed the assessee’s eligibility for deduction under Section 80IA. The assessee had filed the audit report before the completion of the assessment, which the Tribunal found to be sufficient compliance. The Tribunal also referenced CBDT Circular No. 1/2016, which clarified that the term "initial assessment year" means the first year opted by the assessee for claiming deduction. The Tribunal directed the AO to allow the deduction as per this clarification. 5. Reopening of Assessment under Section 147: The assessee contested the reopening of the assessment under Section 147. However, this ground was not pressed by the assessee during the proceedings, and thus, it was dismissed. 6. Depreciation on Managing Director’s Residence: The Tribunal addressed the assessee’s claim for depreciation on the Managing Director’s residence, which was used for both residential and official purposes. The Tribunal allowed a 10% depreciation rate, recognizing the dual use of the property. 7. Disallowance of Contribution to Various Organizations: The Tribunal reviewed the disallowance of contributions made to various organizations. The CIT(A) had granted relief where the assessee provided certificates of registration under Section 80G. The Tribunal upheld this decision, confirming the appropriate relief granted by the CIT(A). 8. Disallowance under Section 43B: The Tribunal considered the disallowance under Section 43B, where the CIT(A) directed the AO to allow the deduction in the subsequent year when the payment was actually made. The Tribunal found this direction appropriate and upheld the CIT(A)’s decision. 9. Charging of Interest under Sections 234B, 234C, and 234D: The Tribunal did not provide a detailed discussion on the charging of interest under Sections 234B, 234C, and 234D. However, the CIT(A)’s confirmation of the AO’s action in charging interest under these sections was upheld. 10. Initiation of Penalty Proceedings under Section 271(1)(c): The Tribunal did not provide a detailed discussion on the initiation of penalty proceedings under Section 271(1)(c). The CIT(A)’s confirmation of the AO’s action in initiating penalty proceedings was upheld. Conclusion: The Tribunal dismissed the appeals filed by the Revenue and allowed the appeals filed by the assessee. The detailed analysis of each issue led to the conclusion that the disallowances and additions made by the AO were not justified, and the relief granted by the CIT(A) was appropriate. The Tribunal’s decision was pronounced in open court on 13/04/2022.
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