2022 (9) TMI 819 - AT - Income Tax

Nature of expenditure - expenditure on repair works - revenue or capital expenditure - CIT(A) directing the AO to delete the addition treating the same as revenue expenditure instead of capital expenditure - HELD THAT - There is no dispute regarding quantum of expenditure incurred by the assessee, it is also not in dispute that the assessee has incurred repairs and there is no enhancement of capacity. No new asset came into existence as such the entire expenditure is allowable as revenue in nature. CIT(A) has categorically mentioned in his order that the expenditure incurred was not capable of increasing the capacity i.e. 14870 tonnes of ferro manganese. There is no contradicting material before AO to come to conclusion that the repairs enhances the capacity - the expenditure is meant for preserving and maintaining the existing asset, but not bringing or creating a new asset or advantage. The expenditure being huge is not the consideration to decide whether it is revenue or capital expenditure. The expenditure can be one time affair or recurring affair. Determination of capital or revenue expenditure is totally based on the circumstances of each case. AO s observations are not supported by material, therefore, on overall facts and circumstances, he opined that the expenditure is revenue in nature. CIT(A) has rightly considered the case of the assessee, therefore, we do not find any infirmity in the order passed by the Ld.CIT(A) and hence dismiss the grounds raised by the revenue.

Summary

Issues:
- Determination of whether the expenditure incurred by the assessee is capital or revenue in nature.

Analysis:
The appeal before the Appellate Tribunal ITAT Visakhapatnam involved a dispute regarding the nature of expenditure incurred by the assessee company in the business of manufacturing, trading, and exporting Ferro Alloys for the Assessment Year 2009-10. The Assessing Officer disallowed an expenditure of Rs. 4,58,23,694 as capital in nature, while the assessee claimed it to be revenue expenditure. The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee, stating that the expenditure was revenue in nature. The revenue then appealed to the Tribunal, arguing that the expenditure was capital in nature due to the enduring benefit and increase in capability resulting from the repairs made. The key issue was whether the expenditure was capital or revenue in nature.

The Tribunal considered the arguments presented by both parties. The Departmental Representative (DR) contended that the expenditure provided an enduring advantage to the company and was not periodical, resembling one-time repairs. On the other hand, the Authorized Representative (AR) for the assessee argued that the repairs did not enhance capacity significantly, and the expenditure was solely for repair works, not for creating a new asset. The AR relied on judicial precedents to support the contention that the expenditure was revenue in nature.

After examining the facts and submissions, the Tribunal observed that there was no dispute regarding the quantum of expenditure incurred by the assessee and that the repairs did not result in capacity enhancement. The Tribunal referred to the decision of the Hon'ble Supreme Court in CIT Vs. Saravana Spinning Mills Pvt. Ltd., emphasizing the distinction between capital and revenue expenditure. The Tribunal also considered the decision of the ITAT Chennai Bench in ACIT Vs. M/s Kannappan Iron & Steel Co. Pvt. Ltd., which supported the view that the repairs constituted revenue expenditure.

Ultimately, the Tribunal upheld the order of the CIT(A) and dismissed the appeal of the revenue, concluding that the expenditure incurred by the assessee was revenue in nature. The Tribunal's decision was based on the analysis of the facts, relevant case laws, and the absence of evidence supporting the capital nature of the expenditure. The judgment highlighted the importance of considering the specific circumstances of each case in determining whether an expenditure should be classified as capital or revenue.