2010 (2) TMI 140 - HC - Income Tax

Capital Expenditure versus revenue expenditure - purchase of second hand machinery for use of its parts to maintain (repair) existing machinery - Power of the Tribunal to give a finding to an issue which was not before it - Assessee claimed the value of second hand machinery as revenue expenditure. But department disallowed the claim on the ground that during the relevant assessment year old machineries purchased by the assessee had not reached Bangalore, therefore the said claim has to be disallowed and that if at all the assessee is entitled to his claim same can be considered for the next assessment year. Held that When the entire sale consideration is paid and when the machinery purchased by him has been despatched by the vendor from USA, sale transaction is completed and as per the provisions of the Sale of Goods Act, title to the goods has been passed on to the assessee and he has become the owner of the second hand machineries purchased by him to use them as spare parts even though the goods have been reached Airport at Bangalore in the month of August, 2001 and it is to be noted that when actually goods were delivered to the assessee is not the criteria to consider the sale transaction. - second hand machinery purchased by the assessee ought to be considered as spare parts for the existing old machineries and allowed as revenue expenditure - when an assessee purchased the spare parts for the existing machineries, same cannot be treated as capital expenditure and it has to be treated as revenue expenditure since these spare parts are purchased for the maintenance of the existing equipments

Summary

Issues Involved:
1. Challenge to concurrent findings of all authorities below regarding expenditure on purchase of second hand medical equipment.
2. Questions of law regarding the nature of expenditure and its allowability as a revenue expenditure.

Analysis:
Issue 1: Challenge to Concurrent Findings
The appellant, a Cardiologist, challenged the findings of all authorities below regarding the expenditure on the purchase of second hand medical equipment from the USA for the assessment year 2001-02. The appellant claimed that the purchased machinery was intended to be used as spare parts for existing old equipment in Bangalore and Mysore. The Department disallowed the claim stating that the machinery had not reached Bangalore during the relevant assessment year. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal also rejected the appeal. The appellant contended that the spare parts were necessary for immediate repairs due to the nature of his profession and the unavailability of spare parts in India. The appellant argued that the purchase of second hand machinery for spare parts should be considered as a revenue expenditure for the maintenance of the machinery.

Issue 2: Questions of Law
The substantial questions of law raised in the appeal were:
1. Whether the Commissioner of Income Tax (Appeals) was empowered to determine that the expenditure was capital in nature when the issue was not before it.
2. Whether the amount spent on purchasing second hand machinery for dismantling and using its parts as spare parts to existing machinery is an allowable expenditure as a revenue expenditure.

Court's Decision
After hearing both parties, the court ruled in favor of the appellant on both issues. The court emphasized that the appellant, being a cardiologist, required immediate access to functioning equipment for patient care. The court held that the purchase of second hand machinery for spare parts should be treated as a revenue expenditure for maintenance purposes. The court disagreed with the Commissioner of Income Tax (Appeals) for treating the expenditure as capital in nature. The court directed the Assessing Officer to reconsider the matter and compute the assessment, treating the purchase of second hand machinery as spare parts to the existing equipment, and considering it as a revenue expenditure.