9911796707
TMI Blog2012 (10) TMI 751X X X X Extracts X X X X X X X X Extracts X X X X ..... peal decides in favour of assessee - I.T.A. Nos. 219, 220, 221, 981 and 982/Mds/2009 & I.T.A. Nos. 1458 and 1459/Mds/2011 - - - Dated:- 18-7-2012 - Shri Abraham P. George Shri Challa Nagendra Prasad, JJ. Appellant by : Shri Shaji P. Jacob, Addl. CIT Respondent by : Shri R. Vijayaragahavan, Advocate ORDER PER BENCH These seven appeals of the Revenue for the assessment years 1993- 94 to 1999-2000 are directed against three different consolidated orders of the Commissioner of Income Tax (Appeals) Large Taxpayer Unit, Chennai dated 29.08.2008, 30.01.2009 and 23.06.2011 for different assessment years. Shri Shaji P. Jacob, Addl. CIT represented on behalf of the Revenue and Shri R. Vijayaragahavan, Advocate represented on behalf of the assessee. 2. The common ground in all these Revenue s appeals, except in the appeals for the assessment years 1993-94 and 1994-95, is that the Commissioner of Income Tax (Appeals) erred in holding that the expenses incurred on Life Extension Program (LEP) of Thermal Power Station I (TPSI) and expenditure on rejuvenation of Bucket Wheel Excavators (BWE) are allowable as revenue expenditure. The common ground in the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Where there has been no capacity addition and the replacement has been made only to restore the machinery to its original state of efficiency so that the entire integrated manufacturing unit which is considered as a profit-making apparatus functions efficiently and produces quality products, the concepts of current repairs , modernization and expenditure laid out or expended wholly and exclusively for the purpose of the business have to be interpreted following the principle of updating construction taking note of the business needs and commercial expediency especially in a competitive business environment created by the globalization and not by applying old concepts of what is capital and what is revenue. In view of the aforesaid decision, it is necessary to see the nature of repair undertaken by the assessee, whether the expenditure was incurred in the capital field or in the revenue field. We find that the Revenue authorities have not examined the issue in the right perspective. The admissibility of the claim is to be examined on the touchstone of the guiding principles laid down by the Hon ble jurisdictional High Court in the case of Janakiram Mills Ltd., supra. We, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to this conclusion, the Commissioner of Income Tax (Appeals) considered various decisions including the decision of the Hon ble Supreme Court in the case of CIT vs. Saravana Spinning Mills (P) Ltd. [293 ITR 201] and passed a detailed order as under: 1) The Appellant Neyveli Lignite Corporation Ltd is a public sector undertaking carrying on the business of generation of electricity. The Appeals relate to Assessment years 1995 96, 1996-97 and 1997-98 and involve common issues and, hence, are proposed to be disposed off through a common order. 2) The appeals have been filed against the order passed by the Assessing Officer pursuant to direction of the Honourable Income Tax Appellate Tribunal vide order in ITA Nos.1836 1837/Mds/02 and 658, 1109, 1368 1369/Mds/03 for Assessment years 1995 96, 1996 97, 1997 98, 1998-99, 1999-2000 2000 01 dated 25/01/07. 3) The points in appeal relate to the claim of expenses incurred on Life Extension Program (LEP) of Thermal Power Station I (TPS I) and expenditure on Rejuvenation of Bucket Wheel extractors as revenue expenditure. 4) The amounts were initially treated as capital by the Appellant, but claims for revenue expenditure were ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls Ltd 275 ITR 403 where in it was held that expenditure on replacement of carding system by high production cards was revenue in nature. 8) The Honourable Tribunal however remitted the issue to the Assessing officer with the direction to consider the matter afresh in the light of the decision of the Madras High Court decision cited by the Appellant. While restoring the file to the assessing officer, the Honorable. ITAT observed as follows:- In view of the decision rendered by the jurisdictional of High Court in the case of CIT Vs Jankiram Mills Ltd. (275 ITR 403) it is necessary to see the nature of repair undertaken by the Assesses, whether the expenditure was incurred in the capital field or revenue field. We find that the revenue authorities have not examined the'" issue in the right perspective. The admissibility of the claim is to be- examined on the touchstone of the guiding principles laid down by the Hon'ble jurisdictional High Court in the case of Jankiram Mills Ltd; supra" . 9) The learned assessing officer in his orders passed pursuant to the direction of the Honourable Tribunal has again disallowed the claim holding that the expenditure in question resulted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stained at the same level. h) It was therefore submitted that the substratum for the disallowance stands dislodged. 11) In so far as the LEP expenditure is concerned, the Appellant had also furnished a technical report from their experts according to which the following points emerge: a) The TPU I unit had operated over 35 years and the plant had developed problems. b) A team of Soviet experts were called in to conduct residual life studies who had reported the requirement of repairs and recommended action for safe operation of the plant. (copy of the report was placed on record). The following have been given as the objective of the Study: i) To carry out 100% metal control ( analysis of metal condition) of those parts failures which are systematically observed in world practice on analogous equipment, and, as a rule lead to grave consequences. ii) To evaluate the reliability of the boiler drums, main steam pipe lines, pipes of water walls, steam super heaters and economizers of the turbine equipment. iii) To work out the recommendation. iv) The results of the3 study on Metal control has been reported as under: 1. Steam super heater pipes Cuttings were mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 108 ram do not meet strength requirements on their actual wall thickness; more than 90% of water down comers do not meet strength requirements. 4. DRUMS In the shells, bottoms, welding joints, openings, investigated, sections of the drum of Boiler 9B non acceptable defects were not detected. The drum is suitable for durable operation if the results of periodical control are positive. In Boiler 9A drum in the near weld zone of the welding joint 23 in the inner side a crack was detected having a length of 420 mm and depth up to 3 mm. After eliminating the crack and grinding the metal it is recommended to carry out control of the above stated welding joint after two years of the drum operation. In case of positive results of the control the drum is suitable for durable operation with periodical control every 25-30 thousand hours. In Unit N1 boiler drum non continuous lamination of the shell between welding Joints J4 and J5 was detected. After 7000 hours of the, drum operation it is recommenced to carry out metal control of the above stated shell and after comparing the results of this control with those of 1989 to take a decision about the suitability of the drum for further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure were in the nature of repairs accordingly admissible as deduction under Sec 31 (1) or 37 (1). l) It would be seen from the technical report that there was only replacement of components and overhauling of equipments. m) It was submitted that the expenditure was incurred to sustain production under safe operating conditions and hence the expenditure would be in the revenue domain. n) It was emphasized that the safe continued operation of the plant was in jeopardy and hence the expenditure was incurred to enable the assessee to continue to carry on the business and accordingly the expenditure was revenue expenditure. o) The appellant also produced a technical write up on the nature of work carried out which has been reproduced below: TECHNICAL WRITE UP FOR THE REJUVENATION OF BWEs 1144/1145/1193 The 700 Ltrs. BWEs (1144/1145/1193 1198) were erected and commissioned between 1960 1966. These BWEs are deployed in the Lignite corporation mines for excavation of overburden / lignite. These equipments have worked round the clock except during the time of regular maintenance i breakdown and planned stoppage. Also these equipments worked in the open atmosphere, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was re-used after repair and strengthening sufficiently. (iii) Tower frame completes including pulley mast (4) : The tower frame is also called as pylon. In the course of working, the soil gets accumulated in the bottom portion of 'this item. Because of the nature of the soil, this portion has also become thinner. This item is one the critical item on which most of the upper parts of the bucket wheel are mounted. Hence it was totally replaced instead of repair/strengthening and however in the course of replacement certain improvement were adopted. (iv) Bucket wheel boom complete: It is consisting of receiving conveyor, bucket wheel and buckets. Receiving conveyor (6), Bucket wheel (7) and Buckets (9) : The receiving conveyor is also a structural parts, handling the material excavated with the help of buckets. These parts were replaced considering the prolonged usage due to wear and tear. (v) Discharge boom complete (8): The material excavated by the bucket wheel is being handled through the receiving conveyor and loaded in the discharge boom conveyor which is in turn transported to conveyor system and it is dumped in the dumping yard. This part is also (disch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as totally bad and required lot of repairs. Hence it was repaired and strengthened and used. (iii) Turn table (3): The turn table was repaired and strengthened due to is prolonged, thinning out of plates and damage of structures. (iv) Counter weight boom and box (10): The counter weight boom is a part, which is used for the balancing the machine while in operation. The counter weight boom was repaired and strengthened considering the years it has worked and the various loads subjected on this item during the operation. This structures have got weakened and hence were used after sufficient strengthening. (v) Intermediate structure: The discharge boom is supported between turn table and counter weight boom through this structure. The structure was also repaired / strengthened and used. On overall basis, it is submitted that in the rejuvenation of BWEs, only major overhaul and repair works were carried out. The replaced parts were the part of the BWE and were not capable of working independently. 12) While the facts relating to LEP and BWE rejuvenation were as stated above it was submitted that the disallowance was made by the learned Assessing Authority on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly argued that the cases cited do not have any relevance to the issue in appeal. c. I have considered the above submissions and summarized reasons listed as under:- d. The entire disallowance seems to have proceeded on the assumption that there has been increase in production capacity. It is clear from material on record, that there has been no increase in power generation or lignite mined. Actually the production has increased if compared to immediately preceding years where due to the repair/overhauling required the production had gone down severely. But if the same is compared with F.Y. 1990-91 and 1991-92, it is found that the production has not enhanced. Moreover, repairs were required as the production machineries were facing several breakdowns like that on account of maintenance/wear and tear. e. The entire expenditure on Life Extension Programme in regard to TPU I was intended to ensure continued operation of the power plant; total replacement of the plant would have resulted in disproportionately high expenditure. What were replaced were parts of integrated plant for generation of power and there was no replacement of machinery as a whole. f. As rightly observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has a concept similar to air-condition plant. Such a process is one integrated process. Therefore, the Tribunal and the High Court erred in holding that the manufacturing process in the textile mill is one continuous integrated process". Accordingly the Apex court has held in this case, "that the Assessing Officer was right in holding that each machine including the ring frame was. an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement of the new machine would not come within the meaning of the words "current repairs". Further, the Supreme Court observed whether an expenditure is revenue or capital in nature would depend an the facts of each case. We do not wish to express any opinion an the applicability of section 37(1) in the present case. There were certain civil appeals wrongly tagged with the present batch which will be decided separately by us as they concern with section 37(1). Hence we do not wish to express any opinion on applicability of section 37(1). However, in this case it has been pointed out by the appellant and not strongly controverted by the AO on the basis of evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding machine remains an asset without any change even after repair or replacement of the autoleveler. To give an example, a compressor is an important part of an air-condition machine. Repair of the compressor will come in the connotation of the words 'current repairs' in section 31 (i) of the said Act because the assessee does not replace the air-condition machine. At the highest, he replaces a part of the air-condition machine. So is the case of the picture tube in a television set, when the picture tube is replaced the television set is not replaced, therefore, such repairs alone can come within the connotation of the words 'current repairs' in section 31(i) of the said Act as it stood at the material time. They are effected to preserve and maintain the asset, viz., airconditioner or carding machine .... The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to 'preserve and maintain' an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage. " So far as the decision relied upon by learned standing counsel for the Department is conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts that the expenditure incurred on these machinery is not repairs as the magnitude of the expenditure incurred on these programmes is to the tune of Rs..252.46 crores during the assessment years 1993-94 to 99-2000. The counsel for the Revenue invited our attention to page 62 to 63 of paper book filed by the assessee containing technical write up on LEP of TPS-I and submitted that it is an extensive repairs and replacement of various machineries and they are not replacement of parts of machinery. He also invited our attention to page 72 to 76 of paper book containing a Note on expenditure of rejuvenation of BWE of Mine I claimed as revenue expenditure and submitted that the assessee has replaced various machineries and therefore, they are not parts of machinery, which can be allowable as revenue expenditure. The counsel placed reliance on the decision of the Hon ble Supreme Court in the case of Saravana Spinning Mills (P) Ltd. (supra), Bharat Gears Ltd. v. CIT [337 368 (Del.)], CIT v. Madura Coats 205 TAXMAN 357/19 (Mad), CIT v. M/s. Rane Brake Linings Ltd. T.C.(A) No. 71 72 of 2008 dated 25.04.2011, CIT vs. Universal Cold Storage Ltd. T.C.(A) No. 39 of 2008 dated 08.11.2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis. The counsel submitted that the Assessing Officer was not correct in holding that such expenditure is capital in nature. The counsel submitted that the quantum of expenditure is not the criteria to decide whether such expenditure is either capital or revenue incurred towards current repairs. The counsel submitted that the total replacement cost of the project shall be Rs..4 crores per MW and in such case the total replacement cost of all 9 power generation units of the assessee constituting 600 MW will be Rs..2400 crores and the expenditure incurred on replacement and overhauling of parts of machinery over a period of 7 years was about Rs..252 crores only. 12. The counsel submits that in the case of Saravana Spinning Mills (P) Ltd. (supra), the Hon ble Supreme Court has decided the issue in favour of the Revenue because what was replaced by the assessee was ring frames, which are independent machinery unlike in assessee s case, where the assessee replaced only parts of boilers, which are not capable of functioning independently. The counsel submits that the Hon ble Supreme Court in the case of Saravana Spinning Mills (P) Ltd. (supra) held that there are various sections in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. in I.T.A. No. 1951/Mds/2009 DCIT v. M/s. Lasik Centre (India) P. Ltd. in I.T.A. No.1480/Mds/2011 14. We have heard both sides, considered the materials available on record and perused the orders of lower authorities and reliance placed on the case law by the counsels. The assessee is engaged in generation of electricity and mining of lignite installed power generation plants consisting of 9 units for generation of 600 MW power. During the assessment years 1993-94 to 99-2000, the assessee incurred the following expenditure towards replacement of various components in boilers and components of BWE under the LEP programme starting from the assessment year 1993-94 to 1999-2000 and the year-wise breakup for such expenditure is as under: Asst. years Amount (Rs..) 1993-94 10,22,63,348/- 1994-95 39,35,07,774/- 1995-96 22,65,86,642/- 1996-97 27,78,53,677/- 1997-98 56,84,06,076/- 1998-99 48,23,92,595/- 1999-2000 47,35,92,595/- Total 252,46,02,707/- The assessee claims this expenditure as allowable deduction either under section 31(i) or under section 37 of the Income Tax Act. The Assessing Officer compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d various tests and studied elaborately. Based on the study results, they recommended for operation of the equipment with reduced steam parameters up to the end of 1991 and the possibility of further operation of the equipment at rated steam parameters only after replacement of the corresponding parts and groups. The high pressure parts of boilers namely Super heaters and main steam line are subjected to creep damage due to reaching of service life of around 180000 running hours, and the water walls economisers are subjected to corrosion and erosion. Other parts namely air heaters, ducts and auxiliary equipments like pulverised fuel burners, mills, draft fans etc. are subjected to corrosion erosion, wear and tear. Thus, the performance of boilers and safe operating life of critical pressure parts of the boiler got exhausted. Considering the ageing of units and for safe operation of the equipments at rated steam parameters, the Life Extension Programme works in all units were carried out from April 1992 to March 1999 in phased manner with the approval of Govt. of India. The components subjected to creep damage namely super heaters, main steam lines etc. and high pressure val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... houses. The following components have been repaired: (i) Steering tiller (FST and RST) (ii) Under carriage (iii) Turn table (iv) Counter weight boom and Box (v) Intermediate structure It may be noted that Rejuvenation of Bucket Wheel Excavators involves repairs / replacement of certain critical worn out parts, none of the part is independent nature of working. All the replaced and repaired items are forming part of the single machine called Bucket wheel excavator and in that process the machine is brought to its original Condition and it does not result in a new asset. Diagrams showing the parts of the Bucket Wheel excavator is enclosed 15. It could be seen from the above technical write-ups, the whole exercise of the LEP of TPS-I and rejuvenation of BWE is for replacement of certain parts of boilers/BWE only. The assessee has not replaced the entire boiler/BWE and what was replaced was only the parts of boiler/BWE. These parts of the boiler/BWE are not capable of functioning independently and this fact is not in dispute. In our view, these expenditures were incurred only to replace certain parts of boiler/BWE and overhauling of the parts in boiler and is only to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,904/- as the cost of the turbine rotor, which was disallowed by the Assessing Officer treating as capital expenditure. It was found by the Tribunal that the turbine rotor was an essential part of turbo generator set and it was not an independent machinery or plant. The turbine rotor of its own independent functioning could not generate electricity. Therefore, it was held that the assessee was entitled to deduction, which was affirmed by the Hon ble Allahabad High Court. While affirming the order of the Tribunal, the Hon ble Allahabad High Court observed as under: We find that the controversy stands concluded by the judgement of this Court in the case of Commissioner of Income Tax Vs. Kanodia Cold Storage [1975]100 ITR 155 wherein it has been held as follows(headnote): "Replacement of worn out parts does not by itself bring in a new asset. In considering the nature of an expenditure one should consider the productive unit as a whole and not pick out parts therein which are new. If the productive unit to the assessee remains the same but a part of it which has become unsuitable for its use is replaced by something which makes it possible for the existing set up to function ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure. In the case on hand the factual position is quite different. It has been found by the Tribunal as a fact that Turbine Rotor is a part of Turbo Generator Set. The Turbine Rotor does not function independently. It is a part of Turbo Generator Set. In view of the above discussion, we do not find any error in the order of the Tribunal. The Tribunal was justified in holding that the expenditure by the assessee on the replacement of one Turbine Rotor amounting to Rs.. 1,05,44,904/- was on account of current repairs and as such it was revenue expenditure. 19. The case law relied on by the counsel for the Revenue in the cases of Bharat Gears Ltd. v. CIT [337 368 (Del.)], CIT v. Madura Coats, CIT v. M/s. Rane Brake Linings Ltd. T.C.(A) No. 71 72 of 2008 dated 25.04.2011, CIT vs. Universal Cold Storage Ltd. T.C.(A) No. 39 of 2008 dated 08.11.2011 are distinguishable on facts and the ratio of these decisions are not applicable to the facts of the assessee s case since in the assessee s case, what was replaced was only the parts of machinery and the expenditure was incurred only to preserve and maintain the existing assets and therefore, the expenditure on such repairs is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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