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TMI Blog2014 (9) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... nt within given time, which hardly extended by the NHAI - assessee had to maintain the national highway in good condition to attract the traffic to increase toll collection, so profit can be maximized. Expenditure on replacement is also a revenue expenditure - If the expenditure is treated capital expenditure, it cannot be recovered in 18 years of period of contract - it required to incur expenditure every year and under which section, the assessee would claim last years’ repair and maintenance expenditure as full - the normal repair expenditure on earthen shoulder road on both sides of highway with normal tear wear on fencing has been claimed by the assessee and allowable u/s 31(1) of the Act - the assessee has exceptional circumstances of constructing highways on BOT basis - The expenditures are not capital expenditure as no new assets has been created - the assessee has only constructive ownership for the period of 18 years on it – the AO has allowed the expenditures as revenue in AYs 2009-10 and 2010-11 – Decided partly in favour of assessee. Depreciation on road construction – Rate of depreciation on EDP equipment @ 60% or 15% - Held that:- As decided in assessee’s own c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to be of capital nature, which is contrary to the facts and circumstances of the case and the intentions of the law, thus such observations deserves to be ignored and excluded. 2.1 Without prejudice to other grounds of appeal and in the alternative, in case the expenditure incurred be hold as capital expenditure, assessee be entitled for depreciation @ 100% as no new assets was created and the expenditure is of temporary in nature. 3. Without prejudice to the above grounds of appeal and in the alternative it is contended that the learned CIT(A) has grossly erred in making enhancement to the assessed income without following the procedure as laid down in section 251(2) of the Income Tax Act, 1961 and the action of learned CIT(A) tantamount to reassessment thus it is a serious misutilization of the available powers which deserves to be hold unlawful and the consequent enhancement of income as done deserves to be hold void ab initio. Grounds of ITA No. 878/JP/2011 On the facts and in the circumstances of the case, the learned CIT(A) has erred in: (i) Deleting the disallowance of ₹ 36,09,51,960/- made by the A.O. on account of depreciation claimed on road/on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exact and correct nature of such repairs job termed as refurbishment of earthen shoulder and carried out by M/s R. Balarami Reddy Co., the relevant work orders dated 09/5/2007 and 05/4/2008, issued in this regard, were examined. From the language of such work orders, it is noted that the nature of repairs job has been defined as Refurbishment of Earthen Shoulders and meant to repair the damaged stretches of highway in the two parts, covering the entire road-length of the project. It was further noted that the first work order dated 09/5/2007 covers the repairing of entire stretch of 90 KM (approx) of the project, involving estimated contract price of ₹ 3.75 crores and contract period was of 10 months to complete such job. Similarly, the other work order dated 05/4/2008, covers an additional stretch of highway of 9 K.M., involving the contract price of ₹ 28,70,100/- and contract period of 6 months to accomplish such job. However, the 2nd work order is not found relevant to the period under consideration. From the above, discussion, it can be inferred that the repair work of earthen shoulders of road of the entire road-assets of the project was not a pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant details, as gathered, rather suggest that these expenses were related to extensive carried out, which would enable the appellant to have enduring benefit through replacement/restoration of an old assets, therefore, the same also amounts to an expenditure of capital in nature, therefore, also not covered U/s 31(1) and even S. 37(1) of the Act. ii) Repair expenses towards replacement of barbed wire/fencing poles (Rs. 3291486/-)- From the relevant copy of account i.e. RM-Pavement and RD furniture account , submitted by the appellant, it is also observed that ₹ 3291486/- were spent towards Fencing Repairs head. In this regard, it was contended that these expenses were incurred towards replacing the old fencing poles and the old/damaged barbed wires. The above fact is also confirmed by the learned AR in his submission dated 07/07/2011, as reproduced hereinabove. As already held in the earlier paras that such replacement of assets/parts of assets amounts to restoration of old assets, leading to an enduring advantages, therefore, does not falls in the category of current repairs ,as such. Since, the fencing cost has been treated as part of total cost of road capitali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital expenditure as resulting into replacement or restoration of the entire old assets, thus, not qualified as deductible expenditure u/s 31(1) of the Act. Similarly, in view of the ratio upheld by the various court, mentioned hereinabove, even such expenditures are not allowable u/s 37(1) of the I.T. Act. Accordingly, the A.O. is directed to disallow the total expenditure of ₹ 38681256 (Rs. 35390040 + ₹ 3291486/-) incurred as repairs expenses towards the purposes, as discussed above, being capital in nature but claimed u/s 31(1) of the Act. Needless to say that these expenses may be allowed to be capitalized and the depreciation thereon, al eligible rate may be allowed at prescribed rate, give in the Act. 4. Learned A.R. for the assessee submitted that the assessee company is engaged in construction, operation and maintenance of Highways. More than 90 KMs stretch between Jaipur and Kishagarh on NH-8 was agreed to Build, Operate and Transfer basis with NHAI, which was opened to public on 09/4/2005. As per agreement made between the NHAI and the appellant, the highway is to be transferred after a period of 18 years in the same condition as on the initially open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of total cost of road eligible for depreciation which fact remained uncontroverted by the learned CIT(A). As the learned CIT(A) held that the repairing work is a replacement of earthen shoulders at both sides of road for prolonged use of the assets but the learned CIT(A) was failed to appreciate the fact that no new asset was created by repairing of the earthen shoulders of both sides of road. Replacement of internal part of machinery does not amount to capital expenditure, rather clarified deduction as current repairs since without such keep up the machine could not function. Likewise, this repair on both sides of earthen shoulder is required for smooth running the traffic on both sides of earthen shoulders road. The assessee had incurred 32.91 lacs on repairing of fencing of both sides of road as we know the fencing on highways is required to prevent the animal, who might come over the national highway which disturbed the smooth running of the N.H. At the time of construction of highway, fencing was done, which was capitalized in the total cost of road, which had been capitalized by the appellant but to repair the fencing and expenditure incurred on it, as revenue expenditure. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer in subsequent year had not disallowed any repair and accepted the assessee s computation of income as it. Thus, enhancement made by the learned CIT(A) without following the procedure laid down in the Act as well as the judicial pronouncements, is required to be quashed. 5. At the outset, the learned CIT DR supported the order of the learned CIT(A) and argued that the learned CIT(A) has coterminous power with Assessing Officer and he had followed the required procedure for enhancement of income of the assessee. 6. We have heard the rival submissions of both the parties and perused the relevant material on record. As discussed above, the appellant made contract with NHAI to construct, operate and maintain 90 KMs N.H. between Jaipur to Kishangarh and incurred total cost more than ₹ 590 crores. The assessee collected total revenue from the toll is more than ₹ 136 crores and shown net income more than ₹ 59 crores from this project. The appellant had already got constructed earthen shoulder road on both sides of road and fencing but on used by the heavy traffic, it got damaged and is not remained in good condition to be used smoothly by the heavy tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A) has followed the due course of proceeding before enhancement as show cause notice was issued to the assessee on 10/12/2010 by the learned CIT(A). Thus, grounds No. 1 and 2 of the assessee s appeal are allowed and decided in favour of the assessee and ground No. 3 of assessee s appeal is dismissed and decided against the assessee. 7. The first and second grounds of the departmental appeal are against deleting the disallowance of ₹ 36,09,51,960/- and addition made by the Assessing Officer on account of depreciation claimed on road/ on road construction. The learned Assessing Officer observed that the assessee had claimed that the depreciation amounting to ₹ 38,90,23,526/-, the assessee was asked to file revised computation of depreciation by the Assessing Officer as per decision of Hon ble ITAT for A.Y. 2006-07, which was submitted by the assessee and depreciation claimed by the appellant was increased to ₹ 39,39,53,179/- in A.Y. 2006-07, this issue of depreciation was decided by the Assessing Officer and confirmed by the learned CIT(A) but the Hon ble ITAT has allowed the appeal in favour of the assessee. 8. Being aggrieved by the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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