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TMI Blog2020 (2) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions raised by the assessee. Allowability of expenditure relating tools and consumables - A.O. held that the assessee is considered to be eligible to claim the depreciation on the tools u/ s 32 of the Act instead of allowance u/ s 31(i)/37 - nature and functions of tools replaced by the assessee - HELD THAT:- All the tools were found to be having independent functions and do not form part of any big machinery. The learned AR also explained to us that these are not tools consumables acquired in the assessment year under consideration. In the assessment years under consideration, the assessee acquired consumable tools for day to day manufacture operation of the assessee and nothing to do with these machineries mentioned by the Assessing Officer and confirmed by the DRP in their respective orders. In our opinion, the Assessing Officer is required to examine the details relating to the incurring of expenses for tools and consumables, if they are not relating to acquisition of above independent machinery, then the Assessing Officer shall treat the same as revenue expenditure and to be allowed in toto. We restore the entire issue relating to allowability of expenditure relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of ground No.(b) to (e) before the DRP as follows:- (b) That in the calculation of ALP the Ld TPO erred by including entities such as M/s DHP India Ltd which are functionally incomparable with the assessee. (c) That the Ld.TPO erred in including entities such as Sundaram Bleistahl as a comparable even though the Related party transactions of the said company exceeds the accepted limits for reasonable comparison for ascertaining the ALP. (d) That in the Computation of the ALP, the Ld TPO erred in not considering Adjustments to the respective Working Capital position of the Assessee and the Comparable Entities. (e) That the Operating Margin of Assessee computed by Ld TPO is erroneous inasmuch as the Ld TPO has not made the same adjustments to the financial results of the assessee as he has made for the comparable entities. 4. These grounds were adjudicated by the DRP in para 1.2 to 1.4, as under:- 1.2 As regards objection of assessee in ground b c for including comparables, the TPO has given his reason and justification in Para 8, 8.1 8.3 of his order. The reason given by the TPO is justified and the objection of the assessee on this ground is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch directions which are put up under sub-section (5) would be further considering the following documents: (a) Draft order; (b) The objection filed by the assessee; (c) The evidence furnished by the assessee; (d) Report, if any, of the Assessing Officer, valuation officer, or TPO or any other authority; (e) Records relating to the draft order; (f) Evidence collected by, or caused to be collected by, it; and (g) Result of any inquiry made by, or caused to be made by it. 5.1 Under sub-section (7), DRP is also authorized before issuing of direction under sub-section (5) to make such further inquiry, as it think fit or cause any further inquiry to be made by any income-tax authority and report the result of the same to it. Under sub-section (8), the DRP has power to confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further inquiry and passing of the assessment order. Under sub-section (11), no direction u/s sub section (5) shall be issued unless an opportunity of being heard is given to the assessee and the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the products manufactured by the assessee. 7. Since the facts are similar in both the years, we consider the facts for assessment year 2011-2012 in ITA No.685/Bang/2016. The assessee has debited ₹ 1,53,15,391 in the profit-and loss account as purchase of consumable tools and claimed the same as revenue expenditure. The A.O. noted that the assessee in the earlier assessment years, except in A.Y. 2009-2010, capitalised the purchase of tools and claimed depreciation in accordance with the provisions of section 32 of the Act and the same was allowed. However, in the assessment year 2009-10 and 2010-11, the assessee claimed theexpenditure towards the tools as revenue expenditure. In the Assessment order for A.Y. 2009- 10, the claim of the assessee was not accepted and only depreciation was allowed after detailed discussion of the facts. The brief reasons for not accepting the claim of the assessee were as under: The assessee had changed the method of treating the tools as capital to revenue for the first time in assessment year 2009-10 which is against the method consistently followed by the assessee. The assessee has considered the tools as capital expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttethomas and Bett ERG 50, Laptor S Gross DIA M25, Cavity gauge, Flow meters, Balancing equipment etc. These tools were usedfor drilling cavity on castings and machining; fixing/ placing castings on it toperform machine jobs; to measure the flow of oil; for performing milling operationson castings; enlarging the inner diameter of a hole; for checking the size of holes and threads on castings; to check the internal structure of the part etc., Thus all the toolswere found to be having independent functions and do not form part of any bigmachinery. 7.3 Considering the nature of tools, their functions, life span and the method of accounting regularly followed by the assessee the replacement of the tools were considered as not allowable as current repairs u/ s 31(i) of the Act. The reliance was placed on the decision of Hon'ble Supreme Court the case of Saravana SpinningMills (P) Ltd (2007) 163 TAXMAN 201 (SC). Once the expenditure is not allowable u/ s 31(i) of the Act then the same cannot be allowed even u/ s 37 of the Act as per the ratio of the above judicial pronouncement. Therefore the claim of the assessee to write off entire value of tools in the year contrary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1(i)/37 of the Act. Accordingly, the claim ₹ 1,53,15,391/- as revenue expenditure towards Tools is disallowed and added back to the taxable income of the assessee after allowing depreciation for the A.Y. 2011-12. 8. Against this the assessee is in appeal before the Tribunal. The learned AR submitted that these tools are consumables and business expenditure incurred for day to day manufacture of the assessee and no stretch of imagination could be considered it as capital in nature so as to give enduring benefit to the assessee. This expenditures are debited to the profit and loss account in the relevant assessment year, whose value is very less and insignificant in relation to the turnover and size of the assessee and life of these items are less than 6 to 8 years and it is revenue in nature and debited to the profit and loss account in these two assessment years. 9. The learned Departmental Representative, on the other hand, submitted that the expenditure incurred for acquisition of tools and they were having independent functions and were not part of any big machinery. The major tools replaced were complete fixture SD6 Doosan VC 500, Display temperature controller, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TC 155 (HL], wherein it was held that a payment made not only once and for all but also to bring into existence an asset or advantage of enduring nature during the lifetime of the company may be treated as Capital expenditure, otherwise it would be revenue. Another one of the earliest decisions, which serves to indicate a broad area of distinction between capital and revenue expenditure is the ruling of Bowen L. J. in the case of City of London Contract Corporation v. Styles , where he remarked that an outlay on the acquisition of the concern would be capital while an outlay in carrying on the concern is revenue. The Supreme Court in the case of CIT v. Travancore Titanium Products Ltd , Appeal (Civil) No.3825 of 1999 dated 7th December, 2000, held that to determine the deductibility of an item, the nature of the outgo must be viewed in the light of commercial practices and normal business requirements. It should be one that is normal and incidental to the nature of the assessee's business and must be necessitated and justified by commercial expediency. What the Act purports to tax is the business profits, and therefore, in determining the deduction, the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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