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TMI Blog2022 (4) TMI 642X X X X Extracts X X X X X X X X Extracts X X X X ..... that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased. Replacement of parts is Capital or Revenue is No more Res integra based on the observation made by the Hon ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills[ 2007 (8) TMI 16 - SUPREME COURT] and CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. [ 2009 (7) TMI 17 - SUPREME COURT] wherein held that when certain parts of an air-conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Applying the same logic to the facts of the assessee s case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power. Replacement of spares in the machineries would be allowable as Revenue expenditure only and addition made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance under s.14A r.w.r. 8D - HELD THAT:- The issue is now settled by the Hon ble Supreme Court in the case of Maxopp Investment Ltd. Vs- Commissioner of Income Tax, New Delhi [ 2018 (3) TMI 805 - SUPREME COURT] wherein it clearly held that Rule 8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted w.e.f. March 24, 2008 vide Income Tax (Fifth Amendment) Rules, 2008. Further jurisdictional High Court in the case of Principal Commissioner of Income-tax-4 Vs- Sintex Industries Ltd. [ 2017 (5) TMI 1160 - GUJARAT HIGH COURT] wherein it is clearly held that the Expenditure incurred in relation to income not includible in total income (Administrative expenses) - Whether where assessee already had its own surplus fund against which minor investment was made, no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A arose and, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses under rule 8D - Thus we clear in our mind the direction given by the Ld CIT[A] to apply Rule 8D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue 2 ITA No. 1534/Ahd/2009 2006-07 Revenue 3 CO No. 117/Ahd/2009 2006-07 Assessee 4 ITA No. 1109/Ahd/2010 2007-08 Revenue 5 ITA No. 644/Ahd/2010 2007-08 Assessee 6 ITA No. 521/Ahd/2012 2008-09 Revenue 7 ITA No. 495/Ahd/2012 2008-09 Assessee 2. The issues involved in these appeals are recurring in nature for all the assessment years, since for the sake of brevity ITA No.1534/Ahd/2009 and C.O.No.117/And/2009 relevant to the Asst. Year 2006-07 are taken as lead case for disposal of the above batch of appeals. 3. The grounds of appeal raised by Revenue read as under: 1. On the facts and circumstances of the case and in law, the learned C1T(A) erred in deleting the addition on account of ₹ 3,83,02,228/- made on account of capital, expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng total income of ₹ 1,78,43,82,629/-. The return of income was processed under s.143(1) of the Act on 23.04.2007. Subsequently, the case was selected for scrutiny and a detailed assessment order was passed on 28.03.2008 making the following Disallowances: (i) Replacement of parts of machines treated as capital expenditure; (ii) claim of deduction u/s.80IA of the IT Act. (iii) Disallowance under s.14A; (iv) claim of deduction under 43B (v) depreciation on Managing Director s residence. Thus, the Ld Assessing Officer determined the total income as ₹ 1,83,04,23,203/- and demanded the tax of ₹ 2,03,900/- which includes interest under s.234B 234C. 6.1. First issue regarding Replacement of parts in machineries treated as capital in nature. On scrutiny of the repairs maintenance expenses debited in the books, the AO observed that some of the expenses were capital in nature. The assessee classified the spares as capital spares in the books and therefore the claim was not allowable as revenue expenditure. The AO issued a show cause notice to the assessee as to why the claim of capital spares on replacement of parts amounting to ₹ 708.61 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange even after repair or replacement of the auto leveler. 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 word 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 in 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 word 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., air-conditioner or a carding machine. 4.2.1 Hence, judicial opinion is quite clearly articulated to the effect that replacement of one or more part(s) of a capital asset would constitute revenue expenditure and not capital expenditure. If preservation of the capital asset entails replacement of worn-out parts, such expenses would be revenue in nature. 4.2.2 Regarding the expenditure incurred by the appellant, it is apparent from the nature of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnai Bench of the Tribunal in the case of Mohan Breweries Distilleries Ltd. v. ACIT, 114 TTJ 532, in this case the Chennai Tribunal has very categorically held that initial assessment year is the year in which the assessee first opts to be governed by the deduction provisions and not the year of manufacture. Following the judgment, the CIT(A) allowed the claim made by the assessee. 8.1. Issue No.3 relates to disallowance under Section 14A of the Act. The assessee had disclosed tax free income of ₹ 65,36,070/-, comprising of dividend income and interest on tax free bond. The learned AO called upon the assessee to show cause why the financial and administrative expenses attributable to earning such income should not be disallowed under s.14A of the Act. In reply, the assessee contended that there were no administrative expenses were incurred since the tax free income was essentially passive income requiring no efforts on the part of the assessee. The next part namely of financial expenses are concerned the assessee submitted it had not made any investments during the year in the assets yielding the tax free income. The AO had not accepted submissions of the assessee and fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his official duties for official meetings. Therefore, the rate of depreciation of 10% is claimed by the assessee. However, AO allowed depreciation @ 5% as per IT Rules as MD s house is used mainly for residential purpose. 10. Issue No.5 relates to disallowance of contribution made to various organizations: The assessee claimed payment of ₹ 2,00,000/= to SVADES, ₹ 95,65,559/= to DEEP and ₹ 15,36,500/= to various NGOs. The AO held there was no business obligation in respect of these expenses and not allowable under the Income Tax Act. On Appeal, the Ld CIT[A] held that the assessee has submitted Certificate of Registration of 80G in respect of payments made to SVADES and DEEP to that extent relief was allowed and balance amount was confirmed. 11. Issue No.6 relates to claim of disallowance under S.43B of the Act. The AO required the assessee to explain as to why the interest payable to Power Finance Corporation of ₹ 2,49,82,597/-which was not paid as per the provisions of section 43B of the Act should not be disallowed. The assessee replied that the provision of Section 43B of the Act is not applicable to the above expenditure. The assessee submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is the year in which such sum was actually paid. Accordingly, it is held that the AO was correct in not allowing the deduction of interest amounting to ₹ 2,49,82,597/-. However, the AO is directed to allow this as a deduction in AY 2008-09. Similarly, the interest payment disallowed in the earlier year, which was actually paid in the PY corresponding to AY 2007-08 should be allowed as deducting in this year. 13. Arguments of both parties and our Decision on each issue are as follows: 14. Issue No.1 regarding Replacement of parts in machineries treated as capital in nature. The Ld AR Mr. Milan Metha appearing for the assessee submission is of two folds [a] that the Accounting method or accounting treatment whether statutorily prescribed under any law or otherwise cannot override the provisions of the Income Tax Act. Further Classification of items in the books is not relevant for deciding the treatment of such items while computing taxable income as held by the Hon ble Supreme Court in the case of Kedarnath Jute Manufacturing Co Ltd - 82 ITR 363. Thus the book entries are not conclusive for determining the nature of expenditure. The provisions of law prevail over t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant gets increased. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer viz. General Electric. USA. The landed cost to the assessee company also increases as the same is required to be imported and thus attracts custom duty, air freight, insurance etc. The details of spares consumed at regular intervals for various Asst. years is as under: Asst Year Item Description Amount (Rs.) 2003-04 Stage - 1 Bucket Kit, Frame - VI PNo. 314B7162G015 3,96,92,557 2004-05 Stage - 1 Bucket Kit along with set of hardware for Gas Turbine 3,11,38,001 Stage - 1 Bucket Kit - Cutter tooth along with set of hardware for Gas Turbine spare 2,30,61,292 Stage - 2 Nozzle Kit with inter-stage rush seals for FR - 9 Gas Turbine 9,79,20,788 Stage - 2 Bucket Kit, Cutter teeth design for FR - 9 G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erabad in the case of DCIT -Vs- AP Gas Power Corporation Ltd reported in 2014 [ID2]-GJX0224-THYD wherein after detailed discussion of Supreme Courts and other Judgements held as follows: 15. We have heard the submissions of the parties and perused the orders of the revenue authorities as well as other materials placed on record. It is quite evident from the facts emanating from record that the expenditure incurred of ₹ 20,21,46,278/- which is subject matter of disallowance was towards repair/replacement of nozzles, buckets, shrouds, bearings, pieces and combustion liners which are parts of the three gas turbines utilized for generating power. It is also a fact that the power generation plant consists of two systems i.e., gas turbines and generating unit. As can be noticed from the process of generation of power as discussed by the CIT(A) in his order, there is no intermediate product in the generation of power. It is also a fact on record that the replaced/repaired parts were relating to three gas turbines. A book let submitted by the assessee regarding operation and maintenance of heavy duty gas turbine clearly shows that a well planned maintenance programme is requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he distinguishing features. It is to be noted that in the case of CIT V/s. Saravana Spinning Mills, there is a clear observation of the Hon ble Supreme Court that the Textile Plant consists of different departments having its own independent plants and machinery which produce different intermediate products. However, in the case of the assessee there is no such intermediate products which requires independent and separate plants and machinery. On the contrary, what the assessee has replaced is certain parts of the gas turbines and the gas turbines as a whole have not been replaced. Therefore, in this context the observation made by the Hon ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills rather favours the assessee. Because the Hon ble Supreme court in the said decision has held that when certain parts of a air conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Therefore, applying the same logic to the facts of the assessee s case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine. e. Further it is also stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased. f. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer out side India and the assessee company procures the same by import and thus attracts custom duty, air freight, insurance etc. g. Further the replacement of parts is Capital or Revenue is No more Res integra based on the observation made by the Hon ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills and CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 wherein held that when certain parts of an air-conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. h. Thus this issue is already dealt by the co-ordinate Benches of ITAT, Hyderabad in the case of DCIT -Vs- AP Gas Power Corporation Ltd wherein after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CBDT Circular No. 1/2016 dated 15.02.2016 is extracted below: In the above sub-section, which prescribes the manner of determining the quantum of deduction, a reference has been made to the term 'initial assessment year'. It has been represented that some Assessing Officers are interpreting the term 'initial assessment year' as the year in which the eligible business/ manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2) which allows a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years. The matter has been examined by the Board. It is abundantly clear from sub-section (2) that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/ first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officers are directed to allow deduction u/s 80IA in accordance with this clarification and Standing Counsels/D.R.s are suitably instructed pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in subsection (5) of section 80IA of the Act. 19. Following this Circular the SLP filed by the department was also dismissed against High Court's ruling that loss in year earlier to initial assessment year already absorbed against profit of other business cannot be notionally brought forward and set off against profits of eligible business as no such mandate is provided in section 80-IA(5) of the IT Act reported in Assistant Commissioner of Income-tax, Tirupur -Vs- Velayudhaswamy Spinning Mills (P.) Ltd. reported in [2016] 76 taxmann.com 176 (SC). Following the same we hereby reject the Grounds of appeal filed by the Revenue and allow the claim of deduction u/s.80IA in favour of the assessee. 20. Issue No.3 relates to disallowance under Section 14A of the Act. The Ld Counsel for the assessee submitted that the assessee disclosed tax free income of ₹ 65,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been made, disallowance under Section 14A is not justified. Thus we clear in our mind the direction given by the Ld CIT[A] to apply Rule 8D is not proper and there being the surplus funds were invested by the assessee and there were no administrative expenses, the disallowance made u/s.14A is unwarranted and liable to be deleted. Thus the Cross Objection filed by the assessee is allowed by deleting the addition made u/s.14A of the Act. 23. Issue No. 4 relates to depreciation on building used for Managing Director s residence. Ld AR submitted that as per the depreciation chart in the tax audit report, an addition of ₹ 87,27,750/- on account of GIPCL House under the head factory building. The assessee claimed MD s house is residence-cum-office building is used for the purpose of residence/office of the Managing Director and he discharges his official duties 365 days for official meetings, therefore the rate of depreciation of 10% is claimed by the assessee. Per Contra the Ld DR relied on the orders of the Lower Authorities. 24. We have given our thoughtful consideration on the materials placed before us, as the building is used for official-cumresidential purpose by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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