Gobind Glass & Industries Ltd V. Dy.C.I.T.(Asstt)

TAXAP/12/2002

AI Insights

The case involves Gobind Glass & Industries Ltd., the appellant, challenging the order of the ITAT which had allowed the appeal of the revenue, disallowing the deduction claimed for the expenditure on repairing an old furnace. The expenditure amounted to Rs.4,21,35,827, which the Assessing Officer initially disallowed, leading to a series of appeals. The CIT(A) partly allowed the appeal, but the ITAT reversed this decision, leading to the present appeal in the Gujarat High Court. The main legal issues revolved around whether the expenditure was deductible as revenue expenditure under section 37(i) or allowable as capital expenditure under section 31(i) of the Income Tax Act, 1961.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 688382 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 21-11-2014
• Assessment Year: misc
• Other Referred Cases: CIT vs. Saravana Spinning Mills P. Ltd., Britannia Industries Ltd. vs. CIT & Anr.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: J P SHAH; MANISH SHAH
• Keywords: Capital expenditure; CIT(A); Deduction; ITAT; Revenue expenditure; Repairing old furnace
• Section: 37(i); 31(i)

Judgement Text

"O/TAXAP/12/2002 JUDGMENT . IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 12 of 2002 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ GOBIND GLASS & INDUSTRIES LTD.....Appellant(s) Versus DY.C.I.T.(ASSTT)....Opponent(s) ================================================================ Appearance: MR JP SHAH, with MANISH J SHAH, ADVOCATE for the Appellant(s) No. 1 MRS MAUNA M BHATT, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 21/11/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. This is an appeal by the appellant- assessee, seeking to challenge the order of the learned ITAT (for short, ‘the Tribunal’), Dated : 17.05.2001, in ITA No.250/Ahd/1995, whereby, the Page 1 of 9 O/TAXAP/12/2002 JUDGMENT Tribunal allowed the appeal of the revenue. 2. The brief facts of the case are that the assessee, herein, carried out certain repairing in the old furnace, amounting to Rs.4,21,35,827/-. The assessee, while filing the return of income, claimed deduction of the aforesaid amount. The AO disallowed the aforesaid amount and thereby rejected the claim of the assessee for deduction. Being aggrieved thereby, the assessee preferred the appeal before the learned CIT(A), who partly allowed the appeal of the assessee. The revenue, hence, carried the matter before the Tribunal in further appeal, wherein, the Tribunal passed the impugned order. Hence, the present appeal at the instance of assessee. 3. At the time of admission, following questions of law were framed by this Court for consideration; “(1) Whether on the facts and in circumstances of the case, Rs.4,20,66,275=00 spent on furnace is deductible revenue expenditure under section 37(i) of the Income Tax Act, 1961? (2) If the reply to question No.1 is in the negative, whether the said expenditure is allowable under section Page 2 of 9 O/TAXAP/12/2002 JUDGMENT 31(i) even if it is capital expenditure?” 4. Mr. Shah, learned Advocate for the assessee, submitted that the Tribunal committed an error in passing the impugned order, by holding that the expenditure incurred by the assessee was capital expenditure. He, further, submitted that the Tribunal ought to have appreciated the fact that the assessee had merely carried out the repairing of the old furnace and had not installed the new one. He submitted that in view of the provisions of Section 31(i) of the Act, the Tribunal ought to have held that, though, the expenditure incurred by the assessee was capital in nature, it is allowable. 5. In support of his submissions, Mr. Shah, placed reliance on a decision of the Apex Court in \"CIT VS. SARAVANA SPINNING MILLS P. LTD.\" [2007] 293 ITR 2001 (SC). He, therefore, prayed that the appeal be allowed. 6. On the other hand, Mrs. Bhatt, learned Advocate for the respondent-revenue, supported the impugned order and submitted that the Tribunal was justified in passing the impugned order. In support of her submission, she placed reliance on decision of the Apex Court in \"BRITANNIA INDUSTRIES LTD. VS. CIT & ANR.\", [2005] 278 ITR 546, wherein, the Apex Court held that Page 3 of 9 O/TAXAP/12/2002 JUDGMENT the expenses incurred towards repairs under Section 30 and 32 of the Act and maintenance expenses are not allowable in respect of the gas house. She, hence, prayed that the appeal being devoid of merit, be dismissed. 7. Heard, learned Counsels for the parties and perused the material on record as well as the orders passed by the CIT(A) and the Tribunal. Before proceeding with the matter, here, it would be relevant to note that it is settled principle of law that the amount of money spent on repairs alone cannot be a factor to determine whether the expenditure would fall under the current repair or not, but, it is the nature of the repair, which is carried out by the assessee, which is to be looked into so far as deduction is concerned. In the instant case, repairing of the furnace was carried out and certain parts, such as refractories etc., were replaced with a view to obtain consistency in the production. The learned CIT(A), while partly allowing the appeal of the assessee, considered various decision of the Apex Court and the other High Courts and recorded a finding of fact that the furnace was old and it required repairs for better performance. The CIT(A), further, recorded that there was no increase in production capacity due to the aforesaid repairs. The CIT(A) in Paras-9 to 11 of Page 4 of 9 O/TAXAP/12/2002 JUDGMENT its order, further, held as under; “9. Another aspect to be considered is as to whether the appellant should have accounted for the material utilised in repairs as its closing stock. In this regard the Representative of the appellant point out that the materials to be utilised in carrying out the repairs were not stocked anywhere but during the period furnace is cooled, the furnace structure of refractories is constructed away from the furnace site to find out whether the refractories supplied by the manufacture s are as per specifications given in the drawing. If they require further recutting and finishing the same are carried out and they are kept ready for use in cold repairs work. All these activities which are necessary part of cold repair exercises are done much prior to the actual lying of the refractories into the furnace. These total exercises had been carried out before 31.3.1991 and, therefore, the process of using the material is carrying out the replacement of refractories had started and the total refractories had been used in these process. In this regard, the representative of the appellant produced the necessary photographs, showing the laying of the refractories, having formed holes with minor tolerances wherein steel material are used to keep them in position. In view of the fact that all the refractories had been used in the process of repairs during the year under consideration, the same are not required to be included in the closing stock. Page 5 of 9 O/TAXAP/12/2002 JUDGMENT 10. In view of the above discussion, the expenses on repairs has to be allowed as a deduction during the assessment year 1992-92. 11. The Assessing Officer has made a passing remark that the assessee could not produce all the bills. The representative of the appellant claimed that this statement is not correct as by letter dated 25th February, 1994, a summary of cold repair expenses from the ledger having six pages of zerox copy was submitted to Assessing Officer. The relevant paragraph 3 of the said letter read as follows:- “3. As regards the details of the cold repairs expenses, we enclosed herewith at Annexure-C in a tabular form the expenses incurred on cold repairs for the accounting year 1990-91 with narrations. The relevant evidence for the arrival of refractories at the site of the factory is also available in the form of vouchers of the shipping agents and copies of bill of lading which are collectively attached at Annexure-D. The original bills/vouchers of salaries paid to masons engaged in cold repairs work are also available for your satisfaction.” The representative of the applicant, therefore, produced before me copies of vouchers and bills. After going through all the vouchers and bills, it is seen that only following five vouchers are not available:- Page 6 of 9 O/TAXAP/12/2002 JUDGMENT Sr. No. Sr. No. In The List Name of Party Amt. Rs. 1 7 Miscellaneo us Expenses 100-00 2 97 Maithan Ceramics Ltd. 37309-60 3 51 Freight payment by cheque 13941-00 4 57 Out of cash expenses for Feb.91, voucher for Rs.233-10 is not traceable. 233-10 5 89 Out of cash expenses of March, 91 voucher for Rs.8028/- is not traceable. 8028-00 69611-70 As all the vouchers but the above mentioned five vouchers have been produced and verified, therefore, total Page 7 of 9 O/TAXAP/12/2002 JUDGMENT expenses of cold repair works are treated as allowed except Rs.69611/- mentioned above. Therefore, the appeal on this ground is allowed for a sum of Rs.42066275/- (Rs.421135887 (-) Rs.69612). In the result, the appeal on this ground is partly allowed.” 8. As against this, the Tribunal, while passing the impugned order, has recorded that the expenses in question incurred by the assessee on dismantling the old furnace and construction of a new furnace are clearly capital in nature, which is not supported by the factual matrix. 9. The Apex Court in \"CIT VS. SARAVANA SPINNING MILLS P. LTD.\"(Supra),wherein, the Apex Court held that to decide the applicability of section 31(i) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by the High Court, but whether, the expenditure is \"current repairs\". The Apex Court, further, held that the basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to \"reserve 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. We are, hence, of the opinion that the present appeal deserves to be allowed. In view of the above discussion, the decision relied on by Page 8 of 9 O/TAXAP/12/2002 JUDGMENT Mrs. Bhatt in \"BRITANNIA INDUSTRIES LTD. VS. CIT & ANR.\" (Supra) shall not apply to the facts of the case on hand. 10. In the result, present appeal is ALLOWED. The impugned order passed by the Tribunal, Dated : 17.05.2001, is QUASHED and set aside and the order of the CIT(A) is restored. No order as to costs. (K.S.JHAVERI, J.) (K.J.THAKER, J) UMESH Page 9 of 9 "