MOOLCHANDJI RLKHABDAS MEHTA, MUMBAI V. INCOME TAX OFFICER, WARD-23(1)(6), MUMBAI

ITA 481/MUM/2023

AI Insights

The case revolves around the classification of 'jala fitting expenses' amounting to Rs.28,61,580 incurred by the assessee, Shri Moolchandji Rikhabdas Mehta, in his manufacturing business. The Income Tax Officer (ITO) initially treated these expenses as capital expenditure, allowing only 15% depreciation, which was contested by the assessee. The Commissioner of Income Tax (Appeals) upheld the ITO's decision, leading to the appeal before the Income Tax Appellate Tribunal. The Tribunal, after considering the nature of the expenses and their recurring usage for machinery protection, ruled in favor of the assessee, classifying the expenses as revenue expenditure.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 302359 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 04-06-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 16-02-2023
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘D‘ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No.481/Mum/2023 (Assessment Year :2014-15) Shri Moolchandji Rikhabdas Mehta 127/129, 3 rd Floor Zaveri Bazar Mumbai – 400 002 Vs. Income Tax Officer Ward-23(1)(6) Mumbai PAN/GIR No.AAAPM8147L (Appellant) .. (Respondent) Assessee by None Revenue by Smt. Riddhi Mishra Date of Hearing 05/06/2023 Date of Pronouncement 28/06/2023 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 14/11/2022 passed by NFAC for the quantum of assessment passed u/s. 143(3) for A.Y.2014-15. 2. In the grounds of appeal, assessee has challenged disallowance of Rs.28,61,580/- of ‘jala fitting expenses’ by treating it as ‘capital expenditure. None appeared on behalf of the assessee despite of service of notices; therefore, same is being decided on the basis of material on record. ITA No.481/Mum/2023 Shri. Moolchandji Rikhabdas Mehta 2 3. The facts in brief are that assessee is an individual engaged in the manufacturing business of converting yarn to finished fabrics and also trading in the finished fabrics in the name of proprietary concern, M/s. Suraj Silk. The ld. AO on perusal of the various details noted that assessee had debited ‘jala fitting expenses’ of Rs.28,61,580/- and enquired assessee as to why the same should not be treated as capital expenditure. 4. In response, assessee submitted that the said expenditure is akin to consumable and spares essential for functioning of the main machineries used in the manufacturing business of fabric and its life span is around six months to one year depending upon the quality of jalas and it is a recurring expenditure and therefore, it has been treated as ‘Revenue expenditure’. However, the ld. AO simply rejected the assessee’s contention on the ground that in the period of six months such a huge expenditure is not seen in this line of business and jala fitting is cover for plant and machinery i.e. after installation of plant and machinery and therefore, it is kind of protection for machinery and hence part of machinery, should be treated as capital expenditure. Consequently, he allowed depreciation of 15%. 5. The ld. CIT (A) after incorporating of the submissions has rejected assessee’s contention after observing as under:- “7.2 By appellant's submissions, it is to be noted that the jala fitting charges are incurred to protect and ensure a smooth ITA No.481/Mum/2023 Shri. Moolchandji Rikhabdas Mehta 3 functioning of the Jacquard Weaving Machineries used in the appellant's manufacturing business 7.3 The question whether such expenses are capital or revenue would depend on the following: 1) Is the impugned amount an expenditure to upgrade and maintain physical assets such as equipment ? (In this case Jacquard Weaving Machines) Yes in appellant's саsе 2) Is the impugned expenditure an ongoing operating expense which is short term used to run the daily business operations? Answer is No. 7.4 By appellant's own admission jala fittings are a kind of consumable stores and spares. While a common sense understanding would point to the fact that cost incurred on these "stores and spares", which is in fact the cost incurred on these jala fittings would usually be treated as revenue expenditure, the cost incurred on such stores consumed in maintaining the fixed asset is to be regarded as capital expenditure. 7.5 The appellant had no objection before the AO to the capitalisation of the impugned expenses should the claim of revenue expenditure be rejection. 7.6 In conclusion, it is held that the disallowance of the expenses incurred towards jala fittings to the extent of Rs.28,61,580/- is correctly disallowed and allowed to be capitalised, for the reasons stated in this appellate order. 8. In the result, appeal is dismissed 6. After hearing the ld. DR and on perusal of the finding given in the impugned orders as well as the explanation of the assessee as incorporated in the order of the ld. CIT(A), we find that at no point of time, the ld. CIT(A) has controverted the fact that this ‘jala fittings’ are used for the protection of the machinery which have a life span of six months to one year ITA No.481/Mum/2023 Shri. Moolchandji Rikhabdas Mehta 4 and is used as consumables and spares which is required to be replaced regularly and is a recurring expenditure. The assessee used Jacquard Weaving Machineries from manufacturing of fabric converting yarn to finished fabrics and for standard operating requirement and smooth functioning and for the protection of the machinery, jala fittings are essential part of the said machinery which has a very short span and is replaced at regular interval. If that is so, then it is very difficult to endorse the reasoning of ld. CIT (A) that it is something for enduring benefit. It is not necessary that an expenditure incurred to maintain fixed asset tantamount to capital expenditure, what is required to be seen is, whether if it is kind of consumable items replaced at regular interval and is essential part of the manufacturing process for manufacturing machines or not. If yes, then it is nothing but revenue expenditure and therefore, the claim of the assessee is allowed and consequently, the ground raised by the assessee is allowed. 7. In the result, appeal of the assessee is allowed. Order pronounced on 28 th June, 2023. Sd/- (GAGAN GOYAL) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 28/06/2023 KARUNA, sr.ps ITA No.481/Mum/2023 Shri. Moolchandji Rikhabdas Mehta 5 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//