Southern Alloy Foundries P Ltd., CHENNAI V. ACIT, CHENNAI

ITA 825/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58096 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 08-03-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 04-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R B NAIK
• Assessee Lawyers: K S B ALAKRISHNAN
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER] I.T.A.NO.825/MDS/2011 ASSESSMENT YEAR : 2006-07 M/S SOUTHERN ALLOY FOUNDRIES (P) LTD 1-B/117, NELSON MANICKAM ROAD AMINJIKARAI, CHENNAI 600 029 VS THE CIT CHENNAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.S.BALAKRISHNAN RESPONDENT BY : SHRI R.B.NAIK, CIT/DR DATE OF HEARING : 08-03-2012 DATE OF PRONOUNCEMENT : 16-03-2012 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE AS SESSEE AGAINST THE ORDER OF THE CIT, CHENNAI III, DATED 7-03-2011. 2. IN THIS APPEAL, THE ASSESSEE HAS TAKEN FOUR GR OUNDS OF APPEAL WHEREIN IT HAS CHALLENGED THE ORDER OF THE L D. CIT IN DIRECTING THE ASSESSING OFFICER TO ADD ` 10,35,717/- BEING REPLACEMENT OF SOME PORTION OF THE MACHINERY TO THE INCOME OF THE ASSE SSE. I.T.A.NO. 825/11 :- 2 -: 3. THE BRIEF FACTS OF THE CASE ARE THAT ORIGINAL A SSESSMENT WAS COMPLETED U/S 143(3) ON 24.12.2007 ACCEPTING THE R ETURNED INCOME. THE LD. CIT, FROM THE PERUSAL OF THE ASSESSMENT REC ORDS, FOUND THAT IN COLUMN NO.17(A) OF THE AUDIT REPORT IN FORM 3CD, AN AMOUNT OF ` 10,35,717/- REPRESENTING THE COST OF MACHINERY REPL ACED, WAS REPORTED AS EXPENDITURE OF CAPITAL NATURE AND THAT THE SAM E WAS DEBITED IN THE PROFIT & LOSS ACCOUNT. ACCORDING TO THE LD. CIT, T HE ITEM OF CAPITAL EXPENDITURE WAS CLEARLY HIT BY SECTION 37 OF THE AC T AND HENCE, WAS NOT AN ALLOWABLE EXPENDITURE. HE, THEREFORE, ISSUE D NOTICE U/S 263 OF THE ACT AND BY PASSING AN ORDER U/S 263 OF THE ACT , DIRECTED THE ASSESSING OFFICER TO ADD ` 10,35,717/- TO THE INCOME OF THE ASSESSEE. 4. THE LD. A.R OF THE ASSESSEE REITERATED THE SU BMISSIONS MADE BEFORE THE LD. CIT AND SUBMITTED THAT THE ITEMS OF REPLACEMENT ARE NOT CAPITAL IN NATURE SINCE ONLY SOME PORTION OF MACHIN ERY WAS REPLACED TO ENSURE PROPER WORKING OF THE PLANT AND MACHINERY. THERE WAS NO ENHANCEMENT OF THE INSTALLED CAPACITY. THE EXPENDI TURE WAS MORE OR LESS IN THE NATURE OF REPAIRS. THE EXPENDITURE INC URRED WAS SHOWN TOWARDS REPLACEMENT OF MACHINERY IN COLUMN 17(A) OF THE AUDIT REPORT IN FORM 3CD IN VIEW OF THE DISCLOSURE NORMS OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA(ICAI). IT WAS ARGUE D THAT DEPICTION OF AN ITEM OF EXPENDITURE IN THE REPORT OF THE AUDITOR WOULD NOT ALTER THE I.T.A.NO. 825/11 :- 3 -: NATURE OR CHARACTER OF THE EXPENDITURE. IT WAS SUB MITTED THAT ALL THE DETAILS OF EXPENDITURE WERE FILED BEFORE THE ASSESS ING OFFICER WHICH WERE ACCEPTED BY THE ASSESSING OFFICER AFTER PROPER EXAMINATION. IT WAS, THEREFORE, SUBMITTED THAT THE LD. CIT WAS NOT JUSTIFIED IN PASSING AN ORDER U/S 263 OF THE ACT AND DIRECTING THE ASSE SSING OFFICER TO ADD THE AMOUNT OF ` 10,35,717/- TO THE INCOME OF THE ASSESSEE. 5. ON THE OTHER HAND, THE LD. CIT/DR SUPPORTED TH E ORDER OF THE CIT. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, THE ASSESSEE HAD INCURRED ` 5,33,490/- ON INDUCTION MELTING FURNACE WHOSE ELECTRICAL CONTROL PANEL REQU IRED FREQUENT REPAIRS DUE TO FAILURE OF PARTS AND THAT IT WAS OUT DATED. THE ASSESSEE REPLACED THE OLD ELECTRICAL CONTROL PANEL WITH A NE W CONTROL PANEL. FURTHER, THE ASSESSEE INCURRED ` 68,013/- ON AN INDUCTION MELTING FURNACE FOR INSTALLING A COOLING TOWER FOR COOLING WATER AS THE ONE UNDER USE WAS OLD AND OUTDATED AND COULD NOT BE PUT INTO USE ANY MORE AND ITS EFFICIENCY WAS ALSO REDUCED REQUIRING REPLACEMENT. FURTHER THE ASSESSEE INCURRED EXPENDITURE OF ` 1,39,566/- ON AN EOT CRANE WHICH WAS MORE THAN 35 YEARS OLD AND THE HOIS T OF THE CRANE WAS BEING REGULARLY MAINTAINED AND USED. THE HOIST COULD NOT BE PUT I.T.A.NO. 825/11 :- 4 -: INTO USE ANY FURTHER AND NEEDED REPLACEMENT. THERE FORE, A NEW WIRE ROPE HOIST WAS PROCURED TO REPLACE THE SAME. THE ASSESSEE INCURRED EXPENDITURE OF ` 2,02,566/- ON EOT CRANE USED FOR HANDLING THE CASTING FOR GAS CUTTING. THE CRANE WAS MORE THAN 2 5 YEARS OLD AND COULD NOT BE PUT TO USE ANY FURTHER AND NEEDED REPL ACEMENT. THEREFORE, A NEW WIRE ROPE HOIST WAS PROCURED WHICH REPLACED THE SAME. FURTHER THE ASSESSEE INCURRED ` 1,08,935/- ON A HOIST USED FOR HANDLING THE PATTERN FOR INSPECTION WHICH WAS VERY OLD AND COULD NOT BE PUT TO USE ANY FURTHER AND NEEDED REPLACEMENT. THEREFORE, A NEW WIRE ROPE HOIST WAS PURCHASED WHICH REPLACED THE SA ME. THE ASSESSEE ALSO INCURRED AN EXPENDITURE OF ` 1,36,599/- ON A HOIST USED FOR HANDLING THE CASTING FOR LOADING INTO THE SHOT BLASTING MACHINE. THIS HOIST HAD BECOME VERY OLD AND COULD NOT BE USE D ANY FURTHER AND NEEDED REPLACEMENT. THEREFORE, A NEW WIRE ROPE HOI ST WAS PROCURED AND THE SAME WAS REPLACED. THE LD. A.R OF THE ASS ESSEE SUBMITTED THAT AFTER EXAMINING THESE DETAILS, THE ASSESSING O FFICER HAS ACCEPTED THE IMPUGNED EXPENDITURE AS REVENUE EXPENDITURE. T HE LD. CIT WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 263 OF THE ACT TO CONCLUDE THAT THE SAID EXPENDITURE IS CAPITAL IN NA TURE. I.T.A.NO. 825/11 :- 5 -: 7. WE FIND THAT IT IS A SETTLED POSITION OF LAW THAT P ROVISIONS OF SECTION 263 CAN BE INVOKED BY THE LD. CIT WHEN THE ORDER PASSED BY THE ASSESSING OFFICER IS BOTH ERRONEOUS AND PREJUDI CIAL TO THE INTERESTS OF THE REVENUE. FURTHER, WHEN A VIEW TAKEN BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER IS NOT TENABLE THEN THE ORD ER PASSED BY THE ASSESSING OFFICER CAN BE HELD AS ERRONEOUS. IN THE INSTANT CASE, THE LD. CIT HELD THE ORDER OF THE ASSESSING OFFICER AS ERRO NEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE BY OBSE RVING AS UNDER: 3 THE SUBMISSIONS OF THE ASSESSEE HAVE BEEN CONSIDERED CAREFULLY. IT IS CLEAR THAT THE REPLACEM ENT OF THESE ITEMS OF MACHINERY DID NOT RESULT IN THE CRE ATION OF A SHORT TERM ADVANTAGE TO THE ASSESSEE. ON THE OTHER HAND, IT GIVES THE PURCHASER AN ENDURING BENEFIT OF BETTER A ND MORE EFFICIENT PRODUCTION OVER A PERIOD OF TIME. THUS, REPLACEMENT OF MACHINERY, AS IN THE INSTANT CASE, CANNOT BE CLASSIFIED AS REVENUE IN NATURE. HENCE, THE ASS ESSEE'S CLAIM OF DEDUCTION U/S.37 IS NOT TENABLE. AS REGARDS, THE CONTENTION, RAISED IN THE COURSE OF HEARING, THAT THE EXPENDITURE IS MORE OR LESS IN THE NATURE OF REPAIR S, IT WOULD BE RELEVANT TO NOTE THAT THE HON'BLE APEX COURT IN ITS DECISION IN CIT V. SARAVANA SPINNING MILLS (P) LTD. (293 ITR 201) HAS MENTIONED TWO EXCEPTIONS IN WHICH REPLACEM ENT COULD AMOUNT TO CURRENT REPAIRS, NAMELY: WHERE OLD PARTS ARE NOT AVAILABLE IN THE MARKET, OR WHERE OLD PARTS HAVE WORKED FOR 50-60 YEARS. IN THE INSTANT CASE, THE AS SESSEE HAD NOT CLAIMED EITHER OF THE ABOVE STATED EXCEPTIO NS. HENCE, THE ASSESSEE'S CLAIM OF DEDUCTION U/S.31 OF THE I.T.ACT CANNOT ALSO BE ACCEPTED. I.T.A.NO. 825/11 :- 6 -: 8. WE FIND THAT THE LD. A.R OF THE ASSESSEE COULD NOT POINT OUT ANY SPECIFIC ERROR IN THE ORDER OF THE LD. CIT. IT IS NOT IN DISPUTE THAT THE EXPENDITURE IN QUESTION WAS FOR REPLACING THE MACHI NES WITH NEW ONES. AS NO ERROR IN THE ORDER OF THE LD. CIT COULD BE PO INTED OUT, WE DO NOT FIND FORCE IN THE ABOVE ARGUMENT OF THE ASSESSEE. 9. HOWEVER, AS THE EXPENDITURE IN QUESTION HAS BEEN TR EATED AS CAPITAL EXPENDITURE BY THE LD. CIT, THE ASSESSEE IS ENTITLED FOR DEPRECIATION IN RESPECT THEREOF. WE, THEREFORE, MO DIFY THE ORDER OF THE LD. CIT TO THAT EXTENT. THUS, THE GROUNDS OF APPEA L OF THE ASSESSEE ARE PARTLY ALLOWED. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSES SEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16-03-2012. SD/- SD/- (GEORGE MATHAN) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 16 TH MARCH, 2012 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR