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Income Tax Appellate Tribunal, “ C ” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–3, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-3/3(2)/308/2016-17 dated arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961(hereinafter referred to as "the Act") dated29/12/2016 relevant to Assessment Year (AY) 2014-15.
2. The assessee has raised the following grounds of appeal:-
1) In law and in facts and circumstances of the Appellant’s case, the learned CIT(A) has grossly erred in the points of law and facts.
Lipi Specific Family Trust vs. DCIT Asst.Year - 2014-15 - 2 -
2) In law and in facts and circumstances of the Appellant’s case, the learned Commissioner of Income-tax (Appeals) ahs grossly erred in confirming disallowance of factory shed expenses of Rs.1,70,72,202/-.
3) In law and in facts and circumstances of the appellant’s case, the learned Commissioner of Income-tax (Appeals) has grossly erred in confirming allowance of depreciation @ 10% of Rs.17,07,220 instead of depreciation @ 15% and initial depreciation @ 20% available to Block of Plant & Machinery.
4) In law and in facts and circumstances of the appellant’s case, the learned Commissioner of Income-tax (Appeals) has grossly erred in confirming disallowance of interest paid on late payment of tax deducted at source for Rs.2,976/-.
5) In law and in facts and circumstances of the appellant’s case, the learned Commissioner of Income-tax (Appeals) has grossly erred in confirming addition on delayed payment of employees contribution of PF and ESIC for Rs.4,890/-.
6) In law and in facts and circumstances of the appellant’s case, the learned Commissioner of Income-tax (Appeals) has grossly erred in holding that charging of interest u/s.234B & 234C of I.T.Act is consequential in nature.
The 1st issue raised by the assessee is general in nature. Therefore we do not find any reason to adjudicate the same. Accordingly, we dismiss the ground of appeal of the assessee.
At the outset, the Ld. AR at the time of hearing before us submitted that he has been instructed not to press 3rd ground of appeal. Therefore we dismiss the same as not pressed.
3.1. At the outset, the Ld. AR at the time of hearing before us also submitted that he has been instructed not to press 4th and 5th ground of appeal due to smallness of amount. Therefore we dismiss the same as not pressed.
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The 2nd issue raised by the assessee is that the Ld. CIT-A erred in upholding the order of the AO on account of disallowance factory shed expenses for the sum Rs. 1,70,72,202.00
Briefly stated facts of the case are that the assessee is a trust and engaged in the manufacturing of HDPE/PP Bags & Fabrics under the name and style of M/s Nandeishwari Packaging.
The assessee in the year under consideration had incurred total expenditure amounting to Rs. 1,70,72,202.00 towards the repair and maintenance of factory shed where manufacturing operation had been conducting. The assessee debited the expenditure of Rs. 1,70,72,202.00 in its profit and loss account by treating it as revenue expenditure. The assessee in support of its claim submitted that the factory is located in suburbs of the Ahmedabad where other different types of factories are also situated. The other factories situated erre engaged in manufacturing of items of steel, chemicals, rubber, pharma etc. The area often receives differential atmosphere such as heavy rain, storms from time to time due to which roof of the factory premise had been affected. For that reason the manufacturing place became very bad therefore it required immediate repairing of the roof.
6.1. The assessee further submitted that due to repairs of the roof of the factory no additional assets brought into existence as well as no additional construction had also been conducted in the factory premise.
6.2. The assessee also submitted that the repair of factory shed did not increase its manufacturing capacity of the woven sacks. The assessee in Lipi Specific Family Trust vs. DCIT Asst.Year - 2014-15 - 4 - support of its contention furnished all the necessary documents ledger copy, copy of invoices before the AO.
6.3. However, the AO observed that the expenditure incurred on factory shed was very huge and it was also not a routine expenditure of the assessee. The AO Also noted that the expenditure incurred for the sum of Rs. 1,70,72,202 on the factory area 22,000 Sq.Ft. was just equivalent to the market rate of the factory premise as on date.
6.4. Thus, the AO in view of the above was of the opinion that the expenditure incurred by the assessee towards repairs of the factory shed was capital in nature. The AO accordingly disallowed the expenditure by treating the same as capital in nature. However the AO allowed the depreciation of Rs. 17,07,220.00 being 10% of Rs. 1,70,72,202.00 to the total income of the assessee.
6.5. Aggrieved assessee, preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A) reiterated the submission as before the AO. The assessee further submits that the presumption of AO that the expenditure incurred was equivalent to the market price of the factory was totally destitute. The assessee also submits that the expenditure was incurred for running the business smoothly and not for obtaining the enduring benefit.
6.6. However, the Ld. CIT(A) observed that the assessee in itself admitted that the expenditure was incurred towards repair and maintenance of the roof of the factory which was damaged due to unwarranted atmosphere. Therefore it is evident that the useful life of the factory premises substantially increased due to incurring such huge amount of repair expenses.
Lipi Specific Family Trust vs. DCIT Asst.Year - 2014-15 - 5 - 6.7. The Ld. CIT(A) also noted that the assessee did not demonstrate that the expenditure incurred towards repair of the roof was nothing but only replacement of old structure.
6.8. Thus, the Ld. CIT(A) was of the view that the expenditure incurred by the assessee was not in the nature of repairs as defined under section 30 of the Income Tax Act.
6.9. Therefore, the Ld. CIT(A) in view of the above treated the expenditure incurred by the assessee as capital expenditure and accordingly upheld the order of the AO.
Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.
The Ld. AR for the assessee before us filed a paper book running from pages 1 to 35 and reiterated the submission as made before the authorities below.
On the other hand, the Ld. DR vehemently supported order of the authorities below.
We have heard the rival contentions and perused the materials available on record. The issue on hand relates to the expenditure incurred by the assessee towards the repair of factory shed whether the same is revenue in nature or capital in nature. Any expenditure incurred by the assessee towards the current repair and maintenance is an allowable expenditure under the provisions of section 30 of the Act. The relevant provision of this section reads under:
Lipi Specific Family Trust vs. DCIT Asst.Year - 2014-15 - 6 - Rent, rates, taxes, repairs and insurance for buildings.
In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed— (a) where the premises are occupied by the assessee— (i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs ; (ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the premises ; (b) any sums paid on account of land revenue, local rates or municipal taxes ; (c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the premises. [Explanation.—For the removal of doubts, it is hereby declared that the amount paid on account of the cost of repairs referred to in sub-clause (i), and the amount paid on account of current repairs referred to in sub-clause (ii), of clause (a), shall not include any expenditure in the nature of capital expenditure.] 9.1. Further, the above provision stipulates the deduction only for current. Therefore to qualify expenditure as current repair, it has to pass certain tests as detailed under: i. Whether the repair expenditure was incurred to preserve the existing assets
ii. Whether there was any extension in the existing assessee out of such repairing expenses. iii. Whether there was any increment in the production capacity 9.2. Now, we proceed to apply the above case in the case on hand to find out whether the alleged expenditure incurred by the assessee for the replacement of the factory shed represents the current repairs.
9.3. In this regard, we note that the assessee before the authorities below has submitted that the condition of the rooftop of the factory building was Lipi Specific Family Trust vs. DCIT Asst.Year - 2014-15 - 7 - deteriorating on account of heavy rain, storm etc. The relevant part of the submission of the assessee before the AO stands as under: “The assessee trust was manufacturing woven sacks for last several years. The factory premise is situated in the area of around 22,000 Sq.Ft. Due to different atmospherial effects due to heavy rain, storms from time to time, corrosion occurred on the roof of the factory premise. The polluted air in the industrial estate is also one of the reasons for corrosion in the rectory premise. This has lead to poor and defective manufacturing place, which requires immediate repairing of the roof. This was also to keep the welfare measure for the workers carrying out the manufacturing process.
All these factors lead the assessee trust to carry out repairs on the roof in the factory premises of around 22,000 Sq. Ft. There is no additional construction conducted in the premises, which is in the nature of capital expenditure. Moreover, the manufacturing capacity of the woven sacks was also increased due to repairs and maintenance carried out by the assessee trust. The trust had incurred expenses of Rs.1,70,72,202/- towards repairing of the shed which is revenue expenditure. No new capital asset was fabricated.”
9.4. Thus, from the submission of the assessee, it is transpired that the sole object of the assessee to incur such expenses was to preserve the existing asset. The contentions of the assessee before the lower authorities have not been controverted by them.
9.5. As such, the reason of treating such expenditure as capital in nature by the AO was based on the volume of the expenses which was equivalent to the market price of the area of the factory. The relevant finding of the AO in details as under:
“4.(ii) The above reply of the assessee is carefully considered. However, the same is not found acceptable. This is in view of fact that the assessee has incurred huge expenditure on the factory and the shade on its GIDC plot. From the narration and the ledger account, it is observe that the said expenditure is not of routine nature which can be allowed as revenue expenditure. Further, it is seen that the area of the factory premises of the assessee is 22000 sq.ft. and the total expenditure is made towards its maintenance is of Rs.1,70,72,202/-, which is absolutely unreasonable
Lipi Specific Family Trust vs. DCIT Asst.Year - 2014-15 - 8 - because this expenditure is almost equivalent to the present market price of the factory premise of the assessee, i.e. cost of Rs.776 per sq.ft. Therefore, the claim of the assessee that the expenditure was incurred towards the maintenance of factory which has got damage by various environmental factors has no base and is not accepted.”
9.6. Similarly, the Ld. CIT (A) confirmed the order of the AO by observing that the impugned expenditure represents the replacement of the entire factory shed. As such a new factory shed was constructed by the assessee. The relevant finding of the learned CIT (A) stands as under:
“3.4. ….. The Appellant has not brought any evidence to prove that expenditure incurred has brought original shed into original shape but expenditure has been incurred for making new shed on entire structure which is nothing but replacement of old structure. The expenditure incurred by the Appellant is not in the nature of current repairs as defined in Section 30 of Income Tax Act hence such expenditure is required to be classified as capital expenditure entitled for depreciation.”
9.7. Thus, from the above, discussion there remains no ambiguity that the contention of the assessee has not been controverted by the authorities below. In view of the above we hold that the alleged expenditure incurred by the assessee falls within the category of current repairs as envisaged under the provisions of section 30 of the Act and in the light of the test applied for holding that expenditure as revenue in nature as elaborated in the preceding paragraph. In this connection, we find support and guidance from judgment of Hon’ble apex court in the case of Ballimal Naval Kishore v/s CIT reported in 224 ITR 414 wherein it was held as under:
“The expression used in section 10(2)(v) is 'current repairs' and not mere 'repairs'. The same expression occurs in section 30(a)(ii) and in section 31(i) of the Income-tax Act, 1961. The question is what is the meaning of the said expression in the context of section 10(2). In New Shorrock Spg. & Mfg. Co. Ltd.'s case (supra), it was observed that the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of Lipi Specific Family Trust vs. DCIT Asst.Year - 2014-15 - 9 - preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. They are such repairs as are attended to as and when need arises and that the question when a building, machinery, etc., requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The test evolved in New Shorrock Spg. & Mfg. Co. Ltd.'s case (supra)is the most appropriate, one having regard to the context in which the said expression occurs.”
9.8. We also find that the expenditure was not incurred for renovation or replacement of the factory. The expenditure incurred towards repairs of factory shed implied that there was no extension of the existing asset out of such expenditure and similarly there was no extension in the business of the assessee. in this regard we further place our reliance on the judgment of Hon’ble apex Court in the case B and A Plantations & Industries Ltd v/s CIT reported in 117 Taxman 323 wherein it was held as under:
“In the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468/ 99 Taxman 575, the Apex Court held that the general principles applicable in determining whether a particular expenditure is capital or revenue expenditure are as follows : (1) outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; (2) expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade; (3) whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital.”
9.9. In view of the above and after considering the facts in detail as discussed above, we are not inclined to uphold the finding of the authorities below. Accordingly, we conclude that the above expenditure incurred by the assessee represents the current repair as provided under section 30 of the Act. Therefore, the same is eligible for deduction. Hence the ground of appeal of the assessee is allowed.
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