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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘C’
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
PER RAJPAL YADAV, JUDICIAL MEMBER : Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-1, Vadodara dated 28.4.2017 passed for the Asstt.Year 2013-14.
In ground no.1, the assessee is aggrieved by the action of ld.CIT(A) in confirming disallowance of payment of Rs.40,895/- towards Employee’s Contribution on the ground that the same was not deposited in the relevant fund on or before the due date.
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Brief facts in this regard are the assessee has deducted PF contribution from its employees, but the same was not deposited in the Government account within the due date prescribed under respective laws. This discrepancy was pointed out by the auditors of the company in its report. The ld.AO with the aid of section 2(24)(x) r.w.s. 36(1)(va) of the Income Tax Act and following judgment of Hon’ble Jurisdictional High Court in the case of CIT v. Gujarat State Road Transport Corporation 366 ITR 170 (Guj) disallowed the claim of the assessee. The action of the AO was confirmed by the ld.CIT(A). Assessee is in further appeal before us.
After hearing both the sides on the issue, we find that this issue has been settled by the Hon’ble jurisdictional High Court in two occasions, viz. in the case of Gujarat State Road Transport Corporation Ltd. (supra) and M/s.Checkmate Facility & Electronics Solutions P.Ltd. Vs.DCIT, wherein it is held that the employees’ contribution to the Employees’ Provident Fund (EPF)/ Employees’ State Insurance Corporation (ESIC) deposited beyond the due date prescribed under section 36(1)(va) of the Income-tax Act, 1961 would not be eligible for deduction under section 43B of the Act, even if deposited before the due date of filing the tax. Therefore, there is no merit in this ground of appeal assessee. It is rejected.
Ground no.2 relates disallowance of claim of Rs.3,63,099/- being expenses incurred on software up-gradation of computers and treating the same as capital expenditure.
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Since the ld.counsel for the assessee does not press this issue for adjudication, this ground no.2 is rejected as not pressed. 7. Ground No.3 reads as under: “a) The ld.CIT(A) has erred in law and in facts in confirming the disallowance of Rs.57,36,315/- out of Rs.76,48,420/- incurred towards repairs and maintenance to plant & machinery.
b) The ld.CIT(A) has further erred in confirming that such expenditure is in the nature of capital expenditure.”
With the assistance of the ld.representatives, we have gone through the record carefully. The ld.counsel for the assessee fairly conceded that identical issue arose in the Asstt.Years 2010-11 and 2011- 12. The ld.CIT(A) has partly confirmed the disallowance out of the claim of current repairs to the plant & machineries. In further appeal, the ITAT confirmed the same by its order in ITA No.549/Ahd/2016 and others dated 11.3.2019. The discussion made by the Tribunal in the Asstt.Years 2010-11 and 2011-12 on this issue reads as under:
“5. Now we take appeals of the assessee for the assessment years 2010-11 and 2011-12. 6. Assessee has taken four grounds of appeal in each assessment year. In brief, its sole grievance is that the ld.CIT(A)has erred in confirming the disallowance of Rs.39,53,249/- out of Rs.52,70,999/- and disallowance of Rs.28,55,917/- out of Rs.38,07,890/- in the Asstt.Year 2010-11 and 2011- 12 respectively by treating them as unexplained expenditure incurred in the capital field instead of treating them in the revenue account for repairs and maintenance to plant & machinery. The facts on all vital points are common in both the assessment years. Basically, the ld.CIT(A) has passed order in the Asstt.Year 2011-12 and that order has been followed in the Asstt.Year 2010-11. Though both orders have been passed simultaneously, therefore, for the sake of reference we take facts from the Asstt.Year 2011-12. 7. Brief facts of the case are that the assessee has filed its return of income on 30.9.2011 declaring total income at Rs.4,26,42,260/-. The
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case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. The ld.AO observed that on perusal of the accounts it revealed that the assessee has debited expenditure of Rs.38,71,001/-; Rs.99,08,739; and Rs.1,44,81,689/- on account of repairs and maintenance in the Asstt.Years 2009-10 to 2011-12. Similarly, he considered turnover in all these three years, the value of the plant & machinery and percentage of repairs. He observed that percentage of repairs in comparison to value of plant & machinery was 60.93% and 31.58% in the Asstt.Year 2010-11 and 2011-12. Thus, he confronted the assessee to show as to why these expenditure should not be construed as incurred in the field of capital, because according to the understanding of the AO, this major repair would give rise to enduring benefit to the assessee in the plant & machinery. In response to the query of the AO, the assessee submitted written submissions, wherein it has pointed out as under:
".... The major expenditure is incurred in the replacement of fire bricks and structures made out of steel and SS & MS plates and other assessories which are installed at the Furnace. The company is manufacturing Glaze Frit which requires heating of the raw material , in the process of manufacturing upto 1500 C. This heating at such high temperatures damages the fire tunnels made from fire bricks and also structures made out of steel and SS & MS Plates ad other accessories thereof. These fire bricks and a short life due to temperature up to 1500C and required to be replaced whenever the same is damaged by cracks or breakage of steel/SS & MS structures. The crack and the breakage result into leakage of heat and the temeperature inside the furnace is not uniform and constant resulting into the damage of the products. The high temperature of heat also damage the steel structure and that also requires replacements and repairs on a continuous basis including parts and accessories etc......”
The ld.AO made detailed analysis of each expenditure and thereafter treated the expenditure to the extent of Rs.38,07,890/- in the capital field and disallowed the same. In the Asstt.Year 2010-11, he similarly treated the expenditure to the extent of Rs.52,70,999/- in the capital field. Dissatisfied with the action of the AO, the assessee carried the matter in appeal before the ld.CIT(A). It has reiterated its stand and pointed out nature of plant & machinery as well as nature of its manufacturing activity. According to the assessee, its plant and machinery is quite old, which has given rise to a lot of wear and tear and therefore continuous replacement of fire bricks, SS and MS plates and
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other accessories. The ld.CIT(A) has called for remand report from the AO because the assessee has submitted certain new details. Thereafter he recorded a finding that repairs carried out by the assessee is to the extent of 43% of the plant & machinery which amounts to major replacement and construed as bringing of a new asset. He accordingly disallowed 25% of the expenditure out of the total claimed by the assessee. The finding recorded by the ld.CIT(A) reads as under:
“5.3. I have considered the facts of the case, observations of the AO as well as remand report and the submissions of the appellant The expenditures disallowed by the AO as revenue expenditures are in the nature of purchase of MS steel plates, angles, shapes, bars, flanges etc. the AO has made a detailed analysis of the expenditure on repairs and maintenance incurred by the appellant company in its own case for different financial years as well as other companies involved in similar line of business as that of the appellant company. After this analysis, the AO has given a finding that the repair and maintenance expenses being claimed by the appellant company are on a much higher side. In the submissions made during the course of the appellate proceedings, the appellant has submitted that such computation can be made only in respect of the total amount of investment made in the plant and machinery and not on the basis of written down value. Accordingly a fresh computation was furnished by the appellant on which the AO has also furnished his remand report. In the remand report, the AO has computed ratio of repairs and maintenance expenses to the total investment in case of all the companies. A perusal of this computation shows that this ratio is still abnormally high in the case of the appellant company. It is 43% in the case of the appellant company as compared to 2% to 6% in the case of other companies. The AO had also pointed out the fact that in the earlier year, the Excise Audit had pointed out that the appellant company was constructing a new shade but the materials utilized in the same was being claimed as revenue expenditure. The plea of the appellant against this observation is that no such observation has been made for the current financial year. But the fact remains that some incriminating observations were made against the appellant company. Hence the expenditure incurred by the appellant company on purchase of these materials cannot be held to be for the purposes of repairs and maintenances only.
5.3.1. At the same time, from the details furnished by the appellant it is evident that a part of such state materials are required for the repair and maintenance of its kilns. Hence the entire expenditure cannot be held to be disallowable as revenue expenditure. Keeping in view the
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nature of business of the appellant company, it is held that 25% of such expenses can be allowed as revenue expenditure as needed for the purposes of repair of plants and machineries. The disallowance of balance expenditure as made by the AO is upheld. The appellant gets part relief accordingly.” 9. Before us, the ld.counsel for the assessee reiterated his contentions as were raised before the AO. On the other hand, the ld.DR relied upon the orders of the Revenue authorities.
Section 31 of the Income Tax Act provides allowance of expenditure towards current repairs to the plant & machinery and furniture as well as insurance expenditure incurred upon it. It contemplates that expenditure for repairs shall be on account of current repairs and shall not include any expenditure in the nature of capital expenditure. Thus, if an assessee has carried out necessary repairs, which falls within the category of current repairs, then the expenditure would be allowed to the assessee. In the case of CIT Vs. Sesa Resources Ltd., 250 taxmann.com 182, Hon’ble Bombay High Court found that the assessee was engaged in mining and mineral process for exports, shipping and stevedoring. The assessee had incurred expenditure on repairs of two marine vessels which has been disallowed, but the ld.CIT(A) treated such repairs as current repairs, and it was allowed. Hon’ble High Court has observed that in order to keep the vessel sea- worthy, if certain expenditure were incurred, then that would not result in increase of capacity of vessels or any new advantage or any capital asset will come into existence. Hence, such expenditure is allowable to the assessee. However, in the case of CIT Vs. Sarvana Spg. Mills P.Ltd., 293 ITR 201, Hon’ble Supreme Court find that in a textile mill there were several departments, and each department there are several machines performing different functions, in such situation repairs/substitution of an old machine would not come within the definition of “current repairs”. In other words, if the expenditure incurred by the assessee would not result in replacement of old machinery with new, then it may come within the ambit of current repair, but expenditure on such a magnitude which ultimately replaces full machinery within one or two years, then it would not come under concept of “current repair”. The AO has observed that the assessee has incurred expenditure to the extent of 60.93% of the value of the machinery in the Asstt.Year 2010-11 and 31.58% in A.Y.2011-12, meaning thereby, by way of this method, almost 92% expenditure were incurred in two years on the value of the plant & machinery. It amounts to replacement. The ld.CIT(A) in this background has rightly observed that other companies in similar line were incurred expenditure to the extent of 2% to 6%, whereas the assessee has incurred expenditure at
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43%. The ld.CIT(A) rightly upheld disallowance of expenditure partly by treating it in the capital field. We do not find any error in the order of the ld.CIT(A) in both years on this issue.
An alternative contention has been raised that in case expenditure is not allowed as revenue expenditure, then depreciation on the disallowed amount be granted to the assessee. We remit this aspect to the file of the AO. He will work out and grant depreciation to the assessee on the addition made by disallowing the current repairs. This alternative contention of the assessee is accepted.”
Since there is no disparity of facts, the following the order of the Tribunal in assessee’s own case in the immediately proceedings year, we do not find any merit in this ground of appeal. It is rejected.
In the result, appeal of the assessee is dismissed. Pronounced in the Open Court on 8th April, 2019.
Sd/- Sd/- (WASEEM AHMED) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated, 08/04/2019