M/S EDISON GENTECH PVT LTD,CHENNAI vs. ITO CORP WARD 2 (1), CHENNAI

This appeal by the Assessee is arising out of the order of the Commissioner of Income Tax (Appeals)-6, vide 6/2015-16; dated 30.11.2017. The assessment was framed by the Income Tax Officer, Corporate Ward–2(1), Chennai for the Assessment Year 2012-13 u/s.143(3) of the Income Tax Act, 1961 (hereinafter “the Act”), vide order dated 25.03.2015.

The Assessee has raised various grounds which we need not be reproduced. However, the only effective ground raised in the appeal of the Assessee relates to the confirmation of the disallowance towards purchase of DG Set spare parts expenditure amounting to Rs.62,68,244/-

Brief facts of the case is that the Assessee company filed its return of income for the Assessment Year 2012-13 on 28.09.2012 with a returned income of Rs.35,02,000/-. The case was taken up for scrutiny through Computer Assisted Scrutiny Selection [CASS] and a notice u/s. 143(2) of the Act dated 08.08.2013 was issued and duly served to the Assessee. In response to the notice issued, the AR of the assessee appeared and furnished the details called for and on going through the details it was seen from the depreciation schedule that an amount of Rs.6,00,000/- was shown as ‘deletion’ against the entry ‘DG Set Spared Parts’ at Sl.No.39 of the depreciation table indicating that the DG Set spare parts are disposed off during the year and has been reduced from the Written- Down Value [WDV] of the fixed asset at the beginning of the financial year.

Dissatisfying with the above order, the assessee preferred an appeal before the Ld. CIT(A). Where the Ld. CIT(A) partly allowed the claim of the assessee and he had taken view of the AO where Ld. CIT(A) held that purchase of spare parts for DG Set as capital in nature and addition made by the AO was confirmed.

Aggrieved by the order of the Ld. CIT(A), the assessee preferred instant appeal before this Tribunal, at the time of hearing, before us the Ld. Counsel for the assessee submitted that the authorities below has disallowed the spare parts expenditure on the sole ground that similar head was present under the head fixed asset in the earlier years and he submitted before us that mere presence of head DG Set Spare Parts under the fixed asset in earlier years

We have heard the rival contentions and perused the material available on record. We note that in the case of DCIT v. M/s. Jindal India Ltd. in & 369/Kol/2010, the Kolkata Tribunal made the following observations on this issue: “We further find force in the contention of the Ld. Counsel for the assessee that since in this case rolls used in iron and steel industries are the parts of the machinery and are replaced very frequently during the year the expenses incurred on replacement of the rolls is allowable as current repairs, therefore, cannot be disallowed simply because assessee was entitled to get 80% depreciation on this item u/s. 32 of the Act. The Hon'ble Delhi High Court in the case of CIT Vs. Hi Line Pens Pvt. Ltd. (Supra) has held as under : "Held, that the replacement was not of the premises but of certain "parts" such as the internal wires and GI Pipes. The analogy of replacement of the entire machine was not applicable to the case of the assesee. It was not the intention of the assessee to bring about any new capital asset. The expenses incurred by the assessee were towards repairing the premises taken on lease so as to make them more conducive to its business activity. Such expenses could fall within the expression of repairs to the premises as appearing in section 30(a)(i). Once the assessee's claim falls within that provision there was no question of considering the question of applicability of section 32. Thus, the Tribunal rightly agreed with the view taken by the Commissioner (Appeals) and held in favour of the assessee." In view of the above, we find no infirmity in the orders of the Ld. CIT(A) in deleting the additions for both the assessment years. Therefore, the grounds of appeal of the revenue for both the assessment years are dismissed.”

Again, in the case of CIT v. Malhotra Industrial Corpn.[2003] 127 Taxman 545 (Punjab & Haryana), assessee was running a steel rolling mill.TheTribunal’s finding was that assessee’s business required frequent replacement of rolls and, therefore, expenditure incurred thereon would certainly fall in nature of current repairs, as same did not result in creation of capital asset or benefit of enduring

We further note that the ITAT Kolkata in the case of M/S Akshay Steel Works Pvt. Ltd. vs Dcit, Cir-3, Kolkata in ITA number 823/Kol/2015 on identical facts has decided the issue in favour of the assessee with the following observations: “7.3 We have heard the rival submissions. We find that the assessee had installed one Rolling Mill for manufacture of rolled products i.e Angles, Channels, Round Bar, Flat Bar, Square Bar, Octagonal Bar, Hexagonal Bar etc . In the rolling mill, the assessee uses 'Steel Rolls' which is an integral part of the machinery. In the process of manufacture of rolled products, the raw materials (mild steel billets / mild steel ingots) are fed into the heating furnace where it is heated at the requisite temperature. The red hot raw materials (ingots and billets) are then passed through a series of rolling stands fitted with steel rolls which keeps rotating and exerts pressure on the hot raw material which elongates the stock to desired shapes and sizes for manufacture of desired rolled products. In the process, the red hot raw materials are compressed between two rotating steel rolls for reducing its cross section. After the rolling process, the hot rolled products are subjected to process of cooling and thereafter sent for sizing, bundling , etc. From the aforesaid manufacturing process, it was explained by the ld AR that the steel rolls get worn out warranting frequent replacement in 2 to 6 months. We find from the explanation of the aforesaid manufacturing process, steel rolls are not independent machinery but instead they are only part of a rolling mill. It does not contribute for the increase in production capacity of the products manufactured by the assessee company. Hence there is no enduring benefit or advantage derived by the assessee company in this regard. The replacement of steel rolls are merely operational expenses incurred in the ordinary course of business by the assessee. Moreover, from the details of replacement of steel rolls as tabulated hereinabove, it could be safely concluded that the steel rolls were replaced by the assessee on a regular basis and hence we hold that merely because the same is found as a separate line item in the Appendix I of Depreciation Rates Schedule, it does not take the character of capital expenditure automatically. We hold that since it is not a capital expenditure at all vis a vis the facts of the instant case and the manufacturing process involved therein, the explanation to section 30 and 31 of the Act brought

The Delhi High Court in the case of Commissioner of Income Tax- 4 Vs. Super Cassettes Industries Ltd. (Delhi High Court) in 171/2010 vide order dated 17-10-2011 held that replacement of parts of an existing machinery in the course of their working will be a revenue expenditure. The Hon'ble High Court observed as below while passing the order: 4. The Assessing Officer did not controvert or deny the aforesaid factual position projected by the assessee that the moulds in question were integral part of the injection moulding machines and had to be replaced by new moulds due to normal wear and tear. The assessee had purchased injection moulding machines which included the moulds and these were treated as capital assets, but once the moulds were replaced by new moulds, the expenditure incurred on new moulds was treated by the assessee as revenue expenditure. The stand taken by the Assessing Officer/ Revenue was that moulds have been classified as a capital asset specifically in the depreciation schedule in the Income Tax Rules, 1962 and the rate of depreciation is specified @ 40% and, therefore, the moulds are capital asset and purchase price of the moulds cannot be treated as revenue expenditure. …… 5. The reasoning is fallacious; the schedule or rate of depreciation cannot decide whether a particular expenditure in the hands of an assessee is revenue or capital expenditure. Same asset can be stock in trade in the hand of one assessee and a capital asset in hands of another assessee. The schedule does not decide whether an asset purchased is a capital asset. Merely because moulds have been classified and mentioned in the schedule relating to depreciation in the Income Tax Rules, it does not mean that the purchase price of the moulds in all cases has to be treated as a capital expenditure. It would depend upon the facts and circumstances of each case whether the purchase price of moulds is to be capitalised or treated as revenue expenditure. Purchase price of moulds cannot be regarded as a capital expenditure if the replaced mould is an integral part of an existing injection moulding machine. In such cases a new asset does not come into existence but the expenditure incurred is towards purchase of parts for repair or maintenance of existing machinery. (Difference between repair and maintenance is not relevant and urged in the present appeals). No new or fresh advantage of enduring benefit materialises but the purpose is to :: 8 :: I.T.A No.:713/CHNY/2018 preserve and maintain an already existing asset. The expenditure incurred on replacement of the moulds is in the nature of replacement of parts of the old machines which continues to exist and remains the capital asset. The tribunal in the impugned order has rightly relied upon the decision of this Court in Commissioner of Income-Tax Vs. Jagatjit Industries Ltd. [2000] 241 ITR 556, wherein it has been held as under:- “Whether on given set of facts, replacement of certain items, forming an integral or important part of the machinery would be revenue expenditure or capital expenditure is primarily a question of fact, to be decided in the context of the business carried on by an assessee. Merely, because the benefit accruing by the expenditure is of enduring nature, is by itself not a conclusive test to hold it as a capital expenditure (see Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC)]. Normally initial investment on machines and their parts will be in the nature of capital expenditure but replacement of parts of an existing machinery in the course of their working will be a revenue expenditure. In the instant case having regard to the nature of the business of the assessee and applying the principle of law enunciated in Mysore Spun Concrete Pipe Pvt. Ltd.’s case [1992] 194 ITR 159 (Kar), the Tribunal has reached a conclusion that the moulds in question do not enhance the capacity of the existing machines and are merely replacements for the moulds damaged during the process of manufacture of glass. It is also evident from the format of the question proposed by the Revenue, that finding of the Tribunal to the effect that the expenditure in question was incurred by the assessee on the ‘replacement’ of the moulds is not under challenge.

In view of the findings recorded by the tribunal, we do not think that any question of law arises for consideration and the appeals are accordingly dismissed without any order as to costs.”

In view of the consistent position taken by various Courts/Tribunals, we are of the considered view that the assessee in the instant set of facts is eligible to claim deduction of expenditure on purchase of DG Spare Parts as revenue expenditure. Accordingly, in our considered view, in the instant set of facts assessee is eligible to claim deduction of DG Spare Parts expenses as revenue expenditure.

In the result, the appeal of the assessee is allowed.