M/S SAHNEY COMMUTATORS PVT LTD ,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-6(1)(1), BANGALORE

The grounds urged by the assessee relate to the following issues: a) Disallowance of repair expenses holding it as capital in nature. b) Disallowance of Rs.12 lakhs u/s 40(a)(ia) of the Act.

The facts relating to the case are stated in brief. The assessee is engaged in the business of manufacture and marketing of commutators, electrical insulation materials and other allied products.

The first issue relates to disallowance of Rs.8,68,960/- out of repair expenses holding the same as capital in nature. The Assessing officer noticed that the assessee has claimed following expenses under the head ‘repairs’. 1 A crankshaft is a mechanical part able to perform a Rs.20,500 conversion between reciprocating motion and rotational motion (purchased from Damodar Power Devices on 9.11.2011) 2 Purchase of Machinery from Sri Tech Engineering on Rs.26,010 29.4.2011 (no description has been provided) 3 250KVA Transformer purchased from Siddheendra Rs.28,000 Associates on 23.5.2011 4 Cage Stripping Machine purchased from online SPM on Rs.27,500 31.5.2011 5 Sheet Mate Side Tray Foon Tray purchased from online Rs.25,000 SPM on 31.5.2011 6 RP Pump purchased from Standard Hydraulik (India) Rs.41,994 Equipment Belgaum Pvt. Ltd. on 9.6.2011 7 Control Panel purchased from Vijayalakshmi Power Rs.30,784 Controls & Automation on 19.7.2011 8 TAOC 5K Air Oil Cooler 2000 KCAL purchased from Rs.21,054 Teccon Services Pvt. Ltd. on 31.10.2011 9 CCR Single Pen with display purchased from G-Tek Rs.44,202 Corporation on 19.12.2011 10 Hydraulic Power Press purchased from RCS Associates on Rs.35,500 31.12.2011 11 Combined Oil coller purchased from Coburg Engg Rs.75,616 Services on 31.01.12 12 PLC Mod No.IC200 Purchased from Fortius Automation Rs.32,000 Services Pvt. Ltd. on 31.1.2012 13 Superheat Make Driver purchased from superheat Rs.44,500 Furnaces on 31.1.2012 14 Control Panel purchased from Vijayalakshmi Power Rs.26,099

The Ld. A.R. submitted that the expenditure claimed by the assessee under the head repairs are related to repair expenses only and they are in the form of spare parts, labour charges, etc. He submitted that none of the above said items could work independently and in any case they are replacement of the existing items of spare parts. Accordingly, he submitted that the tax authorities are not justified in treating the expenses as capital in nature. The Ld. A.R. submitted that the assessee has furnished the details of items purchased and also specified that these parts

The Ld. D.R., on the contrary, supported the order passed by the Ld. CIT(A) and submitted that the nature of expenses incurred by the assessee provide benefit of enduring nature and hence the tax authorities have categorised this expenditure as capital in nature.

In the rejoinder, the Ld. A.R. submitted that the test of benefit of enduring nature alone cannot be the criteria to determine the nature of expenditure. He submitted that the Hon’ble Karnataka High Court in the case of Dr. Ashwat N. Rao (supra) has held that the spare parts purchased for existing machineries cannot be treated as capital expenditure.

We heard the rival contentions on this issue. From the perusal of details furnished by the assessee regarding nature of items purchased, we notice that the assessee has only purchased spare parts and has also specified that none of the items could work independently. In this view of factual aspect, we are of the view that the decision rendered by the Hon’ble Karnataka High Court in the case of Dr. Ashwat N. Rao (supra) would support the contentions of the assessee. As rightly pointed out by Ld. A.R., the test of benefit of enduring nature could not be the sole criteria to categorise an expenditure as capital in nature. When the spare parts of a machinery could not function independently, dehors the machinery, the same would acquire the character of revenue expenditure only. Accordingly, we set aside the order passed by the Ld. CIT(A) and direct the A.O. to delete the disallowance made by

The next issue relates to disallowance of Rs.12 lakhs paid to M/s. Lucas TVS Limited by invoking section 40(a)(ia) of the Act. The A.O. took the view that the above said amount represents commission payment and accordingly, disallowed the same for non- deduction of tax at source there from. The Ld. CIT(A) also confirmed the same along with the issue of disallowance of Rs.7,97,180/- referred above.

The Ld. A.R. invited our attention to page no.29 & 30 of the paper book and submitted that the amount of Rs.12 lakhs actually represents volume discount given by the assessee to M/s. Lucas TVS Limited. The Ld. A.R. submitted that M/s. Lucas TVS Limited is the customer of the assessee and it demanded the discount on the basis of sales performance. Hence the assessee has paid a sum of Rs.12 lakhs as discount. The Ld. A.R. submitted that the tax authorities have not properly appreciated the nature of expenditure. He submitted that discount given by the assessee is not liable for tax deduction at source.

We heard Ld. D.R. on this issue. He submitted that the facts furnished by the assessee were not discussed in the assessment order and accordingly prayed that this issue may be restored to the file of the A.O.

We heard the parties on this issue. According to Ld. A.R., the assessee has furnished the copies of credit note and also an E-Mail copy, which are placed in the paper book, before the AO in order to substantiate the fact that the amount of Rs.12 lakhs represent discount payment. It was submitted that , in the books of accounts also, it has been accounted as discount payment only. Accordingly, it was submitted that the A.O. was not correct on facts in treating the above said amount as commission payment.

We notice that the credit note as well as e-mail correspondence describes the payment as discount only. If the payment is in the nature of discount, then the provisions of section 194H of the Act relating to commission shall not apply. However, as pointed by Ld. D.R., these documents have not been looked into by the Assessing Officer. We also notice that the Ld. CIT(A) has not separately discussed the issue relating to payment of Rs.12 lakhs to M/s. Lucas TVS Limited. Accordingly, we are of the view that this issue needs to be restored to the file of the A.O. If the assessing officer is satisfied that the same represents discount payment, then no disallowance u/s 40(a)(ia) of the Act is called for. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and restore the same to the file of the A.O. for examining it afresh in the light of discussions made (supra).

The next issue relates to disallowance of Rs.7,97,180/- u/s 40(a)(ia) of the Act. The A.O. disallowed the above said payment by observing that the same represents commission payments and assessee has failed to deduct TDS thereon. Before Ld. CIT(A), the assessee submitted that the above said payment was made to M/s. WILEC- A Division of Savcio Holdings (Pvt) Ltd. The assessee

Before us Ld. A.R. reiterated the contentions made before Ld. CIT(A).

We heard the Ld. D.R. and perused the record. Having regard to the fact that the assessee has remitted the payment to M/s. WILEC and the relevant documents have not been examined by the A.O., we are of the view that this issue requires fresh examination at the end of the A.O. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and restore the same to the file of the A.O. for examining it afresh.

In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.