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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: S/SHRI PRAMOD M. JAGTAP & T.R. SENTHIL KUMAR
O R D E R
PER T.R. SENTHIL KUMAR, JUDICIAL MEMBER:
This appeal is filed by the assessee against order dated 25.07.2016 passed by Ld.Commissioner of Income-tax (Appeals)-2, Vadodara [for short “Ld.CIT(A)] in Appeal No.CAB/2/039/15-16 relating to the assessment year 2012-13.
The assessee has raised mainly two issues, viz. disallowance of maintenance expenditure to plant & machinery, and disallowance of foreign travelling expenses. These issues reflected in the grounds of appeal are as follows:
“1) The Learned CIT (A) has erred both in law and on facts in upholding the action of the Ld. AO, though partly.
2) The Ld CIT(A) further erred both in law and on facts in holding that the parts for Machinery/Equipments acquired by the assessee have of Capital Expenditure.
3) The Ld CIT(A) further erred both in law and on facts by transgressing from the Ld. AO's findings which clearly speak elaborately in his impugned order that the treatment of Repairs Expenses by him as Capital Expenses has been based only on the largeness of repair expenses in amount and not on any other ground.
4) The Ld CIT(A) further erred both in law and on facts by not allowing the foreign travelling expenses by taking an untenable stand despite proofs and evidences for such travels to the CPHI Fairs were presented before him.
5) The Ld CIT(A) ought to have allowed the appeal in toto
6) The order of Ld CIT(A) may be set aside and the expenses on Repairs of Machinery be allowed to be held as revenue in nature as have been debited to the Profit and Loss Account.
Brief facts of the case are that the assessee company is engaged in the business of manufacturing of organic and inorganic chemicals. Assessee has efiled its return of income on 10.9.2012 declaring total income at Rs.NIL, and thereafter assessee filed a revised return on 18.9.2012 declaring total income at same figure i.e. Rs.NIL. The case of the assessee was selected for scrutiny assessment by issuance of notice under section 143(2) of the Income Tax Act, 1961 ("the Act" for short) which was duly served upon the assessee. During the assessment proceedings, the ld.AO noticed that assessee has debited an amount of Rs.75,53,855/- under the head “Repairs and Maintenance” and this account was further divided into sub-heads viz. “Repairs & Maintenance to Plant & Machinery” and “Repairs to Building” etc. The ld.AO doubted entries in respect of purchase of some items, which were in the nature of plant & machinery. Accordingly, the ld.AO asked the assessee to produce bills/vouchers of the expenses shown as repairs & maintenance of plant & machinery. After examination of bills, vouchers, etc. the ld.AO construed that the expenditure incurred on purchase of the items were not so small to categorize the same as repairing items. In the impugned assessment order, the ld.AO noticed some of the expenditure aggregating to Rs.9,11,434/- incurred for purchase of items, were in the nature of capital, and details of which are given in page no.9 of the assessment order in tabular form, which reads as under: ".......,.. 1. On perusal of Bills/invoice in respect of items shown in the ledger of Repair & Maintenance to Machinery, it is noticed that some of items are covered under capital expenditure which are as follows: Particulars/ purchased from Voucher no./ Date Sr. Amount (in No. Rs.) 1. 1,48,410/- Filter Plate Model BPZH-18" ( Bombay 06/208/63 Pharma Equipment put ltd) 30.06.2011 2. 1,19,124/- MSGL Impeller Agitator ( Swiss Glasscoat 07/153/314 Equipments Ltd) 30.07.2011 3. 1,48,410/- Model BPZH- 18" Dia Filter Plate . 08/140/56 (Bombay Pharma Equipment pvt ltd) 30.08.2011 4. Condenser ( Shree Ganesh Engg.) 1,08,015/- 08/103/31 31.08.2011 5. 2,72,475/- PP Plate & Fabricated Structure ( NSP 08/255/11 Filters) 31.08.2011 6. 1,1 5,000/- MSGL Impeller Agitator ( Swiss Glasscoat 011/96/763 Equipments Ltd) 22.11.2011 Total 9,11,434/-
After examining of the items mentioned in the list, the ld.AO was of the view that since the value of such items ranges between 35% to 50% of the cost of main asset, i.e. plant & machinery, the same could not be treated as expenditure incurred for repairs and could not be said to be consumable items for claiming revenue expenditure.
Since according to the AO, the items purchased were of plant & machinery, and therefore, the ld.AO issued a show cause as to why the expenditure incurred for purchase of these items, should not be treated as capital nature. In reply, assessee contended that these were consumable items and should be allowable as revenue expenditure. However, ld.AO has not satisfied with the reply of the assessee, he accordingly made an addition of Rs.13,06,564/-i.e. Rs.3,95,130/- plus Rs.9,11,434/-) and granted benefit of depreciation at 15% of the addition. In other words, the ld.AO made a net addition of Rs.11,10,580/- to the total income of the assessee.
Aggrieved with the order of the AO, the assessee went in appeal before the ld.CIT(A). The contentions of the assessee before the ld.CIT(A) were that the sole criteria for treating the impugned expenditure as that of capital in nature by the AO was that of their cost, and the AO totally disregarded business exigencies and nature of business carried out by the assessee. It was submitted that since the assessee is a chemical company, plant & machineries are prone to corrosion. All the items purchased are to be fitted to the main plant & machinery to make the existing machines to work as usual, flawless and efficiently, and therefore, they are not separate and independent machineries. So far as bill related to purchase of agitator was concerned, the same was required to be fitted in the reactor and not as standalone equipment in itself. The agitator is fitted inside the reactor for mixing the products by rotating in the reactor. It was further pleaded that the equipment used by the assessee-company being fragile was more prone to damage and corrosion, and therefore required repairing and replacement as and when necessary, which were of recurring nature. After considering the submissions and nature of items purchased by the assessee, and after verification of the bills produced by the assessee, the ld.CIT(A) has partly confirmed addition. While holding so, he observed that items like agitators, condenser, PP Plates and fabrication of structure with a manual closing, and injection pallets used in factory stores for stacking purposes are capital assets, and therefore, their costs needed to be capitalized. However, cost of filter plates used in standard filter press was in the nature of repairs to the plant & machinery, and therefore, they are revenue in nature. Thus, the ld.CIT(A) has confirmed an addition to the extent of Rs.8,95,880/- as capital expenditure and deleted balance addition of Rs.4,10,684/- being revenue in nature. Still aggrieved, the assessee is further appeal before the Tribunal for part confirmation of addition.
Before us, the ld.counsel for the assessee while reiterating the submissions made before the lower authorities, also filed a detailed note on the items like i) Agitator, (ii) Condensor, (iii) PP Plates as well as (iv) pallets at page no.17 to 24 of the paper book. He also filed a plan (diagram) of main plant, which is available at page no.3, 4 and 8 of the paper book. It is submitted that agitator is only one of the parts of main plant so also, condenser. These both condenser and agitator cannot be function independently, but are fitted into the reactor so as to function as chemical industries. The assessee has explained the function at page no.17 to 21 of the paper book. He also filed a copy of literature found online showing that agitator as component of glass line reactor. Thus, the ld.AR claimed that the above parts are not independent parts, and therefore, the same cannot be treated as replacement of the above and cannot come under the capital expenditure, and the same be treated as revenue expenditure. The assessee also relied upon the following judgments:
i) CIT Vs. Satyadev Chemical, 226 ITR 95 (Guj) ii) CIT Vs. Renu Sagar Power Co.Ltd., 298 ITR 94 (All) iii) CIT Vs. Cooperative Sugar Ltd.,
6 iv) Chodavaram Co-operative Sugar Ltd., Vs. DCIT, 82 ITD 47 (Visakha).
In reply, the ld.DR supported orders of the Revenue authorities and prayed to confirm the same.
We have given our thoughtful consideration of the issues. We have also perused papers and supporting material filed by the assessee before us in paper book. We find that the ld.CIT(A) while partly allowing the claim of the assessee, has observed that items like agitators, condenser, PP Plates and fabrication of structure with a manual closing, and injection pallets used in factory stores for stacking purposes are capital assets, and therefore, their costs needed to be capitalized. However, cost of filter plates used in standard filter press was in the nature of repairs to the plant & machinery, and therefore, they are revenue in nature. This finding of the ld.CIT(A) was not based on some scientific or technical examination, rather based on some general consideration. On perusal of the material placed by the assessee before us, it indicates these are parts which require occasional replacement for smooth and efficient operation of main machineries. By incurring expenditure for purchase of such items, no new separate and distinct asset came into existence, and that there is no replacement of existing machinery as a whole so to consider the same to capital expenditure. It is useful to refer the decision of the co-ordinate Benches of ITAT, Hyderabad in the case of DCIT -Vs- AP Gas Power Corporation Ltd reported in 2014 [ID2]-GJX-0224-THYD wherein after detailed discussion of Supreme Court Judgements held as follows:
"... ... So far as the decision in the case of CIT V/s. Saravana Spinning Mills (supra) is concerned, the CIT(A) has clearly brought out the distinguishing features. It is to be noted that in the case of CIT V/s. Saravana Spinning Mills, there is a clear observation of the Hon’ble Supreme Court that the Textile Plant consists of different departments having its own independent plants and machinery which produce different intermediate products. However, in the case of the assessee there is no such intermediate products which requires independent and separate plants and machinery. On the contrary, what the assessee has replaced is certain parts of the gas turbines and the gas turbines as a whole have not been replaced. Therefore, in this context the observation made by the Hon’ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills rather favours the assessee. Because the Hon’ble Supreme court in the said decision has held that when certain parts of a air conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Therefore, applying the same logic to the facts of the assessee’s case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power. The other decision of the Hon’ble Supreme Court relied upon by the learned D.R. in the case of CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 also following the decision in the case of CIT V/s. Saravana Spinning Mills (supra), has laid down the same proposition of law. On the other hand, the decisions relied upon by the assessee as noted in the order of the CIT(A) clearly supports the view that the expenditure incurred by the assessee cannot be treated as capital expenditure."
The revenue was simply carried away by the size amount rather than nature and import of the items purchased. There is no basis with the revenue authorities, which indicates that the impugned expenditure was in the nature of capital. Therefore, keeping in view overall nature of items purchased by the assessee, we are of the considered view that whatever expenditure incurred for purchasing of these items were the business expenditure, and wholly and exclusively incurred for running day-to-day operational necessity in order to keep the entire plant & machinery functional and efficient. We allow claim of the assessee to treat the impugned expenditure as revenue expenditure.
On the second issue, viz. foreign travelling expenditure incurred by the Directors of the company to China, Germany and other countries are concerned, these visits were not doubted by the lower authorities. Visit to these countries were undertaken by the Directors for attending convention on pharmaceutical ingredient (CPHI) which was in line with the assessee’s business. The assessee has placed on record a detailed note on foreign travelling vide page no.25 to 29 of the paper book. It was clarified by the assessee that the assessee purchased material from China and therefore it required to visit this country. Visit to the Germany was for exploring new business opportunity. Simply because trip has not materialized or yielded business result to the assessee-company would not be ground for disallowing foreign travelling expenditure. In reply, the ld.DR could not controvert the above submissions.
We have considered rival submissions and gone through the material on record. The factum visit to China and Germany, and the nature of the business engaged by the assessee have not been disputed by the Revenue. Assessee has submitted a list of parties to whom the business has business relation in China and Germany, Greece, Span, Belgium Italy, Japan etc. were furnished. Details of tickets, visa, bills etc. were also furnished to support its case about the genuineness and necessity of undertaking such foreign trips. were also furnished. The Revenue authorities have not brought anything on record to show that either details provided by the assessee were bogus or the claim of the assessee that it has imported material from other countries for its production line was found to be incorrect. Therefore, having regard to entire factual scenario and the nature of business assessee’s business i.e. being pharmaceutical company, we are of the view that impugned foreign travel expenses incurred by the assessee are genuine requirement and for business purpose, and therefore, the impugned addition is directed to be deleted. We allow this ground.
In the result, the appeal of the assessee is allowed. Order pronounced in the Court on 16th March, 2022 at Ahmedabad.