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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR & SHRI WASEEM AHMED, ACCOUNTANT MEMEBR
PER MAHAVIR PRASAD, JM:
These batch of appeals filed by the Revenue and assessee and cross objection filed by the assessee are as follows:
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Sl. ITA/CO No. A.Y. Filed by No. 1 ITA No. 3003/Ahd/2010 2003-04 Revenue 2 ITA No. 1534/Ahd/2009 2006-07 Revenue 3 CO No. 117/Ahd/2009 2006-07 Assessee 4 ITA No. 1109/Ahd/2010 2007-08 Revenue 5 ITA No. 644/Ahd/2010 2007-08 Assessee 6 ITA No. 521/Ahd/2012 2008-09 Revenue 7 ITA No. 495/Ahd/2012 2008-09 Assessee
The issues involved in these appeals are recurring in nature for all the assessment years, since for the sake of brevity ITA No.1534/Ahd/2009 and C.O.No.117/And/2009 relevant to the Asst. Year 2006-07 are taken as lead case for disposal of the above batch of appeals.
The grounds of appeal raised by Revenue read as under:
“1. On the facts and circumstances of the case and in law, the learned C1T(A) erred in deleting the addition on account of Rs.3,83,02,228/- made on account of capital, expenditure irrespective of the facts huge expenditure towards spare parts which extended the life time, relying on the decision in the case of Ballimal Naval Kishor v/s. PIT 224 ITR 414 (SC) and the decision of Hon. Supreme Court in the case of CIT(A) vs. Saravana Spinning Mills Pvt. Ltd. (2007) 293 ITR 201 (SC). 2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing deduction U/S.80IA irrespective of the fact that the assessee had claimed the said deduction in view of subsequent change of its opinion in respect of this claim. The necessary condition of section 801A to submit the report on or before the due date of filing of return of income was not fulfilled by the asessee. Further, in view of section 80IA(5) the assessee was required to set off previous year brought forward losses of the said unit first.
The grounds of appeal raised by assessee in cross objection read as under:
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“1. The learned CIT(A) erred in fact and in law in directing the AO to compute disallowance u/s. 14A as per Rule 8D despite the fact that the Assessee had mentioned that no expenditure is incurred for earning tax free income and the AO has not rejected the said contention of the Assessee. 2. The learned CIT(A) erred in fact and in law in confirming the action of the AO in disallowing contribution made to the various organisations of Rs.5,36,500/- on the alleged ground that no details were furnished for making such contribution. 3. The learned CIT(A) erred in fact and in law in confirming the action of the AO in treating MD's residence as residential building and disallowing depreciation amounting to Rs.3,13,108/-despite the fact that the building was used for office purpose. 4. The learned CIT(A) erred in fact and in law in confirming the action of the AO in charging interest u/s. 234B of the Income Tax Act, 1961. 5. The learned CIT(A) erred in fact and in law in confirming the action of the AO in charging interest u/s. 234C of the Income Tax Act, 1961. 6. The learned CIT(A) erred in fact and in law in confirming the action of the AO in initiating the penalty proceeding u/s. 271(1)(c) of the Income Tax Act 1961.”
The brief facts of the case are that assessee is engaged in generation of power in the form of electricity. During Asst. Year 2006-07, assessee filed its return of income on 30.12.2006 declaring total income of Rs.1,78,43,82,629/-. The return of income was processed under s.143(1) of the Act on 23.04.2007. Subsequently, the case was selected for scrutiny and a detailed assessment order was passed on 28.03.2008 making the following Disallowances: (i) Replacement of parts of machines treated as capital expenditure; (ii) claim of deduction u/s.80IA of the IT Act.
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(iii) Disallowance under s.14A; (iv) claim of deduction under 43B & (v) depreciation on Managing Director’s residence.
Thus, the Ld Assessing Officer determined the total income as Rs.1,83,04,23,203/- and demanded the tax of Rs.2,03,900/- which includes interest under s.234B & 234C.
6.1. First issue regarding Replacement of parts in machineries treated as capital in nature. On scrutiny of the repairs & maintenance expenses debited in the books, the AO observed that some of the expenses were capital in nature. The assessee classified the spares as capital spares in the books and therefore the claim was not allowable as revenue expenditure. The AO issued a show cause notice to the assessee as to why the claim of capital spares on replacement of parts amounting to Rs.708.61 lakhs should not be disallowed as the expenditure was capital in nature. In reply, the assessee submitted some of the parts of the plant and machines require replacement on achieving the fixed rated life. Replacement of such parts in no way increased the power generation capacity of the plant but only recouped the last efficiency to some extent. The assessee is compulsorily required to replace such parts based on the criteria of repairs interval hours prescribed by the original equipment manufacturer. The assessee further submitted that by making replacement there is no increase in the power generation capacity. By consuming the spares worth Rs 4.50 crores, there is no impact of increasing the utility of fixed assets having base of Rs.889.93 crores. It was also submitted that the parts
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replaced are not independent machines by itself. These machines can work only if fitted with the main plant. Therefore, the assessee claimed expenses of revenue in nature. However not satisfied with the above reply, the AO made a net addition of Rs 3,83,02,228/- after allowing depreciation @ 15% on the items considered capital in nature.
6.2. On appeal the Ld CIT(A) considered the issue in hand and held that the Hon’ble Supreme Court and High Courts have held that replacement of a part of a larger machine would not amount to creation of any new asset or incurring of capital expenditure. Where a manufacturing activity is carried on by machines comprising of various parts, and where one or more of the parts is replaced, it would not amount to replacement of the whole. This proposition has been reiterated by the Hon’ble Supreme Court in the case of Saravana Spinning Mills Pvt. Ltd., 293 ITR 201, in the context of a part called ‘auto leveler’ forming part of a carding machine, in the following terms:
"Similarly, in the Carding Department we have Carding Machines with auto levelers. If the auto leveler fails, the carding machine becomes nonfunctional. If an auto leveler is to be repaired then that repair would come within] the connotation of the word "current repairs" because it is a part of the Carding Machine. Even if in a given case, replacement of an auto leveler could come within the connotation of the word "current repairs" if the old part is not available in the market. It is a "current repair" because the Carding Machine remains as an asset without any change even after repair or replacement of the auto leveler. To give an example, a Compressor is an-important part of an Air-condition Machine. Repair of the Compressor will come in the connotation of the word "current repairs" in Section 31(i) of the said Act because the assessee does not replace the Air-condition Machine. At the 'highest, he replaces a part of the Air-condition Machine. So is in the case of the picture tube in a television set, when the picture tube is replaced the television set is not replaced,
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therefore, such repairs alone can come within the connotation of the word "current repairs" in Section 31(i)of the said Act-as it stood at the material time. They are effected to preserve and maintain the asset, viz., air-conditioner or a carding machine." 4.2.1 Hence, judicial opinion is quite clearly articulated to the effect that replacement of one or more part(s) of a capital asset would constitute revenue expenditure and not capital expenditure. If preservation of the capital asset entails replacement of worn-out parts, such expenses would be revenue in nature. 4.2.2 Regarding the expenditure incurred by the appellant, it is apparent from the nature of the parts replaced that these are small parts of large machines, which may require replacement on being worn out. By incurring expenditure on purchase of items, no new assets came into existence which were capable of producing any saleable item. The parts replaced are useful only when attached to the main machine. Accordingly, it is held that expenditure on replacement of such parts is revenue in nature. Even if the items in question are classified as capital assets there is no doubt regarding the fact that such items are spare parts of larger machine. Such machine would require replacement of worn out parts from time to time. Since immediate availability of spare part is necessary for replacing the worn out part without causing undue loss of production, the assessee has carried a stock of such capital spare parts. The entire expenditure incurred on maintaining such inventory has not been claimed, but only the value of spares actually utilized for replacement had been debited to P&L a/c. Since spare parts of the value of Rs 4,50,61,445/- have been actually consumed, the same would be allowable as revenue expenditure. Accordingly, the disallowance of the said amount is directed to be deleted.”
7.1. Issue No.2 relates to additional claim under section 80IA of the Act. The assessee has made additional claim of deduction under s.80IA of the Act in respect of profit of 250MW Power Station. The AO has denied the claim on the ground that assessee neither obtained or filed audit report nor claimed deduction under s.80IA of the Act at the time of filing of original return of income. Further, in view of Section 80IA(5) of the Act, the assessee required set off or previous years brought forward losses of the said unit first. However,
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the assessee has not done it. Thus, taking into totality of merits of the case, the claim made by the assessee was rejected by the AO.
7.2. On appeal the learned CIT(A) held that filing of audit report is procedural in nature and if the same is submitted before the finalization of assessment, the legal requirement would be satisfied as held by the Jurisdictional Gujarat High Court in the case of CIT vs. Gujarat Oil and Allied Industries, [reported in 201 ITR 325]. Regarding the computation of profits in conformity with the provisions of section 80IA(5), it is seen that the controversy in question is covered by the decision of the Chennai Bench of the Tribunal in the case of Mohan Breweries & Distilleries Ltd. v. ACIT, 114 TTJ 532, in this case the Chennai Tribunal has very categorically held that initial assessment year is the year in which the assessee first opts to be governed by the deduction provisions and not the year of manufacture. Following the judgment, the CIT(A) allowed the claim made by the assessee.
8.1. Issue No.3 relates to disallowance under Section 14A of the Act. The assessee had disclosed tax free income of Rs.65,36,070/-, comprising of dividend income and interest on tax free bond. The learned AO called upon the assessee to show cause why the financial and administrative expenses attributable to earning such income should not be disallowed under s.14A of the Act. In reply, the assessee contended that there were no administrative expenses were incurred since the tax free income was essentially passive income requiring no efforts on the part
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of the assessee. The next part namely of financial expenses are concerned the assessee submitted it had not made any investments during the year in the assets yielding the tax free income. The AO had not accepted submissions of the assessee and following the rationale of the assessment orders for the Asst. Years 2004-05 & 2005-06, disallowed 10% namely, Rs.6,53,607/- of the exempt income under S.14A of the Act.
8.2. The learned CIT(A) has held that the issue relating to disallowance under s.14A of the Act had become contentious issue and conflicting judgments were available. Special Bench of the ITAT has examined in detail in the case of ITO vs. Daga Capital Management Pvt. Ltd. 119 TTJ 289, wherein Hon’ble ITAT has held that so far as the onus is concerned, the burden lies on the assessee to prove that the expenditure was incurred in the taxable business operations and not in the exempt income operations. Secondly, it has been held that Parliament in its wisdom had enacted section 14A with retrospective effect from 01.04.1962 in order to clarify the already existing position that only those expenses could be claimed which were relatable to the taxable income. Further, subsection (2) & (3) to Section 14A were inserted by the Finance Act, 2006 w.e.f. 01.04.2007. However, these are only machinery provisions intended to provide a basis for computation of the disallowance to be made under s.14A of the Act. Since, the main section itself was retrospectively inserted in the statute book w.e.f. 01.04.1962, the machinery provisions providing that the disallowance should be computed as per Rule 8D would also be deemed to have been in force w.e.f. 01.04.1962. Following the decision of Special
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Bench (supra), it is held that the provisions of Rule 8D would be applicable on the fact of the instant case. Accordingly the Ld CIT[A] directed the AO to re-compute the disallowance under s.14A of the Act in terms of the provisions contained in Rule 8D.
Issue No. 4 relates to depreciation on building used for Managing Director’s residence. As per the depreciation chart in the tax audit report, an addition of Rs.87,27,750/- on account of GIPCL House under the head “factory building”. It is observed from further details, the capitalization of this building made on 20.06.2008 for assessee’s Managing Director’s residence. It means the building is used as residence of the Managing Director and the assessee claimed depreciation @10% in respect of this building. The assessee claimed MD’s house residence-cum-office building is used for the purpose of residence/office of the Managing Director and he discharges his official duties for official meetings. Therefore, the rate of depreciation of 10% is claimed by the assessee. However, AO allowed depreciation @ 5% as per IT Rules as MD’s house is used mainly for residential purpose.
Issue No.5 relates to disallowance of contribution made to various organizations: The assessee claimed payment of Rs.2,00,000/= to SVADES, Rs.95,65,559/= to DEEP and Rs.15,36,500/= to various NGOs. The AO held there was no business obligation in respect of these expenses and not allowable under the Income Tax Act. On Appeal, the Ld CIT[A] held that the assessee has submitted Certificate of Registration
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of 80G in respect of payments made to SVADES and DEEP to that extent relief was allowed and balance amount was confirmed.
Issue No.6 relates to claim of disallowance under S.43B of the Act. The AO required the assessee to explain as to why the interest payable to Power Finance Corporation of Rs.2,49,82,597/-which was not paid as per the provisions of section 43B of the Act should not be disallowed. The assessee replied that the provision of Section 43B of the Act is not applicable to the above expenditure. The assessee submitted that since the due date of payment of interest to Power Finance Corporation is 21.11.2007 (relating to A.Y.2007-08) whereas the due date of filing of return of income was 31.10.2007, the provisions of Section 43B of the Act fails to cover such situation. Further, the assessee submitted that the above interest is only accrued during the year and not due for the payment in view of the terms of the loan and the same could not fall within the meaning of term "any sum payable" as occurring in Section 43B of the Act and relied upon the Explanation 2 to Section 43B of the Act. The said explanation provides that "any sum payable" means a sum for which the assessee incurred liability in previous year even though such sum might not have been payable within that year under the relevant law. The said explanation is however applicable only to clause (a) of Section 43B of the Act. The assessee therefore claimed that the law itself envisaged difference between the meaning of payable and incurrence and for the purpose of Section 43B(a) of the Act only the same meaning is given. However, for the purpose of
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Section 43B(d) of the Act there is spell difference between the term "payable" and "incurrence". Therefore, the assessee submitted that since the sum was not payable, the provisions of Section 43B are not applicable. However, the AO held that assessee had not paid the said amount before the due date of filing of the return of income under s.139(1) of the Act. The AO disallowed Rs.2,49,82,597/- under s.43B of the Act.
The learned CIT(A) by his detailed order has held that the fact that Power Finance Corporation Ltd (PFC) was a public finance institution is not in dispute. The nature of the payment (interest) is also not in dispute. The only dispute is with regard to the fact that although the interest pertained to the PY relevant to AY 2007-08, the payment thereof fell due only in the PY corresponding to AY 2008-09. The issue here is not an accounting one relating to the period to which the liability relates, but a legal one relating to the deeming provisions contained in sec.43B. The words “irrespective of the PY in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him” clearly bring out the legislative intention. The only material fact to be seen while allowing the said interest as a deduction is the year in which such sum was actually paid. Accordingly, it is held that the AO was correct in not allowing the deduction of interest amounting to Rs.2,49,82,597/-. However, the AO is directed to allow this as a deduction in AY 2008-09. Similarly, the interest payment disallowed in the earlier year, which was actually paid in the PY corresponding to AY 2007-08 should be allowed as deducting in this year.”
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Arguments of both parties and our Decision on each issue are as follows:
Issue No.1 regarding Replacement of parts in machineries treated as capital in nature. The Ld AR Mr. Milan Metha appearing for the assessee submission is of two folds [a] that the Accounting method or accounting treatment whether statutorily prescribed under any law or otherwise cannot override the provisions of the Income Tax Act. Further Classification of items in the books is not relevant for deciding the treatment of such items while computing taxable income as held by the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co Ltd - 82 ITR 363. Thus the book entries are not conclusive for determining the nature of expenditure. The provisions of law prevail over the book entries. Accordingly, consumption of spares being only replacement of spare parts would qualify under the head "current repairs" and treated as Revenue Expenditure. The Ld AR submitted before the Bench a “Technical Write Up” about the machinery and also details of spares consumed at regular intervals for various assessment years as follows:
Technical Write up Stage # 1 Bucket Kit- General Electric, USA- G.E.Fr.6 Gas Turbine G.E.Fr.6 (ms6001B) Gas Turbine is 3 Stage turbine having set of Nozzle, Bucket and Shroud in each stage. Bucket set is assembled on turbine rotor in inverted fur-tree slots provided on rotor. Stage # 2 Bucket Kit consists of 92 buckets which when assembled on the rotor forms a series like wheel. The basic function of Buckets is to convert the heat energy of hot
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flue gases in to mechanical energy and thereby driving the coupled generator, which generates the POWER.
Stage # 3 Due to high working temperature of around 800' C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine. The buckets are designed with special profile of airfoil cross section for efficient energy conversion. It is manufactured using precision investment casing process using GTD-1 11 material, which is General Electric. USA proprietary material.
To overcome very high operating temperature, Buckets are coated with proprietary Thermal Barrier Coating (TBC)-GT FN33 and designed with cooling provision.
Because of the above specialties, buckets are designed and manufactured as per General Electric, USA proprietary material and process under very stringent quality control and tests.
For a power generating company, these spares are in the nature of consumables spares only notwithstanding its high cost. It is also to be submitted that the Original Equipment Manufacturer which in the case of the assessee company is BHEL / General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine. Further it is also to be stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer viz. General Electric. USA. The landed cost to the assessee company also increases as the same is required to be imported and thus attracts custom duty, air freight, insurance etc.
The details of spares consumed at regular intervals for various Asst. years is as under:
Asst Year Item Description Amount (Rs.) 2003-04 Stage - 1 Bucket Kit, Frame - VI 3,96,92,557 PNo. 314B7162G015 2004-05 Stage - 1 Bucket Kit along with set of hardware for Gas Turbine 3,11,38,001 Stage - 1 Bucket Kit - Cutter tooth along with set of hardware for Gas Turbine spare 2,30,61,292 Stage - 2 Nozzle Kit with inter-stage rush seals for FR - 9 Gas Turbine 9,79,20,788 Stage - 2 Bucket Kit, Cutter teeth design for FR - 9 Gas Turbine 6,88,20,943 2005-06 Stage - 1 Bucket Kit along with set of hardware for Gas Turbine 3,35,44,305 Stage - 1 Bucket Kit - Cutter tooth along with set of hardware for Gas Turbine spare 2,30,61,292
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2006-07 Compressor Rotor Blade GT Fr. 6 1,63,26,126 Compressor Stator Blade GT Fr. 6 2,19,65,961 Entr Arm (Excitor) 67,69,358 2007-08 Stage - 1 Nozzle Arrangement for GT FR - 6 1,06,01,677 Stage - 1 Bucket Kit for GT FR – 6 3,25,68,456 2008-09 Stage - 1 Nozzle -Fr-6 Gas Turbine 3,07,10,000 Stage - 2 Bucket for GT FR – 6 2,30,21,000
14.1. The second fold of argument of the Ld. Counsel for the assessee is that the spares consumed during the year under the consideration does not give enduring benefit to the assessee nor it increases the life or capacity of the machines and therefore are in nature of current repairs allowable as revenue expenditure. The assessee being in the business of generation and distribution of power requires specialized machines for generating power. Some of the parts of the machines require replacement from time to time on being used for fixed number of hours. The number of hours after which the machines are to be replaced are prescribed by the original equipment manufacturer (OEM). As soon as the machines complete the prescribed number of firing hours, the same are replaced. Thus the replacement is of parts of machines and not the entire machinery. The classification of spares in the books is not relevant for determining taxability of such items as per Income Tax Act. Further the consumption of spares is 0.50% of the net block of plant and machinery as on 31.03.2005. Every year such expenditure is required to be incurred with regularity considering the nature of business.
14.2. In support of this contention the Ld AR further submitted that this issue is squarely covered by 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-
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0224-THYD wherein after detailed discussion of Supreme Courts and other Judgements held as follows:
“… … 15. We have heard the submissions of the parties and perused the orders of the revenue authorities as well as other materials placed on record. It is quite evident from the facts emanating from record that the expenditure incurred of Rs.20,21,46,278/- which is subject matter of disallowance was towards repair/replacement of nozzles, buckets, shrouds, bearings, pieces and combustion liners which are parts of the three gas turbines utilized for generating power. It is also a fact that the power generation plant consists of two systems i.e., gas turbines and generating unit. As can be noticed from the process of generation of power as discussed by the CIT(A) in his order, there is no intermediate product in the generation of power. It is also a fact on record that the replaced/repaired parts were relating to three gas turbines. A book let submitted by the assessee regarding operation and maintenance of heavy duty gas turbine clearly shows that a well planned maintenance programme is required for getting the maximum equipment availability and optimization of maintenance costs. The said book let further specifically notifies the parts which require careful attention and maintenance are those associated with the combustion process together with those exposed to the hot gases discharged from the combustion system. This include combustion liners, end caps, fuel nozzles assemblies, cross fire tubes, transition pieces, turbine nozzles, turbine stationery shrouds and turbine buckets. The said book let mentions about periodic inspection and repair/refurbish/replacement of the aforesaid parts of the gas turbine. It also mentions that when the parts are not repairable, they are to be replaced. From this, it is very much clear that the entire gas turbines are not replaced but some of its parts are either repaired or replaced as per the maintenance requirement. It is to be noted from the detailed discussion made by the CIT(A) that the assessee has submitted the details of periodic inspection to be made as recommended by the equipment manufacturer. Further it is a fact to be taken note of that the assessee has been claiming such expenditure towards replacement of nozzle, shrouds, buckets etc., from the F.Y. 1998- 99 and all along the department has allowed such expenditure. This fact has not been controverted by the learned D.R. It is also a fact that out of the total block of the assets relating to gas turbines of Rs.517 crores, the repair and maintenance to the extent of Rs.20,21,46,278/-. Therefore, considering the quantum of expenditure, it cannot be said that there is replacement of the entire gas turbine so as to bring into existence a completely new asset resulting in enduring benefit to the assessee. It is a further fact on record that the assessee’s contention that there is no
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enhancement of capacity of the gas turbines or generation of power after replacement/repair of the part of the gas turbines remains uncontroverted.
Therefore, in the aforesaid circumstances, it cannot be said that the expenditure incurred by the assessee in repair/replacement of the parts of the gas turbine, has resulted in bringing into existence of an asset of enduring benefit to the assessee so as to treat it as capital expenditure. 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. In the aforesaid view of the matter, we do not find any reason to interfere with the findings of the CIT(A) in this regard. We therefore, confirm the order of the CIT(A) and direct the Assessing Officer to delete the addition made on account of disallowance of expenditure to the tune of Rs.20,21,46,278/-. 14.3. Per contra the Ld DR appearing for the Revenue could not bring any contrary view on the above preposition but however
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contented that when the assessee itself claimed the above expenses in its books of account as “Capital” now cannot claim the same as “Revenue” and relied upon the order passed by the Assessing Officer and prayed for confirming the addition since it is recurring in nature.
We have given our thoughtful consideration on the materials placed before us namely Technical Write Up, Details of spares consumed at regular intervals for various Asst. years and the case laws relied by the assessee. We need not labour ourself in coming to a conclusion that the Replacement of parts in machineries treated as Not Capital but “Revenue” in nature for the following reasons:
a. For a power generating company, these bucket spares are in the nature of consumables spares only notwithstanding its high cost. b. The buckets are designed with special profile of airfoil cross section for efficient energy conversion. c. Due to high working temperature of around 800' C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine. d. It is also seen from the Original Equipment Manufacturer namely BHEL/General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine.
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e. Further it is also stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased. f. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer out side India and the assessee company procures the same by import and thus attracts custom duty, air freight, insurance etc. g. Further the replacement of parts is Capital or Revenue is No more Res integra based on the observation made by the Hon’ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills and CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 wherein held that when certain parts of an air-conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. h. Thus this issue is already dealt by the co-ordinate Benches of ITAT, Hyderabad in the case of DCIT -Vs- AP Gas Power Corporation Ltd wherein after detailed discussion held that expenditure incurred by the assessee cannot be treated as capital expenditure but Revenue expenditure only. i. Thus, 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.
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j. Therefore we have no hesitation in holding that the replacement of spares in the machineries would be allowable as Revenue expenditure only and addition made by the AO is directed to be deleted. Thus the Department ground is rejected.
Issue No.2 relates to additional claim under section 80IA of the Act. The Ld Counsel for the assessee submitted that there is no dispute that the Assessee has satisfied all the conditions for claiming deduction u/s 80IA of the Act. Only reason for disallowing the claim of Assessee is non-furnishing of audit report along with the return of income. Referring to page nos. 247 to 274 of the paper book the Ld AR stated that the Audit Report was filed before completion of the Assessment. Thus, it is settled law that filing of report during the pendency of assessment proceedings is sufficient compliance for claiming deduction u/s 80IA of the Act and relied on the judgement of the jurisdictional High Court in the case of Gujarat Oil and Allied Industries - 201 ITR 325.
The Ld AR further submitted that regarding the issue of set off of losses as per section 80IA(5) for computation of income of eligible unit, the issue of "Initial Assessment Year" is settled by CBDT Circular No. 1 of 2016 dated 15-02-2016. As per the Circular, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80-IA. As per CBDT Circular, AY 2006-07 would be the Initial Assessment Year since for the SLPP unit, the Assessee has claimed the deduction u/s 80IA for the first time in AY 2006-07. Therefore the requirement of setting off unabsorbed
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depreciation and losses shall arise from AY 2007-08 i.e. immediately succeeding the initial assessment year i.e. AY 2006-07.
17.1. Relevant portion of CBDT Circular No. 1/2016 dated 15.02.2016 is extracted below:
In the above sub-section, which prescribes the manner of determining the quantum of deduction, a reference has been made to the term 'initial assessment year'. It has been represented that some Assessing Officers are interpreting the term 'initial assessment year' as the year in which the eligible business/ manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2) which allows a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years. The matter has been examined by the Board. It is abundantly clear from sub-section (2) that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/ first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 801A. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. The Assessing Officers are, therefore, directed to allow deduction u/s 80IA in accordance with this clarification satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in subsection (5) of that section for which the Standing Counsels/D.R.s be suitably instructed.”
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17.2. In reply, the Ld DR appearing for the Revenue admitted that the above Circular No.1/2016 issued by the CBDT has put to end all the issues following the judgement rendered by the High Court of Madras in the case of Velayuthasamy Spinning Mills.
We have given our thoughtful consideration on the materials placed before us the issue is now settled by the Circular No.1/2016 issued by the CBDT that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. The Circular further clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80IA. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. Thus the Assessing Officers are directed to allow deduction u/s 80IA in accordance with this clarification and Standing Counsels/D.R.s are suitably instructed pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to
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interpreting 'initial assessment year' as mentioned in subsection (5) of section 80IA of the Act.
Following this Circular the SLP filed by the department was also dismissed against High Court's ruling that loss in year earlier to initial assessment year already absorbed against profit of other business cannot be notionally brought forward and set off against profits of eligible business as no such mandate is provided in section 80-IA(5) of the IT Act reported in Assistant Commissioner of Income-tax, Tirupur -Vs- Velayudhaswamy Spinning Mills (P.) Ltd. reported in [2016] 76 taxmann.com 176 (SC). Following the same we hereby reject the Grounds of appeal filed by the Revenue and allow the claim of deduction u/s.80IA in favour of the assessee.
Issue No.3 relates to disallowance under Section 14A of the Act. The Ld Counsel for the assessee submitted that the assessee disclosed tax free income of Rs.65,36,070/-, comprising of dividend income and interest on tax free bond. However there were no administrative expenses were incurred since the tax free income was essentially passive income requiring no efforts on the part of the assessee. The next part namely of financial expenses are concerned the assessee submitted it had not made any investments during the year in the assets yielding the tax free income. The adhoc disallowance of 10% on the exempt income under S.14A of the Act made by the AO is against law and the CIT[A] is also not correct in directing to adopt Rule 8D, since the assessment years are prior to the introduction Rule 8D. In the absence of any
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administrative expenses and no barrowed funds for such investments, the question of disallowance u/s.14A is unwarrented.
Per contra the Ld DR appearing for the Revenue accepted that many rulings by various Court on this issue and however supported the orders of the lower authorities.
We have given our thoughtful consideration on the materials placed before us, the issue is now settled by the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. - Vs- Commissioner of Income Tax, New Delhi reported in [2018] 91 taxmann.com 154 (SC) wherein it clearly held that Rule 8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted w.e.f. March 24, 2008 vide Income Tax (Fifth Amendment) Rules, 2008. Further jurisdictional High Court in the case of Principal Commissioner of Income-tax-4 - Vs- Sintex Industries Ltd. reported [2017] 82 taxmann.com 171 (Gujarat) wherein it is clearly held that the Expenditure incurred in relation to income not includible in total income (Administrative expenses) - Whether where assessee already had its own surplus fund against which minor investment was made, no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A arose and, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses under rule 8D. Further the Hon’ble Court referred the another decision in the case of Pr. CIT v. India
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Gelatine & Chemicals Ltd. [2015] 376 ITR 553/[2016] 66 taxmann.com 356 wherein it is observed that when the assessee had sufficient interest-free funds out of which concerned investments had been made, disallowance under Section 14A is not justified. Thus we clear in our mind the direction given by the Ld CIT[A] to apply Rule 8D is not proper and there being the surplus funds were invested by the assessee and there were no administrative expenses, the disallowance made u/s.14A is unwarranted and liable to be deleted. Thus the Cross Objection filed by the assessee is allowed by deleting the addition made u/s.14A of the Act.
Issue No. 4 relates to depreciation on building used for Managing Director’s residence. Ld AR submitted that as per the depreciation chart in the tax audit report, an addition of Rs.87,27,750/- on account of GIPCL House under the head factory building. The assessee claimed MD’s house is residence-cum-office building is used for the purpose of residence/office of the Managing Director and he discharges his official duties 365 days for official meetings, therefore the rate of depreciation of 10% is claimed by the assessee. Per Contra the Ld DR relied on the orders of the Lower Authorities.
We have given our thoughtful consideration on the materials placed before us, as the building is used for official-cum- residential purpose by the Managing Director, with all office facilities we find that 10% depreciation can be granted on this Building and direct the AO to allow the same. Accordingly the CO filed on this ground is allowed.
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Issue No.5 relates to disallowance of contribution made to various organizations: The assessee claimed payment of Rs.2,00,000/= to SVADES, Rs.95,65,559/= to DEEP and Rs.15,36,500/= to various NGOs the same were disallowed by the AO. But the Ld CIT[A] granted relief in cases were the assessee has submitted Certificate of Registration of 80G in respect of payments made to SVADES and DEEP and balance amount was confirmed.
In our considered view the CIT[A] has granted appropriate relief to the assessee, which does not require any further inference. Accordingly the CO filed on this ground is dismissed.
Issue No.6 relates to claim of disallowance under S.43B of the Act. The learned CIT(A) by his detailed order has held that the AO was correct in not allowing the deduction of interest amounting to Rs.2,49,82,597/-. However, the AO is directed to allow this as a deduction in AY 2008-09. Similarly, the interest payment disallowed in the earlier year, which was actually paid in the PY corresponding to AY 2007-08 should be allowed as deducting in this year.
In our considered view the CIT[A] has granted appropriate relief to the assessee, which does not require any further inference. Accordingly the CO filed on this ground is dismissed.
In the result, the captioned appeals are
Sl. ITA/CO No. A.Y. Filed by Result No. 1 ITA No. 3003/Ahd/2010 2003-04 Revenue Dismissed 2 ITA No. 1534/Ahd/2009 2006-07 Revenue Dismissed
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3 CO No. 117/Ahd/2009 2006-07 Assessee Partly Allowed 4 ITA No. 1109/Ahd/2010 2007-08 Revenue Dismissed 5 ITA No. 644/Ahd/2010 2007-08 Assessee Partly Allowed 6 ITA No. 521/Ahd/2012 2008-09 Revenue Dismissed 7 ITA No. 495/Ahd/2012 2008-09 Assessee Partly Allowed
This Order pronounced in Open Court on 28/02/2022
Sd/- Sd/- (WASEEM AHMED) (MAHAVIR PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 28/02/2022 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।