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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
Date of hearing : 21.01.2019 Date of Pronouncement : 15.02.2019 O R D E R
Per N.V. Vasudevan, Vice President
This appeal by the assessee is against the order dated 26.11.2015 of the CIT(Appeals), Hubli relating to assessment year 2012-13.
Ground Nos.1, 2, 11 & 12 are general in nature and call for no adjudication.
Ground No.9 is also general in nature. Ground No.10 is purely consequential. The AO has to give only the consequential effect.
Ground Nos. 3 to 5 raised by the assessee are with regard to the disallowance of Rs.39,81,198 claimed by the assessee as deduction while computing income from business under the head ‘current repairs’.
The assessee is a company engaged in the business of manufacture of tools and tubes. In the course of assessment proceedings, the AO noticed that the assessee had claimed as deduction a sum of Rs.39,81,198 on account of repairs to machinery. The details of items of machinery to which repairs were carried out by the assessee, the year of purchase of the machinery, consideration paid at the time of purchase and quantum of expenditure incurred as repairs on those machines has been tabulated by the AO in the form of a chart which is as follows:-
Amount WDV as on Remarks Sl. Description Year of Consideration incurred 01.04.2011 No Purchase at the time of during purchase the F.Y. 2011-12 1 Machinery 2008-09 1,51,31,700 92, 92,755 31,75,000 Claimed Spares (Outside as Local Area) Revenue expense 2 Machinery 2008-09 6,91,990 4,62,466 1,00,000 Claimed Spares (Outside as Local Area) Revenue expense 3 Machinery 2007-08 9,86,904 5,60,626 2,10,000 Claimed Spares (Outside as Local Area) Revenue expense 4 Machinery 2007-08 12,42,652 7,05,908 97,300 Claimed Spares - as (Outside Revenue Local Area) expense 5 Machinery 2007-08 35,38,411 20,10,050 45,000 Claimed Spares as (Outside Revenue Local Area) expense 6 Machinery 2000-01 65,46,609 1,123,894 90,800 Claimed Spares as (Outside Revenue Local Area) expense 7 Machinery 2007-08 35,38,411 20,10,050 53,324 Claimed Spares as (Outside Revenue Local Area) expense
8 Machinery 2005-06 7,97,278 3,00,693 2,09,774 Claimed Spares (Outside as Local Area) Revenue expense
The AO on an examination of the above chart was of the view that the expenditure incurred on repairs by the assessee compared with the consideration paid for the purchase of machinery and the Written Down Value (WDV) as on 1.4.2011 was substantial. He was of the view that the assessee had carried out major replacement and by doing so had derived an enduring benefit and the expenditure was capital in nature. The AO accordingly disallowed the claim of assessee for deduction. The AO, however, allowed depreciation on the amount that was disallowed. As a result, there was an addition of Rs.34,21,193 to the total income of the assessee, which was computed by the AO as follows:-
Accordingly only depreciation is permissible on this expenditure. Accordingly, the Total amount of expenditure claimed of Rs. 39,81,198 /- is disallowed and depreciation thereon which comes to Rs. 5,60,005/- is allowed. While calculating the depreciation allowed full depreciation is given for those Plant and Machinery which exceeded 180 days and 50% depreciation is given to the Plant and Machinery which is below 180 days. Accordingly the difference amount of Rs. 34,21,193/- (39,81,198 - Rs.5,60,005) is added to the, in some returned by the assessee.
Before the CIT(Appeals), the assessee brought to his notice that list of machineries in respect of which repairs were carried out and also copy of the bills in respect of current repairs. The assessee submitted that the expenditure in question was incurred only for the purpose of keeping the machinery going and there was no major replacement. The assessee submitted that it was for the purpose of preserving an existing asset and no new asset came into existence nor did the assessee derive any advantage of enduring nature. The CIT(A), however, did not agree with the submissions of the assessee. He held that it was only after the replacement of parts of the machinery that the machinery started working and therefore by incurring the expenditure, enduring benefit resulted to the assessee and therefore expenditure was capital expenditure. He took the example of machine SMG Feintool Germany. This was a machinery which was manufactured in the year 2008. This was purchased by the assessee as a second-hand machine in the year 2008-09. The WDV of this machinery as on 1.4.2011 was Rs.92,92,755 on which expenditure on repairs was Rs.31,75,000. A copy of the bill evidencing purchase of parts for this machine is at page 142 of PB and it gives the following description:-
“Hydraulic system with Electrical Control Panel for 630T Fine Blanking Press.” 8. The CITA gave the following findings:-
“This machine is not a single unit but is made up of several parts. Thus, in the first year the assessee claimed depreciation of Rs.1,51,31,700/- which consisted of several parts, in its first year of operation. Only then the assessee started deriving enduring benefit. During the accounting period 2011-2012 this machinery could not operate. The assessee found that one of the parts had to be replaced without which the machinery could not function. It is only after replacement that the machinery started functioning and an advantage was derived from this machine. This machine being congregation of several parts started functioning and enduring benefit was derived only after the replacement of particular part. Thus the expenditure incurred is no doubt a capital expenditure because the replacement of particular part maintained the status quo which is equivalent to a new part of the entire machinery. Thus, it is to be implied that the machinery parts, when replaced, started giving the desired benefit by making them in a working condition. Therefore the expenditure spent on such replacement is not revenue expenditure although there is no new asset generated on account of replacement of particular part.”
In respect of other items of expenditure, there has been no discussion. Even in respect of the parts purchased for the machine SMG Feintool Germany, the description of the item purchased, cost of which was claimed as current repairs has not been spelt out by the CIT(Appeals) in the impugned order. Aggrieved by the order of CIT(A), the assessee has preferred the present appeal before the Tribunal.
We have heard the rival submissions. First let us set out the legal position with regard to when an expenditure can be regarded as current repairs. The Hon’ble Madras High Court in the case of Super Spinning Mills v. ACIT, 357 ITR 720, after considering the several Supreme Court decisions culled out the principles applicable in such a situation as follows:-
“The question as to whether the expenditure incurred on replacement of machinery is revenue or capital expenditure, particularly in the nature of replacements of parts, thus rests on the nature of expenditure incurred, vis-a-vis the benefit that the assessee derives. The ratio deductible from the decisions referred to above are: (i) To decide the applicability of Section 31(i), the test is not whether the expenditure is revenue or capital in nature, but whether the expenditure is “current repairs”. The basic test is to find out whether expenditure is incurred to “preserve and maintain” an already existing asset and the expenditure must not be to bring a new asset into existence or to obtain a new advantage vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.) (ii) Under Section 31(i), the deduction admissible is only for current repairs. Therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question whether such expenditure comes within the etymological meaning of the expression “current repairs”. In other words, even if the expenditure is revenue in nature, it may not fall in the connotation of “current repairs” [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.) (iii) A new asset or new/different advantage cannot amount to `current repairs’. – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited) (iv) Repair implies existence of a part of the machine which has malfunctioned, thereby requiring repair to that machinery, plant etc. Replacement cannot be a current repair, for, “replacement” and “current repair” do not go hand in hand. If one is to hold otherwise, it would only make Section 31(i) wholly redundant and absurd. Thus, replacement expenditure cannot be said to be `current repairs’ vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.) and 2009-TIOL- 86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited) (v) Expenditure is deductible under section 37 only if it (a) is not deductible under sections 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholly and exclusively for the purpose of the business. – 2009- TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited); (vi) Expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure vide Lakshmiji Sugar Mills (P) Co. v. CIT (AIR 1972 SC 159) referred in 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited). (vii) Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case. – [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)”
As can be seen from the aforesaid decision, the questions; whether an expenditure is revenue or capital, what would constitute the repairs as ‘current repairs’ and whether replacement of parts of a machine can be said to be current repairs are questions which will depend on facts and circumstances of each case. We have already set out the nature and description of the item that was used on SMG Feintool Germany. Similarly for other items of machinery, the description is contained in the PB at pages No. 143 to 150 of assessee’s PB. Without a reference to the nature of expenses, it is not possible to decide the question whether the expenditure in question is current repairs or capital expenditure or revenue expenditure. In our view, it will be just and proper to set aside the order of revenue authorities on this issue and remand the question for fresh consideration by the AO in the light of principles laid down by the Hon’ble Madras High Court in the decision cited supra. The AO will afford opportunity of being heard to the assessee, before deciding the issue. The relevant grounds of appeal are decided accordingly.
12. The next issue that arises for consideration is as to, whether the revenue authorities were justified in disallowing a sum of Rs.71,76,751 u/s. 40(a)(ia) of the Act. The grievance of the assessee in this regard is projected in grounds No.6 to 8. The assessee made a payment of Rs.71,76,751 to various transporters, the details of which are as follows:-
Sl.No Expenditure Amount Remarks 1 Transport Inward 16,89,141/- Included in the purchase cost of the material Transport Outward 14,84,608/- 2 For Sales 3 Transport 24,32,489/- Sales by Air Transport Outward (Exports-Air) Outward (Export- 4 Transport Sales by Sea Transport Sea) 15,70,513/- 71,76,751/-
Admittedly, the assessee did not deduct tax at source on the payments made to the transporters. The AO was of the view that under the provisions of section 194C of the Act, payment in question was a payment for carrying out of works for which assessee ought to have deducted tax at source on such payment. Since the assessee failed to deduct tax at source, the AO was of the view that the amount claimed as deduction while computing income on account of transport charges should be disallowed and added to total income of assessee u/s. 40(a)(ia) of the Act.
The assessee submitted that it had obtained declaration from all the transporters who were engaged for the purpose of transportation to the effect that the sum in question was paid to them in the course of their business of plying goods carriages along with their PAN. According to the provisions of section 194C(6) of the Act, if such a declaration is obtained, a person making payment need not deduct tax at source. After the amendment by Finance Act, 2015 w.e.f. 1.6.2015, the declaration to be given by the contractor should be that he owns 10 or less goods carriages during the relevant previous year. Such declaration is not required for the AY 2012-13 which is the assessment year in this appeal. In this appeal, a mere declaration by the transporter that he is in the business of plying goods carriages is enough. It is undisputed that that such declaration was obtained by the assessee. U/s. 194C(7) of the Act, the assessee who is a person making payment has to furnish to the prescribed income tax authority, a declaration obtained from the contractor. It is also admitted that the assessee did not furnish to the prescribed authority the declaration obtained from the contractor. The assessee, nevertheless, pleaded before the AO that no disallowance u/s. 40(a)(ia) can be made because of the provisions of section 194C(6) of the Act. The AO did not agree with the claim of assessee for the following reasons:-
“From the above it is evident that the assessee has incurred freight expenses to big transport companies. Clearly section 194C(6) & 194C(7) are not meant for these transport companies but these sections are applicable to small transport operators who owns very few trucks. Further the repeated payment to the, same transport company clearly indicates that the assessee was in contractual obligation with these transport companies and he is liable to deduct the TDS U/s. 194C of I.T. Act at the prescribed rates. These payments were to be paid after deducting tax at the source. However, the assessee has not made such deduction. Hence as per section 40a(ia). The payment of Rs. 71,76,751/- disallowed and added to the income returned by the assessee.”
On appeal by the assessee, the CIT(Appeals) confirmed the order of AO, but did not deal with the arguments of the assessee with regard to provisions of section 194C(6) of the Act.
Aggrieved by the order of CIT(Appeals), the assessee has raised grounds No.6 to 8 before the Tribunal.
We have heard the rival submissions. We find that identical issue had come up for consideration before the Calcutta Bench of the Tribunal in the case of Soma Rani Ghosh v. DCIT, 74 taxmann.com 90 (Kolkata Trib.) and the Tribunal took the following view:-
“Assessee made payments to transporters towards carriage inward and carriage outward and claimed deduction of same - Assessing Officer having noticed that assessee had not deducted tax at source on such payments disallowed same under section 40(a)(ia) - Assessee contended before Commissioner (Appeals) that because of provision of section 194C(6), she was not liable to effect TDS on payments to transporters who had submitted their PAN and those PAN and addresses of transporters were filed before Assessing Officer - Commissioner (Appeals) held that benefit under section 194C(6) was available only when assessee fulfilled conditions laid down in section 194C(7) and since assessee had not fulfilled conditions, Assessing Officer was justified in disallowing said payments - Whether from reading of provisions of section 194C it follows that if assessee complies with provisions of section 194C(6), no disallowance under section 40(a)(ia) is permissible, even though there is violation of provisions of section 194C(7) - Held, yes - Whether since assessee had submitted PAN and addresses of transporters before Assessing Officer and thus complied with provisions of section 194C(6), no disallowance under section 40(a)(ia) was permissible - Held, yes [Paras 34 and 35][In favour of assessee]”
In the light of the aforesaid decision of the Tribunal, we are of the view that the addition made u/s. 40(a)(ia) of the Act cannot be sustained in the facts and circumstances of the case and the same is directed to be deleted.
In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 15th day of February, 2019.