NUZIVEEDU SWATHI COASTAL CONSORTIUM,HYDERABAD vs. ACIT., CIRCLE-6(1), HYDERABAD

The case was selected for scrutiny and the assessment has been initially completed u/s. 143(3) of the Act on 24.03.2016 where the Assessing Officer has treated expenditure on construction of railway track, conveyor belt system and ventilation ducting as capital in nature and disallowed as revenue expenditure claimed by the assessee for Rs.7,51,71,282/- and has allowed 15% depreciation on the said expenditure as applicable to plant and machinery. Being aggrieved by the assessment order, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) in its order dated 20.02.2019 confirmed the action of the Assessing Officer in the case of capitalising the expenditure incurred on construction of railway track and conveyor belt system and allowed the depreciation thereon. The assessee challenged the order of the Ld. CIT(A) by filing appeal before the Tribunal and the ITAT, Hyderabad ‘A’ Bench vide its combined order dated 26.10.2021 in appeals in to 611 and 1511/Hyd/2019 for the A.Ys 2013-14 to 2018-19 restored the issue to Assessing Officer relating to the issue of capitalising expenditure incurred on construction of railway track and conveyor belt system to the Assessing Officer for fresh verification.

During the second round of proceedings, the Assessing Officer called upon the assessee to file relevant evidences and justify the expenditure incurred for rollers and structures, scrap rails and track, conveyor belt system and ventilation ducting as revenue in nature and also file its objections if any for treatment of said expenditure as capital in nature. In response the assessee submitted that the expenditure incurred for rail track, conveyor belt and ventilation ducting are not capital in nature which gives enduring benefit to the assessee, but used as a consumable in the process of earning income and therefore the same cannot be treated as capital expenditure.

The Assessing Officer after considering the relevant submissions and also taking note of the nature of work executed by the assessee (deployment of TBM), rejected the explanation of the assessee and treated expenditure incurred for the above purpose as capital in nature. The Assessing Officer discussed the issue at length in light of the nature of work carried out by the assessee, the term of contract work, life span of the works or structures created by the assessee and observed that the rail track installed by the assessee in the work site will last for more than one year which gives enduring benefit to the assessee. Further, the conveyor belt fixed by the assessee is also gives enduring benefit for more than one year. Similarly, the ventilation ducting also is in the nature of asset created for the purpose of business which gives enduring benefit for more than one year. Therefore, he held that the expenditure incurred by the assessee for rail track system, conveyor belt and ventilation ducting cannot be treated as revenue in nature. Thus, he disallowed the expenditure claimed by the assessee and allowed 15% depreciation on the said expenditure and the balance amount of Rs.6,55,60,180/- has been added to the total income of the assessee. The relevant findings of the Assessing Officer are as under :

Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee has reiterated the submissions made before the Assessing Officer and claimed that the Assessing Officer was erred in treating expenditure incurred for railway track, conveyor belt and ventilation ducting as capital in nature and allowed depreciation, even though the above expenditure incurred by the assessee is revenue in nature, site specific, temporary and never last long exceeding the project period. Further, the assessee submitted before the Ld. CIT(A) that railway siding installed by the assessee in the work site is site specific and not a general railway track so as to treat it as capital asset. Similarly, the conveyor belt and ventilation duct have been installed in the work site solely for the purpose of transporting excavated material (muck), removal of debris and also to provide oxygen in the tunnel. Before the Ld. CIT(A), the assessee submitted that these are in the nature of consumables used in the execution of contract and the same are billed to the contractors. Further, the assessee submitted before the Ld. CIT(A) that once the tunnel work is completed, the railway siding, conveyor belt and ventilation ducting becomes obsolete and unusable and therefore, the same cannot be treated as capital in nature.

The Ld. CIT(A) after considering the submissions of the assessee and also taking note of reasons given by the Assessing Officer to treat the expenditure incurred for railway track, conveyor belt and ventilation duck as capital in nature rejected the explanation of the assessee and upheld the reasons given by the Assessing Officer on the ground that, the expenditure incurred by the assessee for the above purpose is capital in nature which gives enduring benefit to the assessee going by the facts on record and the nature of assets created by the assessee. Further, the Ld. CIT(A) held that the assessee itself has treated TBM as machinery and claimed depreciation @ 15% and once the assessee has created TBM as plant and machinery, then the aforesaid fixtures created for the purpose of deployment of TBM machine can only be treated as plant and machinery or tools and required to fix the above machine and thus, the same is in the nature of capital asset which gives enduring benefit to the assessee. Therefore, he held that the Assessing Officer has rightly treated the expenditure incurred for rollers and structures, railway track, conveyor belt and ventilation ducting as capital in nature and allowed depreciation as per law. Thus, rejected the explanation of the assessee and upheld the additions made by the Assessing Officer. The relevant findings of the Ld. CIT(A) are as under :

Aggrieved by the order of Ld. CIT(A), the assessee is now in appeal before the Tribunal.

The learned counsel for the assessee, Sri A.V. Raghuram, Advocate submitted that the Ld. CIT(A) erred in sustaining the additions made by the Assessing Officer towards disallowance of revenue expenditure incurred on roller and structures, scrap rails, railway track, conveyor belt and ventilation ducting as capital in nature without appreciating the fact that the nature of expenditure being revenue in nature, site specific, temporary and non-enduring benefit beyond the life of the specific contract. The learned counsel for the assessee further submitted that these are short term capital goods and life span is very less. The Ld. AR further submitted that the assessee has installed used railway track which is suitable to the site conditions mainly for the purpose of movement of workers and removal of debris from the work site. The conveyor belt is fixed to continuously remove excavated material (muck) from the TBM face to the surface. He further submitted that, because of its usage in the work site, it gets damaged very frequently and the assessee needs to replace the belt. The assessee has fixed ventilation ducting to provide continuous fresh air and oxygen to workers operating within the tunnel. The asset installed by the assessee in the work site is site specific and temporary in nature and non-enduring and therefore, in the absence of any asset which came into existence and gives enduring benefit, treatment of said expenditure as capital in nature is contrary to law. The learned counsel for the assessee further referring to the decisions of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT (1980) 124 ITR 01 (SC) submitted that a specific asset is a capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transactions and the relevant factors. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. Therefore in order to decide whether a particular expenditure is capital or revenue, the nature of work executed by the parties and the asset created in the business should be considered. The Ld. AR submitted that if we go by the facts of the present case, the assessee has created temporary structures in the course of its business and the same are in the nature of consumables and not a fixed asset and not created for the purpose of business, therefore, the Assessing Officer was erred in treating the expenditure incurred for the above purpose as capital in nature. The Ld. CIT(A) without appreciating the relevant facts, simply upheld the reasons given by the Assessing Officer. Therefore, he prayed that the additions made by the Assessing Officer should be deleted. In this regard, he relied upon the decisions of Hon'ble Supreme Court in the case of CIT Vs. Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC). The learned counsel also relied upon the decision of Hon'ble Supreme Court in the case of CIT Vs. Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC).

The learned CIT-DR Smt. U Mini Chandran, on the other hand, supporting the orders of Ld. CIT(A) submitted that, whether the expenditure incurred by the assessee is capital in nature or revenue in nature must be decided based on the nature of asset created by the assessee, but not based on the nature of business carried out by the assessee. She submitted that the assessee has installed railway track which is not a scrap rails or a temporary one. The railway track gives enduring benefit to the assessee which lasts for more than 7 to 8 years as claimed by the assessee itself. She further submitted that the assessee has also installed conveyor belt and ventilation ducking which are permanent in nature and gives enduring benefit for more than one year. Further she submitted that, as per the GST Act, section 17 defines conveyor belt as a plant and machinery. The Ld. DR further submitted that, since the assessee was carried out the tunnel work for more than 15 years and installed the railway track, conveyor belt and ventilation ducking which gives enduring benefit to the assessee, the Assessing Officer has rightly treated the expenditure incurred for the above purpose as capital in nature. She submitted that the Ld. CIT(A) after considering the relevant facts, has rightly upheld the additions made by the Assessing Officer. Therefore, she submitted that the order of the Ld. CIT(A) should be upheld and appeal of the assessee should be dismissed.

We have heard both the parties, perused the material available on record and had gone through the orders of authorities below. We have also carefully considered the relevant case laws relied upon by the learned counsel for the assessee in support of his arguments. There is no dispute with regard to fact that the assessee is engaged in the business of execution of the sub-contract work of executing an EPC Turnkey Contract i.e. ‘Construction of Tunnel including Construction of Head Regulator and Excavation of Approach Channel of Veligonda Project in Prakasam District, Andhra Pradesh. The contract work mainly involves boring of tunnel, erection of segments, laying of conveyer belt, air ventilation ducting & laying of track inside the tunnel, etc. The railway track system is used for transporting material and for sometime removal of debris. The assessee has purchased used narrow gauge railway track from railways and laid railway track temporarily along with the tunnel invert for movement of material and removal of debris. The assessee has put conveyor belt to remove excavated material (muck) from the TBM face to the surface. Similarly, the ventilation ducting is provided for continuous supply of fresh air and oxygen to workers inside the tunnel. The assessee has furnished relevant details of the works carried out at the site which are available in the paper book filed by the assessee. Upon perusal of relevant details and also the nature of work executed by the assessee, in our considered view, the expenditure incurred for the purpose of rollers and structures, railway track, conveyor belt and ventilation ducking cannot be treated as capital expenditure which gives enduring benefit to the assessee. Further, the expenditure incurred by the assessee are fundamentally temporary, site specific and non-enduring beyond the life of the specific contract. Therefore, in our considered view, the true test for determining whether the expenditure is revenue or capital, hinges on the nature of an advantage obtained. If the expenditure brings into existence an asset or an advantage of an enduring nature for core business structure of the assessee, it is capital in nature. Conversely, if it is incurred for a smooth and efficient running of the existing business structure or to facilitate the current trade operations, then it is revenue in nature. In the instant case, the railway tracks and conveyor belts were not acquired to create a permanent asset for the business as a whole, nor did they expand the core capacity i.e. the ability to execute more contracts for the assessee. They were merely tools of the trade, acquired pro-tempore and used exclusively and necessarily for the execution of a single, specific contract of tunnelling work. It is not the case of the Assessing Officer that railway track installed by the assessee is a permanent structure which can be used in general like a railway track installed by the Indian Railways. The Assessing Officer is only on the point that the railway track installed by the assessee are not temporary, mainly because of the life of the railway track. In our considered view, the railway track installed by the assessee has to be considered in light of the nature of contract executed by the assessee and if we consider the nature of contract, the assessee is executing a civil contract work for tunnelling in a site provided by the government and installed temporary railway track for movement of material and removal of debris. Once the tunnelling work is completed, the assessee has to either remove the railway track and leave it there as it is, because even if the assessee removes the railway track, it cannot be used for any other site except selling it as a scrap. Therefore, in our considered view, the railway track installed by the assessee in the work site cannot be treated as an asset which gives enduring benefit to the assessee.

Coming back to conveyor belt and ventilation ducting. The conveyor structure with belt is fixed to continuously remove excavated material (muck) from the TBM face to the surface. A conveyor belt system supports from inside the TBM back up area to the tunnel or muck pit. The ventilation ducting is provided for continuous supply of fresh air and oxygen to workers and machinery operating workers within the tunnel and also to remove dust and any harzardous substances relates to pre- excavation. Because of its repeated use, the conveyor belt system damages very frequently as claimed by the assessee by furnishing relevant pictures which are available in the paper book where the assessee has left as it is the used conveyor system and from the above it is very clear that it cannot be reused or sold as scrap. Similar is the case with rollers and structures. The ventilation duct is to provide a continuous supply of fresh air to workers and machinery operating within the tunnel and to remove harmful gases, dust, diesel fumes and any hazardous substances released during excavation. It consists of long, flexible ducts, typically made of fabric reinforced plastic. Air is supplied using fans (blowers) from the tunnel entrance or a ventilation shaft. It is purely temporary in nature and suitable for the work site of the assessee and does not give any enduring benefit. As already stated in earlier part of this order, in order to treat an expenditure is revenue or capital, one has to consider the nature of business of the assessee and expenditure from a commercial point of view, what advantage did the assessee gets by constructing a railway track or conveyor belt or ventilation duct in a site which belongs to somebody else and spending money for construction. The assessee gets only business advantage by deploying the above temporary structures in the work site which does not result in any enduring benefit to the assessee. Temporary railway track, conveyor belt and ventilation duct system created by the assessee in the process of boring a tunnel by using a TBM machine cannot be treated as plant and machinery or an asset which gives enduring benefit to the assessee. In our considered view, while dealing with the issue of whether a particular expenditure is capital or revenue, one has to keep in mind whether the outgoing expenditure is so related to the carrying on or the conduct of the business, that it may be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character. The possession of which is a condition of carrying on business, the expenditure may be regarded as revenue expenditure as held by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT (supra). A similar view has been taken by Hon'ble Supreme Court in the case of Bombay Steam Navigation Vs. CIT (1965) 56 ITR 52 (SC). Therefore, in our considered view, the arguments of the revenue that since the structures created by the assessee last for more than one year and gives enduring benefit and thus, should be treated as capital expenditure, is devoid of merit and cannot be accepted.

The assessee has relied upon the decision of Hon'ble Supreme Court in the case of CIT Vs. Madras Auto Service (P) Ltd. (supra). The Hon'ble Supreme Court has considered an identical issue of capital or revenue expenditure towards expenditure incurred by the assessee for construction of a building on a land which belong to somebody else. The Hon'ble Supreme Court upon considering the nature of business of the assessee and type of assets held as under :

Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade...........If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether.

In the case of Commissioner of Income-tax, Bombay City- I v. Associated Cement Companies Ltd. (172 ITR 257) the respondent- company entered into an agreement to supply water to the municipality and provide water pipelines as also to supply electricity for street lighting and put up a transmission line for that purpose. The assessee also agreed to concrete the main road from the factory to the railway station. The amounts expended for these purposes were held to be revenue expenditure since the installations and accessories were the assets of the municipality and not of the assessee. The expenditure, therefore, did not result in creating any capital asset for the company. The advantage secured by the respondent was immunity from liability to pay municipal rates and taxes for a period of 15 years. This Court said that had these liabilities been paid, the payments would have been on revenue account. Therefore, the advantage secured was in the field of revenue and not capital. In the case of Commissioner of Income-tax v. Bombay Dyeing and Manufacturing Co. Ltd. (219 ITF 521) the company contributed to the State Housing Board certain amounts for construction of tenements for its workers. The tenements remained the property of the Housing Board. It was held that the expenditure was incurred wholly and exclusively on the welfare of the employees and, therefore, constituted legitimate business expenditure. As the assessee company acquired no ownership rights in the tenements, this Court said that the expenditure was incurred merely with a view to carry on the business of the company more efficiently by having a contented labour force. All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expense has been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but t he assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure.”

In this view of the matter and considering the facts and circumstances of the case and also by respectfully following the decision of Hon’ble Supreme Court in the case of CIT Vs. Madras Auto Services (P) Ltd. (supra), we are of the considered view that expenditure incurred by the assessee for the purpose of laying railway track, conveyor belt and ventilation duct in a work site is temporary, site specific and non-enduring beyond the life of the specific contract, which cannot be treated as capital in nature which gives enduring benefit to the assessee. The temporary asset created by the assessee will last for temporary period or till the completion of the contract work and once the contract is completed, these structures are either dismantled or move to a temporary site or loose their functional utility for the assessee They do not form part of the permanent profit earning apparatus of the assessee. Therefore in our considered view, the expenditure incurred by the assessee for the above purpose cannot be considered as capital in nature which gives enduring benefit to the assessee. The Assessing Officer without appreciating the relevant facts, simply held that the expenditure is capital in nature and allowed depreciation. The Ld. CIT(A) without appreciating the relevant facts sustained the additions made by the Assessing Officer. Thus, we set aside the order of the Ld. CIT(A) and direct the Assessing Officer to delete the additions made towards disallowance of the expenditure incurred for railway track, rollers and structures, conveyor belt and ventilation duct for Rs.6,55,60,180/-.

In the result, the appeal filed by the assessee is allowed.

In the result, the appeals filed by the assessee in to 1340/Hyd/2025 are allowed.