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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
and hence, the AO was right in making addition and his order should be upheld.
The Ld.AR for the assessee, on the other hand, strongly supported the order of the CIT(A) and submitted that the Ld.AO failed to appreciate the presentation of accounts to make addition to excise duty collected on the ground that excise duty is not routed through P&L Account and such treatment is in violation of the provision of section 145(1) of the Act. Even going by the method of the AO, if the sales figures were to be increased by the amount of excise duty, on the same parity of reasoning, the amount of excise duty paid by the assessee is required to be debited to the P&L Account. Secondly, the said excise duty is paid before the year and, therefore, the same cannot be disallowed. The CIT(A), after considering relevant facts has righty deleted the addition and his order should be upheld.
We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. Admittedly, the assessee has shown excise duty collected on sales net of excise duty in its financial statements. The assessee has followed a method wherein the excise duty collected and paid has been routed through balance-sheet; however, shown excise duty collected as a separate item in P&L Account. The AO misconstrued the facts to make addition only on the basis of notes to accounts given in the financial statements wherein the assessee has stated that the company being qualified as an exemption unit made an application under the Central Excise Notification No.39/2001 and on receipt of the exemption certificate, the 23 Sourashtra Ferrous P Ltd company will be eligible for refund of excise duty paid and the same will be accounted for as and When received. The AO, on the basis of notes to accounts came to the conclusion that excise duty collected is in the nature of receipt accrued to the assessee, but the assessee has failed to recognise it as income. We do not find any merit in the findings of the AO for the reason that the assessee has collected excise duty on sales and paid the same to the excise department which is evident from the fact that the assessee has routed its excise duty collected on sales and payment of excise duty through balance-sheet. The assessee, for the purpose of disclosure of accounts in accordance with provisions of section 145(1) shown sales net of excise duty in the P&L Account. The AO misconstrued the facts to make addition towards excise duty collected. Therefore, we are of the considered view that the CIT(A) was right in deleting addition made towards excise duty. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised
by the revenue.
27. The next issue that came up for our consideration is addition made on account of disallowance of expenses amounting to Rs.33,00,944 within the meaning of section 40(a)(ia) of the Act. The AO made addition towards transportation charges paid to M/s Delhi Assam Roadways Corporation Ltd on the ground that the assessee has failed to deduct tax at source u/s 194C of the Act. The AO further observed that in response to specific query, the assessee
24 Sourashtra Ferrous P Ltd has submitted a certificate u/s 197 of the Act, submitted by the party for non deduction of tax at source. On going through the copy of the said certificate issued on 24-03-2008, it was observed that the said certificate was valid for the period 29-02-2008 to 31-03-2008. The copy of the said certificate was received by the assessee through an email on 17-12-2010. The above date clearly shows that the assessee had obtained the certificate from the party only when the question was raised regarding TDS and allowability of expenses u/s 40(a)(ia) of the Act. As per section 194C, the assessee is required to make TDS on transportation charges, but failed to deduct TDS, therefore, the AO opined that expenses are inadmissible u/s 40(a)(ia) of the Act. It is the contention of the assessee that it has paid gross amount of Rs.6,23,99,417 to M/s Delhi Assam Roadways Corporation Ltd and deducted TDS of Rs.12,24,764 for the period from 01-04-2007 to 20-02-2008. The payee has furnished certificate issued u/s 197 of the Act, for non deduction of tax at source for the period from 29-02- 2008 to 31-03-2008, therefore, it has not deducted TDS on payment made for the above period of Rs. 33,00,944. Therefore, the AO was incorrect in disallowing expenses u/s 40(a)(ia), even though such payment is not liable for TDS u/s 194C in view of the certificate furnished by the deductee.
Having heard both the sides and considered material on record, we find that the CIT(A) has recorded a categorical finding to the effect that the impugned payment of Rs.33,00,944 is covered by the certificate furnished by the assessee u/s 197 of the Act, for non deduction of tax at source u/s 194C.
25 Sourashtra Ferrous P Ltd The AO, without appreciating the facts, simply disallowed transportation charges u/s 40(a)(ia) even though the assessee has furnished valid certificate issued u/s 197 of the Act. We do not find any error in the findings of the CIT(A); hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
29. The next issue that came up for our consideration is addition made by the AO on account of reduction in production of pig iron amounting to Rs.21,65,77,838 by rejecting books of account u/s 145 of the Act. The AO has dealt with the issue of addition on account of reduction in production assessee at paras 10 to 10.3 on pages 12 to 15 of the assessment order. The AO compared the consumption of raw materials with the production of finished goods for AY 2007-08 and found that the production has been reduced by 7.75% which in quantity worked out to 11,788 metric tonnes which was valued at Rs.21,65,77,838. The AO observed that there is a reduction in production of finished goods and the assessee has not been able to explain reduction in production with necessary evidences. The AO further observed that though the assessee sought to explain the difference in production of finished products attributable to quality of raw materials utilised for production of pig iron and generation of by-product, there is no basis in the generation of by-products and production of pig iron. As such generation of by-product has appeared for the first time in the books of account of the assessee. The AO further observed that the alleged moisture and generation of fines has been accounted for only in the 26 Sourashtra Ferrous P Ltd current year and neither in the past or future records of the assessee shows such items, hence the same is without any basis and documentary evidence.
Moreover, the assessee being a manufacturing industry is required to disclose the consumption ratios with regard to the yield, wastage, by-products, etc in the tax audit report as well as in the return. The tax audit report, however, does not show the yield of finished product percentage of it, shortage / excess, if any, and the relevant columns are kept blank. This itself shows that there is no such data or record maintained as on the date of tax audit. It is only when specific queries were raised, the assessee, with a view to avoid the crucial question has filed the cooked up details which are not backed by any genuine evidences. Though the assessee claims fines sold constitute 14.60% of total raw-material purchased and moisture and ash reduction of 3%, it is without any evidence and documentary support. The assessee stated to have sold 22,675 m.t. of fines at a sale value of 8.73 crores in 2007-08 which is included in the sales in P&L Account. This works out to an average sale price of Rs.3853 per m.t. whereas the purchase of coal from the sister concern works out to Rs.10,192 to Rs.14,038 per m.t.. Though assessee claims to have raised a debit note to the supplier of raw materials towards moisture and ash content of quantity of 5742.27 m.t. for an amount of Rs.6.48 crores, the said debit note is not supported by any documentary evidence. Therefore, the AO opined that the assessee was not able to explain difference in production of pig iron when compared to previous financial year and hence rejected books of account u/s 27 Sourashtra Ferrous P Ltd 145(3) and estimated production loss at 11,738 M.T. and worked out total value at Rs.21,65,77,838 and treated it as unaccounted sales for the year.
It is the contention of the assessee that the AO was erred in estimating production loss on the basis of production percentage of previous financial year without appreciating the fact that production cannot be at equal level at all times and it depends upon various parameters including quality of raw materials used for production of pig iron. The assessee further submitted that it has purchased coal which is having a FV content of 63% when compared to average FV content of 66% in 2006-07 which is the main reason for reduction in production of pig iron. The assessee further submitted that during the year under consideration it is generated 22,675 m.t. of fines and sold for a value of Rs.8.73 crores which is included in sales in the P&L Account. The assessee further submitted that due to moisture and ash content in LAM coke, there is a reduction of 5,742 m.t. which is included in consumption of raw materials. If you take into account sale of fines and moisture and ash content, then net consumption of raw material work out to 42.39% which is on par with previous year’s percentage of 42.23% and hence, there is no change in production percentage of finished goods in terms of quantity. The AO, without appreciating the facts in right perspective and also without bringing any cogent material on record in his possession that the assessee has sold goods outside the books of account or there is excess stock found in the possession of the assessee, made addition only on the basis of suspicion and surmises on the basis
28 Sourashtra Ferrous P Ltd of comparison of production figures of previous financial years.
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The Ld.CIT(A) has dealt with this issue at paras 10 to 10.3.1.11 on pages 16 to 27 of his order, wherein he has extracted written submissions of the assessee as well as the point-wise explanation of the assessee to the observation of the AO in the assessment order. The Ld.CIT(A) also extracted in the form of a table remand report of the AO as well as counter comments of the assessee in respect of the remand reports dated 04-07-2010 and 08-08-2010. The Ld.CIT(A) at para 10.3.1. and 10.3.2 held that the AO had not given adequate opportunity and, therefore, additional evidence filed in the course of appellate proceedings and furnished to the AO is to be admitted as evidences. The CIT(A) has elaborately discussed the issue on merits and held that the assessee has made out a case of explaining iron ore fines generated at the time of handling iron ores in segments. It is a kind of by-product of iron ore and not a separate raw material which has been sold. The CIT(A) further observed that if by-product of iron ore fines sold by assessee and the reduction in quantity of coke due to moisture and ash content is considered for the purpose of calculation of consumption of raw materials, the percentage of production of finished goods achieved by the assessee is in comparison with previous year’s percentage of production of finished goods and, therefore, the AO was incorrect in estimating the production loss on the basis of previous year’s figures. The relevant portion of the CIT(A)’s order is 29 Sourashtra Ferrous P Ltd extracted below:-
10.3.8 To sum up, “fines” are generated at the time of handling the iron ore in stockyards and at the time of operating in handling plant and is a waste or by product of raw material. The iron ore fines of 22675.970 MT so generated were sold through M/s.Canara Overseas Ltd a company an exporters of such fines. The transportation of fines was arranged by M/s.Canara Overseas Ltd on which the appellant had no control. About 84% exports were made to China and the consideration has been credited to the Profit & Loss Account. The documentary evidence including sale bills, export docum.ants, auditor's certificate are placed on record and no discrepancy or adverse comments has been noticed. As such, the appellant's stand that said difference of 7.57% is on account of inclusion of iron fines is acceptable. The revised yield is worked out as below:-
Particulars 2007-08 2006-07 Raw materials Quantity (MT) Quantity (MT) IRON ORE 92389.437 56678.440 COKE 44126.989 28027.588 DOLOMITE 4630.073 3529.000 QUARTZITE 1157.467 1093.464 LIMESTONE 6113.781 3637.159 MANGANESE ORE 452.791 361.509 HYDRATED LIME POWDER 325.791 - PET COKE 5859.210 - 155055.393 93327.160 - Less : Sale of Fines 22675.970 Less : Moisture & Ash - deduction Net Consumption 126637.176 93327.160
As per assessee Finished Goods 2007-08 2006-07 Quantity (MT) Quantity (MT) Cast Iron 34,037
30 Sourashtra Ferrous P Ltd Pig Iron Articles 39715.975 27410.323 Skull 3293.885 3636.952 Slag 10678.278 8330.413 53688.138 39411.725 Yield (%) 42.39 42.23
10.3.9 Thus, even if the second issue of “moisture” in coal is not taken into account then also the yield is comparable.
10.3.10 However, the issue of moisture has also addressed. It is fact that moisture content is a factor while purchasing the coal from sister concern or any other concern. It is an integral part of coal. The moisture and ash content in LAM Coke depends upon the quality of it and will never he uniform. The appellant had filed a copy of extract taken from Website in respect of the details of a public company M/s.Vedanta (Sesa Goa Group) which indicates that moisture and ash and volatile content exceeds over 20%. However, the same will never be uniform and will vary on the quality, the process of which it has to be treated including manual pinching of coke employed by the appellant to cool it down and treated it in the range of around 5000 degree Celsius. In the above background, the moisture content taken at 3.70% by the appellant and mentioned by the Assessing Officer as a credit in calculation of yield by the appellant is very reasonable.”
The AO has made addition towards estimated production loss on the basis of comparison of production of finished goods percentage of financial years 2006-07 to 2007-08 and found 7.75% reduction in production of pig iron. The AO has rejected explanations offered by the assessee to justify reduction in production loss which is attributable to quality of raw material being LAM coke used for production of pig iron which is having lesser content of FV when compared to previous year coke used for production of pig iron. The assessee
31 Sourashtra Ferrous P Ltd also explained that it has generated 22675 m.t. of iron ore fines as a by-product while handling coke in stock yards and production process which has been sold for a value of Rs.8.73 crores. The assessee also explained that due to less moisture and ash contents, there is a reduction in quantity of 5742 m.t. in consumption of raw materials, and if both sale of fines quantity of 22675 m.t. and moisture and ash content of 5742 m.t. are considered, then the production percentage of pig iron works out to 42.39% which at par with 42.23% achieved in the previous financial year. The assessee has furnished relevant supporting documents for generation of by-product called iron ore fines and sale by furnishing various evidences. The assessee has exported 84% of by-product to China which has been handled by M/s Canara Overseas Ltd, a public limited company which is evident from the fact that the said company has filed letter deated 07-01-2008 which appointed its own transporters by the name, M/s Ashapura Cargo Carriers. The fact that an amount of Rs.8.73 crores has been credited in the P&L Account on account of export of by-product is not disputed by the lower authorities. The assessee has also filed auditor’s certificate to support its case.
Coming to the issue of moisture content in coal used for production of pig iron moisture and ash content is an integral part of coal which depends upon quality of LAM coke. The moisture and ash content will never be uniform.
The assessee had filed a copy of extract taken from website in respect of details of public company, M/s Vedanta which indicates that moisture and ash and 32 Sourashtra Ferrous P Ltd volatile content exceeds over 20%. In the above background, the moisture content taken by the assessee at 3.7% and mentioned by the assessee as a credit in calculation of yield is very reasonable.
The AO has made addition on estimated production loss without there being any cogent materials in his possession that the assessee has sold finished goods outside the books of account or the assessee is carrying stock in excess of stock shown in its books of account. The AO has not disputed books of account produced by the assessee which were subjected to audit. The AO has also overlooked the basic fact that the finished products of the assessee are excisable and no finished goods are removed without payment of excise duty. There is nothing on record to suggest that excise authorities have contemplated any action on so-called suppressed production and there is not an iota of evidence to suggest that the assessee has sold produce of finished goods, outside books of account. In the absence of any incorrectness as to books of account and stock registers, merely on the basis of comparison of production percentage of finished goods addition cannot be made for production loss, despite, the assessee explains the reasons for such production and also filed reconciliation explaining the shortfall. Therefore, we are of the view that the AO was incorrect in making addition towards estimated production loss. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO.
We do not find any error or infirmity in the order of the CIT(A) and hence, we are inclined to uphold the order of the CIT(A) and dismiss the ground raised by 33 Sourashtra Ferrous P Ltd the revenue.
The next issue that came up for our consideration from assessee’s appeal as well as revenue’s appeal is disallowance of repairs and maintenance to plant and machinery being capital in nature. The AO has disallowed repairs and maintenance to plant and machinery for Rs.2,24,08,100 on the ground that expenditure is in the nature of capital expenditure which gives enduring benefit to the assessee. The AO further observed that the assessee has repaired blast furnace which was installed in the previous financial year with a capital cost of Rs.5,38,32,142. The function of the same is directly related to yield of production and its failure which compelled the assessee to re-align the same with durable yield efficient and energy efficient with fire bricks. The repair cost with reference to the original cost of the machines is about 40% and that itself shows that the asset has been totally revamped for better production, increase yield, etc. The blast furnace is the core component of the machinery used in the unit and the volume of repair which enhanced the life of the machinery and its utility is clearly a capital expenditure. The assessee derived enduring benefit for the rest of the life of the machinery by undertaking this repair which is evident from the fact that the asset installed was new one and the repairs carried out by the assessee is only an improvement of the asset, therefore, total expenditure incurred under the head ‘repairs and maintenance’ to plant & machinery is in the nature of capital expenditure cannot be allowed as deduction u/s 30(1) or 37(1) of the Income-tax Act, 1961. It is the contention of the 34 Sourashtra Ferrous P Ltd assessee that the company has incurred repairs and maintenance for repairing blast furnace which was damaged due to pressure reactor which operates at a temperature of above 2300 degree centigrade. The blast furnace consists of steel shell which is lined with refractory bricks internally. The shell is continuously cooled by water spray evaporation cooling system from outside.
A refractory was installed in the year 2005. Since the size of the furnace of Chinese design is put up for the first time in the country and the same was not functioning properly resulting in yield going down, the assessee has carried out necessary repairs to keep the blast furnace intact to achieve better production.
Therefore, it cannot be considered as reconstruction of new asset or brought any new asset to hold the expenditure incurred as capital expenditure.
The Ld.AR referring to paper book submitted that expenses of repair consists of fire bricks which is major component of repair expenditure which has been purchased from Saswat International Ltd and cost of each bricks is in the range of Rs.113 to 209 which clearly shows that it is a part of repair of existing blast furnace, but not bringing into existence of a new asset which gives enduring benefit to the assessee. The Ld.AR also furnished copies of pictures of the machine to argue that it is an integrated production process in which blast furnace is one of the parts of the production system which required repairs as it was not giving intended results, therefore, the assessee has carried out necessary repairs. The AO never disputed the fact that the assessee has not created any new asset. The AO made disallowance only on the ground that total cost
35 Sourashtra Ferrous P Ltd incurred for repair and maintenance worked out to 40% of existing machine.
The AR further submitted that cost incurred for repairs and maintenance is not a relevant factor for deciding whether it is capital or revenue in nature but what is relevant is whether the assessee has restored already existing plant and machinery or created new plant & machinery which gives enduring benefit.
The assessee has repaired the existing plant and machinery, therefore, the AO was incorrect in disallowing expenditure as capital in nature. In support of his arguments relied upon plethora of judgements including the decision of Hon’ble Bombay High Court in the case of New Sharrock Spinning & Mfg Co Ltd vs CIT 30 ITR 338 (Bom). The assessee also relied upon the decision of Hon’ble Supreme Court in the case of Ballimal Naval Kishore & Anr vs CIT 224 ITR 414.
On the other hand, the Ld.DR submitted that the Ld.CIT(A) was right in upholding addition made by the AO towards disallowance of repairs and maintenance to plant & machinery as the assessee has carried out renovation of blast furnace which gives enduring benefit which is evident from the fact that cost incurred for repairs and maintenance works out to 40% of the cost of the existing machinery. The Ld.DR further submitted that as admitted by the assessee, the production capacity of the machine had decreased due to bad / inferior quality of the furnace which the assessee has replaced with better quality which resulted into enhanced production capacity which gave enduring benefit till life of the asset. Therefore, the AO was right in disallowing repairs
36 Sourashtra Ferrous P Ltd to plant & machinery being capital in nature and his order should be upheld.
The Ld.DR further submitted that in respect of partial relief allowed by the CIT(A) for Rs.15,86,633, the CIT(A) without appreciating the fact that expenditure is in the nature of capital expenditure, deleted addition made by the AO without assigning any reasons. The AO has brought out clear facts to the effect that total expenditure incurred by the assessee under the head repairs and maintenance is only capital expenditure and hence, it cannot be allowed as deduction u/s 30(1) or u/s 37(1) of the Act.
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The AO disallowed repairs and maintenance to plant & machinery on the ground that expenditure incurred is in the nature of capital expenditure which gives enduring benefit till the life of the asset. The AO has given various reasons for disallowing repairs and maintenance expenditure. According to him total expenditure incurred for repairs and maintenance works out to more than 40% of the existing cost of the asset and the assessee derived enduring benefit for the rest of the life of the machinery by undertaking the repair. The AO further observed that functioning of the blast furnace is directly related to yield of production and failure of its lining which compelled the assessee to realign the same with durable efficacy and energy saving lining of fire bricks which is nothing but capital expenditure.
It is the contention of the assessee that expenditure is in the nature of current repairs which does not give rise to creation of any new asset. The assessee
37 Sourashtra Ferrous P Ltd further contended that it has repaired blast furnace which was not given expected result due to inferior quality of blast furnace which was installed for the first time in 2005 and hence, it has repaired inferior quality blast furnace to achieve better yield and energy efficient which cannot be construed as creation of new asset which gave enduring benefit to the assessee. The assessee further contended that the AO was completely went wrong with his reasoning to disallow expenditure by holding that total expenditure incurred for repairs and maintenance works out to more than 40% of the existing cost of the asset without appreciating the fact that cost incurred for repairs and maintenance is not relevant factor to decide whether a particular expenditure is capital or revenue in nature. What is required to be seen is whether the assessee has repaired existing plant and machinery or created new plant & machinery which gives enduring benefit to the assessee.
The AO has disallowed repairs to plant & machinery only on the ground that expenditure incurred for repairs and maintenance works out to more than 40% of total cost of the asset. Other than this, the AO has not given any reason to come to the conclusion that expenditure incurred is in the nature of capital expenditure. On the other hand, the assessee has filed various details to prove that it is merely a repair of blast furnace to retain its existing production capacity and energy efficiency. The assessee has filed pictures of the plant and machinery. According to the assessee, the blast furnace is an integrated production process, in which lining is one of the components. Due to high
38 Sourashtra Ferrous P Ltd pressure, the lining has been damaged because of which it was not yielding expected production. Therefore, the assesse has leveraged existing blast furnace with new fire bricks. We find that the assessee has furnished a paper book explaining the materials used for repairs and maintenance of blast furnace. The assessee has purchased fire bricks from Sashwat International Ltd and the cost of each fire bricks worked out less than Rs.200. The assessee also furnished various materials used for repairing. On perusal of the details filed by the assessee, the materials used for repairs and maintenance of blast furnace are in the nature of minute components which cannot be considered as creation of new blast furnace which gives enduring benefit to the assessee. We further notice that the AO completely went wrong to conclude that expenditure is in the nature of capital expenditure only on the basis of cost incurred for repairs and maintenance which is not at all relevant to decide whether the particular expenditure is capital or revenue in nature. The quantum of repair expenditure incurred for the blast furnace cannot be a guiding or decisive factor to determine whether the expenditure is capital or revenue in nature. We further notice that by repairing a part of refractory lining of the blast furnace, no additional advantage is procured by the assessee company because the repairing of the refractory lining has not enhanced capacity of the blast furnace. By repairing the blast furnace, the assessee company has regained its production capacity which has reduced substantially due to defects in the refractory lining. Thus, the assessee company has not derived any enduring benefit from the repair of 39 Sourashtra Ferrous P Ltd the refractory lining, more so, when the life of the refractory lining cannot be determined as it has to withstand the heat above 2300 degree centigrade. Therefore, we are of the view that repair and maintenance to plant & machinery is revenue in nature.
The assessee has relied upon various case laws. The Hon’ble Bombay High Court in the case of New Shorrock Spinning & Manufacturing Co. Ltd. v. CIT (30 ITR 338) wherein their Lordships observed as under: “In our opinion, therefore, the expression "current repairs" used in section 10(2)(v) means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration, which is only for the purpose of preserving or maintaining an already existing asset, which does not bring a new asset into existence or does not give to the assessee a new or different advantage, and they must be repairs which are attended to as and when the need for them arises.” "We should also like to make it clear that the question as to when a building, machinery, plant or furniture requires repairs and when the need arises must be decided by not any academic or theoretical test but must be decided by the test of commercial expediency. It is after all for a businessman primarily to decide when his building, machinery, plant or furniture requires repairs. It is by that test alone that the question must be decided as to whether the repairs are current repairs or repairs which have fallen into arrears or have been accumulated over a period of time and then expenditure has been incurred in carrying out those repairs."
The aforesaid decision of the Bombay High Court has been approved and applied by the Hon'ble Supreme Court in the case of Ballimal Naval Kishore & Anr. v. CIT (224 ITR 414) wherein their Lordships observed as under: “In our opinion the test involved by Chagla C. J., in New 40 Sourashtra Ferrous P Ltd Shorrock Spinning and Manufacturing Co. Ltd.'s case [1956] 30 ITR 338 (Born) is the most appropriate one having regard to the context in which the said expression occurs. It has also been followed by a majority of the High Courts in India. We respectfully accept and adopt the test." Dismissing the appeal of the Revenue, the Bombay High Court held as under: "On a plain reading of the above section it is clear that in order to entitle an assessee to claim deduction under section 3 I of the Act, the amount must be paid on account of "current repairs". The expression "current repairs" has not been defined in the Act. It has, therefore, to be taken in its popular or commercial sense. In commercial parlance, it means repairs which are undertaken in the normal course of user for the purpose of preservation, maintenance or proper utilisation. It does not mean "petty repairs" or repairs necessitated by wear and tear during the particular year. Payments on account of "current repairs" must be understood in contradistinction to payments for "additions" or "improvement". As observed by Chagla C. J. in New Shorrock Spg. and Mfg. Co. Ltd. v. CIT [1956] 30 hR 338 (Born), the simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure should not be to bring a new asset into existence nor to obtain a new or different advantage. The quantum of expenditure.”
In the case of CIT v. Jagatjit Industries Ltd. (241 ITR 556). the Delhi High Court held as under: "Whether on given set of facts, replacement of certain items, forming an integral or important part of the machinery would be revenue expenditure or capital expenditure is primarily a question of fact, to be decided in the context of the business carried on by an assessee. Merely, because the benefit accruing by the expenditure is of enduring nature, is by itself not a conclusive test to hold it as a capital expenditure (see Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC)). Normally initial investment on machines and their parts will be in the nature of capital
41 Sourashtra Ferrous P Ltd expenditure but replacement of parts of an existing machinery in the course of their working will he a revenue expenditure.”
In the case of CIT v. Malerkotla Steels And Alloys P. Ltd. (336 ITR 49 the Punjab & Haryana High Court held that the assessee had effected repairs to the damaged furnace in the course of the regular business and no new assets were acquired. The effect of the repairs carried out by the assessee" has been only to restore the machinery to its original condition. Therefore, it was current repairs.
In the case of Metro Ispat Pvt Ltd vs CIT in dated 17th December, 2009, the ITAT, Mumbai Bench held that the expenditure incurred on replacement of chilled rolls / fire bricks / forged rolls cannot be treated as capital expenditure though it may not fall within the description of ‘Current repairs’ but it is allowable as deduction u/s 37 of the Act.
In this view of the matter and considering the ratios of the case laws discussed above, we are of the considered view that the assessee has not derived any enduring benefit by repairing damaged refractory lines of blast furnace. The assessee only regained its lost production capacity by repairing refractory lines. Therefore, the lower authorities were completely erred in treating the repairs and maintenance to plant and machinery being capital in nature. Hence, we direct the AO to delete addition made towards repairs and maintenance to plant & machinery.
In the result, appeal filed by the assessee in is 42 Sourashtra Ferrous P Ltd allowed and the appeal filed by the revenue in is dismissed.
Order pronounced in the open court on 08th December, 2017.