KASTURI FOUNDRY PVT. LTD. vs. ADDITIONAL COMMISSIONER OF INCOME-TAX,,

The notice of appeal was sent to the assessee on 19-04-2018 through RPAD at the address given in Form No. 36. The acknowledgment card

The brief facts of the case as emanating from records are: The assessee is engaged in manufacturing of C.I. Castings and Auto Components. The assessee filed its return of income for the assessment year 2010-11 on 15-10-2010 declaring total income of Rs.1,24,85,250/- and deemed income u/s. 115JB of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) as Rs.3,91,07,646/-. The case of the assessee was selected for scrutiny under CASS and accordingly, statutory notice u/s. 143(2) of the Act was issued to the assessee on 29-08-2011. In scrutiny assessment proceedings, the Assessing Officer made following additions/disallowances : i. Addition on account of discrepancy in closing stock Rs.87,500/- ii. Disallowance of Machinery Maintenance Expenses Rs.5,38,700/- iii. Disallowance of Capital Expenditure claimed as Revenue Expenditure under the head “Machinery Maintenance Expenses” Rs.2,19,904/- iv. Disallowance of various expenditure Rs.6,139/-

Shri Aseem Sharma representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee. The ld. DR submitted that the assessee has purchased spares to replace the old worn-out parts. In the case of assessee‟s sister concern E D Steels Pvt. Ltd., the company has shown sale of discarded spares under the head “Sale of scrap”. Whereas, no such income from sale of scrap has been disclosed by the assessee. Since, the activities of the assessee are similar to the sister concern, the Commissioner of Income Tax (Appeals) has rightly upheld addition on account of sale of scrap. The ld. DR further submitted that the Assessing Officer made addition on account of sale of scrap by applying the rate of 15.27% of the new material consumed. The Commissioner of Income Tax (Appeals) restricted the same to 10% of the new material. The ld. DR contended that the Commissioner of Income Tax (Appeals) was quite considerate in confirming the addition.

We have heard the submissions made by ld. DR and have perused the orders of authorities below. The ground Nos. 1 to 3 raised in the appeal are directed against the addition of Rs.3,52,783/- on account of sale of scrap on estimation basis. The authorities below have presumed that on replacement of spares some scrap must have been generated and the assessee must have earned some income from the sale of such scrap. The authorities below have drawn presumption on sale of scrap from the audit accounts of sister concern E D Steels Pvt. Ltd. The authorities below have erred in not considering the submissions of the assessee. The nature of activity carried out by the assessee and E D Steels Pvt. Ltd. are different. The scrap generated in the case of assessee is reused as input by melting the iron scrap for producing cast iron products. We are of considered view that the authorities below have erred in out rightly rejecting the explanation furnished by the assessee. The addition has been made merely on the basis of presumption without properly understanding the nature of activity carried out by the assessee and E D Steels Pvt. Ltd. In our considered view addition made on mere presumptions and surmises without there being any material whatsoever on record to support such presumption is unsustainable. Accordingly, the addition on account of income from sale of scrap is deleted. In the result, the ground Nos. 1 and 2 raised in the appeal is allowed.

In ground No. 3, the assessee has raised an alternate plea without prejudice to the ground Nos. 1 and 2, to reduce the addition. Since, the

In ground No. 4 of the appeal the assessee has assailed disallowance of Rs.2,19,904/- as revenue expenditure under the head „Machinery maintenance expenses‟. During the assessment proceedings, the Assessing Officer observed that the assessee has claimed Rs.35,27,829/- as Machinery Maintenance Expenses. The Assessing Officer identified that machines/spares purchased to the tune of Rs.2,82,300/- were not in the nature of maintenance and disallowed the claim of assessee as revenue expenditure on such machines/spares.

The Commissioner of Income Tax (Appeals) upheld the findings of Assessing Officer on the ground that the items identified provide enduring benefit to the assessee. The Hon‟ble Bombay High Court in the case of New Sharrock Spinning & Manufacturing Co. Ltd. Vs. Commissioner of Income Tax reported as 30 ITR 338 has held : “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 is not to bring a new asset into existence, or is its object the obtaining of a new or fresh advantage. This can be the only definition of „repairs‟ because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure.”

In the result, the appeal of assessee is partly allowed.