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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Shri M.Balaganesh, AM & Shri S.S.Viswanethra Ravi, JM]
ORDER Per M.Balaganesh, AM
This appeal by the Assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-1, Kolkata [in short the ld CIT(A)] in Appeal No.112/CIT(A)- 1/C-3/2013-14 dated 16.02.2015 against the order passed by the DCIT, Circle-3, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 28.02.2013 for the Assessment Year 2010-11.
2. The only issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the treatment of replacement of steel rolls as capital expenditure as against revenue expenditure claimed by the assessee, in the facts and circumstances of the case. The ld AR during the course of hearing stated that he would press only
2 M/s Akshay Steel Works Pvt. Ltd. A.Yr. 2010-11 Ground No. 2 which is the effective ground for adjudication of the dispute and other grounds are merely argumentative in nature and hence the same are not pressed. Accordingly, the Ground Nos. 3 to 12 raised by the assessee are dismissed as not pressed.
The brief facts of this issue is that the assessee is engaged in the activities of conversion agent and manufacturing of angles, channels, flats, bars and rods. The return of income for the Asst Year 2010-11 was filed by the assessee company on 12.10.2010 disclosing total income of Rs 69,57,590/-. The ld AO on perusal of the profit and loss account of the assessee, observed that it had debited an amount of Rs 95,69,107*/- under sub head ‘Rolls” in Schedule ‘N’ of Profit and loss account under head ‘Operating and Other Expenditure’. On perusal of the details for the same filed by the assessee, the ld AO show caused the assessee as to why the same should not be treated as capital expenditure as it provides enduring benefit to the assessee. The assessee replied that these rolls were used in the process of manufacturing steel items and is purely consumable in nature and that no enduring benefit is derived by the assessee . It was explained that the rolls were used regularly and its life span is less than one year and the same does not fall under the ambit of capital expenditure. The assessee also replied that this expenditure was incurred on a recurring basis by the assessee. The ld AO however noted that since the item of Steel Rolls is a separate line item in the Depreciation Schedule and rate of depreciation provided thereon was 80%, the expenditure incurred thereon would only have to be treated as capital expenditure. The ld AO accordingly treated the same as capital expenditure and granted depreciation in the following manner:-
The ld AO after allowing depreciation of Rs 54,29,808/- , made net disallowance of Rs 41,39,298/- (9569106-5429808) as capital expenditure in the assessment. This action
4 M/s Akshay Steel Works Pvt. Ltd. A.Yr. 2010-11 of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following ground:- 2. The Appellant most humbly submits that expenditure in the “Steel Rolls” in the instant case are incurred wholly and exclusively for the purpose of business and earning profit and not for the purpose of expansion, increasing the production capacity or development improvement or for earning greater profit and also the said expenditures are not meant for any enduring benefit or advantage, hence, the said expenditure cannot be classified as Capital Expenditure by any process of reasoning.
We have heard the rival submissions. We find that the assessee had installed one Rolling Mill for manufacture of rolled products i.e Angles, Channels, Round Bar, Flat Bar, Square Bar, Octagonal Bar, Hexagonal Bar etc . In the rolling mill, the assessee uses ‘Steel Rolls’ which is an integral part of the machinery. In the process of manufacture of rolled products, the raw materials (mild steel billets / mild steel ingots) are fed into the heating furnace where it is heated at the requisite temperature. The red hot raw materials (ingots and billets) are then passed through a series of rolling stands fitted with steel rolls which keeps rotating and exerts pressure on the hot raw material which elongates the stock to desired shapes and sizes for manufacture of desired rolled products. In the process, the red hot raw materials are compressed between two rotating steel rolls for reducing its cross section. After the rolling process, the hot rolled products are subjected to process of cooling and thereafter sent for sizing, bundling , etc. From the aforesaid manufacturing process, it was explained by the ld AR that the steel rolls get worn out warranting frequent replacement in 2 to 6 months. We find from the explanation of the aforesaid manufacturing process, steel rolls are not independent machinery but instead they are only part of a rolling mill. It does not contribute for the increase in production capacity of the products manufactured by the assessee company. Hence there is no enduring benefit or advantage derived by the assessee company in this regard. The replacement of steel rolls are merely operational expenses incurred in the ordinary course of business by 5 M/s Akshay Steel Works Pvt. Ltd. A.Yr. 2010-11 the assessee. Moreover, from the details of replacement of steel rolls as tabulated hereinabove, it could be safely concluded that the steel rolls were replaced by the assessee on a regular basis and hence we hold that merely because the same is found as a separate line item in the Appendix I of Depreciation Rates Schedule, it does not take the character of capital expenditure automatically. We hold that since it is not a capital expenditure at all vis a vis the facts of the instant case and the manufacturing process involved therein, the explanation to section 30 and 31 of the Act brought into the statute with effect from 1.4.2003 would not be applicable to the facts of the instant case.
4.1. We find that the reliance placed by the ld AR on the co-ordinate bench decision of Chandigarh Tribunal in the case of Malhotra Industrial Corporation vs DCIT reported in (2001) 247 ITR (A.T.) 8 (ITAT Chandigarh) dated 21.9.2000 is directly on this point , wherein it was held as under:- “We have considered the rival submissions, examined the facts, evidence and material on record. We have also perused the orders of the authorities below. We have also referred to the various decisions relied upon by learned counsel for the assessee. Now, the main issue that needs to be addressed by us is, whether the expenditure incurred on replacement of rolling mill rolls constitutes a capital expenditure or revenue expenditure The facts detailed above clearly show that the assessee has all throughout been claiming expenditure on replacement of rolls as revenue expenditure. Up to the assessment year 1991-92, the Department has allowed the same as deduction. In none of the earlier assessment years, the expenditure was treated as capital expenditure Now, the only issue before us is that the mere fact that the Appendix cited supra prescribe the rate of depreciation of rolls prior to September 3D, 1991, as 100 per cent. and thereafter at 50 per cent. would show that the Legislature had intended to treat the same as capital in nature. We are unable to accept the reasoning given by the Commissioner of Income-tax (Appeals) that if the intention of the Legislature was not to treat such expenditure as capital in nature, there was no necessity in providing the rate of depreciation on the rolls for the simple reason that expenditure incurred on rolls prior to the commencement of the business would be capital in nature. Therefore, it is necessary to provide the rate of depreciation on rolls so that depreciation at that rate could be allowed to the assessee. But it does not mean that expenditure incurred on replacement of rolls subsequent to the commencement of the business would also be a capital expenditure. The judgment of the Karnataka High Court in the case of Mysore Spun ConcretePipe Pvt. Ltd. [1992] 194 ITR 159, is directly on this issue. In that case, the expenditure incurred was on replacement of damaged moulds and was 5
6 M/s Akshay Steel Works Pvt. Ltd. A.Yr. 2010-11 claimed as revenue expenditure, though prior to the commencement of the business, expenditure on moulds was capitalised. It may be mentioned that the same Appendix, referred to above, prescribed depreciation at 40 per cent. on moulds used in rubber and plastic goods factories and this item figures at (iii) under the head "Machinery and plant". This only shows that the rate of depreciation mentioned in the Appendix provides depreciation when the expenditure is considered as capital and not in the case where the expenditure itself is revenue in nature. Now, it is obvious that the nature of the assessee's business is such that it requires frequent replacement of rolls. The expenditure incurred thereon would certainly fall in the nature of current repairs as the same does not result in creating a capital asset or benefit of enduring nature. It may further be mentioned that in the case of Madras Cement Ltd. [1992] 42 175, the Income-tax Appellate Tribunal, Madras, had held that the expenditure incurred on replacement of part of capital item, though capitalised, would still be in the nature of current repairs. Entries made in the books of account for treating the expenditure as capital would not be a decisive test to determine that the expenditure was capital in nature. Similarly, in the case of Jagatjit Industries Ltd. [2000] 241 ITR 556, the Delhi High Court has held that the expenditure on replacement of damaged moulds was revenue expenditure. In the case of Co-operative Sugars Ltd. [1999] 235 ITR 343, the Kerala High Court has held that expenditure on "machinery maintenance" of sugar plant by replacing substantial part of the plant was revenue expenditure as no new asset was brought into existence. Even the jurisdictional High Court of Punjab and Haryana, in the case of Khalsa Nirbhai Transport Co. (P.) Ltd. [1971] 82 ITR 741, has held that the expenditure incurred replacement of petrol engines by diesel engines in its buses was a revenue expenditure. In the light of the legal position discussed above, we hold that the expenditure incurred replacement of damaged rolls was in the nature of revenue expenditure and not capital in nature. The assessee was entitled to claim deduction as current repairs. In this view of the matter, we set aside the orders of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow deduction on the replacement cost of rolls as current repairs. Accordingly, this ground of appeal is allowed for both the assessment years. In the result, both the appeals of the assessee are partly allowed.”
4.2. We also find that the aforesaid decision of Chandigarh Tribunal had been approved by the Hon’ble Punjab & Haryana High Court in the case of CIT vs Malhotra Industrial Corporation reported in (2002) 254 ITR 635 (P&H) . The questions raised before the Hon’ble Court and the decision rendered thereon are as under:-
In this appeal under section 260A of the Income-tax Act, 1961 (‘the Act’), the revenue maintains that the following substantial question of law arises for the consideration of this Court : 6 7 M/s Akshay Steel Works Pvt. Ltd. A.Yr. 2010-11 "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in treating the expenses incurred on the purchase of rolls as a revenue expenditure particularly when such rolls have been termed as capital assets of the concern on which depreciation is allowable under the Income-tax Act itself at the prescribed rates ?"
We have heard Mr. R.P. Sawhney, the learned counsel for the revenue. He submits that the Tribunal has erred in treating the deduction claimed by the assessee as the revenue expenditure.
3. The assessee is running a steel rolling mill. In para 4 of the petition of appeal, it has been admitted that ‘in the absence of rolls, it is difficult to prepare the finished products in the case under reference’. Yet the revenue alleges that the rolls cannot be treated as an integral part of that machinery or plant.
4. The Tribunal has found as a fact that ‘the nature of the assessee’s business is such that it requires frequent replacement of rolls. The expenditure incurred thereon would certainly fall in the nature of current repairs, as the same does not result in creating of capital asset or benefit of enduring nature’.
We find that in the circumstances of the case, the view taken by the Tribunal is just and reasonable. It is not shown to be contrary to any provision of law. In fact, it is the revenue’s own case that the frequent change of rolls is essential for preparing the finished products. Thus, no substantial question of law arises.
Mr. Sawhney submits that the rolls were purchased after October 1, during the relevant period. Thus, only 50 per cent depreciation should have been granted.
7. No such question has been raised in the memorandum of appeal. Thus, the plea cannot be considered.
No other point has been raised.
In view of the above, we find no merit in the appeal. It is accordingly dismissed in limine. e More 4.3. In view of the aforesaid findings on facts of the instant case and respectfully following the aforesaid decisions, we hold that the replacement of steel rolls in the instant case would have to be treated only as revenue expenditure and we direct accordingly. Hence the Ground No.2 raised by the assessee is allowed.
5. The Ground Nos. 1 and 14 raised by the assessee are general in nature and does not require any specific adjudication.
8 M/s Akshay Steel Works Pvt. Ltd. A.Yr. 2010-11 6. The Ground No. 13 raised by the assessee was stated to be not pressed by the ld AR. Accordingly the same is dismissed as not pressed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Court on 05.01.2018