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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI ABRAHAM P GEORGE & SHRI VIJAY PAL RAOShri Philip K John,
O R D E R Per VIJAY PAL RAO, JM:
This appeal by the revenue is directed against the order dated 28/05/2009 of the CIT(A)-V, Bangalore, for the assessment year 2006-07.
This appeal was already disposed of by this Tribunal vide order dated 26/05/2011. However, on the Miscellaneous Petition (MP) of the revenue, the said order was recalled vide order dated
Page 2 of 5 09/10/2015 in MP No.4/Bang/2012 for adjudication of ground No.5 of the revenue’s appeal which reads as under:
“5. The CIT(A) erred in granting relief in respect of the disallowance of Rs.11,13,722/- made by the AO, being expenses towards maintenance of generator and boiler incurred by the assessee subsequent to the sale of his entire business to ITC vide agreement dt.24.5.05 on the ground that ITC Ltd., had orally agreed to permit the assessee to continue the production activity.” Thus this appeal of the revenue was listed for hearing and adjudication of ground No.5 before this bench. The AO disallowed the claim of the assessee on account of boiler and generator maintenance charges expenditure of 25% on the ground that when the assessee had already sold out the business in the beginning of the year as on 25/4/2005 and further assessee has incurred huge loss, then it is not understandable as to why the assessee has incurred expenditure towards maintenance of generator and boiler. Therefore, the AO disallowed this 25% of the expenditure on the ground of necessity.
On appeal, CIT(A) allowed the claim of the assessee by considering the fact that post transfer of the business, assessee has entered into a lease back agreement with ITC Ltd., for discharging its liability and therefore, maintenance of the generator and boiler was liability of the assessee under the lease/hire agreement.
Before us, learned Departmental Representative has submitted that when the assessee has already sold its business including the entire asset in the beginning of the year as on Page 3 of 5 25/4/2005, then there was no need of incurring such maintenance expenditure on the assets which were transferred to ITC Ltd. He has submitted that when the assessee sold the business then, expenditure on maintenance of asset cannot be allowed on the sold out assets. He has relied upon the order of the AO.
On the other hand, learned AR of the assessee has submitted that though the assessee sold its business to ITC, however, these assets were taken on hire by the assessee from ITC under the agreement for discharging of its liability. He has referred to agreement dated 26/4/2005 under which these machines were hired by the assessee from ITC for fulfilment of certain orders and therefore, the assessee had to incur expenses for running the factory. Thus, learned AR of the assessee has submitted that this arrangement is part of running the factory and assessee had to incur expenses on diesel to run the boiler and generator as well as maintenance. The nature of business activity of the assessee is manufacturing of hydrated products and uninterrupted power supply through generator and steam generator through boiler, were necessary and therefore, for this purpose, diesel was the main item to maintain the generator and boiler.
Having considered rival submission as well as relevant material on record, we note that there is no dispute on the fact that post transfer of the business and asset to ITC Ltd., the assessee hired machinery from ITC vide agreement dated 26/04/2005 being machinery hiring agreement. As per terms of the said agreement,
Page 4 of 5 the ownership and title of machineries shall remain with ITC and assessee was under obligation to maintain the machinery in good and proper condition. We reproduce the relevant clauses of the agreement being 3.1 and 5.5 as under: “3.1 Ownership and title in the Machines shall at all times vest with ITC, PKJ shall not take any action inconsistent with such title and ownership rights of ITC” “5.5 PKJ shall maintain the machines in good and proper condition and in accordance with the standards specified by ITC from time to time. PKJ shall undertake minor repair and maintenance of the machines as per the maintenance protocols specified by ITC from time to time. The Parties hereby agree that where there is any major repair required to any machines, the Parties shall mutually discuss the extent and cost of such repair and ITC shall at its sole discretion decide whether to carry out such repair. In the event ITC decides to carry out such repair, the entire cost of such repair shall be borne by ITC.” The expenses in question were incurred by the assessee on account of fuel (diesel) for running the generator which is essential for uninterrupted power supply for steam generated by the boiler which is essential for manufacturing of de-hydraded products. Therefore, the expenditure in question was not only simiplicitor maintenance of machinery but it also includes fuel expenses of generator apart from maintenance of generator and boiler. The AO has not disputed the genuineness of the expenditure incurred by the assessee, but made ad hoc disallowance of 25% on the ground that after transfer of the machinery to ITC, it was not understandable as to why assessee has incurred such expenditure. Necessity and justification of expenditure cannot be judged by the AO when the assessee has Page 5 of 5 already explained the nature of expenditure for purchase of fuel for generator and maintenance of generator and boiler. As per clause 5.5 of the agreement, assessee was liable to maintain the machinery in good and proper condition as well as to carry out the necessary repairs to keep the Machine in proper condition except in case of major repairs required to any machine. In view of the above facts and circumstances of the case, we do not find any error or illegality in the order of the CIT(A) in allowing the claim of the assessee and deleting the disallowance made by the AO on this account.
Ground No.5 of revenue’s appeal is dismissed.