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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri Waseem Ahmed & Shri K.Narsimha Chary
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 20.11.2013. Assessment was framed by ITO Ward- 11(1), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 31.12.2008 for assessment year 2006-07. The grounds raised by the Revenue per its appeal are as under:- “1. That on the facts and in the circumstances of the case and as per law Ld. CIT(A) erred in deleting the addition amounting Rs.576773/- on account of income from undisclosed source.
2. That on the facts and in the circumstances of the case and as per law Ld. CIT(A) erred in deleting the addition without appreciating that the addition made by the AO on the basis of the facts available on record and confirmation of party consequence to inspection conducted by Deputed Inspector during assessment proceedings.
A.Y. 2006-07 ITO Wd-11(1) Kol. vs. M/s Stoll Berg India Pvt. Ltd. Page 2 3. That on the facts and in the circumstances of the case and as per law Ld. CIT(A) erred in deleting the addition of Rs.2424763/- on account of repairing expenses which was treated by AO as capital in nature.
4. That on the facts and in the circumstances of the case and as per law Ld. CIT(A) erred in deleting the addition without appreciating that the addition made by the AO on the basis of the facts available on record that the assessee derived enduring benefit by spending the amount under the head repair.”
Shri Arup Chatterjee, Ld. Senior Departmental Representative appeared on behalf of Revenue and Shri Ashim Kumar Sinha, Ld. Authorized Representative appeared on behalf of assessee.
Facts in brief are that assessee in the present case is a Private Limited Company and engaged in the business of manufacturing and trading of metallurgical chemicals. The assessee for the year under consideration has filed its return of income declaring income of ₹87,56,630/- which is comprising of income under the head “business and profession”. Thereafter the case was selected for scrutiny assessment under CASS AST module and accordingly notice u/s 143(2) of the Act was issued. The assessment was framed u/s 143(3) at a total income of ₹1,17,58,166/- by disallowing certain expenses which are discussed below.
First issue raised by Revenue in ground No. 1 and 2 are that Ld. CIT(A) erred in deleting the addition of Rs.5,76,773/- (1,21,629 + 4,55,144) on account of income from undisclosed source.
The assessee during the year has shown purchase from several parties. During the course of assessment proceedings, AO observed certain difference in the amount of purchases shown by assessee and details received from the respective party in response to the notice issued u/s. 133(6) of the Act. The difference in the purchases is as follows:- Sl.No. Name of the party Purchase by Sale by party Amount of assessee difference 1 AVM Sales Pvt. Ltd 8731196 8852825 121629 2 Everett Keihin Cargo 461802 1054622 592820 Logistics Pvt. Ltd. A.Y. 2006-07 ITO Wd-11(1) Kol. vs. M/s Stoll Berg India Pvt. Ltd. Page 3 On question by the AO about the difference shown above, assessee made submission which stands as under:- A. AVM Sales Pvt. Ltd. The difference of ₹121629 is arising on account of the debit note issued by the assessee to the party which has not been accounted for books of account of the party. B. Everett Keihin Crago logistics Pvt. Ltd. The assessee submitted that following cheques have not been issued to the party though the party has given its claim in its books of account as received from the assessee. Cheque No. Amount (Rs) 047409 2,30,300.00 531691 1,10,444.02 103003 1,14,700.00 The Assessing Officer deputed the Departmental Inspector to conduct the inquiry about the cheque issued by the assessee to the party. The Departmental Inspector in its report has confirmed the receipt of ₹4,55,144/- by the party from the assessee with the help of bank statement. Accordingly, AO observed that the payment of ₹4,55,144/- has been made by the assessee from its undisclosed source which is not reflected in its regular books of account. In view of the above, AO has disallowed a sum of ₹5,76,773/- (4,55144 + 1,21,629) and added to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee made a submission, which stands as under:- i) Difference with AVM Sales Corpn Ltd. It was submitted that ledger copy of the assessee in the books of account of AVM Sales Corpn. Ltd. was not provided, therefore, it was difficult to point out the exact difference. Therefore, it was not possible for the assessee to make the detailed and relevant reply to the AO for having the difference in the amount of purchase. The Assessee was also apprehended that the debit note issued to the party might not have A.Y. 2006-07 ITO Wd-11(1) Kol. vs. M/s Stoll Berg India Pvt. Ltd. Page 4 been accounted in the books of account of AVM Sales Corpn. Ltd. The amount of difference as found out by the AO is insignificant in relation to the volume of transactions that AVM Sales Corpn. Ltd. i.e. 1.5% of the total transactions. The assessee also submitted that the lower amount of purchase was shown in the books of account and so the profit has been enhanced by ₹1,21,629/-. Therefore, making further addition to the total income of the assessee will amount to double taxation. The Ld. CIT(A) after considering the submission of assessee has deleted the addition made by AO by observing as under:- “5.2.3 Decision: I have considered the facts of the case and the submissions put forth on behalf of the appellant. The ape had not accounted for the purchases to this extent, presumably on account of debit note passed on by it, but which was not allowed by the seller. There is no material brought on record to show that the appellant had suppressed its purchases and the payments have been made to the seller. The Assessing Officer has made the addition merely on the basis of statement of account given by the seller and without verifying the reconciliation statement of the appellant. Having regard to the fact and circumstances, the Assessing Officer is hereby directed to verify the reconciliation statement along with supporting evidence of the appellant with regard to the details of sales as recorded in the books of the seller, and then make any addition of unexplained difference, if any, while giving effect to this order. Thus, this ground of appeal is decided accordingly.”
(ii) difference with M/s Everett Logistics Pvt. Ltd. The assessee before Ld. CIT(A) submitted that the report of the Inspector is incorrect as it clearly states that cheque payment of ₹4,55,144/- has been made from the undisclosed source. Once the payment has been made through banking channel, which has been disclosed in the books of account, then how this can be alleged that the payment was made from undisclosed source. There was no defect in the audited books of account of assessee and no flaw has been reported by AO. The Ld. CIT(A) after considering the submission of assessee has deleted the addition made by AO by observing as under:- “5.3 Decision: I have carefully considered the facts and the submissions of the appellant. The appellant has categorically denied to have issued the three cheques in question from its bank account maintained with HDFC Bank. Therefore, the conclusion reached by the Assessing Officer that the amount of Rs.4,55,144/- represented A.Y. 2006-07 ITO Wd-11(1) Kol. vs. M/s Stoll Berg India Pvt. Ltd. Page 5 by the three cheques found credited in the third party account is undisclosed income of the appellant without bringing any material on record either in the form of corresponding purchase bills of any other evidence does not appear to be justified. in a case of ITO Vs. Mayur Agarwal (2010) 133 TTJ 1: (2010) 43 DTR 116 (Tribunal-Agra), where AO alleged that assessee purchased goods from one “NFP” through bank draft, which was not found recorded in books of account of assessee-Assessee denied the transaction with “NFP”, but Assessing Officer made addition u/s. 69, which was deleted by CIT(A) holding that merely relying or averments of “NFP” addition could not be made, the Hon'ble Agra Bench of the ITAT held that no addition could be made merely on basis of evidence procured from third party unless opportunity of cross- examination was allowed to assessee. The addition so made was deleted by the ITAT. The facts of the case are more or less similar to those of the reported case. I am of the view that the ingredients of section 69 are not satisfied in this case. On the facts and in the circumstances of the case and following the decision of the Hon'ble Agra Bench of the ITAT, I am of the view that the Assessing Officer was not justified in making the impugned addition. The addition of Rs.4,55,154/- made by him on account of undisclosed income is deleted.” Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us. Both the parties before us relied in the order of lower authorities as favourable to them.
We have heard rival contentions of both the parties and perused the materials available on record. From the foregoing discussion, we find that AO has made the addition on account of difference in the transactions on purchase between books of assessee and books of the party. The addition of ₹1,21,629/- being the difference between assessee and AVM Sales Corporation Ltd., we find that the assessee has shown less purchase in its books of account and this is not a case where assessee is claiming more expense in the form of purchase which is having effect in the reduction of profit. We further find that the assessee by showing less amount of purchase is showing more taxable profit in the books of account. As such, we agree with the view of Ld. AR that further addition of ₹1,21,629/- will amount to double taxation. In case this transaction has been booked outside the books of account then also the entire amount cannot be added to the total income of the assessee. In that case, only amount of profit involved in undisclosed transactions and capital employed in that transaction can be brought to the net of tax. In this regard, Ld. DR has not brought anything to A.Y. 2006-07 ITO Wd-11(1) Kol. vs. M/s Stoll Berg India Pvt. Ltd. Page 6 prove that such transaction was booked outside the books of accounts account. The order of AO is also silent with regard to claim of assessee that the difference arising on account of debit note issued by the assessee. In the absence of complete information about the difference found by AO, we are inclined not to interfere in the order of Ld. CIT(A). We uphold accordingly. Hence, the addition of ₹1,21,629/- deserves to be deleted. Similarly, for the addition of ₹4,55,144/- we find that AO has made the addition on the ground that such transaction was made from the undisclosed bank account. From the facts of the case, we find that no detail of such undisclosed bank account has been furnished by AO. On the other hand, as per the submission of assessee, the transaction was made from the disclosed bank account and therefore the addition cannot be sustained on the ground that the transaction was made from the undisclosed source. In this case also we concur with the view of Ld. AR and in rejoinder Ld. DR has not brought anything contrary to the finding of Ld. CIT(A) as well as argument made by Ld. AR. Accordingly, we do not find any reason to interfere in the order of Ld. CIT(A). We uphold accordingly. This ground of Revenue is dismissed.
Next issue raised by Revenue in Ground No. 3 and 4 are that Ld. CIT(A) erred in deleting the addition made by AO for Rs.2424,763/- on account of repairing expenses which was treated by AO as capital in nature.
The assessee has claimed expense for repairs to building and repairs for the plants of Rs. 6,57,662.00 and of ₹17,67,101/- respectively which was disallowed by AO by holding the same as capital in nature.
Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before ld. CIT(A) submitted that the details of repair to the building and plant along with item of work / material used were furnished at the time of assessment and all the repairing works are current repair and therefore eligible for deduction u/s 30/31 & 37 of the Act. Even the expenditure is enduring in nature but it has impact on the revenue of the business, it shall be treated as revenue in nature treating the year under dispute is the 4th year of the business of the assessee and it is a common practice to yearly shut A.Y. 2006-07 ITO Wd-11(1) Kol. vs. M/s Stoll Berg India Pvt. Ltd. Page 7 down the factory for its maintenance of machine and building. No such disallowance was made in earlier AY even though such expenses were claimed by the assessee and in spite of the fact that the factory was comparatively new then now accordingly Ld. CIT(A) deleted the addition made by AO by observing as under:- “5.4.3 Decision: I have considered the facts of the case, and the submissions put forth on behalf of the appellant. I have also gone through details expenses incurred by the app under the heads ‘repair to building’ and repairs to plant & machinery’. It may be noted from the details of expenditure incurred on maintenance of ‘plant and machinery’ at Rs.17,67,101/- included the items such as (i) purchase of stores & spares (local); purchase of spares & spare parts (imported), other charges of import of stores & spares; custom duty for stores & spares imported (Rs.105,055); and repairs to plant at Rs.3,75,894/-. From the details, it is abundantly clear that the expenditure has been incurred for current repairs and replacement of plant and machinery and purchase of new parts & stores, which by no stretch of imagination could be treated as expenditure of capital in nature. Similar is the expenditure incurred for repairs and maintenance of building.
In the case of Indian Ginning and Pressing Co. Ltd. v. CIT [2011] 252 ITR 577 (Guj), where the assessee incurred expenditure on repairs to a godown used for business purpose so as to convert it into n administrative office, the Hon'ble Gujarat High Court held that the expenditure was allowable as revenue expenditure, since the business asset had retained its character and only its use had changed, and the use at both points of lime, i.e. before and after the expenditure was incurred, related to the business of the assessee without there being any addition to or expansion of the profit making apparatus of the assessee. In C.R. Corera & Bros. v. CIT [1963] 49 ITR 188 (Mad.), it has been held that “it cannot be taken as a matter of assumption that merely because a large sum is expended on repairs to machinery it must necessarily amount to reconstruction making the expenditure capital in nature. In the case of CIT v Tea Estate (P) Ltd. [1972] 198 ITR 535 (Cal), the jurisdictional High Court held that where a replacement is made of a physically, commercially and functionally inseparable part of an entire asset, the expense incurred in relation to such transaction must be treated as an admissible revenue expenditure.” In another case of Cultural Enterprises Corporation v. CIT [1992] 196 ITR 488 (Cal), even where a sum of money is spent for repairs in a particular year because of the fact that regular repairs are allowed to fall into arrears and repairs on extensive scale have to be undertaken to remedy the effect of several year’s negligence, the jurisdictional High Court held that the expenses for such arrears repairs are allowable,” 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 A.Y. 2006-07 ITO Wd-11(1) Kol. vs. M/s Stoll Berg India Pvt. Ltd. Page 8 expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage – New Shorrock Spg. & Mfg. Co. Lt. v. CIT [1956] 30 ITR 338(Bom.)/R.B. Bansilal Abirchand Spg. & Wvg., Mills v. CIT [1957] 31 ITR 427 (Nag)/N.N. Kotak v. CIT [1952] 21 ITR 18 (Bom). In CIT v. Chowgule & Co. (P) Ltd. [1995] 214 ITR 523(Bom), the Hon'ble Bombay High Court held that “the words ‘current repairs’ do not mean ‘petty repairs’ or repairs necessitated by wear and tear during the particular year. Payment on account of ‘current repairs’ must be understood in contradistinction to payments for ‘additions’ or ‘improvement’. The simple test that must be constantly borne in mind is that as a resulted of the expenditure which is claimed as n expenditure for repairs what is really being done is to preserve and main and 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.”
Considering the facts if the case and the settled principles of law, the object of the expenditure incurred by the appellant is not to bring a new asset into existence or to obtain a new or different advantage, but to preserve and maintain an already existing asset. Therefore, the expenditure claimed under both the heads, viz., ‘repairs to building’ and ‘repairs to plant and machinery’ are allowable as revenue expenditure. The consequent additions made by the Assessing Officer are deleted. The appeal of the appellant on this ground is allowed.”
Being aggrieved by this order of Ld. CIT(A) Revenue is appeal before us.
Before us both the parties relied on the order of Authorities Below as favourable to them. Ld. AR of the assessee further submitted that it is a well settled law that advantage of enduring benefit is not decisive to distinguish between revenue and capital expense. Enduring benefit or advantage might endure to assessee’s business either in capital field or in a non-capital field. Therefore, in every case, enquiry must be directed as such to the character of the expenditure as to the nature of advantage derived therefrom. When expenditure although enduring in character has its impact on the running of the business, it is revenue in nature.
We have heard rival contentions of both the parties and perused the materials available on record. From the foregoing discussion, we find that the repair expense incurred by assessee for its machine and building were treated as capital in nature. Therefore, AO has disallowed. The same, however were deleted by Ld. CIT(A) by observing these expense as revenue in nature. From the facts of the case, we find that A.Y. 2006-07 ITO Wd-11(1) Kol. vs. M/s Stoll Berg India Pvt. Ltd. Page 9 by incurring expense on the repair of machines and building in such fixed asset, no fixed assets is coming into existence although the benefit was enduring in nature. Therefore, there was no capital asset coming into existence. We agree with the argument placed by Ld. AR of assessee. In similar circumstances, Hon'ble Bombay High Court in the case of CIT Vs. Chowgule & Co. Pvt. Ltd. (1995) 214 ITR 523 (Bom) has considered the expression ‘current’ preceding ‘repairs’ as under: The propositions that emerge for grant of deduction under s. 31 may be summed up thus : (i) The amount should be paid on account of current repairs. (ii) "Current repairs" means repairs undertaken in the normal course of user for the purpose of preservation, maintenance or proper utilisation or for restoring it to its original condition. (iii) "Current repairs" do not mean only petty repairs or repairs necessitated by wear and tear during the particular year. (iv) Such repairs should not bring into existence nor obtain a new or different advantage. (v) The quantum of expenditure nor the fact that on the process of repairs, there was substantial replacement of the parts of machine or ship, is decisive of the true nature of the expenditure. (vi) The original cost of the asset is not at all relevant for ascertainment of the true nature of the expenditure on repairs. (vii) The replacement cost of the asset may, however, at times be used as indicator of the true character of the expenditure. If the expenditure on repairs added to the written down value or disposal value exceeds the replacement cost of the asset, a presumption is possible that it is not a revenue expenditure but expenditure of capital nature. Such presumption, of course, would be rebuttable. (viii) The expression "current" preceding `repairs' appears to have been used by the legislature with a view to restricting the allowance to expenditure incurred for preservation and maintenance thereof in its current state in contradiction to that incurred on any improvement or on addition thereto. In the present case, the Tribunal, on investigation of the nature of the repairs undertaken by the assessee, recorded a categorical finding of fact that it did not result in emergence of a new ship but amounted, in substance, to current repairs to the existing ship. These findings have not been challenged by the Revenue. The fact that old parts of the ship were replaced by new parts, is not relevant for determining whether the expenditure was on "current repairs" or not. The replacement of the old parts by new parts does not mean that a new asset was brought into existence in relation to the ship in question. The replacement of the parts was only in the process of current repairs of the ship. The expenditure claimed in this case, therefore, amounts to `current repairs' which is allowable as a deduction under s. 31.—New Shorrock Spg. & Mfg. Co. Ltd. vs. CIT (1936) 30 ITR 338 (Bom), CIT vs. Sheikhpura Transport Co. Ltd. (1961) 41 ITR 336 (P&H), CIT vs. Coimbatore Motor Transport Co-operative Society (1968) 70 ITR 165 (Mad), CIT vs. Khalsa Nirbhai Transport Co. (P) A.Y. 2006-07 ITO Wd-11(1) Kol. vs. M/s Stoll Berg India Pvt. Ltd. Page 10 Ltd. (1971) 82 ITR 741 (P&H), C.R. Corera vs. CIT (1963) 49 ITR 188 (Mad) and Addl. CIT vs. Desai Bros. (1977) 108 ITR 14 (Guj) relied on The fact that written down value together with expenditure incurred on repairs excluded the original cost of asset is not valid ground for disallowance of expenditure as current repairs.”
Respectfully following the aforesaid judgments, we find no reason to interfere in the order of Ld. CIT(A). We hold accordingly. This ground of Revenue is dismissed.