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Income Tax Appellate Tribunal, BANGALORE BENCH “ B ”
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Appellant By : Dr.P.K. Srihari, Addl. CIT (D.R.) Respondent By : Shri Cherian K Baby, CA. Date of Hearing : 28.4.2015. Date of Pronouncement : 26.6.2015. 2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-II, Bangalore dt.6.12.2013 for Assessment Year 2009-10.
The facts of the case, briefly, are as under :- 2.1 The assessee, a company engaged in the business of export of marine products, dealers in frozen foods, rendering cold chain services which includes the running of refrigerated warehouses and refrigerated transportation, etc filed its return of income for Assessment Year 2009-10 on 9.9.2009 declaring NIL income after claiming set off of unabsorbed depreciation. The return was processed under 2 Section 143(1) of the Income Tax Act, 1961 (herein after referred to as 'the Act') and the case was subsequently taken up for scrutiny. The assessment was concluded under Section 143(3) of the Act vide order dt.30.11.2011 wherein the income of the assessee was determined at Rs.6,20,04,609 in view of various additions/disallowances made. 2.2 Aggrieved by the order of assessment for Assessment Year 2009-10 dt.30.11.2011, the assessee preferred an appeal before the CIT (Appeals) – II, Bangalore. The learned CIT(A) disposed off the appeal vide order dt.6.12.2013 granting the assessee partial relief by deleting some of the additions/disallowances made by the Assessing Officer. 3.0 Aggrieved by the order of the CIT (Appeals) – II, Bangalore, dt.6.12.2013 for Assessment Year 2009-10, Revenue is in appeal before us raising the following grounds :- “
1. The order of the learned CIT (Appeals) is opposed to law and facts of the case.
2. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in law in holding that the bata expenses of Rs.46,44,254 is to be allowed as expenditure without appreciating the fact that the assessee could not substantiate the same before the Assessing Officer despite being afforded opportunity for the same.
3. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in law in not appreciating the fact that “replacement of tyres and pallets” does not come under the definition of word “repair”.
4. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in law in not appreciating that the amount of Rs.68,85,641 debited by the assessee as loss on consignment relates to prior period expenses and the assessee was not able to substantiate the same as a 3 genuine claim before the Assessing Officer despite being afforded opportunity for the same.
5. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in law in not appreciating that the assessee is not in the business of running vehicles on hire as per its own 3CD report to be eligible for depreciation of 30% on the same and is to be allowed only 15% of depreciation as held by the A.O.
6. For these and other grounds tht may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds maybe reversed and that of the Assessing Officer may be restored.
7. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.” 4.0 The Grounds raised at S.Nos. 1, 6 & 7, are general in nature and not being specifically urged before us are dismissed as infructuous. 5.0 Ground No.2 – Batta Expenses – Rs.46,44,254. 5.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee has debited an amount of Rs.46,44,254 as Batta expenses paid to drivers; in addition to the amount of Rs.84,03,244 incurred towards driver’s salaries, incentives and way side expenses. The Assessing Officer disallowed the expenditure on the ground that the assessee did not furnish any supporting documents or evidences for the payments. 5.2 On appeal, the learned CIT(A) considered the submissions made, the remand report submitted by the Assessing Officer and the evidences placed before her and holding that the claim of the assessee is reasonable, allowed the same, thereby deleting the disallowance made by the Assessing Officer.
4 5.3.1 We have heard and considered the rival contentions of both the learned Departmental Representative for Revenue in support of the ground raised and the learned Authorised Representative for the assessee in support of the impugned order of the learned CIT(A) reiterating the submissions put forth before the learned CIT(A). The assessee, in the case on hand, is in the business of cold chain services, which include the running of refrigerated warehouses as well as refrigerated transportation. The assessee is required to maintain transport lorries, which are required to be plied to various places. Such trips involve travel for both vehicle and drivers for several days at a stretch. As rightly observed by the learned CIT(A), the drivers cannot be expected to meet the expenditure incurred on such outstation trips from their monthly salaries and are paid daily allowances to meet such expenses, which is similar to daily allowances paid to employees who go on tour. 5.3.2 We have perused the documents placed in the assessee's paper book, which were submitted before the learned CIT(A) and find that these payments are governed by a proper internal policy which also includes a proper verification process. In the sample vouchers submitted, we find that the details of the trips like the name of the driver, vehicle number, days of travel, etc. are furnished and the batta are paid as per the trip sheet. The details of the date of travel are corroborated by the final expenses sheet also. In view of the factual matrix of the case on this issue, as laid out above, we concur with the view of the learned CIT(A)
5 that these expenses claimed are reasonable, are incurred for the purposes of business and that the expenses are supported by proper details maintained and verified by the assessee. We, therefore, uphold the decision of the learned CIT(A) in deleting the disallowance of Rs.46,44,254 made by the Assessing Officer under the head batta expenses. Consequently, the ground No.2 raised by Revenue is dismissed.
Ground No.3 : Repairs & Maintenance – Rs.18,80,321. 6.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had debited Rs.1,80,44,176 towards vehicle repair and maintenance. On examination thereof, the Assessing Officer found that an amount of Rs.15,15,670 and Rs.3,64,651, aggregated to Rs.18,80,321; were claimed towards replacement of tyres and pallets respectively. The assessee contended that these expenses were incurred towards replacement of tyres and pallets and not repairs; is therefore revenue expenditure and therefore the assessee has rightly been claimed as a deduction. The Assessing Officer was, however, of the view that since these expenses were towards replacement and not repairs, they are capital in nature and disallowed the same. 6.2 On appeal, the learned CIT(A) agreed with the assessee's contention that the replacement of tyres and pallets do not bring into existence new assets of long duration, allowed the assessee's claim and debited the disallowance.
6 6.3 Before us,the learned Departmental Representative supported the order of the Assessing Officer and assailed the decision of the learned CIT(A) in deleting the disallowance of expenditure incurred on replacement of tyres and pallets. In support of his contention, the learned Departmental Representative placed reliance on the following judicial pronouncements :- (i) Super Spinning Mills Ltd. V ACIT (357 ITR 720 (SC) (ii) CIT V Sarvanna Spinning Mills P. Ltd. (293 ITR 201) (SC) 6.4 Per contra, the learned Authorised Representative for the assessee supported the finding of the learned CIT(A) on this issue in the impugned order and reiterated the contentions made before the authorities below. It was contended that the trucks of the refrigerated division run across the country transporting frozen food items. The tyres of these trucks are required to be replaced after it completes travel of a certain distance and such replacement does not result in the creation of a new asset or increasing of capacity and therefore such expenditure is revenue in nature. As regards pallets, it was contended that wooden pallets used to store material inside the frozen warehouses need to be replaced regularly after the completion of the normal useful life and this does not result in the creation of a new asset or increase of capacity and therefore the expenditure incurred in this regard are revenue in nature. In support of its contentions, the assessee placed reliance on the decision of the Hon'ble Apex Court in the case of CIT V Gupta Global Exim P. Ltd. (305 ITR 132) (SC).
7 6.5.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions relied upon. It is not in dispute that the expenditure claimed has been incurred towards replacement of tyres and pallets and that these expenses therefore do not result in the creation of new assets or increase in capacity. 6.5.2 In this factual background, we examine the decision of the Hon'ble Apex Court in the case of Sarvanna Spinning Mills Pvt. Ltd. (supra) cited by the learned Departmental Representative for revenue. In the cited case, the issue was whether the replacement of ‘ring frames’ in textile machinery constituted “current repairs” and whether the expenditure incurred by the assessee for modernisation and replacement came within the connotation of the words “current repairs.” The Hon'ble Apex Court observed that the basic test to find out what would constitute current repairs is that the expenditure must have been incurred to “preserve and maintain” an already existing asset and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage. The Hon'ble Apex Court held that :-
…………..In our view, the AO was right in holding that each machine including the ring frame was an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement of the new machine would not come within the meaning of the words current repairs". In the present case, it is not the case of the assessee that a part of the machine (out of 25 machines) needed repairs. The entire machine had been replaced. Therefore, the expenditure incurred by the assessee did not fall within the meaning of "current repairs" in s. 31(i).
This Court in the case of Ballimal Naval Kishore vs. CIT (1997) 138 CTR (SC) 284 : (1997) 2 SCC 449 approved the test formulated by Chagla C.J. in 8 the case of New Shorrock Spinning & Manufacturing Co. Ltd. vs. CIT (1956) 30 ITR 338 (Bom) as to when the expenditure can be said to have been incurred on current repairs. In that case it was observed as follows : "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, nor 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 s. 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure." In the said judgment, it has been further observed by Chagla C.J. that the definition of the word "repair" does not create much difficulty, but the difficulty is created by the word "current" which qualifies the expression "repair". This adjective, namely, "current" is put in by the legislature. It indicates that the legislature did not intend that the assessee should be permitted to claim allowance for all kinds of repairs, even though conceptually the expenditure may be revenue expenditure. The legislature intended to stress that under s. 31(i) the permissible deduction admissible is only for current repairs, therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question as to whether such an expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue, it may not fall in the connotation of "current repairs" in s. 31(i). The test formulated above applies to cases where the assessee claims allowance under s. 31(i). In the present case, the High Court has lost sight of the test to be applied for an expenditure to fall under s. 31(i) as "current repairs". It has embarked on the test which was not applicable, viz., whether the expenditure is revenue or capital in nature. The above test was not relevant during the assessment years in question as the Explanation to s. 31(i) was inserted later on. In our view, applying the test laid down by Chagla C.J. in the case of New Shorrock Spinning & Manufacturing Co. Ltd. (supra) the assessees were not entitled to claim allowance under s. 31(i) for current repairs. In our view, the ring frame by itself constituted an independent machine with an independent function, which was replaced by a new ring frame giving enduring advantage to the assessee and, therefore, the expenditure incurred in that regard cannot come within the expression "current repairs". In our view, replacement of three ring frames constituted substitution of an old asset by a new asset and, therefore, the expenditure incurred did not constitute current repairs.” 6.5.3 In our view, as can be seen from the above, the judicial decision cited by the learned Departmental Representative viz. Sarvanna Spinning Mills P. Ltd. (supra)
9 does not support the case of Revenue. In the case on hand, the object of the expenditure involved, i.e. towards replacement of tyres and pallets, is not to bring into existence a new asset but only to preserve and maintain an existing asset. We also find that in the cited case, there was a clear finding that the ‘Ring Frame’ by itself constituted an independent machine with an independent function which was replaced by a new ring frame giving enduring benefit. However, in the case on hand, it is nobody’s case that the tyres and pallets constituted an independent machine with independent functions. In this view of the matter, the judicial decision cited by the learned Departmental Representative (supra) has no application to the case of the assessee. We, therefore, concur with the view of the learned CIT(A) that the expenditure incurred for replacement of tyres and pallets does not bring into existence any new assets and are only for preserving and maintaining the trucks and as such qualify for deduction as revenue expenditure. Consequently, Ground No.3 raised by Revenue is dismissed.
Ground No.4 – Prior Period Expenses – Rs.6,81,338. 7.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had debited an amount of Rs.63,85,645 towards loss on consignment business. On verification of the records, the Assessing Officer found that the above expenses are debited towards loss on consignment business, in which the assessee is an agent of M/s. Baskin Robins for managing inventory, warehousing, transportation and distribution services. The Assessing Officer asked the 10 assessee to furnish evidence to show that the amounts debited towards variation of stock in the consignment business pertains to the year under consideration only and not to the earlier years. As the assessee failed to furnish the evidence sought, the Assessing Officer disallowed an amount of Rs.6,81,338. 7.2 On appeal, the learned CIT (Appeals) examined and verified the documents produced and came to the view that the expenditure in question does not relate to the prior period/earlier years, but pertained to the current year only. The learned CIT (Appeals) accepted the assessee's contention that these losses would arise due to fluctuation in temperatures at different places through which the trucks pass and also due to other factors like pilferage, etc. Having rendered such a finding, the learned CIT (Appeals) observed that the assessee's claim is reasonable and deleted the disallowance of Rs.6,81,338 made by the Assessing Officer. 7.3.1 We have heard both the learned Departmental Representative for revenue and the learned Authorised Representative for the assessee and perused and carefully considered the material on record. It is submitted by the assessee that Baskin Robins is one of its major customer for whom the assessee renders services like managing inventory, warehousing, transportation, distribution, selling to retail outlets and collection of money from retail outlets, etc. According to the assessee, as per the agreement with Baskin Robins, a copy of which has been placed on record, the assessee is to bear the losses of transportation, etc and since frozen food items like ice creams, etc. being temperature sensitive, losses are inevitable 11 when transported over long distances to places with differing temperatures. It was submitted that the amount of loss has been determined by carrying out physical verification of the inventory at the end of the year and reconciling the same with the account of the party. It was also submitted that the total volume of business with Baskin Robins is of the order of Rs.30 Crores per annum and the loss reported is hardly 2% of the value, which is reasonable considering the nature of the product. 7.3.2 We find from the details on record that the assessee has furnished the total stock inventory which is prepared product-wise and location-wise. As the Assessing Officer has not found out any discrepancy in the stock statement, which is for the period relevant to the current year under consideration only, the conclusion of the Assessing Officer that these amounts may relate to prior periods is without any evidence or basis. Further, the difference in stock, which pertains to the current year, has been reconciled between the actual stock with the entries in the Books of Account. In the absence of any evidence to the contrary, it would not be appropriate to disregard the same. In this view of the matter, we concur with the observation of the learned CIT (Appeals) that the assessee's claim under this head is reasonable and agree with her decision to delete the disallowance made by the Assessing Officer. Consequently, Ground No.4 of Revenue’s appeal is dismissed.
Ground No.5 : Depreciation – Rs.16,70,201. 8.1 During assessment proceedings, the Assessing Officer observed that the assessee had claimed an amount of Rs.33,40,402 towards depreciation on motor vehicles @ 30%. On examination of the assessee's claim, the Assessing Officer found that the amount claimed was towards depreciation on motor vehicles used in the business of export of marine products and not on motor vehicles used in the business of hire and therefore restricted the assessee's claim of depreciation to 15% and disallowed the balance depreciation of 15%, amounting to Rs.16,70,201.
8.2 On appeal, the learned CIT (Appeals) held that the assessee is also into the business of refrigerated transportation and is therefore eligible for depreciation @ 30% by relying on the provisions as per the New Appendix I to the IT Rules relating to depreciation admissible on assets, vide serial number III(3)(ii) relating to motor lorries.
8.3.1 We have heard the rival contentions and submissions of both the learned Departmental Representative for revenue and the learned Authorised Representative for the assessee, and perused and carefully considered the material on record. It is not in dispute that the business of the assessee, inter alia, requires the transportation of frozen food items and the assessee is required to maintain motor vehicles. But, whether this would fall within the ambit of the provisions specified in New Appendix I to the IT Rules, 1962, relating to depreciation 8.3.2 Serial No.III(3)(i) of the IT Rules specifies that the rate of depreciation is 30% for motor buses, motor lorries and motor taxis used in the business of running them on hire. While the assessee uses motor lorries for its business of refrigerated transporters, it is not the case of the assessee that it is running the motor lorries in the business of hire. Running motor lorries for the assessee's business is different from running motor lorries in the business of hire. In our view, the learned CIT (Appeals) has mis-directed herself in equating the two to be the same. In fact, the judicial decision cited by the assessee, and placed in the paper book of submissions, namely CIT V Global Exim P. Ltd. 305 ITR 132 (SC) goes against the assessee's contentions. In that case, it was held that the higher rate of depreciation on motor trucks cannot be allowed, unless there was evidence that the assessee was in the business of hiring out motor vehicles. Therefore, it is clear that the business of the user of the motor lorries/trucks, is the real test. 8.3.3 In the case on hand, the assessee is using the motor vehicles for transportation in its own business of refrigerated transporters, and it is not the assessee's case that it is in business of hiring out of motor vehicles. Even in the Memorandum and Articles of Association of the assessee, the business of the assessee is statedly, inter alia, as transportation of goods. Nowhere, therein, is it mentioned that the assessee is in the business of running motor vehicles on hire.
14 If the view of the learned CIT (Appeals) is to be accepted, then any motor vehicle used in any business of the assessee would be eligible for higher depreciation because motor vehicles are always used for transport only. Since Appendix I to the IT Rules, 1962 specifically mentions business of “running them on hire”, in our opinion, it would not be appropriate to extend the same to transportation in any business. In this view of the matter, we are of the considered opinion that the Assessing Officer was right in not allowing higher depreciation @ 30% on motor lorries used by the assessee in its refrigerated transportation business. Consequently, we allow Ground No.5 raised by Revenue.
In the result, Revenue’s appeal for Assessment Year 2009-10 is partly allowed.
Order pronounced in the open court on 26th June, 2015.